-----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, UuoU5fpxFO9Hq1sDB1Xw91IRqY8S/prJ0JjeGmzxGwqE1FU3WkZTJ2aBZdAZIsiY EJ10WU+o/QO+RuAanPY8Fw== 0001000301-98-000008.txt : 19980331 0001000301-98-000008.hdr.sgml : 19980331 ACCESSION NUMBER: 0001000301-98-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 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: SEC FILE NUMBER: 000-27036 FILM NUMBER: 98579453 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, 1997 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 March 27, 1998, was $78,061,715. (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 March 27, 1998, there were issued and outstanding 4,258,418 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 Shareholders for the year ended December 31, 1997. Part III of Form 10-K - Portions of the Proxy Statement for the Annual Meeting of Shareholders for the year ended December 31, 1997. 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 National 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, 1997, the Company had $510.4 million of assets and shareholders' equity of $61.2 million or 12% 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. 2 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, Schenectady, Saratoga, Montgomery, and Fulton Counties in New York, which are serviced through the Bank's main office, eleven other banking offices and its operations center. The Bank also operates two offsite automated teller machines. The Company's primary market area consists principally of suburban and rural communities but also includes the capital of New York State, Albany. The economy of the Company's primary market area is highly dependent on manufacturing, state government services (including the State University of New York at Albany), and private higher education services. These three sectors provide the basis for the region's economy and the principal support for its remaining sectors, such as retail trade, finance, and medical services. Significant reductions in two of the region's main sectors, manufacturing and state government, from completed, announced, and anticipated layoffs and relocations will continue to have a negative effect on the economy in the Company's primary market area. Saratoga County, where the Bank operates two (2) traditional and two (2) supermarket branches, is the fastest growing county in the Company's market area. From 1980 to 1990 the population in Saratoga County grew by 27,517 or 17.9% to 181,276. For the same period, the number of households increased by 14,490, or 27.9% to 66,425. 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 1990 population of approximately 51,981. Albany County, where the Bank operates one traditional branch (Guilderland) and one supermarket branch (Latham) is the most populated county in the Company's market area with a 1990 population of approximately 292,594. 3 The Capital District Regional Planning Commission (CDRPC) in its most recent population and household projections (1997) has projected the population in the Capital District to increase by 97,331 persons or 12.5% between 1990 and 2030. Saratoga County is projected to experience the greatest amount and rate of growth rising from 181,276 persons in 1990 to 234,085 persons in 2030, a 29.1% increase. The most significant population growth is expected to occur in suburban and rural communities, while population in many of the cities and villages is projected to remain the same or slightly decline. The communities expected to experience the largest net increase in population between 1990 and 2030 include Clifton Park (Saratoga County), up 12,862 or 42.7%; Guilderland (Albany County), up 8,211 or 27.4%; Colonie (Albany County), up 6,805 or 24.7%; and Halfmoon (Saratoga County), up 6,618 or 47.7%. 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. In 1997 the Company initiated 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, 1997, the Company's net loan portfolio totaled $281.1 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 commercial real estate or commercial business loan whose aggregate borrowings are in excess of $250,000, and for all other loans in excess of $500,000. The Bank also has an Officer/Director Loan Committee which has authority to approve loans between $250,000 and $2,000,000 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, 1997, the maximum amount which the Bank could have loaned to any one borrower and the borrower's related entities was approximately $7.4 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. 4 At December 31, 1997, the Company's largest lending relationship consisted of a $1.4 million loan secured by a strip shopping center. The next three largest lending relationships at December 31, 1997 consisted of a $1.2 million loan secured by a motel, a $1.1 million loan secured by a day treatment center for the mentally retarded and developmentally disabled individuals, and a $1.0 million lending relationship consisting of 20 loans secured by 20 one-to four-family properties. At December 31, 1997, there were no other loans or lending relationships equal to or in excess of $1.0 million. All of the foregoing loans were current at December 31, 1997. Loan Portfolio Composition. The following table presents information concerning the composition of the Company's loan portfolio in dollar amounts and in percentages (before deferred costs net of deferred fees and discounts and allowances for losses) as of the dates indicated.
December 31, -------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ (Dollars in Thousands) Real Estate Loans: One- to four-family $189,666 66.88% 158,182 63.15% $133,468 53.20% $140,418 53.63% $116,441 52.18% Home Equity 30,246 10.67 22,817 9.11 17,519 6.98 16,715 6.39 16,135 7.23 Multi-family 4,152 1.46 4,724 1.88 8,176 3.26 8,718 3.33 10,978 4.92 Commercial 26,585 9.38 29,947 11.96 41,929 16.71 46,736 17.85 51,528 23.09 Construction 2,081 0.73 2,234 0.89 1,073 0.43 4,809 1.84 812 0.36 -------- ------ -------- ------ -------- ------ -------- ------- ------- ------ Total Real Estate 252,730 89.12 217,904 86.99 202,165 80.58 217,396 83.04 195,894 87.78 -------- ------ -------- ------ -------- ------ -------- ------- ------- ------ Other Loans: Consumer Loans Auto Loans 16,237 5.73 12,417 4.96 9,337 3.72 4,765 1.82 1,147 0.52 Recreational Vehicles 6,775 2.39 9,416 3.76 12,881 5.13 12,352 4.72 7,908 3.54 Manufactured Homes 494 0.17 620 0.25 13,484 5.37 15,161 5.79 5,751 2.58 Other Secured 1,781 0.63 1,866 0.74 2,020 0.81 2,065 0.79 3,867 1.73 Unsecured 1,847 0.65 1,445 0.58 1,299 0.52 1,398 0.53 1,499 0.67 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Total Consumer Loans 27,134 9.57 25,764 10.29 39,021 15.55 35,741 13.65 20,172 9.04 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Commercial Business Loans: Secured 3,233 1.14 6,199 2.47 9,346 3.73 8,332 3.18 6,810 3.05 Unsecured 471 0.17 620 0.25 350 0.14 339 0.13 279 0.13 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Total Commercial Business Loans 3,704 1.31 6,819 2.72 9,696 3.87 8,671 3.31 7,089 3.18 -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ Total Loan Portfolio, Gross 283,568 100.00% 250,487 100.00% 250,882 100.00% 261,808 100.00% 223,155 100.00% ====== ====== ====== ====== ====== Deferred costs, net of deferred fees and discounts 1,362 1,045 1,756 2,008 741 Allowance for Loan Losses (3,807) (3,438) (2,647) (2,235) (3,249) -------- -------- -------- -------- -------- Total Loans Receivable, Net $281,123 $248,094 $249,991 $261,581 $220,647 ======== ======== ======== ======== ========
5 The following table shows the composition of the Company's loan portfolio by fixed- and adjustable-rate at the dates indicated.
December 31, ------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 ------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) Fixed Rate Loans: Real Estate: One- to four-family $124,457 43.89% $111,841 44.65% $ 91,528 36.48% $ 91,299 34.87% $ 68,377 30.64% Home Equity 23,099 8.14% 15,234 6.08% 8,405 3.35% 6,689 2.56% 5,586 2.50% Commercial and Multi-family 2,723 0.96% 2,590 1.03% 2,633 1.05% 13,144 5.02% 17,918 8.03% Construction 2,081 0.73% 1,840 0.73% 633 0.25% 4,809 1.84% 812 0.36% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total Real Estate 152,360 53.72% 131,505 52.49% 103,199 41.13% 115,941 44.29% 92,693 41.53% Consumer 26,260 9.26% 25,110 10.03% 33,343 13.29% 28,027 10.70% 15,644 7.01% Commercial Business 1,415 0.50% 3,124 1.24% 4,476 1.79% 3,480 1.33% 2,387 1.07% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total fixed-rate loans 180,035 63.48% 159,739 63.76% 141,018 56.21% 147,448 56.32% 110,724 49.61% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Adjustable Rate Loans: Real Estate: One- to four-family 65,209 23.00% 46,341 18.50% 41,940 16.72% 49,119 18.76% 48,064 21.54% Home Equity 7,147 2.52% 7,583 3.03% 9,114 3.63% 10,026 3.83% 10,549 4.73% Commercial and Multi-family 28,014 9.88% 32,081 12.81% 47,472 18.92% 42,310 16.16% 44,588 19.98% Construction --- ----% 394 0.16% 440 0.18% --- ----% --- ----% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total Real Estate 100,370 35.40% 86,399 34.50% 98,966 39.45% 101,455 38.75% 103,201 46.25% Consumer 874 0.31% 654 0.26% 5,678 2.26% 7,714 2.95% 4,528 2.03% Commercial Business 2,289 0.81% 3,695 1.48% 5,220 2.08% 5,191 1.98% 4,702 2.11% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total adjustable-rate loans 103,533 36.52% 90,748 36.24% 109,864 43.79% 114,360 43.68% 112,431 50.39% -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- Total Loan Portfolio, Gross 283,568 100.00% 250,487 100.00% 250,882 100.00% 261,808 100.00% 223,155 100.00% ====== ====== ====== ====== ====== Deferred costs, net of deferred fees and discounts 1,362 1,045 1,756 2,008 741 Allowance for Loan Losses (3,807) (3,438) (2,647) (2,235) (3,249) -------- -------- -------- -------- -------- Total Loans Receivable, Net $281,123 $248,094 $249,991 $261,581 $220,647 ======== ======== ======== ======== ========
6 The following table illustrates the contractual maturity of the Company's loan portfolio at December 31, 1997. 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, 1998 (1) $ 985 8.92% $2,149 8.76% $----- -----% $1,637 10.06% $2,018 9.13% $6,789 8.49% 1999 to 2002 11,345 8.44 14,840 9.33 ----- ----- 19,026 8.14 1,382 7.16 46,593 8.56 2003 and beyond 207,582 7.66 13,748 9.03 2,081 7.04 6,471 10.84 304 10.71 230,186 7.77 - --------------------- (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, 1997, the total amount of loans due after December 31, 1998 which have fixed interest rates was $179.1 million, while the total amount of loans due after such date which have floating or adjustable interest rates was $97.7 million. 7 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, 1997, $189.7 million, or 66.9%,of the Company's gross loans consisted of one- to four-family residential first mortgage loans. Approximately 65.6% 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. At December 31, 1997, the largest one- to four-family aggregate lending relationship consisted of 20 loans totaling $1.0 million secured by 20 townhouses located in Webster, New York. All of these loans were current as of December 31, 1997. 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." 8 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, 1997, the Company's construction loan portfolio totaled $2.1 million, or 0.7% 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, 1997, 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 $300,000. 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, 1997, the Company had $30.2 million in home equity loans and lines of credit outstanding, with an additional $4.3 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, 1997, the Company had $26.6 million and $4.2 million of commercial real estate and multi-family real estate loans, respectively, which represented 9.4% and 1.5%, 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 1996 bulk sale of certain multi-family and commercial real estate loans. 9 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, 1997, the Company's largest multi-family or commercial real estate lending relationship consisted of a $1.4 million loan secured by a strip shopping center. The next largest multi-family or commercial lending relationships at December 31, 1997 were a $1.2 million loan secured by a motel, and a $1.1 million loan secured by a day treatment center for the mentally retarded and developmentally disabled individuals, all of which were current as of December 31, 1997. At December 31, 1997, $1.1 million , or 3.4% 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 $30.7 million at December 31, 1997, due primarily to the bulk sale of certain performing and non-performing loans in 1996. 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. 10 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 no longer originates manufactured home 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, 1997 the Company's consumer loan portfolio totaled $27.1 million, or 9.6% of the gross loan portfolio. At December 31, 1997, 96.8% of the Company's consumer loans were fixed-rate loans and 3.2% 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 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, 1997, automobile loans and RV loans (such as motor homes, boats, motorcycles, snowmobiles and other types of recreational vehicles) totaled $16.2 million and $6.8 million or 59.8% and 25.0% of the Company's total consumer loan portfolio, and 5.7% and 2.4% of its gross loan portfolio, respectively. During 1997 and 1996, the Company placed more emphasis on originating automobile loans secured by both new and used automobiles, thereby experiencing approximately $3.8 million and $3.1 million in net growth in 1997 and 1996, respectively. In the past, originations were generated primarily through advertising and lobby displays. In 1996, the Company 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, 1997 totaled $36,000 or 0.1% of the Company's consumer loan portfolio. Of the RV loan balance, approximately $4.8 and $2.0 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, 1997, RV loans totaling $195,000 or 2.9% of the total RV portfolio were non-performing. 11 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, e.g. 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, 1997, $295,000, or 1.1%, of the Company's consumer loan portfolio was non-performing. 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, 1997, commercial business loans comprised $3.7 million, or 1.3% 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. 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 consecutive 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 12 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 $3.7 million in 1997, due primarily to the bulk sale of certain performing and non-performing loans, and the partial charge-off of the Bennett Funding Group loan relationship in 1996, as well as the general de-emphasis of this loan type in 1997. 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 a significant amount of loans since 1989. 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, 1997, the Company originated $91.5 million of loans compared to $81.4 million and $50.2 million in 1996 and 1995, respectively. During 1997 and 1996, the Company increased its originations of one- to four-family mortgages through the referrals of several local brokers. Of the one- to four-family and home equity originations, approximately $22.6 million were adjustable rate, and $44.9 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. 13 The following table shows the loan origination, loan sale and repayment activities of the Company for the periods indicated. Years Ended December 31, -------------------------- 1997 1996 1995 -------------------------- Origination by Type: (In Thousands) Real estate-one- to four-family (1) $67,503 $61,982 $16,190 -multi-family 1,490 190 134 -non-residential 3,000 2,838 2,014 Non-real estate-consumer 14,694 7,735 18,359 -commercial business 4,781 8,681 13,472 ------ ------ ------ Total loans originated $91,468 $81,426 $50,169 Repayments: Principal repayments 57,084 52,741 58,374 Proceeds from sale of loans --- 18,929 --- Net decrease in other items (2) 1,355 11,653 3,385 ------ ------ ------ Net increase (decrease) $ 33,029 ($1,897) ($11,590) ======== ======= ====== - ----------------------------------- (1) Includes home equity loans. (2) 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. 14 The following table sets forth the Company's loan delinquencies by type, by amount and by percentage of type at December 31, 1997.
--------------------------------------------------------------- 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 37 $1,629 0.85% 22 $1,069 0.56% 59 $2,698 1.42% Home Equity 2 86 0.28% 2 54 0.18% 4 140 0.46% Multi-family - - - 1 28 0.67% 1 28 0.67% Commercial 1 23 0.09% 4 278 1.05% 5 301 1.13% Consumer 28 251 0.93% 37 295 1.09% 65 546 2.01% Commercial Business 3 60 1.62% 6 603 16.25% 9 663 17.90% -------- ------- -------- ------- -------- -------- Total 71 $2,049 0.72% 72 $2,327 0.82% 143 $4,376 1.54% ======== ======= ===== ======== ======= ====== ======== ======== ======
Non-Performing Assets The table below sets forth the amounts and categories of non-performing 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 using the cash basis method of income recogntion. Accruing loans delinquent 90 days or more include FHA insured loans, VA guaranteed loans, and loans that are in the process of negotiating a restructuring with the Bank, excluding troubled debt restructurings (TDRs), or where the Bank has been notified by the borrower that the outstanding loan balance plus accrued interest and late fees will be paid-in-full within a relatively short period of time from the date of such notification. Foreclosed assets includes assets acquired in settlement of loans. For further discussion of non-performing assets, and the 1996 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. 15
December 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (In thousands) Non-accruing loans: One- to four-family (1) $843 $ 259 $1,525 $1,130 $1,705 Multi-family 28 --- 77 563 1,354 Commercial real estate 265 339 1,549 4,096 2,937 Consumer 293 256 605 111 286 Commercial Business 447 2,269 743 404 684 ------- ------- ------- ------- ------- Total 1,876 3,123 4,499 6,304 6,966 ------- ------- ------- ------- ------- Accruing loans delinquent more than 90 days: One- to four-family (1) 280 151 261 480 396 Multi-family --- --- --- --- 54 Commercial real estate 13 568 --- --- 67 Consumer 2 6 --- --- --- Commercial Business 156 --- --- --- --- ------- ------- ------- ------- ------- Total 451 725 261 480 517 ------- ------- ------- ------- ------- Troubled debt restructured loans: One- to four-family (1) 86 88 89 90 91 Multi-family 34 38 1,626 1,645 1,709 Commercial real estate 761 781 2,185 1,758 1,547 Consumer -- 56 84 62 3 Commercial Business 50 68 51 95 527 ------- ------- ------- ------- ------- Total 931 1,031 4,035 3,650 3,877 ------- ------- ------- ------- ------- Total non-performing loans: 3,258 4,879 8,795 10,434 11,360 ------- ------- ------- ------- ------- Foreclosed assets: One- to four-family (1) 69 194 459 102 346 Multi-family --- 282 926 1,792 2,405 Commercial real estate --- --- 1,503 1,799 2,707 Consumer 74 239 281 111 42 Commercial Business --- --- --- --- --- ------- ------- ------- ------- ------- Total 143 715 3,169 3,804 5,500 ------- ------- ------- ------- ------- Total non-performing assets $3,401 $5,594 $11,964 $14,238 $16,860 ======= ======= ======= ======= ======= Total as a percentage of total assets 0.67% 1.18% 2.72% 4.15% 5.06% - -------------------------------------- (1) Includes home equity loans
16 For the year ended December 31, 1997, 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 $357,000. The amount that was included in interest income on such loans was $127,000, which represented actual receipts. Similarly, for the year ended December 31, 1997, gross interest income which would have been recorded had the year end restructured loans paid in accordance with their original terms amounted to $112,000. The amount that was included in interest income for the year ended December 31, 1997 was $65,000. Non-Accruing Loans At December 31, 1997, the Company had $1.9 million in non-accruing loans, which constituted 0.7% of the Company's gross loan portfolio. There were no non-accruing loans or aggregate non-accruing loans-to-one-borrower in excess of $500,000. Accruing Loans Delinquent More than 90 Days As of December 31, 1997, the Company had $445,000 of accruing loans delinquent more than 90 days. Of these loans, $259,000 were FHA insured or VA guaranteed one-to-four family residential loans. The remaining $186,000 represented one (1) one-to-four-family real estate loan, one (1) commercial real estate loan, and two (2) commercial loans for which management believes that all contractual payments are collectible. These loans are pending restructuring with the Bank. Restructured Loans As of December 31, 1997, the Company had restructured loans of $931,000 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 (1) one- to four-family residential mortgage loan, one (1) multi-family real estate loan, three (3) commercial real estate loans, and three (3) commercial business loans. The Company's largest restructured loan or lending relationship at December 31, 1997, 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, 1997, the outstanding balance on the Company's participation interest was $583,000. This loan has continued to perform according to the terms of the restructure; however, tenancy remains a problem and the property is in need of a significant upgrade that will require a new infusion of capital. The Company has reached a tentative agreement to sell, at a discount, its share of the participation loan and transfer its lead lender status to a group of investors who will bring the needed capital to this project. Current reserves on the loan are adequate to accommodate the discounted sale and no additional write-down is anticipated. 17 Foreclosed Assets As of December 31, 1997, the Company had $143,000 in carrying value of foreclosed assets. One-to-four family real estate represents 48.3% of the company's foreclosed property, consisting of two properties. Repossessed consumer assets represented 51.7% of the Company's foreclosed properties, consisting of 12 recreational vehicles. Other Loans of Concern As of December 31, 1997, there were $5.8 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, 1997 consisted of a commercial real estate loan secured by a one-story educational facility located in Amsterdam, New York. This loan was originated in December 1995 as a $1,000,000 line of credit with a loan-to-value ratio of 25%. The loan is due to mature on December 31, 1998. Discussions with the borrower indicate that this loan will not be fully repaid by the maturity date, and negotiations have commenced to rewrite this loan. At December 31, 1997, the balance was $892,000. The second largest other loan of concern at December 31, 1997 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 experienced tenant vacancies in the past and based on financial information submitted by the borrower, the cash flow generated by this property had 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. The most recent information provided by the customer indicates that, as of November 1997, this property has been fully leased. At December 31, 1997, the principal balance of this loan was $876,000. The third largest other loan of concern at December 31, 1997 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 was not sufficient to keep the loan current but the borrower has been able to keep the loan current by utilizing other sources of funds. Recent financial information obtained from the guarantors for this loan confirms the resources used to keep this loan current. At December 31, 1997, the principal balance on this loan was $636,000. As of December 31, 1997, all of the above loans were current. There were no other loans with a balance in excess of $500,000 being specially monitored by the Company as of December 31, 1997. The balance of other loans of concern at that date consisted of 21 commercial and multi-family real estate loans totaling $2.6 million, 12 commercial business loans totaling $683,000 and one (1) one-to four-family mortgage loan totaling $72,000. These loans have been considered by management in conjunction with the analysis of the adequacy of the allowance for loan losses. 18 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, 1997, the Company had classified $8.1 million as substandard, $326,000 as doubtful, and none as 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 collectability 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 recorded by a charge to operations and the asset's recorded value is written down accordingly. 19 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, 1997, the Company had a total allowance for loan losses of $3.8 million, representing 117.1% 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, 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- (In thousands) Balance at beginning of period $3,438 $2,647 $2,235 $3,248 $3,089 Charge-offs: One- to four-family (1) (15) (530) (31) (28) (24) Multi-family (51) (1,174) (171) (668) (257) Commercial real estate (372) (2,564) (568) (1,336) (641) Consumer (316) (1,834) (400) (196) (409) Commercial business (460) (2,616) (46) (232) (399) ----------- ----------- ----------- ----------- ----------- Total Charge offs (1,214) (8,718) (1,216) (2,460) (1,730) ----------------------------------------------------------- Recoveries: One- to four-family (1) 1 10 --- 27 13 Multi-family -- -- 64 --- 1 Commercial real estate 26 -- 1 193 --- Consumer 76 49 41 110 128 Commercial business 392 -- --- 10 58 ----------- ----------- ----------- ----------- ----------- Total Recoveries 495 59 106 340 200 ----------------------------------------------------------- Net Charge-offs (719) (8,659) (1,110) (2,120) (1,530) Provisions charged to operations 1,088 9,450 1,522 1,107 1,689 ----------- ----------- ----------- ----------- ----------- Balance at end of period $3,807 $3,438 $2,647 $2,235 $3,248 =========== =========== =========== =========== =========== Ratio of net charge-offs during the period to average loans outstanding during period 0.25% 3.30% 0.42% 0.88% 0.65% ====== ====== ====== ====== ====== - ------------------------------------- (1) Includes home equity loans.
20 No portion of the allowance is restricted to any loan or group of loans, and the entire allowance is available to absorb realized losses. The amount and timing of realized losses and future allowance allocations may vary from current estimates. The following table summarizes the distribution of the Company's allowance for losses on loans at the dates indicated:
December 31, --------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------------- -------------------- -------------------- -------------------- ------------------- 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) $897 77.55% $ 157 72.26% $268 60.18% $207 60.02% $175 59.41% Multi-family and Commercial real estate 1,818 10.84% 1,599 13.84% 1,097 19.97% 1,260 21.18% 2,607 28.01% Construction and development --- 0.73% --- 0.89% --- 0.43% --- 1.84% - 0.36% Consumer 449 9.57% 355 10.29% 718 15.55% 454 13.65% 330 9.04% Commercial Business 483 1.31% 1,327 2.72% 268 3.87% 114 3.31% 127 3.18% Unallocated 160 ---- --- ---- 296 ---- 200 ---- 9 ----% ------ ------- ------ ------- ------ ------- ------ ------- ----- ------- Total $3,807 100.00% $3,438 100.00% $2,647 100.00% $2,235 100.00% $3,248 100.00% ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= - ------------------------------- (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, 1997, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 37.05%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" contained in the Annual Report. 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. 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. 21 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, 1997, all of the Company's securities were classified as available for sale. The fair value (excluding FHLB stock) and amortized cost of the Company's securities at December 31, 1997 were $205.8 million and $206.3 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, 1997, $111.2 million or 78.3% 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, 1997, the contractual maturity of 96.2% 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 the 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. 22 The following table sets forth the composition of the Company's securities at the dates indicated.
December 31, --------------------------------------------------------------------------------- 1997 1996 1995 --------------------------------------------------------------------------------- Carrying Carrying Carrying Value (1) %of Total Value (1) %of Total Value (1) %of Total ----------- -------- ------------ -------- ----------- -------- (Dollars in Thousands) Securities: Federal Agency Obligations $ 63,145 30.19% $43,773 21.65% $ 9,967 13.06% Municipal Bonds 766 0.37% 505 0.25% --- ----% Other investment securities (2) --- ---- --- ---% 11,422 14.97% Mortgage-backed securities 141,897 67.85% 156,261 77.10% 53,033 69.49% ---------- ------- ---------- ------- --------- ------ Total debt securities 205,808 98.41% 200,539 99.00% 74,422 97.52% FHLB stock 3,291 1.57% 2,029 1.00% 1,892 2.48% Other equity securities (3) 34 .02% --- ----% --- ----% ---------- ------- ---------- ------- --------- ------ Total securities and FHLB stock $ 209,133 100.00% $202,568 100.00% $ 76,314 100.00% ========== ======= ========== ======= ========= ====== Other interest-earning assets: Interest-bearing deposits with banks $ 4,598 100.00% $ 2,051 31.31% $ 5,259 6.39% Federal Funds Sold --- ---- 4,500 68.69% 77,100 93.61% ---------- ------- ---------- ------- ---------- ------ Total $ 4,598 100.00% $ 6,551 100.00% $ 82,359 100.00% ========== ======= ========== ======= ========= ====== ------------------------------------- (1)At December 31, 1997, 1996 and 1995, debt securities are classified as available for sale and are carried at fair value. 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. (3)Comprised of municipal bond mutual funds.
23 The composition and contractual maturities of the securities portfolio (all of which are categorized as available for sale), excluding FHLB stock and other equity securities, are indicated in the following table. The Company's securities portfolio at December 31, 1997, 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 (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.
December 31, 1997 --------------------------------------------------------------------------------------- Over One Over Five One Year Year through Years through Over or less Five Years Ten Years 10 Years Total Securities -------------- -------------- -------------- -------------- --------------------------- Amortized Cost Amortized Cost Amortized Cost Amortized Cost Amortized Cost Fair Value -------------- -------------- -------------- -------------- -------------- ------------ (Dollars in Thousands) Federal agency obligations $ 3,998 $ 13,000 $ 31,200 $ 15,000 $ 63,198 $ 63,145 Municipal Bonds --- 755 --- --- 755 766 Mortgage-backed securities --- --- 5,433 136,879 142,312 141,897 ------- ------- ------- ------- ------- ------- Total investment securities $ 3,998 $ 13,755 $ 36,633 $151,879 $206,265 $205,808 ======= ======= ======= ======= ======= ======= Weighted average yield .... 5.74% 6.05% 7.06% 7.35% 7.18% 7.18% ======= ======= ======= ======= ======= =======
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. Deposits 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, 1997, 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. 24 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 deposit 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 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 net 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. The net increase in deposits during 1997 was attributable, in part, to the reverse of 1996 with depositors shifting investable funds into certificates of deposit to obtain the relatively higher interest rates paid by the Bank and its market area competitors. Also contributing to the increase were new account relationships that resulted from the opening of three new branch offices in May 1997. Years Ended December 31, -------------------------------- 1997 1996 1995 ---------- --------- --------- (Dollars in thousands) Opening balance $298,082 $311,238 $293,152 Deposits 924,133 860,011 841,042 Withdrawals 902,595 885,591 835,404 Interest credited 13,645 12,424 12,448 ========== ========= ======== Ending balance $333,265 298,082 $311,238 ========== ========= ======== Net increase (decrease) $35,183 ($13,156) $ 18,086 ========== ========= ======== Percent increase (decrease) 11.80% (4.23)% 6.17% ========== ========= ======== 25 The following table shows rate and maturity information for the Company's certificates of deposit as of December 31, 1997. Certificate Accounts 0.00- 4.01 - 6.01 - Percent Maturing in Quarter Ending: 4.00% 6.00% 8.00 Total of Total - --------------------------- ------- -------- -------- -------- -------- (Dollars in Thousands) March 31, 1998 $ 999 $ 43,640 $ 1,189 $ 45,828 25.00% June 30, 1998 12 41,571 3,255 44,838 24.46% September 30, 1998 --- 23,597 383 23,980 13.08% December 31, 1998 --- 24,443 14 24,457 13.34% March 31, 1999 --- 8,389 996 9,385 5.12% June 30, 1999 --- 4,295 994 5,289 2.88% September 30, 1999 --- 3,897 177 4,074 2.22% December 31, 1999 --- 2,173 1,098 3,271 1.78% March 31, 2000 --- 2,091 5,294 7,385 4.03% June 30, 2000 --- 1,305 5,070 6,375 3.48% September 30, 2000 --- 1,541 85 1,626 .89% December 31, 2000 --- 764 13 777 .42% Thereafter --- 3,359 2,688 6,047 3.30% ------ ----- ----- ----- ------- Total $ 1,011 $161,065 $ 21,256 $183,332 100.00% ======== ======== ======== ======== ======= Percent of Total 0.55% 87.86% 11.59% 100.00% ======== ======== ======== ======== The following table indicates the amount of the Company's certificates of deposit by time remaining until maturity as of December 31, 1997. 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 $42,611 $39,724 $43,066 $40,083 $165,484 Certificates of deposit of $100,000 or more 3,217 5,114 5,371 4,146 17,848 --------- -------- -------- -------- -------- Total certificates of deposit $45,828 $44,838 $48,437 $44,229 $183,332 ========= ======== ======== ======== ======== 26 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, 1997, the Company had $12.3 million in FHLB advances. During 1996, the Company significantly increased its other borrowings by $102.8 million. 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, 1997, pledged securities totaled $111.2 million. The positive interest rate spread between the volume of pledged securities and the related borrowings has produced an increase in net interest income but at an interest rate spread that is less than the Company has earned on other asset to funding spreads. The increased level of borrowings coupled with a reduction in the interest rate spread related to the borrowings has resulted in a narrowing in the Company's overall net interest margin from 3.66% for the year ended December 31, 1996 to 3.36% for the year ended December 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating Results" contained in the Annual Report. See Note 9 of the Notes to Consolidated Financial Statements 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, ----------------------------- 1997 1996 1995 -------- -------- -------- (In thousands) Maximum Balance: FHLB Advances $ 14,400 $28,000 $15,000 Securities sold under agreements to repurchase 99,410 102,780 4,000 Average Balance: FHLB Advances 3,667 9,757 3,922 Securities sold under agreements to repurchase 95,261 57,815 958 27 The following table sets forth certain information as to the Company's borrowings at the dates indicated: December 31, ----------------------------- 1997 1996 1995 -------- -------- -------- (Dollars in thousands) FHLB advances $ 12,300 $ 6,000 $------ Securities sold under agreements to repurchase 99,250 102,780 ------ --------- -------- -------- Total borrowings $111,550 $108,780 $------ ========= ======== ======== Weighted average interest rate of FHLB advances 6.38% 6.88% ----% Weighted average interest rate of securities sold under agreements to repurchase 6.04% 5.96% ----% Subsidiary and Other Activities As a federally chartered savings association, the Bank is permitted by OTS regulations to invest up to 2% of its assets, or $10.2 million at December 31, 1997, 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 $60,800 for the year ended December 31, 1997. Regulation General The Bank, organized in 1886, is a federally chartered savings bank, the deposits of which are federally insured by the FDIC and backed by the full faith and credit of the United States Government. Accordingly, the Bank is subject to broad federal regulation and oversight by the OTS 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 a savings and loan holding company, the Company also is subject to federal regulation and oversight. The Bank is a member of the Bank Insurance Fund ("BIF"), which is administered by the FDIC. Its deposits are insured up to applicable limits by the FDIC. As a result, the FDIC also has certain regulatory and examination authority over the Bank. Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document. 28 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, 1997, was $110,000. The OTS also has extensive enforcement authority over savings associations 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. In addition, the investment, lending and branching authority of the Bank is prescribed by federal law. 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, 1997, the Bank's lending limit was $7.4 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. 29 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 insurance fund. 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 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%) or considered of substantial supervisory concern pay the highest premium. Risk classification of all insured institutions is made by the FDIC semi-annually. The FDIC is authorized to adjust the insurance premium rates for banks that are insured by the BIF, such as the Bank, in order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits. The ranges of BIF premium rates in effect during fiscal 1997 was 0% to 0.27%. In addition, BIF insured institutions are required to contribute to the cost of financial bonds that were issued to finance the cost of resolving the thrift failures in the 1980s (the "FICO Premium"). The rate currently set for the FICO Premium for BIF insured banks, such as the Bank, is 1.3 basis points. 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. The OTS is also authorized to impose capital requirements in excess of these standards on a case-by-case basis. At December 31, 1997, the Bank was in compliance with its regulatory capital requirements. See Note 15 of the Notes to Consolidated Financial Statements contained in the Annual Report. 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. 30 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 retained earnings 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." 31 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 CAMELS 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. 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, 1997, 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 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." 32 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". 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. 33 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, were 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). The Company and its subsidiaries file consolidated federal income tax returns on a fiscal year basis using the accrual method of accounting. 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. The IRS is currently examining the Company, including returns of subsidiaries and predecessors, for the years ended 1990 through 1996. 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. 34 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. 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 doing business 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, 1997, the Company had a total of 189 employees, including 26 part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. 35 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 55, is Vice President, Chief Financial Officer 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 51, 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 48, is Vice President of Operations/MIS 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 48, 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 35, 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. Item 2. Description of Property The Company conducts its business at its main office, eleven other banking offices and an operations office in its primary market area. The Company owns its Main Office, its operations center and two branch offices and leases the remaining nine branch offices. 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, 1997 was $3.1 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. 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 on certain legal proceedings, see Note 13(a) of the Notes to Consolidated Financial Statements contained in the Annual Report. 36 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, 1997. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters Page 61 of the Annual Report is herein incorporated by reference. Item 6. Selected Financial Data Pages 3 and 4 of the Annual Report is herein incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Pages 5 through 20 of the Annual Report are herein incorporated by reference. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Pages 17 through 19 of the Annual Report are herein incorporated by reference. Item 8. Financial Statements and Supplementary Data Pages 21 through 60 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 consolidated financial statements reporting a change of accountants and/or reporting disagreements on any matter of accounting principle or financial statement disclosure. 37 PART III Item 10. Directors and Executive Officers of the Registrant Directors - --------- 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 22, 1998, 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. Executive Officers - ------------------ Information concerning executive officers of the Company is set forth under the caption "Executive Officers of the Company and the Bank who are not Directors" contained in Part 1 of this Form 10-K. Compliance with Section 16(a) - ----------------------------- Section 16(a) of the Exchange Act requires the Company's directors and executive officers, and persons who own more that 10% of a registered class of the Company's equity securities, to file with the SEC reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Officers, directors and greater than 10% shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based soley on a review of the copies of such reports furnished to the Company and written representations that no other reports were required during the fiscal year ended December 31, 1997, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with. 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 22, 1998, 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. 38 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 22, 1998, 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 22, 1998, 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, 1997, 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, 1997 and 1996 ..................................... 23 Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 ............................... 24 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 ............... 25 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 ............................... 26-27 Notes to Consolidated Financial Statements .......................... 28-60 39 (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: See Index to Exhibits (b) Reports on Form 8-K: Current reports on form 8-K were filed as follows: On November 20, 1997, a Press Release dated November 19, 1997 announcing regular quarterly cash dividend. 40 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: March 30, 1998 By: /s/ Robert J. Brittain ------------------------------ ---------------------- Robert J. Brittain, President and Chief Executive Officer (Duly Authorized Representative) 41 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: March 30, 1998 Date: March 30, 1998 ----------------------------- -------------------------------- /s/ William A. Wilde, Jr. /s/ Lauren T. Barnett - ----------------------------------- ------------------------------------- William A. Wilde, Jr., Director Lauren T. Barnett, Director Date: March 30, 1998 Date: March 30, 1998 ----------------------------- -------------------------------- /s/ Robert J. Dunning /s/ Carl A. Schmidt, Jr. - ----------------------------------- ------------------------------------- Robert J. Dunning, DDS, Director Carl A. Schmidt, Jr., Director Date: March 30, 1998 Date: March 30, 1998 ----------------------------- -------------------------------- /s/ Charles S. Pedersen /s/ Lionel H. Fallows - ----------------------------------- ------------------------------------- Charles S. Pedersen, Director Lionel H. Fallows, Director Date: March 30, 1998 Date: March 30, 1998 ----------------------------- -------------------------------- /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: March 30, 1998 Date: March 30, 1998 ----------------------------- -------------------------------- /s/ Marvin R. LeRoy, Jr. - ----------------------------------- Marvin R. LeRoy, Jr., Director Date: March 30, 1998 ----------------------------- 42 Index to Exhibits Exhibit Number Document - ------ ------------------------------------------------------------ 3(i) Registrants's Certificate of Incorporation as currently in effect, filed as an exhibit to Registrants's Registration Statement of Form S-1 (File No. 33-96654), is incorporated herein by reference. 3(ii) Registrants's Bylaws as currently in effect, filed as an exhibit to Registrant's Registration Statement on Form S-1 (File No. 33-96654), is incorporated herein by reference. 4 Registrant's Specimen Stock Certificate, filed as an exhibit to Registrant's Registration Statement on Form S-1 (File No. 33-96654), is incorporated herein by reference. 10.1 Employment Agreements between the Registrant's operating subsidiary and Robert J. Brittain, Harold A. Baylor, Jr., Richard C. Edel, Nancy S. Virkler, Cynthia M. Proper and Robert Kelly, filed as exhibits to Registrant's Registration Statement on Form S-1 (File No. 33-96654), are incorporated herein by reference. 10.2 Registrant's Employee Stock Ownership Plan, filed as an exhibit to Registrant's Registration Statement on Form S-1 (File No. 33-96654), is incorporated herein by reference. 10.3 Registrant's 1997 Stock Option and Incentive Plan, Filed as Exhibit A to Registrant's Proxy Statement filed with the Commission on March 26, 1997, pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended (File No. 0-27036), is incorporated herein by reference. 10.4 Registrant's Recognition and Retention Plan, filed as Exhibit B to Registrant's Proxy Statement filed with the Commission on March 26, 1997, pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended (File No. 0-27036), is incorporated herein by reference. 11 Statement re: computation of per share earnings (see Notes 1(n) and 17 of the Notes to Consolidated Financial Statements contained in the Annual Report to Shareholders filed as Exhibit 13 herein). 13 Annual Report to Shareholders 21 Subsidiaries of the Registrant 27 Financial Data Schedule EX-13 2 ANNUAL REPORT TO SECURITY HOLDERS ________________________________________________________________________________ 1997 ANNUAL REPORT ________________________________________________________________________________ [LOGO] AMBANC HOLDING CO., INC. AMSTERDAM, NEW YORK 1997 ANNUAL REPORT TABLE OF CONTENTS President's Message to Shareholders ...........................................2 Selected Consolidated Financial Information ...................................3 Management's Discussion and Analysis of Financial Condition and Results of Operations .........................................................5 Independent Auditors' Report .................................................22 Consolidated Statements of Financial Condition ...............................23 Consolidated Statements of Income ............................................24 Consolidated Statements of Changes in Shareholders' Equity ...................25 Consolidated Statements of Cash Flows ........................................26 Notes to Consolidated Financial Statements ...................................28 Corporate and Shareholder Information ........................................61 Directors and Executive Officers .............................................62 1 MESSAGE FROM THE PRESIDENT To Our Shareholders: I am pleased to present the third Annual Report to shareholders of Ambanc Holding Co., Inc., the parent holding company of Amsterdam Savings Bank, FSB. During 1997, as part of our ongoing commitment to expand the Company's core business, we opened our fourth and fifth supermarket branch offices, both located in Saratoga County, N.Y., and a traditional branch located in Guilderland, Albany County, N.Y. The Company continues to focus on enhancing shareholder value. Since the Company's initial public offering ("IPO") in December 1995, the Company's outstanding shares of common stock have been reduced to 4,306,418 shares at December 31, 1997 through stock repurchases of 1,115,832 shares, representing 20.6% of the shares issued in the IPO. In addition to the stock repurchase programs, the Company paid its first regular quarterly cash dividend in August 1997 of $0.05 per share. Total cash dividends paid in 1997 totaled $0.10 per share, or 14.3% of 1997 basic earnings per share. The Company's closing stock price increased to $18.75 at December 31, 1997 from $11.25 at December 31, 1996, an increase of $7.50 per share, or 67%. The total return on the Company's stock, including cash dividends, for the year ended December 31, 1997, was in excess of 67%. As we move further into our third year as a public company, your Board of Directors, officers and staff remain dedicated to maintaining the Company's financial strength, expanding its core business and enhancing shareholder value. Your Company's directors, officers and staff are also committed to making a positive difference in the communities in which they live and work. Many of these individuals are actively involved in their communities participating in service clubs and a variety of charitable civic and cultural organizations. We optimistically look forward to the future and, on behalf of the Board of Directors, I wish to thank our customers, staff and shareholders for your continued support of Ambanc Holding Co., Inc. Sincerely, Robert J. Brittain President and Chief Executive Officer 2 SELECTED CONSOLIDATED FINANCIAL INFORMATION Set forth below are selected consolidated financial and other data of the Company. This financial data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes to the Consolidated Financial Statements of the Company presented elsewhere in this Annual Report. All references to the Company, unless otherwise indicated, at or before December 26, 1995 refer to the Bank.
December 31, 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- Selected Consolidated (In Thousands) Financial Condition Data: Total assets ..................... $ 510,444 $ 472,421 $ 438,944 $ 343,334 $ 332,902 Securities available for sale .... 205,842 200,539 74,422 -- -- Investment securities ............ -- -- -- 53,390 57,797 Loans receivable, net ............ 281,123 248,094 249,991 261,581 220,647 Deposits ......................... 333,265 298,082 311,239 293,152 294,780 Borrowed funds ................... 111,550 108,780 -- 19,000 -- Shareholders' equity ............. 61,202 61,518 76,015 27,414 25,464 Years Ended December 31, 1997 1996 1995 1994 1993 --------- --------- --------- -------- --------- Selected Consolidated (In Thousands) Operations Data: Total interest and dividend income $ 35,566 $ 32,348 $ 25,582 $ 23,806 $ 23,789 Total interest expense ........... 19,654 16,435 12,746 10,192 10,885 --------- --------- --------- --------- --------- Net interest income .............. 15,912 15,913 12,836 13,614 12,904 Provision for loan losses ........ 1,088 9,450 1,522 1,107 1,689 --------- --------- --------- --------- --------- Net interest income after provision for loan losses ....... 14,824 6,463 11,314 12,507 11,215 Other income ..................... 1,826 920 1,512 905 1,196 Other expenses ................... 12,197 13,148 11,383 11,340 9,659 --------- --------- --------- --------- --------- Income (loss) before taxes and cummulative effect of a change in accounting principle ......... 4,453 (5,765) 1,443 2,072 2,752 Income tax provision (benefit) ... 1,693 (1,929) 586 122 71 Cummulative effect of a change in accounting principle related to SFAS No. 109 .................... -- -- -- -- 600 --------- --------- --------- --------- --------- Net income (loss) ................ $ 2,760 ($ 3,836) $ 857 $ 1,950 $ 2,681 ========= ========= ========= ========= ========= Basic earnings (loss) per share* . $ 0.70 ($ 0.81) N/A N/A N/A ========= ========= ========= ========= ========= Diluted earnings (loss) per share* $ 0.69 ($ 0.81) N/A N/A N/A ========= ========= ========= ========= ========= Dividend payout ratio ............ 14.3% N/A N/A N/A N/A ========= ========= ========= ========= =========
*Earnings per share were not calculated for 1995 and prior periods since the Company had no stock outstanding prior to its initial public offering completed on December 26, 1995. 3
Years Ended December 31, 1997 1996 1995 1994 1993 ------------------------------------------ Selected Consolidated Financial Ratios and Other Data: Performance Ratios: Return (loss) on average assets (1) ....... 0.56% (0.84)% 0.25% 0.59% 0.83% Return (loss) on average equity (1) ....... 4.52 (5.24) 3.00 7.36 11.00 Interest rate spread information: Average during period .................. 2.58 2.74 3.36 4.01 3.85 Net interest margin (2) ................ 3.36 3.66 3.87 4.34 4.19 Efficiency ratio (3) ...................... 69.81 62.50 68.18 63.46 61.06 Ratio of other expenses to average total assets (1) ....................... 2.48 2.86 3.37 3.38 2.97 Ratio of average interest-earning assets to average interest-bearing liabilities ............................. 118.93 124.26 113.31 110.24 109.53 Asset Quality Ratios: Non-performing assets to total assets at end of period (1) .................... 0.67 1.18 2.72 4.15 5.06 Non-performing loans to total loans ....... 1.16 1.94 3.48 3.97 5.07 Allowance for loan losses to non-performing loans .................... 117.07 70.47 30.10 21.42 28.59 Allowance for loan losses to loans receivable .............................. 1.34 1.37 1.05 0.85 1.47 Capital Ratios: Equity to total assets at end of period (1) 11.99 13.02 17.32 7.98 7.65 Average equity to average assets (1) ...... 12.42 15.95 8.30 7.96 7.52 Other Data: Number of full-service offices ............ 12 9 9 7 6 (1) Period end and average asset and equity amounts reflect securities available for sale at fair value, with net unrealized gains/losses, net of tax, included as a component of equity. (2) Net interest income divided by average interest-earning assets. (3) The efficiency ratio represents other expenses (excluding real estate owned and repossessed assets expenses, net), divided by the sum of net interest income and other income (excluding net gains (losses) on securities transactions).
4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Ambanc Holding Co., Inc. ("Ambanc" or the "Company"), a savings institution holding company is the parent corporation of Amsterdam Savings Bank, FSB (the "Bank"). Ambanc was formed as a Delaware Corporation to act as the holding company for the Bank upon the completion of the Bank's conversion from the mutual to stock form on December 26, 1995 (the "Conversion"). As such, the Company had no material results of operations during 1995. Accordingly, the discussion herein for periods prior to 1996 relates primarily to the Bank's results of operations. The Company's primary business, through the Bank, consists of attracting deposits from the general public and originating real estate loans and other types of investments. The Bank services a five-county area in upstate New York through the Bank's main office, eleven other banking offices and its operations center. The Company also has a wholly-owned subsidiary, ASB Insurance Agency, Inc., which offers mutual funds, annuity products and brokerage services to the Bank's customers and the general public. Like all thrift institutions, the Bank's (and therefore the Company's) operations are materially affected by general economic conditions, the monetary and fiscal policies of the federal government and the policies of the various regulatory authorities, including the Office of Thrift Supervision (the "OTS") and the Board of Governors of the Federal Reserve System ("Federal Reserve Board"). Its results of operations are largely dependent upon its net interest income, which is the difference between (i) the interest its receives on its loan portfolio and its securities portfolio and (ii) the interest it pays on its deposit accounts and borrowings. The operations of the Company can also be affected by the economic conditions in its market area, upstate New York. The Company's main office is located at 11 Division Street, Amsterdam, New York 12010. The Company's telephone number at this address is (518)842-7200. Forward Looking Statements When used in this annual report, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties -- including, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the 5 Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake -- and specifically disclaims any obligation - -- to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Year 2000 The Company has established a committee (the "Y2K Committee") to conduct a comprehensive review of its computer systems to identify the systems that could be affected by the "Year 2000" problem. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time sensitive software may recognize a date using "00" as the year 1900 rather that the year 2000. This could result in a major system failure or miscalculations. The Company is also aware of these risks to third parties, including vendors (and to the extent appropriate, depositors and borrowers), and the potential adverse impact on the Company resulting from failures by these parties to adequately address the Year 2000 problem. The Company has been communicating with its outside data processing service bureau, as well as other third party service providers (and to the extent appropriate, depositors and borrowers), to assess their progress in evaluating their systems and implementing any corrective measures required by them to be prepared for the year 2000. To date, the Company has not been advised by any of its primary vendors that they do not have plans in place to address and correct the issues associated with the Year 2000 problem; however, no assurance can be given as to the adequacy of such plans or to the timeliness of their implementation. The Y2K Committee reports on a quarterly basis to the Audit Committee of the Board of Directors as to the Company's progress in resolving any Year 2000 problems. Based on the Company's current knowledge and investigations, the expense of the year 2000 problem as well as the related potential effect on the Company's earnings is not expected to have a material effect on the Company's financial position or results of operations. Furthermore, the Company expects any corrective measures required to be prepared for the Year 2000 to be implemented on a timely basis. Management Strategy Management's primary goal is to improve the Company's profitability while minimizing its risks. To meet these goals, the Company's strategies focus on: (i) emphasizing lending secured by one- to four- family residential mortgages, home equity, and consumer products, especially automobile loans; (ii) asset quality; (iii) increasing the Bank's presence in its market area primarily through the establishment of low-cost supermarket branches; and (iv) managing interest rate risk. 6 Emphasizing Lending Secured by One- to Four-Family Residential Mortgages, --------------------------------------------------------------------------- Home Equity and Consumer Products --------------------------------- The Bank has emphasized and plans to continue to emphasize originating traditional one- to four-family residential mortgage, home equity and consumer loans in its primary market area. During 1997, 1996, and 1995, the Bank originated $67.5 million, $62.0 million and $16.2 million, respectively, of loans secured by one-to four-family residences, including home equity loans, and $14.7 million, $7.7 million and $18.4 million, respectively, of consumer loans. At December 31, 1997, the Bank had $189.7 million of loans secured by one- to four-family residences, $30.2 million of home equity loans and $27.1 million of consumer loans representing 66.9%, 10.7% and 9.6%, respectively, of the Bank's gross loan portfolio. Asset Quality ------------- The Bank's loan portfolio consists primarily of one- to four-family residential and home equity loans, which are considered to have less risk than commercial and multi-family real estate or consumer loans. The Bank has de-emphasized its commercial and multi-family real estate lending, with the portfolio shrinking as a percentage of the Bank's total loan portfolio to 10.8% of total loans at December 31, 1997 from 13.8% and 28.0% at December 31, 1996 and 1993, respectively. During the same period, the Bank's portfolio of loans secured by one- to four-family and home equity mortgage loans has grown as a percentage of the Bank's total loan portfolio to 77.6% of total loans at December 31, 1997 from 72.3%, and 59.4% at December 31, 1996 and 1993, respectively. The Bank's non-performing assets consist of non-accruing loans, accruing loans delinquent more than 90-days, troubled debt restructurings and foreclosed and repossessed assets. Prior to 1997, the Company's performance had been significantly hampered by the level of its non-performing assets. During 1996, the Company decided to dispose of certain non-performing and higher credit risk performing assets in a bulk sale versus continuing to resolve the problems on an asset specific basis in order to accelerate the reduction in loan portfolio credit risk, reduce the drag on earnings that resulted from these assets, enhance overall asset quality and better position the Company to achieve its strategic goals. The net sales proceeds totaled $20.4 million, resulting in a pre-tax loss of $6.6 million, which was charged against the allowance for loan losses (approximately $5.6 million) and to other real estate owned expense (approximately $1.0 million). Primarily as a result of the bulk sale in 1996, the ratio of non-performing assets to total assets declined from 2.72% at December 31, 1995 to 1.18% at December 31, 1996. This ratio experienced further improvement in 1997, dropping to 0.67% at December 31, 1997. In addition, the Bank's ratios of non-performing loans to total loans and the allowance for loan losses to non-performing loans also improved. The ratio of non-performing loans to total loans at December 31, 1997 was 1.16% compared to 1.94% and 3.48% at December 31, 1996 and 1995, respectively. The ratio of the allowance for loan losses to non-performing loans increased to 117.1% at December 31, 1997 compared to 70.5% and 30.1% at December 31, 1996 and 1995, respectively. 7 Increasing the Bank's Presence in its Market Area Primarily through the --------------------------------------------------------------------------- Establishment of Low-Cost Supermarket Branches ---------------------------------------------- Since November 1994, the Bank has opened five branch offices in supermarkets, with one located in each of Schenectady, Albany and Montgomery Counties, and two in Saratoga County, New York. Management believes that these supermarket branch offices are an effective way to service its customers due to their size, efficiency and convenient, high traffic locations. In addition to the two new supermarket branch offices opened in 1997 in Saratoga County, the Bank also opened a "traditional" branch office in 1997. With the opening of the three branch offices in 1997, the Bank operates 12 full-service branch locations in its primary market area, all of which provide customers with 24-hour access to ATMs. Two offsite ATMs were also placed into service in 1997. Managing Interest Rate Risk --------------------------- The Bank has an asset/liability management committee that meets weekly to develop, implement and review policies to manage interest rate risk. The Bank has endeavored to manage its interest rate risk through the pricing and diversification of its loans, including the introduction of new, first mortgage loan products with shorter terms to maturity or with different interest rate adjustment periods, the origination of consumer loans with shorter average lives or which reprice at shorter intervals than fixed and adjustable-rate, one- to four-family residential loans and, from time to time, the purchase of short- to intermediate-term securities available for sale. Financial Condition Comparison of Financial Condition at December 31,1997 and December 31, 1996. Total assets at December 31, 1997, were $510.4 million, an increase of $38.0 million, or 8.1%, compared to total assets of $472.4 million at December 31, 1996. The growth in total assets was primarily attributable to a $33.4 million, or 13.3%, increase in loans receivable, including net deferred costs, fees and loan discounts. One-to four-family mortgage loans increased by $31.5 million, or 19.9% and home equity loans expanded by $7.4 million, or 32.6%. Partially offsetting these increases were declines in multi-family, non-residential and construction loans. An increase of $1.4 million, or 5.3%, in consumer loans, primarily auto loans which increased by $3.8 million, or 30.8% also contributed to total growth. These increases were partially offset by a net decline in all other consumer loan categories, mainly loans for recreational vehicles which declined by $2.6 million. Total deposits at December 31, 1997, were $333.3 million, an increase of $35.2 million, or 11.8%, compared to $298.1 million at December 31, 1996. The increase in total deposits was attributable primarily to a $31.4 million, or 20.7%, increase in certificates of deposit. "NOW" accounts increased $3.8 million, or 20.4%, to $22.7 million and demand deposits grew to $22.7 million, an increase of $2.5 million, or 12.2% increase. These increases were partially offset by a $2.5 million or 2.4% decline in savings and money market accounts. 8 Results of Operations Comparison of Fiscal Years Ended December 31, 1997 and 1996 General. The Company recorded net income of $2.8 million for the fiscal year ended December 31, 1997 compared to a net loss of $3.8 million for the prior year. Net interest income for 1997 and 1996 was unchanged at $15.9 million. The net loss in 1996 was due primarily to the $9.5 million provision for loan losses and the $2.6 million of expenses incurred in connection with the Company's real estate owned and repossessed assets. The large provision was necessitated to replenish and increase the Company's allowance for loan losses which was depleted as a result of write-offs associated with the Company's bulk sale of certain loans in 1996 and the commercial bankruptcy of a large commercial borrower. See "Management Strategy - Asset Quality" and "Results of Operations - Provision for Loan Losses." Interest and Dividend Income. Interest and dividend income increased $3.2 million, or 9.9%, to $35.5 million in 1997 from $32.3 million in 1996. The increase in interest income resulted from a $38.5 million, or 8.9%, increase in the Company's average interest-earning assets, primarily securities available for sale, which increased $38.0 million, or 24.3% in 1997, to $194.1 million compared to $156.1 million in 1996. The increase in securities available for sale was primarily funded with increased borrowings. The average yield earned on interest-earning assets increased by 8 basis points to 7.52% in 1997 from 7.44% in the prior year. The increase in the average yield earned was attributable primarily to a change in the composition, or mix, of the Company's interest-earning assets, mainly average securities available for sale which increased in 1997 to 41.0% of total interest-earning assets from 35.9% in 1996. The average yield earned on the Company's securities also increased by 19 basis points to 7.19% in 1997 compared to 7.00% in 1996. Interest Expense. Interest expense increased by $3.2 million, or 19.6%, to $19.6 million in 1997 compared to $16.4 million in 1996. Average interest-bearing liabilities increased by $48.1 million, or 13.8%, to $397.8 million in 1997 compared to $349.7 million during the prior year. During the same periods, the average rate paid on interest-bearing liabilities increased by 24 basis points to 4.94% from 4.70%. The increase in interest expense was attributable primarily to a $31.3 million, or 46.4%, increase in the average balance of borrowed funds to $98.9 million from $67.6 million in 1996 and an increase in average certificates of deposit which grew by $22.0 million, or 14.7%, to $172.3 million from $150.3 million. The average rates paid on borrowed funds and certificates of deposit during 1997 also increased over 1996 by 13 basis points on borrowed funds and 8 basis points on certificates of deposit. Borrowings consisted primarily of securities sold under agreements to repurchase, with an increase in the average balance of $37.5 million, or 64.9%, to $95.3 million in 1997 from $57.8 million in 1996, partially offset by a decline in average advances from the Federal Home Loan Bank ("FHLB") of New York. These borowings were primarily used to fund the growth in the Company's securities available for sale. Net Interest Income. Net interest income before provision for loan losses was $15.9 million for 1997 and 1996. During 1997, the Company's average interest-earning assets grew by $38.5 million, or 8.9%, to $473.1 million. The 9 average yield on these assets also increased when compared to 1996, improving by 8 basis points to 7.52% from 7.44%. However, the increase in average interest-bearing liabilities exceeded the growth in average interest-earning assets, increasing by $48.1 million to $397.8 million. The increase in the average interest-bearing liabilities was accompanied by a 24 basis point increase in the average rate paid on these funds to 4.94% for 1997 from 4.70% for 1996. Ambanc Holding Co., Inc. operates in an environment of intense competition for deposits and loans. The competition in today's environment is not limited to other local banks and thrifts, but also includes a myriad of financial services providers that are located both within and outside the Company's local market area. Due to this heightened level of competition to attract and retain customers, the Company must continue to offer competitive interest rates on loans and deposits. As a consequence of these competitive pressures, from time-to-time, the relative spreads between interest rates earned and interest rates paid will tighten, exerting downward pressure on net interest income, net interest rate spread and the net interest margin. This is especially true during periods when the growth in interest-earning assets lags behind the growth in interest-bearing liabilities, the environment that the Company experienced in 1997. However, management does not want to discourage, by offering noncompetitive interest rates, the creation of new customer relationships or jeopardize existing relationships thereby curtailing customer base and loan growth and the attendant benefits to be derived from them. Management believes that the longer-term benefits to be derived from this position will outweigh the shorter term costs associated with attracting, cross-selling and retaining an expanding customer base. The Company's growing customer base provides Ambanc with the potential for future, profitable customer relationships, which should in turn increase the value of the franchise. Provision for Loan Losses. The provision for loan losses decreased $8.4 million to $1.1 million in 1997 from $9.5 million during 1996. The higher provision in 1996 resulted primarily from the Company's bulk sale of certain performing and non-performing loans in the fourth quarter of 1996 and the aggregate lending relationship with the Bennett Funding Group, a company that filed for Chapter 11 bankruptcy protection on March 29, 1996. In order to accelerate its objective of reducing credit risk in the loan portfolio and better position the Company to achieve its strategic goals, management considered it to be prudent to complete the bulk sale of certain non-performing and performing commercial loans and manufactured home loans (which are considered a higher credit risk consumer product) at a loss, versus continuing to address these problem assets on an asset specific basis. The Company's provision for loan losses is based upon its analysis of the adequacy of the allowance for loan losses. Management determines the adequacy of the allowance for loan losses based upon its analysis of risk factors in the loan portfolio. This analysis includes evaluation of concentrations of credit, historical loss experience, current economic conditions, estimated fair value of underlying collateral, delinquencies, and other factors. At December 31, 1997, the Bank's allowance for loan losses totaled $3.8 million, or 1.3% of total loans and 117.1% of non-performing loans, compared to $3.4 million, or 1.4% of total loans and 70.5% of non-performing loans at December 31, 1996. Other Income. Other income increased $906,000, or 98.5%, to $1.8 million for the year ended December 31, 1997, from $920,000 in 1996. The primary reason 10 for the increase in other income was the net gains on securities transactions of $775,000, compared to a net loss of $102,000 in 1996. As the general level of interest rates declined during 1997, management decided that it would be prudent to sell securities and record the net gains on the transactions. One condition adhered to in determining the selection and timing of the securities to be sold was that the yield obtained on the reinvestment of the sale proceeds would not be significantly lower than the foregone yield. A second condition was that the credit rating of the replacement securities would be no lower than the quality of the securities sold. Other Expenses. Other expenses decreased $951,000, or 7.2%, to $12.2 million for the year ended December 31, 1997 from $13.1 million in the same 1996 period. The primary reason for the improvement was a $2.2 million decline in the net costs associated with the Company's real estate owned and repossessed assets. The decrease in these expenses resulted from one-time charges in 1996 related to the bulk sale of certain foreclosed real estate properties. Excluding the expenses related to real estate owned and repossessed assets, other expenses increased $1.2 million, or 11.9%, to $11.8 million in 1997 from $10.6 million in 1996, mainly due to a higher level of salaries, wages and benefits which increased $989,000, or 19.4%, to $6.1 million from $5.1 million the prior year. Salaries, wages and benefits increased $250,000 as a result of the opening of three branch offices in May 1997. Also contributing to the higher level of salaries, wages and benefits was a $239,000 increase in the compensation costs related to the Employee Stock Ownership Plan (ESOP) and a $137,000 expense associated with awards of Company common stock under the Recognition and Retention Plan (RRP) to officers. The remainder of the increase was attributable to higher payroll taxes, employee insurance premiums and normal cost of living and merit increases. Occupancy and equipment expenses increased $211,000, or 15.9%, to $1.5 million, as a result of the opening of three branch offices in 1997. In addition, other expenses increased $135,000 in 1997 as a result of awards of Company Common Stock under the RRP to directors. Income Tax Expense. Income tax expense increased $3.6 million to $1.7 million in 1997 due to a pre-tax loss of $5.8 million incurred in 1996 as compared to pre-tax income of $4.5 million in 1997. Results of Operations Comparison of Fiscal Years Ended December 31, 1996 and 1995 General. For the fiscal year ended December 31, 1996, the Company recorded a net loss of $3.8 million compared to net income of $857,000 for the prior year. The net loss for 1996 was attributable primarily to the provision for loan losses of $9.5 million; which was primarily related to the bulk sale of certain performing and non-performing loans and the Company's aggregate lending relationship with the Bennett Funding Group ("Bennett"). See "--Provision for Loan Losses." Interest and Dividend Income. Interest and dividend income increased $6.8 million, or 26.4%, to $32.3 million in 1996 from $25.6 million in 1995. The 11 increase in interest income resulted from a $103.2 million, or 31.2%, increase in the Company's average interest-earning assets, primarily securities available for sale, which increased $106.5 million, or 214% in 1996, to $156.1 million at December 31, 1996, compared to $49.6 million of securities held to maturity in 1995. The average yield earned on the Company's securities increased 89 basis points to 7.00% in 1996 compared to 6.11% in 1995. However, overall the average yield earned on interest-earning assets decreased 28 basis points to 7.44% in 1996 from 7.72% in the prior year. The decrease in the average yield earned was mainly the result of the change in the mix of average interest-earning assets with lower yielding securities available for sale increasing as a percent of the total mix, rising to 36.4% during 1996 from 15.5% in 1995, while the percentage of higher yielding loans to total interest-earning assets declined to 60.3% from 78.9% for the same periods. Interest Expense. Interest expense increased by $3.7 million, or 28.9%, to $16.4 million in 1996 compared to $12.7 million in 1995. Average interest-bearing liabilities increased $57.3 million, or 19.6%, to $349.7 million in 1996 compared to $292.4 million during the prior year. During the same periods, the average rate paid on interest-bearing liabilities increased by 34 basis points to 4.70% from 4.36%. The increase in interest expense was due primarily to a $62.7 million increase in the average outstanding balance of borrowed funds to $67.6 million from $4.9 million in 1995, mainly resulting from an increase in securities sold under agreements to repurchase, which grew $56.8 million to $57.8 million in 1996 from $1.0 million in 1995. Average borrowed funds, with an average rate of 5.94%, increased to 19.3% of total interest-bearing liabilities for 1996 up from 1.7% in 1995 while average savings accounts, with an average rate of 3.04% in 1996, declined to 29.5% from 37.2% in 1995 and average certificates of deposit, with an average rate of 5.65% in 1996, decreased to 43.0% of the funding mix in 1996 from 50.4% the prior year. Net Interest Income. Net interest income before provision for loan losses increased $3.1 million, or 24.0%, to $15.9 million for the year ended December 31, 1996, compared to $12.8 million for 1995. As a result of implementing the Company's strategy to enhance net interest income through the restructuring of its balance sheet through the use of leveraged reverse repurchase agreements, net interest income increased approximately $1.4 million. Partially offsetting the increased net interest income attributable to average net earning asset growth was a decline in the net yield on average interest-earning assets of 21 basis points to 3.66% in 1996 from 3.87% in 1995, primarily the result of the changes in the composition of average interest-earning assets and average interest-bearing liabilities as discussed above. See "Financial Condition","Interest Income", "Interest Expense" and "Asset Liability Management" herein. Provision for Loan Losses. The provision for loan losses increased $8.0 million to $9.5 million in 1996 from $1.5 million during 1995. The increase resulted primarily from the Company's bulk sale of certain performing and non-performing loans in the fourth quarter of 1996, (see "Asset Quality" herein), the aggregate lending relationship with the Bennett Funding Group, a company that filed for Chapter 11 bankruptcy protection on March 29, 1996, as well as the Company's continual review of its loan portfolio. In order to accelerate its objective of reducing credit risk in the loan portfolio and better position the Company to achieve its strategic goals, management considered it to be more prudent to complete the bulk sale of certain non-performing commercial type loans and manufactured home loans (which are considered a higher credit risk consumer product), versus continuing to address these assets on an asset specific basis (see "Asset Quality" herein). 12 The Bank records a provision for loan losses based upon its analysis of the adequacy of the allowance for loan losses. Management determines the adequacy of the allowance for loan losses based upon its analysis of risk factors in the loan portfolio. This analysis includes evaluation of concentrations of credit, historical loss experience, current economic conditions, estimated fair value of underlying collateral, delinquencies, and other factors. While the increase in the 1996 provision for loan losses was primarily due to the Bennett relationship and the result of the bulk loan sale, it was also due to weaknesses in the economy in the Bank's primary market area, decreases in the value of real estate (the primary collateral securing many loans) in the region, as well as increases in charge-offs, even after excluding the effects of the bulk loan sales and the Bennett relationship. At December 31, 1996, the Bank's allowance for loan losses totaled $3.4 million, or 1.4% of total loans and 70.5% of non-performing loans, compared to $2.6 million, or 1.1% of total loans and 30.1% of non-performing loans at December 31, 1995. Other Income. Other income decreased by $592,000 to $920,000 for the year ended December 31, 1996, from $1.5 million in 1995. The primary reasons for the decline in non-interest income were the receipt by the Bank of a non-recurring FDIC deposit insurance premium refund of $189,000 in 1995, net losses on the sale of securities available for sale of $102,000 in 1996 compared to a net gain in the prior year of $225,000 and the receipt in 1995 of non-recurring insurance proceeds related to a fire loss on a real estate owned property in the amount of $76,000. In late 1995, the Bank's securities portfolio was yielding below market rates. As a result, the Bank decided in early January 1996 to sell $34 million of its holdings and reinvest the proceeds in then current higher yielding securities, based on a projection that the losses on the sales would be recovered in approximately six-months. Other Expense. Other expense increased $1.8 million to $13.1 million for the year ended December 31, 1996, an increase of 15.5%, from $11.4 million in 1995. The primary reasons for the increase were a $962,000 increase in the net costs associated with the Bank's real estate owned and repossessed assets and an increase in salaries, wages, and benefits of $694,000, or 15.8% over the prior year. The increase in the expenses related to real estate owned and repossessed assets resulted primarily from the bulk sale of certain foreclosed real estate properties at an amount below book value, which increased expenses by approximately $1.0 million. Although these assets had been carried at fair value, the Bank was willing to accept a price lower than book value as part of this bulk sale in order to reduce the drag on earnings that resulted from carrying these non-performing assets. This increase was partially offset by a decline in other write-downs of real estate owned of $377,000 to $877,000 for 1996 compared to $1.3 million during 1995. Also contributing to the increase was an increase in expenses related to holding these assets. The increase in salaries, wages, and benefits was primarily attributable to the Company's Employee Stock Ownership Plan ("ESOP"), that was established at the time of conversion. The year ended December 31, 1996, was the first year in which the Company was required to recognize compensation expense related to the 13 ESOP. The amount of the expense recorded for 1996 was $527,000. Excluding the ESOP expense, salaries, wages, and benefits increased $167,000, or 3.8%, to $4.6 million from $4.4 million in 1995 due mainly to normal cost of living and merit increases. All other non-interest expenses increased by $109,000, or 2.0%, to $5.5 million in 1996 from $5.4 million the prior year. Increases related to occupancy and equipment, data processing, professional fees, and certain other expense categories totaling $974,000 were offset almost entirely by decreases of $865,000 in certain other expense categories, primarily FDIC deposit insurance premiums, which declined by $531,000 from $533,000 in 1995 to $2,000 in 1996 due to a decrease in the rates charged to well-capitalized, Bank Insurance Fund (BIF) member institutions such as the Bank, and the recording of non-recurring expenses of $205,000 in 1995 pertaining to the seizure and liquidation of Nationar by the Superintendent of Banks of N.Y.S. Income Tax Expense. Due to the pre-tax loss of $5.8 million incurred in 1996 as compared to pre-tax income of $1.4 million in 1995, the Company recorded a tax benefit of $1.9 million for 1996 compared to an expense of $586,000 in 1995. 14 Average Balances, Interest Rates and Yields The following table presents for the periods indicated the total dollar amount of interest income earned on average interest-earning assets and the resultant yields, as well as the total dollar amount of interest expense incurred on average interest-bearing liabilities and the resultant rates. No tax equivalent adjustments were made. All average balances are daily average balances. Non-accruing loans have been included in the table as loans with interest earned on a cash basis only. Securities available for sale are included at amortized cost.
1997 1996 1995 --------------------------- ------------------------- -------------------------- Average Interest Yield/ Average Interest Yield/ Average Interest Yield/ Balance Inc./Exp. Rate Balance Inc./Exp. Rate Balance Inc./Exp. Rate ------- --------- ------ ------- --------- ------ ------- --------- ------ Interest-Earning Assets (Dollars in Thousands) Loans receivable ........................... $ 267,726 $ 21,011 7.85% $ 262,193 $20,557 7.84% $261,482 $ 21,385 8.18% Securities available for sale .............. 194,111 13,957 7.19% 156,093 10,921 7.00% -- -- -- Investment securities ...................... -- -- -- -- -- -- 49,598 3,028 6.11% Federal Home Loan Bank Stock ............... 3,066 204 6.65% 2,013 130 6.46% 1,867 143 7.66% Federal funds sold and interest- bearing deposits ......................... 8,162 394 4.76% 14,218 740 5.12% 18,352 1,026 5.59% ------- ------ ------- ------ ------- ------ Total interest-earning assets .......... 473,065 35,566 7.52% 434,517 32,348 7.44% 331,299 25,582 7.72% ------- ------ ------- ------ ------- ------ Allowance for Loan Losses .................... (3,846) (3,686) (2,598) Due from Brokers ............................. 7,121 14,221 -- Unrealized Gain/(Loss)-AFS Securities ........ (884) (1,475) -- Other Assets ................................. 16,150 15,616 13,620 --------- --------- ----------- Total Average Assets ......................... $ 491,606 $ 459,193 $ 345,021 ========= ========= =========== Interest-Bearing Liabilities Savings deposits ........................... $ 99,389 $ 3,016 3.03% $103,931 $ 3,162 3.04% $108,747 $ 3,300 3.03% NOW deposits .............................. 19,990 543 2.72% 19,124 527 2.76% 18,640 511 2.74% Certificates of deposit .................... 172,319 9,882 5.73% 150,300 8,492 5.65% 147,348 8,272 5.61% Money Market Accounts ...................... 7,159 204 2.85% 8,765 243 2.77% 10,362 285 2.75% Borrowed Funds ............................. 98,927 6,009 6.07% 67,572 4,011 5.94% 4,880 299 6.13% Advances from borrowers for taxes and insurance, and stock subscription proceeds -- -- -- -- -- -- 2,402 79 3.28% ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities ..... 397,784 19,654 4.94% 349,692 16,435 4.70% 292,379 12,746 4.36% ------- ------ ------- ------ ------- ------ Other Liabilities ............................ 32,757 36,255 24,017 ------ ------ ------ Total Liabilities ............................ 430,541 385,947 316,369 Shareholders' Equity ......................... 61,065 73,246 28,625 ------ ------ ------ Total Average Liabilities & Equity ........... $ 491,606 $ 459,193 $ 345,021 ========= ========= ========== Net interest income ...................... $ 15,912 $ 15,913 $ 12,836 ======== ======== ======== Net interest rate spread ................. 2.58% 2.74% 3.36% ====== ====== ===== Net earning assets ....................... $ 75,281 $ 84,825 $ 38,920 ========= ========= ========== Net yield on average interest-earning assets ................. 3.36% 3.66% 3.87% ====== ====== ===== Average interest-earning assets/ Average interest/bearing liabilities ... 118.93% 124.26% 113.31% ========== ========== ==========
15 Rate/Volume Analysis of Net Interest Income The following table presents the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and the changes due to changes in interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
---------------------------------------------------------------------------- 1997 vs. 1996 1996 v. 1995 --------------------------------- --------------------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total ----------------- Increase ------------------ Increase Volume Rate Decrease Volume Rate Decrease ---------- ------- --------- -------- --------- ----------- Interest-Earning Assets (Dollars in thousands) Loans receivable (1) ................. $ 434 $ 20 $ 454 $ 58 ($ 886) ($ 828) Securities available for sale (2) .... 2,726 310 3,036 10,921 -- 10,921 Investment securities ................ -- -- -- (3,028) -- (3,028) Federal Home Loan Bank Stock ......... 70 4 74 13 (26) (13) Federal funds sold and interest- bearing deposits ................... (298) (48) (346) (219) (67) (286) -------- -------- -------- -------- -------- -------- Total interest-earning assets .... 2,932 286 3,218 7,745 (979) 6,766 -------- -------- -------- -------- -------- -------- Interest-Bearing Liabilities Savings deposits ..................... (138) (9) (147) (145) 7 (138) NOW deposits ........................ 23 (6) 17 13 3 16 Certificates of deposit .............. 1,261 129 1,390 167 53 220 Money Market Accounts ................ (46) 7 (39) (44) 2 (42) Borrowed Funds ....................... 1,902 96 1,998 3,720 (8) 3,712 Advances from borrowers for taxes and insurance, and stock subscription proceeds .............. -- -- -- (45) (34) (79) -------- -------- -------- -------- -------- -------- Total interest-bearing liabilities $ 3,003 $ 216 $ 3,219 $ 3,666 $ 23 $ 3,689 -------- -------- -------- -------- -------- -------- Net interest income ................ ($ 1) $ 3,077 ======== ========
(1) Calculated net of deferred loan fees, loan discounts and loans in process. (2) Net of securities available for sale pending settlement and net unrealized gains/(losses). 16 Market Risk Interest rate risk ("IRR") is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. The Company does not currently engage in trading activities or use derivative instruments, such as caps, collars or floors, to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-bearing liabilities reprice on a different basis or at a different pace from its interest-earning assets. Management of the Bank believes it is important to manage the effect interest rates have on the Bank's net portfolio value ("NPV") and net interest income. NPV helps measure interest rate risk by calculating the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance sheet contracts. Presented below, as of December 31, 1997, is an analysis of the Bank's interest rate risk as calculated by the OTS, measured by changes in the Bank's NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis points increments, up and down 400 basis points. Net Portfolio Value Change in Interest Rate $ Amount $ Change % Change ------------- --------- -------- -------- (Basis Points) (Dollars in Thousands) +400 $ 9,223 $(46,322) (83)% +300 20,659 (34,887) (63) +200 32,638 (22,908) (41) +100 44,675 (10,871) (20) ---- 55,546 ---- -- -100 63,988 8,443 15 -200 70,552 15,007 27 -300 77,133 21,588 39 -400 85,695 30,150 54 Certain assumptions utilized by the OTS in assessing the interest rate risk of savings institutions were employed in preparing the foregoing table. These assumptions related to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates will not change as a result of changes in interest rates although there can be no assurance that this will be the case. Even if interest rates change in the designated amounts, there can be no assurance that the Bank's assets and liabilities would perform as set forth above. In addition, a change in Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated above. In evaluating the Bank's exposure to interest rate risk, certain shortcomings inherent in the method of analysis presented in the foregoing table must be considered. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while 17 interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in calculating the table. Finally, the ability of many borrowers to service their debt may decrease in the event of an interest rate increase. As a result, the actual effect of changing interest rates may differ from that presented in the foregoing table. The Bank maintains an asset/liability committee which meets weekly to review interest rate risk management strategy and to review the Bank's investment strategy for loans and securities, monitor investment performance and to take any actions necessary for adjusting future investment direction. In managing its asset/liability mix, and depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, the Bank may place more emphasis on limiting interest rate risk than on enhancing its net interest income. Management believes that the stability which can be obtained by limiting interest rate risk can more than offset the benefits which can be derived from seeking to enhance the net interest margin on a short-term basis. In managing its asset/liability mix, the Bank, at times, depending on the relationship between long- and short-term interest rates, market conditions and consumer preference, may place greater emphasis on maximizing its net interest margin than on matching the interest rate sensitivity of its assets and liabilities, in an effort to improve or maintain its spread. Management believes that the increased net income resulting from a mismatch in the maturity of its asset and liability portfolios can, during periods of declining or stable interest rates, provide high enough returns to justify the increased vulnerability to sudden and unexpected increases in interest rates which can result from such a mismatch. As a result, the Bank may at certain times be more vulnerable to rapid increases in interest rates than some other institutions which concentrate principally on matching the maturities of their assets and liabilities. The Bank also utilizes the FHLB's Interest Rate Risk Service in managing its IRR. In most cases, the FHLB has followed OTS methodology, however, because of differences in modeling techniques and assumptions, the FHLB results may differ from the estimates generated by the OTS for changes in NPV. The FHLB simulation model, in addition to estimating NPV changes, also estimates the effect on net interest income ("NII") and net interest margin ("NIM") from the assumed changes in interest rates and compares the Bank's changes to those of a similar asset size peer group. Management believes that the strategy related to the purchase of securities with borrowed funds and the simultaneous pledging of those securities as securities sold under agreements to repurchase does not expose the Company's NII and its NIM to an unacceptable level of sensitivity to changes, either up or down, in interest rates. See "Financial Condition" and "Net Interest Income" herein. Management is aware, however, that by pursuing the balance sheet strategy it followed during 1997, that the Bank's NPV would be more sensitive to 18 changes in interest rates. Based on the FHLB's Peer Group Report for December 31, 1997, if rates increased 200 basis points, the Bank's NPV would decline 31.5% from its base NPV (compared to the OTS calculated 41.0% in the table above) while the median decline for its peers would be 20.5%. When the Bank is compared to its peers by the FHLB in regard to changes in NII, the Bank is less interest rate sensitive than its peer group. With a 200 basis point increase in interest rates, the Bank's NII would decline by an estimated 8.2% compared to its peer group's average decline of 8.9%. If rates increased 400 basis points, the Bank's NII would decline by 18.2% compared to an average decline of 20.4% for its peer group. Given a 200 basis point increase in interest rates as of December 31, 1997, the Bank's NIM would decline 22 basis points from its base margin rate of 2.78% to 2.56%, compared to a peer group decline from 2.79% to 2.64%, a decline of 15 basis points. If interest rates increased 400 basis points, the Bank's NIM would decline 50 basis points to 2.28% from the base margin rate of 2.78% while the peer group's NIM would decline by 39 basis points to 2.40% from 2.79%. Liquidity and Capital Resources The Bank's primary sources of funds for operations are deposits from its market area, principal and interest payments on loans and securities available for sale, proceeds from the maturity of securities available for sale, advances from the FHLB of New York and proceeds from the sale of securities sold under agreements to repurchase ("reverse repo"). While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. The primary investing activities of the Company are the origination of loans and purchase of securities. During 1997, 1996 and 1995 the Bank's loan originations totaled $91.5 million, $81.4 million and $50.2 million, respectively. During 1995, the Bank purchased $47.0 million of securities and classified such securities, consistent with the reclassification of all investment and mortgage-backed securities at December 31, 1995, as available for sale. In 1996, the Company purchased $192.6 million of securities and classified such securities as available for sale. For the year 1997, the Company purchased $247.4 million of securities, all of which were classified as available for sale. The primary financing activity of the Bank is the attraction of deposits. During the years ended December 31, 1997 and 1995, the Bank experienced net deposit inflows of $35.2 million and $18.1 million, respectively. However for the year ended December 31, 1996, the Bank had net deposit outflows of $13.2 million. Management believes that the decrease in deposits in 1996 was the result, in part, of some of the Bank's depositors deciding to pursue alternative investment opportunities, such as stock mutual funds, with a portion of their investable funds. The increase in deposits during 1997 management believes was a reversal of the 1996 situation as depositors shifted investable funds back into certificates of deposit to take advantage of the higher interest rates that prevailed in the Bank's market area during 1997. During the year ended December 31, 1997, the Bank's certificates of deposit increased by $31.4 million, or 20.7%. The net increase of $18.1 million in 1995 resulted from an increase of $41.2 million in certificates of deposit which was the result of the Bank's aggressive 1995 marketing campaigns related, in part, to the three supermarket branches that the Bank opened since November 1994. 19 The Bank is required to maintain minimum levels of liquid assets as defined by OTS regulations. This requirement, which may be varied by the OTS depending upon economic conditions and deposit flows, is based upon a percentage of deposits. The required minimum liquidity ratio is currently 4%. The Bank's average daily liquidity ratio for the month of December 1997 was 37.05%. The Bank's most liquid assets are cash and cash equivalents, which consist of federal funds sold and bank deposits. The level of these assets is dependent on the Bank's operating, financing and investing activities during any given period. At December 31, 1997, 1996 and 1995 cash and cash equivalents totaled $10.2 million, $10.9 million and $84.6 million, respectively. The Bank anticipates that it will have sufficient funds available to meet its current commitments. At December 31, 1997, the Bank had commitments to originate loans of $4.2 million as well as undrawn commitments of $5.4 million on home equity and other lines of credit. Certificates of deposit which are scheduled to mature in one year or less at December 31, 1997, totaled $139.1 million. Management believes that a significant portion of such deposits will remain with the Bank. However, if the Bank is not able to maintain its historical retention rate on maturing certificates of deposit, it may consider employing the following strategies: (i) increase its borrowed funds position to compensate for the deposit outflows; (ii) increase the rates it offers on these deposits in order to increase the retention rate on maturing certificates of deposit and/or to attract new deposits; or (iii) attempt to increase certificates of deposit through the use of deposit brokers. Depending on the level of market interest rates on the renewal dates of the certificates of deposit, the employment of one or a combination of these strategies could result in higher or lower levels of NII and net income. The Company also has a need for, and sources of, liquidity. Liquidity is required to fund its operating expenses, as well as for the payment of any dividends to shareholders. The Company currently has no significant liquidity commitments as operating costs are modest and dividends to shareholders are discretionary. At December 31, 1997, the Holding Company had $9.4 in liquid assets on hand, however, the primary source of liquidity on an ongoing basis is dividends from the Bank. To date, no dividends have been paid from the Bank to the Company; however, it is anticipated that the Bank will pay a dividend to the Company in 1998. Federally insured savings institutions are required to maintain a minimum level of regulatory capital. The OTS has established standards, including a tangible capital requirement, a leverage ratio (or core capital) requirement and a risk-based capital requirement applicable to such savings associations. These capital requirements must be generally as stringent as the comparable capital requirements of national banks. The OTS is also authorized to impose capital requirements in excess of these standards on individual associations on a case-by-case basis. See Note 15 of the Notes to Consolidated Financial Statements for information on the Bank's regulatory capital requirements. 20
Unaudited Consolidated Interim Financial Information 1997 1996 ----------------------------------------- ------------------------------------------ 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in thousands, except per share data) Interest Income .................... $8,675 $8,773 $8,827 $9,291 $6,915 $7,562 $8,825 $9,046 Net Interest Income ................ 4,020 4,008 3,881 4,003 3,653 3,881 4,231 4,147 Provision for Loan Losses .......... 363 275 225 225 1,628 433 549 6,840 Income/(Loss) Before Income Taxes .. 1,076 889 1,188 1,300 (535) 802 897 (6,929) Net Income/(Loss) .................. 652 572 736 800 (314) 510 572 (4,604) Earnings/(Loss)per share - Basic ... 0.16 0.14 0.19 0.21 (0.06) 0.10 0.12 (1.05) Earnings/(Loss)per share - Diluted . 0.16 0.14 0.19 0.20 (0.06) 0.10 0.12 (1.05) Average Shares Outstanding - Basic . 4,011,349 4,024,536 3,897,492 3,832,531 4,988,828 4,999,672 4,675,401 4,404,735 Incremental Shares: Options ....................... -- 3,233 36,300 57,608 -- -- -- -- Unvested RRP Shares ........... -- 2,244 23,642 39,608 -- -- -- -- Average Shares Outstanding - Diluted 4,011,349 4,030,013 3,957,434 3,929,747 4,988,828 4,999,672 4,675,401 4,404,735
21 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Financial Statements As of December 31, 1997 and 1996 and for the three year period ended December 31, 1997 (With Independent Auditors' Report Thereon) Independent Auditors' Report The Board of Directors Ambanc Holding Co., Inc.: We have audited the accompanying consolidated statements of financial condition of Ambanc Holding Co., Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ambanc Holding Co., Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. Albany, N.Y. February 13, 1998 22 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Financial Condition December 31, Assets 1997 1996 ---- ---- (In thousands) Cash and due from banks ............................. $ 10,225 6,387 Federal funds sold .................................. -- 4,500 -------- -------- Cash and cash equivalents ................. 10,225 10,887 Securities available for sale, at fair value (note 4) 205,842 200,539 Loans receivable, net (note 5) ...................... 281,123 248,094 Accrued interest receivable (note 6) ................ 3,734 3,201 Premises and equipment, net (note 7) ................ 3,121 2,784 Federal Home Loan Bank of New York stock, at cost ... 3,291 2,029 Real estate owned and repossessed assets ............ 143 715 Other assets ........................................ 2,965 4,172 -------- -------- Total assets .............................. $510,444 472,421 ======== ======== Liabilities and Shareholders' Equity Liabilities: Deposits (note 8) .............................. $333,265 298,082 Advances from borrowers for taxes and insurance 1,902 1,703 Borrowed funds (note 9) ........................ 111,550 108,780 Accrued interest payable ....................... 819 1,077 Accrued expenses and other liabilities ......... 1,706 1,261 -------- -------- Total liabilities ......................... 449,242 410,903 -------- -------- Commitments and contingent liabilities (notes 10, 11 and 13) Shareholders' equity: Preferred stock $.01 par value. Authorized 5,000,000 shares; none outstanding at December 31, 1997 and 1996 ................... - - Common stock $.01 par value. Authorized 15,000,000; 5,422,250 shares issued at December 31, 1997 and 1996 ................... 54 54 Additional paid-in capital ..................... 52,385 52,128 Retained earnings, substantially restricted .... 26,458 24,436 Treasury stock, at cost, (1,115,832 shares at December 31, 1997 and 1,030,227 at December 31, 1996) ........................... (12,585) (11,208) Common stock acquired by ESOP .................. (3,303) (3,812) Unearned RRP shares issued ..................... (1,533) -- Net unrealized loss on securities available for sale, net of tax ......................... (274) (80) --------- --------- Total shareholder's equity ................ 61,202 61,518 --------- --------- Total liabilities and shareholders' equity $ 510,444 472,421 ========= ========= See accompanying notes to consolidated financial statements. 23 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1997 1996 1995 ---- ---- ---- (In thousands, except per share amounts) Interest and dividend income: Loans ................................... $21,011 20,557 21,385 Securities available for sale ........... 13,957 10,921 -- Investment securities ................... -- -- 3,028 Federal funds sold ...................... 394 740 1,026 Federal Home Loan Bank stock ............ 204 130 143 ------- ------- ------- Total interest and dividend income .... 35,566 32,348 25,582 ------- ------- ------- Interest expense: Deposits (note 8) ....................... 13,645 12,424 12,447 Borrowings .............................. 6,009 4,011 299 ------- ------- ------- Total interest expense ......... 19,654 16,435 12,746 ------- ------- ------- Net interest income ............ 15,912 15,913 12,836 Provision for loan losses (note 5) ........... 1,088 9,450 1,522 ------- ------- ------- Net interest income after provision for loan losses .............. 14,824 6,463 11,314 ------- ------- ------- Other income: Service charges on deposit accounts ..... 786 764 783 Net gains (losses) on securities transactions ........................... 775 (102) 225 Other ................................... 265 258 504 ------- ------- ------- Total other income ............. 1,826 920 1,512 ------- ------- ------- Other expenses: Salaries, wages and benefits ............ 6,086 5,097 4,403 Occupancy and equipment ................. 1,539 1,328 1,219 Data processing ......................... 923 843 728 Federal deposit insurance premium ....... 39 2 533 Correspondent bank processing fees ...... 126 116 245 Provision for losses on Nationar related receivable .................... -- -- 205 Real estate owned and repossessed assets expenses, net .................. 355 2,563 1,601 Professional fees ....................... 429 540 358 Other ................................... 2,700 2,659 2,091 ------- ------- ------- Total other expenses ........... 12,197 13,148 11,383 ------- ------- ------- Income (loss) before taxes ................... 4,453 (5,765) 1,443 Income tax expense (benefit) (note 10) ....... 1,693 (1,929) 586 ------- ------- ------- Net income (loss) .............. $ 2,760 (3,836) 857 ======= ======= ======= Basic earnings (loss) per share .............. $ 0.70 $ (0.81) N/A ======= ======= ======= Diluted earnings (loss) per share ............ $ 0.69 $ (0.81) N/A ======= ======= ======= See accompanying notes to consolidated financial statements. 24 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1997, 1996 and 1995 (in thousands, except share data)
Net unrealized gain (loss) on Common Unearned securities Additional stock RRP available Common paid-in Retained Treasury acquired shares for sale, stock capital earnings stock by ESOP issued net of tax Total ----- ------- --------- ----- ------- ------ ---------- ----- Balance at December 31, 1994 .......... $ -- -- 27,415 -- -- -- -- 27,415 Net income ............................ -- -- 857 -- -- -- -- 857 Common stock issued (5,422,250 shares) 54 52,127 -- -- -- -- -- 52,181 Purchase of ESOP shares (433,780) ..... -- -- -- -- (4,338) -- -- (4,338) Change in net unrealized loss on securities available for sale, net of tax .......................... -- -- -- -- -- -- (100) (100) ------- ------- ------- ------- ------- ------- ------- ------- Balance at December 31, 1995 .......... 54 52,127 28,272 -- (4,338) -- (100) 76,015 Net loss .............................. -- -- (3,836) -- -- -- -- (3,836) Purchase of treasury shares (1,030,227) -- -- -- (11,208) -- -- -- (11,208) Release of ESOP shares (52,964) ....... -- 1 -- -- 526 -- -- 527 Change in net unrealized loss on securities available for sale, net of tax ................................. -- -- -- -- -- -- 20 20 Balance at December 31, 1996 .......... 54 52,128 24,436 (11,208) (3,812) -- (80) 61,518 ------- ------- ------- ------- ------- ------- ------- ------- Net income ............................ -- -- 2,760 -- -- -- -- 2,760 Release of ESOP shares (50,561) ....... -- 257 -- -- 509 -- -- 766 Purchase of treasury shares (216,890) . -- -- -- (3,488) -- -- -- (3,488) Issuance of RRP shares (131,285) ...... -- -- (306) 2,111 -- (1,805) -- -- RRP shares earned ..................... -- -- -- -- -- 272 -- 272 Change in net unrealized loss on securities available for sale, net of tax ................................. -- -- -- -- -- -- (194) (194) Cash dividends $0.10 per share ........ -- -- (432) -- -- -- -- (432) ------- ------- ------- ------- ------- ------- ------- ------- Balance at December 31, 1997 .......... $ 54 52,385 26,458 (12,585) (3,303) (1,533) (274) 61,202 ======= ======= ======= ======== ======= ======== ======= ========
See accompanying notes to consolidated financial statements. 25 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Net income (loss) ................................ $ 2,760 (3,836) 857 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization .................. 652 558 496 Provision for loan losses ...................... 1,088 9,450 1,522 Provision for losses and writedowns on real estate owned and repossessed assets ...... 171 877 1,254 Provisions for losses on Nationar related receivables ........................... -- -- 205 Loss on sale of fixed assets ................... -- 64 -- ESOP compensation expense ...................... 766 527 -- RRP expense .................................... 272 -- -- Net loss (gains) on sale and redemptions of securities available for sale .............. (775) 102 (225) Net loss on sale of other real estate owned .... 38 1,260 74 Net amortization on securities ................. 320 475 19 (Increase) decrease in accrued interest receivable and other assets ................... 831 (3,316) (560) Decrease (increase) in due from broker ......... -- 18,128 (18,128) Increase (decrease) in accrued expenses and other liabilities ......................... 187 (1,201) 2,225 Increase (decrease) in due to broker ........... -- (46,880) 46,880 Increase (decrease) in advances from borrowers for taxes and insurance ............. 199 11 (762) ----- -------- ------- Net cash provided (used) by operating activities ................................... 6,509 (23,781) 33,857 ----- -------- ------- Cash flows from investing activities: Proceeds from sales and redemptions of securities available for sale .................... 194,210 34,469 18,372 Purchases of securities available for sale ........(247,424) (192,647) -- Proceeds from principal paydowns and maturities of securities available for sale ...... 48,029 31,508 -- Proceeds from principal paydowns and maturities of investment securities .............. -- -- 7,530 Purchase of investment securities ................. -- -- (46,980) Purchase of FHLB stock ............................ (1,262) (137) (237) Proceeds from sale of loans ....................... -- 18,929 -- Net (increase) decrease in loans made to customers ..................................... (34,384) (28,685) 8,205 Capital expenditures .............................. (1,004) (341) (692) Proceeds from sales of other real estate .......... 631 2,519 1,340 Proceeds from the sale of fixed assets ............ -- 25 -- -------- --------- -------- Net cash used by investing activities ......... (41,204) (134,360) (12,462) -------- --------- -------- (Continued) 26 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---- ---- ---- Cash flows from financing activities: Purchase of ESOP shares ......................... $ -- -- (4,338) Net proceeds from common stock issued in stock conversion ........................... -- -- 52,181 Purchase of treasury shares ..................... (3,488) (11,208) -- Dividends paid .................................. (432) -- -- Net increase (decrease) in deposits ............. 35,183 (13,157) 18,087 Advances from (repayments on) FHLB borrowings, net ............................... 6,300 6,000 (19,000) Increase (decrease) in other borrowed funds ..... (3,530) 102,780 -- -------- -------- -------- Net cash provided by financing activities 34,033 84,415 46,930 -------- -------- -------- Net increase (decrease) in cash and cash equivalents .. (662) (73,726) 68,325 Cash and cash equivalents at beginning of year ........ 10,887 84,613 16,288 -------- -------- -------- Cash and cash equivalents at end of year .............. $ 10,225 10,887 84,613 ======== ======== ======== Supplemental disclosures of cash flow information - cash paid during the year for: Interest ..................................... $ 19,912 15,360 12,447 ======== ======== ======== Income taxes ................................. $ 1,770 306 1,000 ======== ======== ======== Noncash investing activities: Net reduction in loans receivable resulting from the transfer to real estate owned ......... $ 268 2,203 1,864 ======== ======== ======== Transfer of investment securities to securities available for sale .................. $ -- -- 45,736 ======== ======== ======== Noncash financing activities: Issuance of RRP shares ........................... $ 2,111 -- -- ======== ======== ========
See accompanying notes to consolidated financial statements. 27 AMBANC HOLDING CO., INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997 and 1996 (1) Summary of Significant Accounting Policies Ambanc Holding Co. Inc. (the Holding Company) was incorporated under Delaware law in June 1995 as a Holding Company to purchase 100% of the common stock of Amsterdam Savings Bank, FSB (the Bank). The Bank converted from a mutual form to a stock institution in December 1995, and the Holding Company completed its initial public offering on December 26, 1995, at which time the Holding Company purchased all the outstanding stock of the Bank. The following is a description of the more significant policies which Ambanc Holding Co., Inc. follows in preparing and presenting its consolidated financial statements. (a) Basis of Presentation The accompanying consolidated financial statements include the accounts of Ambanc Holding Co., Inc., and its wholly owned subsidiaries, Amsterdam Savings Bank FSB, and A.S.B. Insurance Agency, Inc., collectively referred to as the Company. All significant intercompany accounts have been eliminated in consolidation. The accounting and reporting policies of the Company conform in all material respects to generally accepted accounting principles and to general practice within the thrift industry. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses and the valuation of real estate owned and repossessed assets acquired in connection with foreclosures or in satisfactions of loans. In connection with the determination of the allowance for loan losses, the valuation of real estate owned, and estimates of fair value for repossessed assets, management obtained appraisals for significant assets. (b) Business A substantial portion of the Company's assets are loans secured by real estate in the upstate New York area. In addition, all real estate owned is located in those same markets. Accordingly, the ultimate collectibility of a considerable portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of real estate owned are dependent upon market conditions in the upstate New York region. 28 (1) Summary of Significant Accounting Policies, Continued Management believes that the allowance for loan losses is adequate and that other real estate owned and repossessed assets are properly valued. While management uses available information to recognize losses on loans and other real estate owned and repossessed assets, future additions to the allowance or writedowns of other real estate and repossessed assets may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and valuation of other real estate owned and repossessed assets. Such agencies may require the Bank to recognize additions to the allowance or write downs of other real estate and repossessed assets based on their judgments about information available to them at the time of their examination which may not be currently available to management. (c) Securities Available for Sale, Investment Securities and FHLB of New York Stock Management determines the appropriate classification of securities at the time of purchase. If management has the positive intent and ability to hold debt securities to maturity they are classified as held to maturity and are stated at amortized cost. All other debt and marketable equity securities are classified as securities available for sale and are reported at fair value, with net unrealized gains and losses reported as a separate component of shareholders' equity, net of estimated income taxes. The Company does not maintain a trading portfolio, and at December 31, 1997 and 1996 the Company had no securities classified as securities held to maturity. Unrealized losses on securities that reflect a decline in value that is other than temporary are charged to income. Non- marketable equity securities, such as Federal Home Loan Bank (FHLB) of New York stock, is stated at cost. The investment in FHLB of New York stock is required for membership. Mortgage backed securities, which are guaranteed by the Government National Mortgage Association ("GNMA"), the Federal Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage Corporation ("FNMA"), represent participation interests in direct pass-through pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Gains and losses on the sale and redemption of securities available for sale are based on the amortized cost of the specific security sold. The cost of securities is adjusted for amortization of premium and accretion of discounts, which is calculated on an effective interest method. Purchases and sales are recorded on a trade date basis. Receivables and payables from unsettled transactions are shown as due from brokers or due to brokers in the consolidated financial statements. 29 (1) Summary of Significant Accounting Policies, Continued (d) Reclassification of Investment Securities In November 1995, the Financial Accounting Standards Board (FASB) released its Special Report "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." The Special Report contained, among other things, a unique provision that allowed entities to, as of one date either concurrent with the initial adoption of the Special Report (November 15, 1995), but no later than December 31, 1995, reassess the appropriateness of the classifications of all securities held at that time. In accordance with the FASB's Special Report, as of December 31, 1995, the Company reclassified all investment securities held to maturity, with an amortized cost of $45,735,971, to securities available for sale. (e) Loans Receivable and Loan Fees Loans receivable are stated at unpaid principal amount, net of unearned discount, deferred loan costs, net, and allowance for loan losses. Discounts are amortized to income over the contractual loan life using the level-yield method. Loan fees received and the related direct cost of originations have been deferred and are being recorded as yield adjustments over the life of the related loans using the interest method of amortization. Non-performing loans include non-accrual loans, restructured loans and loans which are 90 days or more past due and still accruing interest. Loans considered doubtful of collection by management are placed on a nonaccrual status for the recording of interest. Generally loans past due 90 days or more as to principal or interest are placed on nonaccrual status except for certain loans which, in management's judgment, are adequately secured and for which collection is probable. Previously accrued income that has not been collected is reversed from current income. Thereafter, the application of payments received (principal or interest) on non-accrual loans is dependent on the expectation of ultimate repayment of the loan. If ultimate repayment of the loan is expected, any payments received are applied in accordance with contractual terms. If ultimate repayment of principal is not expected or management judges it to be prudent, any payment received on a non-accrual or an impaired loan is applied to principal until ultimate repayment becomes expected. Loans are removed from non-accrual status when they are estimated to be fully collectible as to principal and interest. Amortization of related deferred fees is suspended when a loan is placed on non-accrual status. The allowance for loan losses is maintained at a level deemed appropriate by management based on an evaluation of the known and inherent risks in the present portfolio, the level of non-performing loans, past loan loss experience, estimated value of underlying collateral, and current and prospective economic conditions. The allowance is increased by provisions for loan losses charged to operations. 30 (1) Summary of Significant Accounting Policies, Continued (f) Loan Impairment Management considers a loan to be impaired if, based on current information, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral if the loan is collateral dependent. Except for loans restructured in a troubled debt restructuring subsequent to January 1, 1995, management excludes large groups of smaller balance homogeneous loans such as residential mortgages and consumer loans which are collectively evaluated. Impairment losses, if any, are recorded through a charge to the provision for loan losses. (g) Real Estate Owned and Repossessed Assets Real estate owned and repossessed assets include assets received from foreclosures and in-substance foreclosures. A loan is classified as an insubstance foreclosure when the Company has taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place. Real estate owned and repossessed assets, including in-substance foreclosures, are recorded on an individual asset basis at net realizable value which is the lower of fair value minus estimated costs to sell or "cost" (defined as the fair value at initial foreclosure). When a property is acquired or identified as in-substance foreclosure, the excess of the loan balance over fair value is charged to the allowance for loan losses. Subsequent write-downs to carry the property at fair value less costs to sell are included in noninterest expense. Costs incurred to develop or improve properties are capitalized, while holding costs are charged to expense. At December 31, 1997 and 1996, real estate owned and repossessed assets consisted of primarily residential one to four family properties, recreational vehicles and boats. The Company had no in-substance foreclosures at December 31, 1997 and 1996. (h) Premises and Equipment, Net Premises and equipment are carried at cost, less accumulated depreciation applied on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the respective original lease terms without regard to lease renewal options. 31 (1) Summary of Significant Accounting Policies, Continued (i) Income Taxes Income taxes are recorded on income reported in the consolidated statements of income regardless of when such taxes are payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company's policy is that deferred tax assets are reduced by a valuation reserve if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be recognized. In considering if it is more likely than not that some or all of the deferred tax assets will not be realized, the Company considers temporary taxable differences, historical taxes and estimates of future taxable income. (j) Pension Plan The Company has a defined benefit pension plan covering substantially all employees. The Company's actuarially determined annual contribution to the pension plan meets or exceeds the minimum funding requirements set forth in the Employees Retirement Income Security Act of 1974. (k) Off-Balance Sheet Risk The Company is a party to certain financial instruments with off-balance sheet risk such as commitments to extend credit, unused lines of credit and standby letters of credit. The Company's policy is to record such instruments when funded. (l) Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. 32 (1) Summary of Significant Accounting Policies, Continued (m) Stock Based Compensation Plans The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. SFAS No. 123, "Accounting for Stock-Based Compensation," encourages entities to recognize the fair value of all stock-based awards on the date of grant as compensation expense over the vesting period. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123. The Company's Recognition and Retention Plan (RRP) is also accounted for in accordance with APB Opinion No. 25. The fair value of the shares awarded, measured as of the grant date, is recognized as unearned compensation (a deduction from shareholders' equity) and amortized to compensation expense as the shares become vested. (n) Earnings per share On December 31, 1997, the Company adopted the provisions of SFAS No. 128, "Earnings Per Share". The statement supersedes Accounting Principles Board Opinion No. 15, "Earnings Per Share" and related interpretations. SFAS No. 128 requires dual presentation of "Basic EPS" and Diluted EPS" on the face of the income statement for all entities with complex capital structures and specifies additional disclosure requirements. Basic earnings per share excludes dilution and is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Unvested restricted stock awards are considered outstanding common shares and included in the computation of basic EPS as of the date that they are fully vested. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised into common stock or resulted in the issuance of common stock. All prior period EPS data has been restated to conform to the provisions of this Statement. The adoption of this Statement did not have a material effect on the Company's financial position or results of operations. (o) Official Bank Checks The Company's treasurer checks (including expense checks) are drawn upon the Bank and are ultimately paid through the Bank's Federal Reserve Bank of New York correspondent account and are included in accrued expenses and other liabilities in the consolidated statements of financial condition. 33 (1) Summary of Significant Accounting Policies, Continued (p) Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS No. 125 which provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities based on consistent application of a financial components approach that focuses on control. It distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. Certain aspects of SFAS No. 125 were amended by SFAS No. 127, "Deferral of the Effective Date of Certain Provision of FAS Statement No. 125." The adoption of SFAS No. 125 did not have a material impact on the Company's consolidated financial statements. (q) Reclassifications Amounts in the prior years' consolidated financial statements are reclassified whenever necessary to conform to current periods presentations. (r) Recent Accounting Pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for reporting and displaying of comprehensive income. Comprehensive income includes the reported net income of the company adjusted for items that are currently accounted for as equity transactions, such as market value adjustment for securities available for sale, foreign currency transactions, and minimum pension liability adjustments. This statement is effective for fiscal years beginning after December 15, 1997. Management believes that the adoption of SFAS No. 130 will not have a material impact on the Company's consolidated financial statements. In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for reporting by public companies of operating segments within the company, disclosures about products and services, geographic areas and major customers. This statement is effective for periods beginning after December 15, 1997. Management believes that the adoption of SFAS No. 131 will not have a material impact on the Company's consolidated financial statements. (2) Conversion to Stock Ownership On December 26, 1995, the Holding Company sold 5,422,250 shares of common stock at $10.00 per share to depositors and employees of the Bank. Net proceeds from the sale of stock of the Holding Company, after deducting conversion expenses of approximately $2.0 million, were $52.2 million and are reflected as common stock and additional paid-in capital in the accompanying December 31, 1997 and 1996 consolidated statements of financial condition. The Company utilized $26.0 million of the net proceeds to acquire all of the capital stock of the Bank. 34 (2) Conversion to Stock Ownership, Continued As part of the conversion, the Bank established a liquidation account for the benefit of eligible depositors who continue to maintain their deposit accounts in the Bank after conversion. In the unlikely event of a complete liquidation of the Bank, each eligible depositor will be entitled to receive a liquidation distribution from the liquidation account, in the proportionate amount of the then current adjusted balance for deposit accounts held, before distribution may be made with respect to the Bank's capital stock. The Bank may not declare or pay a cash dividend to the Holding Company on, or repurchase any of, its capital stock if the effect thereof would cause the retained earnings of the Bank to be reduced below the amount required for the liquidation account. Except for such restrictions, the existence of the liquidation account does not restrict the use or application of retained earnings. The Bank's capital exceeds all of the fully phased-in capital regulatory requirements. The Office of Thrift Supervision (OTS) regulations provide that an institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution could, after prior notice but without the approval by the OTS, make capital distributions during the calendar year of up to 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year. Any additional capital distributions would require prior regulatory approval. At December 31, 1997, the maximum amount that could have been paid by the Bank to the Holding Company was approximately $17.5 million. Unlike the Bank, the Holding Company is not subject to these regulatory restrictions on the payment of dividends to its stockholders. (3) Reserves and Investments Required by Law The Company is required to maintain certain reserves of cash and or deposits with the Federal Reserve Bank. The amount of this reserve requirement, included in cash and due from banks, was approximately $1,123,000 and $1,069,000 at December 31, 1997 and 1996, respectively. The Company is required to maintain certain levels of stock in the Federal Home Loan Bank. The Company has pledged its investment in this stock, as well as a blanket pledge of qualifying residential real estate loans, to secure its advances from the Federal Home Loan Bank of New York. 35 (4) Securities Available for Sale The amortized cost, gross unrealized gains and losses and estimated fair values of securities available for sale at December 31, 1997 and 1996 are as follows:
1997 (in thousands) Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value U.S. Government and agency securities $ 63,198 60 (113) 63,145 Mortgage-backed securities .......... 142,312 100 (515) 141,897 State and political subdivisions .... 755 11 -- 766 -------- -------- -------- -------- Total debt securities ............... 206,265 171 (628) 205,808 -------- -------- -------- -------- Equity securities ................... 34 -- -- 34 -------- -------- -------- -------- Total ............................... $206,299 171 (628) 205,842 ======== ======== ======== ======== 1996 (in thousands) Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value U.S. Government and agency securities $ 43,968 69 (264) 43,773 Mortgage-backed securities .......... 156,191 705 (635) 156,261 State and political subdivisions .... 500 5 -- 505 -------- -------- -------- -------- Total ............................... $200,659 779 (899) 200,539 ======== ======== ======== ========
The amortized cost and estimated fair value of debt securities available for sale at December 31, 1997, by contractual maturity, are shown below (mortgage backed securities are included by final contractual maturity). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Estimated cost fair value (In thousands) Due within one year ................... $ 3,998 3,998 Due after one year through five years . 13,755 13,712 Due after five years through ten years 36,633 36,591 Due after ten years ................... 151,879 151,507 -------- -------- Totals ...................... $206,265 205,808 ======== ======== 36 (4) Securities Available for Sale, Continued The following table sets forth information with regard to sales transactions of securities available for sale: 1997 1996 1995 ---- ---- ---- (In thousands) Proceeds from sale of securities .... $174,010 34,469 18,372 Gross realized gains from sale of securities ...................... 1,017 14 319 Gross realized losses from sale of securities ...................... 242 116 94 Securities available for sale carried at $111,153,000 on December 31, 1997 and at $113,828,000 on December 31, 1996 were pledged to secure repurchase agreements and other purposes. (5) Loans Receivable, Net Loans receivable consist of the following at December 31, 1997 and 1996: December 31, 1997 1996 (In thousands) Loans secured by real estate: 1 - 4 Family ................................ $ 189,666 158,182 Home equity ................................. 30,246 22,817 Multi family ................................ 4,152 4,724 Non-residential ............................. 26,585 29,947 Construction ................................ 2,081 2,234 --------- --------- Total loans secured by real estate .. 252,730 217,904 --------- --------- Other Loans: Consumer loans: Recreational vehicles ..................... 6,775 9,416 Auto loans ................................ 16,237 12,417 Other secured ............................. 1,781 1,866 Unsecured ................................. 1,847 1,445 Manufactured homes ........................ 494 620 --------- --------- Total consumer loans .................. 27,134 25,764 --------- --------- Commercial loans: Secured ................................... 3,233 6,199 Unsecured ................................. 471 620 --------- --------- Total commercial loans ................ 3,704 6,819 --------- --------- 283,568 250,487 --------- --------- Allowance for loan losses ................... (3,807) (3,438) Deferred costs, net of deferred fees and discounts ................................... 1,362 1,045 --------- --------- Total loans receivable, net $ 281,123 248,094 ========= ========= 37 (5) Loans Receivable, Net, Continued A summary of the allowance for loan losses is as follows: December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Balance at beginning of year .......... $ 3,438 2,647 2,235 Provision charged to operations ....... 1,088 9,450 1,522 Charge-offs ........................... (1,214) (8,718) (1,216) Recoveries ............................ 495 59 106 ------- ------- ------- Balance at end of year ................ $ 3,807 3,438 2,647 ======= ======= ======= The following table sets forth the information with regard to non-performing loans: December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Loans in a non-accrual status ......... $1,876 3,123 4,499 Loans contractually past due 90 days or more and still accruing interest .. 451 725 261 Restructured loans .................... 931 1,031 4,035 ------ ------ ------ Total non-performing loans ............ $3,258 4,879 8,795 ====== ====== ====== Accumulated interest on the above non-performing loans of $276,848, $375,459 and $876,524 was not recognized as income in 1997, 1996 and 1995, respectively. Approximately $192,000, $229,000 and $482,000 of interest on restructured and non-accrual loans was collected and recognized as income in 1997, 1996 and 1995, respectively. At December 31, 1997, the recorded investment in loans that are considered to be impaired totaled $769,095 for which the related allowance for loan losses is $337,865. At December 31, 1996 the recorded investment in loans that were considered to be impaired was $2,638,780 for which the related allowance for loan losses was $1,182,838. As of December 31, 1997 and 1996, there were no impaired loans which did not have an allowance for loan losses. The average recorded investment in impaired loans during the years ended December 31, 1997, 1996 and 1995 was approximately $1,445,000, $6,918,000, and $4,106,000, respectively. For the years ended December 31, 1997, 1996, and 1995, the Company recognized interest income on those impaired loans of $14,768, $110,470 and $61,278, respectively, which included $0, $13,633 and $2,787, respectively, of interest income recognized using the cash basis method of income recognition. Certain directors and executive officers of the Company were customers of and had other transactions with the Company in the ordinary course of business. Loans to these parties were made in the ordinary course of business at the Company's normal credit terms, including interest rate and collateralization. The aggregate of such loans totaled approximately $1,021,308 and $887,696 at December 31, 1997 and 1996, respectively. There were $182,750 in advances to the directors and executive officers during the year ended December 31, 1997. Total payments made on these loans were $49,138 during the year ended December 31, 1997. 38 (6) Accrued Interest Receivable Accrued interest receivable consists of the following: December 31, 1997 1996 (In thousands) Loans .................................... $1,347 1,260 Securities available for sale ............ 2,387 1,941 ------ ------ $3,734 3,201 ====== ====== (7) Premises and Equipment A summary of premises and equipment is as follows: December 31, 1997 1996 (In thousands) Banking house and land ................... $2,362 2,362 Leasehold improvements ................... 1,100 700 Furniture, fixtures and equipment ........ 3,737 3,114 Construction in progress ................. -- 80 ------ ------ 7,199 6,256 Less accumulated depreciation and amortization ........................... (4,078) (3,472) ------- ------ $3,121 2,784 ======= ====== Amounts charged to depreciation expense were $605,933, $500,833 and $438,057 for the years ended December 31, 1997, 1996 and 1995. (8) Deposits Deposits are summarized as follows: December 31, 1997 1996 (In thousands) Regular savings accounts (3.00% at December 31, 1997 and 1996) ...... $ 97,591 99,569 Certificates of deposit: 3.01 to 4.00% ................... 1,011 994 4.01 to 5.00% ................... 6,688 42,824 5.01 to 6.00% ................... 154,377 88,042 6.01 to 7.00% ................... 10,801 11,330 7.01 to 8.00% ................... 10,455 8,742 -------- -------- 183,332 151,932 -------- -------- Money market accounts (2.96% at December 31, 1997 and 2.86% at December 31, 1996) .............. 6,877 7,433 NOW accounts (2.75% at December 31, 1997 and 1996) .............. 22,718 18,875 Demand accounts .................. 22,747 20,273 -------- -------- Total deposits................... $333,265 298,082 ======== ======== 39 (8) Deposits, Continued The approximate amount of contractual maturities of certificates of deposit for the years subsequent to December 31, 1997 are as follows: (In thousands) Years ended December 31, 1998 $ 139,103 1999 22,019 2000 16,163 2001 3,688 2002 2,359 --------- $ 183,332 ========= The aggregate amount of certificates of deposits with a balance of $100,000 or more were approximately $17.9 million and $11.2 million at December 31, 1997 and 1996, respectively. Interest expense on deposits for the years ended December 31, 1997, 1996 and 1995, is summarized as follows: 1997 1996 1995 (In thousands) Regular savings accounts ........ $ 3,016 3,162 3,300 Certificate of deposits ......... 9,882 8,492 8,272 NOW accounts .................... 543 527 511 Money market accounts ........... 204 243 285 Common stock subscriptions escrow -- -- 79 ------- ------- ------- Total interest expense .......... $13,645 12,424 12,447 ======= ======= ======= (9) Borrowed Funds At December 31, 1997, the Company had a $24.2 million overnight line of credit and a $24.2 million 30 day line of credit with the FHLB of New York. As of December 31, 1997 the Company had taken $12.3 million in advances on these lines of credit. At December 31, 1996, the Company had a $22.4 million overnight line of credit and a $22.4 million 30 day line of credit with the FHLB. As of December 31, 1996 the Company had taken $6.0 million in advances on these lines of credit. Under the terms of a blanket collateral agreement with the FHLB, these outstanding balances are collateralized by certain qualifying assets not otherwise pledged (primarily first mortgage loans). The Company enters into sales of securities under repurchase agreements. Such agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities on the Company's consolidated statements of financial condition. During the period of such agreements, the underlying securities are transferred to a third party custodian's account that explicitly recognizes the Company's interest in the securities. 40 (9) Borrowed Funds, Continued The following sets forth certain information related to the Company's borrowings, consisting of FHLB advances and securities sold under agreements to repurchase: December 31, 1997 1996 (In thousands) FHLB advances ...................... $ 12,300 6,000 Securities sold under agreements to repurchase ........................ 99,250 102,780 ------- -------- Total borrowings ................... $111,550 108,780 ======== ======== Weighted average interest rate of FHLB advances ...................... 6.38% 6.88% ======== ======== Weighted average interest rate of securities sold under agreements to repurchase ........................ 6.04% 5.96% ======== ======== The following table sets forth the maturities of securities sold under agreements to repurchase, including the weighted average interest rates, and the fair value of the securities sold under the repurchase agreements as of December 31, 1997: Weighted Fair Value Repurchase Average of Securities Liability Interest Rate Sold (In thousands) Due after 30 days up to 90 days $ 2,600 5.91% $ 5,402 Due after 91 days up to 365 days 53,650 6.21% 58,370 Due after 365 days ............. 43,000 5.84% 47,381 -------- ---- -------- $ 99,250 6.04% $111,153 ======== ==== ======== The following table sets forth the maximum month-end balances and average balances of FHLB advances and securities sold under agreements to repurchase for the periods indicated. Years Ended December 31, 1997 1996 1995 (In thousands) Maximum Month-end Balance: FHLB advances ..................... $ 14,400 28,000 15,000 ========== ======= ====== Securities sold under agreements to repurchase .................... 99,410 102,780 4,000 ========== ======= ====== Average Balance: FHLB advances ..................... 3,667 9,757 3,922 ========== ======= ====== Securities sold under agreements to repurchase .................... 95,261 57,815 958 ========== ======= ====== Weighted average interest rate of FHLB advances .................... 5.43% 5.35% 6.06% ========== ======= ====== Weighted average interest rate of securities sold under agreement to repurchase ....................... 6.01% 5.94% 6.30% ========== ======= ====== 41 (10) Income Taxes The components of income tax expense (benefit) are as follows: December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Current tax (benefit) expense: Federal .......................... $ 1,735 (1,421) 955 State ............................ 270 1 208 ------- ------- ------- 2,005 (1,420) 1,163 Deferred tax benefit .............. (312) (509) (577) ------- ------- ------- Total income tax expense (benefit) $ 1,693 (1,929) 586 ======= ======= ======= Actual tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 differs from expected tax expense (benefit), computed by applying the Federal corporate tax rate of 34% to income before taxes as follows: December 31, 1997 1996 1995 ---- ---- ---- (In thousands) Expected tax expense (benefit) ... $ 1,514 (1,960) $ 491 State taxes, net of Federal income tax benefit ..................... 178 1 103 Other items ...................... 1 30 (8) ------- ------- ------- $ 1,693 (1,929) $ 586 ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 are presented below: Temporary Temporary Deductible Taxable Differences Differences (In thousands) Reserves for loan losses .................. $1,508 216 Nonqualified deferred compensation ........ 227 -- Loan accounting differences ............... 409 -- Property and equipment .................... -- 113 Prepaid expenses .......................... -- 243 Other items ............................... 113 -- ------ ------ 2,257 572 ===== ====== Deferred tax liability .................... 572 ------ Net deferred tax asset at December 31, 1997 1,685 Net deferred tax asset at January 1, 1997 . 1,373 ------ Deferred tax benefit for the year ended December 31, 1997 ........................ $ 312 ====== 42 (10) Income Taxes, Continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 are presented below: Temporary Temporary Deductible Taxable Differences Differences (In thousands) Reserves for loan losses .................. $1,358 65 Nonqualified deferred compensation ........ 233 -- Loan accounting differences ............... 236 -- Property and equipment .................... -- 113 Prepaid expenses .......................... -- 330 Other items ............................... 54 -- ------ ------ 1,881 508 ===== ====== Deferred tax liability .................... 508 ------ Net deferred tax asset at December 31, 1996 1,373 Net deferred tax asset at January 1, 1996 . 864 ------ Deferred tax benefit for the year ended December 31, 1996 ........................ $ 509 ====== In addition to the deferred tax items described in the preceding table, the Company also has a deferred tax asset of approximately $183,000 and $40,000 at December 31, 1997 and 1996, respectively, relating to the unrealized loss on securities available for sale. There was no valuation allowance or change in the valuation allowance for deferred tax assets as of and for the years ended December 31, 1997 and 1996. Management believes that the realization of the recognized net deferred tax asset at December 31, 1997 and 1996 is more likely than not, based on historical taxable income, available tax planning strategies, and expectations as to future taxable income. As a thrift institution, the Bank is subject to special provisions in the Federal and New York State tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. These deductions historically have been determined using methods based on loss experience or a percentage of taxable income. Tax bad debt reserves are maintained equal to the excess of allowable deductions over actual bad debt losses and other reserve reductions. These reserves consist of a defined base-year amount, plus additional amounts ("excess reserves") accumulated after the base year. Deferred tax liabilities are recognized with respect to such excess reserves, as well as any portion of the base-year amount which is expected to become taxable (or "recaptured") in the foreseeable future. 43 (10) Income Taxes, Continued Certain amendments to the Federal and New York State tax laws regarding bad debt deductions were enacted in July and August 1996. The Federal amendments include elimination of the percentage of taxable income method for tax years beginning after December 31, 1995, and imposition of a requirement to recapture into taxable income (over a period of approximately six years) the bad debt reserves in excess of the base-year amounts. The Bank previously established, and will continue to maintain, a deferred tax liability with respect to such excess Federal reserves. The New York State amendments redesignate the Bank's state bad debt reserves at December 31, 1995 as the base-year amount and also provide for future additions to the base-year reserve using the percentage of taxable income method. Deferred tax liabilities have not been recognized with respect to the Federal base-year reserve of approximately $3.3 million at December 31, 1997 and the state base-year reserve of approximately $5.9 million at December 31, 1997, since the Bank does not expect that these amounts will become taxable in the foreseeable future. Under New York State tax law, as amended, events that would result in taxation of these reserves include the failure of the Bank to maintain a specified qualifying assets ratio or meet other thrift definition tests for tax purposes. The unrecognized deferred tax liability at December 31, 1997 with respect to the Federal base-year reserve was approximately $1.1 million. The unrecognized deferred tax liability at December 31, 1997 with respect to the state base-year reserve was approximately $350 thousand (net of Federal benefit). (11) Employee Benefit Plans (a) Pension Plan The Bank maintains a non-contributory pension plan with the RSI Retirement Trust, covering substantially all employees aged 21 and over with 1 year of service with the exception of hourly paid employees. Benefits are computed as two percent of the highest three year average annual earnings multiplied by credited service up to a maximum of 35 years. The amounts contributed to the plan are determined annually on the basis of (a) the maximum amount that can be deducted for Federal income tax purposes or (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Assets of the plan are primarily invested in pooled equity funds and fixed income funds. 44 (11) Employee Benefit Plans, Continued The following table sets forth the plan's funded status and amounts recognized in the Company's consolidated statements of financial condition at December 31, 1997 and 1996:
1997 1996 (In thousands) Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $3.7 million in 1997 and $3.1 million in 1996 ....................................... $(3,805) (3,324) ======= ======= Projected benefit obligation ........................... (4,508) (4,060) Plan assets at fair value .............................. 5,994 5,130 ------- ------- Projected plan assets in excess of benefit obligation .. 1,486 1,070 Unrecognized net gain .................................. (806) (301) Unrecognized prior service cost ........................ 12 15 Unrecognized net asset being recognized over 10.71 years (85) (132) ------- ------- Prepaid pension cost ................................... $ 607 652 ======= ======= Net pension costs recognized in the consolidated statements of income for the years ended December 31, 1997, 1996 and 1995 are Summarized as follows: 1997 1996 1995 ---- ---- ---- (In thousands) Components of net pension cost: Service cost - benefits earned during the period ...... $ 183 187 141 Interest cost on estimated projected benefit obligation 304 288 268 Actual return on plan assets ........................... (1,104) (627) (783) Net amortization and deferral .......................... 663 222 437 ------- ------- ------- Net pension cost ....................................... $ 46 70 63 ======= ======= =======
Significant assumptions used in determining the actuarial present value of the projected benefit obligation are as follows: 1997 1996 1995 ---- ---- ---- Weighted average discount rate .... 7.25% 7.50% 7.50% Increase in future compensation ... 5.00% 5.50% 5.50% Expected long term rate of return . 8.00% 8.00% 8.00% 45 (11) Employee Benefit Plans, Continued (b) 401(k) Savings Plan The Bank maintains a defined contribution 401(k) savings plan, covering all full time employees who have attained age 21 and have completed one year of employment. The Bank had matched 50% of employee contributions that were less than or equal to 3% of the employee's salary. As of March 1, 1997, the Bank no longer matched employee contributions. Total expense recorded during 1997, 1996 and 1995 was $5,321, $37,671 and $33,181, respectively. (c) Employee Stock Ownership Plan As part of the conversion discussed in note 2, an employee stock ownership plan (ESOP) was established to provide substantially all employees of the Company the opportunity to become shareholders. The ESOP borrowed $4.3 million from the Company and used the funds to purchase 433,780 shares of the common stock of the Company issued in the conversion. The loan will be repaid principally from the Company's discretionary contributions to the ESOP over a period of ten years. At December 31, 1997 and 1996, the loan had an outstanding balance of $3.5 million and $3.9 million, respectively. The loan obligation is reduced by the amount of loan repayments made by the ESOP. Shares are released for allocation and unearned compensation is amortized over the loan repayment period based on the amount of principal and interest paid on the loan as a percentage of the total principal and interest to be paid on the loan over its entire term. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants on the basis of compensation in the year of allocation. The Company accounts for the ESOP in accordance with the American Institute of Certified Public Accountants' Statement of Position No. 93-6 "Employees' Accounting For Stock Ownership Plans" (SOP 93-6). Accordingly, the shares pledged as collateral are reported as unallocated ESOP shares in shareholders' equity. As shares are released from collateral, the Company reports compensation expense equal to the average market price of the shares (during the applicable service period), and the shares become outstanding for earnings per share computations. Unallocated ESOP shares are not included in the earnings per share computations. The Company recorded approximately $766,000 of compensation expense under the ESOP during the year ended December 31, 1997 and recorded $527,000 of compensation expense for the year ended December 31, 1996. The ESOP shares as of December 31, 1997 were as follows: Allocated shares ............. 52,964 Shares released for allocation 50,561 Unallocated shares ........... 330,255 ------- 433,780 ======= Market value of unallocated shares at December 31, 1997 $6,192,281 ========== 46 (11) Employee Benefit Plans, Continued (d) Stock Option Plan On May 23, 1997, the Company's shareholders approved the 1997 Stock Option and Incentive Plan ("Stock Option Plan"). The primary objective of the Stock Option Plan is to provide officers and directors with a proprietary interest in the Company as an incentive to encourage such persons to remain with the Company. The Stock Option Plan provides for awards in the form of stock options, stock appreciation rights, and limited stock appreciation rights. Under the Stock Option Plan, 542,225 authorized but unissued shares are reserved for issuance upon option exercises. The Company also has the alternative to fund the Stock Option Plan with treasury stock. Options under the plan may be either non-qualified stock options or incentive stock options. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair value on the date of grant. Options expire no later than ten years following the date of grant. Upon shareholder ratification of the Stock Option Plan, options to purchase 373,974 shares were awarded at an exercise price of $13.75 per share. These shares have a ten-year term and vest at a rate of 25% per year from their respective grant dates. No options were exercised, cancelled or forfeited during the year ended December 31, 1997. As of December 31, 1997 no options were vested and the weighted average remaining contractual life of the options was approximately 9.6 years. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its Stock Option Plan. Accordingly, no compensation cost has been recognized for the Stock Option Plan. SFAS No. 123 requires companies not using a fair value based method of accounting for employee stock options or similar plans, to provide pro forma disclosures of net income and earnings per share as if that method of accounting had been applied. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997: dividend yield of 1.32%; expected volatility of 40.90%; risk free interest rate of 5.48% and expected lives of 5 years. The estimated fair value of the options granted in 1997 was $5.30. Pro-forma disclosures for the Company for the year ended December 31, 1997 are as follows: (in thousands, except per share data) Net Income: As reported $ 2,760 Pro-forma 2,578 Earnings per Share: Basic EPS as reported $ 0.70 Pro-forma 0.65 Diluted EPS as reported 0.69 Pro-forma 0.65 47 (11) Employee Benefit Plans, Continued The full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro-forma net income amounts presented above because compensation cost is reflected over the options' vesting period of four years. Because the Company's employee stock options have characteristics significantly different from those of traded options for which the Black-Scholes model was developed, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models, in management's opinion, do not necessarily provide a reliable single measure of the fair value of its employee stock options. (e) Recognition and Retention Plan On May 23, 1997, the Company's shareholders approved the Ambanc Holding Co., Inc. Recognition and Retention Plan (RRP). The purpose of the plan is to promote the long-term interests of the Company and its shareholders by providing a stock based compensation program to attract and retain officers and directors. Under the RRP, 216,890 shares of authorized but unissued shares, are reserved for issuance under the plan. The Company also has the alternative to fund the RRP with Treasury stock. On May 23, 1997, 131,285 shares were awarded under the RRP. The shares vest in four equal installments commencing one year from the date of grant. The fair market value of the shares awarded under the plan was $1.8 million at the grant date and is being amortized to compensation expense on a straight line basis over the four year vesting period. Compensation expense of $272,000 was recorded during 1997 with the remaining unearned compensation cost of $1.5 million shown as a reduction of shareholder's equity at December 31, 1997. (f) Post Retirement Benefits Certain postretirement health insurance benefits have been committed to a closed group of eleven retired employees. The Company has formally adopted measures to not offer these benefits to any additional employees. The annual health insurance increase and discount rate used to calculate the transition obligation were 6% and 8.5%, respectively. There are no plan assets. The estimated transition obligation at January 1, 1995 was $260,000. The net periodic post retirement benefit costs in both 1997 and 1996 were approximately $26,000. (g) Directors' Deferred Compensation Agreements Under the Directors' Deferred Compensation Agreements, the Company's directors were eligible to elect to defer fees for services that were otherwise currently payable. Fees were deferred over a period of five years. The Company utilized the deferred fees to purchase life insurance policies to fund the benefits on each director with the Bank listed as the beneficiary. Each director participating in such agreements deferred their fees over a five year period with a set amount established as an annual payout over a ten year period after five years from the date of the agreement or upon reaching the age of 65, whichever is later. The present value of the remaining installments due under these agreements is included in other liabilities in the consolidated balance sheets. The cash surrender value of the life insurance policies is included in other assets in the consolidated balance sheets. 48 (12) Earnings Per Share Calculation of basic earnings per share (basic EPS) and diluted earnings per share (diluted EPS) is as follows:
Weighted Net Average Per Share Income (loss) Shares Amount (In thousands, except share and per share data) For Year Ended December 31, 1997 Basic EPS Income available to common shareholders $ 2,760 3,940,867 0.70 Effect of Dilutive Securities Stock Options ......................... 24,285 RRP shares ............................ 16,374 Diluted EPS Income available to common shareholders plus assumed conversions ............. 2,760 3,981,526 0.69 ========= ========= ==== For Year Ended December 31, 1996 Basic EPS Income available to common shareholders $ (3,836) 4,761,393 (0.81) Effect of Dilutive Securities No dilutive securities during 1996 Diluted EPS Income available to common shareholders (3,836) 4,761,393 (0.81) ========= ========= ====
The Bank converted from a mutual form to a stock institution in December 1995, and the Holding Company completed its initial public offering on December 26, 1995, at which time the Holding Company purchased all of the outstanding stock of the Bank. The Company did not report EPS for 1995 and therefore it is excluded from this footnote. (13) Commitments and Contingent Liabilities (a) Legal Proceedings The Company and its subsidiaries may, from time to time, be defendants in legal proceedings relating to the conduct of their business. In the best judgments of management, the consolidated financial position of the Company and its subsidiaries will not be affected materially by the outcome of any pending legal proceedings. 49 (13) Commitments and Contingent Liabilities, Continued The Bank was a defendant in an action by the current owners of F. H. Doherty Associates, Inc. (the Bank sold F. H. Doherty Associates, Inc. to the current owners), seeking to rescind the sale of stock, recover any additional capital contributions made by the plaintiffs, punitive damages in the amount of $1,000,000, and indemnification on a potential claim in the amount of $67,500 resulting from a subsequent transfer of a portion of the stock by plaintiffs to a third party. During 1996, the Bank stipulated to a settlement and agreed to pay $262,500 to the plaintiffs. The Bank charged $175,000 against the allowance for probable loss which was established for this matter in 1995. The remaining $87,500 was charged to 1996 operations. (b) Nationar Receivables On February 6, 1995, the Superintendent of Banks for the State of New York ("Superintendent") seized Nationar, a check-clearing and trust company, freezing all of Nationar's assets. On that date, the Bank had: a demand account balance of $233,000, and a Nationar debenture of $100,000 collateralized by a $1,000,000 investment security. On September 26, 1995, the Company entered into a standby letter of credit with the superintendent for $1,086,250 which replaced the $1,000,000 security that was pledged as collateral for the capital debenture bonds. As of December 31, 1995, the Company charged off the Nationar debenture of $100,000 and established an additional reserve of $105,000 for potential losses of the demand account and potential losses related to the stand by letter of credit. During 1996 the Company received a cash payment of $233,000 from the Superintendent relating to its Nationar claim. In addition, on June 10, 1996 the Company issued a new standby letter of credit for $150,000 to the Superintendent, and the initial standby letter of credit was canceled. Concurrent with the new standby letter of credit, the Company was required to pay $58,000 under the original standby letter of credit agreement. This amount was charged against the reserve the Company had previously established. Subsequently, the Company was informed by the Superintendent's Office that the $150,000 standby letter of credit was canceled and that the Company will have no further liability in connection with its agreement with the Superintendent. During 1997, the Bank received approximately $45,000 from the Superintendent of Banks as a partial recovery of the amounts previously charged off and is included in Other Income. (c) Lease Commitments The Company leases office space and equipment under noncancelable operating leases. Minimum rental commitments under these leases are as follows: Years ended December 31, (In thousands) 1998 $ 330 1999 266 2000 212 2001 182 2002 128 2003 and thereafter 1,010 ------- $ 2,128 ======= 50 (13) Commitments and Contingent Liabilities, Continued Amounts charged to rent expense were approximately $315,000, $225,000 and $203,000 for the years ended December 31, 1997, 1996 and 1995. (d) Off-Balance Sheet Financing and Concentrations of Credit The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the consolidated statement of financial condition. The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, unused lines of credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Unless otherwise noted, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral, if any, required by the Company upon the extension of credit is based on management's credit evaluation of the customer. Mortgage commitments are secured by a first lien on real estate. Collateral on extensions of credit for commercial loans varies but may include property, plant and equipment, and income producing commercial property. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support borrowing arrangements. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. 51 (13) Commitments and Contingent Liabilities, Continued Contract amounts of financial instruments that represent the future extension of credit as of December 31, 1997 and 1996 at fixed and variable interest rates are as follows: 1997 Fixed Variable Total (In thousands) Financial instruments whose contract amounts represent Credit risk: Commitments to extend credit $3,797 393 4,190 Unused lines of credit ..... 1,025 4,336 5,361 Standby letters of credit .. -- 100 100 ------ ------ ------ $4,822 4,829 9,651 ====== ====== ====== 1996 Fixed Variable Total (In thousands) Financial instruments whose contract amounts represent Credit risk: Commitments to extend credit $1,076 826 1,902 Unused lines of credit ..... 914 4,981 5,895 Standby letters of credit .. -- 100 100 ------ ------ ------ $1,990 5,907 7,897 ====== ====== ====== The range of interest on fixed rate commitments was 5.50% to 8.75% at December 31, 1997 and 7.0% to 8.5% at December 31, 1996. The range of interest on adjustable rate commitments was 6.75% to 7.25% and 5.5% to 9.75% at December 31, 1997 and 1996, respectively. (14) Fair Values A financial instrument is defined as cash, evidence of ownership interest in an entity, or a contract that imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity or to exchange other financial instruments on potentially unfavorable terms with a second entity and conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity or to exchange other financial instruments on potentially favorable terms with the first entity. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected net cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. 52 (14) Fair Values, Continued Fair value estimates are based on existing on-and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax asset and property, plant, and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates of fair value. In addition there are significant intangible assets that the fair value estimates do not recognize, such as the value of "core deposits," the Company's branch network and other items generally referred to as "goodwill." The specific estimation methods and assumptions used can have a substantial impact on the resulting fair values ascribed to financial instruments. The following is a brief summary of the significant methods and assumptions used: Securities Available for Sale The carrying amounts for short-term investments approximate fair value because they mature in 90 days or less and do not present unanticipated credit concerns. The fair value of longer-term investments and mortgage-backed securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. See note 4 for detail disclosure of securities available for sale. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as single family loans, consumer loans and commercial loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans, is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the contractual term of the loans to maturity taking into consideration certain prepayment assumptions. Fair value for significant non-performing loans is based on recent external appraisals and discounting of cash flows. Estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. 53 (14) Fair Values, Continued Deposit Liabilities The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, passbook accounts, NOW accounts and money market accounts must be stated at the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. Borrowed Funds The fair value of borrowed funds due in 90 days or less, or that reprice in 90 days or less is estimated to approximate the carrying amounts. The fair value of longer term borrowed funds is estimated by discounting scheduled cash flows based on current rates available to the Company for similar types of borrowing arrangements. Other Items The following items are considered to have a fair value equal to book value due to the nature of the financial instrument and the period within which it will be settled or repriced: cash and due from banks, federal funds sold, accrued interest receivable, investments required by law, due to broker, advances from borrowers for taxes and insurance, and accrued interest payable. 54 (14) Fair Values, Continued Table of Financial Instruments The carrying values and estimated fair values of financial instruments as of December 31, 1997 and 1996 were as follows:
December 31, 1997 December 31, 1996 ----------------------- ---------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value (in thousands) Financial assets: Cash and cash equivalents ..... $ 10,225 10,225 10,887 10,887 Securities available for sale . 205,842 205,842 200,539 200,539 Federal Home Loan Bank of New York stock ............... 3,291 3,291 2,029 2,029 Loans ......................... 284,930 280,765 251,532 249,665 Less: Allowance for loan losses (3,807) -- (3,438) -- --------- --------- --------- --------- Net loans ............. 281,123 280,765 248,094 249,665 Accrued interest receivable ... 3,734 3,734 3,201 3,201 Financial liabilities: Deposits: Demand, passbook, money market, and NOW accounts . 149,933 149,933 146,150 146,150 Certificates of deposit ... 183,332 184,208 151,932 152,797 Borrowed funds ................ 111,550 111,006 108,780 108,806 Accrued interest payable ...... 819 819 1,077 1,077 Advances from borrowers for tax and insurance ........ 1,902 1,902 1,703 1,703
Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. Fees, such as these are not a major part of the Company's business and in the Company's business territory are not a "normal business practice." Therefore, based upon the above facts the Company believes that book value equals fair value and the amounts are not significant. 55 (15) Regulatory Capital Requirements OTS capital regulations require savings institutions to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 1997, the Bank was required to maintain a minimum ratio of tangible capital to total tangible assets of 1.5%; a minimum leverage ratio of core (Tier 1) capital to total adjusted tangible assets of 3.0% to 4.0%; and a minimum ratio of total capital (core capital and supplementary capital) to risk-weighted assets of 8.0%, of which 4.0% must be core (Tier 1) capital. Under the prompt corrective action regulations, the OTS is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on an institution's financial statements. The regulations establish a framework for the classification of savings institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally, an institution is considered well capitalized if it has a core (Tier 1) capital ratio of at least 5.0% (based on average total assets); a core (Tier 1) risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors. Management believes that, as of December 31, 1997 and 1996, the Bank meets all capital adequacy requirements to which it is subject. Further, the most recent OTS notification categorized the Bank as a well-capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. 56 (15) Capital Requirements, Continued The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 1997 and 1996. Although the OTS capital regulations apply at the Bank level only, the Company's consolidated capital amounts and ratios are also presented. The OTS does not have a holding company capital requirement.
December 31, 1997 December 31, 1996 Actual Actual Amount Ratio Amount Ratio Bank Tangible capital $ 49,722 9.88% 46,225 10.08% Tier 1 (core) capital 49,722 9.88 46,225 10.08 Risk-based capital: Tier 1 49,722 23.42 46,225 23.35 Total 52,390 24.68 48,712 24.61 Actual Actual Amount Ratio Amount Ratio Consolidated Tangible capital $ 61,476 11.99% 61,598 13.04% Tier 1 (core) capital 61,476 11.99 61,598 13.04 Risk-based capital: Tier 1 61,476 28.79 61,598 30.66 Total 64,159 30.04 64,098 31.90
57 (16) Holding Company Financial Information The Holding Company began operations on December 26, 1995 in conjunction with the Bank's mutual-to-stock conversion and the Company's initial public offering of its common stock. The Holding Company's statements of financial condition as of December 31, 1997 and 1996 and related statements of income and cash flows for the years ended December 31, 1997, 1996 and for the period from inception (December 26, 1995) to December 31, 1995 are as follows (the Holding Company did not have any income or expenses for the period from December 26, 1995 to December 31, 1995): Statements of Financial Condition At December 31, 1997 1996 (in thousands) Assets Cash and cash equivalents ...................... $ 1,046 469 Securities available for sale* ................. 9,400 13,956 Loan receivable from subsidiary ................ 3,470 3,904 Accrued interest receivable .................... 115 163 Investment in subsidiary ....................... 49,467 46,312 Other assets ................................... 335 85 Total assets .......................... $63,833 64,889 ======= ======= Liabilities and Shareholders' Equity Liabilities: Security sold under agreement to repurchase**............................. $ 2,600 3,000 Other liabilities ........................ 30 371 ------- ------- Shareholders' Equity .......................... 61,203 61,518 ------- ------- Total liabilities and shareholders' equity .................. $63,833 64,889 ======= ======= * The Holding Company's securities available for sale consist of U.S. Government Agency and mortgage backed securities with a weighted average maturity of 3.0 years and 5.0 years at December 31, 1997 and 1996, respectively. ** Weighted average rate at December 31, 1997 and 1996 is 5.91% and 5.60% with a maturity date of February 20, 1998 and March 26, 1997, respectively. 58 (16) Holding Company Financial Information, Continued Statements of Income Years ended December 31, 1997 1996 1995 (in thousands) Interest income ........................ $ 868 1,128 -- Interest expense ....................... 170 2 -- ------ ------ ------ Net interest income ............... 698 1,126 -- Non interest expense ................... 646 309 -- ------ ------ ------ Income before income taxes and equity in undistributed earnings (loss) of subsidiary ......................... 52 817 -- ------ ------ ------ Income tax expense ..................... 21 328 -- ------ ------ ------ Income before equity in undistributed earnings (loss) of subsidiary ......... 31 489 -- Equity in undistributed (loss) earnings of subsidiary ......................... 2,729 (4,325) 857 ------ ------ ------ Net income (loss) ...................... $2,760 (3,836) 857 ====== ====== ====== 59 (16) Holding Company Financial Information, Continued
Statements of Cash Flows Years ended December 31, 1997 1996 1995 (in thousands) Cash flows from operating activities: Net income (loss) ............................. $ 2,760 (3,836) 857 Adjustment to reconcile net income (loss) to net cash (used by) provided by operating activities: Equity in undistributed loss (earnings) of subsidiary ................. (2,729) 4,325 (857) Net loss on sale and redemptions of securities available for sale ......... 153 -- -- RRP expense ............................... 272 -- -- (Decrease) increase in other liabilities .............................. (341) 371 -- Increase in accrued interest receivable and other assets .............. (274) (163) -- -------- -------- -------- Net cash (used by) provided by operating activities .............. (159) 697 -- -------- -------- -------- Cash flows from investing activities: Decrease (increase) in loans receivable from subsidiary .............................. 434 434 (4,338) Investment in common stock of subsidiary ...... -- -- (26,090) Purchases of securities available for sale .... (11,052) (19,985) -- Proceeds from principal paydowns and maturities of securities available for sale .. 8,159 3,984 -- Proceeds from sales of available for sale securities ................................... 7,515 1,795 -- -------- -------- -------- Net cash provided by (used in) investing activities .............. 5,056 (13,772) (30,428) -------- -------- -------- Cash flows from financing activities: Net (decrease) increase in borrowed funds ..... (400) 3,000 -- Net proceeds from issuance of common stock .... -- -- 52,180 Dividends paid ................................ (432) -- -- Purchase of treasury shares ................... (3,488) (11,208) -- -------- -------- -------- Net cash provided by (used in) financing activities .............. (4,320) (8,208) 52,180 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 577 (21,283) 21,752 Cash and cash equivalents: Beginning of period ........................... 469 21,752 -- -------- -------- -------- End of period ................................. $ 1,046 469 21,752 ======== ======== ======== These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto.
60 CORPORATE AND SHAREHOLDER INFORMATION Company and Bank Address 11 Division Street Amsterdam, New York 12010-4303 Telephone: (518) 842-7200 Fax: (518) 842-7500 Stock Price Information The Company's stock is traded on The Nasdaq National Market System under the symbol "AHCI". The table below shows the range of high and low bid prices of the Company's Common Stock during 1996 and 1997. The information set forth in the table below was provided by The Nasdaq Stock Market. Such information reflects interdealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. High Low High Low 1996 First Quarter 10.500 9.375 1997 First Quarter 14.875 11.125 1996 Second Quarter 10.000 9.375 1997 Second Quarter 10.000 12.500 1996 Third Quarter 10.625 9.500 1997 Third Quarter 16.625 15.125 1996 Fourth Quarter 11.750 10.000 1997 Fourth Quarter 19.750 15.375 For information regarding restriction on dividends, see Note 2 to the Notes to Consolidated Financial Statements. As of March 27, 1998, the Company had approximately 1,119 shareholders of record and 4,258,148 outstanding shares of Common Stock. Special Counsel Silver, Freedman & Taff, L.L.P. 1100 New York Avenue, N.W. Washington, D.C. 20005-3934 Telephone: (202) 414-6100 61(a) Investor Relations Shareholders, investors and analysts interested in additional information may contact: Harold A. Baylor, Jr., CFO Ambanc Holding Co., Inc. 11 Division Street Amsterdam, New York 12010-4303 Telephone: (518) 842-7200 Fax: (518) 842-1688 Annual Report on Form 10-K Copies of Ambanc Holding Co., Inc.'s Annual Report for year ended December 31, 1997 on Form 10-K filed with the Securities and Exchange Commission are available without charge to shareholders upon written request to: Investor Relations Ambanc Holding Co., Inc. 11 Division Street Amsterdam, New York 12010-4303 Annual Meeting The annual meeting of shareholders will be held at 10:00 a.m., New York time, on Friday, May 22, 1998 at the Best Western, located at 10 Market Street, Amsterdam, New York. Stock Transfer Agent and Registrar Ambanc Holding Co., Inc.'s transfer agent, American Stock Transfer & Trust, maintains all shareholder records and can assist with stock transfer and registration address changes, changes or corrections in social security or tax identification numbers and 1099 tax reporting questions. If you have questions, please contact the stock transfer agent at the address below: American Stock Transfer & Trust 40 Wall Street, 46th Floor New York, New York 10005 Telephone: (718) 921-8290 61(b) Amsterdam Savings Bank, FSB Offices Corporate 11 Division Street Amsterdam, N.Y. 12010 (518) 842-7200 Amsterdam Route 30N Amsterdam, N.Y. 12010 Price Chopper Supermarket Sanford Farms Plaza Amsterdam, N.Y. 12010 Ballston Spa Grand Union Plaza, Rte. 50 Ballston Spa, N.Y. 12020 Clifton Park Village Plaza Clifton Park, N.Y. 12065 Fort Plain 19 River Street Fort Plain, N.Y. 13339 Gloversville Arterial at Fifth Avenue Gloversville, N.Y. 12078 Latham Price Chopper Supermarket 873 New Loudon Road Latham, N.Y. 12110 Schenectady Price Chopper Supermarket 1640 Eastern Parkway Schenectady, N.Y. 12309 Saratoga Price Chopper Supermarket 115 Ballston Avenue Saratoga Springs, N.Y. 12866 Guilderland 5 New Karner Road Guilderland, N.Y. 12084 Wilton Price Chopper Supermarket Route 50 Saratoga Springs, N.Y. 12866 Operations Center 35 East Main Street Amsterdam, N.Y. 12010 62(a) DIRECTORS AND OFFICERS Board of Directors - ------------------ (Ambanc Holding Co., Inc. and Year appointed Amsterdam Savings Bank, FSB) to Bank Board Paul W. Baker, Chairman of the Board 1963 Robert J. Brittain, President and Chief Executive Officer 1988 Lauren T. Barnett, Barnett Agency, Inc. 1966 John J. Daly, Alpin Haus 1988 Robert J. Dunning D.D.S., Dentist 1972 Lionel H. Fallows, Retired, Lieutenant Colonel 1981 Marvin R. LeRoy, Jr., Alzheimers Association, Northeastern NY Chapter 1996 Charles S. Pedersen, Independent Manufacturers' Representative 1977 Carl A. Schmidt, Jr., Sofco, Inc. 1974 William A. Wilde, Jr., Amsterdam Printing and Litho Corp. 1966 Executive Officers of Ambanc Holding Co., Inc. - ---------------------------------------------- Robert J. Brittain President/Chief Executive Officer Harold A. Baylor, Jr. Vice President/Treasurer/Chief Financial Officer Robert Kelly Vice President/General Counsel/Secretary Executive Officers of Amsterdam Savings Bank, FSB - ------------------------------------------------- Robert J. Brittain President/Chief Executive Officer Harold A. Baylor, Jr. Vice President/Treasurer/Chief Financial Officer Robert Kelly Vice President/General Counsel/Secretary Nancy S. Virkler Vice President of Operations Richard C. Edel Vice President Cynthia M. Proper Vice President/Director of Lending 62(b) EX-21 3 SUBSIDIARIES OF THE REGISTRANT Subsidiary Name State of Incorporation - ------------------------------- ---------------------- Amsterdam Savings Bank, FSB New York ASB Insurance Agency, Inc. New York EX-27 4 FDS -- 12/31/97
9 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1997 OF AMBANC HOLDING CO., INC. AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1000 12-mos DEC-31-1997 DEC-31-1997 5,627 4,598 0 0 205,842 0 0 284,930 3,807 510,444 333,265 68,550 4,427 43,000 0 0 54 61,148 510,444 21,011 13,957 598 35,566 13,645 19,654 15,912 1,088 775 12,197 4,453 4,453 0 0 2,760 0.70 0.69 3.36 1,876 445 931 5,813 3,438 1,214 495 3,807 3,807 0 0
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