-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R+pex+N3hxHoWLgc4uMV8KJtpJFAVweBQN1YvxwSMEZuLtLs7x59AtNbELYUarCK GyC4428EwIaNJD1hcBrgAQ== 0001000301-97-000032.txt : 19970416 0001000301-97-000032.hdr.sgml : 19970416 ACCESSION NUMBER: 0001000301-97-000032 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970415 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMBANC HOLDING CO INC CENTRAL INDEX KEY: 0001000301 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 141783770 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-27036 FILM NUMBER: 97580879 BUSINESS ADDRESS: STREET 1: 11 DIVISION ST CITY: AMSTERDAM STATE: NY ZIP: 12010 BUSINESS PHONE: 5188427200 MAIL ADDRESS: STREET 1: PO BOX 669 CITY: AMSTERDAM STATE: NY ZIP: 12010 10-K 1 ANNUAL 10-K FILING UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from___________________ to ______________________ Commission file number: 0-27036 AMBANC HOLDING CO., INC. ______________________________________________________________________________ (Exact name of registrant as specified in its charter) Delaware 14-1783770 _____________________________________ _____________________________________ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 11 Division Street, Amsterdam, New York 12010-4303 _______________________________________________________________________________ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518)842-7200 ___________________________ Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, $.01 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES X . NO __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the average of the closing bid and asked prices of such stock on the Nasdaq National Market as of April 11, 1997, was $57,539,688. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the registrant that such person is an affiliate of the registrant.) As of April 11, 1997, there were issued and outstanding 4,392,023 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Parts II and IV of Form 10-K - Portions of the Annual Report to Stockholders for the year ended December 31, 1996. Part III of Form 10-K - Portions of the Proxy Statement for the Annual Meeting of Stockholders for the year ended December 31, 1996. PART I Item 1. Description of Business General Ambanc Holding Co., Inc. (the "Company") was formed as a Delaware corporation in June 1995 to act as the holding company for Amsterdam Savings Bank, FSB (the "Bank") upon the completion of the Bank's conversion from mutual to stock form (the "Conversion"). The Company received approval from the Office of Thrift Supervision (the "OTS") to acquire all of the common stock of the Bank to be outstanding upon completion of the Conversion. The Conversion was completed on December 26, 1995. The Company's Common Stock trades on The Nasdaq Stock Market under the symbol "AHCI". All references to the Company, unless otherwise indicated, at or before December 26, 1995 refer to the Bank. At December 31, 1996, the Company had $ 472.4 million of assets and stockholders' equity of $61.5 million (or 13.0%) of total assets. The Bank, organized in 1886, is a federally chartered savings bank headquartered in Amsterdam, New York. The principal business of the Bank consists of attracting retail deposits from the general public and using those funds, together with borrowings and other funds, to originate primarily one- to four-family residential mortgage loans, home equity loans and consumer loans, and to a lesser extent, commercial and multi-family real estate, and commercial business loans in the Bank's primary market area. See "-Market Area." The Bank also invests in mortgage-backed securities, U.S. Government and agency obligations and other permissible investments. Revenues are derived primarily from interest on loans, mortgage-backed and related securities and investments. The Bank offers a variety of deposit accounts having a wide range of interest rates and terms. The Bank is a member of the Bank Insurance Fund (the "BIF"), which is administered by the Federal Deposit Insurance Corporation (the "FDIC"). Its deposits are insured up to applicable limits by the FDIC, which insurance is backed by the full faith and credit of the United States Government. The Bank primarily solicits deposits in its primary market area and currently does not have brokered deposits. The Bank is a member of the Federal Home Loan Bank (the "FHLB") System. The Company's and the Bank's executive office is located at 11 Division Street, Amsterdam, New York, 12010-4303, and its telephone number is (518) 842-7200. When used in this annual Report on Form 10-K, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties - including, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake - and specifically disclaims any obligation - - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Market Area The Company's primary market area is comprised of Albany, Fulton, Montgomery, Saratoga and Schenectady Counties in New York, which are serviced through the Bank's main office, eight other banking offices and its operations center. The Company's primary market area consists principally of suburban and rural communities with manufacturing serving as the basis of the local economy. Trade, service and government related industries comprise the other major components of the Company's primary market area economy. Consistent with the trend throughout the United States, the service sector has been increasing as a percentage of the total employment in the Bank's primary market area with State and local government accounting for a large percentage of such employment. The manufacturing sector of the economy is very diverse, with a large majority of the manufacturers having fewer than 200 employees. Employers in Montgomery County include St. Mary's Hospital, Amsterdam Memorial Hospital, Amsterdam Printing and Litho Corp., Hasbro, Inc. and Kasson & Keller/Keymark. Montgomery County, where the main office of the Company is located, is the least populated county in the Company's primary market area with a population of approximately 52,600. Albany County, where the Bank opened a new branch, is the most populated county in the Company's market area with a population of approximately 293,700. The unemployment rate in Montgomery County as of December 1996 was 6.9%, down from 7.0% as of October 1995; the unemployment rate for New York State was 5.9%, down from 6.0% as of the same dates. Lending Activities General The Company primarily originates fixed- and adjustable rate, one- to four-family mortgage loans. The Company's general policy is to originate mortgages with terms between 15 and 30 years for retention in its portfolio. The Company also originates fixed and adjustable rate consumer loans. Adjustable rate mortgage ("ARM"), home equity and consumer loans are originated in order to maintain loans with more frequent terms to repricing or shorter maturities than fixed-rate, one- to four-family mortgage loans. See "- Loan Portfolio Composition" and "- One- to Four-Family Residential Real Estate Lending." In addition, the Company originates commercial and multi-family real estate, construction and commercial business loans in its primary market area; although, the originations of these types of loans has recently been de-emphasized by the Bank. Beginning in 1997 the Company will initiate an FHA loan program primarily directed at low-to-moderate income borrowers with terms up to 30 years. Loan originations are generated by the Company's marketing efforts, which include print and radio advertising, lobby displays and direct contact with local civic and religious organizations, as well as by the Company's present customers, walk-in customers and referrals from real estate agents, brokers and builders. At December 31, 1996, the Company's net loan portfolio totaled $248.1 million. Loan applications are initially considered and approved at various levels of authority, depending on the type, amount and loan-to-value ratio of the loan. Bank employees with lending authority are designated, and their lending limit authority defined, by the Board of Directors of the Bank. The approval of the Bank's Board of Directors is required for any loan relationship that includes a commercial real estate or commercial business loan whose aggregate borrowings exceed $250,000, and for all other loan relationships whose aggregate borrowings exceed $500,000. The Bank also has an Officer/Director Loan Committee which has authority to approve loans between $250,000 and $500,000 and meets as needed to approve loans between Board meetings. The aggregate amount of loans that the Bank is permitted to make under applicable federal regulations to any one borrower, including related entities, or the aggregate amount that the Bank could have invested in any one real estate project is generally the greater of 15% of unimpaired capital and surplus or $500,000. See "Regulation - Federal Regulation of Savings Associations." At December 31, 1996, the maximum amount which the Bank could have loaned to any one borrower and the borrower's related entities was approximately $6.9 million. At such date, the Bank did not have any loans or series of loans to related borrowers with an outstanding balance in excess of this amount. At December 31, 1996, the Company's largest lending relationship totaled $1.9 million (net of $1.7 million charged off in 1996) and consisted of eight loans secured by various office equipment and the equipment lease contracts between the borrower and its lessees. These loans were in default as of December 31, 1996 as a result of a bankruptcy filing on March 29, 1996. For further discussion, see "Asset Quality - Non-Performing Assets" herein, and "Management Discussion and Analysis of Financial Condition and Results of Operations": contained in the Company's Annual Report to Stockholders attached hereto as Exhibit 13 ("Annual Report"). The next three largest lending relationships at December 31, 1996 consisted of a $1.3 million loan secured by a motel, a $1.2 million loan secured by a strip shopping center, and a $1.1 million loan secured by a day treatment center for mentally retarded and developmentally disabled individuals. At December 31, 1996, there were only three other loans or lending relationships equal to or in excess of $1 million. All of the foregoing loans were current at December 31, 1996. Loan Portfolio Composition. The following table presents information concerning the composition of the Company's loan portfolio in dollar amounts and in percentages (before deductions for deferred fees and discounts and allowances for losses) as of the dates indicated.
December 31, -------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ (Dollars in Thousands) Real Estate Loans: One- to four-family $158,182 63.15% $133,468 53.20% $140,418 53.63% $116,441 52.18% $136,554 55.22% Home Equity 22,817 9.11 17,519 6.98 16,715 6.39 16,135 7.23 15,777 6.38 Multi Family 4,724 1.88 8,176 3.26 8,718 3.33 10,978 4.92 10,499 4.25 Commercial 29,947 11.96 41,929 16.71 46,736 17.85 51,528 23.09 58,674 23.72 Construction 2,234 0.89 1,073 0.43 4,809 1.84 812 0.36 2,280 0.92 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Total Real Estate 217,904 86.99 202,165 80.58 217,396 83.04 195,894 87.78 223,784 90.49 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Other Loans: Consumer Loans Auto Loans 12,417 4.96 9,337 3.72 4,765 1.82 1,147 0.52 1,362 0.55 Recreational Vehicles 9,416 3.76 12,881 5.13 12,352 4.72 7,908 3.54 6,949 2.81 Manufactured Homes 620 0.25 13,484 5.37 15,161 5.79 5,751 2.58 1,616 0.66 Other Secured 1,866 0.74 2,020 0.81 2,065 0.79 3,867 1.73 3,793 1.53 Unsecured 1,445 0.58 1,299 0.52 1,398 0.53 1,499 0.67 1,564 0.63 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Total Consumer Loans 25,764 10.29 39,021 15.55 35,741 13.65 20,172 9.04 15,284 6.18 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Commercial Business Loans: Secured 6,199 2.47 9,346 3.73 8,332 3.18 6,810 3.05 7,857 3.18 Unsecured 620 0.25 350 0.14 339 0.13 279 0.13 379 0.15 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Total Commercial Business Loans 6,819 2.72 9,696 3.87 8,671 3.31 7,089 3.18 8,236 3.33 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Total Loan Portfolio, Gross 250,487 100.00% 250,882 100.00% 261,808 100.00% 223,155 100.00% 247,304 100.00% ====== ====== ====== ====== ====== Less: Unamortized discount and deferred loan fees (1,045) (1,756) (2,008) (741) (222) Allowance for Loan Losses 3,438 2,647 2,235 3,249 3,089 -------- -------- -------- -------- -------- Total Loans Receivable, Net $248,094 $249,991 $261,581 $220,647 $244,437 ======== ======== ======== ======== ========
The following table shows the composition of the Company's loan portfolio by fixed- and adjustable-rate at the dates indicated.
December 31, ------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 ------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) Fixed Rate Loans: Real Estate: One- to Four-Family $111,841 44.65% $ 91,528 36.48% $ 91,299 34.87% $ 68,377 30.64% $ 86,529 34.99% Home Equity 15,234 6.08% 8,405 3.35% 6,689 2.56% 5,586 2.50% 5,133 2.08% Commercial and Multi Family 2,590 1.03% 2,633 1.05% 13,144 5.02% 17,918 8.03% 17,268 6.98% Construction 1,840 0.73% 633 0.25% 4,809 1.84% 812 0.36% 2,280 0.92% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total Real Estate 131,505 52.49% 103,199 41.13% 115,941 44.29% 92,693 41.53% 111,210 44.97% Consumer 25,110 10.03% 33,343 13.29% 28,027 10.70% 15,644 7.01% 15,284 6.18% Commercial Business 3,124 1.24% 4,476 1.79% 3,480 1.33% 2,387 1.07% 8,236 3.33% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total fixed-rate loans 159,739 63.76% 141,018 56.21% 147,448 56.32% 110,724 49.61% 134,730 54.48% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Adjustable Rate Loans: Real Estate: One- to Four-Family 46,341 18.50% 41,940 16.72% 49,119 18.76% 48,064 21.54% 50,025 20.23% Home Equity 7,583 3.03% 9,114 3.63% 10,026 3.83% 10,549 4.73% 10,644 4.30% Commercial and Multi Family 32,081 12.81% 47,472 18.92% 42,310 16.16% 44,588 19.98% 51,905 20.99% Construction 394 0.16% 440 0.18% --- ----% --- ----% --- ----% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total Real Estate 86,399 34.50% 98,966 39.45% 101,455 38.75% 103,201 46.25% 112,574 45.52% Consumer 654 0.26% 5,678 2.26% 7,714 2.95% 4,528 2.03% --- ----% Commercial Business 3,695 1.48% 5,220 2.08% 5,191 1.98% 4,702 2.11% --- ----% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total adjustable-rate loans 90,748 36.24% 109,864 43.79% 114,360 43.68% 112,431 50.39% 112,574 45.52% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total Loan Portfolio, Gross 250,487 100.00% 250,882 100.00% 261,808 100.00% 223,155 100.00% 247,304 100.00% ====== ====== ====== ====== ====== Less: Unamortized discount and deferred loan fees (1,045) (1,756) (2,008) (741) (222) Allowance for Loan Loss 3,438 2,647 2,235 3,249 3,089 -------- -------- -------- -------- -------- Total Loans Receivable, Net $248,094 $249,991 $261,581 $220,647 $244,437 ======== ======== ======== ======== ========
The following table illustrates the contractual maturity of the Company's loan portfolio at December 31, 1996. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the contract is due. The schedule does not reflect the effects of possible prepayments or enforcement of due-on-sale clauses.
Real Estate -------------------------------------------------- One- to Multi- Four-Family Family and Commercial and Home Equity Commercial Construction(2) Consumer Business Total -------------- -------------- -------------- -------------- -------------- -------------- Weighted Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Average Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Amount Rate Due During ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- Periods Ending December 31, 1997 (1) $1,711 9.34% $1,443 9.49% $ ----- ----% $2,088 9.64% $1,574 9.92% $6,816 9.60% 1998 1,277 8.60 2,288 8.36 ------ ---- 1,681 9.16 1,541 8.86 6,787 8.72 1999 2,300 8.40 3,839 9.75 ------ ---- 4,970 8.37 1,638 9.20 12,747 8.90 2000 and 2001 6,740 8.40 12,012 7.07 ------ ---- 8,376 8.35 1,331 7.53 28,459 7.78 2002 to 2006 19,748 8.13 7,282 9.38 ------ ---- 4,185 11.15 91 9.13 31,306 8.82 2007 to 2011 65,389 7.76 1,012 9.10 924 7.59 4,419 10.56 255 10.98 71,999 7.96 2012 and following 83,834 7.53 6,795 9.15 1,310 6.78 45 8.39 389 10.37 92,373 7.65 - --------------------- (1) Includes demand loans, loans having no stated maturity and overdraft loans. (2) Construction loan terms are generally less than one year, however, upon completion of the construction phase, the loans are generally converted to a permanent mortgage with a term not to exceed thirty years, thereby extending the contractual maturity. Accordingly, the maturity on these loans are shown at the final expected maturity of the permanent financing.
As of December 31, 1996, the total amount of loans due after December 31, 1997 which have fixed interest rates was $ 158.0 million, while the total amount of loans due after such date which have floating or adjustable interest rates was $85.6 million. One- to Four-Family Residential Real Estate Lending The Company's residential first mortgage loans consist primarily of one- to four-family, owner-occupied mortgage loans. At December 31, 1996, $158.2 million, or 63.2%,of the Company's gross loans consisted of one- to four-family residential first mortgage loans. Approximately 70.7% of the Company's one- to four-family residential first mortgage loans provide for fixed rates of interest and for repayment of principal over a fixed period not to exceed 30 years. The Company's fixed-rate one- to four-family residential mortgage loans are priced competitively with the market. Accordingly, the Company attempts to distinguish itself from its competitors based on quality of service. The Company generally underwrites its fixed-rate, one- to four-family, residential, first mortgage loans using Federal National Mortgage Association ("FNMA") secondary market standards. The Company generally holds for investment all one- to four-family residential first mortgage loans it originates. In underwriting one- to four-family residential first mortgage loans, the Company evaluates both the borrower's ability to make monthly payments and the value of the property securing the loan. Properties securing real estate loans made by the Company are appraised by independent fee appraisers approved by the Board of Directors. The Company requires borrowers to obtain title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Company currently offers one, three, five and seven year residential ARM loans with an interest rate that adjusts annually in the case of a one-year ARM loan, and every three, five or seven years in the case of a three, five or seven year ARM loan, respectively, based on the change in the relevant Treasury constant maturity index. These loans provide for up to a 2.0% periodic cap and a lifetime cap of 6.0% over the initial rate. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as is the Company's cost of funds. Borrowers of one-year residential ARM loans are generally qualified at a rate 2.0% above the initial interest rate. The Company's residential ARM loans may be modified into fixed-rate loans. ARM loans generally pose greater credit risks than fixed-rate loans, primarily because as interest rates rise, the required periodic payment by the borrower rises, increasing the potential for default. However, as of December 31, 1996, the Company had not experienced higher default rates on these loans. See "Asset Quality - Non-Performing Assets." The Company's one- to four-family mortgage loans do not contain prepayment penalties and do not permit negative amortization of principal. Real estate loans originated by the Company generally contain a "due on sale" clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property. The Company has waived the due on sale clause on loans held in its portfolio from time to time to permit assumptions of the loans by qualified borrowers. The Company does not currently originate residential mortgage loans if the ratio of the loan amount to the value of the property securing the loan (i.e., the "loan-to-value" ratio) exceeds 95%, with the exception of FHA loans, which are fully insured by the Federal Government. If the loan-to-value ratio exceeds 80%, the Company requires that borrowers obtain private mortgage insurance in amounts intended to reduce the Company's exposure to 80% or less of the lower of the appraised value or the purchase price of the real estate security. See "Loan Originations and Sales." The Company makes construction loans to individuals for the construction of their residences. The Company has occasionally made loans to builders for the construction of residential homes, provided the builder has a sales contract to sell the home upon completion. No construction loan is approved unless there is evidence of a commitment for permanent financing upon completion of the residence, whether through the Company or another financial institution. Construction loans generally will require construction stage inspections before funds may be released to the borrower. Such inspections are generally performed by outside fee appraisers. At December 31, 1996, the Company's construction loan portfolio totaled $2.2 million, or 0.9% of its gross loan portfolio. Substantially all of these construction loans were to individuals intending to occupy such residences and were secured by property located within the Company's primary market area. Although no construction loans were classified as non-performing as of December 31, 1996, these loans do involve a higher level of risk than conventional one- to four-family residential mortgage loans. For example, if a project is not completed and the borrower defaults, the Company may have to hire another contractor to complete the project at a higher cost. Home Equity Lending The Company's home equity loans and lines of credit are secured by a lien on the borrower's residence and generally do not exceed $200,000. The Company uses the same underwriting standards for home equity loans as it uses for one- to four-family residential mortgage loans. Home equity loans are generally originated in amounts which, together with all prior liens on such residence, do not exceed 90% of the appraised value of the property securing the loan. The interest rates for home equity loans and lines of credit adjust at a stated margin over the prime rate or, in the case of loans (but not lines of credit), have fixed interest rates. Home equity lines of credit generally require interest only payments on the outstanding balance for the first five years of the loan, after which the outstanding balance is converted into a fully amortizing, adjustable-rate loan with a term not in excess of 15 years. As of December 31, 1996, the Company had $22.8 million in home equity loans and lines of credit outstanding, with an additional $4.0 million of unused home equity lines of credit. Commercial and Multi-Family Real Estate Lending The Company has engaged in commercial and multi-family real estate lending secured primarily by apartment buildings, small office buildings, motels, warehouses, nursing homes, strip shopping centers and churches located in the Company's primary market area, although the origination of these types of loans has recently been de-emphasized by the Bank. At December 31, 1996, the Company had $29.9 million and $4.7 million of commercial real estate and multi-family real estate loans, respectively, which represented 12.0% and 1.9%, respectively, of the Company's gross loan portfolio at that date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management Strategy - Asset Quality" and "Provision for Loan Losses" in the Annual Report for a discussion of the Bank's bulk sale of certain multi-family and commercial loans. The Bank's commercial and multi-family real estate loans generally have adjustable rates and terms to maturity that do not exceed 20 years. The Company's current lending guidelines generally require that the multi-family or commercial income-producing property securing a loan generate net cash flows of at least 125% of debt service after the payment of all operating expenses, excluding depreciation, and a loan-to-value ratio not exceeding 65%. Prior to September 1990, the Company originated commercial and multi-family loans with loan-to-value ratios of up to 75%. Due to declines in the value of some properties as a result of the economic conditions in the Company's primary market area, however, the current loan-to-value ratio of some commercial and multi-family real estate loans in the Company's portfolio may exceed the initial loan-to-value ratio. Adjustable rate commercial and multi-family real estate loans provide for interest at a margin over a designated index, with periodic adjustments at frequencies of up to five-years. The Company generally analyzes the financial condition of the borrower, the borrower's credit history, the reliability and predictability of the cash flows generated by the property securing the loan and the value of the property itself. The Company generally requires personal guarantees of the borrowers in addition to the security property as collateral for such loans. Appraisals on properties securing commercial and multi-family real estate loans originated by the Company are performed by independent fee appraisers approved by the Board of Directors. At December 31, 1996, the Company's largest multi-family or commercial real estate lending relationship consisted of a $1.3 million loan secured by a motel. The next largest multi-family or commercial lending relationships at December 31, 1996 were a $1.2 million loan secured by a strip shopping center, and a $1.1 million loan secured by a day treatment center for mentally retarded and developmentally disabled individuals, all of which were current as of December 31, 1996. At December 31, 1996, $1,726,000 , or 4.98% of the Company's multi-family and commercial real estate loan portfolio was non-performing. See "Asset Quality - Non-Performing Assets". Multi-family and commercial real estate loans generally present a higher level of risk than loans secured by one- to four-family residences. This greater risk is due to several factors, including the concentration of principal in a limited number of loans and borrowers, the effect of general economic conditions on income producing properties and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family and commercial real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower's ability to repay the loan may be impaired and the value of the property may be reduced. The balances of these types of loans have declined over the past five years with a significant decrease from $50.1 million at December 31, 1995 to $34.7 million at December 31, 1996, due primarily to the bulk sale of certain performing and non-performing loans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management Strategy Asset Quality" in the Annual Report. The Company currently plans to continue to de-emphasize the origination of commercial and multi-family real estate loans, thereby reducing its credit risk exposure associated with these types of loans. Consumer Lending The Company offers a variety of secured consumer loans, including loans secured by automobiles and recreational vehicles ("RV's"). In addition, the Company offers other secured and unsecured consumer loans. The Company currently originates substantially all of its consumer loans in its primary market area. The Company originates consumer loans on a direct basis only, where the Company extends credit directly to the borrower. At December 31, 1996 the Company's consumer loan portfolio totaled $25.8 million, or 10.3% of the gross loan portfolio. At December 31, 1996, 97.5% of the Company's consumer loans were fixed-rate loans and 2.5% were adjustable-rate loans. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. Terms to maturity range up to 15 years for manufactured homes and certain RV's and up to 60 months for other secured and unsecured consumer loans. The Company offers both open- and closed-end credit. Open-end credit is extended through lines of credit that are generally tied to a checking account. These credit lines currently bear interest up to 18% and are generally limited to $10,000. The Company no longer originates manufactured home loans. The underwriting standards employed by the Company for consumer loans include, a determination of the applicant's payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. Although creditworthiness of the applicant is a primary consideration, the underwriting process also includes a comparison of the value of the security, if any, in relation to the proposed loan amount. At December 31, 1996, automobile loans and RV loans (such as motor homes, boats, motorcycles, snowmobiles and other types of recreational vehicles) totaled $12.4 million and $9.4 million or 48.2% and 36.5% of the Company's total consumer loan portfolio, and 5.0% and 3.8% of its gross loan portfolio, respectively. During 1996, the Company placed more emphasis on originating automobile loans secured by both new and used automobiles, thereby experiencing approximately $3 million in net growth. In the past, originations were generated primarily through advertising and lobby displays. The Company, over the past year, has increased the number of relationships with local automobile dealerships in order to further enhance automobile originations through their referrals. The Company's maximum loan-to-value ratio on new automobiles is 100% of the borrower's cost including sales tax, and on used automobiles up to 5 years old, 100% of the vehicle average retail value, based on NADA (National Auto Dealers Association) valuation. Non-performing automobile loans as of December 31, 1996 totaled $39,000 or .2% of the Company's consumer loan portfolio. Of the RV loan balance, approximately $6.5 and $2.9 million were secured by new and used RVs, respectively. Approximately 75% of the RV portfolio consists of loans that were originated through the Company's relationship with Alpin Haus, Inc., a retail RV dealer formerly owned by one of the Company's directors. The Company's maximum loan-to-value ratio on new and used RV loans is the lesser of (i) 85% of the borrower's cost, which includes such items as sales tax and dealer options or (ii) 115% of either the factory invoice for a new RV or the wholesale value, plus sales tax, for a used RV. In the case of used RV's, the wholesale value is determined using published guide books. At December 31, 1996, RV loans totaling $175,000 or 1.9% of the total RV portfolio, were non-performing. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or are secured by rapidly depreciable assets, RVs and automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of high initial loan-to-value ratios, repossession, rehabilitation and carrying costs, and the greater likelihood of damage, loss or depreciation of the underlying collateral. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans. In the case of RV loans, which tend to have loan balances in excess of the resale value of the collateral, borrowers may abandon the collateral property making repossession by the Company and subsequent losses more likely. During 1996, the Company sold certain performing and non-performing loans as part of a bulk sale, including a majority of its manufactured home loan portfolio, as well as certain RV loans, thereby significantly reducing its credit risk exposure on these types of loans (see "Loan Originations and Sales"). However, management expects that delinquencies in its consumer loan portfolio may increase as RV loans continue to season. At December 31, 1996, $318,000, or 1.2%, of the Company's consumer loan portfolio was non-performing and $56,000 or 0.2% of such loans were restructured. There can be no assurances that additional delinquencies will not occur in the future. Commercial Business Lending The Company also originates commercial business loans, although the origination of these types of loans has recently been de-emphasized by the Bank. At December 31, 1996, commercial business loans comprised $6.8 million, or 2.7% of the Company's gross loan portfolio. Most of the Company's commercial business loans have been extended to finance local businesses and include primarily short term loans to finance machinery and equipment purchases and, to a lesser extent, inventory and accounts receivable. Loans made to finance inventory and accounts receivable will only be made if the borrower secures such loans with the inventory and/or receivables plus additional collateral acceptable to the Company, generally real estate. Commercial loans also involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies. At December 31, 1996, the largest commercial business lending relationship consisted of eight loans to the Bennett Funding Group, aggregating $3.6 million secured by various office equipment and the equipment contracts between the borrower and its lessees. These loans were in default as of December 31, 1996 as a result of a bankruptcy filing on March 29, 1996, and the Bank reduced its recorded value to $1.9 million for such loans as of December 31, 1996. For further discussion, see "Asset Quality - Non-Performing Assets" herein, and "Management Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report. The terms of loans extended on machinery and equipment are based on the projected useful life of such machinery and equipment, generally not to exceed seven years. Secured, non-mortgage lines of credit are available to borrowers provided that the outstanding balance is paid in full (i.e.,the credit line has a zero balance) for at least 30 days every year. In the event the borrower does not meet this 30 day requirement, the line of credit is generally terminated and the outstanding balance is converted into an amortizing loan. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income and which are secured by real property, the value of which tends to be more easily ascertainable, commercial business loans typically are made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself (which, in turn, is often dependent upon the general economic environment). The Company's commercial business loans are usually, but not always, secured by business assets. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. As part of its commercial business lending policy, the Company generally requires all borrowers with commercial business loans to submit annual financial statements to the Company. The Company's commercial business lending policy includes credit file documentation and analysis of the borrower's character, capacity to repay the loan, the adequacy of the borrower's capital and collateral as well as an evaluation of conditions affecting the borrower. Consideration of the borrower's cash flows is also an important aspect of the Company's current credit analysis. The Company generally obtains personal guarantees on its commercial business loans. Nonetheless, such loans are believed to carry higher credit risk than more traditional thrift institution investments. The balances of these types of loans have declined from $9.7 million in 1995 to $6.8 million in 1996, due primarily to the bulk sale of certain performing and non-performing loans, the partial charge-off of the Bennett Funding Group loan relationship, as well as the general de-emphasis of this loan type. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Management Strategy - Asset Quality" in the Annual Report. The Company plans to continue to de-emphasize the origination of commercial business loans, thereby reducing its credit risk exposure associated with this type of lending. Loan Originations and Sales Loan originations are developed from continuing business with depositors and borrowers, soliciting realtors, dealerships and mortgage brokers, as well as walk-in customers. Loans are originated by the Company's staff of salaried loan officers. While the Company originates both fixed- and adjustable-rate loans, its ability to originate loans is dependent upon demand for loans in its market. Demand is affected by the local economy and interest rate environment. The Company currently retains fixed-rate and adjustable-rate real estate loans it originates in its portfolio. As a regular part of its business, the Company does not sell loans and has not purchased any loans since 1989, except for one $200,000 residential ARM loan it purchased from a mortgage banker in 1994. During 1996, the Company completed the bulk sale of certain performing and nonperforming loans in order to improve the credit quality of its loan portfolio. See "Management Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report. For the year ended December 31, 1996, the Company originated $81.4 million of loans compared to $50.2 million and $91.2 million in 1995 and 1994, respectively. Management attributes the high level of originations during 1994 to the sustained low interest rate environment prevalent during 1993 and the first half of 1994, which caused many individuals to refinance their loans. Similarly, management attributes the decrease in or the "leveling off" of loan originations for 1995 to the sharp decline in refinancing as a result of a generally rising interest rate environment since mid 1994. During 1996, the Company increased its originations of one- to four-family mortgages through the referrals of several local brokers. Primarily, these originations reflected a resurgence of refinancings, which comprised approximately 67% of the Bank's total originations of one- to four family mortgages. Of the one- to four-family and home equity originations, approximately $26.5 million were adjustable rate, and $35.5 million were fixed rate loans. In periods of economic uncertainty, the Company's ability to originate large dollar volumes of real estate loans with acceptable underwriting characteristics may be substantially reduced or restricted with a resultant decrease in operating earnings. The following table shows the loan origination, loan sale and repayment activities of the Company for the periods indicated. Years Ended December 31, -------------------------- 1996 1995 1994 -------------------------- Origination by Type: (In Thousands) Real estate-one- to four-family $47,691 $ 8,269 $56,014 -home equity 14,291 7,921 7,876 -multi-family 190 134 510 -non-residential 2,838 2,014 3,437 Non-real estate-consumer 7,735 18,359 17,207 -commercial business 8,681 13,472 6,174 ------ ------ ------ Total loans originated 81,426 50,169 91,218 Repayments: Principal repayments 52,741 58,374 48,504 Proceeds from sale of loans 18,929 --- --- Other decreases, net (1) 11,653 3,385 1,780 ------ ------ ------ Net increase (decrease) ($ 1,897) ($11,590) $40,934 ======= ======= ====== - ----------------------------------- (1) Includes net charge-offs, transfers to real estate owned, and additions to loan loss allowances. Asset Quality Generally, when a borrower fails to make a required payment on a loan secured by residential real estate or consumer products, the Company initiates collection procedures by mailing a delinquency notice after the account is 15 days delinquent. At 30 days delinquent, a personal letter is generally sent to the customer requesting him or her to make arrangements to bring the loan current. If the delinquency is not cured by the 45th day, the customer is generally contacted by telephone and another personal letter is sent, with the same procedure being repeated if the loan becomes 60 days delinquent. At 90 days past due, a demand letter is generally sent. If there is no response, a final demand letter for payment in full is sent, and unless satisfactory repayment arrangements are made subsequent to the final demand letter, immediate repossession or foreclosure procedures are commenced. Similar collection procedures are employed for loans secured by commercial real estate and commercial business collateral, except when such loans are 60 days delinquent, a letter is generally sent requesting rectification of the delinquency within seven days, otherwise foreclosure or repossession procedures, as applicable, are commenced. The following table sets forth the Company's loan delinquencies by type, by amount and by percentage of type at December 31, 1996.
--------------------------------------------------------------- Total Loans Delinquent 60-89 Days 90 Days and Over 60 Days or More --------------------------------------------------------------- ------------------------------ % of Loan % of Loan % of Loan Number Amount Category Number Amount Category Number Amount Category -------- ------- --------- -------- ------- -------- -------- -------- --------- (Dollars in Thousands) Real Estate: One-to four-family --- $ --- ----% 16 $ 410 0.26% 16 $ 410 0.26% Home Equity 1 21 0.09% --- --- ----% 1 21 0.09% Multi-family --- --- ----% --- --- ----% --- --- ----% Commercial 2 108 0.36% 7 907 3.03% 9 1,015 3.39% Consumer 21 184 0.71% 33 262 1.02% 54 446 1.73% Commercial Business 5 85 1.25% 15 2,269 33.27% 20 2,354 34.52% -------- ------- --------- -------- ------- -------- -------- -------- --------- Total 29 $398 0.16% 71 $3,848 1.54% 100 $4,246 1.70% ======== ======= ========= ======== ======= ======== ======== ======== =========
Non-Performing Assets The table below sets forth the amounts and categories of non-performing assets in the Company's total assets at the dates indicated. Loans are generally placed on non-accrual status when the loan is more than 90 days delinquent (except for FHA insured and VA guaranteed loans) or when the collection of principal and/or interest in full becomes doubtful. When loans are designated as non-accrual, all accrued but unpaid interest is reversed against current period income and, as long as the loan remains on non-accrual status interest is recognized only when received. Foreclosed assets include assets acquired in settlement of loans. For further discussion of non-performing assets, and the bulk sale of certain non-performing assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset Quality" contained in the Annual Report.
December 31, ---------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (In thousands) Non-accruing loans: One- to four-family (1) $259 $1,525 $1,130 $1,705 $448 Multi-family --- 77 563 1,354 --- Commercial real estate 339 1,549 4,096 2,937 2,669 Consumer 256 605 111 286 331 Commercial Business 2,269 743 404 684 1,563 ---------- ---------- ---------- ---------- ---------- Total 3,123 4,499 6,304 6,966 5,011 ---------- ---------- ---------- ---------- ---------- Accruing loans delinquent more than 90 days: One- to four-family (1) 151 261 480 396 803 Multi-family --- --- --- 54 --- Commercial real estate 568 --- --- 67 1,230 Consumer 6 --- --- --- 2 Commercial Business --- --- --- --- --- ---------- ---------- ---------- ---------- ---------- Total 725 261 480 517 2,035 ---------- ---------- ---------- ---------- ---------- Troubled debt restructured loans: One- to four-family (1) 88 89 90 91 0 Multi-family 38 1,626 1,645 1,709 1,169 Commercial real estate 781 2,185 1,758 1,547 1,890 Consumer 56 84 62 3 23 Commercial Business 68 51 95 527 336 ---------- ---------- ---------- ---------- ---------- Total 1,031 4,035 3,650 3,877 3,418 ---------- ---------- ---------- ---------- ---------- Total non-performing loans: 4,879 8,795 10,434 11,360 10,464 ---------- ---------- ---------- ---------- ---------- Foreclosed assets: One- to four-family (1) 194 459 102 346 373 Multi-family 282 926 1,792 2,405 502 Commercial real estate --- 1,503 1,799 2,707 3,983 Consumer 239 281 111 42 64 Commercial Business --- --- --- --- --- ---------- ---------- ---------- ---------- ---------- Total 715 3,169 3,804 5,500 4,922 ---------- ---------- ---------- ---------- ---------- Total non-performing assets $5,594 $11,964 $14,238 $16,860 $15,386 ========== ========== ========== ========== ========== Total as a percentage of total assets 1.18% 2.72% 4.15% 5.06% 4.76% - -------------------------------------- (1) Includes home equity loans
For the year ended December 31, 1996, gross interest income which would have been recorded had the year end non-accruing loans been current in accordance with their original terms amounted to $477,000. The amount that was included in interest income on such loans was $149,000, which represented actual receipts. Similarly, for the year ended December 31, 1996, gross interest income which would have been recorded had the year end restructured loans paid in accordance with their original terms amounted to $127,000. The amount that was included in interest income for the year ended December 31, 1996 was $80,000. Non-Accruing Assets At December 31, 1996, the Company had $3.1 million in non-accruing loans, which constituted 1.2% of the Company's gross loan portfolio. Except as discussed immediately below, there were no non-accruing loans or aggregate non-accruing loans-to-one-borrower in excess of $500,000. The largest non-accruing loan or aggregate lending relationship at December 31, 1996, consisted of eight loans secured by various office equipment and the equipment lease contracts between the borrower and its lessees. On March 29, 1996, the borrower, Bennett Funding Group, filed Chapter 11 bankruptcy. At that time, the loan balances aggregated $3.6 million. During 1996, the Company established reserves totaling $2.8 million. In the fourth quarter, $1.7 million was charged against this reserve, reducing the recorded amount of these loans to $1.9 million. Negotiations with the Bennett bankruptcy trustee related to the Bank's total Bennett relationship are in process, and based upon discussions to date, management believes that the remaining $1.1 million reserve is adequate. Accruing Loans Delinquent More than 90 Days As of December 31, 1996, the Company had $725,000 of accruing loans delinquent more than 90 days. Of these loans, $151,000 were FHA insured or VA guaranteed one- to four-family residential loans. The remaining $568,000 represented three commercial real estate loans for which management believes that all contractual payments are collectible. Subsequent to December 31, 1996 these three loans were brought current. Restructured Loans As of December 31, 1996, the Company had restructured loans of $1.0 million with one loan or aggregate lending relationship over $500,000 as discussed below. The balance of the Company's restructured loans at that date consisted of one one- to four-family residential mortgage loan, one multi-family real estate loan, four commercial real estate loans, two consumer loans and three commercial business loans. The Company's largest restructured loan or lending relationship at December 31, 1996, was a 58% loan participation interest, secured by a mixed use office/apartment complex located in Syracuse, New York, on which the Company is the lead lender. The loan participation was originated for $1.1 million in February 1986 with a loan to value ratio of 67.0%. The loan had been experiencing delinquencies since June 1993 due to cash flow problems caused by high vacancy rates. In December 1993, the Company, based on an October 1993 appraisal, wrote-down the loan balance to $609,000 and in July 1994 restructured the loan to reduce the principal balance outstanding and interest rate charged. At December 31, 1996, the outstanding balance on the Company's participation interest was $593,000. The office and apartment portions of the property at December 31, 1996 were approximately 50% occupied. The rooms are rented on a daily basis and the gross income from room rental increased 1% in 1996. The loan, since being restructured, has performed according to the terms of the restructuring. Foreclosed Assets As of December 31, 1996, the Company had $715,000 in carrying value of foreclosed assets. Multi-family and commercial real estate represented 39.4% of the Company's foreclosed property, which consisted solely of a three story, 54-unit, student housing project located in Morrisville, New York. Repossessed consumer assets represented 33.4% of the Company's foreclosed properties, consisting primarily of 18 manufactured homes and 13 recreational vehicles. The student housing project loan referred to above was originated as a loan to facilitate the sale of foreclosed property in 1985 for $1.4 million at a 100% loan-to-value ratio. The Company reacquired this property through foreclosure in April 1994. The apartment complex began experiencing vacancy problems when the State University of New York at Morrisville stopped referring students to off-campus housing and began requiring students to live on campus. The occupancy rate of the housing project was approximately 28% during the 1995-1996 academic year. Subsequent to December 31, 1996, the Company received a contract for sale on this property, and expects a closing to take place in April 1997. This property is being carried at a value equal to the estimated net sales proceeds. Other Loans of Concern As of December 31, 1996, there were $7.4 million of other loans not included in the table or discussed above where known information about the possible credit problems of borrowers caused management to have doubts as to the ability of the borrower to comply with present loan repayment terms. Set forth below is a description of the largest other loans of concern. The largest other loan of concern at December 31, 1996, consisted of a commercial real estate loan secured by a one-story light industrial facility in Gates, New York. This loan was originated in May 1988 for $930,000 with a loan-to-value ratio of 74.4%. The property has recently experienced tenant vacancies and based on recent financial information submitted by the borrower, the cash flow generated by this property has deteriorated. However, the borrower has been able to keep the loan current by utilizing other sources of funds. As a result, the Bank has requested additional financial information from the guarantors on this loan, to assess their financial position, as the secondary source of repayment on this lending relationship. At December 31, 1996, the principal balance was $886,000. The second largest loan of concern at December 31, 1996, consisted of a commercial real estate loan secured by an office building in Atlanta, Ga. This loan was originated in 1987 with a loan-to-value ratio of 74%. Based on financial information submitted by the borrower, the cash flow generated by this property is insufficient to cover the debt service on this loan. At December 31, 1996, the principal balance was $848,000. Subsequent to this date, this loan has been paid in full. The third largest loan of concern at December 31, 1996, consisted of a single use commercial property (a bowling facility and adjacent used car lot) located in Schenectady, New York. This loan was originated in 1992 with a loan-to-value ratio of 50%. Although the most recent financial information received indicates that cash flow is adequate to service the debt on this loan, the borrower's financial position has shown deterioration over the last few years. The Bank has requested more recent financial statements from the borrower and will continue to monitor the cash flow trends on this property. The principal balance as of December 31, 1996 was $667,000. The fourth largest loan of concern at December 31, 1996, consisted of a multi-family real estate loan secured by a 32-unit apartment building located in LeRoy, New York. This loan was originated in December 1989 with a loan-to-value ratio of 72.2%. Although the property was 97% occupied based on a 1996 rent roll, the cash flow generated by the property has deteriorated. However, the borrower has been able to keep the loan current by utilizing other sources of funds. As a result, the Bank has requested additional financial information from the guarantors on this loan, to assess their financial position, as the secondary source of repayment on this lending relationship. A recent property inspection also noted the existence of deferred maintenance. At December 31, 1996, the principal balance was $645,000. The fifth largest loan of concern at December 31, 1996, consisted of a commercial real estate loan secured by a retail store/warehouse in Douglasville, Georgia. This loan was originated in 1987 with a loan-to-value ratio of 78%. The Bank has been unable to obtain current financial information from the borrower, and therefore, cannot make any assumptions regarding the borrowers ability to continue to service this debt in the future. The Bank continues to request current financial information from the borrower. Also, a property inspection has been completed subsequent to December 31, 1996 which indicates that the property is in excellent condition and the value has remained stable, providing a loan-to-value ratio at December 31, 1996 of 62%. At December 31, 1996, the principal balance was $549,000. All of the above mentioned loans were current at December 31, 1996. There were no other loans with a balance in excess of $500,000 being specially monitored by the Company as of December 31, 1996. The balance of other loans of concern at that date consisted of 15 commercial and multi-family real estate loans totaling $3.1 million, nine commercial business loans totaling $484,000 and six one- to four-family mortgages totaling $193,000. These loans have been considered by management in conjunction with the analysis of the adequacy of the allowance for loan losses. Classified Assets Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the insured institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. When an insured institution classifies problem assets as either substandard or doubtful, it may increase general allowances for loan losses in an amount deemed prudent by management to address the increased risk of loss on such assets. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review and adjustment by the OTS and the FDIC, which may order increases in general or specific loss allowances. In connection with the filing of its periodic reports with the OTS and in accordance with its classification of assets policy, the Company regularly reviews the problem assets in its portfolio to determine whether any assets require classification in accordance with applicable regulations. On the basis of management's review of its assets, at December 31, 1996, the Company had classified $10.9 million as substandard, none as doubtful or loss. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risk inherent in its loan portfolio and changes in the nature and volume of its loan activity, including those loans which are being specifically monitored by management. Such evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers among other matters, the loan classifications discussed above, the estimated fair value, less estimated disposal costs, of the underlying collateral, economic conditions, historical loan loss experience, and other factors that warrant recognition in providing for an adequate loan loss allowance. Real estate properties acquired through foreclosure are recorded at fair value, less estimated disposal costs. If fair value at the date of foreclosure is lower than the book balance of the related loan, the difference will be charged to the allowance for loan losses at the time of transfer. Valuations of the property are periodically updated by management and if the value declines, a specific provision for losses on such property is established by a charge to operations and the asset's recorded value is written down accordingly. Although management believes that it uses the best information available to determine the allowances, unforeseen market conditions could result in adjustments and net earnings could be significantly affected if circumstances differ substantially from the assumptions used in determining the level of the allowance. Future additions to the Company's allowances will be the result of periodic loan, property and collateral reviews and thus cannot be predicted in advance. In addition, federal regulatory agencies, as an integral part of the examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based upon their judgment of the information available to them at the time of their examination. At December 31, 1996, the Company had a total allowance for loan losses of $3.4 million, representing 70.5% of total non-performing loans. See Note 5 of the Notes to Consolidated Financial Statements. The following table sets forth an analysis of the Company's allowance for loan losses.
For the year ended December 31, 1996 1995 1994 1993 1992 ----------- ----------- ----------- ----------- ----------- (In thousands) Balance at beginning of period $2,647 $2,235 $3,248 $3,089 $3,294 Charge-offs: One- to four-family (1) (530) (31) (28) (24) --- Multi Family (1,174) (171) (668) (257) --- Commercial Real Estate (2,564) (568) (1,336) (641) (593) Consumer (1,834) (400) (196) (409) (181) Commercial Business (2,616) (46) (232) (399) (3) ----------- ----------- ----------- ----------- ----------- Total Charge offs (8,718) (1,216) (2,460) (1,730) (777) Recoveries: One- to four-family (1) 10 --- 27 13 --- Multi Family --- 64 --- 1 --- Commercial Real Estate --- 1 193 --- --- Consumer 49 41 110 128 78 Commercial Business --- --- 10 58 4 ----------- ----------- ----------- ----------- ----------- Total Recoveries 59 106 340 200 82 Net Charge-offs (8,659) (1,110) (2,120) (1,530) (695) Provisions charged to operations 9,450 1,522 1,107 1,689 490 ----------- ----------- ----------- ----------- ----------- Balance at end of period 3,438 2,647 2,235 3,248 3,089 =========== =========== =========== =========== =========== Ratio of net charge-offs during the period to average loans outstanding during period 3.30% 0.42% 0.88% 0.65% 0.29% ====== ====== ====== ====== ====== Ratio of net charge-offs during the period to average non-performing assets 55.57% 8.45% 13.43% 9.92% 4.81% ====== ====== ====== ====== ====== - ------------------------------------- (1) Includes home equity loans.
The distribution of the Company's allowance for losses on loans at the dates indicated is summarized as follows:
December 31, --------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 --------------------------------------------------------------------------------------------------------- Percent Percent Percent Percent Percent Amount of loans Amount of loans Amount of loans Amount of loans Amount of loans of in each of in each of in each of in each of in each Loan category Loan category Loan category Loan category Loan category Loss to total Loss to total Loss to total Loss to total Loss to total Allowance loans Allowance loans Allowance loans Allowance loans Allowance loans -------------------------------------------------------------------------------------------------------- One- to four-family (1) $157 72.26% $268 60.18% $207 60.02% $175 59.41% $181 61.60% Multi family and commercial real estate 1,599 13.84% 1,097 19.97% 1,260 21.18% 2,607 28.01% 2,123 27.97% Construction and development --- 0.89% --- 0.43% --- 1.84% --- 0.36% --- 0.92% Consumer 355 10.29% 718 15.55% 454 13.65% 330 9.04% 294 6.18% Commercial Business 1,327 2.72% 268 3.87% 114 3.31% 127 3.18% 491 3.33% Unallocated --- ----% 296 ----% 200 ----% 9 ----% --- ----% ------ ------- ------ ------- ------ ------- ------ ------- ------ ------- Total $3,438 100.00% $2,647 100.00% $2,235 100.00% $3,248 100.00% $3,089 100.00% ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= - ------------------------------- (1) Includes home equity loans.
Investment Activities The Bank must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. Liquidity may increase or decrease depending upon the availability of funds and comparative yields on investments in relation to the return on loans. Historically, the Bank has maintained liquid assets at levels above the minimum requirements imposed by the OTS regulations and above levels believed adequate to meet the requirements of normal operations, including potential deposit outflows. At December 31, 1996, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 7.51%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Annual Report and "Regulation - Liquidity" contained herein. In December 1995 the Company reclassified its entire portfolio of investment and mortgage-backed securities to the available for sale category. This reclassification was made in response to a one time transfer allowed by the Financial Accounting Standards Board and the various federal banking regulators. See Note 1(d) of the Notes to Consolidated Financial Statements contained in the Annual Report. Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest their assets in investment grade commercial paper and corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Generally, the investment policy of the Company is to invest funds among various categories of investments and maturities based upon the Company's need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings and to fulfill the Company's asset/liability management policies. To date, the Company's investment strategy has been directed toward high-quality mortgage-backed securities. Substantially all of the mortgage-backed securities owned by the Company are issued, insured or guaranteed either directly or indirectly by a federal agency. At December 31, 1996, all of the Company's securities were classified as available for sale. The fair market value (excluding FHLB stock) and amortized cost of the Company's securities at December 31, 1996 was $200.5 million and $200.7 million, respectively. For additional information on the Company's securities, see Note 4 of the Notes to Consolidated Financial Statements in the Annual Report. Mortgage-backed securities generally increase the quality of the Company's assets by virtue of the insurance or guarantees that back them. Such securities are more liquid than individual mortgage loans and may be used to collateralize borrowings or other obligations of the Company. At December 31, 1996, $113.8 million or 72.8% of the Company's mortgage-backed securities were pledged to secure various obligations of the Company. While mortgage-backed securities carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution of the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. The prepayment risk associated with mortgage-backed securities is monitored periodically, and prepayment rate assumptions adjusted as appropriate to update the Company's mortgage-backed securities accounting and asset/liability reports. Classification of the Company's mortgage-backed securities portfolio as available for sale is designed to minimize that risk. At December 31, 1996, the contractual maturity of 88.8% of all of the Company's mortgage-backed securities was in excess of ten years. The actual maturity of the mortgage-backed security is typically less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are different than anticipated will affect the yield to maturity. The yield is based upon the interest income and the amortization of any premium or discount related to the mortgage-backed security. In accordance with generally accepted accounting principles, premiums and discounts are amortized/accreted over the estimated lives of the securities, which decrease and increase interest income, respectively. The prepayment assumptions used to determine the amortization/accretion period for premiums and discounts can significantly affect the yield of the mortgage-backed security, and these assumptions are reviewed periodically to reflect actual prepayments. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of falling mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Company may be subject to reinvestment risk because to the extent that the Company's mortgage-backed securities amortize or prepay faster than anticipated, the Company may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. The following table sets forth the composition of the Company's securities at the dates indicated.
December 31, ----------------------------------------------------------------------------------- 1996 1995 1994 ----------------------------------------------------------------------------------- Carrying Carrying Carrying Value (1) %of Total Value (1) %of Total Value (1) %of Total ------------ -------- ------------ -------- ----------- -------- Securities: Federal Agency Obligations $ 43,773 21.65% $ 9,967 13.06% $ 10,000 18.17% Municipal Bonds 505 0.25% --- ----% 239 0.43% Other investment securities (2) --- ----% 11,422 14.97% 16,635 30.22% Mortgage-backed securities 156,261 77.10% 53,033 69.49% 26,516 48.17% ----------- -------- ---------- -------- --------- -------- Total securities 200,539 99.00% 74,422 97.52% 53,390 96.99% FHLB stock 2,029 1.00% 1,892 2.48% 1,656 3.01% ----------- -------- ---------- -------- --------- -------- Total securities, and $ 202,568 100.00% $ 76,314 100.00% $ 55,046 100.00% FHLB stock ========== ======== ========== ======== ========= ======== Other interest-earning assets: Interest-bearing deposits with banks $ 2,051 31.31% $ 5,259 6.39% $ 470 6.65% Federal Funds Sold 4,500 68.69% 77,100 93.61% 6,600 93.35% ----------- -------- ---------- -------- ---------- -------- Total $ 6,551 100.00% $ 82,359 100.00% $ 7,070 100.00% ========== ======== ========== ======== ========= ======== ------------------------------------- (1)At December 31, 1996 and 1995 debt security are classified as available for sale and are carried at fair value, and at December 31, 1994 debt securities are classified as held to maturity and are carried at amortized cost. The FHLB stock is non-marketable and accordingly is carried at cost. (2)Primarily comprised of debt securities of Fortune 500 companies initially rated A or better. These securities generally contain greater risk than U.S. Government securities and Federal agency obligations.
The composition and contractual maturities of the securities portfolio (all of which are categorized as available for sale), excluding FHLB stock, are indicated in the following table. The Company's securities portfolio at December 31, 1996, contained no securities of any issuer with an aggregate book value in excess of 10% of the Company's equity, excluding those issued by the United States Government or its agencies. Securities are stated at their contractual maturity date and does not reflect the effects of possible prepayments.
December 31, 1996 --------------------------------------------------------------------------------------- Over One Over Five One Year Year through Years through Over or less Five Years Ten Years 10 Years Total Investment Securities --------------------------------------------------------------------------------------- Amortized Cost Amortized Cost Amortized Cost Amortized Cost Amortized Cost Fair Value --------------------------------------------------------------------------------------- (Dollars in Thousands) Federal agency obligations $ --- $ 18,000 $ 13,000 $ 12,968 $ 43,968 $ 43,773 Other investment securities --- 250 250 --- 500 505 Mortgage-backed securities --- 11,044 6,403 138,744 156,191 156,261 ------- ------- ------- ------- ------- ------- Total investment securities $ --- $ 29,294 $ 19,653 $151,712 $200,659 $200,539 ======= ======= ======= ======= ======= ======= Weighted average yield .... ----% 5.99% 6.99% 7.72% 7.40% 7.40%
Sources of Funds General The Company's primary sources of funds are deposits, borrowings, amortization and prepayment of loan and mortgage-backed security principal, maturities of investment securities, short-term investments, and funds provided from operations. Deposit The Company offers a variety of deposit accounts having a range of interest rates and terms. The Company's deposits consist of savings accounts, money market accounts, transaction accounts, and certificate accounts currently ranging in terms from 91 days to 60 months. The Company primarily solicits deposits from its primary market area and at December 31, 1996, did not have brokered deposits. The Company relies primarily on competitive pricing policies, advertising and customer service to attract and retain these deposits. The Company has utilized premiums and promotional gifts for new accounts in connection with the opening of new branches or with club accounts. At times the Company also uses small advertising give-aways in the aisles of the supermarkets where it maintains branches. For information regarding average balances and rate information on deposit accounts, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report and for information on the dollar amount of deposits in the various deposit types offered by the Company, see Note 8 of the Notes to Consolidated Financial Statements in the Annual Report. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit accounts offered by the Company has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Company has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. The Company manages the pricing of its deposits in keeping with its asset/liability management, liquidity and profitability objectives. Based on its experience, the Company believes that its savings accounts, and transaction accounts are relatively stable sources of deposits. However, the ability of the Company to attract and maintain money market accounts, and certificates of deposit and the rates paid on these deposits have been and will continue to be significantly affected by market conditions. The following table sets forth the savings flows at the Company during the periods indicated. The net increase in deposits for the year ended December 31, 1995, was primarily the result of the Company's having opened two new branches in November 1994 and May 1995 and the Company's decision to raise the interest rates offered on six month certificates of deposit in order to replace borrowed funds. Management believes that the decrease in deposits during 1996 was the result, in part, to some of the Bank's depositors deciding to pursue alternative opportunities, such as stock mutual funds, with a portion of their investable funds. Years Ended December 31, -------------------------------- 1996 1995 1994 ---------- --------- --------- (Dollars in thousands) Opening balance $311,238 $293,152 $294,780 Deposits 860,011 841,042 807,373 Withdrawals 885,591 835,404 818,885 Interest credited 12,424 12,448 9,884 ========== ========= ========= Ending balance $298,082 $311,238 $293,152 ========== ========= ========= Net increase (decrease) ($13,156) $18,086 ($1,628) =========== ======== ========= Percent increase (decrease) (4.23%) 6.17% (0.55%) =========== ======== ========= The following table shows rate and maturity information for the Company's certificates of deposit as of December 31, 1996.
Certificate Accounts 0.00- 4.01 - 6.01 - 8.01 - Percent Maturing in Quarter Ending: 4.00% 6.00% 8.00 or greater Total of Total - ---------------------------------------------------------------------------------------- March 31, 1997 $ 979 $ 33,387 $ 1,035 $ --- $ 35,401 23.30% June 30, 1997 9 22,256 573 --- 22,838 15.03% September 30, 1997 --- 17,006 1,625 --- 18,631 12.26% December 31, 1997 6 13,251 931 --- 14,188 9.34% March 31, 1998 --- 19,332 991 --- 20,323 13.38% June 30, 1998 --- 9,384 2,668 --- 12,052 7.93% September 30, 1998 --- 3,220 372 --- 3,592 2.36% December 31, 1998 --- 2,407 23 --- 2,430 1.60% March 31, 1999 --- 1,879 894 --- 2,773 1.83% June 30, 1999 --- 1,758 880 --- 2,638 1.74% September 30, 1999 --- 2,326 167 --- 2,493 1.64% December 31, 1999 --- 1,287 1,132 --- 2,419 1.59% Thereafter --- 3,373 8,781 --- 12,154 8.00% Total $ 994 $130,866 $ 20,072 $ --- $151,932 100.00% ======== ======== ======== ======== ======== ======= Percent of Total 0.65% 86.13% 13.21% ----% 100.00% ======== ======== ======== ======== ========
The following table indicates the amount of the Company's certificates of deposit by time remaining until maturity as of December 31, 1996.
Maturity Over Over 3 Months 3 to 6 6 to 12 Over or Less Months Months 12 Months Total --------- -------- -------- -------- -------- (In thousands) Certificates of deposit less than $100,000 $34,114 $21,591 $29,918 $55,109 $140,732 Certificates of deposit of $100,000 or more 1,287 1,247 2,901 5,765 11,200 --------- -------- -------- -------- -------- Total certificates of deposit $35,401 $22,838 $32,819 $60,874 $151,932 ========= ======== ======== ======== ========
Borrowings Although deposits are the Company's primary source of funds, the Company's policy generally has been to utilize borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread or when the Company needs additional funds to satisfy loan demand. The Company's borrowings historically have consisted of advances from the FHLB of New York. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At December 31, 1996, the Company had $6 million in FHLB advances. During 1996, the Company significantly increased its other borrowings by $102.8 million. See Note 9 of the Notes to Consolidate Financial Statements contained in the Annual Report. These borrowings were used to purchase various investments including Federal agency obligations and mortgage-backed securities which were simultaneously pledged as securities sold under agreements to repurchase. At December 31, 1996, pledged securities totaled $113.8 million. The positive interest rate spread between these volumes of investments and borrowings has produced an increase of approximately $1.4 million in net interest income with a narrowing in the Company's overall net interest margin from 3.87% for the year ended December 31, 1995 to 3.66% for the year ended December 31, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating Results" contained in the Annual Report. The following table sets forth the maximum month-end balance and average balance of FHLB advances, securities sold under agreements to repurchase and other borrowings for the periods indicated. Years Ended December 31, ----------------------------- 1996 1995 1994 -------- -------- -------- (In thousands) Maximum Balance: FHLB Advances $ 28,000 $15,000 $15,000 Securities sold under agreements to repurchase 102,780 4,000 4,000 Average Balance: FHLB Advances 9,757 3,922 4,068 Securities sold under agreements to repurchase 57,815 958 1,403 The following table sets forth certain information as to the Company's borrowings at the dates indicated: December 31, ----------------------------- 1996 1995 1994 -------- -------- -------- (Dollars in thousands) FHLB advances $ 6,000 $ --- $ 15,000 Securities sold under agreements to repurchase 102,780 --- 4,000 --------- -------- -------- Total borrowings $108,780 $ --- $ 19,000 ========= ======== ======== Weighted average interest rate of FHLB advances 5.30% ----% 5.65% Weighted average interest rate of securities sold under agreements to repurchase 5.96% ----% 5.50% Subsidiary and Other Activities General As a federally chartered savings association, the Bank is permitted by OTS regulations to invest up to 2% of its assets, or $9.2 million at December 31, 1996, in the stock of, or loans to, service corporation subsidiaries. As of such date, the Bank had no investments in service corporation subsidiaries. The Bank may invest an additional 1% of its assets in service corporations where such additional funds are used for inner-city or community development purposes and up to 50% of its total capital in conforming loans to service corporations in which it owns more than 10% of the capital stock. Federal associations also are permitted to invest an unlimited amount in operating subsidiaries engaged solely in activities which a federal association may engage in directly. The Bank organized a single service corporation in 1984, which is known as ASB Insurance Agency, Inc. ("ASB Insurance"). In November 1996, the Company purchased the service corporation from the Bank for $1,000. ASB Insurance offers mutual funds, annuity and brokerage services through a registered broker-dealer to the Company's customers and members of the general public. ASB Insurance recognized gross revenues of $67,500 for the year ended December 31, 1996. Regulation General The Bank, organized in 1886, is a federally chartered savings bank, the deposits of which are federally insured and backed by the full faith and credit of the United States Government. Accordingly, the Bank is subject to broad federal regulation and oversight extending to all its operations. The Bank is a member of the FHLB of New York and is subject to certain limited regulation by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). As the savings and loan holding company of the Bank, the Company also is subject to federal regulation and oversight. The purpose of the regulation of the Company and other holding companies is to protect subsidiary savings associations. The Bank is a member of the Bank Insurance Fund, which is administered by the FDIC. Its deposits are insured up to applicable limits by the FDIC. As a result, the FDIC has certain regulatory and examination authority over the Bank. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. Federal Regulation of Savings Association. The OTS has extensive authority over the operations of savings associations. As part of this authority, the Bank is required to file periodic reports with the OTS and is subject to periodic examinations by the OTS, its primary federal banking regulator, and the FDIC. The last regular OTS examination of the Bank was as of December 31, 1996. When these examinations are conducted by the OTS and the FDIC, the examiners, if they deem appropriate, may require the Bank to provide for higher general or specific loan loss reserves. All savings associations are subject to a semi-annual assessment, based upon the savings association's total assets, to fund the operations of the OTS. The Bank's OTS assessment for the fiscal year ended December 31, 1996, was $89,600. The OTS also has extensive enforcement authority over all federal savings institutions and their holding companies, including the Bank and the Company. This enforcement authority includes, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including the filing of misleading or untimely reports with the OTS. Except under certain circumstances, public disclosure of final enforcement actions by the OTS is required. In addition, the investment, lending and branching authority of the Bank is prescribed by federal laws and it is prohibited from engaging in any activities not permitted by such laws. For instance, no savings institution may invest in non-investment grade corporate debt securities. In addition, the permissible level of investment by federal associations in loans secured by non-residential real property may not exceed 400% of total capital, except with approval of the OTS. Federal savings associations are also generally authorized to branch nationwide. The Bank is in compliance with the noted restrictions. The Bank's general permissible lending limit for loans-to-one-borrower is equal to the greater of $500,000 or 15% of unimpaired capital and surplus (except for loans fully secured by certain readily marketable collateral, in which case this limit is increased to 25% of unimpaired capital and surplus). At December 31, 1996, the Bank's lending limit under this restriction was $6.9 million. Loans fully secured by certain readily marketable collateral may be made for up to 25% of unimpaired capital and surplus, or $11.6 million. The Bank is in compliance with the loans-to-one-borrower limitation. The OTS, as well as the other federal banking agencies, has adopted guidelines establishing safety and soundness standards on such matters as loan underwriting and documentation, asset quality, earnings standards, internal controls and audit systems, interest rate risk exposure and compensation and other employee benefits. Any institution which fails to comply with these standards must submit a compliance plan. A failure to submit a plan or to comply with an approved plan will subject the institution to further enforcement action. The OTS and the other federal banking agencies have also proposed additional guidelines on asset quality and earnings standards. No assurance can be given as to whether or in what form the proposed regulations will be adopted. Insurance of Accounts and Regulation by the FDIC The Bank is a member of the BIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the United States Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines, by regulation or order, to pose a serious risk to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings associations, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices, or is in an unsafe or unsound condition. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy pay the lowest premium, while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC semi-annually. As is the case with the SAIF, the FDIC is authorized to adjust the insurance premium rates for banks that are insured by the BIF, such as Amsterdam Savings Bank, in order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF reaching its statutory reserve ratio, the FDIC revised the premium schedule for BIF insured institutions to provide a range of 0.04% to 0.31% of deposits effective in the third quarter of 1995. In addition, the BIF rates were further revised, effective January 1996, to provide a range of 0% to 0.27% with a minimum annual assessment of $2,000. The insurance premiums paid by institutions insured by the Savings Association Insurance Fund (the "SAIF") were not adjusted, however, and remained at the range previously applicable to both BIF and SAIF insured institutions which was .23% to .31% of deposits. In addition, BIF insured institutions are required to contribute to the cost if financial bonds were issued to finance the cost of resolving thrift failures in the 1980s. Until the earlier of the year 2000 or when the BIF and SAIF are merged, BIF deposits will only be assessed at a rate of 20% of the rate for SAIF deposits. The rate currently set for BIF and SAIF deposits is 1.3 basis points and 6.5 basis points, respectively. On September 30, 1996 federal legislation was enacted that required the SAIF to be recapitalized with a one-time assessment on virtually all SAIF insured institutions, equal to 65.7 basis points on SAIF insured deposits maintained by those institutions as of March 31, 1995. All of the Bank's deposits are BIF insured, and therefore, this one-time assessment had no impact on the Bank. Regulatory Capital Requirements Federally insured savings associations, such as the Bank, are required to maintain a minimum level of regulatory capital. The OTS has established capital standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. The capital regulations require tangible capital of at least 1.5% of adjusted total assets (as defined by regulation). Tangible capital generally includes common shareholders' equity and retained income, and certain noncumulative perpetual preferred stock and related income. In addition, all intangible assets, other than a limited amount of purchased mortgage servicing rights, must be deducted from tangible capital for calculating compliance with the requirement. At December 31, 1996, the Bank did not have any intangible assets. The OTS regulations establish special capitalization requirements for savings associations that own subsidiaries. In determining compliance with the capital requirements, all subsidiaries engaged solely in activities permissible for national banks or engaged in certain other activities solely as agent for its customers are "includable" subsidiaries that are consolidated for capital purposes in proportion to the association's level of ownership. For excludable subsidiaries the debt and equity investments in such subsidiaries are deducted from assets and capital. At December 31, 1996, the Bank had no subsidiaries. At December 31, 1996, the Bank had tangible capital of $46.2 million, or 10.0% of adjusted total assets, which is approximately $39.3 million above the minimum requirement of 1.5% of adjusted total assets in effect on that date. The capital standards also require core capital equal to at least 3% of adjusted total assets. Core capital generally consists of tangible capital plus certain intangible assets, including a limited amount of purchased credit card relationships. As a result of the prompt corrective action provisions discussed below, however, a savings association must maintain a core capital ratio of at least 4% to be considered adequately capitalized unless its supervisory condition is such to allow it to maintain a 3% ratio. At December 31, 1996, the Bank had no intangibles which were subject to these tests. At December 31, 1996, the Bank had core capital equal to $46.2 million, or 10.0% of adjusted total assets, which is $32.4 million above the minimum leverage ratio requirement of 3% as in effect on that date. The OTS risk-based requirement requires savings associations to have total capital of at least 8% of risk-weighted assets. Total capital consists of core capital, as defined above, and supplementary capital. Supplementary capital consists of certain permanent and maturing capital instruments that do not qualify as core capital, plus general valuation loan and lease loss allowances up to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used to satisfy the risk-based requirement only to the extent of core capital. The OTS is also authorized to require a savings association to maintain an additional amount of total capital to account for concentration of credit risk and the risk of non-traditional activities. At December 31, 1996, the Bank had $2.5 million of general loss reserves included in risk-based capital, which excludes $951,000 of general loss reserves which was in excess of the maximum of 1.25% of risk-weighted assets. Certain exclusions from capital and assets are required to be made for the purpose of calculating total capital. Such exclusions consist of equity investments (as defined by regulation) and that portion of land loans and nonresidential construction loans in excess of an 80% loan-to-value ratio and reciprocal holdings of qualifying capital instruments. The Bank had no such exclusions from capital and assets at December 31, 1996. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, will be multiplied by a risk weight, ranging from 0% to 100%, based on the risk inherent in the type of asset. For example, the OTS has assigned a risk weight of 50% for prudently underwritten permanent one- to four-family first lien mortgage loans not more than 90 days delinquent and having a loan to value ratio of not more than 80% at origination unless insured to such ratio by an insurer approved by the FNMA or FHLMC. OTS regulations also require that every savings association with more than normal interest rate risk exposure to deduct from its total capital, for purposes of determining compliance with such requirement, an amount equal to 50% of its interest-rate risk exposure multiplied by the present value of its assets. This exposure is a measure of the potential decline in the net portfolio value of a savings association, greater than 2% of the present value of its assets, based upon a hypothetical 200 basis point increase or decrease in interest rates (whichever results in a greater decline). Net portfolio value is the present value of expected cash flows from assets, liabilities and off-balance sheet contracts. The rule provides for a two quarter lag between calculating interest rate risk and recognizing any deduction from capital. The rule will not become effective until the OTS evaluates the process by which savings associations may appeal an interest rate risk deduction determination. It is uncertain as to when this evaluation may be completed. Any savings association with less than $300 million in assets and a total capital ratio in excess of 12% is exempt from this requirement unless the OTS determines otherwise. On December 31, 1996, the Bank had total capital of $48.7 million (including $46.2 million in core capital and $2.5 million in qualifying supplementary capital) and risk-weighted assets of $198.0 million (including $3.0 million in converted off-balance sheet assets); or total capital of 24.6% of risk-weighted assets. This amount was $32.9 million above the 8% requirement in effect on that date. The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations. As a condition to the approval of the capital restoration plan, any company controlling an undercapitalized association must agree that it will enter into a limited capital maintenance guarantee with respect to the institution's achievement of its capital requirements. Any savings association that fails to comply with its capital plan or is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios of less than 3% or a risk-based capital ratio of less than 6%) must be made subject to one or more of additional specified actions and operating restrictions which may cover all aspects of its operations and include a forced merger or acquisition of the association. An association that becomes "critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is subject to further mandatory restrictions on its activities in addition to those applicable to significantly undercapitalized associations. In addition, the OTS must appoint a receiver (or conservator with the concurrence of the FDIC) for a savings association, with certain limited exceptions, within 90 days after it becomes critically undercapitalized. Any undercapitalized association is also subject to the general enforcement authority of the OTS and the FDIC, including the appointment of a conservator or a receiver. The OTS is also generally authorized to reclassify an association into a lower capital category and impose the restrictions applicable to such category if the institution is engaged in unsafe or unsound practices or is in an unsafe or unsound condition. The imposition by the OTS or the FDIC of any of these measures on the Bank or the Company may have a substantial adverse effect on the Company's operations and profitability. Company shareholders do not have preemptive rights, and therefore, if the Company is directed by the OTS or the FDIC to issue additional shares of Common Stock, such issuance may result in the dilution of a shareholder's percentage ownership of the Company. Limitations on Dividends and Other Capital Distributions OTS regulations impose various restrictions on savings associations with respect to their ability to make distributions of capital, which include dividends, stock redemptions or repurchases, cash-out mergers and other transactions charged to the capital account. OTS regulations also prohibit a savings association from declaring or paying any dividends or from repurchasing any of its stock if, as a result, the regulatory capital of the association would be reduced below the amount required to be maintained for the liquidation account established in connection with its mutual to stock conversion. Generally, savings associations, such as the Bank, that before and after the proposed distribution meet their capital requirements, may make capital distributions during any calendar year equal to the greater of 100% of net income for the year-to-date plus 50% of the amount by which the lesser of the association's tangible, core or risk-based capital exceeds its capital requirement for such capital component, as measured at the beginning of the calendar year, or 75% of its net income for the most recent four quarter period. However, an association deemed to be in need of more than normal supervision by the OTS may have its dividend authority restricted by the OTS. The Bank may pay dividends in accordance with this general authority. Savings associations proposing to make any capital distribution need only submit written notice to the OTS 30 days prior to such distribution. Savings associations that do not, or would not meet their current minimum capital requirements following a proposed capital distribution, however, must obtain OTS approval prior to making such distribution. The OTS may object to the distribution during that 30-day notice period based on safety and soundness concerns. See "- Regulatory Capital Requirements." The OTS has proposed regulations that would revise the current capital distribution restrictions. Under the proposal a savings association may make a capital distribution without notice to the OTS (unless it is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2 rating, is not of supervisory concern, and would remain adequately capitalized (as defined in the OTS prompt corrective action regulations) following the proposed distribution. Savings associations that would remain adequately capitalized following the proposed distribution but do not meet the other noted requirements must notify the OTS 30 days prior to declaring a capital distribution. The OTS stated it will generally regard as permissible that amount of capital distributions that do not exceed 50% of the institution's excess regulatory capital plus net income to date during the calendar year. A savings association may not make a capital distribution without prior approval of the OTS and the FDIC if it is undercapitalized before, or as a result of, such a distribution. As under the current rule, the OTS may object to a capital distribution if it would constitute an unsafe or unsound practice. No assurance may be given as to whether or in what form the regulations may be adopted. Liquidity All savings associations, including the Bank, are required to maintain an average daily balance of liquid assets equal to a certain percentage of the sum of its average daily balance of net withdrawable deposit accounts and borrowings payable in one year or less. For a discussion of what the Bank includes in liquid assets, see "Management's Discussion and Analysis of Financial Condition and Results of Operations Liquidity and Capital Resources" in the Annual Report. This liquid asset ratio requirement may vary from time to time (between 4% and 10%) depending upon economic conditions and savings flows of all savings associations. At the present time, the minimum liquid asset ratio is 5%. In addition, short-term liquid assets (e.g., cash, certain time deposits, certain bankers acceptances and short-term United States Treasury obligations) currently must constitute at least 1% of the association's average daily balance of net withdrawable deposit accounts and current borrowings. Penalties may be imposed upon associations for violations of either liquid asset ratio requirement. At December 31, 1996, the Bank was in compliance with both requirements, with an overall liquid asset ratio of 7.51% and a short-term liquid assets ratio of 1.61%. Accounting An OTS policy statement applicable to all savings associations clarifies and re-emphasizes that the investment activities of a savings association must be in compliance with approved and documented investment policies and strategies, and must be accounted for in accordance with GAAP. Under the policy statement, management must support its classification of and accounting for loans and securities (i.e., whether held for investment, sale or trading) with appropriate documentation. OTS accounting regulations, which may be made more stringent than GAAP by the OTS, require that transactions be reported in a manner that best reflects their underlying economic substance and inherent risk and that financial reports must incorporate any other accounting regulations or orders prescribed by the OTS. The Bank is in compliance with these amended rules. Qualified Thrift Lender Test All savings associations, including the Bank, are required to meet a qualified thrift lender ("QTL") test to avoid certain restrictions on their operations. This test requires a savings association to have at least 65% of its portfolio assets (as defined by regulation) in qualified thrift investments on a monthly average for nine out of every 12 months on a rolling basis. As an alternative, the savings association may maintain 60% of its assets in those assets specified under Section 7701(a)(19) of the Internal Revenue Code. Under either test, such assets primarily consist of residential housing related loans and investments. At December 31, 1996, the Bank met the test and has always met the test since its effectiveness. Any savings association that fails to meet the QTL test must convert to a national bank charter, unless it requalifies as a QTL and thereafter remains a QTL. If an association does not requalify and converts to a national bank charter, it must remain SAIF-insured until the FDIC permits it to transfer to the BIF. If such an association has not yet requalified or converted to a national bank, its new investments and activities are limited to those permissible for both a savings association and a national bank, and it is limited to national bank branching rights in its home state. In addition, the association is immediately ineligible to receive any new FHLB borrowings and is subject to national bank limits for payment of dividends. If such association has not requalified or converted to a national bank within three years after the failure, it must divest of all investments and cease all activities not permissible for a national bank. In addition, it must repay promptly any outstanding FHLB borrowings, which may result in prepayment penalties. If any association that fails the QTL test is controlled by a holding company, then within one year after the failure, the holding company must register as a bank holding company and become subject to all restrictions on bank holding companies. See "- Holding Company Regulation." Community Reinvestment Act Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of the Bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications, such as a merger or the establishment of a branch, by the Bank. An unsatisfactory rating may be used as the basis for the denial of an application by the OTS. The federal banking agencies, including the OTS, have recently revised the CRA regulations and the methodology for determining an institution's compliance with the CRA. Due to the heightened attention being given to the CRA in the past few years, the Bank may be required to devote additional funds for investment and lending in its local community. The Bank was last examined for CRA compliance in June 1996 and received a rating of "satisfactory". Transactions with Affiliates Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms as favorable to the association as transactions with non-affiliates. In addition, certain of these transactions, such as loans to an affiliate, are restricted to a percentage of the association's capital. Affiliates of the Bank include the Company and any company which is under common control with the Bank. In addition, a savings association may not lend to any affiliate engaged in activities not permissible for a bank holding company or acquire the securities of most affiliates. The Bank's subsidiaries are not deemed affiliates; however, the OTS has the discretion to treat subsidiaries of savings associations as affiliates on a case by case basis. Certain transactions with directors, officers or controlling persons are also subject to conflict of interest regulations enforced by the OTS. These conflict of interest regulations and other statutes also impose restrictions on loans to such persons and their related interests. Among other things, such loans must be made on terms substantially the same as for loans to unaffiliated individuals. Holding Company Regulation The Company is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, the Company is required to register and file reports with the OTS and is subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over the Company and its non-savings association subsidiaries, which authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings association. As a unitary savings and loan holding company, the Company generally is not subject to activity restrictions. If the Company acquires control of another savings association as a separate subsidiary, it would become a multiple savings and loan holding company, and the activities of the Company and any of its subsidiaries (other than the Bank or any savings association) would become subject to activity restrictions unless such other associations each qualify as a QTL and were acquired in a supervisory acquisition. If the Bank fails the QTL test, the Company must obtain the approval of the OTS prior to continuing after such failure, directly or through its other subsidiaries, any business activity other than those approved for multiple savings and loan holding companies or their subsidiaries. In addition, within one year of such failure the Company must register as, and will become subject to, the restrictions applicable to bank holding companies. The activities authorized for a bank holding company are more limited than are the activities authorized for a unitary or multiple savings and loan holding company. See "Qualified Thrift Lender Test." The Company must obtain approval from the OTS before acquiring control of any savings association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association. Federal Securities Law The stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements of the SEC under the Exchange Act. Company stock held by persons who are affiliates (generally officers, directors and principal shareholders) of the Company may not be resold without registration or unless sold in accordance with certain resale restrictions set forth under Rule 144 of the Securities Act. If the Company meets specified current public information requirements, each affiliate of the Company is able to sell in the public market, without registration, a limited number of shares in any three-month period. Federal Reserve System The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At December 31, 1996, the Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements that may be imposed by the OTS. See "Liquidity." Savings associations are authorized to borrow from the Federal Reserve Bank "discount window," but Federal Reserve Board regulations require associations to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the Federal Reserve Bank. Federal Home Loan Bank System The Bank is a member of the FHLB of New York, which is one of 12 regional FHLBs that administers the home financing credit function of savings associations. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB, which are subject to the oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to be used to provide funds for residential home financing. As a member, the Bank is required to purchase and maintain stock in the FHLB of New York. At December 31, 1996, the Bank had $2.0 million in FHLB stock, which was in compliance with this requirement. In past years, the Bank has received substantial dividends on its FHLB stock. Over the past five calendar years such dividends have averaged 8.0% and were $130,000 or 6.4% for 1996. Under federal law the FHLBs are required to provide funds for the resolution of troubled savings associations and to contribute to low- and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of the Bank's FHLB stock may result in a corresponding reduction in the Bank's capital. Federal Taxation Savings associations such as the Bank that meet certain definitional tests relating to the composition of assets and other conditions prescribed by the Internal Revenue Code of 1986, as amended (the "Code"), are permitted to establish reserves for bad debts and to make annual additions thereto which may, within specified formula limits, be taken as a deduction in computing taxable income for federal income tax purposes. The amount of the bad debt reserve deduction is computed under the experience method. Under the experience method, the bad debt reserve deduction is an amount determined under a formula based generally upon the bad debts actually sustained by the savings association over a period of years. In addition to the regular income tax, corporations, including savings associations such as the Bank, generally are subject to a minimum tax. An alternative minimum tax is imposed at a minimum tax rate of 20% on alternative minimum taxable income, which is the sum of a corporation's regular taxable income (with certain adjustments) and tax preference items, less any available exemption. The alternative minimum tax is imposed to the extent it exceeds the corporation's regular income tax and net operating losses can offset no more than 90% of alternative minimum taxable income. For taxable years beginning after 1986 and before 1996, corporations, including savings associations such as the Bank, are also subject to an environmental tax equal to 0.12% of the excess of alternative minimum taxable income for the taxable year (determined without regard to net operating losses and the deduction for the environmental tax) over $2 million. To the extent prior years earnings appropriated to a savings association's bad debt reserves for "qualifying real property loans" and deducted for federal income tax purposes exceed the allowable amount of such reserves computed under the experience method and to the extent of the association's supplemental reserves for losses on loans ("Excess"), such Excess may not, without adverse tax consequences, be utilized for the payment of cash dividends or other distributions to a shareholder (including distributions on redemption, dissolution or liquidation) or for any other purpose (except to absorb bad debt losses). As of December 31, 1996, the Bank's Excess for tax purposes totaled approximately $162,000. The Bank and its subsidiaries file consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. The Company intends to file consolidated federal income tax returns with the Bank and its subsidiaries. The Bank and its consolidated subsidiaries have been audited by the IRS with respect to consolidated federal income tax returns through December 31, 1988. With respect to years examined by the IRS, either all deficiencies have been satisfied or sufficient reserves have been established to satisfy asserted deficiencies. In the opinion of management, any examination of still open returns (including returns of subsidiaries and predecessors of, or entities merged into, the Bank) would not result in a deficiency which could have a material adverse effect on the financial condition of the Bank and its consolidated subsidiaries. New York Taxation The Bank and its subsidiaries that operate in New York are subject to New York state taxation. The Bank is subject to the New York State Franchise Tax on Banking Corporations in an annual amount equal to the greater of (i) 9% of the Bank's "entire net income" allocable to New York State during the taxable year, or (ii) the applicable alternative minimum tax. The alternative minimum tax is generally the greater of (a) 0.01% of the value of the Bank's assets allocable to New York State with certain modifications, (b) 3% of the Bank's "alternative entire net income" allocable to New York State, or (c) $250. In addition, New York also imposes a surtax of approximately 3% on the applicable tax described above. The surtax is scheduled to expire in 1996. Entire net income is similar to federal taxable income, subject to certain modifications (including the fact that net operating losses cannot be carried back or carried forward) and alternative entire net income is equal to entire net income without certain modifications. The Bank and its consolidated subsidiaries have been audited by the New York State Department of Taxation and Finance through December 31, 1994. Delaware Taxation As a Delaware holding company, the Company is exempted from Delaware corporate income tax but is required to file an annual report with and pay an annual fee to the State of Delaware. The Company is also subject to an annual franchise tax imposed by the State of Delaware. Competition The Company faces strong competition, both in originating real estate and other loans and in attracting deposits. Competition in originating real estate loans comes primarily from other savings institutions, commercial banks, credit unions and mortgage brokers making loans secured by real estate located in the Company's primary market area. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. The Company attracts substantially all of its deposits through its branch offices, primarily from the communities in which those branch offices are located; therefore, competition for those deposits is principally from mutual funds and other savings institutions, commercial banks and credit unions located in the same communities. The Company competes for these deposits by offering a variety of deposit accounts at competitive rates, convenient business hours, and convenient branch locations with interbranch deposit and withdrawal privileges. Automated teller machine facilities are also available. Employees At December 31, 1996, the Company had a total of 172 employees, including 28 part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Executive Officers of the Company and the Bank Who Are Not Directors The following information as to the business experience during the past five years is supplied with respect to the executive officers of the Company and the Bank who do not serve on the Company's or the Bank's Board of Directors. There are no arrangements or understandings between such persons named and any persons pursuant to which such officers were selected. Harold A. Baylor, Jr. Mr. Baylor, age 54, is Vice President and the Treasurer of the Company and the Bank, positions he has held with the Company since June 1995 and with the Bank since 1990 and 1987, respectively. Robert Kelly. Mr. Kelly, age 50, is Vice President, Secretary and General Counsel to the Company, positions he has held with the Company since its incorporation in June 1995. Mr. Kelly has been Vice President and General Counsel to the Bank since July 1994. In January 1995 he was appointed Secretary of the Bank. Prior to joining the Bank in 1994, Mr. Kelly was self-employed in the general practice of law in the State of New York. Nancy S. Virkler. Ms. Virkler, age 47, is Vice President of Operations at the Bank. She was appointed Vice President in June 1994. Ms. Virkler has served the Bank in various capacities since she began as a management trainee in 1977. Richard C. Edel. Mr. Edel, age 47, is a Vice President of the Bank, a position he has held since 1987. Mr. Edel is also currently serving as the Community Reinvestment Act Officer of the Bank. Cynthia M. Proper. Ms. Proper, age 34, was appointed Vice President and Director of Lending of the Bank in July 1995. Prior to such appointment, Ms. Proper was the Director of Internal Audit. She also served the Bank in various other capacities, primarily in the lending and savings areas. Ms. Proper has been employed at the Bank since 1985. Michelle G. Brown. Ms. Brown, age 29, is Vice President and the Director of Human Resources of the Bank, positions she has held since June 1994. Ms. Brown joined the Bank in June 1992 as the Director of Internal Audit. Prior to joining the Bank, Ms. Brown was a District Financial Examiner with the National Credit Union Administration. Item 2. Description of Property The Company conducts its business at its main office, eight other banking offices and an operations office in its primary market area. The following table sets forth information relating to each of the Company's offices as of December 31, 1996. The Company also owns a parking lot located at 18-22 Division Street, Amsterdam, New York, which is used to service the main office. The net book value of the Company's premises and equipment (including land, building and leasehold improvements and furniture, fixtures and equipment) at December 31, 1996 was $2.8 million. See Note 7 of Notes to Consolidated Financial Statements in the Annual Report. The Company believes that its current facilities are adequate to meet the present and foreseeable needs of the Bank and the Company, subject to possible future expansion.
Total Owned Lease Approximate Date or Expiration Square Net Book Acquired Leased Date Footage Value -------- ------ -------- -------- ------- Location Main Office: 11 Division Street 1914 Owned -- 18,600 $ 418,965 Amsterdam, New York Branch Offices: 19 River Street 1972 Leased 1997 2,000 19,554 Fort Plain, New York Arterial at Fifth Avenue 1979 Owned -- 2,200 272,200 Gloversville, New York Route 30N 1972 Owned -- 2,700 249,828 Amsterdam, New York Village Plaza 1987 Leased 1997 4,000 46,643 Clifton Park, New York Grand Union Plaza 1988 Leased 2008 3,000 134,473 Route 50 Balston Spa, New York Price Chopper Supermarket (1) 1994 Leased 1999 362 154,923 1640 Eastern Parkway Schenectady, New York Price Chopper Supermarket (1) 1995 Leased 2000 384 179,526 873 New Loudon Road Latham, New York Price Chopper Supermarket (1) 1995 Leased 2000 326 159,905 Sanford Farms Shopping Center Amsterdam, New York Operations Center: 35 East Main Street 1993 Owned -- 10,800 1,148,050 Amsterdam, New York - -------------------- (1) Banking operations are located inside of the supermarkets. Each of these leases contains two 5 year renewal options.
The Company maintains an on-line data base with a service bureau servicing financial institutions. The net book value of the data processing and computer equipment utilized by the Company at December 31, 1996, was $292,473. Item 3. Legal Proceedings The Company is involved as plaintiff or defendant in various legal actions arising in the normal course of its business. While the ultimate outcome of these proceedings cannot be predicted with certainty, it is the opinion of management, after consultation with counsel representing the Company in the proceedings, that the resolution of these proceedings should not have a material effect on the Company's results of operations. For more information, see Note 13(a) of the Notes to Consolidated Financial Statements contained in the Annual Report. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 1996. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters Page 58 of the Annual Report is herein incorporated by reference. Item 6. Selected Financial Data Pages 2 and 3 of the Annual Report is herein incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 4 through 21 of the Annual Report are herein incorporated by reference. Item 8. Financial Statements and Supplementary Data Pages 22 through 57 of the Annual Report are herein incorporated by reference. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure There has been no Current Report on Form 8-K filed within 24 months prior to the date of the most recent financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. PART III Item 10. Directors and Executive Officers of the Registrant Information concerning Directors of the Registrant is incorporated herein by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 23, 1997, except for information contained under the heading "Compensation Committee Report on Executive Compensation" and "Shareholder Return Performance Presentation", a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 11. Executive Compensation Information concerning executive compensation is incorporated herein by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 23, 1997, except for information contained under the heading "Compensation Committee Report on Executive Compensation" and "Shareholder Return Performance Presentation", a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 23, 1997, except for information contained under the heading "Compensation Committee Report on Executive Compensation" and "Shareholder Return Performance Presentation", a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 13. Certain Relationships and Related Transactions Information concerning certain relationships and transactions is incorporated herein by reference from the Corporation's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 23, 1997, except for information contained under the heading "Compensation Committee Report on Executive Compensation" and "Shareholder Return Performance Presentation", a copy of which will be filed not later than 120 days after the close of the fiscal year. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements: The following information appearing in the Registrant's Annual Report to Shareholders for the year ended December 31, 1996, is incorporated by reference in this Form 10-K Annual Report as Exhibit 13. Pages in Annual Annual Report Section Report --------------------- -------- Independent Auditors' Report ........................................ 22 Consolidated Statements of Financial Condition at December 31, 1996 and 1995 ..................................... 23 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 ............................... 24 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 ............... 25 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 ............................... 26-27 Notes to Consolidated Financial Statements .......................... 28-57 (a) (2) Financial Statement Schedules: All financial statement schedules have been omitted as the information is not required under the related instructions or is inapplicable. (a) (3) Exhibits:
Reference to Regulation Prior Filing or S-K Exhibit Exhibit Number Number Document Attached Hereto 2 Plan of acquisition, reorganization, arrangement, None liquidation or succession 3 Certificate of Incorporation and Bylaws * 4 Instruments defining the rights of security * holders, including indentures 9 Voting trust agreement None 10.1 Employment Agreements of Robert J. Brittain, * Harold A. Baylor, Jr., Richard C. Edel, Nancy S. Virkler, Cynthia M. Proper and Robert Kelly 10.2 Employee Stock Ownership Plan * 11 Statement re: computation of per share earnings ** 12 Statement re: computation or ratios Not required 13 Annual Report to Security Holders 13 16 Letter re: change in certifying accountants None 18 Letter re: change in accounting principles None 21 Subsidiaries of Registrant 21 22 Published report regarding matters submitted to None vote of security holders 23 Consent of experts and counsel None 24 Power of Attorney Not Required 27 Financial Data Schedule 27 99 Additional exhibits None - ------------------- *Filed on September 7, 1995, as exhibits to the Registrant's Form S-1 registration statement (Registration No. 33-96654), pursuant to the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-K. **See Notes to Consolidated Financial Statements, Note 1(n) contained in the Company's Annual Report.
(b) Reports on Form 8-K: Current reports on form 8-K were filed on November 4, 1996 for: (i) October 25, 1996 press release regarding Ambanc Holding Co., Inc. earnings for the three and nine months ended September 30, 1996. Current reports on from 8-K were filed on January 15, 1997 for: (ii) December 13, 1996 press release announcing its intentions to commence a 10% stock repurchase program; and approval to open a new branch. (iii) December 23, 1996 press release announcing the sale of loans and foreclosed real estate and increased provisions for loan losses. (iv) January 13, 1997 press release announcing the completion of the 10% stock repurchase. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMBANC HOLDING CO., INC. Date: April 15, 1997 By: /s/ Robert J. Brittain ------------------------------ ---------------------- Robert J. Brittain, President and Chief Executive Officer (Duly Authorized Representative) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ Robert J. Brittain /s/ Paul W. Baker - ----------------------------------- ------------------------------------- Robert J. Brittain , President Paul W. Baker, Chairman of the Board and Chief Executive Officer (Principal Executive Officer) Date: April 15, 1997 Date: April 15, 1997 ----------------------------- -------------------------------- /s/ William A. Wilde, Jr. /s/ Lauren T. Barnett - ----------------------------------- ------------------------------------- William A. Wilde, Jr., Director Lauren T. Barnett, Director Date: April 15, 1997 Date: April 15, 1997 ----------------------------- -------------------------------- /s/ Robert J. Dunning /s/ Carl A. Schmidt, Jr. - ----------------------------------- ------------------------------------- Robert J. Dunning, DDS, Director Carl A. Schmidt, Jr., Director Date: April 15, 1997 Date: April 15, 1997 ----------------------------- -------------------------------- /s/ Charles S. Pedersen /s/ Lionel H. Fallows - ----------------------------------- ------------------------------------- Charles S. Pedersen, Director Lionel H. Fallows, Director Date: April 15, 1997 Date: April 15, 1997 ----------------------------- -------------------------------- /s/ John J. Daly /s/ Harold A. Baylor, Jr. - ----------------------------------- ------------------------------------- John J. Daly, Director Harold A. Baylor, Jr., Vice President and Treasurer (Principal Financial and Accounting Officer) Date: April 15, 1997 Date: April 15, 1997 ----------------------------- -------------------------------- Index to Exhibits Exhibit Number - ------- 13 Annual Report to Security Holders 21 Subsidiaries of the Registrant 27 Financial Data Schedule EX-13 2 ANNUAL REPORT TO SECURITY HOLDERS EXHIBIT 13 1996 ANNUAL REPORT - -------------------------------------------------------------------------------- TABLE OF CONTENTS - -------------------------------------------------------------------------------- PAGE ---- President's Message to Stockholders .................................... 1 Selected Consolidated Financial Information ............................ 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................................... 4 Independent Auditors' Report ........................................... 22 Consolidated Statements of Financial Condition ......................... 23 Consolidated Statements of Income ...................................... 24 Consolidated Statements of Changes in Shareholders' Equity ............. 25 Consolidated Statements of Cash Flows .................................. 26 Notes to Consolidated Financial Statements ............................. 28 Corporate and Stockholder Information .................................. 58 Directors and Executive Officers ....................................... 60 A MESSAGE FROM THE PRESIDENT - ---------------------------- To Our Stockholders I am pleased to present the 2nd Annual Report to Stockholders of Ambanc Holding Co., Inc., the parent holding company of Amsterdam Savings Bank, FSB. Last year I told you that we would remain focused on providing a positive return on your investment. As you review the Annual Report you will see that we have been faithful to that promise. Two stock repurchases during 1996, totaling 1,030,227 shares, have reduced the company's outstanding shares to 4,392,023. This has given added value to the investor, and represents a solid investment in the company's future. The Proxy Statement contains a graph which will illustrate the increase in market price per share of the company's stock which occurred during 1996. We believe that this is an indication of the positive results of our efforts. I also told you last year that we are committed to a solid and steady future and that we would use the capital raised in the initial stock offering to expand customer services and utilize new technological developments. We have also kept that promise. Three new branch locations were secured in 1996, and all three will be opening for business in 1997. The new branch office in Guilderland, New York will be strategically located to serve our Albany and Schenectady customer base, in a newly constructed building, equipped with state-of-the-art electronic facilities and customer friendly furnishings. Construction is expected to be complete by mid-May 1997. The other two new locations will be in our Saratoga market area and will be super marketbranches. The opening date for both of these branches is April 14, 1997. We have also confirmed our commitment to the utilization of new technology by establishing a home page on the Internet. Our customers are now able to obtain current information about the bank's products and services "on-line" without leaving the comfort of their homes. Our biggest challenge for the future is to successfully compete with larger institutions for a profitable share of the Capital District market area. We believe that the key to meeting this challenge is to continue to do what we have always done the best -- deliver competitively priced products and services to our customers on a person-to-person basis. In our first full year as a single bank holding company we have built on the bank's heritage (dating back to 1886) of strength, stability and personal service. We have stood the test of time and boldly face the future with pride and confidence that we will meet the challenge of providing maximum shareholder value, growth, improvement and focus on the future. The support of our shareholders (many of whom are also our customers) and their continuous referrals of friends and neighbors is important to our growth and profitability. I would like to express my heartfelt gratitude to all of you and to our employees, officers, directors and customers for your ongoing loyalty and support. Very truly yours, Robert J. Brittain President and Chief Executive Officer 1 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.
December 31, ------------------------------------------------------ 1996 1995 1994 1993 1992 ------------------------------------------------------ (In thousands) Selected Consolidated Financial Condition Data: - ------------------------- Total assets $472,421 $438,944 $343,334 $332,902 $323,492 Loans receivable, net 248,094 249,991 261,581 220,647 244,437 Securities, available for sale 200,539 74,422 --- --- --- Securities, held to maturity --- --- 53,390 57,797 36,767 Deposits 298,082 311,239 293,152 294,780 297,849 Total borrowings 108,780 --- 19,000 --- --- Total equity 61,518 76,015 27,414 25,464 22,783
Years Ended December 31, ------------------------------------------------------ 1996 1995 1994 1993 1992 ------------------------------------------------------ (In thousands) Selected Consolidated Operations Data: - --------------------- Total interest income $32,348 $25,582 $23,806 $23,789 $26,661 Total interest expense 16,435 12,746 10,192 10,885 14,332 -------- -------- -------- ------- -------- Net interest income 15,913 12,836 13,614 12,904 12,329 Provision for loan losses 9,450 1,522 1,107 1,689 490 -------- -------- -------- ------- -------- Net interest income after provision for loan losses 6,463 11,314 12,507 11,215 11,839 Fees and service charges 764 783 642 679 605 Gain (loss) on sales and redemptions of securities (102) 225 --- --- 5 Other noninterest income 258 504 263 517 451 -------- -------- -------- ------- -------- Total noninterest income 920 1,512 905 1,196 1,061 Total noninterest expense 13,148 11,383 11,340 9,659 8,833 -------- -------- -------- ------- -------- Income (loss) before taxes and cummulative effect of a change in accounting principle (5,765) 1,443 2,072 2,752 4,067 Income tax provision (benefit) (1,929) 586 122 671 1,568 Cummulative effect of a change in accounting principle related to SFAS No. 109 --- --- --- 600 --- -------- -------- -------- ------- -------- Net income (loss) ($3,836) $857 $1,950 $2,681 $2,499 ======== ======== ======== ======= ======== (Loss) per share (1) ($0.81) N/A N/A N/A N/A (1) Loss per share was calculated net of unearned ESOP shares. Average shares outstanding for the year 1996 were 4,761,393. Per share earnings were not calculated for the comparable periods since the Company had no stock outstanding prior to its initial public offering completed on December 26, 1995.
2
Years Ended December 31, ------------------------------------------------------ 1996 1995 1994 1993 1992 ------------------------------------------------------ Selected Consolidated Financial Ratios and Other Data: Performance Ratios: Return on average assets (0.84%) 0.25% 0.59% 0.83% 0.79% Return on average equity (1) (5.24) 3.00 7.36 11.00 11.68 Interest rate spread information: Average during period 2.74 3.36 4.01 3.85 3.66 Net interest margin (2) 3.66 3.87 4.34 4.19 4.08 Efficiency Ratio (3) 62.88 68.18 63.46 61.06 60.88 Ratio of operating expense to average total assets 2.86 3.37 3.38 2.97 2.74 Ratio of average interest-earning assets to average interest-bearing liabilities 124.26 113.31 110.24 109.53 108.84 Asset Quality Ratios: Non-performing assets to total assets at end of period 1.18 2.72 4.15 5.06 4.76 Non-performing loans to total loans 1.94 3.48 3.97 5.07 4.23 Allowance for loan losses to non- performing loans 70.47 30.10 21.42 28.59 29.52 Allowance for loan losses to total loans receivable 1.37 1.05 0.85 1.47 1.27 Capital Ratios: Equity to total assets at end of period (1) 13.02 17.32 7.98 7.65 7.04 Average equity to average assets (1) 15.95 8.30 7.96 7.52 6.76 Other Data: Number of full-service offices 9 9 7 6 6 - -------------------------------------- (1) Period end and average asset and equity amounts reflect securities available for sale at fair value, with net unrealized gains/losses, net of tax, included as a component of equity. (2) Net interest income divided by average interest-earning assets (3) The efficiency ratio represents operating expenses (excluding real estate owned and repossessed asset expense of $2.6 million, $1.6 million, $2.1 million, $1.0 million and $534,000 for the fiscal years ended December 31, 1996, 1995, 1994, 1993, and 1992 respectively), divided by the sum of net interest income and non-interest income.
3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The most significant events of the 1996 fiscal year were: (i) the completion of the Company's two 10% stock repurchase programs, which resulted in the buy-back of 1,030,227 shares of common stock; (ii) the bulk sales of certain performing and non-performing loans and foreclosed real estate; and (iii) the filing for Chapter 11 bankruptcy protection by the Bennett Funding Group, a lease finance company that had a $3.6 million aggregate lending relationship with the Company at the time of the bankruptcy filing. All references to the Company prior to December 26, 1995, the conversion date, except where otherwise indicated, are to Amsterdam Savings Bank, FSB. (the "Bank"), the Company's wholly owned bank subsidiary. As of December 31, 1995, the Company had no material results of operations; accordingly, the following discussion relates primarily to the Bank's results of operations for periods prior to fiscal year 1996. When used in this annual report, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties -- including, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake -- and specifically disclaims any obligation -- to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Management Strategy Management's primary goal is to improve the Company's profitability while minimizing its risks. To meet these goals, the Company's strategies focus on: (i) emphasizing one- to four- family residential mortgage lending, home equity loans, and consumer loans, especially automobile loans; (ii) asset quality; (iii) increasing the Company's subsidiary Bank's presence in its market area primarily through the establishment of low-cost supermarket branches; and (iv) managing interest rate risk. 4 Emphasizing Lending Secured by One- to Four-Family Residential Mortgages, Home Equity and Consumer Products The Company's bank subsidiary has emphasized and plans to continue to emphasize originating traditional one- to four-family residential mortgage, home equity and consumer loans in its primary market area. During 1996, 1995, and 1994, the Bank originated $47.7 million, $8.3 million and $56.0 million, respectively, of loans secured by one-to-four-family residences, home equity loans of $14.3 million, $7.9 million and $7.9 million, respectively, and $7.7 million, $18.4 million and $17.2 million, respectively, of consumer loans. At December 31, 1996, the Bank had $158.2 million of loans secured by one- to four-family residences, $22.8 million of home equity loans and $26.0 million of consumer loans representing 63.1%, 9.1% and 10.3%, respectively, of the Bank's gross loan portfolio. Asset Quality The Bank's loan portfolio consists primarily of one- to four-family residential and home equity loans, which are considered to have less risk than commercial and multi-family real estate or consumer loans. The Bank has de-emphasized its commercial and multi-family real estate lending, with the portfolio shrinking from $50.1 million at December 31, 1995, to $34.7 million at December 31, 1996. During the same period, the Bank's portfolio of loans secured by one- to four-family and home equity mortgage loans has grown from $151.0 million to $181.0 million. The Bank's non-performing assets consist of non-accruing loans, accruing loans delinquent more than 90 days, troubled debt restructurings and foreclosed assets. The Bank has established a high priority for its loan collection efforts and has aggressively marketed real estate owned properties in order to increase operating earnings. At the end of the first quarter of 1996, non-performing loans increased due to the Chapter 11 bankruptcy filing by the Bennett Funding Group, a lease financing company that had a $3.6 million aggregate lending relationship with the Company at the time of the filing. During 1996, the Company recorded a provision for loan losses related to the Bennett relationship of $2.8 million on a loan relationship exposure of $3.6 million. During December 1996, $1.7 million of Bennett's total loan balance was charged-off against the allowance for loan losses previously established through charges to earnings. Negotiations with the Bennett bankruptcy trustee related to the Bank's total Bennett relationship are in process, and, based upon discussions to date, the Bank believes that the remaining $1.1 million loan loss reserve for Bennett is adequate. 5 The Company has been severely handicapped by the level of its non-performing assets, resulting in significant resources allocated to managing these assets, as well as reduced earnings. The Company decided to dispose of certain non-performing assets in a bulk sale versus continuing to resolve the problems on an asset specific basis in order to accelerate the reduction in loan portfolio credit risk, reduce the drag on earnings that resulted from these assets, enhance overall asset quality and better position the Company to achieve its strategic goals. Accordingly, during the fourth quarter of 1996, the Company sold certain non-performing commercial type loans totaling $13.8 million and other performing loans with relatively high credit risk (primarily manufactured home loans) totaling $10.7 million and other real estate owned totaling $2.5 million. The net sales proceeds totaled $20.4 million, resulting in a loss of $6.6 million, which was charged against the allowance for loan losses (approximately $5.6 million) and to other real estate owned expense (approximately $1.0 million). Primarily as a result of the bulk sale, non-performing assets as a percentage of total assets improved to 1.18% at December 31, 1996, from 2.72% at December 31, 1995. In addition, the Bank's ratios of non-performing loans to total loans and the allowance for loan losses to non-performing loans also improved. The ratio of non-performing loans to total loans declined to 1.94% at December 31, 1996 from 3.48% at December 31, 1995. The ratio of the allowance for loan losses to non-performing loans increased to 70.47% at December 31, 1996 from 30.10% at December 31, 1995. See "--Selected Consolidated Financial Ratios and Other Data, Asset Quality Ratios," herein. Increasing the Bank's Presence in its Market Area Primarily through the Establishment of Low-Cost Supermarket Branches Since November 1994, the Bank has opened three branch offices in supermarkets, with one located in each of Schenectady, Albany and Montgomery Counties, New York. The Bank will be opening its fourth and fifth supermarket branches in April of 1997. These branch offices will both be located in Saratoga County, New York, one of the fastest growing counties in New York State. Management believes that these supermarket branch offices are an effective way to service its customers due to their size, efficiency and convenient, high traffic locations. In addition to the two new supermarket branch offices, the Bank will also open a "traditional" branch office in 1997. This branch office will be located in the Town of Guilderland, Albany County, New York, in a new shopping center being constructed at the intersection of N.Y.S. Routes 20 and 155, a high traffic area. With the opening of its three new branch offices in 1997, the Bank will be operating 12 full-service branch locations in its primary market area, all of which provide customers with 24-hour access to ATMs. Managing Interest Rate Risk. The Bank has an asset/liability management committee ("ALCO") that meets weekly to develop, implement and review policies to manage interest rate risk. The Bank has endeavored to manage its interest rate risk through the pricing and diversification of its loans, including the introduction of new, first mortgage loan products with shorter terms to maturity or with different interest rate adjustment periods, the origination of consumer loans with shorter average lives or which reprice at shorter intervals than fixed and adjustable-rate one- to four-family residential loans and, from time to time, the purchase of short- to intermediate-term securities available for sale. 6 Financial Condition Comparison of Financial Condition at December 31, 1996 and December 31, 1995. Total assets at December 31, 1996, were $472.4 million, an increase of $33.5 million, or 7.6%, compared to total assets of $438.9 million at December 31, 1995. The growth in total assets was primarily attributable to a $126.1 million increase in securities available for sale, mainly mortgage-backed securities which increased $103.1 million. The growth of $33.5 million in total asset was funded by an increase in borrowed funds of $108.8 million, primarily securities sold under agreements to repurchase, which increased to $102.8 at December 31, 1996, from zero at December 31, 1995. Before committing the Company to a significant change in the composition of its balance sheet, management completed an analysis to measure the projected impact on the Company's net interest income and the net interest margin. On the basis of its analysis, management determined that the benefit of a projected significant increase in net interest income, although at a spread lower than the Company's traditional spread between interest-earning assets and interest-bearing liabilities, outweighed the negative impact from a projected narrowing in the Company's net interest margin. See "Net Interest Income" and "Asset/Liability Management" herein. Total deposits at December 31, 1996, were $298.1 million, a decrease of $13.2 million, or 4.2%, compared to $311.2 million the prior year. The decrease was primarily due to declines in certificates of deposit of $5.4 million, passbook and statement savings accounts ("savings accounts") of $4.7 million, and money market accounts of $2.4 million. On the basis of the Bank's statistical and anecdotal monitoring reports of withdrawals and account closeouts, management believes that the declines in deposit balances resulted, in part, from a shift by some of the Bank's depositors of a portion of their investable funds into alternative investment vehicles, such as stock mutual funds, during 1996. Total stockholders' equity decreased $14.5 million to $61.5 million mainly as the result of the Company's stock buy-backs totaling $11.2 million and the net loss of $3.8 million recorded for the year ended December 31, 1996, partially offset by a $527,000 decrease in unearned shares held by the Company's Employee Stock Ownership Plan ("ESOP"). 7 Results of Operations Comparison of Fiscal Years Ended December 31, 1996 and 1995 General. For the fiscal year ended December 31, 1996, the Company recorded a net loss of $3.8 million compared to net income of $857,000 for the prior year. The net loss for 1996 was attributable primarily to the provision for loan losses of $9.5 million; which was primarily related to the bulk sale of certain performing and non-performing loans and the Company's aggregate lending relationship with the Bennett Funding Group ("Bennett"). See "--Provision for Loan Losses." Interest Income. Interest income increased $6.8 million, or 26.4%, to $32.3 million in 1996 from $25.6 million in 1995. The increase in interest income resulted from a $103.2 million, or 31.2%, increase in the Company's average interest-earning assets, primarily securities available for sale, which increased $106.5 million, or 214% in 1996, to $156.1 million at December 31, 1996, compared to $49.6 million of securities held to maturity in 1995. The average yield earned on the Company's securities increased 89 basis points to 7.00% in 1996 compared to 6.11% in 1995. However, overall the average yield earned on interest-earning assets decreased 28 basis points to 7.44% in 1996 from 7.72% in the prior year. The decrease in the average yield earned was mainly the result of the change in the mix of average interest-earning assets with lower yielding securities available for sale increasing as a percent of the total mix, rising to 36.4% during 1996 from 15.5% in 1995, while the percentage of higher yielding loans to total interest-earning assets declined to 60.3% from 78.9% for the same periods. Interest Expense. Interest expense increased by $3.7 million, or 28.9%, to $16.4 million in 1996 compared to $12.7 million in 1995. Average interest-bearing liabilities increased $57.3 million, or 19.6%, to $349.7 million in 1996 compared to $292.4 million during the prior year. During the same periods, the average rate paid on interest-bearing liabilities increased by 34 basis points to 4.70% from 4.37%. The increase in interest expense was due primarily to a $62.7 million increase in the average outstanding balance of borrowed funds to $67.6 million from $4.9 million in 1995, mainly resulting from an increase in securities sold under agreements to repurchase, which grew $56.8 million to $57.8 million in 1996 from $1.0 million in 1995. Average borrowed funds, with an average rate of 5.94%, increased to 19.3% of total interest-bearing liabilities for 1996 up from 1.7% in 1995 while average savings accounts, with an average rate of 3.04% in 1996, declined to 29.5% from 37.2% in 1995 and average certificates of deposit, with an average rate of 5.65% in 1996, decreased to 43.0% of the funding mix in 1996 from 50.4% the prior year. 8 Net Interest Income. Net interest income before provision for loan losses increased $3.1 million, or 24.0%, to $15.9 million for the year ended December 31, 1996, compared to $12.8 million for 1995. As a result of implementing the Company's strategy to enhance net interest income through the restructuring of its balance sheet through the use of leveraged reverse repurchase agreements, net interest income increased approximately $1.4 million. Partially offsetting the increased net interest income attributable to average net earning asset growth was a decline in the net yield on average interest-earning assets of 21 basis points to 3.66% in 1996 from 3.87% in 1995, primarily the result of the changes in the composition of average interest-earning assets and average interest-bearing liabilities as discussed above. See "Financial Condition","Interest Income", "Interest Expense" and "Asset Liability Management" herein. Provision for Loan Losses. The provision for loan losses increased $8.0 million to $9.5 million in 1996 from $1.5 million during 1995. The increase resulted primarily from the Company's bulk sale of certain performing and non-performing loans in the fourth quarter of 1996, the aggregate lending relationship with the Bennett Funding Group (see "Asset Quality" herein), a company that filed for Chapter 11 bankruptcy protection on March 29, 1996, as well as the Company's continual review of its loan portfolio. In order to accelerate its objective of reducing credit risk in the loan portfolio and better position the Company to achieve its strategic goals, management considered it to be more prudent to complete the bulk sale of certain non-performing commercial type loans and manufactured home loans (which are considered a higher credit risk consumer product), versus continuing to address these assets on an asset specific basis (see "Asset Quality" herein). The Bank records a provision for loan losses based upon its analysis of the adequacy of the allowance for loan losses. Management determines the adequacy of the allowance for loan losses based upon its analysis of risk factors in the loan portfolio. This analysis includes evaluation of concentrations of credit, historical loss experience, current economic conditions, estimated fair value of underlying collateral, delinquencies, and other factors. While the increase in the 1996 provision for loan losses was primarily due to the Bennett relationship and the result of the bulk loan sale, it was also due to weaknesses in the economy in the Bank's primary market area, decreases in the value of real estate (the primary collateral securing many loans) in the region, as well as increases in charge-offs, even after excluding the effects of the bulk loan sales and the Bennett relationship. 9 At December 31, 1996, the Bank's allowance for loan losses totaled $3.4 million, or 1.4% of total loans and 70.5% of non-performing loans, compared to $2.6 million, or 1.1% of total loans and 30.1% of non-performing loans at December 31, 1995. Non-interest Income. Non-interest income decreased by $592,000 to $920,000 for the year ended December 31, 1996, from $1.5 million in 1995. The primary reasons for the decline in non-interest income were the receipt by the Bank of a non-recurring FDIC deposit insurance premium refund of $189,000 in 1995, net losses on the sale of securities available for sale of $102,000 in 1996 compared to a net gain in the prior year of $225,000 and the receipt in 1995 of non-recurring insurance proceeds related to a fire loss on a real estate owned property in the amount of $76,000. In late 1995, the Bank's securities portfolio was yielding below market rates. As a result, the Bank decided in early January 1996 to $34 million of its holdings and reinvest the proceeds in then current higher yielding securities, based on a projection that the losses on the sales would be recovered in approximately six-months. Non-interest Expense. Non-interest expense increased $1.8 million to $13.1 million for the year ended December 31, 1996, an increase of 15.5%, from $11.4 million in 1995. The primary reasons for the increase were a $962,000 increase in the net costs associated with the Bank's real estate owned and repossessed assets and an increase in salaries, wages, and benefits of $694,000, or 15.8% over the prior year. The increase in the expenses related to real estate owned and repossessed assets resulted primarily from the bulk sale of certain foreclosed real estate properties at an amount below book value, which increased expenses by approximately $1.0 million. Although these assets had been carried at fair value, the Bank was willing to accept a price lower than book value as part of this bulk sale in order to reduce the drag on earnings that resulted from carrying these non-performing assets. This increase was partially offset by a decline in other write-downs of real estate owned of $377,000 to $877,000 for 1996 compared to $1.3 million during 1995. Also contributing to the increase was an increase in expenses related to holding these assets. 10 The increase in salaries, wages, and benefits was primarily attributable to the Company's Employee Stock Ownership Plan ("ESOP"), that was established at the time of conversion. The year ended December 31, 1996, was the first year in which the Company was required to recognize compensation expense related to the ESOP. The amount of the expense recorded for 1996 was $527,000. Excluding the ESOP expense, salaries, wages, and benefits increased $167,000, or 3.8%, to $4.6 million from $4.4 million in 1995 due mainly to normal cost of living and merit increases. All other non-interest expenses increased by $109,000, or 2.0%, to $5.5 million in 1996 from $5.4 million the prior year. Increases related to occupancy and equipment, data processing, professional fees, and certain other expense categories totaling $974,000 were offset almost entirely by decreases of $865,000 in certain other expense categories, primarily FDIC deposit insurance premiums, which declined by $531,000 from $533,000 in 1995 to $2,000 in 1996 due to a decrease in the rates charged to well-capitalized, Bank Insurance Fund (BIF) member institutions such as the Bank, and the recording of non-recurring expenses of $205,000 in 1995 pertaining to the seizure and liquidation of Nationar by the Superintendent of Banks of N.Y.S. Income Tax Expense. Due to the pre-tax loss of $5.8 million incurred in 1996 as compared to pre-tax income of $1.4 million in 1995, the Company recorded a tax benefit of $1.9 million for 1996 compared to an expense of $586,000 in 1995. Comparison of Fiscal Years Ended December 31, 1995 and 1994 General. Net income for the year ended December 31, 1995, decreased $1.1 million, or 56.1%, to $857,000 from $2.0 million for the year ended December 31, 1994. The decrease in net income resulted primarily from a decline in net interest income before provision for loan losses of $778,000, or 5.7%, an increase in the provision for loan losses of $415,000, or 37.5%, and an increase in non-interest expenses of $43,000, or 0.4%, partially offset by an increase in non-interest income of $607,000, or 67.1%. Interest Income. Interest income increased $1.8 million, or 7.5%, to $25.6 million in 1995 from $23.8 million in 1994. The increase in interest income was the result of a $17.7 million, or 5.6%, increase in the Bank's average interest-earning assets (primarily loans receivable) for the year ended December 31, 1995, to $331.3 million, compared to $313.6 million during 1994. The yield earned on the Bank's interest-earning assets increased 13 basis points to 7.72% in 1995 from 7.59% in 1994. This increase was primarily a result of an increase in rates earned on federal funds sold by the Bank. 11 Interest Expense. Interest expense increased by $2.5 million, or 25.1%, to $12.7 million for the year ended December 31, 1995, from $10.2 million in 1994. Average interest-bearing liabilities increased $7.9 million, or 2.8%, to $292.4 million in 1995 from $284.5 million in 1994 and the average rate paid on interest-bearing liabilities increased by 75 basis points to 4.33% from 3.58% during the same periods. The increase in interest expense, however, was primarily the result of a $37.6 million increase in the average outstanding balance of the Bank's certificate accounts (approximately $14.0 million of which represented a shift from lower earning savings accounts at the Bank) coupled with a 118 basis point increase in the rates paid on such accounts. In this regard, the Bank offered attractive promotional rates on certain certificate accounts in connection with the supermarket branch openings. Net Interest Income. Net interest income before provision for loan losses decreased $778,000, or 5.7%, to $12.8 million for the year ended December 31, 1995, compared to $13.6 million for 1994. The decrease was primarily due to a 65 basis point decline in the Bank's average net interest rate spread to 3.36% in 1995 from 4.01% in 1994, partially offset by an increase in average net earning assets of $9.8 million, or 33.6%, to $38.9 million in 1995 from $29.1 million in 1994. The Bank's average net yield on interest-earning assets also declined in 1995 to 3.87% from 4.34% in 1994. Provision for Loan Losses. The provision for loan losses increased $415,000, or 37.5%, to $1.5 million for the year ended December 31, 1995, from $1.1 million for the year ended December 31, 1994. This increase was attributable mainly to increased non-accruals for consumer loans secured by recreational vehicles and to a lesser extent manufactured homes. These types of loans typically have a higher risk of loss associated with them than real estate loans since they are generally secured by rapidly depreciable assets. Management's decision to increase the provision for loan losses was impacted primarily by management's analysis of the Bank's asset quality and the level of its allowance for loan losses. At December 31, 1995, the Bank's allowance for loan losses totaled $2.6 million or 1.1% of total loans and 30.1% of total non-performing loans. Non-interest Income. Total non-interest income increased $607,000, or 67.1%, to $1.5 million for the year ended December 31, 1995, from $905,000 for the year ended December 31, 1994. The primary reasons for the improvement in non-interest income in 1995 were a non-recurring FDIC deposit insurance premium refund of $189,000 and net gains on the sale of securities available for sale of $225,000 on the sale of securities available for sale. Also contributing to the increase in non-interest income were a $46,000 increase in commissions from annuity and mutual fund sales by the Bank's insurance agency subsidiary and the receipt of insurance proceeds related to a fire loss on real estate owned property in the amount of $76,000. 12 Non-interest Expense. Total non-interest expense increased $43,000, or 0.4%, to $11.4 million for 1995 compared to $11.3 million for 1994. The increase in non-interest expense was due to a $355,000, or 8.8% increase in salaries, wages, and benefits as a result of normal cost of living and merit increases and the addition of 13 full-time equivalent employees for the three supermarket branch offices opened since November of 1994. Also contributing to the increase was an increase of $232,000 in data processing fees, of which $105,000 was related to the implementation of check imaging, an increase of $151,000, or 14.1%, in occupancy and equipment expenses, due mainly to the addition of the three supermarket branches, partially offset by a decrease in other non-interest expenses of $695,000. The decrease in other non-interest expenses resulted primarily from a $451,000 decline in real estate owned and repossessed assets expenses and a $259,000 reduction in correspondent bank processing fees as a result of the Bank's decision to no longer outsource certain processes. Also contributing to the overall decrease in other non-interest expenses was a reduction in the Bank's FDIC, Bank Insurance Fund (BIF)-member, deposit insurance premiums of $188,000 due to a downward revision by the FDIC in its premium schedule for BIF-member institutions in anticipation of the BIF achieving its statutory reserve ratio. The lower premiums for BIF-member institutions became effective in the third quarter of 1995. Partially offsetting these decreases were a charge of $175,000 for legal costs related to a lawsuit in which the Bank was the defendant and the establishment of loss reserves totaling $205,000 related to the Bank's relationship with Nationar. Income Tax Expense. Income tax expense increased by $464,000 to $586,000 for 1995. The increase was due to a $641,000 decrease in the deferred tax asset valuation allowance during 1994, which reduced income tax expenses in 1994, with no such credit in 1995. 13 Average Balances, Interest Rates and Yields The following table presents for the periods indicated the total dollar amount of interest income earned on average interest-earning assets and the resultant yields, as well as the total dollar amount of interest expense incurred on average interest-bearing liabilities and the resultant rates. No tax equivalent adjustments were made. All average balances are daily average balances. Non-accruing loans have been included in the table as loans with interest earned on a cash basis only.
Years Ended December 31, --------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- --------------------------- --------------------------- Average Interest Yield/ Average Interest Yield/ Average Interest Yield/ Balance Inc./Exp. Rate Balance Inc./Exp. Rate Balance Inc./Exp. Rate -------- --------- ------- ------- --------- ------- ------- --------- ------ (Dollars in Thousands) Interest-Earning Assets: Loans receivable (1) $262,193 $20,557 7.84% $261,482 $21,385 8.18% $240,192 $19,718 8.21% Securities-available for sale (2) 156,093 10,921 7.00 --- --- --- --- --- --- Securities-held to maturity --- --- --- 49,598 3,028 6.11 55,890 3,360 6.01 Federal Home Loan Bank Stock 2,013 130 6.46 1,867 143 7.66 1,670 127 7.60 Federal funds sold 14,218 740 5.20 18,352 1,026 5.59 15,878 601 3.79 -------- --------- ------- --------- ------- --------- Total interest-earning assets (1)(2) 434,517 32,348 7.44 331,299 25,582 7.72 313,630 23,806 7.59 -------- --------- ------- --------- ------- --------- Interest-Bearing Liabilities Savings deposits 103,931 3,162 3.04 108,747 3,300 3.03 135,747 4,123 3.04 NOW deposits 19,124 527 2.76 18,640 511 2.74 18,583 510 2.74 Certificates of deposit 150,300 8,492 5.65 147,348 8,272 5.61 109,713 4,861 4.43 Money market accounts 8,765 243 2.77 10,362 285 2.75 13,253 364 2.75 Borrowed funds 67,572 4,011 5.94 4,880 299 6.11 5,471 307 5.61 Advances from borrowers for taxes and insurance, and stock subscription proceeds --- --- --- 2,402 79 3.28 1,725 27 1.57 -------- --------- ------- --------- ------- --------- Total interest-bearing liabilities 349,692 16,435 4.70 292,379 12,746 4.36 284,492 10,192 3.58 -------- --------- ------- --------- ------- --------- Net interest income $15,913 $12,836 $13,614 ========= ========= ========= Net interest rate spread (1)(2) 2.74% 3.36% 4.01% ===== ===== ===== Net earning assets (1)(2) $84,825 $38,920 $29,138 ======== ======= ======= Net yield on average interest-earning assets (1)(2) 3.66% 3.87% 4.34% ===== ===== ===== Average interest-earning assets/ average interest-bearing liabilities 124.26% 113.31% 110.24% ======== ======= ======= - --------------------------------------------- (1) Calculated net of deferred loan fees, loan discounts and loans in process. (2) Net of Securities available for sale pending settlement and net unrealized gains/(losses).
14 Rate/Volume Analysis of Net Interest Income The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and the changes due to changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e., changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
Year Ended December 31, ----------------------------------------------------------------- 1996 vs. 1995 1995 vs. 1994 ----------------------------------------------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total ----------------- Increase ------------------ Increase Volume Rate (Decrease) Volume Rate (Decrease) -------- ------ --------- -------- ------ --------- (Dollars in Thousands) Interest-Earning Assets: Loans receivable (1) $58 ($886) ($828) $1,739 ($72) $1,667 Securities-available for sale (2) 10,921 -- 10,921 -- -- -- Securities-held to maturity (3,028) -- (3,028) (389) 57 (332) Federal Home Loan Bank Stock 13 (26) (13) 15 1 16 Federal Funds sold (219) (67) (286) 105 320 425 -------- ------ --------- -------- ------ --------- Total interest-earning assets 7,745 (979) 6,766 1,470 306 1,776 -------- ------ --------- -------- ------ --------- Interest-Bearing Liabilities Savings deposits (145) 7 (138) (809) (14) (823) NOW deposits 13 3 16 2 (1) 1 Certificates of deposit 167 53 220 1,920 1,491 3,411 Money market accounts (44) 2 (42) (80) 1 (79) Borrowed funds 3,720 (8) 3,712 (50) 42 (8) Advances from borrowers for taxes and insurance, and stock subscription proceeds (45) (34) (79) 17 35 52 -------- ------ --------- -------- ------ --------- Total interest-bearing liabilities $3,666 $23 3,689 $1,000 $1,554 2,554 ======== ====== --------- ======== ======= --------- Net interest income $3,077 ($778) ========= ======== - ------------------------------------- (1) Calculated net of deferred loan fees, loan discounts and loans in process. (2) Net of Securities available for sale pending settlement and net unrealized gains/(losses).
15 Asset/Liability Management The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-bearing liabilities reprice on a different basis or at a different pace from its interest-earning assets. Management of the Bank believes it is important to manage the relationship between interest rates and the effect on the Bank's net portfolio value ("NPV"). This approach calculates 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. Thrift institutions with greater than "normal" interest rate exposure must take a deduction from their total capital available to meet their risk-based capital requirement. The amount of the deduction is one-half of the difference between (a) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (b) its "normal" level of exposure which is defined as 2% of the present value of its assets. The regulation, however, will not become effective until the OTS evaluates the process by which savings associations may appeal an interest rate risk deduction determination. It is uncertain as to when this evaluation may be completed. Furthermore, the Bank, due to its asset size and level of risk-based capital is exempt from this requirement. At December 31, 1996, a change in interest rates of positive 200 basis points would have resulted in a 4.14% decrease (as a percentage of the net present value of the Bank's assets) in the Bank's NPV while a change in interest rates of negative 200 basis points would have resulted in a 2.43% increase (as a percentage of the net present value of the Bank's assets) in the Bank's NPV. Accordingly, the Bank's interest rate risk was considered normal under OTS regulations and no additional risk-based capital would have been required at December 31, 1996. Presented below, as of December 31, 1996, is an analysis of the Bank's interest rate risk as calculated by the OTS, measured by changes in the Bank's NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis points increments, up and down 400 basis points. Net Portfolio Value ------------------- Change in Interest Rate $ Amount $ Change % Change ------------- -------- -------- -------- (Basis Points) (Dollars in Thousands) +400 $17,103 $(38,857) (69)% +300 26,503 (29,459) (53) +200 36,446 (19,514) (35) +100 46,552 ( 9,409) (17) ---- 55,961 ---- ---- -100 62,976 7,016 13 -200 67,404 11,444 20 -300 71,920 15,959 29 -400 77,826 21,865 39 16 Certain assumptions utilized by the OTS in assessing the interest rate risk of thrift institutions 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, a change in Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated above. The Bank maintains an asset/liability committee ("ALCO") which meets weekly to review interest rate risk management strategy and to review the Bank's investment strategy for loans and securities, monitor investment performance and to take any actions necessary for adjusting future investment direction. In managing its asset/liability mix, and depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, the Bank may place more emphasis on limiting interest rate risk than on enhancing its net interest income. Management believes that the stability which can be obtained by limiting interest rate risk can more than offset the benefits which can be derived from seeking to enhance the net interest margin on a short-term basis. In managing its asset/liability mix, the Bank, at times, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, may place greater emphasis on maximizing its net interest margin than on matching the interest rate sensitivity of its assets and liabilities, in an effort to improve or maintain its spread. Management believes that the increased net income resulting from a mismatch in the maturity of its asset and liability portfolios can, during periods of decline or stable interest rates, provide high enough returns to justify the increased vulnerability to sudden and unexpected increases in interest rates which can result from such a mismatch. As a result, the Bank may at certain times be more vulnerable to rapid increases in interest rates than some other institutions which concentrate principally on matching the maturities of their assets and liabilities. In evaluating the Bank's exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. As a result, the actual effect of changing interest rates may differ from that presented in the foregoing table. 17 In addition, as part of its asset/liability management process, the Bank subscribes as a member of the Federal Home Loan Bank of New York to the Interest Rate Risk Service provided by the Federal Home Loan Bank of Atlanta (FHLBA). The Bank directly furnishes the FHLBA with the starting data needed to run the asset/liability simulation model developed by the FHLBA. The required starting data consists of the Bank's quarterly OTS call report. The schedules from this report, provide the FHLBA with asset, liability and capital positions in addition to maturity, rate and repricing information. The FHLBA's simulation model identifies the Bank's exposure to interest rate risk by measuring the estimated interest rate sensitivity of the participating institution's Net Portfolio Value (NPV), the estimated sensitivity of the institution's net interest income (NII), and the institution's estimated maturity gap position. In most cases the FHLBA has followed OTS methodology, however, because of differences in modeling techniques and assumptions, the FHLBA results may differ from estimates generated by the OTS. Management believes that the strategy related to the purchase of securities with borrowed funds and the simultaneous pledging of those securities as securities sold under agreements to repurchase does not expose the Company's net interest income and its net interest margin (NIM) to an unacceptable level of sensitivity to changes, either up or down, in interest rates. See "Financial Condition" and "Net Interest Income" herein. Management is aware, however, that by pursuing the balance sheet strategy it followed, that the Bank's NPV would be more sensitive to changes in interest rates. Based on the FHLBA's Peer Group Report for December 31, 1996, if rates increased 200 basis points, the Bank's NPV would decline 29.6% from its base NPV (compared to the OTS calculated 35% in the table above) while the median decline for its peers was 22.6%. However, if interest rates increased 400 basis points, the Bank's NPV would decline by 67.1% (compared to the OTS calculated 69% in the table above) while the median decline for its peer group was estimated at 47.2%. When the Bank is compared to its peers in regard to changes in net interest income and net interest margin, the Bank becomes less interest rate sensitive than its peer group. With a 200 basis point increase in interest rates, the Bank's NII would decline by an estimated 3.9% compared to its peer group's median decline of 8.5%. If rates increased 400 basis points, the Bank's NII would decline by 9.2% compared to a median decline of 18.6% for its peer group. Given a 200 basis increase in interest rates as of December 31, 1996, the Bank's NIM would decline 13 basis points from its base case rate of 3.14% to 3.01%, compared to a peer group decline to 2.66% from 2.83%, a decline of 17 basis points. If interest rates increased 400 basis points, the Bank's NIM would decline 29 basis points to 2.85% from the base margin of 3.14% while the peer group's NIM would decline by 42 basis points to 2.41% from 2.83%. Liquidity and Capital Resources The Bank's primary sources of funds for operations are deposits from its market area, principal and interest payments on loans and securities available for sale , proceeds from the maturity of securities available for sale, advances from the FHLB of New York and proceeds from the sale of securities sold under agreements to repurchase ("reverse repo"). While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. 18 The primary investing activities of the Company are the origination of loans and purchase of securities. During, 1996, 1995 and 1994 the Bank's loan originations totaled $81.4 million, $50.2 million and $91.2 million, respectively. The Bank purchased securities held for investment during the year ended December 31, 1994 of $12.2 million. During 1995, the Bank purchased $47.0 million of securities and classified such securities, consistent with the reclassification of all investment and mortgage-backed securities at December 31, 1995, as available for sale. In 1996, the Company purchased $192.6 million of securities and classified such securities as available for sale. The primary financing activity of the Bank is the attraction of deposits. However, during the years ended December 31, 1996 and 1994, the Bank experienced net decreases in deposits of $13.2 million and $1.6 million, respectively. During the year ended December 31, 1995, the Bank experienced a net increase in deposits of $18.1 million. Management believes that the decrease in deposits during the year ended December 31, 1996, was the result, in part, to some of the Bank's depositors deciding to pursue alternative investment opportunities, such as stock mutual funds, with a portion of their investable funds. The net increase of $18.1 million in 1995 resulted from an increase of $41.2 million in certificates of deposit, partially offset by declines in savings and transaction accounts. The increase in certificates of deposit was the result of the Bank's aggressive 1995 marketing campaigns related, in part, to the three supermarket branches that the Bank opened since November 1994. The Bank is required to maintain a minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied by the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required minimum liquidity ratio is currently 5% and the short-term liquidity ratio is 1%. The Bank's average daily liquidity ratio for the month of December 1996 was 7.5%, and its short-term liquidity for the same month was 1.6%. The Bank's most liquid assets are cash and cash equivalents, which consist of federal funds sold and bank deposits. The level of these assets is dependent on the Bank's operation, financing and investing activities during any given period. At December 31, 1996, 1995 and 1994 cash and cash equivalents totaled $10.9 million, $84.6 million and $16.3 million, respectively. The Bank anticipates that it will have sufficient funds available to meet its current commitments. At December 31, 1996, the Bank had commitments to originate loans of $1.9 million as well as undrawn commitments of $5.9 million on home equity and other lines of credit. Certificates of deposit which are scheduled to mature in one year or less at December 31, 1996, totaled $91.1 million. Management believes that a significant portion of such deposits will remain with the Bank. However, if the Bank is not able to maintain its historical retention rate on maturing certificates of deposit, it may consider employing the following strategies: (i) increase its borrowed funds position to compensate for the deposit outflows; (ii) increase the rates it offers on these deposits in order to increase the retention rate on maturing certificates of deposit and/or to attract new deposits; or (iii) attempt to increase certificates of deposit through the use of deposit brokers. Depending on the level of market interest rates on the renewal dates of the certificates of deposit, the employment of one or a combination of these strategies could result in higher or lower levels of net interest income and net income. 19 The Bank is also involved as plaintiff or defendant in various legal actions in the normal course of its business. For additional information regarding such legal matters see "Business-Legal Proceedings" and Note 13(a) of the Notes to Consolidated Financial Statements. The Company also has a need for, and sources of, liquidity. Liquidity is required to fund its operating expenses, as well as for the payment of any dividends to stockholders. The Company currently has no significant liquidity commitments as operating costs are modest and dividends to stockholders are discretionary and to date no dividends have been declared or paid. At December 31, 1996, the Holding Company had $469,000 in liquid assets on hand, however, the primary source of liquidity on an ongoing basis is dividends from the Bank. To date, no dividends have been paid from the Bank to the Company. Federally insured savings institutions are required to maintain a minimum level of regulatory capital. The OTS has established standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements for national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. At December 31, 1996, the Bank had tangible and core capital of $46.2 million and $46.2 million, respectively, or 10.08% of adjusted total assets, which was approximately $39.3 million and $32.4 million above the minimum requirements of 1.5% and 3.0%, respectively, of the adjusted total assets in effect on that date. On December 31, 1996, the Bank had total risk-based capital of $48.7 million (including $46.2 million in core capital), or 24.61% of risk-weighted assets of $198.0 million. This amount was $32.9 million above the 8.0% requirement in effect on that date. Impact Of Inflation The Consolidated Financial Statements and Notes thereto 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 the change in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Nearly all the assets sand liabilities of the Company are financial, unlike most industrial companies. As a result, the Company's performance is directly impacted by changes in interest rates, which are indirectly influenced by inflationary expectations. The Company's ability to match the interest sensitivity of its financial assets to the interest sensitivity of its financial liabilities in its asset/liability management may tend to minimize the effect of changes in interest rates on the Company's performance. Changes in interest rates do not necessarily move to the same extent as do changes in the price of goods and services. 20 Unaudited Consolidated Interim Financial Information Following is a summary of unaudited quarterly consolidated financial information for each quarter of 1996 and 1995.
1996 Quarters Ended 1995 Quarters Ended 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 ---- ---- ---- ----- ---- ---- ---- ----- (Dollars in thousands, except per share data) Interest Income $6,948 $7,590 $8,854 $8,956 $6,272 $6,426 $6,405 $6,479 Net Interest Income 3,686 3,909 4,259 4,059 3,418 3,278 3,064 3,076 Provision for Loan Losses 1,628 433 549 6,840 168 1,116 60 178 Income/(Loss) Before Income Taxes (472) 873 963 (7,129) 1,096 (1,271) 1,031 587 Net Income/(Loss) (314) 510 572 (4,604) 648 (820) 665 364 Per Share: Net Income/(Loss)* (.06) .10 .12 (1.05) N/A N/A N/A N/A - ----------------------------------------- * The summation of the 1996 quarterly earnings per share do not equal the December 31, 1996 year to date loss per share of ($.81) as a result of the loss in the fourth quarter being applied to a smaller average shares outstanding balance for the fourth quarter (due to the two stock buy backs in December 1996) as compared to the average on a year to date basis.
21 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, 1996 and 1995, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ambanc Holding Co., Inc. and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, as of January 1, 1995, the Company adopted the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 114 "Accounting by Creditors For Impairment of a Loan," and Statement of Financial Accounting Standards No. 118, "Accounting by Creditors For Impairment of a Loan - - Income Recognition and Disclosures," which prescribe recognition criteria for loan impairment and measurement methods for certain impaired loans and loans whose terms are modified in a troubled debt restructuring subsequent to the adoption of these Statements. KPMG Peat Marwick LLP Albany, N.Y. February 7, 1997 22 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition
December 31, Assets 1996 1995 ---- ---- (in thousands) Cash and due from banks ........................................ $ 6,387 $ 7,513 Federal funds sold ............................................... 4,500 77,100 ------- ------- Cash and cash equivalents ................ 10,887 84,613 Securities available for sale, at fair value (note 4) .......................................... 200,539 74,422 Loans receivable, net (note 5) ................................... 248,094 249,991 Accrued interest receivable (note 6) ............................. 3,201 1,827 Premises and equipment, net (note 7) ............................. 2,784 3,071 Federal Home Loan Bank of New York stock, at cost .................................................. 2,029 1,892 Real estate owned and repossessed assets ......................... 715 3,169 Other assets ..................................................... 4,172 1,831 Due from broker .................................................. -- 18,128 ------- ------- Total assets ............................. $ 472,421 $ 438,944 ======= ======= Liabilities and Shareholders' Equity Liabilities: Deposits (note 8) ........................................ $ 298,082 $ 311,239 Advances from borrowers for taxes and insurance .......................................... 1,703 1,692 Borrowed funds (note 9) .................................. 108,780 -- Accrued interest payable ................................. 1,077 2 Accrued expenses and other liabilities ................... 1,261 3,116 Due to broker ............................................ -- 46,880 ------- ------- Total liabilities ......................... $ 410,903 $ 362,929 ------- ------- Commitments and contingent liabilities (notes 10, 11 and 13) Shareholders' equity: Preferred stock $.01 par value, Authorized 5,000,000 shares; none outstanding at December 31, 1996 and 1995 . -- -- Common stock $.01 par value, Authorized 15,000,000 shares; 5,422,250 shares issued and outstanding at December 31, 1996 and 1995 .......................... 54 54 Additional paid-in capital ............................... 52,128 52,127 Retained earnings, substantially restricted .............. 24,436 28,272 Treasury stock, at cost, (1,030,227 shares at December 31, 1996 and none at December 31, 1995) ..................................... (11,208) -- Common stock acquired by ESOP ............................ (3,812) (4,338) Net unrealized loss on securities available for sale, net of tax ......................... (80) (100) ------- ------- Total shareholder's equity ................ 61,518 76,015 ------- ------- Total liabilities and shareholders' equity. $ 472,421 438,944 ======= ======= See accompanying notes to consolidated financial statements.
23 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Income
Years ended December 31, 1996 1995 1994 ---- ---- ---- (In thousands, except per share amounts) Interest and dividend income: Loans ....................................... $ 20,557 21,385 19,718 Securities available for sale ............... 10,921 -- -- Investment securities ....................... -- 3,028 3,360 Federal funds sold .......................... 740 1,026 601 Federal Home Loan Bank stock ................ 130 143 127 -------- -------- -------- Total interest and dividend income ..... 32,348 25,582 23,806 Interest expense: Deposits (note 8) ........................... 12,424 12,447 9,885 Borrowings .................................. 4,011 299 307 -------- -------- -------- Total interest expense ................. 16,435 12,746 10,192 -------- -------- -------- Net interest income .................... 15,913 12,836 13,614 Provision for loan losses (note 5) ............... 9,450 1,522 1,107 -------- -------- -------- Net interest income after provision for loan losses ............ 6,463 11,314 12,507 -------- -------- -------- Other income: Service charges on deposit accounts ......... 764 783 642 Net gains (losses) on securities transactions (102) 225 -- Other ....................................... 258 504 263 -------- -------- -------- Total other income ..................... 920 1,512 905 -------- -------- -------- Other expenses: Salaries, wages and benefits ................ 5,097 4,403 4,048 Occupancy and equipment ..................... 1,328 1,219 1,068 Data processing ............................. 843 728 496 Federal deposit insurance premium ........... 2 533 721 Correspondent bank processing fees .......... 116 245 504 Provision for losses on Nationar related receivable ....................... -- 205 -- Real estate owned and repossessed assets expenses, net ..................... 2,563 1,601 2,052 Professional fees ........................... 540 358 326 Other ....................................... 2,659 2,091 2,125 -------- -------- -------- Total other expenses ................... 13,148 11,383 11,340 -------- -------- -------- Income (loss) before taxes ....................... (5,765) 1,443 2,072 Income tax expense (benefit) (note 10) ........... (1,929) 586 122 -------- -------- -------- Net income (loss) ...................... $ (3,836) 857 1,950 ======== ======== ======== Net loss per share ............................... $ (0.81) N/A N/A ======== ======== ======== See accompanying notes to consolidated financial statements.
24 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1996, 1995 and 1994 (in thousands, except share data)
Net unrealized gain (loss) on securities Common Additional available stock Common paid-in Treasury Retained for sale, acquired stock capital stock earnings net of tax by ESOP Total ------- ---------- -------- -------- ------------ -------- ------- Balance at January 1, 1994 ................... $ -- -- -- 25,465 -- -- 25,465 Net income ................................... -- -- -- 1,950 -- -- 1,950 Balance at December 31, 1994 ................. -- -- -- 27,415 -- -- 27,415 Net income ................................... -- -- -- 857 -- -- 857 Common stock issued (5,422,250 shares) ....... 54 52,127 -- -- -- -- 52,181 Purchase of ESOP shares (433,780 shares) ..... -- -- -- -- -- (4,338) (4,338) Change in net unrealized loss on securities available for sale, net of tax ............ -- -- -- -- (100) -- (100) Balance at December 31, 1995 ................. 54 52,127 -- 28,272 (100) (4,338) 76,015 Net loss ..................................... -- -- -- (3,836) -- -- (3,836) Purchase of treasury shares (1,030,227 shares) -- -- (11,208) -- -- -- (11,208) Release of ESOP shares (52,964 shares) ....... -- 1 -- -- -- 526 527 Change in net unrealized loss on securities available for sale, net of tax ............ -- -- -- -- 20 -- 20 Balance at December 31, 1996 ................. $ 54 52,128 (11,208) 24,436 (80) (3,812) 61,518 See accompanying notes to consolidated financial statements.
25 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows
Years ended December 31, 1996 1995 1994 ---- ---- ---- (In thousands) Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Net income (loss) ..................................... $ (3,836) 857 1,950 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation .................................... 501 438 377 Amortization of computer software costs ......... 57 58 -- Provision for loan losses ....................... 9,450 1,522 1,107 Provision for losses and writedowns on real estate owned and repossessed assets ............. 877 1,254 1,590 Provisions for losses on Nationar related receivables . -- 205 -- Loss on sale of fixed assets .......................... 64 -- -- ESOP compensation expense ............................. 527 -- -- Net loss (gains) on sale and redemptions of securities available for sale ........................ 102 (225) -- Net loss on sale of other real estate owned ........... 1,260 74 128 Net amortization on securities ........................ 475 19 39 Deferred tax expense (benefit) ........................ (509) (577) 360 (Increase) decrease in accrued interest receivable and other assets .......................... (2,807) 17 (1,410) Decrease (increase) in due from broker ................ 18,128 (18,128) -- Increase (decrease) in accrued expenses and other liabilities .................................... (1,201) 2,225 (9,144) Increase (decrease) in due to broker .................. (46,880) 46,880 -- Increase (decrease) in advances from borrowers for taxes and insurance .............................. 11 (762) 572 ------- ------- ------- Net cash provided (used) by operating activities (23,781) 33,857 (4,431) ------- ------- ------- Cash flows from investing activities: Proceeds from sales and redemptions of securities available for sale ........................ 34,469 18,372 -- Purchases of securities available for sale ............ (192,647) -- -- Proceeds from principal paydowns and maturities of securities available for sale .......... 31,508 -- -- Proceeds from principal paydowns and maturities of investment securities ............................. -- 7,530 16,708 Purchase of investment securities ..................... -- (46,980) (12,195) Purchase of FHLB stock ................................ (137) (237) -- Proceeds from sale of loans ........................... 18,929 -- -- Net (increase) decrease in loans made to customers .... (28,685) 8,205 (42,714) Capital expenditures .................................. (341) (692) (544) Proceeds from sales of other real estate .............. 2,519 1,340 1,378 Proceeds from the sale of fixed assets ................ 25 -- 9 ------- ------- ------- Net cash used by investing activities .......... $ (134,360) (12,462) (37,358) ======= ======= ======= (Continued)
26 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued
Years ended December 31, 1996 1995 1994 ---- ---- ---- Cash flows from financing activities: Purchase of ESOP shares ............................. $ -- (4,338) -- Net proceeds from common stock issued in stock conversion .................................. -- 52,181 -- Purchase of treasury stock ............................ (11,208) -- -- Net increase (decrease) in deposits ................... (13,157) 18,087 (1,627) Advances from (repayments on) FHLB borrowings, net ...................................... 6,000 (19,000) 19,000 Increase in securities sold under agreements to repurchase ............................. 102,780 -- -- ------- ------- ------- Net cash provided by financing activities ....... 84,415 46,930 17,373 ------- ------- ------- Net increase (decrease) in cash and cash equivalents .................. (73,726) 68,325 (24,416) Cash and cash equivalents at beginning of year ........................ 84,613 16,288 40,704 ------- ------- ------- Cash and cash equivalents at end of period ............................ $ 10,887 84,613 16,288 ======= ======= ======= Supplemental disclosures of cash flow information - cash paid during the year for: Interest .............................................. $ 15,360 12,447 9,950 ======= ======= ======= Income taxes .......................................... $ 306 1,000 498 ======= ======= ======= Noncash investing activities: Net reduction in loans receivable resulting from the transfer to real estate owned ...................... $ 2,203 1,864 1,330 ======= ======= ======= Transfer of investment securities to investment securities available for sale ............................... $ -- 45,736 -- ======= ======= ======= Net decrease in unrealized loss on securities available for sale, net of tax ............................... $ 20 -- -- ======= ======= ======= See accompanying notes to consolidated financial statements.
27 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1996 and 1995 (1) Summary of Significant Accounting Policies Ambanc Holding Co. Inc. (the Holding Company) was incorporated under Delaware law in June 1995 as a Holding Company to purchase 100% of the common stock of Amsterdam Savings Bank, FSB (the Bank). The Bank converted from a mutual form to a stock institution in December 1995, and the Holding Company completed its initial public offering on December 26, 1995, at which time the Holding Company purchased all the outstanding stock of the Bank. The following is a description of the more significant policies which Ambanc Holding Co., Inc. follows in preparing and presenting its consolidated financial statements. (a) Basis of Presentation The accompanying consolidated financial statements include the accounts of Ambanc Holding Co., Inc., and its wholly owned subsidiaries, Amsterdam Savings Bank FSB and A.S.B. Insurance Agency, Inc., collectively referred to as the Company. All significant intercompany accounts have been eliminated in consolidation. The accounting and reporting policies of the Company conform in all material respects to generally accepted accounting principles and to general practice within the thrift industry. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate owned and repossessed assets acquired in connection with foreclosures or in satisfactions of loans. In connection with the determination of the allowance for loan losses, the valuation of real estate owned, and estimates of fair value for repossessed assets, management obtained appraisals for significant assets. (b) Business A substantial portion of the Company's assets are loans secured by real estate in the upstate New York area. In addition, a significant portion of the real estate owned is located in those same markets. Accordingly, the ultimate collectibility of a considerable portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of real estate owned are dependent upon market conditions in the upstate New York region. 28 (1) Summary of Significant Accounting Policies, Continued Management believes that the allowance for loan losses is adequate and that other real estate owned and repossessed assets are properly valued. While management uses available information to recognize losses on loans and other real estate owned and repossessed assets, future additions to the allowance or writedowns of other real estate and repossessed assets may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and valuation of other real estate owned and repossessed assets. Such agencies may require the Bank to recognize additions to the allowance or write downs of other real estate and repossessed assets based on their judgments about information available to them at the time of their examination which may not be currently available to management. (c) Securities Available for Sale, Investment Securities and FHLB of New York Stock On January 1, 1994 the Bank adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments and Debt and Equity Securities" (SFAS No. 115). Management determines the appropriate classification of securities at the time of purchase. If management has the positive intent and ability to hold debt securities to maturity they are classified as held to maturity and are stated at amortized cost. All other debt and marketable equity securities are classified as securities available for sale and are reported at fair value, with net unrealized gains and losses reported as a separate component of shareholders' equity, net of estimated income taxes. The Company does not maintain a trading portfolio, and at December 31, 1996 and 1995 the Company had no securities classified as investment securities. 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 of New York stock, is stated at cost. The investment in Federal Home Loan Bank of New York stock is required for membership. Mortgage backed securities, which are guaranteed by the Government National Mortgage Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Corporation ("FNMA"), represent participation interests in direct pass-through pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Gains and losses on the sale and redemption of securities available for sale are based on the amortized cost of the specific security sold. The cost of securities is adjusted for amortization of premium and accretion of discounts, which is calculated on an effective interest method. Purchases and sales are recorded on a trade date basis. Receivables and payables from unsettled transactions are shown as due from brokers or due to brokers in the consolidated financial statements. 29 (1) Summary of Significant Accounting Policies, Continued (d) Reclassification of Investment Securities In November 1995, the Financial Accounting Standards Board (FASB) released its Special Report "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The Special Report contained, among other things, a unique provision that allowed entities to, as of one date either concurrent with the initial adoption of the Special Report (November 15, 1995), but no later than December 31, 1995, reassess the appropriateness of the classifications of all securities held at that time. In accordance with the FASB's Special Report, as of December 31, 1995, the Company reclassified all investment securities held to maturity, with an amortized cost of $45,735,971, to securities available for sale. (e) Loans Receivable and Loan Fees Loans receivable are stated at unpaid principal amount, net of unearned discount, deferred loan fees, net, and allowance for loan losses. Discounts are amortized to income over the contractual loan life using the level-yield method. Loan fees received and the related direct cost of originations have been deferred and are being recorded as yield adjustments over the life of the related loans using the interest method of amortization. Non-performing loans include non-accrual loans, restructured loans and loans which are 90 days or more past due and still accruing interest. Loans considered doubtful of collection by management are placed on a nonaccrual status for the recording of interest. Generally loans past due 90 days or more as to principal or interest are placed on nonaccrual status except for certain loans which, in management's judgment, are adequately secured and for which collection is probable. Previously accrued income that has not been collected is reversed from current income. Thereafter, the application of payments received (principal or interest) is dependent on the expectation of ultimate repayment of the loan. If ultimate repayment of the loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment of principal is not expected or management judges it to be prudent, any payment received on a non-accrual loan is applied to principal until ultimate repayment becomes expected. Loans are removed from non-accrual status when they are estimated to be fully collectible as to principal and interest. Amortization of related deferred fees is suspended when a loan is placed on non-accrual status. The allowance for loan losses is maintained at a level deemed appropriate by management based on an evaluation of the known and inherent risks in the present portfolio, the level of non-performing loans, past loan loss experience, estimated value of underlying collateral, and current and prospective economic conditions. The allowance is increased by provisions for loan losses charged to operations. 30 (1) Summary of Significant Accounting Policies, Continued (f) Loan Impairment On May 31, 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan", (SFAS No. 114). Statement No. 114 was amended by Statement of Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures," (SFAS No. 118). These Statements prescribe recognition criteria for loan impairment, generally related to commercial type loans and measurement methods for certain impaired loans and all loans whose terms are modified in troubled debt restructuring subsequent to the adoption of these Statements. A loan is considered impaired when it is probable that the borrower will not repay the loan according to the original contractual terms of the loan agreement. As of January 1, 1995, the Company adopted the provisions of SFAS No. 114 and SFAS No. 118. The effect of adoption was not material to the consolidated financial statements. As a result of the adoption of SFAS No. 114, the allowance for loan losses related to impaired loans that are identified for evaluation in accordance with SFAS No. 114 is based on discounted cash flows using the loan's initial effective rate or the fair value of the collateral for certain loans where repayment of the loan is expected to be provided solely by the underlying collateral (collateral dependent loans). The Company's impaired loans are generally collateral dependent. The Company considers estimated costs to sell, on a discounted basis, when determining the fair value of collateral in the measurement of impairment if those costs are expected to reduce the cash flows available to repay or otherwise satisfy the loans. Impaired loans are included in non-performing loans, generally as non-accrual commercial type loans and all loans restructured in a troubled debt restructuring subsequent to January 1, 1996, and all restructured loans which are not performing in accordance with their restructured terms. (g) Real Estate Owned and Repossessed Assets Real estate owned and repossessed assets include assets received from foreclosures and in-substance foreclosures. In accordance with SFAS No. 114, a loan is classified as an insubstance foreclosure when the Company has taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place. Real estate owned and repossessed assets, including in-substance foreclosures, are recorded on an individual asset basis at net realizable value which is the lower of fair value minus estimated costs to sell or "cost" (defined as the fair value at initial foreclosure). When a property is acquired or identified as in-substance foreclosure, the excess of the loan balance over fair value is charged to the allowance for loan losses. Subsequent write-downs to carry the property at fair value less costs to sell are included in noninterest expense. Costs incurred to develop or improve properties are capitalized, while holding costs are charged to expense. 31 (1) Summary of Significant Accounting Policies, Continued At December 31, 1996, real estate owned and repossessed assets consisted primarily of residential one to four family properties and mobile homes. At December 31, 1995, real estate owned and repossessed assets consisted primarily of multi-family and commercial real estate properties. The Company had no in-substance foreclosures at December 31, 1996 and 1995. (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) Income Taxes Income taxes are recorded on income reported in the consolidated statements of income regardless of when such taxes are payable. The Company records income taxes in accordance with Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, (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 differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company's policy is that deferred tax assets are reduced by a valuation reserve if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be recognized. In considering if it is more likely than not that some or all of the deferred tax assets will not be realized, the Company considers temporary taxable differences, historical taxes and estimates of future taxable income. (j) Pension Plan The Company has a defined benefit pension plan covering substantially all employees. The Company's actuarially determined annual contribution to the pension plan meets or exceeds the minimum funding requirements set forth in the Employees Retirement Income Security Act of 1974. (k) Off-Balance Sheet Risk The Company is a party to certain financial instruments with off-balance sheet risk such as commitments to extend credit, unused lines of credit and standby letters of credit. The Company's policy is to record such instruments when funded. 32 (1) Summary of Significant Accounting Policies, Continued (l) Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. (m) Long Lived Assets In May 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS No. 121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Various assets are excluded from the scope of SFAS No. 121, including financial instruments which constitute the majority of the Company's assets. For long-lived assets included in the scope of SFAS No. 121, such as premises and equipment, an impairment loss must be recognized when the estimate of total undiscounted future cash flows attributable to the asset is less than the asset's carrying amount. Measurement of impairment loss is determined by reducing the carrying amount of the asset to its fair value. Long-lived assets to be disposed of, such as real estate owned and repossessed assets or premises to be sold, are reported at the lower of carrying amount or fair value less estimated cost to sell. The Company adopted SFAS No. 121 in 1996. The adoption of SFAS No. 121 did not have a material impact on the Company's consolidated financial statements. (n) Earnings per share Earnings or loss per share are computed based on the weighted average number of shares outstanding, less unreleased employee stock ownership plan shares, during the period. Earnings per share are not presented for periods prior to the initial stock offering as the Bank was a mutual savings bank at the time and no stock was outstanding. The weighted average number of shares outstanding was 4,761,393 for the year ended December 31, 1996. (o) Official Bank Checks The Company's treasurer checks (including expense checks) are drawn upon the Bank and are ultimately paid through the Bank's Federal Reserve Bank of New York correspondent account and are included in accrued expenses and other liabilities in the consolidated statements of financial condition. 33 (1) Summary of Significant Accounting Policies, Continued (p) Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125). SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. SFAS No. 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and will supesede SFAS No. 122, which is discussed above. Certain aspects of SFAS No. 125 were amended by SFAS No. 127, "Deferral of the Effective Date of Certain Provision of FAS Statement No. 125." Management believes that adoption of SFAS No. 125, as amended, will not have a material impact on the Company's consolidated financial statements. (q) Reclassifications Amounts in the prior years' consolidated financial statements are reclassified whenever necessary to conform to current period presentations. (2) Conversion to Stock Ownership On December 26, 1995, the Holding Company sold 5,422,250 shares of common stock at $10.00 per share to depositors and employees of the Bank. Net proceeds from the sale of stock of the Holding Company, after deducting conversion expenses of approximately $2.0 million, were $52.2 million and are reflected as common stock and additional paid-in capital in the accompanying December 31, 1996 and 1995 consolidated statements of financial condition. The Company utilized $26.0 million of the net proceeds to acquire all of the capital stock of the Bank. As part of the conversion, the Bank established a liquidation account for the benefit of eligible depositors who continue to maintain their deposit accounts in the Bank after conversion. In the unlikely event of a complete liquidation of the Bank, each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account, in the proportionate amount of the then current adjusted balance for deposit accounts held, before distribution may be made with respect to the Bank's capital stock. The Bank may not declare or pay a cash dividend to the Holding Company on, or repurchase any of, its capital stock if the effect thereof would cause the retained earnings of the Bank to be reduced below the amount required for the liquidation account. Except for such restrictions, the existence of the liquidation account does not restrict the use or application of retained earnings. 34 (2) Conversion to Stock Ownership, Continued 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, 1996, the maximum amount that could have been paid by the Bank to the Holding Company was approximately $17.0 million. Unlike the Bank, the Holding Company is not subject to these regulatory restrictions on the payment of dividends to its stockholders. (3) Reserves and Investments Required by Law The Company is required to maintain certain reserves of cash and or deposits with the Federal Reserve Bank. The amount of this reserve requirement, included in cash and due from banks, was approximately $1,069,000 and $1,005,000 at December 31, 1996 and 1995, 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 certain residential real estate loans, to secure its advances from the Federal Home Loan Bank of New York. (4) Securities Available for Sale The amortized cost and estimated fair values of securities available for sale at December 31, 1996 and 1995 are as follows:
1996 ------------------------------------------------- (in thousands) Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- U.S. Government and agency securities $ 43,968 69 (264) 43,773 Mortgage-backed securities .......... 156,191 705 (635) 156,261 State and political subdivisions .... 500 5 -- 505 -------- ----- ------ ------- Total ....................... $ 200,659 779 (899) 200,539 ======== ===== ====== =======
35 (4) Securities Available for Sale, Continued
1995 ------------------------------------------------- (in thousands) Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- U.S. Government and agency securities $ 10,000 2 (35) 9,967 Mortgage-backed securities .......... 53,070 1 (38) 53,033 Financial notes ..................... 6,998 -- (61) 6,937 Industrial bonds .................... 999 -- (2) 997 Public utility bonds ................ 2,400 -- (10) 2,390 Floating rate notes ................. 1,100 -- (2) 1,098 -------- ----- ------ ------- Total ............... $ 74,567 3 (148) 74,422 ======== ===== ====== =======
The amortized cost and estimated fair value of investment securities available for sale at December 31, 1996, by contractual maturity, are shown below (mortgage backed securities are included by final contractual maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Estimated cost fair value ---- ---------- (In thousands) Due after one year through five years . $ 29,294 28,964 Due after five years through ten years 19,653 19,534 Due after ten years ................... 151,712 152,041 ------- ------- Totals ........................ $ 200,659 200,539 ======= ======= Proceeds from sales of securities available for sale in 1996 and 1995 were $34,469,000 and $18,372,251, respectively. Gross realized gains in 1996 and 1995 were $13,718 and $318,855, respectively, and in 1996 and 1995 there were gross realized losses of $115,806 and $94,086, respectively. Securities available for sale carried at $113,828,560 on December 31, 1996 were pledged to secure repurchase agreements and other purposes. 36 (5) Loans Receivable, Net Loans receivable consist of the following at December 31, 1996 and 1995: December 31, 1996 1995 ---- ---- (In thousands) Loans secured by real estate: 1 - 4 Family ..................................... $ 158,182 133,468 Home equity ...................................... 22,817 17,519 Multi family ..................................... 4,724 8,176 Non-residential .................................. 29,947 41,929 Construction ..................................... 2,234 1,073 ------- ------- Total loans secured by real estate 217,904 202,165 ======= ======= Other Loans: Consumer loans: Manufactured homes ....................... 620 13,484 Recreational vehicles .................... 9,416 12,881 Auto loans ............................... 12,417 9,337 Other secured ............................ 1,866 2,020 Unsecured ................................ 1,445 1,299 ------- ------- Total consumer loans ............. 25,764 39,021 ======= ======= Commercial loans: Secured .................................. 6,199 9,346 Unsecured ................................ 620 350 ------- ------- Total commercial loans ........... 6,819 9,696 ------- ------- 250,487 250,882 ======= ======= Less: Allowance for loan losses ........................ 3,438 2,647 Unamortized discount and deferred loan fees ...... (1,045) (1,756) ------- ------- 2,393 891 ------- ------- $ 248,094 249,991 ======= ======= A summary of the allowance for loan losses is as follows: December 31, 1996 1995 1994 ---- ---- ---- (In thousands) Balance at beginning of period $ 2,647 2,235 3,248 Provision charged to operations 9,450 1,522 1,107 Charge-offs ................... (8,718) (1,216) (2,460) Recoveries .................... 59 106 340 ------ ------ ------ Balance at end of period ...... $ 3,438 2,647 2,235 ====== ====== ====== 37 (5) Loans Receivable, Net, Continued The following table sets forth the information with regard to non-performing loans: December 31, 1996 1995 ---- ---- (In thousands) Loans in a non-accrual status ...... $ 3,123 4,499 Loans contractually past due 90 days or more and still accruing interest 725 261 Restructured loans ................ 1,031 4,035 ----- ----- Total non-performing loans $ 4,879 8,795 ===== ===== Accumulated interest on the above non-performing loans of $375,459, $876,524 and $759,897 was not recognized as income in 1996, 1995 and 1994, respectively. Approximately $229,000, $482,000 and $356,000 of interest on restructured and non-accrual loans was collected and recognized as income in 1996, 1995 and 1994, respectively. At December 31, 1996, the recorded investment in loans that are considered to be impaired under Statement No. 114 totaled $2,638,780 for which the related allowance for loan losses is $1,182,838. At December 31, 1995 the recorded investment in loans that were considered to be impaired was $3,003,497 for which the related allowance for loan losses was $603,127. As of December 31, 1996 and 1995, there were no impaired loans which did not have an allowance for loan losses determined in accordance with Statement No. 114. The average recorded investment in impaired loans during the years ended December 31, 1996 and 1995 was approximately $6,918,000 and $4,106,000, respectively. For the years ended December 31, 1996 and 1995, the Company recognized interest income on those impaired loans of $110,470 and $61,278, respectively, which included $13,633 and $2,787, respectively, of interest income recognized using the cash basis method of income recognition. Certain directors and executive officers of the Company were customers of and had other transactions with the Company in the ordinary course of business. Loans to these parties were made in the ordinary course of business at the Company's normal credit terms, including interest rate and collateralization. The aggregate of such loans totaled approximately $887,696 and $1,154,765 at December 31, 1996 and 1995, respectively. There were no advances to the directors and executive officers during the year ended December 31, 1996. Total payments made on these loans were $267,069. 38 (6) Accrued Interest Receivable Accrued interest receivable consists of the following: December 31, 1996 1995 ---- ---- (In thousands) Loans ....................................... $ 1,260 1,374 Securities available for sale ............... 1,941 453 ----- ----- $ 3,201 1,827 ===== ===== (7) Premises and Equipment A summary of premises and equipment is as follows: December 31, 1996 1995 ---- ---- (In thousands) Banking house and land ....................... $ 2,362 2,362 Leasehold improvements ....................... 700 629 Furniture, fixtures and equipment ............ 3,114 3,078 Construction in progress ..................... 80 12 ------ ------ 6,256 6,081 Less accumulated depreciation and amortization (3,472) (3,010) ------ ------ $ 2,784 3,071 ====== ====== Amounts charged to depreciation expense were $500,833, $438,057 and $376,632 for the years ended December 31, 1996, 1995 and 1994. (8) Deposits Deposits are summarized as follows: December 31, 1996 1995 ---- ---- (In thousands) Passbook accounts (3.00% at December 31, 1996 and 1995) $ 99,569 104,269 ------- ------- Certificates of deposit: 3.01 to 4.00% ..................... 994 1,143 4.01 to 5.00% ..................... 42,824 29,464 5.01 to 6.00% ..................... 88,042 70,172 6.01 to 7.00% ..................... 11,330 46,983 7.01 to 8.00% ..................... 8,742 9,593 8.01 to 9.00% ..................... -- 6 ------- ------- $ 151,932 157,361 ------- ------- Money market accounts(2.86% and 2.75% at December31, 1996 and 1995, respectively)... 7,433 9,808 NOW accounts (2.75% at December 31 and 1995) 18,875 19,037 Demand accounts ............................ 20,273 20,764 ------- ------- Total deposits ..................... $ 298,082 311,239 ======= ======= 39 (8) Deposits, Continued The approximate amount of contractual maturities of certificates of deposit for the years subsequent to December 31, 1996 are as follows: (In thousands) Years ended December 31, 1997 $ 91,058 1998 38,397 1999 10,323 2000 10,267 2001 1,887 ------- $ 151,932 ======= The aggregate amount of certificates of deposits with a balance of $100,000 or more were approximately $11.2 million and $11.1 million at December 31, 1996 and 1995, respectively. Interest expense on deposits for the years ended December 31, 1996, 1995 and 1994, is summarized as follows: 1996 1995 1994 ---- ---- ---- (In thousands) Passbook accounts ............................. $ 3,162 3,300 4,123 Certificate of deposits ....................... 8,492 8,272 4,860 Now accounts .................................. 527 511 511 Money market accounts ......................... 243 285 364 Advances from borrowers for taxes and insurance -- -- 27 Common stock subscriptions escrow ............. -- 79 -- ------ ------ ------ Total interest expense ................ $ 12,424 12,447 9,885 ====== ====== ====== (9) Borrowed Funds On March 29, 1996, the Company entered into a $22.4 million overnight line of credit and a $22.4 million 30 day line of credit with Federal Home Loan Bank of New York (FHLB). As of December 31, 1996 the Company had taken $6 million in advances on these lines of credit. At December 31, 1995, the Company had a $17.4 million line of credit with the FHLB. There were no advances taken on the line of credit as of December 31, 1995. The Company enters into sales of securities under repurchase agreements. Such agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities on the Company's consolidated statements of financial condition. During the period of such agreements, the underlying securities are transferred to a third party custodian's account that explicitly recognizes the Company's interest in the securities. 40 (9) Borrowed Funds, Continued The following sets forth certain information related to the Company's borrowings, consisting of Federal Home Loan Bank (FHLB) advances and securities sold under agreements to repurchase: December 31, 1996 1995 (In thousands) FHLB advances .............................. $ 6,000 -- Securities sold under agreements to repurchase 102,780 -- ------- ----- Total borrowings ...................... $ 108,780 -- ======= ===== Weighted average interest rate of FHLB advances 5.30% --% ======= ===== Weighted average interest rate of securities sold under agreements to repurchase .......... 5.96 --% ======= ===== The following table sets forth the maturities of securities sold under agreements to repurchase, including the weighted average interest rates, and the fair value of the securities sold under the repurchase agreements as of December 31, 1996: Weighted Fair Value Repurchase Average of Securities Liability Interest Rate Sold Due within 30 days ............. $ 20,450 5.67% $ 21,318 Due after 30 days up to 90 days 7,700 5.61% 11,372 Due after 91 days up to 365 days 24,130 5.72% 24,847 Due after 365 days ............. 50,500 6.24% 56,292 ------- ----- ------ $ 102,780 5.96% $ 113,829 ======= ===== ======= The following table sets forth the maximum month-end balances and average balances of FHLB advances and securities sold under agreements to repurchase for the periods indicated. Years Ended December 31, 1996 1995 (In thousands) Maximum Month-end Balance: - ------------------------- FHLB advances ................................. $ 28,000 15,000 ======= ====== Securities sold under agreements to repurchase 102,780 4,000 ======= ====== Average Balance: - --------------- FHLB advances ................................. 9,757 3,922 ======= ====== Securities sold under agreements to repurchase 57,815 958 ======= ====== Weighted average interest rate of FHLB advances 5.35% 6.06% ======= ====== Weighted average interest rate of securities sold under agreement to repurchase ............ 5.94% 6.30% ======= ====== 41 (10) Income Taxes The components of income tax expense (benefit) are as follows: December 31, 1996 1995 1994 ---- ---- ---- (In thousands) Current tax (benefit) expense: Federal ........................ $ (1,421) 955 (98) State ............................ 1 208 (140) ----- ----- ----- (1,420) 1,163 (238) Deferred tax (benefit) expense ........... $ (509) (577) 360 ----- ----- ----- Total income tax expense (benefit) (1,929) 586 122 ===== ===== ===== Actual tax expense (benefit) for the years ended December 31, 1996, 1995 and 1994 differs from expected tax expense (benefit), computed by applying the Federal corporate tax rate of 34% to income before taxes as follows: December 31, 1996 1995 1994 ---- ---- ---- (In thousands) Expected tax expense (benefit) ........... $ (1,960) $ 491 $ 704 State taxes, net of Federal income tax benefit ...................... 1 103 55 Change in valuation allowance for deferred tax asset....................... -- -- (641) Other items .............................. 30 (8) 4 ----- ----- ----- $ (1,929) $ 586 $ 122 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 are presented below: Temporary Temporary Deductions Taxable Differences Differences ----------- ----------- (In thousands) Reserves for loan losses ............................ $ 1,358 65 Nonqualified deferred compensation .................. 233 -- Loan accounting differences ......................... 236 -- Property and equipment .............................. -- 113 Prepaid expenses .................................... -- 330 Other items ......................................... 54 -- ----- ----- 1,881 508 Deferred tax liability .............................. 508 ----- Net deferred tax asset at December 31, 1996 ......... 1,373 Net deferred tax asset at January 1, 1996 ........... 864 ----- Deferred tax benefit for the year ended December 31, 1996.................................. $ 509 ===== 42 (10) Income Taxes, Continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1995 are presented below: Temporary Temporary Deductions Taxable Differences Differences ----------- ----------- (In thousands) Reserves for loan losses .......................... $ 1,206 120 Nonqualified deferred compensation ................ 417 -- Loan accounting differences ....................... -- 267 Property and equipment ............................ -- 124 Prepaid expenses .................................. -- 361 Other items ....................................... 113 -- ----- ---- 1,736 872 ==== Deferred tax liability ............................ 872 ----- Net deferred tax asset at December 31, 1995 ....... 864 Net deferred tax asset at January 1, 1995 ......... 287 ----- Deferred tax benefit for the year ended December 31, 1995................................ $ 577 ===== In addition to the deferred tax items described in the preceding table, the Company also has a deferred tax asset of approximately $40,000 and $46,000 at December 31, 1996 and 1995, respectively, relating to the unrealized loss on securities available for sale. There was no valuation allowance or change in the valuation allowance for deferred tax assets as of and for the years ended December 31, 1996 and 1995. Management believes that the realization of the recognized net deferred tax asset at December 31, 1996 amounting to approximately $1.4 million is more likely than not, based on available tax planning strategies, and expectations as to future taxable income. The change in the deferred tax asset valuation reserve in 1994 was based on the Company's continuing evaluation of the level of such valuation reserve and the realizability of the temporary differences creating the deferred tax asset and after considering the estimates of future taxable income. As a qualifying thrift institution under IRS guidelines, the Bank has been eligible to claim special tax deductions substantially in excess of actual loss experience as a tax bad debt reserve which has not been subject to deferred taxes through December 31, 1987, in accordance with SFAS No. 109. Accordingly, no deferred tax liability has been recorded for the tax bad debt reserve at December 31, 1987. This reserve, which approximated $3,294,000 at December 31, 1987, will not be subject to tax as long as the Bank does not (i) redeem stock or have excess distributions to shareholders, or (ii) fail to maintain a specified qualifying assets ratio or meet other definition tests for New York State purposes. 43 (10) Income Taxes, Continued As a result of tax legislation passed by Congress in 1996, the Company is no longer eligible to claim the special deduction for Federal income tax purposes. The Federal tax bad debt reserve, aggregating approximately $3,456,000 million at December 31, 1996, exceeds the base year reserve by approximately $162,000 (the "excess reserve"). The excess reserve is to be recaptured as taxable income over a defined number of years. The Company had previously established a deferred tax liability for this excess reserve such that there is no impact on total tax expense (benefit) for the Company in 1996 or any future year. (11) Employee Benefit Plans (a) Pension Plan The Bank maintains a non-contributory pension plan with the RSI Retirement Trust, covering substantially all employees aged 21 and over with 1 year of service with the exception of hourly paid employees. Benefits are computed as two percent of the highest three year average annual earnings multiplied by credited service up to a maximum of 35 years. The amounts contributed to the plan are determined annually on the basis of (a) the maximum amount that can be deducted for Federal income tax purposes or (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Assets of the plan are primarily invested in pooled equity funds and fixed income funds. The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated statements of financial condition at December 31, 1996 and 1995: 1996 1995 ---- ---- (In thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $3.1 million in 1996 and $3.0 million in 1995 $ (3,324) (3,171) ===== ===== Projected benefit obligation ............................. (4,060) (3,833) Plan assets at fair value ................................ 5,093 4,553 ----- ----- Projected plan assets in excess of benefit obligation .... 1,033 720 Unrecognized net loss .................................... (301) (28) Unrecognized prior service cost .......................... 52 61 Unrecognized net asset being recognized over 10.71 years . (132) (178) ----- ----- Prepaid pension cost ..................................... $ 652 575 ===== ===== 44 (11) Employee Benefit Plans, Continued Net pension costs recognized in the consolidated statements of income for the years ended December 31, 1996, 1995 and 1994 are summarized as follows: 1996 1995 1994 ---- ---- ---- (In thousands) Components of net pension cost: Service cost - benefits earned during the period ...... $ 187 141 169 Interest cost on estimated projected benefit obligation 288 268 251 Actual return on plan assets .......................... (627) (783) 21 Net amortization and deferral ......................... 222 437 (366) ---- ---- ---- Net pension cost ...................................... $ 70 63 75 ==== ==== ==== Significant assumptions used in determining the actuarial present value of the projected benefit obligation are as follows: 1996 1995 1994 ---- ---- ---- Weighted average discount rate ........................ 7.50% 7.50% 8.25% Increase in future compensation ....................... 5.50% 5.50% 6.00% Expected long term rate of return ..................... 8.00% 8.00% 8.00% (b) 401(k) Savings Plan The Bank maintains a defined contribution 401(k) savings plan, covering all full time employees who have attained age 21 and have completed one year of employment. The Bank matches 50% of employee contributions that are less than or equal to 3% of the employee's salary. Total expense recorded during 1996, 1995, and 1994 was $37,671, $33,181 and $27,514, respectively. (c) Employee Stock Ownership Plan As part of the conversion discussed in note 2, an employee stock ownership plan (ESOP) was established to provide substantially all employees of the Company the opportunity to become stockholders. The ESOP borrowed $4.3 million from the Company and used the funds to purchase 433,780 shares of the common stock of the Company issued in the conversion. The loan will be repaid principally from the Company's discretionary contributions to the ESOP over a period of ten years. At December 31, 1996 and 1995, the loan had an outstanding balance of $3.9 million and $4.3 million, respectively and an interest rate of 6.21%. 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. 45 (11) Employee Benefit Plans, Continued The Company accounts for the ESOP in accordance with the American Institute of Certified Public Accountants' Statement of Position No. 93-6 "Employees' Accounting For Stock Ownership Plans" (SOP 93-6). Accordingly, the shares pledged as collateral are reported as unallocated ESOP shares in shareholders' equity. As shares are released from collateral, the Company reports compensation expense equal to the average market price of the shares (during the applicable service period), and the shares become outstanding for earnings per share computations. Unallocated ESOP shares are not included in the earnings per share computations. The Company recorded approximately $527,000 of compensation expense under the ESOP during the year ended December 31, 1996. The ESOP shares as of December 31, 1996 were as follows: Allocated shares ........................................ -- Shares released for allocation .......................... 52,964 Unallocated shares ...................................... 380,816 --------- 433,780 ========= Market value of unallocated shares at December 31, 1996.. $ 4,284,180 ========= (d) Post Retirement Benefits The Company accounts for postretirement benefits under Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106). Under SFAS No. 106, the cost of postretirement benefits other than pensions must be recognized on an accrual basis as employees perform services to earn the benefits. Based on the transition provisions of SFAS No. 106, the accumulated postretirement benefit obligation at the date of adoption (the transition obligation) may be recognized in income as the cumulative effect of an accounting change in the period of adoption or delayed and amortized as a component of net periodic postretirement benefit cost. The Company adopted SFAS No. 106 as of January 1, 1995 and opted to amortize the transition obligation into expense. The adoption of SFAS No. 106 did not have a material effect on the Company's consolidated financial statements. Certain postretirement health insurance benefits have been committed to a closed group of twelve retired employees. The Company has formally adopted measures to not offer these benefits to any additional employees. The annual health insurance increase and discount rate used to calculate the transition obligation were 6% and 8.5%, respectively. There are no plan assets. The estimated transition obligation at January 1, 1995 was $260,000. The net periodic postretirement benefit costs in 1996 and 1995 were approximately $26,000. 46 (12) Retained Earnings As a qualifying thrift institution, the Bank has been eligible to claim special Federal tax deductions substantially in excess of actual loss experience as a tax bad debt reserve. Such reserve, aggregating approximately $3,456,000 at December 31, 1996, is included within equity in the accompanying consolidated statement of financial condition. Federal tax law restricts the use of such reserves to charges for bad debts. If this reserve is charged for amounts other than bad debts, taxable income of an identical amount is created. Since ineligible charges to the reserve are not anticipated, no provision has been made for Federal income taxes thereon. See also note 2. (13) Commitments and Contingent Liabilities (a) Legal Proceedings The Company and its subsidiaries may, from time to time, be defendants in legal proceedings relating to the conduct of their business. In the best judgments of management, the consolidated financial position of the Company and its subsidiaries will not be affected materially by the outcome of any pending legal proceedings. The Bank was a defendant in an action by the current owners of F. H. Doherty Associates, Inc. (the Bank sold F. H. Doherty Associates, Inc. to the current owners), seeking to rescind the sale of stock, recover any additional capital contributions made by the plaintiffs, and punitive damages in the amount of $1,000,000, and indemnification on a potential claim in the amount of $67,500 resulting from a subsequent transfer of a portion of the stock by plaintiffs to a third party. During 1996, the Bank stipulated to a settlement and agreed to pay $262,500 to the plaintiffs. The Bank charged $175,000 against the allowance for probable loss which was established for this matter in 1995. The remaining $87,500 was charged against current year operations. (b) Nationar Receivables On February 6, 1995, the Superintendent of Banks for the State of New York ("Superintendent") seized Nationar, a check-clearing and trust company, freezing all of Nationar's assets. On that date, the Bank had: a demand account balance of $233,000, and a Nationar debenture of $100,000 collateralized by a $1,000,000 investment security. On September 26, 1995, the Company entered into a standby letter of credit with the Superintendent for $1,086,250 which replaced the $1,000,000 security that was pledged as collateral for the capital debenture bonds. As of December 31, 1995, the Company charged off the Nationar debenture of $100,000 and established an additional reserve of $105,000 for potential losses of the demand account and potential losses related to the stand by letter of credit. 47 (13) Commitments and Contingent Liabilities, Continued During 1996 the Company received a cash payment of $233,000 from the Superintendent relating to its Nationar claim. In addition, on June 10, 1996 the Company issued a new standby letter of credit for $150,000 to the Superintendent, and the initial standby letter of credit was cancelled. Concurrent with the new standby letter of credit, the Company was required to pay $58,000 under the original standby letter of credit agreement. This amount was charged against the reserve the Company had previously established. Subsequently, the Company was informed by the Superintendent's Office that the $150,000 standby letter of credit was canceled and that the Company will have no further liability in connection with its agreement with the Superintendent. (c) Lease Commitments The Company leases office space and equipment under noncancelable operating leases. Minimum rental commitments under these leases are as follows: Years ended December 31, (In thousands) 1997 $ 289 1998 307 1999 230 2000 202 2001 146 2002 and thereafter 1,994 ----- $ 3,168 ===== Amounts charged to rent expense were approximately $225,000, $203,000 and $141,000 for the years ended December 31, 1996, 1995 and 1994. (d) Off-Balance Sheet Financing and Concentrations of Credit The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated statement of financial condition. The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, unused lines of credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Unless otherwise noted, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. 48 (13) Commitments and Contingent Liabilities, Continued 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 that represent the future extension of credit as of December 31, 1996 and 1995 at fixed and variable interest rates are as follows: 1996 --------------------------- Fixed Variable Total ----- -------- ----- (In thousands) Financial instruments whose contract amounts represent Credit risk: Commitments to extend credit $ 1,076 826 1,902 Unused lines of credit ..... 914 4,981 5,895 Standby letters of credit .. -- 100 100 ----- ----- ----- $ 1,990 5,907 7,897 ===== ===== ===== 1995 --------------------------- Fixed Variable Total ----- -------- ----- (In thousands) Financial instruments whose contract amounts represent Credit risk: Commitments to extend credit $ 426 1,528 1,954 Unused lines of credit ..... 864 5,723 6,587 Standby letters of credit .. -- 1,236 1,236 ----- ----- ----- $ 1,290 8,487 9,777 ===== ===== ===== The range of interest on fixed rate commitments was 7.0% to 8.5% at December 31, 1996, and 7.5% to 8.5% at December 31, 1995. The range of interest on adjustable rate commitments was 5.5% to 9.75% and 8.50% to 10.0% at December 31, 1996 and 1995, respectively. 49 (14) Fair Values The Financial Accounting Standards Board issued SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" (SFAS No. 107), which requires that the Company disclose estimated fair values for certain financial instruments. SFAS No. 107 defines fair value of financial instruments as the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. SFAS No. 107 defines a financial instrument 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 asset and property, plant, and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates of fair value under SFAS No. 107. In addition there are significant intangible assets that SFAS No. 107 does not recognize, such as the value of "core deposits," the Company's branch network and other items generally referred to as "goodwill." 50 (14) Fair Values, Continued The specific estimation methods and assumptions used can have a substantial impact on the resulting fair values ascribed to financial instruments. The following is a brief summary of the significant methods and assumptions used: Securities Available for Sale The carrying amounts for short-term investments approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of longer-term investments and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. See note 4 for detail disclosure of securities available for sale. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as single family loans, consumer loans and commercial loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the contractual term of the loans to maturity taking into consideration certain prepayment assumptions. Fair value for significant non-performing loans is based on recent external appraisals and discounting of cash flows. Estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities Under SFAS No. 107, the fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, passbook accounts, NOW accounts and money market accounts must be stated at the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. 51 (14) Fair Values, Continued Borrowed Funds The fair value of borrowed funds due in 90 days or less, or that reprice in 90 days or less is estimated to approximate the carrying amounts. The fair value of longer term borrowed funds is estimated by discounting scheduled cash flows based on current rates available to the Company for similar types of borrowing arrangements. Other Items The following items are considered to have a fair value equal to book value due to the nature of the financial instrument and the period within which it will be settled or repriced: cash and due from banks, federal funds sold, accrued interest receivable, due to/from broker, investments required by law, due to broker, advances from borrowers for taxes and insurance, and accrued interest payable. Table of Financial Instruments The carrying values and estimated fair values of financial instruments as of December 31, 1996 and 1995 were as follows: December 31, 1996 December 31, 1995 ----------------- ----------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value ----- ----- ----- ----- (in thousands) Financial assets: Cash and cash equivalents .......... $ 10,887 10,887 84,613 84,613 Securities available for sale ...... 200,539 200,539 74,422 74,422 Federal Home Loan Bank of New York stock ....................... 2,029 2,029 1,892 1,892 Loans .............................. 251,532 249,665 252,638 248,936 Less: Allowance for loan losses ... (3,438) -- (2,647) -- ------- ------- ------- ------- Net loans ................... 248,094 249,665 249,991 248,936 Due from broker .................... -- -- 18,128 18,128 Accrued interest receivable ........ 3,201 3,201 1,827 1,827 Financial liabilities: Deposits: Demand, passbook, money market,and NOW accounts ..... 146,150 146,150 153,878 153,878 Certificates of deposit ..... 151,932 152,797 157,361 159,852 Borrowed funds ..................... 108,780 108,806 -- -- Accrued interest payable ........... 1,077 1,077 2 2 Advances from borrowers for tax and insurance................ 1,703 1,703 1,692 1,692 Due to broker ...................... -- -- 46,880 46,880 52 (14) Fair Values, Continued Commitments to Extend Credit, Standby Letters of Credit, and Financial Guarantees Written The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of financial guarantees written and letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. Fees, such as these are not a major part of the Company's business and in the Company's business territory are not a "normal business practice." Therefore, based upon the above facts the Company believes that book value equals fair value and the amounts are not significant. (15) Regulatory Capital Requirements OTS capital regulations require savings institutions to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 1996, 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%; 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 a December 31, 1996, the Bank meets all capital adequacy requirements to which it is subject. Further, the most recent OTS notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. 53 (15) Capital Requirements, Continued The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 1996, compared to the OTS minimum capital adequacy requirements and the OTS requirements for classification as a well-capitalized institution. 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. Minimum Capital For Classification Actual Adequacy as Well Capitalized --------------- --------------- -------------------- Amount Ratio Ratio Ratio ------ ----- ----- ----- Bank - ---- Tangible capital .... $ 46,225 10.08% 1.50% -- Tier 1 (core) capital 46,225 10.08 3.00 5.00% Risk-based capital: Tier 1 ...... 46,225 23.35 -- 6.00 Total ....... 48,712 24.61 8.00 10.00 Actual --------------- Amount Ratio ------ ----- Consolidated - ------------ Tangible capital .... $ 61,598 13.04 Tier 1 (core) capital 61,598 13.04 Risk-based capital: Tier 1 ...... 61,598 30.66 Total ....... 64,098 31.90 54 (16) Holding Company Financial Information The Holding Company began operations on December 26, 1995 in conjunction with the Bank's mutual-to-stock conversion and the Company's initial public offering of its common stock. The Holding Company's statements of financial condition as of December 31, 1996 and 1995 and related statements of income and cash flows for the year ended December 31, 1996 and for the period from inception (December 26, 1995) to December 31, 1995 are as follows (the Holding Company did not have any income or expenses for the period from December 26, 1995 to December 31, 1995): Statements of Financial Condition At December 31, --------------- 1996 1995 ---- ---- (in thousands) Assets Cash and cash equivalents ................................ $ 469 21,752 Securities available for sale* ........................... 13,956 -- Loan receivable from subsidiary .......................... 3,904 4,338 Accrued interest receivable .............................. 163 -- Investment in subsidiary ................................. 46,312 49,925 Other assets ............................................. 85 -- ------ ------ Total assets ............................. $ 64,889 76,015 ====== ====== Liabilities and Shareholders' Equity Liabilities: Security sold under agreement to repurchase** .... $ 3,000 -- Other liabilities ................................ 371 -- ------ ------ Shareholders' Equity ..................................... 61,518 76,015 ------ ------ Total liabilities and shareholders' equity $ 64,889 76,015 ====== ====== * The Holding Company's securities available for sale consist of U.S. Government Agency and mortgage backed securities with a weighted average maturity of 5.0 years. ** Weighted average rate at December 31, 1996 is 5.60% with a maturity date of March 26, 1997. 55 (16) Holding Company Financial Information, Continued Statements of Income For the Year Ended December 31, 1996, and for the Period From Inception (December 26, 1995) Through December 31, 1995 1996 1995 ---- ---- (in thousands) Interest income ............................. $ 1,128 -- Interest expense .............................. 2 -- ----- ----- Net interest income ................... 1,126 -- Non interest expense .......................... 309 -- ----- ----- Income before income taxes and equity in undistributed earnings (loss) of subsidiary 817 -- ----- ----- Income tax expense ............................ 328 -- ----- ----- Income before equity in undistributed earnings (loss) of subsidiary ................ 489 -- Equity in undistributed (loss) earnings of subsidiary ................................ (4,325) 857 ----- ----- Net income (loss) ............................. $ (3,836) 857 ===== ===== 56 (16) Holding Company Financial Information, Continued Statements of Cash Flows For the Year ended December 31, 1996, and for the Period From Inception (December 26, 1995) Through December 31, 1995 1996 1995 ---- ---- (in thousands) Cash flows from operating activities: Net income (loss) ................................ $ (3,836) 857 Adjustment to reconcile net income (loss) to net cash provided by operating activities: Equity in undistributed loss (earnings) of subsidiary ..................... 4,325 (857) Increase in other liabilities .................. 371 -- Increase in accrued interest receivable ........ (163) -- ------- ------- Net cash provided by operating activities 697 -- ------- ------- Cash flows from investing activities: Decrease (increase) in loans receivable from subsidiary ................................. 434 (4,338) Investment in common stock of subsidiary .......... -- (26,090) Purchases of securities available for sale ........ (19,985) -- Proceeds from principal paydowns and maturities of securities available for sale ..... 3,984 -- Proceeds from sales of available for sale securities ...................................... 1,795 -- ------- ------- Net cash used in investing activities ... (13,772) (30,428) ------- ------- Cash flows from financing activities: Net increase in borrowed funds .................... 3,000 -- Net proceeds from issuance of common stock ........ -- 52,180 Purchase of treasury stock ........................ (11,208) -- ------- ------- Net cash provided by (used in) financing activities .................. (8,208) 52,180 ------- ------- Net increase (decrease) in cash and cash equivalents ...... (21,283) 21,752 Cash and cash equivalents: Beginning of period ............................... 21,752 -- ------- ------- End of period ..................................... $ 469 21,752 ======= ======= These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto. 30 57 CORPORATE AND STOCKHOLDER 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 since the Company's common Stock began trading on December 27, 1995. The information set forth in the table below was provided by The Nasdaq Stock Market. Such information reflects interdealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. High Low 1995 Fourth Quarter (1) $10.500 $ 9.500 1996 First Quarter 10.500 9.375 1996 Second Quarter 10.000 9.375 1996 Third Quarter 10.625 9.500 1996 Fourth Quarter 11.750 10.000 (1) Reflects the period from December 27, 1995 through December 31, 1995 - ------------------------------------- No cash dividends have been paid on Ambanc Holding Co., Inc. common stock to date. For information regarding restriction on dividends, see Note 2 to the Notes to Consolidated Financial Statements. As of April 9, 1997, the Company had approximately 1,225 stockholders of record and 4,392,023 outstanding shares of Common Stock. Investor Relations Stockholders, investors and analysts interested in additional information may contact: Harold A. Baylor, Jr. Ambanc Holding Co., Inc. 11 Division Street Amsterdam, New York 12010-4303 (518) 842-1445 Annual Report on Form 10-K Copies of Ambanc Holding Co., Inc.'s Annual Report for year ended December 31, 1996 on Form 10-K filed with the Securities and Exchange Commission are available without charge to stockholders upon written request to: Investor Relations Ambanc Holding Co., Inc. 11 Division Street Amsterdam, New York 12010-4303 58 Annual Meeting The annual meeting of stockholders will be held at 10:00 a.m., Amsterdam, New York time, on Friday, May 23, 1997 at the Best Western, formerly the Holiday Inn, 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 stockholder 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 Amsterdam Savings Bank, FSB Offices Corporate 11 Division Street Amsterdam, N.Y. 12010 (518) 842-7200 Amsterdam Route 30N Amsterdam, N.Y. 12010 Price Chopper Supermarket Sanford Farms Plaza Amsterdam, N.Y. 12010 Ballston Spa Grand Union Plaza, Rte. 50 Ballston Spa, N.Y. 12020 Clifton Park Village Plaza Clifton Park, N.Y. 12065 Fort Plain 19 River Street Fort Plain, N.Y. 13339 Gloversville Arterial at Fifth Avenue Gloversville, N.Y. 12078 Latham Price Chopper Supermarket 873 New Loudon Road Latham, N.Y. 12110 Schenectady Price Chopper Supermarket 1640 Eastern Parkway Schenectady, N.Y. 12309 Operations Center 35 East Main Street Amsterdam, N.Y. 12010 59 DIRECTORS AND OFFICERS Board of Directors Year (Ambanc Holding Co., Inc. and appointed Amsterdam Savings Bank, FSB) to Bank Board - ----------------------------------------------------------------- -------------- Paul W. Baker, Chairman of the Board 1963 Robert J. Brittain, President and Chief Executive Officer 1988 Lauren T. Barnett, Barnett Agency, Inc. 1966 John J. Daly, Alpin Haus 1988 Robert J. Dunning D.D.S., Dentist 1972 Lionel H. Fallows, Retired, Lieutenant Colonel 1981 Marvin R. LeRoy, Alzheimers Association, Northeastern NY Chapter 1996 Charles S. Pedersen, Independent Manufacturers' Representative 1977 Carl A. Schmidt, Jr., Sofco, Inc. 1974 William A. Wilde, Jr., Amsterdam Printing and Litho Corp. 1966 Executive Officers of Ambanc Holding Co., Inc. - ---------------------------------------------- Robert J. Brittain, President/Chief Executive Officer Harold A. Baylor, Jr., Vice President/Treasurer Robert Kelly, Vice President/General Counsel/Secretary Executive Officers of Amsterdam Savings Bank, FSB - -------------------------------------------------- Robert J. Brittain, President/Chief Executive Officer Harold A. Baylor, Jr., Vice President/Treasurer Robert Kelly, Vice President/General Counsel/Secretary Nancy S. Virkler, Vice President of Operations Richard C. Edel, Vice President Cynthia M. Proper, Vice President/Director of Lending Michelle G. Brown, Vice President/Director of Human Resources 60 EX-21 3 SUBSIDIARIES OF THE REGISTRANT Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Subsidiary Percent State of of Incorporation Parent Subsidiary Ownership or Organization Ambanc Holding Co., Inc. Amsterdam Savings Bank, FSB 100% Federal Ambanc Holding Co., Inc. ASB Insurance Agency, Inc. 100% New York EX-27 4 FDS -- 12/31/96
9 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1996 OF AMBANC HOLDING CO., INC. AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-mos DEC-31-1996 DEC-31-1996 4,336 2,051 4,500 0 200,539 0 0 251,532 3,438 472,421 298,082 58,280 4,041 50,500 0 0 54 61,464 472,421 20,557 10,921 870 32,348 12,424 16,435 15,913 9,450 (102) 13,148 (5,765) (5,765) 0 0 (3,836) (0.81) (0.81) 3.66 3,123 725 1,031 7,397 2,647 8,718 59 3,438 3,438 0 0
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