-----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, Sts4F2K3kJSsiBev2ptqc9BmJpf6MCEXINd8l3ckNP4aEVbs+29Pj9E6fmq2/vo6 P/MViAnS3IBrGpQcWVRJ+w== 0001000301-01-500009.txt : 20020410 0001000301-01-500009.hdr.sgml : 20020410 ACCESSION NUMBER: 0001000301-01-500009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-27036 FILM NUMBER: 1789781 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-Q 1 q0901.txt 10-Q FOR THE QUARTER ENDED 09/30/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934. For the quarterly period ended September 30, 2001 ------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND 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 ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's class of common stock, as of the latest practicable date. Class Outstanding at November 14, 2001 - ----------------------------- ----------------------------------- Common Stock, $.01 Par Value 4,496,178 AMBANC HOLDING CO., INC. AND SUBSIDIARIES FORM 10-Q September 30, 2001 Table of Contents Part I. FINANCIAL INFORMATION Item 1. Consolidated Interim Financial Statements (unaudited): Consolidated Statements of Financial Condition at September 30, 2001 and December 31, 2000 ...................... 3 Consolidated Statements of Income for the nine months and three months ended September 30, 2001 and 2000 ............ 4 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001 and 2000 ...................... 5 Notes to Unaudited Interim Consolidated Financial Statements... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.....28 Part II. OTHER INFORMATION..................................................28 Item 1. Legal Proceedings .............................................28 Item 2. Changes in Securities .........................................28 Item 3. Defaults Upon Senior Securities ...............................28 Item 4. Submission of Matters to a Vote of Security Holders ...........28 Item 5. Other Information .............................................28 Item 6. Exhibits and Reports on Form 8-K...................................28 SIGNATURES....................................................................29 2 Part I. Financial Information Item 1. Financial Statements AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition (unaudited) (dollars in thousands, except per share amounts) Sept 30, December 31, 2001 2000 Assets --------- --------- Cash and due from banks ............................... $ 15,729 $ 15,306 Federal funds sold .................................... 15,000 11,600 Interest-bearing deposits ............................. 44,666 51,591 --------- --------- Cash and cash equivalents ........................ 75,395 78,497 --------- --------- Securities available for sale, at fair value .......... 92,545 138,990 Federal Home Loan Bank of New York stock, at cost ..... 6,039 8,870 Loans receivable ...................................... 474,964 465,703 Allowance for loan losses ........................ (5,760) (5,745) --------- --------- Loans receivable, net ............................ 469,204 459,958 --------- --------- Accrued interest receivable ........................... 3,148 4,103 Premises and equipment, net ........................... 5,331 5,288 Real estate owned and repossessed assets .............. 245 373 Goodwill, net ........................................ 6,458 6,858 Bank-owned life insurance ............................. 10,501 222 Other assets .......................................... 3,763 3,477 --------- --------- Total assets ..................................... $ 672,629 $ 706,636 ========= ========= Liabilities and Shareholders' Equity Liabilities: Deposits ........................................... $ 473,392 $ 478,592 Federal Home Loan Bank short-term borrowings ....... -- 5,000 Federal Home Loan Bank long-term advances .......... 56,676 66,435 Securities sold under agreements to repurchase ..... 52,500 72,500 Advances from borrowers for taxes and insurance .... 1,030 3,402 Accrued interest payable ........................... 861 1,108 Accrued expenses and other liabilities ............. 10,016 2,477 --------- --------- Total liabilities ................................ 594,475 629,514 --------- --------- Shareholders' equity: Preferred stock $.01 par value. Authorized 5,000,000 shares; none outstanding at September 30, 2001 and December 31, 2000 ................................. -- -- Common stock $.01 par value. Authorized 15,000,000 shares; 5,432,245 outstanding at September 30, 2001 and December 31, 2000 ............................. 54 54 Additional paid in capital ......................... 63,901 63,529 Retained earnings,substantially restricted ......... 31,023 29,994 Treasury Stock, at cost (936,067 shares at September 30, 2001 and 829,279 shares at December 31, 2000) (15,400) (13,032) Unallocated common stock held by ESOP .............. (1,590) (1,909) Unearned RRP shares ................................ (108) (126) Accumulated other comprehensive income (loss) ...... 274 (1,388) --------- --------- Total shareholders' equity ....................... 78,154 77,122 --------- --------- Total liabilities and shareholders' equity ....... $ 672,629 $ 706,636 ========= ========= See accompanying notes to unaudited interim consolidated financial statements. 3 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Interim Statements of Income (unaudited) (dollars in thousands, except per share amounts)
Nine months Three months ended Sept 30, ended Sept 30, 2001 2000 2001 2000 -------- -------- -------- -------- Interest and dividend income: Loans receivable ..................................... $ 26,165 $ 26,070 $ 8,778 $ 8,681 Securities available for sale ........................ 7,147 10,718 2,121 3,493 Federal funds sold and interest-bearing deposits ..... 1,646 117 296 45 Federal Home Loan Bank stock ......................... 441 448 130 154 -------- -------- -------- -------- Total interest and dividend income ................. 35,399 37,353 11,325 12,373 -------- -------- -------- -------- Interest expense: Deposits ............................................. 14,437 13,762 4,592 4,928 Borrowings ........................................... 6,072 7,426 1,714 2,242 -------- -------- -------- -------- Total interest expense ............................. 20,509 21,188 6,306 7,170 -------- -------- -------- -------- Net interest income ................................ 14,890 16,165 5,019 5,203 Provision for loan losses ............................... 390 360 150 120 -------- -------- -------- -------- Net interest income after provision for loan losses .................................. 14,500 15,805 4,869 5,083 -------- -------- -------- -------- Non-interest income: Service charges on deposit accounts .................. 1,074 987 389 346 Net gains (losses) on securities transactions ........ 208 (102) 136 (56) Gain on curtailment of pension plan .................. 1,020 -- -- -- Other ................................................ 1,284 381 803 111 -------- -------- -------- -------- Total non-interest income .......................... 3,586 1,266 1,328 401 -------- -------- -------- -------- Non-interest expenses: Salaries, wages and benefits ......................... 6,039 6,085 1,996 1,960 Occupancy and equipment .............................. 1,863 1,781 600 586 Data processing ...................................... 1,287 1,189 463 408 Real estate owned and repossessed assets expenses, net 45 62 17 15 Professional fees .................................... 778 379 381 140 Amortization of goodwill ............................. 399 399 133 133 Other ................................................ 2,360 2,414 858 754 -------- -------- -------- -------- Total non-interest expenses ........................ 12,771 12,309 4,448 3,996 -------- -------- -------- -------- Income before taxes .................................... 5,315 4,762 1,749 1,488 Income tax expense ...................................... 2,135 1,945 753 584 -------- -------- -------- -------- Net income ......................................... $ 3,180 $ 2,817 $ 996 $ 904 ======== ======== ======== ======== Basic earnings per share ................................ $ 0.74 $ 0.61 $ 0.23 $ 0.19 Diluted earnings per share .............................. $ 0.72 $ 0.60 $ 0.23 $ 0.19
See accompanying notes to unaudited interim consolidated financial statements. 4 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Interim Statements of Cash Flows (unaudited) (dollars in thousands) Nine months ended September 30, 2001 2000 -------- ------- Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Net income ........................................ $ 3,180 $ 2,817 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of premises and equipment .............................. 814 676 Amortization of goodwill ........................ 399 399 Net amortization of premium on securities ....... 248 212 Net (gains) losses on securities transactions ... (208) 102 Provision for loan losses ....................... 390 360 Provision for losses and writedowns on real estate owned and repossessed assets ........ -- 14 Net losses on sale of real estate owned and repossessed assets ..................... 3 26 ESOP compensation expense ....................... 599 488 RRP expense ..................................... 251 363 Gain on curtailment of pension plan ............. (1,020) -- Net gain on closing of branch and sale of related deposits ........................... (422) -- Decrease (increase) in accrued interest receivable and other assets ................ 981 (393) Increase (decrease) in accrued interest payable, accrued expenses and and other liabilities ...................... 7,292 (1,329) -------- -------- Net cash provided by operating activities ........... 12,507 3,735 -------- -------- Cash flows from investing activities: Proceeds from sales of securities available for sale .............. 79,826 5,446 Purchases of securities available for sale ...... (89,911) (4,227) Proceeds from principal paydowns, maturities, and calls of securities available for sale ..... 59,260 12,102 Redemption (purchase) of Federal Home Loan Bank of New York stock .......................... 2,831 (122) Net loans repaid by customers ................... 3,908 13,489 Purchase of loans ............................... (13,830) (10,000) Purchase of bank-owned life insurance ........... (10,000) -- Purchases of premises and equipment ............. (1,080) (451) Proceeds from sales of real estate owned and repossessed assets ......................... 411 190 -------- -------- Net cash provided by investing activities ........... 31,415 16,427 -------- -------- (continued) 5 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Interim Statements of Cash Flows (unaudited) (continued) (dollars in thousands) Nine months ended September 30, 2001 2000 -------- ------- Cash flows from financing activities: Net increase in deposits, exclusive of deposits sold ................................. $ 8,805 $ 26,505 Payment for deposits sold, net ................... (13,583) -- Net decrease in FHLB short-term borrowings ................................... (5,000) (52,600) Proceeds from FHLB long-term advances ............ 5,000 40,000 Repayments of FHLB long-term advances ............ (14,759) (2,984) Proceeds from repurchase agreements .............. -- 22,651 Repayments of repurchase agreements .............. (20,000) (62,891) Decrease in advances from borrowers for taxes and insurance .................... (2,372) (2,152) Purchases of treasury stock ...................... (4,929) (1,142) Excercises of stock options ...................... 1,972 -- Dividends paid ................................... (2,158) (1,769) -------- -------- Net cash used in financing activities ...... (47,024) (34,382) -------- -------- Net decrease in cash and cash equivalents ............ (3,102) (14,220) Cash and cash equivalents at beginning of period ..... 78,497 29,611 -------- -------- Cash and cash equivalents at end of period ........... $ 75,395 $ 15,391 ======== ======== Supplemental disclosures of cash flow information - cash paid during the period for: Interest ............................................. $ 20,756 $ 21,689 ======== ======== Income taxes ......................................... $ 1,525 $ 1,715 ======== ======== Noncash investing and financing activities: Net transfer of loans to real estate owned and repossessed assets .......................... $ 286 $ 162 ======== ======== Adjustment of securities available for sale to fair value, net of tax $ 1,662 $ 2,959 ======== ======== Net book value of premises and equipment transferred to assets held for sale ...................... $ 223 -- ======== ======== Issuance of RRP shares ............................... $ 233 -- ======== ======== Tax benefit related to vesting of RRP shares and exercises of stock options ............... $ 455 $ 1 ======== ======== See accompanying notes to unaudited interim consolidated financial statements. 6 NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS (1) In management's opinion, the financial information included herein, which is unaudited, reflects all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the financial information as of and for the three and nine month periods ended September 30, 2001 and 2000, in conformity with generally accepted accounting principles. These consolidated financial statements should be read in conjunction with Ambanc Holding Co., Inc.'s ("the Company" herein) 2000 Annual Report on Form 10-K. The results of operations for the 2001 interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year ended December 31, 2001, or any other interim periods (2) Amounts in the prior periods' unaudited interim consolidated financial statements are reclassified whenever necessary to conform to current period's presentation. (3) Earnings per Share Basic earnings per share (EPS) excludes dilution and is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Unallocated ESOP shares are not considered outstanding for purposes of computing EPS. Shares of restricted stock (RRP shares) are considered outstanding common shares and included in the computation of basic EPS when they become fully vested. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as the Company's stock options and unvested RRP shares) were exercised into common stock or resulted in the issuance or vesting of common stock using the treasury stock method. The calculation of basic EPS and diluted EPS is as follows: Net Weighted Income Average Per Share (in thousands) Shares Amount For the nine months ended Sept. 30, 2001------------ ---------- --------- Basic EPS Net income $3,180 4,317,661 $0.74 ====== ===== Effect of dilutive securities: Stock options 103,933 Unvested RRP shares 9,068 --------- Diluted EPS Net income $3,180 4,430,662 $0.72 ====== ========= ===== For the nine months ended Sept. 30, 2000------------ ---------- --------- Basic EPS Net income $2,817 4,650,055 $0.61 ====== ===== Effect of dilutive securities: Stock options 21,624 Unvested RRP shares 12,033 --------- Diluted EPS Net income $2,817 4,683,712 $0.60 ====== ========= ===== 7 For the quarter ended Sept. 30, 2001 Basic EPS Net income $ 996 4,293,167 $0.23 ====== ===== Effect of dilutive securities: Stock options 116,294 Unvested RRP shares --- --------- Diluted EPS Net income $ 996 4,409,461 $0.23 ====== ========= ===== For the quarter ended Sept. 30, 2000 Basic EPS Net income $ 904 4,653,495 $0.19 ====== ===== Effect of dilutive securities: Stock options 33,274 Unvested RRP shares 6,093 --------- Diluted EPS Net income $ 904 4,692,862 $0.19 ====== ========= ===== (4) Comprehensive Income (Loss) Comprehensive income (loss) represents the sum of net income and items of other comprehensive income or loss, which are reported directly in shareholders' equity, net of tax, such as the change in the net unrealized gain or loss on securities available for sale. Accumulated other comprehensive income or loss, which is included in shareholders' equity, represents the net unrealized gain or loss on securities available for sale, net of tax Comprehensive income for the nine-month periods ended September, 30, 2001 and 2000 was $4.8 million and $5.8 million, respectively. Comprehensive income for the three-month periods ended September 30, 2001 and 2000 was $2.0 million and $3.3 million, respectively. (5) Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Company adopted Statement No. 133, as amended, on January 1, 2001. As of January 1, 2001, and during the six months ended June 30, 2001, the Company did not have any derivative instruments or derivative instruments embedded in other contracts. Therefore, the adoption of Statement No. 133 did not have a material impact on the Company's consolidated financial statements. (6) Business Combinations and Goodwill and Other Intangible Assets In July 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, as well as for all purchase method business combinations completed after June 30, 2001. Statement 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. Statement 142 will require that goodwill and intangible assets with indefinite 8 useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS NO. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The Company is required to adopt the provisions of Statement 141 immediately, and Statement 142 effective January 1, 2002. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 will continue to be amortized prior to the adoption of Statement 142. Upon adoption of Statement 142, Statement 141 will require that the Company evaluate its existing intangible assets and goodwill that were acquired in prior purchase business combinations, and to make any necessary reclassifications in order to conform with the new criteria in Statement 141 for recognition apart from goodwill. Upon adoption of Statement 142, the Company will be required to reassess the useful lives and residual values of all intangible assets acquired in purchase business combinations, and make any necessary amortization period adjustments by the end of the first interim period after adoption. In addition, to the extent an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of Statement 142 within the first interim period after adoption. Any impairment loss will be measured as of the date of adoption and recognized as a cumulative effect of a change in accounting principle in the first interim period after adoption. In connection with the transitional goodwill impairment evaluation, Statement 142 will require the Company to perform an assessment of whether there is an indication that goodwill is impaired as of the date of adoption, based on criteria specified in the Statement. Any transitional impairment loss will be recognized as the cumulative effect of a change in accounting principal in the Company's statement of earnings. As of the date of adoption, the Company expects to have unamortized goodwill in the amount of $6.3 million, which will be subject to the transition provisions of Statements 141 and 142. Amortization expense related to goodwill was $532 thousand and $399 thousand for the year ended December 31, 2000 and the nine months ended September 30, 2001, respectively. Because of the extensive effort needed to comply with adopting Statements 141 and 142, it is not practicable to reasonably estimate the impact of adopting these Statements on the Company's consolidated financial statements at the date of this Report, including whether any transitional impairment losses will be required to be recognized as the cumulative effect of a change in accounting principle. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Ambanc Holding Co., Inc. ("Ambanc" or the "Company") is a unitary savings and loan holding company. Ambanc was formed as a Delaware Corporation to act as the holding company for the former Amsterdam Savings Bank, FSB (now known as Mohawk Community Bank) upon the completion of Amsterdam Savings Bank's conversion from the mutual to stock form on December 26, 1995. Mohawk Community Bank's (the Bank's) results of operations are primarily dependent on its net interest income, which is the difference between the interest and dividend income earned on its assets, primarily loans and securities, and the interest expense on its liabilities, primarily deposits and borrowings. Net interest income may be affected significantly by general economic and competitive conditions and policies of regulatory agencies, particularly those with respect to market interest rates. The results of operations are also significantly influenced by the level of non-interest expenses, such as employee salaries and benefits, non-interest income, such as fees on deposit-related services, the provision for loan losses, and income taxes. Management's strategy has been to try to achieve a high loan to asset ratio with emphasis on originating traditional one- to four-family residential mortgage and home equity loans in its primary market area. The Company has also increased emphasis on the origination of commercial-type loans, including entering into participation agreements with other financial institutions. At September 30, 2001, the Company's loans receivable, net, to assets ratio was 69.8%, as compared with 65.1% at December 31, 2000. The Company's portfolio of one- to four-family residential mortgage and home equity loans was 78.1% of total loans at September 30, 2001. Total commercial-type loans were 17.7% of total loans at September 30, 2001, up from 11.8% at December 31, 2000. Forward-Looking Statements When used in this Form 10-Q, in future filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected, including, but not limited to, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition. The 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. 10 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. Merger and Acquisitions On September 4, 2001, Ambanc Holding Co., Inc. ("Ambanc") jointly announced that it had entered into an Agreement and Plan of Merger (the "Agreement") with Hudson River Bank & Trust Company, Hudson, New York ("Hudson") for the merger of Ambanc with and into Hudson and the merger of Ambanc's wholly-owned subsidiary, Mohawk Community Bank, with and into Hudson (collectively, the "Merger"). In consideration of the Merger, each outstanding share of common stock of Ambanc will be exchanged for $21.50 in cash. Consummation of the Merger is subject to several conditions precedent including, among other things, the approval of Ambanc's stockholders, and regulatory approval. The parties to the Agreement desire to consummate the merger during the first quarter of 2002. The Agreement will expire, however, if the transactions contemplated thereby have not occurred by June 30, 2002, unless the parties agree to extend this date.. Financial Condition Comparison of Financial Condition at September 30, 2001 and December 31, 2000. Total assets decreased by $34.0 million, or 4.8%, to $672.6 million at September 30, 2001 from $706.6 million at December 31, 2000, primarily due to decreases in securities available for sale and cash and cash equivalents of $46.4 million and $3.1 million, respectively, in addition to a decrease in Federal Home Loan Bank of New York stock of $2.8 million. These decreases were partially offset by increases in bank-owned life insurance of $10.3 million, in addition to an increase in loans receivable, net of $9.2 million. Cash and cash equivalents decreased by $3.1 million, or 4.0%, to $75.4 million at September 30, 2001 from $78.5 million at December 31, 2000. This decrease was primarily due to a decrease in interest-bearing deposits of $6.9 million from $51.6 million at December 31, 2000 to $44.7 million at September 30, 2001, which in part were re-deployed into federal funds sold. Federal Home Loan Bank of New York (FHLB) stock decreased $2.8 million, or 31.9%, to $6.0 million at September 30, 2001 from $8.9 million at December 31, 2000 due to the redemption of stock, as the Company's borrowings with the FHLB have decreased since December 31, 2000. Securities available for sale decreased $46.4 million, or 33.4%, to $92.5 million at September 30, 2001 from $139.0 million at December 31, 2000 resulting primarily from the sales, maturities, and calls of securities and the reinvestment of the proceeds in the loan portfolio, the pay down of borrowings, and repurchases of the Company's stock. 11 Loans receivable, net increased $9.2 million, or 2.0%, to $469.2 million at September 30, 2001, from $460.0 million at December 31, 2000. During the second half of 2000 and the first half of 2001, the Company entered into commercial real estate and commercial business loan participations with an unrelated financial institution in its market area. This strategy is consistent with management's focus on the growth of the commercial loan portfolio. During the first half of 2001, the Company purchased $13.8 million of commercial real estate and commercial business loan participations. Commercial real estate and commercial business loans increased $18.3 million and $6.0 million, respectively, during the nine months ended September 30, 2001. Likewise, during the nine months ended September 30, 2001 home equity loans increased $16.6 million. Partially offsetting these increases were decreases in one-to-four family mortgage loans of $28.3 million and consumer loans of $639 thousand. Bank-owned life insurance increased $10.3 million due to the Company's purchase of additional bank-owned life insurance at the end of the first quarter of 2001, as well as an increase in the cash surrender value of $279 thousand for the nine months ended September 30, 2001. Other assets increased $286 thousand, or 8.2%, to $3.8 million at September 30, 2001 due primarily to the gain on the curtailment of the Company's pension plan, which increased prepaid pension cost, offset in part by the deferred tax consequences related to the adjustment of securities available for sale to fair value. Deposits decreased by $5.2 million, or 1.1%, to $473.4 million at September 30, 2001 from $478.6 million at December 31, 2000 due primarily to the sale of deposits at the Company's Oneonta branch totaling $14.4 million during the third quarter of 2001. This significantly impacted money market accounts, which decreased $5.3 million from $23.4 million to $18.1 million; time deposits, which decreased $4.2 million from $248.9 million to $244.7 million; and NOW accounts, which decreased $974 thousand from $46.3 million to $45.4 million. These decreases were partially offset by increases in non-interest-bearing demand deposits, which increased $3.6 million from $38.6 million to $42.2 million and savings accounts, which increased $1.6 million from $121.4 million to $123.0 million. Short-term borrowings from the FHLB decreased by $5.0 million, to $0 at September 30, 2001. Likewise, long-term advances from the FHLB decreased $9.8 million, or 14.7%, to $56.7 million at September 30, 2001 from $66.4 million at December 31, 2000. Securities repurchase agreements decreased $20.0 million, or 27.6%, to $52.5 million at September 30, 2001 from $72.5 million at December 31, 2000, due primarily to the maturity and subsequent repayment of the repurchase agreements. The payoff of short-term borrowings and pay down of long-term advances coupled with the repayment of the repurchase agreements is part of the Company's effort to improve its interest rate risk position by more closely matching the maturities of its assets and liabilities. Accrued expenses and other liabilities increased $7.5 million to $10.0 million at September 30, 2001 from $2.5 million at December 31, 2000. This increase was primarily the result of a change in processing whereby teller drafts and money orders are now drawn upon the Bank and ultimately paid through the Bank's Federal Reserve Bank correspondent account and are included in accrued expenses and other liabilities. Previously, these items were drawn directly against a correspondent bank account. 12 Shareholders' equity increased $1.0 million from $77.1 million at December 31, 2000 to $78.2 million at September 30, 2001, primarily due to net income of $3.2 million, the decrease in net unrealized losses on securities available for sale, net of tax, of $1.7 million, and the excercise of stock options, which increased shareholders' equity by $2.0 million, partially offset by treasury stock purchases totaling $4.9 million and the payment of cash dividends of $2.2 million for the nine months ended September 30, 2001. Other items impacting shareholders' equity were the release of ESOP shares and the continued amortization of unearned RRP shares. Consolidated Average Balances, Interest Rates & Yields The following table presents for the periods indicated the total dollar amount of interest and dividend income earned on average earning assets and the resultant yields, as well as the total dollar amount of interest expense incurred on average interest-bearing liabilities and the resultant rates. No tax equivalent adjustments were made. All average balances are daily average balances. Non-accruing loans have been included in the table as loans with interest earned on a cash basis only. Securities available for sale are included at amortized cost. 13
Three months ended September 30, 2001 2000 ------------------------------------ ------------------------------------ Average Interest Yield/ Average Interest Yield/ Balance Inc./Exp. Rate Balance Inc./Exp. Rate Earning assets: (Dollars in thousands) Loans receivable (1) $472,906 $8,778 7.36% $461,575 $8,681 7.48% Securities available for sale (AFS)(2) 138,277 2,121 6.09% 213,319 3,493 6.51% Federal Home Loan Bank stock 6,070 130 8.50% 8,870 154 6.91% Federal funds sold & interest-bearing deposits 34,766 296 3.38% 2,709 45 6.61% -------------- --------- -------- -------------- --------- -------- Total earning assets 652,019 11,325 6.89% 686,473 12,373 7.17% -------------- --------- -------- -------------- --------- -------- Allowance for loan losses (5,692) (5,587) Unrealized loss on AFS securities (335) (9,698) Other assets 44,648 33,830 --------------- --------------- Total assets $690,640 $705,018 =============== =============== Interest-bearing liabilities: Savings deposits 129,215 827 2.54% 126,598 873 2.74% NOW deposits 46,364 138 1.18% 41,443 194 1.86% Certificates of deposit 249,546 3,427 5.45% 249,613 3,627 5.78% Money market accounts 23,137 200 3.43% 24,228 234 3.84% Borrowed funds 116,041 1,714 5.86% 141,162 2,242 6.32% -------------- --------- -------- -------------- --------- -------- Total interest-bearing liabilities 564,303 6,306 4.43% 583,044 7,170 4.89% -------------- --------- -------- -------------- --------- -------- Demand deposits 36,817 37,887 Other liabilities 13,160 7,634 --------------- --------------- Total liabilities 614,280 628,565 --------------- --------------- Stockholders' equity 76,360 76,453 --------------- --------------- Total liabilities & equity $690,640 $705,018 =============== =============== Net interest income $5,019 $5,203 Interest rate spread 2.46% 2.28% Net earning assets $ 87,716 $103,429 Net interest margin 3.05% 3.02% Average earning assets/Average interest-bearing liabilities 115.54% 117.74% (1) Calculated net of deferred loan fees and costs, loan discounts and loans in process. (2) Securities available for sale exclude securities pending settlement.
14 Consolidated Rate/Volume Analysis of Net Interest Income The following table presents the dollar amount of changes in interest and dividend income and interest expense for major components of earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and the changes due to changes in interest rates. For each category of earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e. changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate. Three months ended September 30, 2001 vs. 2000 ------------------------------- Increase (Decrease) Due to Total --------------------- Increase Volume Rate (Decrease) --------- -------- -------- Earning assets (In thousands) Loans receivable .......................... $ 226 $ (129) $ 97 Securities available for sale ............. (1,179) (193) (1,372) Federal Home Loan Bank stock .............. (55) 31 (24) Federal funds sold and interest-bearing deposits ............................... 284 (33) 251 --------- -------- -------- Total earning assets .................. (724) (324) (1,048) --------- -------- -------- Interest-bearing liabilities Savings deposits .......................... 18 (64) (46) NOW deposits ............................. 21 (77) (56) Certificates of deposit ................... (1) (199) (200) Money market accounts ..................... (10) (24) (34) Borrowed funds ............................ (374) (154) (528) --------- -------- -------- Total interest-bearing liabilities .... (346) (518) (864) --------- -------- -------- Net interest income ..................... $ (378) $ 194 $ (184) ========= ======== ======== 15 Comparison of Operating Results for the Three Months Ended September 30, 2001 and 2000. Net Income. Net income increased by $92 thousand, or 10.2%, for the three months ended September 30, 2001 to $996 thousand from $904 thousand for the three months ended September 30, 2000. Net income for the three months ended September 30, 2001 was significantly impacted by a $422 thousand (pre-tax) net gain related to the closing of the Company's Oneonta branch and the sale of the related deposits, as well as $255 thousand of non-tax-deductible expenses incurred to date related to the Company's merger agreement with Hudson River Bancorp, Inc. These and other changes are discussed in more detail below. Net Interest Income. Net interest income decreased $184 thousand, or 3.5%, to $5.0 million for the three months ended September 30, 2001 from $5.2 million for the three months ended September 30, 2000. During the period, average interest-bearing liabilities decreased $18.7 million, or 3.2%, to $564.3 million. However, the decrease in the average balance of earning assets of $34.5 million, or 5.0%, to $652.0 million exceeded the decrease in average interest-bearing liabilities. A portion of the decrease in the average earning assets is attributable to the Company's stock repurchases, as well as the purchase of bank owned life insurance. Earning assets consist of loans receivable, securities available for sale, federal funds sold, interest-bearing deposits, and FHLB stock. Interest-bearing liabilities consist of interest-bearing deposits, FHLB advances and securities repurchase agreements. The interest rate spread, which is the difference between the yield on average earning assets and the cost of average interest-bearing liabilities, increased to 2.46% for the three months ended September 30, 2001, from 2.28% for the three months ended September 30, 2000. The increase in the interest rate spread is due primarily to the decrease in the average cost of interest-bearing liabilities being greater than the decrease in the yield on interest earning assets. The average yield on interest earning assets decreased 28 basis points to 6.89% for the three months ended September 30, 2001. The average cost of interest-bearing liabilities decreased from 4.89% for the three months ended September 30, 2000 to 4.43% for the three months ended September 30, 2001. This decrease was largely impacted by a decrease in the average rate paid on certificates of deposit and borrowed funds of 33 basis points, to 5.45%, and 46 basis points, to 5.86%, respectively. The Company operates in an environment of intense competition for deposits and loans. The competition in today's environment is not limited to other local banks and thrifts, but also includes a myriad of financial services providers that are located both within and outside the Company's local market area. Due to this heightened level of competition to attract and retain customers, the Company must continue to offer competitive interest rates on loans and deposits. As a consequence of these competitive pressures, from time-to-time, the relative spreads between interest rates earned and interest rates paid will tighten, exerting downward pressure on net interest income, the interest rate spread and the net interest margin. However, management does not want to discourage, by offering noncompetitive interest rates, the creation of new customer relationships or jeopardize existing relationships thereby curtailing the Company's customer base and the attendant benefits to be derived. Management believes that the longer-term benefits to be derived from this position will outweigh the shorter-term costs associated with attracting, cross-selling and retaining an expanding customer base. The growing customer base provides the Company with the potential for future, profitable customer relationships, which should in turn increase the value of the franchise. 16 Interest and Dividend Income. Interest and dividend income decreased by $1.0 million or 8.5%, to $11.3 million for the three months ended September 30, 2001 from $12.4 million for the three months ended September 30, 2000. The decrease was largely the result of the decrease in the average balance of earning assets from $686.5 million for the three months ended September 30, 2000 to $652.0 million for the three months ended September 30, 2001. In addition to the decrease in the average balance of earning assets the Company experienced a 28 basis point decrease in the average yield on total earning assets. The yield on the average balance of earning assets was 6.89% and 7.17% for the three months ended September 30, 2001 and 2000, respectively. Interest and fees on loans increased $97 thousand to $8.8 million for the three months ended September 30, 2001. This increase was primarily the result of an increase in the average balance of net loans receivable from $461.6 million for the three months ended September 30, 2000 to $472.9 million for the three months ended September 30, 2001, offset in part by a decrease in the average yield on net loans receivable of 12 basis points, to 7.36%. Interest and dividend income on securities available for sale decreased $1.4 million, or 39.3%, to $2.1 million for the three months ended September 30, 2001 from $3.5 million for the previous period. This decrease is primarily the result of a decrease in the average balance of securities available for sale of $75.0 million, or 35.2%. Interest income on federal funds sold and interest-bearing deposits increased $251 thousand to $296 thousand for the three months ended September 30, 2001 from $45 thousand for the previous quarter, primarily due to an increase in the average balance of $32.1 million, offset somewhat by a decrease in the average yield from 6.61% to 3.38%. Interest Expense. Total interest expense decreased by $864 thousand, or 12.1%, to $6.3 million for the three months ended September 30, 2001 from $7.2 million for the three months ended September 30, 2000. Total average interest-bearing liabilities decreased by $18.7 million to $564.3 million for the third quarter of 2001 compared to $583.0 million for the same period of the previous year, primarily due to the pay down of borrowed funds, partially offset by an increase in average interest-bearing deposits. The average balance of borrowed funds decreased $25.1 million, or 17.8%, from $141.2 million for the three months ended September 30, 2000 to $116.0 million for the three months ended September 30, 2001. This decrease in borrowed funds reflects management's continued efforts to de-leverage the balance sheet and improve the Company's interest rate risk position. During the same periods, the average rate paid on interest-bearing liabilities decreased by 46 basis points to 4.43% from 4.89%. Provision for Loan Losses. The Company's provision for loan losses is based upon management's analysis of the adequacy of the allowance for loan losses. The allowance is increased by a charge to the provision for loan losses, the amount of which depends upon an analysis of the changing risks inherent in the loan portfolio. Management determines the adequacy of the allowance for loan losses based upon its analysis of risk factors in the loan portfolio. This analysis includes evaluation of credit risk, historical loss experience, current economic conditions, estimated fair value of underlying collateral, delinquencies, and other factors. The provision for loan losses for the three months ended September 30, 2001 increased $30 thousand to $150 thousand from $120 thousand for the three months ended September 30, 2000. The increase in the provision was due primarily to the increase in net charge-offs as well as the increase in commercial loans. 17 Non-Interest Income. Total non-interest income increased by $927 thousand to $1.3 million for the three months ended September 30, 2001 from $401 thousand for the three months ended September 30, 2000. This increase is primarily due to a $422 thousand (pre-tax) net gain related to the closing of the Company's Oneonta branch and the sale of the related deposits, in addition to the increase in the cash surrender value of bank-owned life insurance of $147 thousand for the three months ended September 30, 2001. During the quarter ended September 30, 2000 approximately $1.5 million in investments of mortgaged-related securities were sold resulting in a net loss of $56 thousand. However, for the three months ended September 30, 2001, the sale of securities transactions resulted in a net gain of $136 thousand. Service charges on deposit accounts increased $43 thousand to $389 thousand for the quarter ended September 30, 2001, primarily from increased fees charged on deposit accounts. Non-Interest Expenses. Non-interest expenses increased $452 thousand, or 11.3%, to $4.4 million for the three months ended September 30, 2001 from $4.0 million for the three months ended September 30, 2000 primarily due to $255 thousand non-tax-deductible expenses related to the Company's proposed merger with Hudson River Bank and Trust Company. These and other changes are discussed in more detail below. Salaries, wages and benefits expense increased by $36 thousand, or 1.8%, for the three months ended September 30, 2001. During the third quarter of 2001, the Company recognized $36 thousand in expense related to matching contributions under the Company's 401(k) plan. No matching contributions were made during the third quarter of 2000. In addition, the expense related to the ESOP for the third quarter of 2001 was $42 thousand higher than the comparable quarter in 2000 due to the increased stock price in 2001 relative to 2000. Management believes that salaries, wages and benefits expenses may fluctuate in future periods as costs related to the Company's ESOP are dependent on the Company's average stock price. Partially offsetting these increases was the recognition of a net periodic pension credit of $64 thousand in the third quarter of 2001, as compared to a net periodic pension expense of approximately $10 thousand recognized during the third quarter of 2000. Occupancy and equipment increased $14 thousand, or 2.4%, to $600 thousand for the three months ended September 30, 2001, from $586 thousand in 2000 primarily due to an increase in amortization and depreciation of software and equipment related to the change to a new computer system in June 2001. Data processing increased $55 thousand, or 13.5%, from $408 thousand in the 2000 period to $463 thousand for the three months ended September 30, 2001 due primarily to the increase in volume of deposit and loan accounts serviced by the Company. 18 Excluding the $255 thousand of merger-related expenses noted above, professional fees decreased $14 thousand to $126 thousand for the three months ended September 30, 2001, from $140 thousand for the comparable period of the previous year. Impacting professional fees during the third quarter of 2000 were costs associated with certain tax planning strategies implemented by the Company. Management expects to incur additional merger-related expenses in future periods, which will increase non-interest expenses. Other non-interest expenses increased $104 thousand, or 13.8%, to $858 thousand for the three months ended September 30, 2001 when compared to the previous period. This increase was primarily due to expenses associated with the promotion of bank products and services utilizing television and billboard advertisements during the quarter ended September 30, 2001. No such special advertising was conducted during the third quarter of 2000. Income Tax Expense. Income tax expense increased by $169 thousand, or 28.9%, to $753 thousand for the three months ended September 30, 2001 from $584 thousand for the three months ended September 30, 2000. Moreover, the effective tax rate increased from 39.2% for the three months ended September 30, 2000 to 43.1% for the three months ended September 30, 2001. The increase in the effective tax rate was due primarily to the non-tax-deductible merger-related expenses mentioned above. Consolidated Average Balances, Interest Rates & Yields The following table presents for the periods indicated the total dollar amount of interest and dividend income earned on average earning assets and the resultant yields, as well as the total dollar amount of interest expense incurred on average interest-bearing liabilities and the resultant rates. No tax equivalent adjustments were made. All average balances are daily average balances. Non-accruing loans have been included in the table as loans with interest earned on a cash basis only. Securities available for sale are included at amortized cost. 19
Nine months ended September 30, 2001 2000 ------------------------------------ ------------------------------------ Average Interest Yield/ Average Interest Yield/ Balance Inc./Exp. Rate Balance Inc./Exp. Rate Earning assets: (Dollars in thousands) Loans receivable (1) $468,433 $26,165 7.47% $467,286 $26,070 7.45% Securities available for sale (AFS)(2) 147,917 7,147 6.46% 216,943 10,718 6.60% Federal Home Loan Bank stock 7,927 441 7.44% 8,819 448 6.79% Federal funds sold & interest-bearing deposits 45,649 1,646 4.82% 2,668 117 5.86% -------------- --------- -------- -------------- --------- -------- Total earning assets 669,926 35,399 7.06% 695,716 37,353 7.17% -------------- --------- -------- -------------- --------- -------- Allowance for loan losses (5,735) (5,551) Unrealized loss on AFS securities (811) (10,272) Other assets 39,764 34,541 --------------- --------------- Total assets $703,144 $714,434 =============== =============== Interest-bearing liabilities: Savings deposits 125,562 2,434 2.59% 128,297 2,635 2.74% NOW deposits 46,758 519 1.48% 38,598 441 1.53% Certificates of deposit 251,992 10,851 5.76% 238,263 9,917 5.56% Money market accounts 23,059 633 3.67% 26,701 769 3.85% Borrowed funds 133,630 6,072 6.08% 163,630 7,426 6.06% -------------- --------- -------- -------------- --------- -------- Total interest-bearing liabilities 581,001 20,509 4.72% 595,489 21,188 4.75% -------------- --------- -------- -------------- --------- -------- Demand deposits 36,963 36,632 Other liabilities 8,401 6,565 --------------- --------------- Total liabilities 626,365 638,686 --------------- --------------- Stockholders' equity 76,779 75,748 --------------- --------------- Total liabilities & equity $703,144 $714,434 =============== =============== Net interest income $14,890 $16,165 Interest rate spread 2.34% 2.42% Net earning assets $ 88,925 $100,227 Net interest margin 2.97% 3.10% Average earning assets/Average interest-bearing liabilities 115.31% 116.83% (1) Calculated net of deferred loan fees and costs, loan discounts and loans in process. (2) Securities available for sale exclude securities pending settlement.
20 Consolidated Rate/Volume Analysis of Net Interest Income The following table presents the dollar amount of changes in interest and dividend income and interest expense for major components of earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and the changes due to changes in interest rates. For each category of earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e. changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate. Nine months ended September 30, 2001 vs. 2000 ------------------------------- Increase (Decrease) Due to Total --------------------- Increase Volume Rate (Decrease) --------- -------- -------- Earning assets (In thousands) Loans receivable .......................... $ 47 $ 48 $ 95 Securities available for sale ............. (3,355) (216) (3,571) Federal Home Loan Bank stock .............. (47) 40 (7) Federal funds sold and interest-bearing deposits ............................... 1,554 (25) 1,529 --------- -------- -------- Total earning assets .................. (1,801) (153) (1,954) --------- -------- -------- Interest-bearing liabilities Savings deposits .......................... (55) (146) (201) NOW deposits ............................. 88 (10) 78 Certificates of deposit ................... 584 350 934 Money market accounts ..................... (103) (33) (136) Borrowed funds ............................ (1,375) 21 (1,354) --------- -------- -------- Total interest-bearing liabilities .... (861) 182 (679) --------- -------- -------- Net interest income ..................... $ (940) $ (335) $(1,275) ========= ======== ======== 21 Comparison of Operating Results for the Nine Months Ended September 30, 2001 and 2000. Net Income. Net income increased by $363 thousand, or 12.9%, for the nine months ended September 30, 2001 to $3.2 million from $2.8 million for the nine months ended September 30, 2000. Net income for the nine months ended September 30, 2001 was significantly impacted by a $1.0 million ($634 thousand after-tax) curtailment gain related to the freezing of benefit accruals and participation in the Company's defined benefit pension plan, in addition to a $422 thousand (pre-tax) net gain related to the closing of the Company's Oneonta branch and the sale of the related deposits, as well as $255 thousand of non-tax-deductible expenses incurred to date related to the Company's proposed merger with Hudson River Bank and Trust Company. These and other changes are discussed in more detail below. Net Interest Income. Net interest income decreased $1.3 million, or 7.9%, from $16.2 million for the nine months ended September 30, 2000 to $14.9 million for the nine months ended September 30, 2001. The decrease in net interest income was primarily due to a decrease in the interest rate spread from 2.42% for the nine months of 2000 to 2.34% for the nine months of 2001, a decrease in the net interest margin from 3.10% to 2.97%, and a decrease in average earning assets of $25.8 million, a portion of which is attributable to the Company's treasury stock purchases, as well as the purchase of bank owned life insurance. Interest and Dividend Income. Interest and dividend income decreased by $2.0 million, or 5.2%, from $37.4 million for the nine months ended September 30, 2000 to $35.4 million for the nine months ended September 30, 2001. The decrease was largely the result of a decrease in the average balance of earning assets from $695.7 million for the nine months ended September 30, 2000 to $669.9 million for the nine months ended September 30, 2001. Interest and fees on loans increased $95 thousand to $26.2 million for the nine months ended September 30, 2001 due to an increase in the average balance of loans receivable of $1.1 million to $468.4 million for the nine months ended September 30, 2001 from $467.3 million for the comparable period of the previous year, in addition to a 2 basis point increase in the average yield. Interest and dividend income on securities available for sale decreased $3.6 million, or 33.3%, to $7.1 million for the nine months ended September 30, 2001 from $10.7 million for the previous period. This decrease is primarily the result of a decrease in the average balance of securities available for sale of $69.0 million, or 31.8%. Interest income on federal funds sold and interest-bearing deposits increased $1.5 million to $1.6 million for the nine months ended September 30, 2001 from $117 thousand for the previous period primarily due to an increase in the average balance of $43.0 million. 22 Interest Expense. Total interest expense decreased by $679 thousand, or 3.2%, to $20.5 million for the nine months ended September 30, 2001 from $21.2 million for the nine months ended September 30, 2000. This decrease is primarily due to a decrease in the average balance of borrowed funds, offset in part by an increase in the average balance and the rate paid on certificates of deposit during the period. The average balance of borrowed funds decreased $30.0 million, or 18.3%, from $163.6 million for the nine months ended September 30, 2000 to $133.6 million for the nine months ended September 30, 2001. As noted in the three month discussion, the decrease in borrowed funds reflects management's continued efforts to de-leverage the balance sheet and improve the Company's interest rate risk position. The average balance on certificates of deposits increased to $252.0 million for the nine months ended September 30, 2001, from $238.3 million for the comparable period of the previous year. Likewise, the average rate paid on certificates of deposit increased 20 basis points to 5.76%. Based on current market interest rates and the prospective run-off in CD's, it is anticipated that the average rate paid on these deposits will trend downward in subsequent periods. Provision for Loan Losses. The provision for loan losses for the nine months ended September 30, 2001 increased $30 thousand to $390 thousand from $360 thousand for the nine months ended September 30, 2000. The increase in the provision was due primarily to the increase in net charge-offs as well as the increase in commercial loans. Non-Interest Income. Total non-interest income increased by $2.3 million to $3.6 million for the nine months ended September 30, 2001 from $1.3 million for the nine months ended September 30, 2000. As previously mentioned, significantly impacting non-interest income during the first nine months of 2001 was a $1.0 million curtailment gain related to the freezing of benefit accruals and participation in the Company's defined benefit pension plan, in addition to a $422 thousand (pre-tax) net gain related to the closing of the Company's Oneonta branch and the sale of the related deposits. The Company recognized $279 thousand of non-interest income due to the increase in the cash surrender value of bank-owned life insurance for the nine months ended September 30, 2001. For the nine months ended September 30, 2000, the Company sold mortgage-related securities recognizing a net loss of $102 thousand. However, for the nine months ended September 30, 2001, a $208 thousand net gain was recognized on securities transactions. Service charges on deposit accounts increased $87 thousand to $1.1 million for the nine months ended September 30, 2001 primarily from increased fees charged on deposit accounts. Non-Interest Expenses. Non-interest expenses increased $462 thousand, or 3.8%, to $12.8 million for the nine months ended September 30, 2001. The various changes are discussed in more detail below. Salaries, wages and benefits decreased by $46 thousand for the first nine months of 2001 primarily due to a decrease in benefits associated with the curtailment of the Company's pension plan, which reduced the service cost component of net periodic pension cost/credit. During the first nine months of 2001, the Company recognized a net periodic pension credit of $192 thousand compared to a net periodic pension expense of $78 thousand for the same period of the previous year. However, during the first nine months of 2001, the Company recognized $105 thousand in expense related to matching contributions under the Company's 401(k) plan. No matching contributions were made for the previous year. In addition, the expense related to the ESOP for the first nine months of 2001 was $111 thousand higher than the comparable period in 2000 due to the increased stock price in 2001 relative to 2000. Management believes that salaries, wages and benefits expenses may fluctuate in future periods as costs related to the Company's ESOP are dependent on the Company's average stock price. 23 Occupancy and equipment increased $82 thousand, or 4.6%, to $1.9 million for the nine months ended September 30, 2001 when compared to the previous period primarily due to costs related to the change to a new computer system which resulted in a $57 thousand loss from the disposal of the old equipment. Also contributing to the increase is the acceleration of lease expense and the amortization of leasehold improvements totaling $57 thousand during the first quarter of 2001, related to a branch office that closed in June 2001. Data processing increased $98 thousand, or 8.2%, from $1.2 million in the 2000 period to $1.3 million for the nine months ended September 30, 2001 due primarily to the increase in volume of deposit and loan accounts serviced by the Company. Real estate owned and repossessed assets expense decreased $17 thousand to $45 thousand for the nine months ended September 30, 2001 due primarily to larger losses recognized on the sale of real estate owned and repossessed assets during the 2000 period as compared to the 2001 period. Professional fees increased $399 thousand to $778 thousand for the nine months ended September 30, 2001 primarily due to the $255 thousand of expenses related to the proposed merger with Hudson River Bank and Trust Company, as well as professional fees incurred in the amount of $157 thousand during the second quarter of 2001 in connection with the Company's response to inquires from, and preliminary discussions with, third parties regarding possible business combinations with the Company. Other non-interest expenses decreased $54 thousand, or 2.2%, to $2.4 million for the nine months ended September 30, 2001 when compared to the previous period. This decrease was primarily due to expenses associated with the promotion and advertising of time deposit and lending products offered during the first half of 2000. No such promotion was offered during the first half of 2001. In addition, the Company reduced the costs associated with armored car and courier service by implementing a change in both the carrier and in the number of runs made. Income Tax Expense. Income tax expense increased by $190 thousand, or 9.8%, to $2.1 million for the nine months ended September 30, 2001. The increase was primarily the result of the increase in income before taxes, as well as the impact of the non-tax-deductible merger-related expenses mentioned above, partially offset by the impact of certain tax planning strategies implemented by the Company, which decreased the effective tax rate. 24 ASSET QUALITY Non-Performing Assets The table below sets forth the amounts and categories of non-performing assets at the dates indicated. Sept. 30, Dec. 31, 2001 2000 ------ ------ (In thousands) Non-accruing loans: One-to four-family (1)........ $1,432 $1,471 Commercial real estate ....... -- 44 Consumer ..................... 473 418 Commercial business .......... 554 515 ------ ------ Total ...................... 2,459 2,448 ------ ------ Accruing loans delinquent more than 90 days: One-to four-family (1) ....... 267 247 Consumer ..................... -- 10 ------ ------ Total ...................... 267 257 ------ ------ Troubled debt restructured loans: One-to four-family (1)........ 81 82 Commercial real estate ....... 446 458 Commercial business .......... -- 1 ------ ------ Total ...................... 527 541 ------ ------ Total non-performing loans ...... 3,253 3,246 ------ ------ Foreclosed and repossessed assets: One-to four-family (1)........ 179 232 Commercial real estate ....... -- 112 Consumer ..................... 66 29 ------ ------ Total ...................... 245 373 ------ ------ Total non-performing assets ..... $3,498 $3,619 ====== ====== Non-performing loans as a percentage of total loans ..... 0.68% 0.70% ====== ====== Non-performing assets as a percentage of total assets .... 0.52% 0.51% ====== ====== (1) Includes home equity loans. 25 Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in the Bank's loan portfolio and changes in the nature and volume of its loan activity, including those loans that 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 estimated fair value of the underlying collateral for collateral dependent loans, the net present value of estimated future cash flows if the loan is not collateral dependent, economic conditions, historical loan loss experience, and other factors that warrant recognition in providing for an adequate loan loss allowance. The following table sets forth an analysis of the Company's allowance for loan losses. For the nine months ended September 30, 2001 2000 ------- ------- (In thousands) Balance at beginning of period ........ $ 5,745 $ 5,509 Charge-offs: One- to four-family (1) .......... (33) (14) Consumer ......................... (166) (217) Commercial business .............. (215) (21) ------- ------- Total charge-offs ............. (414) (252) ------- ------- Recoveries: One- to four-family (1) .......... 3 3 Commercial real estate ........... -- 13 Consumer ......................... 15 44 Commercial business .............. 21 12 ------- ------- Total recoveries .............. 39 72 ------- ------- Net charge-offs ....................... (375) (180) Provisions charged to operations ...... 390 360 ------- ------- Balance at end of period .............. 5,760 5,689 ======= ======= Ratio of allowance for loan losses to total loans (period end) .... 1.21% 1.22% Ratio of allowance for loan losses to non-performing loans (period end) .. 177.07% 180.49% Ratio of net charge-offs during the period to average loans outstanding during period (annualized) ............ 0.11% 0.05% (1) Includes home equity loans. 26 Liquidity and Capital Resources The Bank is required by OTS regulations to maintain sufficient liquidity to ensure its safe and sound operation. The Company's sources of liquidity include cash flows from operations, principal and interest payments on loans, mortgage-backed securities and collateralized mortgage obligations, maturities of securities, deposit inflows, borrowings from the FHLB of New York and proceeds from the sale of securities sold under agreements to repurchase. While maturities and scheduled amortization of loans and securities are, in general, a predictable source of funds, deposit flows and prepayments on loans and securities are greatly influenced by general interest rates, economic conditions and competition. In addition, the Company invests excess funds in overnight deposits which provide liquidity to meet lending requirements. In addition to deposit growth, the Company borrows funds from the FHLB of New York or may utilize other types of borrowed funds to supplement its cash flows. At September 30, 2001 and December 31, 2000, the Company had $56.7 million and $71.4 million, respectively, in outstanding borrowings from the FHLB and $52.5 million and $72.5 million, respectively, in securities repurchase agreements, the vast majority of which are also with the FHLB. As of September 30, 2001 and December 31, 2000, the Company had $92.5 million and $139.0 million, respectively, of securities classified as available for sale. The liquidity of the securities available for sale portfolio provides the Company with additional potential cash flows to meet loan growth and deposit flows. Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, adverse publicity relating to the savings and loan industry, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on the Company's commitment to make loans and management's assessment of the Company's ability to generate funds. The Bank is subject to federal regulations that impose certain minimum capital requirements. At September 30, 2001, the Bank's capital exceeded each of the regulatory capital requirements of the OTS. The Bank was "well capitalized" at September 30, 2001 according to regulatory definition. At September 30, 2001, the Bank's tangible and core capital levels were both $61.2 million (9.23% of total adjusted assets) and its total risk-based capital level was $65.9 million (17.76% of total risk-weighted assets). The minimum regulatory capital ratio requirements of the Bank are 1.5% for tangible capital, 4.0% for core capital, and 8.0% for total risk-based capital. During the first nine months of 2001, the Company repurchased 263,477 shares of its common stock in open-market transactions at a total cost of $4.9 million. 27 Item 3. Quantitative And Qualitative Disclosures About Market Risk There have been no material changes in the Company's interest rate risk position since December 31, 2000. Other types of market risk, such as foreign exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. Part II - Other Information Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Registrant filed proxy material concerning its proposed merger with Hudson River Bank and Trust Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits as required by Item 601 of Regulation S-K. Not applicable. (b) Reports on Form 8-K The Company filed a current report on Form 8-K with the SEC on September 6, 2001, to report the entering into of the merger agreement dated September 4, 2001, with Hudson River Bank and Trust Company. 28 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. /s/ John M. Lisicki John M. Lisicki President and Chief Executive Officer (Principal Executive Officer) Date: November 14, 2001 /s/ James J. Alescio James J. Alescio Executive Vice President, and CFO (Principal Financial and Accounting Officer) Date: November 14, 2001 29 -----END PRIVACY-ENHANCED MESSAGE-----