-----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, GcUZHscPapn1d53q6w/tnNBSRoVlr99UXDtD0ufguhez5z1cJ/jJ6WZH4eHjNHkk n5tOpqLM5bfnlAFp9fP5SA== 0001000301-99-000004.txt : 19990409 0001000301-99-000004.hdr.sgml : 19990409 ACCESSION NUMBER: 0001000301-99-000004 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990407 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMBANC HOLDING CO INC CENTRAL INDEX KEY: 0001000301 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99584634 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, 1998 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 closing price of such stock on the Nasdaq National Market as of March 29, 1999, was $87,372,923. (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 29, 1999, there were issued and outstanding 5,315,463 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, 1998. Part III of Form 10-K - Portions of the Proxy Statement for the Annual Meeting of Shareholders for the year ended December 31, 1998. 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 Mohawk Community Bank (formerly known as 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. On November 16, 1998, the Company acquired AFSALA Bancorp. Inc. ("AFSALA") and its wholly owned subsidiary, Amsterdam Federal Bank. At the date of the merger, AFSALA had approximately $167.1 million in assets, $144.1 million in deposits, and $19.2 million in shareholders' equity. Pursuant to the merger agreement, AFSALA was merged with and into the Company, and Amsterdam Federal Bank was merged with and into the former Amsterdam Savings Bank, FSB. The combined bank now operates as one institution under the name "Mohawk Community Bank". Upon consummation of the merger, each share of AFSALA common stock was converted into the right to receive 1.07 shares of Ambanc common stock. Based on the 1,249,727 shares of AFSALA common stock issued and outstanding immediately prior to the merger, the Company issued 1,337,207 shares of common stock in the merger. Of the 1,337,207 shares issued in the merger, 1,327,086 were issued from the Company's treasury stock and 10,121 were newly-issued shares. At December 31, 1998, the Company had $735.5 million of assets and shareholders' equity of $85.9 million or 11.7% 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. Forward-looking Statements When used in this Annual Report on Form 10-K, in future filings by the Company with the Securities and Exchange Commision, in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected, including, but not limited to, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, the possibility that expected cost savings from the merger with AFSALA cannot be fully realized or realized within the expected time frame, the possiblity that costs or difficulties related to the integration of the businesses of the Company and AFSALA may be greater than expected and the possibility that revenues following the merger with AFSALA may be lower than expected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake - and specifically disclaims any obligation - - - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Market Area The Company's primary market area is comprised of Albany, Schenectady, Saratoga, Montgomery, Fulton, Chenango, Schoharie and Otsego Counties in New York, which are serviced through the Bank's main office, seventeen other banking offices and its operations center. 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 are expected to continue to have a negative effect on the economy in the Company's primary market area. 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. 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, 1998, the Company's net loan portfolio totaled $420.9 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 all loan relationships whose aggregate borrowings are in excess of $2,000,000. The Bank also has an Officer/Director Loan Committee which has authority to approve loans between $1,250,000 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, 1998, the maximum amount which the Bank could have loaned to any one borrower and the borrower's related entities was approximately $9.6 million. At such date, the Bank did not have any loans or series of loans to related borrowers with an outstanding balance in excess of this amount. At December 31, 1998, the Company's largest lending relationships consisted of a $1.4 million loan secured by a strip shopping center, and a $1.2 million loan secured by a motel. At December 31, 1998, 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, 1998. 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 the allowance for loan losses) as of the dates indicated.
December 31, -------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------ -------- ------ -------- ------ ------- ------- ------- ------ (Dollars in Thousands) Real Estate Loans: One- to four-family $273,523 64.53% $189,666 66.88% 158,182 63.15% $133,468 53.20% $140,418 53.63% Home Equity 83,949 19.80 30,246 10.67 22,817 9.11 17,519 6.98 16,715 6.39 Multi-family 4,165 0.98 4,152 1.46 4,724 1.88 8,176 3.26 8,718 3.33 Commercial 23,506 5.55 26,585 9.38 29,947 11.96 41,929 16.71 46,736 17.85 Construction 3,600 0.85 2,081 0.73 2,234 0.89 1,073 0.43 4,809 1.84 -------- ----- -------- ------ -------- ------ -------- ------ -------- ------- Total Real Estate 388,743 91.71 252,730 89.12 217,904 86.99 202,165 80.58 217,396 83.04 -------- ----- -------- ------ -------- ------ -------- ------ -------- ------- Other Loans: Consumer Loans Auto Loans 14,146 3.34 16,237 5.73 12,417 4.96 9,337 3.72 4,765 1.82 Recreational Vehicles 4,990 1.18 6,775 2.39 9,416 3.76 12,881 5.13 12,352 4.72 Manufactured Homes 385 0.09 494 0.17 620 0.25 13,484 5.37 15,161 5.79 Other Secured 6,289 1.48 1,781 0.63 1,866 0.74 2,020 0.81 2,065 0.79 Unsecured 3,712 0.88 1,847 0.65 1,445 0.58 1,299 0.52 1,398 0.53 -------- ----- ------- ------ -------- ------ -------- ------ ------- ------- Total Consumer Loans 29,522 6.96 27,134 9.57 25,764 10.29 39,021 15.55 35,741 13.65 -------- ----- ------- ------ -------- ------ -------- ------ ------- ------- Commercial Business Loans: Secured 5,101 1.20 3,233 1.14 6,199 2.47 9,346 3.73 8,332 3.18 Unsecured 508 0.12 471 0.17 620 0.25 350 0.14 339 0.13 -------- ----- ------- ------ -------- ------ -------- ------ ------- ------- Total Commercial Business Loans 5,609 1.32 3,704 1.31 6,819 2.72 9,696 3.87 8,671 3.31 -------- ----- ------- ------ -------- ------ -------- ------ ------- ------- Total Loan Portfolio, Gross 423,874 100.00% 283,568 100.00% 250,487 100.00% 250,882 100.00% 261,808 100.00% ====== ====== ====== ====== ====== Deferred costs, net of deferred fees and discounts Allowance for Loan Losses 1,950 1,362 1,045 1,756 2,008 (4,891) (3,807) (3,438) (2,647) (2,235) Total Loans Receivable, Net -------- -------- -------- -------- -------- $420,933 $281,123 $248,094 $249,991 $261,581 ======== ======== ======== ======== ========
The following table shows the composition of the Company's loan portfolio by fixed- and adjustable-rate at the dates indicated.
December 31, ------------------------------------------------------------------------------------------------ 1998 1997 1996 1995 1994 ------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent -------- ------- -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in thousands) Fixed Rate Loans: Real Estate: One- to four-family $204,184 48.17% $124,457 43.89% $111,841 44.65% $ 91,528 36.48% $ 91,299 34.87% Home Equity 77,553 18.30 23,099 8.14% 15,234 6.08% 8,405 3.35% 6,689 2.56% Commercial and Multi-family 6,201 1.46 2,723 0.96% 2,590 1.03% 2,633 1.05% 13,144 5.02% Construction 2,867 0.68 2,081 0.73% 1,840 0.73% 633 0.25% 4,809 1.84% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Total Real Estate 290,805 68.61 152,360 53.72% 131,505 52.49% 103,199 41.13% 115,941 44.29% Consumer 28,771 6.79 26,260 9.26% 25,110 10.03% 33,343 13.29% 28,027 10.70% Commercial Business 3,501 0.83 1,415 0.50% 3,124 1.24% 4,476 1.79% 3,480 1.33% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Total fixed-rate loans 323,077 76.22 180,035 63.48% 159,739 63.76% 141,018 56.21% 147,448 56.32% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Adjustable Rate Loans: Real Estate: One- to four-family 69,339 16.36 65,209 23.00% 46,341 18.50% 41,940 16.72% 49,119 18.76% Home Equity 6,396 1.51 7,147 2.52% 7,583 3.03% 9,114 3.63% 10,026 3.83% Commercial and Multi-family 21,470 5.07 28,014 9.88% 32,081 12.81% 47,472 18.92% 42,310 16.16% Construction 733 0.17 --- ----% 394 0.16% 440 0.18% --- ----% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Total Real Estate 97,938 23.10 100,370 35.40% 86,399 34.50% 98,966 39.45% 101,455 38.75% Consumer 751 0.18 874 0.31% 654 0.26% 5,678 2.26% 7,714 2.95% Commercial Business 2,108 0.17 2,289 0.81% 3,695 1.48% 5,220 2.08% 5,191 1.98% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Total adjustable-rate loans 100,797 23.78 103,533 36.52% 90,748 36.24% 109,864 43.79% 114,360 43.68% -------- ------ -------- ------- -------- ------- -------- ------- -------- ------- Total Loan Portfolio, Gross 423,874 100.00% 283,568 100.00% 250,487 100.00% 250,882 100.00% 261,808 100.00% ====== ====== ====== ====== ====== Deferred costs, net of deferred fees and discounts 1,950 1,362 1,045 1,756 2,008 Allowance for Loan Losses (4,891) (3,807) (3,438) (2,647) (2,235) -------- -------- -------- -------- -------- Total Loans Receivable, Net $420,933 $281,123 $248,094 $249,991 $261,581 ======== ======== ======== ======== ========
The following table illustrates the maturity of the Company's loan portfolio at December 31, 1998. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the interest rate changes. 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 Consumer Business Total -------------- -------------- -------------- -------------- -------------- -------------- Due During Periods Ending December 31, 1999 (1) $35,375 $11,749 $2,179 $3,620 $3,284 $56,207 2000 to 2003 57,268 12,905 1,421 16,786 918 89,298 2004 and beyond 264,829 3,017 --- 9,116 1,407 278,369 - - --------------------- (1) Includes demand loans, loans having no stated maturity and overdraft loans.
As of December 31, 1998, the total amount of loans due after December 31, 1999 which have fixed interest rates was $284.8 million, while the total amount of loans due after such date which have floating or adjustable interest rates was $82.9 million. One- to Four-Family Residential Real Estate Lending The Company's residential first mortgage loans consist primarily of one- to four-family, owner-occupied mortgage loans. At December 31, 1998, $273.5 million, or 64.5%,of the Company's gross loans consisted of one- to four-family residential first mortgage loans. Approximately 74.6% 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. 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 90%, 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. 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, 1998, the Company's construction loan portfolio totaled $3.6 million, or 0.9% of its gross loan portfolio. Substantially all of these construction loans were to individuals intending to occupy such residences and were secured by property located within the Company's primary market area. Although no construction loans were classified as non-performing as of December 31, 1998, 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, 1998, the Company had $83.9 million in home equity loans and lines of credit outstanding, with an additional $3.3 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. At December 31, 1998, the Company had $23.5 million and $4.2 million of commercial real estate and multi-family real estate loans, respectively, which represented 5.6% and 1.0%, respectively, of the Company's gross loan portfolio at that date. 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, 1998, the Company's largest multi-family or commercial real estate lending relationships consisted of a $1.4 million loan secured by a strip shopping center, and a $1.2 million loan secured by a motel. At December 31, 1998, $772,000, or 2.8% of the Company's multi-family and commercial real estate loan portfolio was non-performing. 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 $27.7 million at December 31, 1998, due primarily to the bulk sale of certain performing and non-performing loans in 1996. 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. For the reasons discussed below, 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, 1998 the Company's consumer loan portfolio totaled $29.5 million, or 7.0% of the gross loan portfolio. At December 31, 1998, 97.5% of the Company's consumer loans were fixed-rate loans and 2.5% were adjustable-rate loans. Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. Terms to maturity range up to 15 years for manufactured homes and certain RV's and up to 60 months for other secured and unsecured consumer loans. The Company offers both open- and closed-end credit. Open-end credit is extended through lines of credit that are generally tied to a checking account. These credit lines currently bear interest up to 18% and are generally limited to $10,000. The 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, 1998, automobile loans and RV loans (such as motor homes, boats, motorcycles, snowmobiles and other types of recreational vehicles) totaled $14.1 million and $5.0 million or 47.9% and 16.9% of the Company's total consumer loan portfolio, and 3.3% and 1.2% of its gross loan portfolio, respectively. Originations are generated primarily through advertising and lobby displays. The Company has also maintained 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's average retail value, based on NADA (National Auto Dealers Association) valuation. Non-performing automobile loans as of December 31, 1998 totaled $23,000 or 0.1% of the Company's consumer loan portfolio. Of the RV loan balance, approximately $3.6 million and $1.4 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, 1998, RV loans totaling $182,000 or 3.6% of the total RV portfolio were non-performing. Consumer loans may entail greater credit risk than 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. However, management expects that delinquencies in its consumer loan portfolio may increase as RV loans continue to season. At December 31, 1998, $349,000, or 1.2%, 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 had been de-emphasized by the Bank prior to the merger, management intends to proactively originate commercial loans with the particular emphasis on small business lending. At December 31, 1998, commercial business loans comprised $5.6 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 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. 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, with the exception of the purchase of $31.9 million of residential real estate loans in 1998, 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. For the year ended December 31, 1998, the Company originated $120.9 million of loans compared to $91.5 million and $81.4 million in 1997 and 1996, respectively. The Company also purchased $31.9 million in residential mortgage loans during 1998. These loans were located in Ohio and New Jersey. The Company currently has no plans or intentions to purchase additional loans. During 1998, 1997 and 1996, the Company increased its originations of one- to four-family mortgages through the referrals of several local brokers. 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. 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. 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.
December 31, ------------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (In thousands) Non-accruing loans: One- to four-family (1) $1,018 $843 $ 259 $1,525 $1,130 Multi-family --- 28 --- 77 563 Commercial real estate 20 265 339 1,549 4,096 Consumer 342 293 256 605 111 Commercial Business 230 447 2,269 743 404 ------- ------- ------- ------- ------- Total 1,610 1,876 3,123 4,499 6,304 ------- ------- ------- ------- ------- Accruing loans delinquent more than 90 days: One- to four-family (1) 358 280 151 261 480 Multi-family --- --- --- --- --- Commercial real estate 215 13 568 --- --- Consumer 7 2 6 --- --- Commercial Business --- 156 --- --- --- ------- ------- ------- ------- ------- Total 580 451 725 261 480 ------- ------- ------- ------- ------- Troubled debt restructured loans: One- to four-family (1) 85 86 88 89 90 Multi-family --- 34 38 1,626 1,645 Commercial real estate 537 761 781 2,185 1,758 Consumer --- -- 56 84 62 Commercial Business 92 50 68 51 95 ------- ------- ------- ------- ------- Total 714 931 1,031 4,035 3,650 ------- ------- ------- ------- ------- Total non-performing loans 2,904 3,258 4,879 8,795 10,434 ------- ------- ------- ------- ------- Foreclosed assets: One- to four-family (1) 313 69 194 459 102 Multi-family --- --- 282 926 1,792 Commercial real estate 30 --- --- 1,503 1,799 Consumer 56 74 239 281 111 Commercial Business --- --- --- --- --- ------- ------- ------- ------- ------- Total 399 143 715 3,169 3,804 ------- ------- ------- ------- ------- Total non-performing assets $3,303 $3,401 $5,594 $11,964 $14,238 ======= ======= ======= ======= ======= Total as a percentage of total assets 0.45% 0.67% 1.18% 2.72% 4.15% - - -------------------------------------- (1) Includes home equity loans
For the year ended December 31, 1998, 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 $255,000. The amount that was included in interest income on such loans was $161,000, which represented actual receipts. Similarly, for the year ended December 31, 1998, gross interest income which would have been recorded had the year end restructured loans paid in accordance with their original terms amounted to $101,000. The amount that was included in interest income for the year ended December 31, 1998 was $77,000. Non-Accruing Loans At December 31, 1998, the Company had $1.6 million in non-accruing loans, which constituted 0.4% 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, 1998, the Company had $580,000 of accruing loans delinquent more than 90 days. Of these loans, $241,000 were FHA insured or VA guaranteed one-to four-family residential loans. The remaining $339,000 represented five (5) one-to four-family real estate loans, four (4) commercial real estate loans, and three (3) consumer loans for which management believes that all contractual payments are collectible. These loans are pending refinancing with the Bank. Restructured Loans As of December 31, 1998, the Company had restructured loans of $714,000 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, two (2) commercial real estate loans, and three (3) commercial business loans. The Company's largest restructured loan or lending relationship at December 31, 1998, 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 participation balance to $609,000 and in July 1994 restructured the loan to reduce the principal balance outstanding and interest rate charged. At December 31, 1998, the outstanding balance on the Company's participation interest was $569,000. 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. Foreclosed and Reposessed Assets As of December 31, 1998, the Company had $399,000 in carrying value of foreclosed and repossessed assets. One-to four-family real estate represented 78.4% of the Company's foreclosed and repossessed property, consisting of nine (9) properties. Commercial real estate represented 7.6% of the Company's foreclosed and repossessed assets and consisted of one (1) property. Repossessed consumer assets represented 14.0% of the Company's foreclosed and repossessed properties, consisting of six (6) recreational vehicles (including automobiles). Other Loans of Concern As of December 31, 1998, there were $4.0 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 other loans of concern in excess of $500,000. The largest other loan of concern at December 31, 1998 consisted of a commercial real estate loan secured by a one story educational facility located in the Bank's market area. 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 matured on December 31, 1998 with a principal balance of $892,000. After the borrower made a principal payment of approximately $192,000 the remaining balance of the loan was rewritten in February 1999 as a fully amortizing commercial mortgage in the amount of $700,000 with a 15 year term. The value of the collateral was reaffirmed by an independent appraisal. Continued concern regarding the source of the loans repayment has resulted in its continued status as a loan of concern. The second largest other loan of concern at December 31, 1998 consisted of a multi-family real estate loan secured by a 32 unit apartment building located outside of the Bank's primary market area. This loan was originated in December 1989 with a loan to value ratio of 72.2%. Although the property was 91% occupied based on the latest rent roll, the cashflow generated was not sufficient to service the debt but the borrower has been able to keep the loan current by utilizaing other sources of funds. Current financial information has been requested from the guarantors for this loan to confirm the amount of resources available to keep this loan current. At December 31, 1998, the loan was current and had a principal balance of $627,000. There were no other loans with a balance in excess of $500,000 being specially monitored by the Company as of December 31, 1998. Other loans of concern with balances less than $500,000 at December 31, 1998 consisted of 17 commercial and multi-family real estate loans totaling $1.8 million, 10 commercial business loans totaling $492,000 and 7 one-to four-family mortgage loans totaling $187,000. These loans have been considered by management in conjunction with the analysis of the adequacy of the allowance for loan losses. Allowance for Loan Losses The allowance for loan losses is increased through a provision for loan losses based on management's evaluation of the risks 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 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 carrying value 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. Although management believes that it uses the best information available to determine the allowance for loan losses, 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 allowance for loan losses 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, 1998, the Company had a total allowance for loan losses of $4.9 million, representing 168.4% of non-performing loans. The following table sets forth an analysis of the activity in the Company's allowance for loan losses.
For the year ended December 31, 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (In thousands) Balance at beginning of period $3,807 $3,438 $2,647 $2,235 $3,248 Charge-offs: One- to four-family (1) (69) (15) (530) (31) (28) Multi-family (129) (51) (1,174) (171) (668) Commercial real estate (437) (372) (2,564) (568) (1,336) Consumer (275) (316) (1,834) (400) (196) Commercial business (316) (460) (2,616) (46) (232) ----------- ----------- ----------- ----------- ----------- Total Charge offs (1,226) (1,214) (8,718) (1,216) (2,460) ----------- ----------- ----------- ----------- ----------- Recoveries: One- to four-family (1) 6 1 10 --- 27 Multi-family -- -- -- 64 --- Commercial real estate 59 26 -- 1 193 Consumer 56 76 49 41 110 Commercial business 174 392 -- --- 10 ----------- ----------- ----------- ----------- ----------- Total Recoveries 295 495 59 106 340 ----------- ----------------------------------------------- Net Charge-offs (931) (719) (8,659) (1,110) (2,120) Allowance acquired from AFSALA Bancorp. Inc. 1,115 -- -- -- -- Provisions charged to operations 900 1,088 9,450 1,522 1,107 ----------- ----------- ----------- ----------- ----------- Balance at end of period $4,891 $3,807 $3,438 $2,647 $2,235 =========== =========== =========== =========== =========== Ratio of allowance for loan losses to total loans (at period end) 1.15% 1.34% 1.37% 1.05% 0.85% ====== ====== ====== ====== ====== Ratio of allowance for loan losses to non-performing loans (at period end) 168.42% 117.07% 70.47% 30.10% 21.42% ====== ====== ====== ====== ====== Ratio of net charge-offs during the period to average loans outstanding during period 0.29% 0.25% 3.30% 0.42% 0.88% ====== ====== ====== ====== ====== - - ------------------------------------- (1) Includes home equity loans.
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 loan losses at the dates indicated:
December 31, --------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 --------------------- -------------------- -------------------- -------------------- ------------------- 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 --------- -------- --------- -------- --------- -------- --------- -------- --------- -------- (Dollars in thousands) One- to four-family (1) $1,661 84.33% $897 77.55% $ 157 72.26% $268 60.18% $207 60.02% Multi-family and Commercial real estate 1,383 6.53 1,818 10.84% 1,599 13.84% 1,097 19.97% 1,260 21.18% Construction --- 0.85 --- 0.73% --- 0.89% --- 0.43% --- 1.84% Consumer 397 6.96 449 9.57% 355 10.29% 718 15.55% 454 13.65% Commercial Business 666 1.32 483 1.31% 1,327 2.72% 268 3.87% 114 3.31% Unallocated 784 ---- 160 ---- --- ---- 296 ---- 200 ---- ------ ------ ------ ------- ------ ------- ------ ------- ------ ------ Total $4,891 100.00% $3,807 100.00% $3,438 100.00% $2,647 100.00% $2,235 100.00% ====== ======= ====== ======= ====== ======= ====== ======= ====== ======= - - ------------------------------- (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, 1998, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 32.0%. 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. All securities purchased after this transfer have been classified as available for sale (including those acquired in the AFSALA acquisition). 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. The Company's investment strategy has been directed primarily toward high-quality mortgage-backed securities, as well as U.S. Government and agency securities and collateralized mortage obligations. 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, 1998, all of the Company's securities were classified as available for sale. The fair value and amortized cost of the Company's securities (excluding FHLB stock) at December 31, 1998 were $244.2 million and $243.6 million, respectively. For additional information on the Company's securities, see Note 5 of the Notes to Consolidated Financial Statements in the Annual Report. At December 31, 1998, the fair value and amortized cost of the Company's collaterized mortgage obligations ("CMOs") were $62.1 million and $62.0 million, respectively. CMOs owned by the Company consisted of either AAA rated securities or securities issued, insured or guaranteed either directly or indirectly by a federal agency. For additional information on the Company's securities, see Note 5 of the Notes to Consolidated Financial Statements in the Annual Report. Mortgage-backed securities and CMOs 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, 1998, $135.8 million or 85.7% of the Company's mortgage-backed securities and CMOs were pledged to secure various obligations of the Company. While mortgage-backed securities and CMOs 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 and CMOs portfolio as available for sale is designed to minimize that risk. At December 31, 1998, the contractual maturity of 95.8% of all of the Company's mortgage-backed securities and CMOs were in excess of ten years. The actual maturity of a mortgage-backed security or CMO 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 or CMO. 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 a 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. The following table sets forth the composition of the Company's securities portfolio at the dates indicated.
December 31, --------------------------------------------------------------------------------- 1998 1997 1996 --------------------------------------------------------------------------------- Carrying Carrying Carrying Value (1) %of Total Value (1) %of Total Value (1) %of Total ----------- -------- ------------ -------- ----------- -------- (Dollars in Thousands) Securities: U.S. Government and agency $ 84,000 33.41% $ 63,145 30.19% $43,773 21.65% State and political subdivisions 1,837 0.73% 766 0.37% 505 0.25% Mortgage-backed securities 96,256 38.28% 131,986 63.11% 156,261 77.10% Collateralized mortgage obligations 62,148 24.71% 9,911 4.74% --- --- --------- ------- ---------- ------- ---------- ------- Total debt securities 244,241 97.13% 205,808 98.41% 200,539 99.00% FHLB stock 7,215 2.87% 3,291 1.57% 2,029 1.00% --------- ------- ---------- ------- ---------- ------- Total securities and FHLB stock $ 251,456 100.00% $ 209,133 100.00% $202,568 100.00% ========= ======= ========== ======= ========== ======= ------------------------------------- (1)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.
The composition and contractual maturities of the securities portfolio (all of which are categorized as available for sale), excluding FHLB stock, are indicated in the following table. The Company's securities portfolio at December 31, 1998, 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 and collateralized mortgage obligations are included by final contractual maturity). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
December 31, 1998 --------------------------------------------------------------------------------------- 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) U.S. Government and agency $ 5,781 $ 7,272 $ 47,540 $ 23,072 $ 83,665 $ 84,000 State and political subdivisions 906 913 --- --- 1,819 1,837 Mortgage-backed securities 185 3,891 1,134 90,929 96,140 96,256 Collateralized mortgage obligations --- --- 1,432 60,568 62,000 62,148 ------- ------- ------- ------- ------- ------- Total investment securities $ 6,872 $ 12,077 $ 50,106 $174,569 $243,624 $244,241 ======= ======= ======= ======= ======= ======= Weighted average yield .... 5.83% 6.48% 6.51% 7.57% 6.95% ======= ======= ======= ======= =======
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 securities, short-term investments, and funds provided from operations. Deposits The Company offers a variety of deposit products 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, 1998, 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 9 of the Notes to Consolidated Financial Statements in the Annual Report. The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit products 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. At December 31, 1998, the Company's certificates of deposit totaled $228.0 million. These certificates of deposits were issued at interest rates ranging from 3.70% to 7.36%. (For additional information regarding certificate of deposit interest rates, see Note 9 of the Notes to Consolidated Financial Statements in the Annual Report.) The following table indicates the amount of the Company's certificates of deposit by time remaining until maturity as of December 31, 1998. 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 $40,376 $39,790 $53,936 $67,971 $202,073 Certificates of deposit of $100,000 or more 4,206 4,320 7,889 9,517 25,932 --------- -------- -------- -------- -------- Total certificates of deposit $44,582 $44,110 $61,825 $77,488 $228,005 ========= ======== ======== ======== ======== 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 prior to 1996 primarily 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, 1998, the Company had $21.4 million in FHLB advances. During 1996, the Company significantly increased its other borrowings. 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, 1998, securities repurchase agreements totaled $152.4 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 historically. 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% in 1996, to 3.36% in 1997 to 3.04% in 1998. For further information regarding the Company's borrowings, see Note 10 of the Notes to Consolidated Financial Statements contained in the Annual Report. 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 $14.4 million at December 31, 1998, in the stock of, or in 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 $63,800 for the year ended December 31, 1998. Regulation General The Bank 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. 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, 1997. 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, 1998, was $124,000. 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 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, 1998, the Bank's lending limit was $9.6 million. The Bank is in compliance with the loans-to-one-borrower limitation. 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 1998 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 All federally insured savings institutions 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, 1998, the Bank was in compliance with its regulatory capital requirements. See Note 16 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. 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. 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, 1998, 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. 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 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 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. 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 generally become subject to additional restrictions. 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. 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. 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, 1996. With respect to years examined by the IRS, either all deficiencies have been satisfied or sufficient reserves have been established to satisfy asserted deficiencies. New York Taxation The Bank and its subsidiaries 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 also 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 products 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, 1998, the Company had a total of 182 employees, including 25 part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. Executive Officers of the Company and the Bank Who Are Not Directors The following information as to the business experience during the past five years is supplied with respect to the executive officers of the Company and the Bank who do not serve on the Company's or the Bank's Board of Directors. There are no arrangements or understandings between such persons named and any persons pursuant to which such officers were selected. Benjamin Ziskin, age 40, is the Senior Vice President of the Company and the Bank since November 1998. Mr. Ziskin served as Treasurer of Amsterdam Federal Bank from 1985 to 1993 and was appointed Vice President of Amsterdam Federal Bank in 1989 and of AFSALA upon its formation in 1996. James J. Alescio, age 37, is Senior Vice President, Chief Financial Officer and the Treasurer of the Company and the Bank, positions he has held with the Company since November 1998. Mr. Alescio served as Assistant Treasurer of Amsterdam Federal Bank from 1984 to 1987 and was appointed Treasurer and Chief Financial Officer of Amsterdam Federal Bank in 1993 and of AFSALA upon it formation. Thomas Nachod, age 57, is Senior Vice President of the Company and the Bank. Mr. Nachod joined the Company in December 1998. Prior to joining the Company, he held the position of Senior Vice President at ALBANK. In addition, Mr. Nachod previously worked in a variety of rolls at KeyBank, as well as having served as Chief Executive Officer of two banks, Connecticut Community Bank in Greenwich, CT and Fidelity Bank of Scottsdale, AZ. Robert 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. Item 2. Description of Property The Company conducts its business at its main office, seventeen other banking offices and an operations office in its primary market area. The Company owns its Main Office, its operations center and four branch offices and leases the remaining thirteen 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, buildings and leasehold improvements and furniture, fixtures and equipment) at December 31, 1998 was $4.5 million. See Note 8 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 financial position or results of operations. For more information on certain legal proceedings, see Note 14(a) of the Notes to Consolidated Financial Statements contained in the Annual Report. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended December 31, 1998. PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters The information required is herein incorporated by reference to the Annual Report Item 6. Selected Financial Data The information required is herein incorporated by reference to the Annual Report Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required is herein incorporated by reference to the Annual Report Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required is herein incorporated by reference to the Annual Report Item 8. Financial Statements and Supplementary Data The information required is herein incorporated by reference to the Annual Report 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. 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 Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 28, 1999, 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, 1998, 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 Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 28, 1999, except for information contained under the heading "Compensation Committee Report on Executive Compensation" and "Shareholder Return Performance Presentation", a copy of which will be filed not later than 120 days after the close of the fiscal year. Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 28, 1999, 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 Company's definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 28, 1999, 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, 1998, is incorporated by reference in this Form 10-K Annual Report as Exhibit 13. (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: October 23, 1998 announcement of third quarter earnings for the Company. October 29, 1998 announcement of OTS approval for merger between the Company and AFSALA. November 13, 1998 announcement of merged Company and Bank's executive management team. December 1, 1998 declaration of increased cash dividend to shareholders. 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 31, 1999 By: /s/ ------------------------------ ---------------------- John M. Lisicki, 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 March 31, 1999: /s/ /s/ - - ----------------------------------- ------------------------------------- John M. Lisicki, President James J. Alescio, Senior Vice and Chief Executive Officer President, Chief Financial Officer (Principal Executive Officer) (Principal Financial and Accounting ` officer) /s/ /s/ - - ----------------------------------- ------------------------------------- Paul W. Baker, Director Lauren T. Barnett, Director /s/ /s/ - - ----------------------------------- ------------------------------------- James J. Bettini, Director John J. Daly, Director /s/ /s/ - - ----------------------------------- ------------------------------------- Robert J. Dunning, Director Lionel H. Fallows, Director /s/ /s/ - - ----------------------------------- ------------------------------------- Dr. Daniel J. Greco, Director Marvin R. LeRoy, Jr., Director /s/ /s/ - - ----------------------------------- ------------------------------------- Charles S. Pedersen, Director Carl A. Schmidt, Jr., Director /s/ /s/ - - ----------------------------------- ------------------------------------- Dr. Ronald S. Tecler, Director John A. Tesiero, Jr., Director /s/ /s/ - - ----------------------------------- ------------------------------------- William A. Wilde, Jr., Director Charles E. Wright, Director 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 Agreement between the Registrant and Robert Kelly, filed as an exhibit to Registrant's Registration Statement on Form S-1 (File No. 33-96654), is incorporated herein by reference. 10.2 Forms of Employment Agreements between the Registrant and John M. Lisicki, James J. Alescio, and Benjamin W. Ziskin, filed as exhibits to the Registrant's Registration Statement on Form S-4 (File No. 333-59721). 10.3 Supplemental Retirement Benefit agreement with John M. Lisicki and Benjamin W. Ziskin. 10.4 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. 10.5 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. 10.6 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. 10.7 AFSALA Bancorp, Inc. 1997 Stock Option Plan, filed as Exhibit 10.4 to the 1997 Annual Report on Form 10-KSB of AFSALA Bancorp, Inc. (file number 0-2113), and the amendment to the Plan, filed as an appendix to the definitive proxy statement filed with the Commision by AFSALA Bancorp, Inc. on January 8, 1998, are incorporated herein by reference. 11 Statement re: computation of per share earnings (see Notes 1(n) and 13 of the Notes to Consolidated Financial Statements contained in the Annual Report to Shareholders filed as Exhibit 13 herein). 13 Portions of Annual Report to Security Holders 21 Subsidiaries of the Registrant 23 Consent of Independent Certified Public Accountants 27 Financial Data Schedule EX-10.3 2 SUPPLEMENTAL EXECUTIVE RETIREMENT PLANS Exhibit 10.3 AMSTERDAM FEDERAL BANK TARGET BENEFIT SUPPLEMENTAL RETIREMENT BENEFIT AGREEMENT AS AMENDED THIS SUPPLEMENTAL RETIREMENT BENEFIT AGREEMENT, AS AMENDED (hereinafter called the "Agreement") made and entered into as of this 17th day of March, 1998 (hereinafter called the "Effective Date"), by and between AMSTERDAM FEDERAL BANK, a federal savings bank having its principal office at 161 Church Street, P.O. Box 271, Amsterdam, New York (hereinafter called the "Bank"), and Benjamin W. Ziskin, Vice President (hereinafter called "Officer"). WITNESSETH: WHEREAS, the Officer is the Vice President of the Bank, having been in the employ of the Bank since 1982; and WHEREAS, the Bank has previously adopted the Agreement as of November 16, 1993, WHEREAS, the Bank wishes to amend such Agreement in certain respects so as to further promote the purposes of the Agreement; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and obligations hereinafter set forth, and other good and valuable consideration, it is hereby agreed by and between the Bank and the Officer that the Agreement shall be amended and restated in its entirety as follows: Section 1. Deferred Compensation Account. As of the Effective Date of this Agreement, and as of the first day of each calendar year thereafter during the continuance of the Officer's employment by the Bank, the Bank shall credit to a unfunded book reserve established for the purposes of providing the Target Benefit under this Agreement, (hereinafter called "the Deferred Compensation Account") six and 19/100 percent (6.19%) of the Officer's annual salary as of such date. 1 Section 2. Investments. Amounts credited under the Deferred Compensation Account established under Section 1. of this Agreement shall be invested by the Bank (either in the Bank's name or in the name of a trustee through an irrevocable trust arrangement established by the Bank for this purpose) in one or more registered investment companies under the Investment Company Act of 1940, to the extent permitted by applicable banking law, and/or in one or more fixed income investment opportunities selected in the sole discretion of the Bank. The value of the Officer's Deferred Compensation Account at any given time shall be based solely on the then value of the investment fund or funds selected hereunder. Section 3. Retirement Benefit. Upon the Officer's termination of employment with the Bank, absent termination by the Bank for cause as specified at Section 6 hereinafter, the supplemental retirement benefits consisting of the aggregate total of the then value of all amounts in said Deferred Compensation Account as of the Officer's date of termination from employment shall be payable. Such benefits will be paid in any one of the following modes, as determined by the Bank: (i) a single lump sum payment; (ii) purchase of a straight life or joint and survivor annuity; or (iii) monthly installments over a period of five, ten or fifteen years. If the Officer shall die prior to having received the total of installment payments specified in clause (iii), above, the unpaid balance of such installments will continue to be paid in monthly installments for the unexpired portion of the specified installment period, to a designated beneficiary or contingent beneficiary. Section 4. Death Benefit. In the event the Officer's employment shall terminate as a result of death, the amount in the Deferred Compensation Account as of the date of death shall be paid to the Officer's designated beneficiary, or contingent beneficiary, as the case may be, in one of the following modes, as determined by the Bank: (i) a single lump sum payment; or (ii) purchase of a straight life annuity based upon the designated beneficiary's life expectancy. Section 5. Payment to Estate; Change of Beneficiary. If there is no designated beneficiary living at the time of the Officer's death, the then value of all amounts in the Deferred Compensation Account, determined as of the date of the Officer's death, shall be paid in a single lump sum to the Officer's estate. Any designated or contingent beneficiary referred to in Section 3. may be changed by the Officer without the consent of any prior designated or contingent beneficiary, upon written notice to the bank, signed by the Officer, the receipt of which has been acknowledged in writing by an officer of the Bank. 2 Section 6. Forfeiture. In case the Officer's employment is terminated by the Bank for cause as defined at 12 CFR 563.39(b) as determined by the Board of Directors of the Bank, the Bank shall have no obligation to make any payments to the Officer or any designated beneficiary or contingent beneficiary under this Agreement and the Agreement shall terminate as of such date the Officer's employment is terminated. Section 7. Designation of Beneficiaries. For the purposes of this Agreement, the Officer hereby names as primary beneficiary(ies), Lynnette F. Ziskin, and designates The Estate of Benjamin W. Ziskin as contingent beneficiary(ies). Section 8. Successors and Assigns. The right of the Officer or any beneficiary to the payment of the supplemental retirement benefit payable under this Agreement shall not be assigned, transferred, pledged or encumbered, except by the Officer's last will and testament, or by the applicable laws of descent and distribution. This Agreement will inure to the benefit of and be binding upon the Officer, the Officer's legal representatives and estate or interstate distributees, and the Bank, its successors and assigns, including any successor by merger or consolidation, a statutory receiver, or any other person or firm or corporation to which all or substantially all of the assets and business of the Bank may be sold or otherwise transferred. Section 9. Creditor Rights. The Officer's rights under this Agreement shall be limited to those of an unsecured general creditor of the Bank and the Bank shall have no obligation to fund the Target Benefit supplemental retirement benefit provided for hereunder. Section 10. No Right to Employment. Nothing contained in this Agreement shall be construed as conferring upon the Officer the right to continue in the employ of the Bank as an officer of the Bank or in any other capacity. 3 Section 11. Arbitration of Disputes. Any dispute between the Bank and the Officer, any designated or contingent beneficiary, or the Officer's estate as to the proper interpretation or application of any provision of this Agreement, shall be settled by arbitration, as follows. One arbitrator shall be selected by each of the parties with a dispute pursuant to this Agreement and a third arbitrator chosen by the two so selected, and the decision of a majority of the arbitrators so selected shall be final and binding upon all of the parties to such dispute. Section 12. Termination. The Bank's obligation to make payments under this Agreement shall terminate following the final payment required to be made under the applicable payment option. Section 13. Facility of Payment. If the Bank shall find that any individual entitled to receive payments under this Agreement is unable to care for his or her affairs because of age, lack of capacity, illness or accident, the Bank may pay such benefit, unless claim shall have been made therefor by a duly appointed legal representative, to the spouse, descendant, other relative, or to a person with whom the individual entitled to payment resides, and any such payment so made shall be a complete discharge of the liability of the Bank under this Agreement. Section 14. Records. The records of the Bank, the Retirement Plan, and the Savings Plan, shall be conclusive in respect of all matters involved in the calculation of benefits under this Agreement. Section 15. Unfunded Arrangement. This Agreement is an unfunded supplemental benefit arrangement, subject to the requirements of Department of Labor Regulation Section 2520.104-23. Section 16. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 17. Authorization to Execute Agreement. This Agreement has been approved by the Board of Directors of the Bank, and the undersigned has been specifically authorized by the Board to execute this Agreement on behalf of the Bank. 4 Section 18. Entire Agreement; Modifications. This instrument contains the entire Agreement of the parties relating to the subject matter hereof and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 19. Headings. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 20. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without reference to conflicts of law principles. 5 IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate, each of which shall be deemed to be an original for all purposes, effective as of the day and year first above written. OFFICER /s/ Benjamin W. Ziskin Print Name: Benjamin W. Ziskin Title:Vice President/Senior Lending Officer ATTEST: By: /s/ Sandra M. Hammond Print Name: Sandra M. Hammond AMSTERDAM FEDERAL BANK By: /s/ James J. Alescio Print Name: James J. Alescio Title: Executive Vice President ATTEST: By: /s/ Sandra M. Hammond Print Name: Sandra M. Hammond 6 AMSTERDAM FEDERAL BANK TARGET BENEFIT SUPPLEMENTAL RETIREMENT BENEFIT AGREEMENT AS AMENDED THIS SUPPLEMENTAL RETIREMENT BENEFIT AGREEMENT, AS AMENDED (hereinafter called the "Agreement") made and entered into as of this 17th day of March, 1998 (hereinafter called the "Effective Date"), by and between AMSTERDAM FEDERAL BANK, a federal savings bank having its principal office at 161 Church Street, P.O. Box 271, Amsterdam, New York (hereinafter called the "Bank"), and John Lisicki, President (hereinafter called "Officer"). WITNESSETH: WHEREAS, the Officer is the President of the Bank, having been in the employ of the Bank since 1978; and WHEREAS, the Bank has previously adopted the Agreement as of November 16, 1993, WHEREAS, the Bank wishes to amend such Agreement in certain respects so as to further promote the purposes of the Agreement; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and obligations hereinafter set forth, and other good and valuable consideration, it is hereby agreed by and between the Bank and the Officer that the Agreement shall be amended and restated in its entirety as follows: Section 1. Deferred Compensation Account. As of the Effective Date of this Agreement, and as of the first day of each calendar year thereafter during the continuance of the Officer's employment by the Bank, the Bank shall credit to a unfunded book reserve established for the purposes of providing the Target Benefit under this Agreement, (hereinafter called "the Deferred Compensation Account") sixteen and 90/100 percent (16.90%) of the Officer's annual salary as of such date. 1 Section 2. Investments. Amounts credited under the Deferred Compensation Account established under Section 1. of this Agreement shall be invested by the Bank (either in the Bank's name or in the name of a trustee through an irrevocable trust arrangement established by the Bank for this purpose) in one or more registered investment companies under the Investment Company Act of 1940, to the extent permitted by applicable banking law, and/or in one or more fixed income investment opportunities selected in the sole discretion of the Bank. The value of the Officer's Deferred Compensation Account at any given time shall be based solely on the then value of the investment fund or funds selected hereunder. Section 3. Retirement Benefit. Upon the Officer's termination of employment with the Bank, absent termination by the Bank for cause as specified at Section 6 hereinafter, the supplemental retirement benefits consisting of the aggregate total of the then value of all amounts in said Deferred Compensation Account as of the Officer's date of termination from employment shall be payable. Such benefits will be paid in any one of the following modes, as determined by the Bank: (i) a single lump sum payment; (ii) purchase of a straight life or joint and survivor annuity; or (iii) monthly installments over a period of five, ten or fifteen years. If the Officer shall die prior to having received the total of installment payments specified in clause (iii), above, the unpaid balance of such installments will continue to be paid in monthly installments for the unexpired portion of the specified installment period, to a designated beneficiary or contingent beneficiary. Section 4. Death Benefit. In the event the Officer's employment shall terminate as a result of death, the amount in the Deferred Compensation Account as of the date of death shall be paid to the Officer's designated beneficiary, or contingent beneficiary, as the case may be, in one of the following modes, as determined by the Bank: (i) a single lump sum payment; or (ii) purchase of a straight life annuity based upon the designated beneficiary's life expectancy. Section 5. Payment to Estate; Change of Beneficiary. If there is no designated beneficiary living at the time of the Officer's death, the then value of all amounts in the Deferred Compensation Account, determined as of the date of the Officer's death, shall be paid in a single lump sum to the Officer's estate. Any designated or contingent beneficiary referred to in Section 3. may be changed by the Officer without the consent of any prior designated or contingent beneficiary, upon written notice to the bank, signed by the Officer, the receipt of which has been acknowledged in writing by an officer of the Bank. 2 Section 6. Forfeiture. In case the Officer's employment is terminated by the Bank for cause as defined at 12 CFR 563.39(b) as determined by the Board of Directors of the Bank, the Bank shall have no obligation to make any payments to the Officer or any designated beneficiary or contingent beneficiary under this Agreement and the Agreement shall terminate as of such date the Officer's employment is terminated. Section 7. Designation of Beneficiaries. For the purposes of this Agreement, the Officer hereby names as primary beneficiary(ies), Jacquelyn Lisicki, and designates John Lisicki, Jr., Kenneth Lisicki, and Robert Lisicki as contingent beneficiary(ies). Section 8. Successors and Assigns. The right of the Officer or any beneficiary to the payment of the supplemental retirement benefit payable under this Agreement shall not be assigned, transferred, pledged or encumbered, except by the Officer's last will and testament, or by the applicable laws of descent and distribution. This Agreement will inure to the benefit of and be binding upon the Officer, the Officer's legal representatives and estate or interstate distributees, and the Bank, its successors and assigns, including any successor by merger or consolidation, a statutory receiver, or any other person or firm or corporation to which all or substantially all of the assets and business of the Bank may be sold or otherwise transferred. Section 9. Creditor Rights. The Officer's rights under this Agreement shall be limited to those of an unsecured general creditor of the Bank and the Bank shall have no obligation to fund the Target Benefit supplemental retirement benefit provided for hereunder. Section 10. No Right to Employment. Nothing contained in this Agreement shall be construed as conferring upon the Officer the right to continue in the employ of the Bank as an officer of the Bank or in any other capacity. 3 Section 11. Arbitration of Disputes. Any dispute between the Bank and the Officer, any designated or contingent beneficiary, or the Officer's estate as to the proper interpretation or application of any provision of this Agreement, shall be settled by arbitration, as follows. One arbitrator shall be selected by each of the parties with a dispute pursuant to this Agreement and a third arbitrator chosen by the two so selected, and the decision of a majority of the arbitrators so selected shall be final and binding upon all of the parties to such dispute. Section 12. Termination. The Bank's obligation to make payments under this Agreement shall terminate following the final payment required to be made under the applicable payment option. Section 13. Facility of Payment. If the Bank shall find that any individual entitled to receive payments under this Agreement is unable to care for his or her affairs because of age, lack of capacity, illness or accident, the Bank may pay such benefit, unless claim shall have been made therefor by a duly appointed legal representative, to the spouse, descendant, other relative, or to a person with whom the individual entitled to payment resides, and any such payment so made shall be a complete discharge of the liability of the Bank under this Agreement. Section 14. Records. The records of the Bank, the Retirement Plan, and the Savings Plan, shall be conclusive in respect of all matters involved in the calculation of benefits under this Agreement. Section 15. Unfunded Arrangement. This Agreement is an unfunded supplemental benefit arrangement, subject to the requirements of Department of Labor Regulation Section 2520.104-23. Section 16. Severability. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. Section 17. Authorization to Execute Agreement. This Agreement has been approved by the Board of Directors of the Bank, and the undersigned has been specifically authorized by the Board to execute this Agreement on behalf of the Bank. 4 Section 18. Entire Agreement; Modifications. This instrument contains the entire Agreement of the parties relating to the subject matter hereof and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. Section 19. Headings. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. Section 20. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York, without reference to conflicts of law principles. 5 IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate, each of which shall be deemed to be an original for all purposes, effective as of the day and year first above written. OFFICER /s/ John M. Lisicki Print Name: John M. Lisicki Title: President ATTEST: By: /s/ Sandra M. Hammond Print Name: Sandra M. Hammond AMSTERDAM FEDERAL BANK By: /s/ Benjamin W. Ziskin Print Name: Benjamin W. Ziskin Title: Vice President/Senior Lending Officer ATTEST: By: /s/ Sandra M. Hammond Print Name: Sandra M. Hammond 6 EX-13 3 ANNUAL REPORT TO SECURITY HOLDERS SELECTED CONSOLIDATED FINANCIAL INFORMATION Set forth below are selected consolidated financial and other data of the Company. This financial data is derived in part from, and should be read in conjunction with, the Consolidated Financial Statements and Notes to the Consolidated Financial Statements of the Company presented elsewhere in this Annual Report. All references to the Company, unless otherwise indicated, at or before December 26, 1995 refer to the Bank.
December 31, 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- Selected Consolidated (In Thousands) Financial Condition Data: Total assets ..................... $ 735,472 $ 510,444 $ 472,421 $ 438,944 $ 343,334 Securities available for sale .... 244,241 205,808 200,539 74,422 -- Investment securities ............ -- -- -- -- 53,390 Loans receivable, net ............ 420,933 281,123 248,094 249,991 261,581 Deposits ......................... 461,413 333,265 298,082 311,239 293,152 Borrowed funds ................... 173,810 111,550 108,780 -- 19,000 Shareholders' equity ............. 85,893 61,202 61,518 76,015 27,414 Years Ended December 31, 1998 1997 1996 1995 1994 --------- --------- --------- -------- ----------- Selected Consolidated (Dollars in thousands, except per share data) Operations Data: Total interest and dividend income $38,973 $ 35,566 $ 32,348 $ 25,582 $ 23,806 Total interest expense ........... 22,441 19,654 16,435 12,746 10,192 ------- --------- --------- --------- --------- Net interest income .............. 16,532 15,912 15,913 12,836 13,614 Provision for loan losses ........ 900 1,088 9,450 1,522 1,107 ------- --------- --------- --------- --------- Net interest income after provision for loan losses ....... 15,632 14,824 6,463 11,314 12,507 Other income ..................... 1,144 1,819 908 1,512 905 Other expenses ................... 15,075 12,190 13,136 11,383 11,340 ------- --------- --------- --------- --------- Income (loss) before taxes ....... 1,701 4,453 (5,765) 1,443 2,072 Income tax expense (benefit) ..... 670 1,693 (1,929) 586 122 ------- --------- --------- --------- --------- Net income (loss) ................ $ 1,031 $ 2,760 ($ 3,836) $ 857 $ 1,950 ======= ========= ========= ========= ========= Basic earnings (loss) per share* . $ 0.26 $ 0.70 ($ 0.81) N/A N/A ======= ========= ========= ========= ========= Diluted earnings (loss) per share* $ 0.26 $ 0.69 ($ 0.81) N/A N/A ======= ========= ========= ========= ========= Dividend payout ratio ............ 96.1% 14.3% N/A N/A N/A ======= ========= ========= ========= =========
*Earnings per share were not calculated for 1995 and prior periods since the Company had no stock outstanding prior to its initial public offering completed on December 26, 1995.
At or for the years ended December 31, 1998 1997 1996 1995 1994 ------------------------------------------ Selected Consolidated Financial Ratios and Other Data: Performance Ratios: Return (loss) on average assets (1) ....... 0.18% 0.56% (0.84)% 0.25% 0.59% Return (loss) on average equity (1) ....... 1.64 4.52 (5.24) 3.00 7.36 Interest rate information: Average interest rate spread during year 2.32 2.58 2.74 3.36 4.01 Average net interest margin during year (2) 3.04 3.36 3.66 3.87 4.34 Efficiency ratio (3) ...................... 74.44 69.81 62.50 68.18 63.46 Ratio of average earning assets to average interest-bearing liabilities ... 117.28 118.93 124.26 113.31 110.24 Asset Quality Ratios: Non-performing assets to total assets (1) . 0.45 0.67 1.18 2.72 4.15 Non-performing loans to total loans ....... 0.68 1.16 1.94 3.48 3.97 Allowance for loan losses to non-performing loans .................... 168.42 117.07 70.47 30.10 21.42 Allowance for loan losses to total loans .. 1.15 1.34 1.37 1.05 0.85 Capital Ratios: Equity to total assets at end of period (1) 11.68 11.99 13.02 17.32 7.98 Average equity to average assets (1) ...... 11.18 12.42 15.95 8.30 7.96 Other Data: Number of full-service offices ............ 18 12 9 9 7 (1) Period end and average asset and equity amounts reflect securities available for sale at fair value, with net unrealized gains/losses, net of tax, included as a component of equity. (2) Net interest income divided by average earning assets. (3) The efficiency ratio represents other expenses (excluding real estate owned and repossessed assets expenses, net, the amortization of goodwill, and certain non-recurring expenses in 1998 totaling approximately $1.7 million, primarily related to costs associated with the merger, costs asociated with the termination and consulting agreements entered into with the former President and CEO, costs incurred to defend against and settle legal actions initiated by a shareholder, and costs associated with the core system conversion) divided by the sum of net interest income and other income (excluding net gains (losses) on securities transactions).
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Ambanc Holding Co., Inc. ("Ambanc" or the "Company") is a savings and loan holding company. Ambanc was formed as a Delaware corporation to act as the holding company for the former Amsterdam Savings Bank, FSB (now known as Mohawk Community Bank) upon the completion of Amsterdam Savings Bank's conversion from the mutual to stock form on December 26, 1995 (the "Conversion"). As such, the Company had no material results of operations during 1995. Accordingly, any discussion herein for periods prior to 1996 relates primarily to the Bank's results of operations. On November 16, 1998, the Company acquired AFSALA Bancorp, Inc. ("AFSALA") and its wholly owned subsidiary, Amsterdam Federal Bank. Pursuant to the merger agreement, AFSALA was merged with and into Ambanc Holding Co., Inc., and Amsterdam Federal Bank was merged with and into the former Amsterdam Savings Bank, FSB. The combined bank now operates as one institution under the name "Mohawk Community Bank" (the "Bank"). See "Acquisition of AFSALA Bancorp, Inc." The Bank's results of operations are primarily dependent on its net interest income, which is the difference between the interest and dividend income earned on its assets, primarily loans and securities, and the interest expense on its liabilities, primarily deposits and borrowings. Net interest income may be affected significantly by general economic and competitive conditions and policies of regulatory agencies, particularly those with respect to market interest rates. The results of operations are also significantly influenced by the level of non-interest expenses, such as employee salaries and benefits, other income, such as fees on deposit-related services, and the Bank's provision for loan losses. The Bank has been, and intends to continue to be, a community-oriented financial institution offering a variety of financial services. Management's strategy has been to try to achieve a high loan to asset ratio with emphasis on originating traditional one- to four-family residential mortgage and home equity loans in its primary market area. At December 31, 1998, the Bank's loan receivable, net, to assets ratio was 57.2%, up from 55.1% at December 31, 1997. In addition, the Bank's portfolio of loans secured by one- to four-family residential mortgage and home equity loans has grown as a percentage of the Bank's total loan portfolio to 84.3% of total loans at December 31, 1998 from 77.6% at December 31, 1997. Forward-Looking Statements When used in this Annual Report on Form 10-K, in future filings by the Company with the Securities and Exchange Commision, in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected, including, but not limited to, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, the possibility that expected cost savings from the merger with AFSALA cannot be fully realized or realized within the expected time frame, the possiblity that costs or difficulties related to the integration of the businesses of the Company and AFSALA may be greater than expected and the possibility that revenues following the merger with AFSALA may be lower than expected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake - and specifically disclaims any obligation - - - to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Acquisition of AFSALA Bancorp, Inc. On November 16, 1998, the Company acquired AFSALA Bancorp, Inc. and its wholly owned subsidiary, Amsterdam Federal Bank. At the date of the merger, AFSALA had approximately $167.1 million in assets, $144.1 million in deposits, and $19.2 million in shareholders' equity. Pursuant to the merger agreement, AFSALA was merged with and into Ambanc Holding Co., Inc., and Amsterdam Federal Bank was merged with and into the former Amsterdam Savings Bank, FSB. The combined bank now operates as one institution under the name "Mohawk Community Bank" . Upon consummation of the merger, each share of AFSALA common stock was converted into the right to receive 1.07 shares of Ambanc common stock. Based on the 1,249,727 shares of AFSALA common stock issued and outstanding immediately prior to the merger, the Company issued 1,337,207 shares of common stock in the merger. Of the 1,337,207 shares issued in the merger, 1,327,086 were issued from the Company's treasury stock and 10,121 were newly-issued shares. In addition, under the merger agreement, the Company assumed unexercised, fully-vested options to purchase 144,118 shares of AFSALA common stock which converted into fully-vested options to purchase 154,206 shares of Ambanc common stock. The acquisition was accounted for using purchase accounting in accordance with APB Opinion No. 16, "Business Combinations" (APB No. 16). Under purchase accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values. The acquisition of AFSALA resulted in approximately $8.0 million in excess of cost over net assets acquired ("goodwill"). Goodwill is being amortized to expense over a period of fifteen years using the straight-line method. The results of operations of AFSALA have been included in the Company's 1998 consolidated statement of operations from the date of acquisition. See Note 2 to the Consolidated Financial Statements for further information regarding the acquisition of AFSALA. Financial Condition Comparison of Financial Condition at December 31, 1998 and 1997. Total assets at December 31, 1998 were $735.5 million, an increase of $225.0 million, or 44.1%, over the December 31, 1997 amount of $510.4 million. The primary reason for the increase in total assets was the previously discussed acquisition of AFSALA Bancorp, Inc. (AFSALA), which had total assets of $167.1 million at the date of the acquisition. Federal funds sold increased to $30.2 million at December 31, 1998 from $0 at December 31, 1997, due primarily to the balances acquired from AFSALA. In addition, given the low interest rate environment that existed during most of 1998, the Company maintained greater liquidity at year-end 1998 as compared to year-end 1997 to take advantage of any favorable movements in interest rates. Securities available for sale increased by $38.6 million, from $205.8 million at December 31, 1997 to $244.2 million at December 31, 1998, due primarily to the $56.0 million in securities (at fair value) acquired from AFSALA. The net decrease in securities of $17.6 million after consideration of the securities acquired from AFSALA was due to the Company's decision to maintain greater liquidity to take advantage of any movements in interest rates. Federal Home Loan Bank of New York (FHLB) stock increased $3.9 million, or 119.2%, due to a combination of purchases of additional stock of $3.4 million and the $565 thousand in FHLB stock acquired from AFSALA. Loans receivable, net increased $139.8 million, or 49.7%, from $281.1 million at December 31, 1997, to $420.9 million at December 31, 1998, due primarily to the $82.9 million in net loans (at fair value) acquired from AFSALA. The majority of the loans acquired from AFSALA were one -to four-family residential mortgage and home equity loans. The Company also experienced growth in its own portfolio, primarily due to the purchase of $31.9 million in residential real estate loans during the first and second quarters. The remaining growth in the Company's loan portfolio was mainly in home equity loans due to the offering of a product with low closing costs and competitive rates. Premises and equipment, net increased $1.4 million due primarily to the acquisition of assets from AFSALA. The acquisition of AFSALA resulted in approximately $8.0 million in goodwill, which represents the excess of the purchase price over the fair value of the net assets acquired. Goodwill is being amortized over fifteen years using the straight-line method. During 1998, $67 thousand of goodwill was amortized, leaving a balance of $7.9 million at December 31, 1998. Deposits at December 31, 1998 were $461.4 million, an increase of $128.1 million, or 38.5%, over the balance of $333.3 million at December 31, 1997. The main reason for the increase was the deposits assumed in the acquisition of AFSALA, which totaled $144.8 million (at fair value) at the acquisition date. Excluding the AFSALA acquisition, deposits decreased $16.6 million, due primarily to the competitive rate environment on time deposits and the Company's use of borrowings as an alternative funding source. Total borrowings (including FHLB overnight and term advances and securities sold under agreements to repurchase) increased $62.3 million from year-end 1997 to year-end 1998. The only borrowings assumed from AFSALA were $1.4 million (at fair value) in FHLB term advances. The primary increase in borrowings was in securities sold under agreements to repurchase, which increased $53.2 million, or 53.6%, from $99.3 million at December 31, 1997 to $152.4 million at December 31, 1997. The proceeds from the securities sold under agreements to repurchase were used mainly to fund the loan growth, including the purchase of the residential real estate loans noted above. In addition, the Company borrowed $20.0 million in adjustable rate FHLB term advances during 1998. See Note 10 of the Notes to Consolidated Financial Statements for further information regarding the Company's borrowings. Shareholders' equity increased $24.7 million, or 40.3%, from $61.2 million at December 31, 1997 to $85.9 million at December 31, 1998, due primarily to the acquisition of AFSALA noted above. In connection with the acquisition, the Company issued 1,337,207 shares of common stock. Of the 1,337,207 shares issued in the acquisition, 1,327,086 were issued from the Company's treasury stock and 10,121 were newly-issued shares. The acquisition of AFSALA had the impact of increasing shareholders' equity by $26.9 million. Other significant items impacting shareholders' equity during 1998 were purchases of treasury stock ($4.1 million), cash dividends paid ($1.1 million), and net income for the year ($1.0 million). Comparison of Operating Results for the Years Ended December 31, 1998 and 1997. Net Income. Net income decreased by $1.7 million, or 62.6%, for the year ended December 31, 1998 to $1.0 million from $2.8 million for the year ended December 31, 1997. Net income for the year ended December 31, 1998 was reduced primarily as a result of increased non-interest expenses and a decrease in non-interest income, offset in part by increased net interest income and a decrease in the provision for loan losses. These and other changes are discussed in more detail below. Net Interest Income. Net interest income increased $620 thousand, or 3.9%, to $16.5 million for the year ended December 31, 1998 from $15.9 million for the year ended December 31, 1997. The increase in net interest income was primarily due to an increase of $70.9 million, or 15.0%, in the average balance of earning assets, offset by an increase in the average balance of interest-bearing liabilities of $66.1 million, or 16.6%, and a decrease in the interest rate spread from 2.58% for the year ended December 31, 1997 to 2.32% for the year ended December 31, 1998. Earning assets primarily consist of loans receivable, securities available for sale, federal funds sold, FHLB of New York stock, and interest-bearing deposits. Interest-bearing liabilities primarily consist of interest-bearing deposits, FHLB advances and securities repurchase agreements. The interest rate spread, which is the difference between the yield on average earning assets and the cost of average interest-bearing liabilities, decreased to 2.32% for the year ended December 31, 1998 from 2.58% for the year ended December 31, 1997. The decrease in the interest rate spread is primarily the result of the decrease in the average yield on earning assets being greater than the decrease in the average cost of interest-bearing liabilities. Ambanc Holding Co., Inc. operates in an environment of intense competition for deposits and loans. The competition in today's environment is not limited to other local banks and thrifts, but also includes a myriad of financial services providers that are located both within and outside the Company's local market area. Due to this heightened level of competition to attract and retain customers, the Company must continue to offer competitive interest rates on loans and deposits. As a consequence of these competitive pressures, from time-to-time, the relative spreads between interest rates earned and interest rates paid will tighten, exerting downward pressure on net interest income, net interest rate spread and the net interest margin. This is especially true during periods when the growth in earning assets lags behind the growth in interest-bearing liabilities. However, management does not want to discourage, by offering noncompetitive interest rates, the creation of new customer relationships or jeopardize existing relationships thereby curtailing customer base and loan growth and the attendant benefits to be derived from them. Management believes that the longer-term benefits to be derived from this position will outweigh the shorter term costs associated with attracting, cross-selling and retaining an expanding customer base. The Company's growing customer base provides Ambanc with the potential for future, profitable customer relationships, which should in turn increase the value of the franchise. Interest and Dividend Income. Interest and dividend income increased by approximately $3.4 million, or 9.6%, to $39.0 million for the year ended December 31, 1998 from $35.6 million for the year ended December 31, 1997. The increase was largely the result of an increase of $70.9 million, or 15.0%, in the average balance of earning assets to $544.0 million for the year ended December 31, 1998 as compared to $473.1 million for the year ended December 31, 1997. The increase in the average balance of earning assets consisted primarily of increases in the average balance of loans receivable of $54.6 million, or 20.4%, securities available for sale of $11.9 million, or 6.12%, FHLB of New York stock of $2.0 million, or 64.6 %, and federal funds sold and interest-bearing deposits of $2.5 million, or 30.3%. Partially offsetting the effects of the increase in the average balance of earning assets was a 36 basis point decrease in the average yield on total earning assets. The yield on the average balance of earning assets was 7.16% and 7.52% for the years ended December 31, 1998 and 1997, respectively. Interest and fees on loans increased $3.6 million, or 17.2%, to $24.6 million for the year ended December 31, 1998. This increase was primarily the result of an increase in the average balance of net loans receivable of $54.6 million partially offset by a 21 basis point decrease in the average yield. Interest income on securities available for sale decreased $478 thousand, or 3.4%, to $13.5 million for the year ended December 31, 1998 from $14.0 million for the previous year. This decrease is primarily the result of a 65 basis point decrease in the average yield on securities available for sale partially offset by an increase in the average balance of $11.9 million. Interest Expense. Total interest expense increased by $2.8 million, or 14.2%, to $22.4 million for the year ended December 31, 1998 from $19.7 million for the year ended December 31. 1997. Total average interest-bearing liabilities increased by $66.1 million, or 16.6%, to $463.9 million in 1998 compared to $397.8 million in 1997. During the same periods, the average rate paid on interest-bearing liabilities decreased by 10 basis points to 4.84% in 1998 from 4.94% in 1997. Total interest expense for the year ended December 31, 1998 increased primarily due to an increase in the average balance of total borrowed funds to $150.3 million from $98.9 million, partially offset by a decrease of 34 basis points, to 5.73%, in the average rate paid for these funds during the year. The increase in the average balance of borrowed funds was used primarily to fund the increase in loans, including the purchase of loans noted above. Provision for Loan Losses. The Company's provision for loan losses is based upon its analysis of the adequacy of the allowance for loan losses. The allowance is increased by a charge to the provision for loan losses, the amount of which depends upon an analysis of the changing risks inherent in the Bank's loan portfolio. Management determines the adequacy of the allowance for loan losses based upon its analysis of risk factors in the loan portfolio. This analysis includes evaluation of credit risk, historical loss experience, current economic conditions, estimated fair value of underlying collateral, delinquencies, and other factors. The provision for loan losses for the year ended December 31, 1998 decreased $188 thousand to $900 thousand from $1.1 million for the year ended December 31, 1997. The decrease in the provision was due primarily to the decrease in non-performing loans during the year from $3.3 million at December 31, 1997, to $2.9 million at December 31, 1998, a decrease of 10.9%. Non-Interest Income. Total non-interest income decreased by $675 thousand, or 37.1%, to $1.1 million for the year ended December 31, 1998 from $1.8 million for the year ended December 31, 1997 primarily due to net losses on securities transactions of $165 thousand in 1998 compared to net gains of $775 thousand in 1997. This decrease in net gains (losses) on securities transactions was partially offset by an increase in service charges on deposit accounts of $226 thousand from 1997 to 1998. The increase in service charges on deposit accounts is primarily attributable to the restructuring of service charges on certain deposit products, in addition to an increase in the number of deposit accounts due to the merger. Non-Interest Expenses. Non-interest expenses increased $2.9 million, or 23.7%, to $15.1 million for the year ended December 31, 1998 from $12.2 million for the year ended December 31, 1997. Non-interest expenses in 1998 were impacted by significant non-recurring expenses totaling approximately $1.7 million primarily related to costs associated with the merger of the two companies, costs associated with the termination and consulting agreements entered into with the former President and CEO, costs incurred to defend against and settle legal actions initiated by a shareholder, and costs associated with the core system conversion. These and other changes are discussed in more detail below. Salaries, wages and benefits expense increased by $307 thousand, or 5.0%, due primarily to increased costs as a result of the merger, the opening of three new branches during 1997, increased costs associated with the Company's ESOP, as well as general cost of living and merit raises to employees. Management believes that salaries, wages and benefits expenses may fluctuate in future periods as a result of the costs related to the Company's ESOP, as the expense related to the ESOP is dependent on the Company's average stock price. During 1998, the Company incurred certain non-recurring termination benefits totaling approximately $608 thousand. The non-recurring termination benefits related to the termination and consulting agreements entered into with the Company's former President and CEO, and severance packages for three former officers. Occupancy and equipment increased $270 thousand, or 17.5%, primarily due to the acceleration of depreciation and amortization of equipment and leasehold improvements as a result of the merger. In addition, rent and maintenance expense increased as a result of the branch offices opened in 1997 and the four additional branches acquired through the merger. Data processing increased $520 thousand, or 44.5%, primarily due to non-recurring expenses related to the core system conversion subsequent to the merger. The non-recurring expenses relate to the conversion of the core system (loans and deposits) and the termination of the network contract for automated teller machine (ATM) processing. The non-recurring expenses associated with the conversion of the core system and the termination of the ATM processing contract were approximately $368 thousand. Also contributing to the increase in data processing expense was the increase in the number of loan and deposit accounts due to the merger. Professional fees increased $306 thousand, or 71.3%, primarily due to charges of $219 thousand related to legal costs incurred to defend against legal actions initiated by a shareholder. Real estate owned and repossessed assets expenses decreased $294 thousand, or 82.8%, to $61 thousand in 1998 as compared to $355 thousand in 1997 primarily due to a decrease in net costs associated with foreclosed real estate properties and repossessed assets. This decrease was largely the result of a decrease of $298 thousand, or 69.1%, in the average balance of real estate owned and repossessed assets during the year. Non-interest expenses for 1998 included the amortization of goodwill totaling approximately $67 thousand. As noted previously, goodwill is being amortized to expense over fifteen years using the straight-line method. Other non-interest expenses increased approximately $1.1 million, or 43.4%, to $3.6 million for the year ended December 31, 1998 when compared to 1997. This increase was primarily due to merger-related costs which included advertising related to promoting the new bank, the replacement of supplies and the write-off of software duplication between the banks, additional courier services for check processing due to the added branches, and an increase in postage due to special mailings to depositors and shareholders related to the merger. In addition, costs associated with the settlement of legal actions initiated by a shareholder, and costs related to a one-time charge to substantially modify repurchase agreements contributed to this increase. Income Tax Expense. Income tax expense decreased by $1.0 million, or 60.4%, to $670 thousand for the year ended December 31, 1998 from $1.7 million for the year ended December 31, 1997. The decrease was primarily the result of the decrease in income before taxes. Results of Operations Comparison of Operating Results for the Years Ended December 31, 1997 and 1996 General. The Company recorded net income of $2.8 million for the fiscal year ended December 31, 1997 compared to a net loss of $3.8 million for the prior year. Net interest income for 1997 and 1996 was unchanged at $15.9 million. The net loss in 1996 was due primarily to the $9.5 million provision for loan losses and the $2.6 million of expenses incurred in connection with the Company's real estate owned and repossessed assets. The large provision was necessitated to replenish and increase the Company's allowance for loan losses which was depleted as a result of write-offs associated with the Company's bulk sale of certain loans in 1996 and the commercial bankruptcy of a large commercial borrower. Interest and Dividend Income. Interest and dividend income increased $3.2 million, or 9.9%, to $35.6 million in 1997 from $32.3 million in 1996. The increase in interest income resulted from a $38.5 million, or 8.9%, increase in the Company's average earning assets, primarily securities available for sale, which increased $38.0 million, or 24.3% in 1997, to $194.1 million compared to $156.1 million in 1996. The increase in securities available for sale was primarily funded with increased borrowings. The average yield earned on earning assets increased by 8 basis points to 7.52% in 1997 from 7.44% in the prior year. The increase in the average yield earned was attributable primarily to a change in the composition, or mix, of the Company's earning assets, mainly average securities available for sale which increased in 1997 to 41.0% of total earning assets from 35.9% in 1996. The average yield earned on the Company's securities also increased by 19 basis points to 7.19% in 1997 compared to 7.00% in 1996. Interest Expense. Interest expense increased by $3.2 million, or 19.6%, to $19.6 million in 1997 compared to $16.4 million in 1996. Average interest-bearing liabilities increased by $48.1 million, or 13.8%, to $397.8 million in 1997 compared to $349.7 million during the prior year. During the same periods, the average rate paid on interest-bearing liabilities increased by 24 basis points to 4.94% from 4.70%. The increase in interest expense was attributable primarily to a $31.3 million, or 46.4%, increase in the average balance of borrowed funds to $98.9 million from $67.6 million in 1996 and an increase in average certificates of deposit which grew by $22.0 million, or 14.7%, to $172.3 million from $150.3 million. The average rates paid on borrowed funds and certificates of deposit during 1997 also increased over 1996 by 13 basis points on borrowed funds and 8 basis points on certificates of deposit. Borrowings consisted primarily of securities sold under agreements to repurchase, with an increase in the average balance of $37.5 million, or 64.9%, to $95.3 million in 1997 from $57.8 million in 1996, partially offset by a decline in average advances from the Federal Home Loan Bank ("FHLB") of New York. These borowings were primarily used to fund the growth in the Company's securities available for sale. Net Interest Income. Net interest income before provision for loan losses was $15.9 million for 1997 and 1996. During 1997, the Company's average earning assets grew by $38.5 million, or 8.9%, to $473.1 million. The average yield on these assets also increased when compared to 1996, improving by 8 basis points to 7.52% from 7.44%. However, the increase in average interest-bearing liabilities exceeded the growth in average earning assets, increasing by $48.1 million to $397.8 million. The increase in the average interest-bearing liabilities was accompanied by a 24 basis point increase in the average rate paid on these funds to 4.94% for 1997 from 4.70% for 1996. Provision for Loan Losses. The provision for loan losses decreased $8.4 million to $1.1 million in 1997 from $9.5 million during 1996. The higher provision in 1996 resulted primarily from the Company's bulk sale of certain performing and non-performing loans in the fourth quarter of 1996 and the aggregate lending relationship with the Bennett Funding Group, a company that filed for Chapter 11 bankruptcy protection on March 29, 1996. In order to accelerate its objective of reducing credit risk in the loan portfolio and better position the Company to achieve its strategic goals, management considered it to be prudent to complete the bulk sale of certain non-performing and performing commercial loans and manufactured home loans (which are considered a higher credit risk consumer product) at a loss, versus continuing to address these problem assets on an asset specific basis. At December 31, 1997, the Bank's allowance for loan losses totaled $3.8 million, or 1.3% of total loans and 117.1% of non-performing loans, compared to $3.4 million, or 1.4% of total loans and 70.5% of non-performing loans at December 31, 1996. Other Income. Other income increased $906,000, or 98.5%, to $1.8 million for the year ended December 31, 1997, from $920,000 in 1996. The primary reason for the increase in other income was the net gains on securities transactions of $775,000, compared to a net loss of $102,000 in 1996. As the general level of interest rates declined during 1997, management decided that it would be prudent to sell securities and record the net gains on the transactions. One condition adhered to in determining the selection and timing of the securities to be sold was that the yield obtained on the reinvestment of the sale proceeds would not be significantly lower than the foregone yield. A second condition was that the credit rating of the replacement securities would be no lower than the quality of the securities sold. Other Expenses. Other expenses decreased $951,000, or 7.2%, to $12.2 million for the year ended December 31, 1997 from $13.1 million in the same 1996 period. The primary reason for the improvement was a $2.2 million decline in the net costs associated with the Company's real estate owned and repossessed assets. The decrease in these expenses resulted from one-time charges in 1996 related to the bulk sale of certain foreclosed real estate properties. Excluding the expenses related to real estate owned and repossessed assets, other expenses increased $1.2 million, or 11.9%, to $11.8 million in 1997 from $10.6 million in 1996, mainly due to a higher level of salaries, wages and benefits which increased $989,000, or 19.4%, to $6.1 million from $5.1 million in the prior year. Salaries, wages and benefits increased $250,000 as a result of the opening of three branch offices in May 1997. Also contributing to the higher level of salaries, wages and benefits was a $239,000 increase in the compensation costs related to the Employee Stock Ownership Plan (ESOP) and a $137,000 expense associated with awards of Company common stock under the Recognition and Retention Plan (RRP) to officers. The remainder of the increase was attributable to higher payroll taxes, employee insurance premiums and normal cost of living and merit increases. Occupancy and equipment expenses increased $211,000, or 15.9%, to $1.5 million, as a result of the opening of three branch offices in 1997. In addition, other expenses increased $135,000 in 1997 as a result of awards of Company Common Stock under the RRP to directors. Income Tax Expense. Income tax expense increased $3.6 million to $1.7 million in 1997 due to a pre-tax loss of $5.8 million incurred in 1996 as compared to pre-tax income of $4.5 million in 1997. Asset Quality The Bank's loan portfolio consists primarily of one-to four-family residential mortgage and home equity loans, which are generally considered to have less credit risk than commercial and multi-family real estate or consumer loans. The Bank has de-emphasized its commercial and multi-family real estate lending, with the portfolio declining as a percentage of the Bank's total loan portfolio to 6.5% of total loans at December 31, 1998 from 10.8% and 13.8% at December 31, 1997 and 1996, respectively. During the same period, the Bank's portfolio of loans secured by one- to four-family residential mortgage and home equity loans has grown as a percentage of the Bank's total loan portfolio to 84.3% of total loans at December 31, 1998 from 77.6% and 72.3% at December 31, 1997 and 1996, respectively. The Bank's non-performing assets consist of non-accruing loans, accruing loans delinquent more than 90 days, troubled debt restructurings and foreclosed and repossessed assets. Prior to 1997, the Company's performance had been significantly hampered by the level of its non-performing assets. During 1996, the Bank decided to dispose of certain non-performing and higher credit risk performing assets in a bulk sale, as opposed to continuing to resolve the problems on an asset specific basis. The bulk sale strategy was chosen in order to accelerate the reduction in loan portfolio credit risk, reduce the drag on earnings that resulted from carrying these assets, enhance overall asset quality and better position the Bank to achieve its strategic goals. Primarily as a result of the bulk sale in 1996, the ratio of non-performing assets to total assets declined from 2.72% at December 31, 1995 to 1.18% at December 31, 1996. This ratio experienced further improvement in 1997 and 1998, dropping to 0.67% at December 31, 1997 and to 0.45% at December 31, 1998. In addition, the Bank's ratios of non-performing loans to total loans and the allowance for loan losses to non-performing loans have also improved. The ratio of non-performing loans to total loans at December 31, 1998 was 0.68% compared to 1.16% and 1.94% at December 31, 1997 and 1996, respectively. The ratio of the allowance for loan losses to non-performing loans increased to 168.4% at December 31, 1998, compared to 117.1% and 70.5% at December 31, 1997 and 1996, respectively. Market Risk Interest rate risk is the most significant market risk affecting the Company. Other types of market risk, such as foreign currency exchange rate risk and commodity price risk, do not arise in the normal course of the Company's business activities. The Company does not currently engage in trading activities or use derivative instruments, such as caps, collars or floors, to control interest rate risk. Even though such activities may be permitted with the approval of the Board of Directors, the Company does not intend to engage in such activities in the immediate future. The Bank's net interest income is sensitive to changes in interest rates, as the rates paid on its interest-bearing liabilities generally change faster than the rates earned on its interest-earning assets. As a result, net interest income will frequently decline in periods of rising interest rates and increase in periods of decreasing interest rates. To mitigate the impact of changing interest rates on its net interest income, the Bank manages its interest rate sensitivity and asset/liability products through its asset/liability management committee. The asset/liability management committee meets weekly to determine the rates of interest for loans and deposits and consists of the President and Chief Executive Officer, the Senior Vice President and Chief Commercial Lending Officer, the Senior Vice President and Chief Consumer Lending Officer, and the Treasurer and Chief Financial Officer. Rates on deposits are primarily based on the Bank's needs for funds and on a review of rates offered by other financial institutions in the Bank's market areas. Interest rates on loans are primarily based on the interest rates offered by other financial institutions in the Bank's primary market areas as well as the Bank's cost of funds. In an effort to reduce interest rate risk and protect itself from the negative effects of rapid or prolonged changes in interest rates, the Bank has instituted certain asset and liability management measures, including (i) originating, for its portfolio, a large base of adjustable-rate loans, which include residential mortgage and home equity loans, which at December 31, 1998, totaled 23.8% of total loans, and (ii) maintaining substantial levels of federal funds sold and debt securities with one to five year terms to maturity. The committee manages the interest rate sensitivity of the Bank through the determination and adjustment of asset/liability composition and pricing strategies. The committee then monitors the impact of the interest rate risk and earnings consequences of such strategies for consistency with the Bank's liquidity needs, growth, and capital adequacy. The Bank's principal strategy is to reduce the interest rate sensitivity of its earning assets and to match, as closely as possible, the maturities of earning assets with interest-bearing liabilities. The Bank is subject to interest rate risk to the extent that its interest-bearing liabilities reprice on a different basis or a different pace from its earning assets. Management of the Bank believes it is important to manage the effect interest rates have on the Bank's net portfolio value ("NPV") and net interest income. NPV helps measure interest rate risk by calculating the difference between the present value of expected cash flows from assets and the present value of expected cash flows from liabilities, as well as cash flows from off-balance sheet contracts. Presented below, as of December 31, 1998, is an analysis of the Bank's interest rate risk as calculated by the OTS, measured by changes in the Bank's NPV for instantaneous and sustained parallel shifts in the yield curve, in 100 basis points increments, up and down 400 basis points. NPV as % of PV Net Portfolio Value of Assets ------------------------------- ------------------------------ Change NPV in Rates $Amount $Change(1) $Change(2) Ratio(3) Change(4) -------- -------- ---------- ---------- -------- --------- (Dollars in thousands) +400 bp 19,875 (56,041) (74)% 2.99% -732 bp +300 bp 34,369 (41,548) (55) 5.03 -528 bp +200 bp 49,099 (26,817) (35) 7.00 -331 bp +100 bp 63,278 (12,638) (17) 8.79 -152 bp 0 bp 75,916 10.31 -100 bp 85,127 9,211 12 11.36 105 bp -200 bp 94,711 18,795 25 12.41 210 bp -300 bp 106,432 30,516 40 13.66 335 bp -400 bp 118,319 42,403 56 14.89 458 bp - - ------------------------------------------------------------------------------- (1) Represents the excess (deficiency) of the estimated NPV assuming the indicated change in interest rates minus the estimated NPV assuming no change in interest rates. (2) Calculated as the amount of change in the estimated NPV divided by the estimated NPV assuming no change in interest rates. (3) Calculated as the estimated NPV divided by present value of total assets. (4) Calculated as the excess (deficiency) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates. Certain assumptions utilized by the OTS in assessing the interest rate risk of savings associations were employed in preparing the previous table. These assumptions related to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates will not change as a result of changes in interest rates although there can be no assurance that this will be the case. Even if interest rates change in the designated amounts, there can be no assurance that the Bank's assets and liabilities would perform as set forth above. In addition, certain shortcomings are inherent in the preceding NPV table since the data reflects hypothetical changes in NPV based upon assumptions used by the OTS to evaluate the Bank as well as other institutions. The experience of the Bank has been that net interest income declines with increases in interest rates and that net interest income increases with decreases in interest rates. Generally, during periods of increasing interest rates, the Bank's interest rate sensitive liabilities would reprice faster than its interest rate sensitive assets causing a decline in the Bank's interest rate spread and margin. This would result from an increase in the Bank's cost of funds that would not be immediately offset by an increase in its yield on earning assets. An increase in the cost of funds without an equivalent increase in the yield on earning assets would tend to reduce net interest income. The Bank's interest rate spread decreased to 2.32% for the year ended December 31, 1998 from 2.58% for the year ended December 31, 1997. The reduction in the interest rate spread was due primarily to the leveraging strategy employed by the Company during 1998. In times of decreasing interest rates, fixed rate assets could increase in value and the lag in repricing of interest rate sensitive assets could be expected to have a positive effect on the Bank's net interest income. During 1998, proceeds from FHLB term advances and repurchase agreements totaled approximately $162.6 million, offset by repayments of repurchase agreements of approximately $89.4 million. These funds were primarily used to fund the purchase of residential real estate loans and securities available for sale, in addition to funding the home equity and residential real estate loan growth during the year. Management believes that the strategy related to the purchase of loans and securities with borrowed funds causes the bank's NPV to be more sensitive to changes in interest rates. Although this strategy did not expose the Company's net interest income and its net interest margin to an unacceptable level of sensitivity to changes in interest rates in 1998, management plans to de-emphasize this strategy in 1999. Average Balances, Interest Rates and Yields The following table presents for the periods indicated the total dollar amount of interest and dividend income earned on average earning assets and the resultant yields, as well as the total dollar amount of interest expense incurred on average interest-bearing liabilities and the resultant rates. No tax equivalent adjustments were made. All average balances are daily average balances. Non-accruing loans have been included in the table as loans with interest earned on a cash basis only. Securities available for sale are included at amortized cost.
1998 1997 1996 --------------------------- ------------------------- -------------------------- Average Interest Yield/ Average Interest Yield/ Average Interest Yield/ Balance Inc./Exp. Rate Balance Inc./Exp. Rate Balance Inc./Exp. Rate ------- --------- ------ ------- --------- ------ ------- --------- ------ Earning Assets (Dollars in Thousands) Loans receivable (1) ....................... $ 322,335 $ 24,623 7.64% $ 267,726 $ 21,011 7.85% $ 262,193 $20,557 7.84% Securities available for sale (AFS) (2)..... 205,995 13,479 6.54% 194,111 13,957 7.19% 156,093 10,921 7.00% Federal Home Loan Bank Stock ............... 5,048 364 7.21% 3,066 204 6.65% 2,013 130 6.46% Federal funds sold and interest- bearing deposits ......................... 10,632 507 4.70% 8,162 394 4.76% 14,218 740 5.12% ------- ------ ------- ------ ------- ------ Total earning assets ................... 544,010 38,973 7.16% 473,065 35,566 7.52% 434,517 32,348 7.44% ------- ------ ------- ------ ------- ------ Allowance for Loan Losses .................... (4,220) (3,846) (3,686) Due from Brokers ............................. 5,265 7,121 14,221 Unrealized Gain/(Loss) on AFS Securities ..... 225 (884) (1,475) Other Assets ................................. 15,926 16,150 15,616 ------- --------- --------- Total Average Assets ......................... $ 561,206 $ 491,606 $ 459,193 ========= ========= ========= Interest-Bearing Liabilities Savings deposits ........................... $ 103,513 3,119 3.01% $ 99,389 $ 3,016 3.03% $103,931 $ 3,162 3.04% NOW deposits .............................. 25,410 549 2.16% 19,990 543 2.72% 19,124 527 2.76% Certificates of deposit .................... 176,136 9,882 5.61% 172,319 9,882 5.73% 150,300 8,492 5.65% Money Market Accounts ...................... 8,481 272 3.21% 7,159 204 2.85% 8,765 243 2.77% Borrowed Funds ............................. 150,335 8,619 5.73% 98,927 6,009 6.07% 67,572 4,011 5.94% ------- ------ ------- ------ ------- ------ Total interest-bearing liabilities ..... 463,875 22,441 4.84% 397,784 19,654 4.94% 349,692 16,435 4.70% ------- ------ ------- ------ ------- ------ Other Liabilities ............................ 34,590 32,757 36,255 ------- ------ ------ Total Liabilities ............................ 498,465 430,541 385,947 Shareholders' Equity ......................... 62,741 61,065 73,246 ------- ------ ------ Total Average Liabilities & Equity ........... $ 561,206 $ 491,606 $ 459,193 ========= ========= ========= Net interest income ...................... $ 16,532 $ 15,912 $ 15,913 ======= ======= ======== Interest rate spread ..................... 2.32% 2.58% 2.74% ====== ====== ====== Net earning assets ....................... $ 80,135 $ 75,281 $ 84,825 ========= ========= ========= Net interest margin ...................... 3.04% 3.36% 3.66% ====== ====== ====== Average earning assets/Average interest-bearing liabilities ........... 117.28% 118.93% 124.26% ========== ========== ========== (1) Calculated net of deferred loan fees, loan discounts and loans in process. (2) Securities available for sale exclude securities pending settlement.
Rate/Volume Analysis of Net Interest Income The following table presents the dollar amount of changes in interest and dividend income and interest expense for major components of earning assets and interest-bearing liabilities. It distinguishes between the changes related to outstanding balances and the changes due to changes in interest rates. For each category of earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
---------------------------------------------------------------------------- 1998 vs. 1997 1997 v. 1996 --------------------------------- --------------------------------------- Increase Increase (Decrease) (Decrease) Due to Total Due to Total ----------------- Increase ------------------ Increase Volume Rate (Decrease) Volume Rate (Decrease) ---------- ------- --------- -------- --------- ----------- Earning Assets (Dollars in thousands) Loans receivable ..................... $ 4,154 $ (542) $ 3,612 $ 434 $ 20 $ 454 Securities available for sale (AFS) .. 1,018 (1,496) (478) 2,726 310 3,036 Federal Home Loan Bank Stock ......... 142 18 160 70 4 74 Federal funds sold and interest- bearing deposits ................... 118 (5) 113 (298) (48) (346) ------- ------- ------- ------- -------- -------- Total earning assets ............. 5,432 (2,025) 3,407 2,932 286 3,218 ------- ------- ------- ------- -------- -------- Interest-Bearing Liabilities Savings deposits ..................... 124 (21) 103 (138) (9) (147) NOW deposits ........................ 24 (18) 6 23 (6) 17 Certificates of deposit .............. 216 (216) -- 1,261 129 1,390 Money Market Accounts ................ 40 28 68 (46) 7 (39) Borrowed Funds ....................... 2,926 (316) 2,610 1,902 96 1,998 ------- ------- ------- ------- -------- -------- Total interest-bearing liabilities $ 3,330 $ (543) $ 2,787 $ 3,003 $ 216 $ 3,219 ------- ------- ------- ------- -------- -------- Net interest income ................ $ 620 $ (1) ======= ========
Liquidity and Capital Resources The Bank is required by OTS regulations to maintain, for each calendar month, a daily average balance of cash and eligible liquid investments of not less than 4% of the average daily balance of its net withdrawable savings and borrowings (due in one year or less) during the preceding calendar month. This liquidity requirement may be changed from time to time by the OTS to any amount within the range of 4% to 10%. The Bank's average liquidity ratio was 31.97% and 27.15% at December 31, 1998 and 1997, respectively. The Company's sources of liquidity include cash flows from operations, principal and interest payments on loans, mortgage-backed securities and collateralized mortgage obligations, maturities of securities, deposit inflows, borrowings from the FHLB of New York and proceeds from the sale of securities under agreements to repurchase. While maturities and scheduled amortization of loans and securities are, in general, a predictable source of funds, deposit flows and prepayments on loans and securities are greatly influenced by general interest rates, economic conditions and competition. In addition, the Bank invests excess funds in overnight deposits which provide liquidity to meet lending requirements. In addition to deposit growth, the Company borrows funds from the FHLB of New York or may utilize other types of borrowed funds to supplement its cash flows. During 1998, borrowed funds from the FHLB of New York increased $7.7 million and borrowings under securities repurchase agreements ("repos") increased $56.2 million. Since March 31, 1998, $100.0 million in callable repos with the Federal Home Loan Bank have been added to borrowed funds while the Company has reduced its obligation with other repo counterparties to take advantage of the lower rates offered by the Federal Home Loan Bank. The Federal Home Loan Bank repos all mature within 10 years with call dates ranging from one year to five years and fixed rates that range from 5.01% to 5.59%. These repos were used primarily to fund the origination and purchase of loans. At December 31, 1998 and 1997, the Company had $21.4 million and $12.3 million, respectively, in outstanding term borrowings (advances) from the FHLB and $152.4 million and $99.3 million, respectively, in borrowings under securities repurchase agreements. See Note 10 to the Consolidated Financial Statements for further information regarding the Company's borrowings. As of December 31, 1998 and 1997, the Company had $244.2 million and $205.8 million of securities, respectively, classified as available for sale. The liquidity of the securities available for sale portfolio provides the Company with additional potential cash flows to meet loan growth and deposit flows. Liquidity may be adversely affected by unexpected deposit outflows, excessive interest rates paid by competitors, adverse publicity relating to the banking industry, and similar matters. Management monitors projected liquidity needs and determines the level desirable, based in part on the Company's commitments to make loans and management's assessment of the Company's ability to generate funds. The Bank is subject to federal regulations that impose certain minimum capital requirements. At December 31, 1998, the Bank's capital exceeded each of the regulatory capital requirements of the OTS. The Bank is "well capitalized" at December 31, 1998 according to regulatory definition. At December 31, 1998, the Bank's tangible and core capital levels were both $63.5 million (8.83% of total adjusted assets) and its total risk-based capital level was $67.4 million (21.99% of total risk-weighted assets). The minimum regulatory capital ratio requirements of the Bank are 1.5% for tangible capital, 3.0% for core capital, and 8.0% for total risk-based capital. During 1998, the Company repurchased 215,320 shares of stock in open-market transactions at a total cost of $4.1 million. However, upon consummation of the merger with AFSALA Bancorp, Inc., the Company issued 1,337,207 shares of common stock of which 1,327,086 shares were issued from the Company's treasury stock. Impact of the Year 2000 The Year 2000 issue confronting the Company, its vendors, and its customers, centers on the inability of computer systems to recognize the year 2000. Many existing computer programs and systems originally were programmed with six digit dates that provided only two digits to identify the calendar year in the date field. With the impending new millennium, these programs and computers might recognize "00" as the year 1900 rather than the year 2000. Financial institution regulators recently have increased their focus upon Y2K compliance issues and have issued guidance concerning the responsibilities of senior management and directors. The Federal Financial Institution Examination Council has issued several interagency statements on Y2K project management awareness. These statements require financial institutions to, among other things, examine the Y2K implications of their reliance on vendors with respect to data exchange and the potential impact of the Y2K issue on their customers, suppliers and borrowers. These statements also require each federally regulated financial institution to survey its exposure, measure its risk and plan to address the Y2K issue. In addition, the federal banking regulators have issued safety and soundness guidelines to be followed by insured depository institutions to assure resolution of any Y2K problems. The federal banking agencies have assured that Y2K testing and certification is a key safety and soundness issue in conjunction with regulatory exams and thus, that an institution's failure to address appropriately the Y2K issue could result in supervisory action, including the reduction of the institution's supervisory ratings, the denial of applications for approval of mergers or acquisitions or the imposition of civil money penalties. The Company has formulated a plan addressing the Y2K issue and established a seven member steering committee consisting of three officers and four employees of the Bank. The steering committee meets monthly and reports on a quarterly basis to the Board of Directors as to the Company's progress in resolving any Y2K problems. The committee created an action plan that includes milestones, budget, estimates, strategies, and methodologies to track and report the status of the project. Members of the committee attended conferences to gain more insight into the Y2K issue and potential strategies for addressing it. These strategies were further developed with respect to how the objectives of the Y2K plan would be achieved, and a Y2K business risk assessment was made to quantify the extent of the Company's Y2K exposure. A Company inventory was taken to identify and monitor Y2K readiness for information systems, including hardware, software, and vendors, as well as environmental systems, including security systems and facilities. The Company inventory revealed that Y2K upgrades were available for all vendor supplied mission critical systems, and these Y2K-ready versions have been delivered, installed and have entered the validation process. The action plan includes a validation phase designed to test the ability of hardware and software to accurately process date sensitive data. During the validation testing process to date, no significant Y2K problems have been identified relating to any modified or upgraded mission critical systems. During the assessment phase, the Company began to develop back-up or contingency plans for each of its mission critical systems. The majority of the Company's mission critical systems are dependent upon third party service providers or vendors, therefore, contingency plans include using or reverting to manual systems until system problems can be corrected or selecting a new vendor. In the event a current vendor's system fails during the validation phase, and it is determined that the vendor is unable or unwilling to correct the failure, the Company will convert to a new system from a list of prospective vendors. The Company has identified a worst case scenario that envisions the possibility of the lack of power or communication services for a period of time in excess of a day. Contingency planning is an integral part of the Company's Y2K readiness plan. Key operating personnel are actively analyzing services that will be supported during extended outages and preparing written plans and procedures to train Bank personnel. Until and after the Year 2000 rollover takes place, there can be no assurance that Year 2000-related problems will not occur. Despite the Company's efforts to identify and address Year 2000 issues, such issues present risks to the Company, including business disruptions and financial losses. The costs incurred by the Company during fiscal 1998 to address Year 2000 compliance were approximately $41 thousand. The Company estimates it will incur up to approximately $125 thousand in direct costs during fiscal 1999 to support its compliance initiatives. Although the Company anticipates that its systems will be Year 2000 compliant on or before December 31, 1999, it cannot predict with certainty the outcome or the success of its Year 2000 program, or that third party systems are or will be Year 2000 complaint, or that the costs required to address the Year 2000 issue, or that the impact of a failure to achieve substantial Year 2000 compliance, will not have a material adverse effect on the Company's business, financial condition or results of operations. Effect of Inflation and Changing Prices The Company's consolidated financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money over time due to inflation. Unlike industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or with the same magnitude as the prices of goods and services. Recent Accounting Pronouncements The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income represents the sum of net income and items of "other comprehensive income," which are reported directly in shareholders' equity, net of tax, such as the change in the net unrealized gain or loss on securities available for sale. While SFAS No. 130 does not require a specific reporting format, it does require that an enterprise display an amount representing total comprehensive income for each period for which an income statement is presented. In accordance with SFAS No. 130, the Company has reported comprehensive income and its components for 1998, 1997 and 1996 in the consolidated statements of changes in shareholders' equity. Accumulated other comprehensive income, which is included in shareholders' equity, net of tax, represents the net unrealized gain or loss on securities available for sale. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments. For the Company, the statement became effective for its annual financial statements for the year ended December 31, 1998. The Company engages in the traditional operations of a community banking enterprise, principally the delivery of loan and deposit products and other financial services. Management makes operating decisions and assesses performance based on an ongoing review of the Company's community banking operations, which constitute the Company's only operating segment for financial reporting purposes. The Company operates primarily in upstate New York in Montgomery, Fulton, Schenectady, Saratoga, Albany, Otsego, Chenango and Schoharie counties and surrounding areas. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which amends and, to the extent practicable, standardizes the financial statement disclosure requirements applicable to such benefits. This Statement is applicable to all entities and addresses disclosures only. The Statement does not change any of the measurement or recognition provisions provided for in the applicable accounting standards. The Company has provided the required disclosures under SFAS No. 132 in Note 12 to the consolidated financial statements. In June 1988, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Management is currently evaluating the impact of this Statement on the Company's consolidated financial statements.
Unaudited Consolidated Quarterly Financial Information 1998 1997 ----------------------------------------- ------------------------------------------ 3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31 -------- -------- -------- -------- -------- -------- -------- -------- (In thousands, except share and per share data) Interest and Dividend Income ....... $9,009 $9,095 $9,955 $10,914 $8,675 $8,773 $8,827 $9,291 Net Interest Income ................ 3,862 3,848 4,085 4,737 4,020 4,008 3,881 4,003 Provision for Loan Losses .......... 225 225 225 225 363 275 225 225 Income (Loss) Before Taxes ......... 808 169 779 ( 55) 1,076 889 1,188 1,300 Net Income ......................... 446 97 478 10 652 572 736 800 Earnings per share - Basic ......... 0.12 0.03 0.13 0.00 0.16 0.14 0.19 0.21 Earnings per share - Diluted ....... 0.11 0.03 0.13 0.00 0.16 0.14 0.19 0.20 Average Shares Outstanding - Basic . 3,828,636 3,759,045 3,701,018 4,371,881 4,011,349 4,024,536 3,897,492 3,832,531 Average Shares Outstanding - Diluted 3,927,904 3,861,896 3,745,764 4,417,751 4,011,349 4,030,013 3,957,434 3,929,747
Independent Auditors' Report The Board of Directors Ambanc Holding Co., Inc.: We have audited the accompanying consolidated statements of financial condition of Ambanc Holding Co., Inc. and subsidiaries (the Company) as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ambanc Holding Co., Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ KPMG LLP Albany, New York February 12, 1999 AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition December 31, 1998 1997 (In thousands) Assets Cash and due from banks ....................................... $ 9,225 5,628 Interest-bearing deposits ..................................... 3,390 4,631 Federal funds sold ............................................ 30,200 0 Cash and cash equivalents .............................. 42,815 10,259 Securities available for sale, at fair value .................. 244,241 205,808 Federal Home Loan Bank of New York stock, at cost ............. 7,215 3,291 Loans receivable, net ......................................... 420,933 281,123 Accrued interest receivable ................................... 4,115 3,734 Premises and equipment, net ................................... 4,537 3,121 Real estate owned and repossessed assets ...................... 399 143 Goodwill ...................................................... 7,923 0 Other assets .................................................. 3,294 2,965 Total assets ........................................... $ 735,472 510,444 Liabilities and Shareholders' Equity Liabilities: Deposits ................................................... 461,413 333,265 Federal Home Loan Bank overnight advances .................. --- 12,300 Federal Home Loan Bank term advances ....................... 21,410 --- Securities sold under agreements to repurchase ............. 152,400 99,250 Advances from borrowers for taxes and insurance ............ 2,436 1,902 Accrued interest payable ................................... 1,426 819 Accrued expenses and other liabilities ..................... 4,494 1,706 Due to brokers ............................................. 6,000 --- Total liabilities ...................................... 649,579 449,242 Commitments and contingent liabilities (note 14) Shareholders' equity: Preferred stock $.01 par value. Authorized 5,000,000 shares; none issued at December 31, 1998 and 1997 ................ --- --- Common stock $.01 par value. Authorized 15,000,000 shares; 5,432,371 shares issued at December 31, 1998 and 5,422,250 shares issued at December 31, 1997 ....................... 54 54 Additional paid-in capital ................................. 63,019 52,385 Retained earnings, substantially restricted ................ 26,356 26,458 Treasury stock, at cost (23,908 shares at December 31, 1998 and 1,115,832 shares at December 31, 1997) .......... (329) (12,585) Unallocated common stock held by ESOP ...................... (2,818) (3,303) Unearned RRP shares ........................................ (759) (1,533) Accumulated other comprehensive income ..................... 370 (274) Total shareholders' equity ............................. 85,893 61,202 Total liabilities and shareholders' equity ............. $ 735,472 510,444 See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Operations Years ended December 31, 1998 1997 1996 (In thousands, except per share amounts) Interest and dividend income: Loans receivable ...................................... $ 24,623 21,011 20,557 Securities available for sale ......................... 13,479 13,957 10,921 Federal funds sold and interest-bearing deposits ...... 507 394 740 Federal Home Loan Bank stock .......................... 364 204 130 Total interest and dividend income ................ 38,973 35,566 32,348 Interest expense: Deposits .............................................. 13,822 13,645 12,424 Borrowings ............................................ 8,619 6,009 4,011 Total interest expense ............................ 22,441 19,654 16,435 Net interest income ............................... 16,532 15,912 15,913 Provision for loan losses ................................ 900 1,088 9,450 Net interest income after provision for loan losses 15,632 14,824 6,463 Other income: Service charges on deposit accounts ................... 1,012 786 764 Net (losses) gains on securities transactions ......... (165) 775 (102) Other ................................................. 297 258 246 Total other income ................................ 1,144 1,819 908 Other expenses: Salaries, wages and benefits .......................... 6,393 6,086 5,097 Non-recurring termination benefits .................... 608 --- --- Occupancy and equipment ............................... 1,809 1,539 1,328 Data processing ....................................... 1,688 1,168 1,088 Correspondent bank processing fees .................... 147 126 116 Real estate owned and repossessed assets expenses, net 61 355 2,563 Professional fees ..................................... 735 429 540 Amortization of goodwill .............................. 67 --- --- Other ................................................. 3,567 2,487 2,404 Total other expenses .............................. 15,075 12,190 13,136 Income (loss) before taxes ............................... 1,701 4,453 (5,765) Income tax expense (benefit) ............................. 670 1,693 (1,929) Net income (loss) ................................. $ 1,031 2,760 (3,836) Basic earnings (loss) per share $ 0.26 0.70 (0.81) Diluted earnings (loss) per share $ 0.26 0.69 (0.81) See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity Years ended December 31, 1998, 1997 and 1996 (In thousands, except share and per share data) Additional Common paid-in Retained Treasury stock capital earnings stock Balance at December 31, 1995 .................. $ 54 52,127 28,272 --- Comprehensive loss: Net loss ................................... --- --- (3,836) --- Other comprehensive income, net of tax: Unrealized net holding losses on securities available for sale arising during the year (pre-tax $68) Reclassification adjustment for net losses realized in net income during the year (pre-tax $102) Other comprehensive income ................. --- --- --- --- Comprehensive loss Purchase of treasury shares (1,030,227 shares). --- --- --- (11,208) Release of ESOP shares (52,964 shares) ........ --- 1 --- --- Balance at December 31, 1996 .................. 54 52,128 24,436 (11,208) Comprehensive income: Net income ................................. --- --- 2,760 --- Other comprehensive loss, net of tax: Unrealized net holding gains on securities available for sale arising during the year (pre-tax $452) Reclassification adjustment for net gains realized in net income during the year (pre-tax $775) Other comprehensive loss ................... --- --- --- --- Comprehensive income Purchase of treasury shares (216,890 shares) .. --- --- --- (3,488) Release of ESOP shares (50,561 shares) ........ --- 257 --- 0 Issuance of RRP shares (131,285 shares) ....... --- --- (306) 2,111 RRP shares earned ............................. --- --- --- --- Cash dividends - $0.10 per share .............. --- --- (432) --- Balance at December 31, 1997 .................. 54 52,385 26,458 (12,585) Comprehensive income: Net income ................................. --- --- 1,031 --- Other comprehensive income, net of tax: Unrealized net holding gains on securities available for sale arising during the year (pre-tax $908) Reclassification adjustment for net losses realized in net income during the year (pre-tax $165) Other comprehensive income ................. --- --- --- --- Comprehensive income Purchase of treasury shares (215,320 shares) .. --- --- --- (4,111) Release of ESOP shares (48,498 shares) ........ --- 331 --- --- RRP shares earned ............................. --- --- --- --- Tax benefit related to RRP shares earned ...... --- 76 --- --- RRP shares forfeited (29,331 shares) .......... --- --- --- (403) Exercises of stock options (9,489 shares) ..... --- 5 --- 125 Acquisition of AFSALA Bancorp, Inc.(see note 2) --- 10,222 --- 16,645 Cash dividends - $0.25 per share .............. --- --- (1,133) --- Balance at December 31, 1998 .................. $ 54 63,019 26,356 (329) See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity (continued) Years ended December 31, 1998, 1997 and 1996 (In thousands, except share and per share data) Unallocated Accumulated common stock Unearned other held by RRP comprehensive Comprehensive ESOP shares income Total income(loss) Balance at December 31, 1995 .................... (4,338) --- (100) 76,015 Comprehensive loss: Net loss ................................... --- --- --- (3,836) $(3,836) Other comprehensive income, net of tax: Unrealized net holding losses on securities available for sale arising during the year (pre-tax $68) ....... (41) Reclassification adjustment for net losses realized in net income during the year (pre-tax $102) ............. 61 Other comprehensive income ................. --- --- 20 20 20 Comprehensive loss .............. $(3,816) Purchase of treasury shares (1,030,227 shares) .. --- --- --- (11,208) Release of ESOP shares (52,964 shares) .......... 526 --- --- 527 Balance at December 31, 1996 .................... (3,812) --- (80) 61,518 Comprehensive income: Net income ................................. --- --- --- 2,760 $ 2,760 Other comprehensive loss, net of tax: Unrealized net holding gains on securities available for sale arising during the year (pre-tax $452) ...... 271 Reclassification adjustment for net gains realized in net income during the year (pre-tax $775) ............. (465) Other comprehensive loss ................... --- --- (194) (194) (194) Comprehensive income ............. $ 2,566 Purchase of treasury shares (216,890 shares) .... --- --- --- (3,488) Release of ESOP shares (50,561 shares) .......... 509 --- --- 766 Issuance of RRP shares (131,285 shares) ......... --- (1,805) --- --- RRP shares earned ............................... --- 272 --- 272 Cash dividends - $0.10 per share ................ --- --- --- (432) Balance at December 31, 1997 .................... (3,303) (1,533) (274) 61,202 Comprehensive income: Net income ................................. --- --- --- 1,031 $ 1,031 Other comprehensive income, net of tax: Unrealized net holding gains on securities available for sale arising during the year (pre-tax $908) ...... 545 Reclassification adjustment for net losses realized in net income during the year (pre-tax $165) ............. 99 Other comprehensive income ................. --- --- 644 644 644 Comprehensive income ............. $ 1,675 Purchase of treasury shares (215,320 shares) .... --- --- --- (4,111) Release of ESOP shares (48,498 shares) .......... 485 --- --- 816 RRP shares earned ............................... --- 371 --- 371 Tax benefit related to RRP shares earned ........ --- --- --- 76 RRP shares forfeited (29,331 shares) ............ --- 403 --- --- Exercises of stock options (9,489 shares) ....... --- --- --- 130 Acquisition of AFSALA Bancorp, Inc. (see note 2). --- --- --- 26,867 Cash dividends - $0.25 per share ................ --- --- --- (1,133) Balance at December 31, 1998 .................... (2,818) (759) 370 85,893 See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows Years ended December 31, 1998 1997 1996 (In thousands) Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Net income (loss) ......................................... $1,031 2,760 (3,836) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ...................... 848 652 558 Provision for loan losses .......................... 900 1,088 9,450 Provision for losses and writedowns on real estate owned and repossessed assets ............. 7 171 877 Net (gains) losses on sale of real estate owned and repossessed assets .................... (7) 38 1,260 Loss on sale of premises and equipment ............. --- --- 64 ESOP compensation expense .......................... 816 766 527 RRP expense ........................................ 371 272 0 Net losses (gains) on securities transactions ...... 165 (775) 102 Net amortization on securities ..................... 1,094 320 475 (Increase) decrease in accrued interest receivable and other assets ..................... (17) 831 (3,316) Increase (decrease) in accrued interest payable, accrued expenses and other liabilities .......... 1,423 187 (1,201) Net cash provided by operating activities 6,631 6,310 4,960 Cash flows from investing activities: Proceeds from sales and redemptions of securities available for sale .......................... 126,846 194,210 34,469 Purchases of securities available for sale ................ (157,188) (247,390) (192,647) Proceeds from principal paydowns and maturities of securities available for sale ............ 53,743 48,029 31,508 Net decrease in due to/from brokers ....................... --- --- (28,752) Purchases of FHLB stock ................................... (3,359) (1,262) (137) Purchases of loans ........................................ (31,888) --- 0 Proceeds from sales of loans .............................. --- --- 18,929 Net increase in loans made to customers ................... (26,391) (34,384) (28,685) Purchases of premises and equipment ....................... (422) (1,004) (341) Proceeds from sales of real estate owned and repossessed assets ..................................... 270 631 2,519 Proceeds from the sale of premises and equipment .......... --- --- 25 Cash and cash equivalents acquired in acquisition, net of cash paid ....................................... 24,996 --- --- Net cash used in investing activities .............. (13,393) (41,170) (163,112)
AMBANC HOLDING CO., INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued) Years ended December 31, 1998 1997 1996 (In thousands) Cash flows from financing activities: Net (decrease) increase in deposits .............. $(16,533) 35,183 (13,157) Net (decrease) increase in FHLB overnight advances (12,300) 6,300 6,000 Proceeds from FHLB term advances ................. 20,000 --- --- Repayments of FHLB term advances ................. (35) --- --- Proceeds from repurchase agreements .............. 142,575 66,570 193,770 Repayments of repurchase agreements .............. (89,425) (70,100) (90,990) Increase in advances from borrowers for taxes and insurance ..................................... 150 199 11 Purchases of treasury stock ...................... (4,111) (3,488) (11,208) Exercises of stock options ....................... 130 --- --- Dividends paid ................................... (1,133) (432) 0 Net cash provided by financing activities . 39,318 34,232 84,426 Net increase (decrease) in cash and cash equivalents ...... 32,556 (628) (73,726) Cash and cash equivalents at beginning of year ............ 10,259 10,887 84,613 Cash and cash equivalents at end of year .................. $42,815 10,259 10,887 Supplemental disclosures of cash flow information - cash paid during the year for: Interest ......................................... $ 21,834 19,912 15,360 Income taxes ..................................... $ 1,429 1,770 306 Noncash investing and financing activities: Net transfer of loans to real estate owned and repossessed assets ............................... $ 386 268 2,203 Increase in amounts due to brokers from purchases of securities available for sale .................... $ 6,000 --- --- Fair value of non-cash assets acquired in acquisition $142,820 --- --- Fair value of liabilities assumed in acquisition ..... $148,565 --- --- Issuance of RRP shares ............................... $ --- 2,111 --- Tax benefit related to vested RRP shares ............. $ 76 --- --- RRP shares forfeited ................................. $ 403 --- --- See accompanying notes to consolidated financial statements.
AMBANC HOLDING CO., INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1998, 1997 and 1996 (1) Summary of Significant Accounting Policies (a) Basis of Presentation The accompanying consolidated financial statements include the accounts of Ambanc Holding Co., Inc. (Ambanc or the Holding Company), and its wholly owned subsidiaries, Mohawk Community Bank, formerly known as Amsterdam Savings Bank, FSB (the Bank), and A.S.B. Insurance Agency, Inc., collectively referred to as the Company. All significant intercompany accounts have been eliminated in consolidation. The accounting and reporting policies of the Company conform in all material respects to generally accepted accounting principles and to general practice within the banking industry. (b) Use of Estimates The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses. In connection with the determination of the allowance for loan losses, management obtains appraisals for significant assets. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination which may not be currently available to management. A substantial portion of the Company's assets are loans secured by real estate in the upstate New York area. Accordingly, the ultimate collectibility of a considerable portion of the Company's loan portfolio is dependent upon market conditions in the upstate New York region. (c) Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. (d) Securities Available for Sale, Securities Held to Maturity and FHLB of New York Stock Management determines the appropriate classification of securities at the time of purchase. If management has the positive intent and ability to hold debt securities to maturity, they are classified as securities held to maturity and are stated at amortized cost. All other debt and marketable equity securities are classified as securities available for sale and are reported at fair value, with net unrealized gains and losses reported in accumulated other comprehensive income. The Company does not maintain a trading portfolio and at December 31, 1998 and 1997, the Company had no securities classified as held to maturity. Unrealized losses on securities that reflect a decline in value that is other than temporary are charged to income. Non-marketable equity securities, such as Federal Home Loan Bank (FHLB) of New York stock, are stated at cost. The investment in FHLB of New York stock is required for membership and is pledged to secure FHLB borrowings. Mortgage-backed securities, which are guaranteed by the Government National Mortgage Association ("GNMA"), Freddie Mac or Fannie Mae, represent participation interests in pools of long-term first mortgage loans originated and serviced by the issuers of the securities. Gains and losses on the sale and redemption of securities available for sale are based on the amortized cost of the specific security sold or redeemed. The cost of securities is adjusted for the amortization of premiums and the accretion of discounts, which is calculated on an effective interest method. Purchases and sales are recorded on a trade date basis. Receivables and payables from unsettled transactions are shown as due from brokers or due to brokers in the consolidated statements of financial condition. (e) Loans Receivable and Loan Fees Loans receivable are stated at the unpaid principal amount, net of unearned discount, net deferred loan fees and costs, and the allowance for loan losses. Discounts are amortized to income over the contractual life of the loan using the level-yield method. Loan fees received and the related direct costs of originations are deferred and recorded as yield adjustments over the lives of the related loans using the interest method of amortization. Non-performing loans include nonaccrual loans, restructured loans and loans which are 90 days or more past due and still accruing interest. Loans considered doubtful of collection by management are placed on a nonaccrual status with respect to interest income recognition. Generally, loans past due 90 days or more as to principal or interest are placed on nonaccrual status except for certain loans which, in management's judgment, are adequately secured and for which collection is probable. Previously accrued income that has not been collected is reversed from current income. Thereafter, the application of payments received (principal or interest) on nonaccrual loans is dependent on the expectation of ultimate repayment of the loan. If ultimate repayment of the loan is reasonably assured, any payments received are applied in accordance with the contractual terms. If ultimate repayment of principal is not reasonably assured or management judges it to be prudent, any payment received is applied to principal until ultimate repayment of the remaining balance is reasonably assured. Loans are removed from nonaccrual status when they are estimated to be fully collectible as to principal and interest. Amortization of the related deferred fees or costs is suspended when a loan is placed on nonaccrual status. The allowance for loan losses is maintained at a level deemed appropriate by management based on an evaluation of the known and inherent risks in the portfolio, the level of non-performing loans, past loan loss experience, the estimated value of underlying collateral, and current and prospective economic conditions. The allowance is increased by provisions for loan losses charged to operations. Losses on loans (including impaired loans) are charged to the allowance when all or a portion of a loan is deemed to be uncollectible. Recoveries of loans previously charged off are credited to the allowance when realized. (f) Loan Impairment Management considers a loan to be impaired if, based on current information, it is probable that the Company will be unable to collect all scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Except for loans restructured in a troubled debt restructuring subsequent to January 1, 1995, management excludes large groups of smaller balance homogeneous loans such as residential mortgages and consumer loans which are collectively evaluated for impairment. Impairment losses, if any, are recorded through a charge to the provision for loan losses. (g) Real Estate Owned and Repossessed Assets Real estate owned and repossessed assets include assets received from foreclosures, in-substance foreclosures, and repossessions. A loan is classified as an in-substance foreclosure when the Company has taken possession of the collateral regardless of whether formal foreclosure proceedings have taken place. Real estate owned and repossessed assets, including in-substance foreclosures, are recorded on an individual asset basis at the lower of fair value less estimated costs to sell or "cost" (defined as the fair value at initial foreclosure or repossession). When a property is acquired or identified as an in-substance foreclosure, the excess of the loan balance over fair value is charged to the allowance for loan losses. Subsequent writedowns to carry the property at fair value less costs to sell are included in noninterest expense. Costs incurred to develop or improve properties are capitalized, while holding costs are charged to expense. At December 31, 1998 and 1997, real estate owned and repossessed assets consisted primarily of one-to-four family residential properties, recreational vehicles and automobiles. The Company had no in-substance foreclosures at December 31, 1998 or 1997. (h) Premises and Equipment, Net Premises and equipment are carried at cost, less accumulated depreciation applied on a straight-line basis over the estimated useful lives of the assets. Leasehold improvements are amortized on a straight-line basis over the respective original lease terms without regard to lease renewal options. (i) Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired for transactions accounted for using purchase accounting. Goodwill is being amortized over fifteen years using the straight-line method. Accumulated amortization of goodwill amounted to approximately $67,000 at December 31, 1998. Goodwill is periodically reviewed by management for recoverability, and impairment is recognized by a charge to income if a permanent loss in value is indicated. (j) Securities Repurchase Agreements In securities repurchase agreements, the Company transfers the underlying securities to a third party custodian's account that explicitly recognizes the Company's interest in the securities. These agreements are accounted for as secured financing transactions provided the Company maintains effective control over the transferred securities and meets other criteria for such accounting as specified in Statement of Financial Accounting Standards (SFAS) No. 125. The Company's agreements are accounted for as secured financings; accordingly, the transaction proceeds are recorded as borrowed funds and the underlying securities continue to be carried in the Company's securities available for sale portfolio. (k) Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under the asset and liability method of SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. The Company's policy is that deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be recognized. In considering if it is more likely than not that some or all of the deferred tax assets will not be realized, the Company considers taxable temporary differences, historical income taxes paid and estimates of future taxable income. (l) Financial Instruments In the normal course of business, the Company is a party to certain financial instruments with off-balance sheet risk such as commitments to extend credit, unused lines of credit and standby letters of credit. The Company's policy is to record such instruments when funded. (m) Stock-Based Compensation Plans The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, compensation expense is recognized only if the exercise price of the option is less than the fair value of the underlying stock at the grant date. SFAS No. 123, "Accounting for Stock-Based Compensation," encourages entities to recognize the fair value of all stock-based awards on the date of grant as compensation expense over the vesting period. Alternatively, SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma disclosures of net income and earnings per share as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosures required by SFAS No. 123. The Company's Recognition and Retention Plan (RRP) is also accounted for in accordance with APB Opinion No. 25. The fair value of the shares awarded, measured as of the grant date, is recognized as unearned compensation (a deduction from shareholders' equity) and amortized to compensation expense as the shares become vested. (n) Earnings per Share Basic earnings per share (EPS) excludes dilution and is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the period. Shares of restricted stock are considered outstanding common shares and included in the computation of basic EPS when they become fully vested. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as the Company's stock options and unvested RRP shares) were exercised into common stock or resulted in the issuance of common stock. (o) Official Bank Checks The Company's official bank checks (including expense checks), which are drawn upon the Bank and are ultimately paid through the Bank's Federal Reserve Bank of New York correspondent account, are included in accrued expenses and other liabilities in the consolidated statements of financial condition. (p) Comprehensive Income The Company has adopted SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income represents the sum of net income and items of "other comprehensive income," which are reported directly in shareholders' equity, net of tax, such as the change in the net unrealized gain or loss on securities available for sale. While SFAS No. 130 does not require a specific reporting format, it does require that an enterprise display an amount representing total comprehensive income for each period for which an income statement is presented. In accordance with SFAS No. 130, the Company has reported comprehensive income and its components for 1998, 1997 and 1996 in the consolidated statements of changes in shareholders' equity. Accumulated other comprehensive income, which is included in shareholders' equity, net of tax, represents the net unrealized gain or loss on securities available for sale. (q) Segment Reporting In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments. For the Company, the statement became effective for its annual financial statements for the year ended December 31, 1998. The Company engages in the traditional operations of a community banking enterprise, principally the delivery of loan and deposit products and other financial services. Management makes operating decisions and assesses performance based on an ongoing review of the Company's community banking operations, which constitute the Company's only operating segment for financial reporting purposes. The Company operates primarily in upstate New York in Montgomery, Fulton, Schenectady, Saratoga, Albany, Otsego, Chenango and Schoharie counties and surrounding areas. (r) Reclassifications Amounts in the prior years' consolidated financial statements are reclassified whenever necessary to conform to the current year's presentation. (2) Acquisition of AFSALA Bancorp, Inc. On November 16, 1998, the Company acquired AFSALA Bancorp, Inc. (AFSALA) and its wholly owned subsidiary, Amsterdam Federal Bank. At the date of the merger, AFSALA had approximately $167.1 million in assets, $144.1 million in deposits, and $19.2 million in shareholders' equity. Pursuant to the merger agreement, AFSALA was merged with and into Ambanc Holding Co., Inc., and Amsterdam Federal Bank was merged with and into the former Amsterdam Savings Bank, FSB. The combined bank now operates as one institution under the name "Mohawk Community Bank". Upon consummation of the merger, each share of AFSALA common stock was converted into the right to receive 1.07 shares of Ambanc common stock. Based on the 1,249,727 shares of AFSALA common stock issued and outstanding immediately prior to the merger, the Company issued 1,337,207 shares of common stock in the merger. Of the 1,337,207 shares issued in the merger, 1,327,086 were issued from the Company's treasury stock and 10,121 were newly-issued shares. In addition, under the merger agreement, the Company assumed unexercised, fully-vested options to purchase 144,118 shares of AFSALA common stock, which converted into fully-vested options to purchase 154,206 shares of Ambanc common stock. See also Note 12(d). The acquisition was accounted for using purchase accounting in accordance with APB Opinion No. 16, "Business Combinations" (APB No. 16). Under purchase accounting, the purchase price is allocated to the respective assets acquired and liabilities assumed based on their estimated fair values. The acquisition of AFSALA resulted in approximately $8.0 million in excess of cost over net assets acquired ("goodwill"). Goodwill is being amortized to expense over a period of fifteen years using the straight-line method. The results of operations of AFSALA have been included in the Company's 1998 consolidated statement of operations from the date of acquisition. In conjunction with the acquisition of AFSALA, premiums on securities, loans, time deposits and FHLB term advances were recorded totaling approximately $155,000, $1,459,000, $651,000 and $26,000, respectively, in order to record these assets and liabilities at their fair values based on market interest rates at the acquisition date. The premiums are being amortized over the estimated period to repricing of the respective items. For the year ended December 31, 1998, the impact on net income from the net amortization of the premiums was not significant. The following unaudited proforma combined consolidated financial information gives effect to the November 16, 1998 acquisition of AFSALA as if it had been consummated as of the beginning of 1998 and 1997, respectively, after giving effect to certain adjustments, including (1) the amortization of goodwill, (2) the elimination of the expense related to AFSALA's ESOP and Restricted Stock Plan which terminated as of the merger date, (3) the elimination of AFSALA's acquisition-related expenses, and (4) the related income tax effects. The unaudited proforma combined consolidated financial information does not reflect any potential cost savings or revenue enhancements which may result from the combination of operations of Ambanc and AFSALA and, accordingly, may not be indicative of the results that actually would have occurred had the acquisition been consummated at the beginning of the years presented, or that may be obtained in the future. Years ended December 31, 1998 1997 ------------------------ (Unaudited) (In thousands, except per share data) Net interest income $ 21,154 21,209 Net income 1,491 3,639 Basic earnings per share 0.28 0.66 Diluted earnings per share 0.27 0.66 (3) Conversion to Stock Ownership On December 26, 1995, the Holding Company sold 5,422,250 shares of common stock at $10.00 per share to depositors and employees of the former Amsterdam Savings Bank, FSB. Net proceeds from the sale of stock of the Holding Company, after deducting conversion expenses of approximately $2.0 million, were $52.2 million and are reflected as common stock and additional paid-in capital in the accompanying consolidated financial statements. The Company utilized $26.0 million of the net proceeds to acquire all of the capital stock of the former Amsterdam Savings Bank, FSB. As part of the conversion of the former Amsterdam Savings Bank, FSB, and the former Amsterdam Federal Bank, liquidation accounts were established for the benefit of eligible depositors who continue to maintain their deposit accounts after conversion. In the unlikely event of a complete liquidation of the Bank, each eligible depositor will be entitled to receive a liquidation distribution from the liquidation accounts, in the proportionate amount of the then current adjusted balance for deposit accounts held, before distribution may be made with respect to the Bank's capital stock. The Bank may not declare or pay a cash dividend to the Holding Company on, or repurchase any of, its capital stock if the effect thereof would cause the retained earnings of the Bank to be reduced below the amount required for the liquidation accounts. Except for such restrictions, the existence of the liquidation accounts does not restrict the use or application of retained earnings. The Bank's capital exceeds all of the fully phased-in capital regulatory requirements. The Office of Thrift Supervision (OTS) regulations provide that an institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution could, after prior notice but without the approval by the OTS, make capital distributions during the calendar year of up to 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year. Any additional capital distributions would require prior regulatory approval. At December 31, 1998, the maximum amount that could have been paid by the Bank to the Holding Company was approximately $18.7 million. (4) Reserves and Investments Required by Law The Company is required to maintain certain reserves of cash and/or deposits with the Federal Reserve Bank. The amount of this reserve requirement, included in cash and due from banks, was approximately $2,378,000 and $1,123,000 at December 31, 1998 and 1997, respectively. The Company is required to maintain certain levels of stock in the Federal Home Loan Bank. The Company has pledged its investment in this stock, as well as a blanket pledge of qualifying residential real estate loans, to secure its borrowings from the Federal Home Loan Bank of New York. (5) Securities Available for Sale The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale at December 31, 1998 and 1997 are as follows: 1998 ------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value --------- ---------- ---------- --------- (In thousands) U.S. Government and agency securities $ 83,665 400 (65) 84,000 Mortgage-backed securities .......... 96,140 253 (137) 96,256 Collateralized mortgage obligations . 62,000 244 (96) 62,148 States and political subdivisions ... 1,819 18 -- 1,837 ------- ------- ------- ------- Total ..................... $ 243,624 915 (298) 244,241 ======= ======= ======= ======= 1997 ------------------------------------------ Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value --------- ---------- ---------- --------- (In thousands) U.S. Government and agency securities $ 63,198 60 (113) 63,145 Mortgage-backed securities .......... 132,272 100 (386) 131,986 Collateralized mortgage obligations . 10,040 -- (129) 9,911 States and political subdivisions ... 755 11 -- 766 ------- ------- ------- ------- Total ..................... $ 206,265 171 (628) 205,808 ======= ======= ======= ======= The amortized cost and estimated fair value of debt securities available for sale at December 31, 1998, by contractual maturity, are shown below (mortgage-backed securities and collateralized mortgage obligations are included by final contractual maturity). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Estimated cost fair value -------- -------- (In thousands) Due within one year ................... $ 6,872 6,886 Due after one year through five years . 12,077 12,117 Due after five years through ten years 50,106 50,167 Due after ten years ................... 174,569 175,071 -------- -------- Totals .......................... $243,624 244,241 ======== ======== The following table sets forth information with regard to sales of securities available for sale for the years ended December 31: 1998 1997 1996 ---- ---- ---- (In thousands) Proceeds from sale .. $79,101 174,010 34,469 Gross realized gains 154 1,017 14 Gross realized losses 319 242 116 Securities available for sale with a carrying value of $163,169,000 at December 31, 1998 and $111,153,000 at December 31, 1997 were pledged to secure securities repurchase agreements. (6) Loans Receivable, Net Loans receivable consisted of the following at December 31, 1998 and 1997: 1998 1997 -------- ------- (In thousands) Loans secured by real estate: 1 - 4 family ................................ $ 273,523 189,666 Home equity ................................. 83,949 30,246 Non-residential ............................. 23,506 26,585 Multi-family ................................ 4,165 4,152 Construction ................................ 3,600 2,081 --------- -------- Total loans secured by real estate 388,743 252,730 --------- -------- Other loans: Consumer loans: Auto loans ............................. 14,146 16,237 Recreational vehicles .................. 4,990 6,775 Other secured .......................... 6,289 1,781 Unsecured .............................. 3,712 1,847 Manufactured homes ..................... 385 494 --------- -------- Total consumer loans .............. 29,522 27,134 --------- -------- Commercial loans: Secured ................................ 5,101 3,233 Unsecured .............................. 508 471 --------- -------- Total commercial loans ............ 5,609 3,704 --------- -------- Total loans receivable ............ 423,874 283,568 Deferred costs, net of deferred fees and discounts ............................. 1,950 1,362 Allowance for loan losses ................... (4,891) (3,807) --------- -------- Loans receivable, net ............. $ 420,933 281,123 ========= ======== A summary of activity in the allowance for loan losses for the years ended December 31 is as follows: 1998 1997 1996 ------- ------- ------ (In thousands) Balance at beginning of year .. $ 3,807 3,438 2,647 Provision charged to operations 900 1,088 9,450 Charge-offs ................... (1,226) (1,214) (8,718) Recoveries .................... 295 495 59 Allowance acquired ............ 1,115 -- -- ------- ------- ------- Balance at end of year ........ $ 4,891 3,807 3,438 ======= ======= ======= The following table sets forth information with regard to non-performing loans at December 31: 1998 1997 1996 ------ ------ ------ (In thousands) Non-accrual loans ......................... $1,610 1,876 3,123 Loans contractually past due 90 days or more and still accruing interest .... 580 451 725 Restructured loans ........................ 714 931 1,031 ------ ------ ------ Total non-performing loans ................ $2,904 3,258 4,879 ====== ====== ====== There are no material commitments to extend further credit to borrowers with non-performing loans. Accumulated interest on the above non-performing loans of approximately $118,000, $277,000 and $375,000 was not recognized as income in 1998, 1997 and 1996, respectively. Approximately $238,000, $192,000 and $229,000 of interest on restructured and non-accrual loans was collected and recognized as income in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, the recorded investment in loans that are considered to be impaired totaled approximately $328,000 and $769,000, respectively, for which the related allowance for loan losses was approximately $44,000 and $338,000, respectively. As of December 31, 1998 and 1997, there were no impaired loans which did not have an allowance for loan losses. The average recorded investment in impaired loans during the years ended December 31, 1998, 1997 and 1996 was approximately $688,000, $1,445,000 and $6,918,000, respectively. For the years ended December 31, 1998, 1997 and 1996, the Company recognized interest income on those impaired loans of approximately $78,000, $15,000 and $110,000, respectively, which included $50,000, $0 and $14,000, respectively, of interest income recognized using the cash basis method of income recognition. Certain directors and executive officers of the Company are customers of and have other transactions with the Company in the ordinary course of business. Loans to these parties are made in the ordinary course of business at the Company's normal credit terms, including interest rate and collateralization. The aggregate of such loans totaled less than 5% of total shareholders' equity at both December 31, 1998 and 1997. (7) Accrued Interest Receivable Accrued interest receivable consisted of the following at December 31: 1998 1997 ------ ------ (In thousands) Loans $ 2,031 1,347 Securities available for sale 2,084 2,387 ------- ------- $ 4,115 3,734 ======= ======= (8) Premises and Equipment A summary of premises and equipment is as follows at December 31: 1998 1997 ------- ------- Land and buildings ........................... $ 3,342 2,362 Furniture, fixtures and equipment ............ 4,182 3,737 Leasehold improvements ....................... 1,614 1,100 Construction in progress ..................... 195 -- ------- ------- 9,333 7,199 Less accumulated depreciation and amortization (4,796) (4,078) ------- ------- $ 4,537 3,121 ======= ======= Amounts charged to depreciation and amortization expense were approximately $735,000, $606,000 and $501,000 for the years ended December 31, 1998, 1997 and 1996, respectively. (9) Deposits Deposits are summarized as follows at December 31: 1998 1997 -------- -------- (In thousands) Savings accounts (2.92%-3.00% at December 31, 1998 and 3.00% at December 31, 1997) ............. $136,921 97,591 -------- -------- Time deposits: 3.01 to 4.00% ............................... 1,806 1,011 4.01 to 5.00% ............................... 61,030 6,688 5.01 to 6.00% ............................... 140,676 154,377 6.01 to 7.00% ............................... 11,432 10,801 7.01 to 8.00% ............................... 13,061 10,455 -------- -------- 228,005 183,332 -------- -------- NOW accounts (1.73%-2.75% at December 31, 1998 and 2.75% at December 31, 1997) ........ 38,814 22,718 Money market accounts (2.25%-4.87% at December 31, 1998 and 2.96% at December 31, 1997) ........ 21,359 6,877 Demand accounts (non-interest bearing) ........... 36,314 22,747 -------- -------- Total deposits ......................... $461,413 333,265 ======== ======== The approximate amount of contractual maturities of time deposits for the years subsequent to December 31, 1998 are as follows: (In thousands) Years ending December 31, 1999 $150,517 2000 57,742 2001 10,560 2002 4,581 2003 4,605 -------- $228,005 ======== The aggregate amount of time deposits with a balance of $100,000 or more was approximately $25.9 million and $17.9 million at December 31, 1998 and 1997, respectively. Interest expense on deposits for the years ended December 31, 1998, 1997 and 1996, is summarized as follows: 1998 1997 1996 ------- ------- ------- (In thousands) Savings accounts .... $ 3,119 3,016 3,162 Time deposits ....... 9,882 9,882 8,492 NOW accounts ........ 549 543 527 Money market accounts 272 204 243 ------- ------- ------- Total ....... $13,822 13,645 12,424 ======= ======= ======= (10) Borrowed Funds At December 31, 1998, the Company had a $26.2 million overnight line of credit and a $26.2 million 30 day line of credit with the FHLB of New York. As of December 31, 1998, the Company had no amounts outstanding on these lines of credit. At December 31, 1997, the Company had a $24.2 million overnight line of credit and a $24.2 million 30 day line of credit with the FHLB. As of December 31, 1997, the Company had borrowed $12.3 million under these lines of credit. Under the terms of a blanket collateral agreement with the FHLB, any outstanding balances are collateralized by FHLB stock and certain qualifying assets not otherwise pledged (primarily first-lien mortgage loans). The Company also has longer-term advances with the FHLB totaling $21.4 million at December 31, 1998. These advances consist of the following: (i) $20.0 million of interest-only, non-prepayable, adjustable rate advances, with the interest rate tied to LIBOR and adjusted quarterly; $10.0 million matures in July 2001 and $10.0 million matures in July 2003; and (ii) $1.4 million of adjustable rate amortizing advances with interest rates ranging from 5.91% to 7.91% at December 31, 1998; final maturities on these advances range from April 2000 to September 2004. The following table presents the detail of the Company's borrowings and weighted-average interest rates thereon for the years ended December 31, 1998, 1997 and 1996: Securities FHLB FHLB Sold Under Overnight Term Agreements Advances Advances to Repurchase --------- -------- ------------- (Dollars in thousands) 1998: Balance at December 31 ........ $ -- $ 21,410 $152,400 Average balance during the year 9,366 8,493 132,476 Maximum month-end balance ..... 38,800 21,446 165,150 Weighted-average interest rate: At December 31 ........... -- 5.32% 5.48% During the year .......... 5.49% 5.71 5.67 1997: Balance at December 31 ........ $ 12,300 $ -- $ 99,250 Average balance during the year 3,667 -- 95,261 Maximum month-end balance ..... 14,400 -- 99,410 Weighted-average interest rate: At December 31 ........... 6.38% -- 6.04% During the year .......... 5.43 -- 6.01 1996: Balance at December 31 ........ $ 6,000 $ -- $102,780 Average balance during the year 9,757 -- 57,815 Maximum month-end balance ..... 28,000 -- 102,780 Weighted-average interest rate: At December 31 ........... 6.88% -- 5.96% During the year .......... 5.35 -- 5.94 Information concerning outstanding securities repurchase agreements as of December 31, 1998 is summarized as follows: Securities Repurchase Agreements -------------------------------------------------------- Accrued Weighted- Fair Value Remaining Term to Repurchase Interest Average of Collateral Final Maturity (1) Liability Payable Rate Securities (2) ------------------ ---------- -------- ---- -------------- (Dollars in thousands) Within 90 days ........ $ -- -- -- $ -- After 90 days but within one year .. 22,400 191 5.94% 24,411 After one year but within five years 30,000 199 5.75 32,903 After five years but within ten years . 100,000 836 5.30 107,086 -------- -------- ---- -------- Total ....... $152,400 1,226 5.48% $164,400 ======== ======== ==== ======== (1) The weighted-average remaining term to final maturity was approximately 7.0 years at December 31, 1998. At December 31, 1998, $115.0 million of the securities repurchase agreements contained call provisions. The weighted-average rate at December 31, 1998 on the callable securities repurchase agreements was 5.37%, with a weighted-average remaining period of 2.1 years to the call date. At December 31, 1998, $37.4 million of the securities repurchase agreements did not contain call provisions. The weighted-average rate at December 31, 1998 on the non-callable securities repurchase agreements was 5.82%, with a weighted-average remaining period of 1.8 years to the repurchase date. (2) Represents the fair value of the securities which were transferred, plus accrued interest receivable of approximately $1.2 million at December 31, 1998. At December 31, 1998, the "amount at risk" (defined as the excess of (i) the carrying amount, or fair value, if higher, of the securities transferred plus accrued interest receivable over (ii) the amount of the repurchase liability plus accrued interest payable) with any individual counterparty was less than ten percent of total shareholders' equity. (11) Income Taxes The components of income tax expense (benefit) are as follows for the years ended December 31: 1998 1997 1996 ------- ------- ------ (In thousands) Current tax expense (benefit): Federal .......................... $ 763 1,389 (1,893) State ............................ 13 270 1 ------- ------- ------ 776 1,659 (1,892) Deferred tax (benefit) expense ........ (106) 34 (37) ------- ------- ------ Total income tax expense (benefit) $ 670 1,693 (1,929) ======= ======= ====== Actual income tax expense (benefit) for the years ended December 31, 1998, 1997 and 1996 differs from expected income tax expense (benefit), computed by applying the Federal corporate tax rate of 34% to income (loss) before taxes, as a result of the following items: 1998 1997 1996 ------- ------- ------- (In thousands) Expected tax expense (benefit) $ 578 1,514 (1,960) State taxes, net of Federal income tax benefit ........ 1 178 1 Non-deductible portion of ESOP compensation expense ...... 113 89 -- Other items, net ............. (22) (88) 30 ------- ------- ------- $ 670 1,693 (1,929) ======= ======= ======= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1998 and 1997 are presented below: 1998 1997 ------- ------- (In thousands) Deferred tax assets: Allowance for loan losses .................. $ 1,939 1,508 Deferred compensation ...................... 469 227 Unvested RRP shares ........................ 76 109 Purchase accounting adjustments ............ 237 -- Other deductible temporary differences ..... 148 105 ------- ------- Total deferred tax assets ............. 2,869 1,949 ------- ------- Deferred tax liabilities: Tax bad debt reserve ....................... 174 216 Net deferred loan costs .................... 681 409 Defined benefit pension plan ............... 245 243 Property and equipment ..................... 91 113 Prepaid expenses ........................... 61 83 Purchase accounting adjustments ............ 626 -- Other taxable temporary differences ........ 107 18 ------- ------- Total deferred tax liabilities ........ 1,985 1,082 ------- ------- Net deferred tax asset at end of year ........................ 884 867 Net deferred tax asset at beginning of year .................. 867 901 ------- ------- (17) 34 Net deferred tax asset acquired ............ 285 -- Initial net deferred tax liability for purchase accounting adjustments ..... (374) -- ------- ------- Deferred tax (benefit) expense for year $ (106) 34 ======= ======= In addition to the deferred tax items shown in the table above, the Company also had a deferred tax liability of approximately $247,000 at December 31, 1998, and a deferred tax asset of approximately $183,000 at December 31, 1997, relating to the net unrealized gain or loss on securities available for sale. There was no valuation allowance for deferred tax assets at December 31, 1998 and 1997, or change in the valuation allowance for the years ended December 31, 1998, 1997 and 1996. Management believes that the realization of the recognized net deferred tax asset at December 31, 1998 and 1997 is more likely than not, based on historical taxable income, available tax planning strategies and expectations as to future taxable income. As a thrift institution, the Bank is subject to special provisions in the Federal and New York State tax laws regarding its allowable tax bad debt deductions and related tax bad debt reserves. These deductions historically have been determined using methods based on loss experience or a percentage of taxable income. Tax bad debt reserves are maintained equal to the excess of allowable deductions over actual bad debt losses and other reserve reductions. These reserves consist of a defined base-year amount, plus additional amounts ("excess reserves") accumulated after the base year. Deferred tax liabilities are recognized with respect to such excess reserves, as well as any portion of the base-year amount which is expected to become taxable (or "recaptured") in the foreseeable future. Certain amendments to the Federal and New York State tax laws regarding bad debt deductions were enacted in 1996. The Federal amendments include elimination of the percentage of taxable income method for tax years beginning after December 31, 1995, and imposition of a requirement to recapture into taxable income (over a period of six years) the bad debt reserves in excess of the base-year amounts. The Bank previously established, and will continue to maintain, a deferred tax liability with respect to such excess Federal reserves. The New York State amendments redesignate the state bad debt reserves at December 31, 1995 as the base-year amount and also provide for future additions to the base-year reserve using the percentage of taxable income method. In accordance with SFAS No. 109, the Company has not recognized deferred tax liabilities with respect to the Bank's Federal and state base-year reserves of approximately $5.2 million and $10.1 million, respectively, at December 31, 1998, since the Company does not expect that these amounts will become taxable in the foreseeable future. Under the tax laws, as amended, events that would result in taxation of these reserves include (i) redemptions of the Bank's stock or certain excess distributions to the Holding Company, and (ii) failure of the Bank to maintain a specified qualifying assets ratio or meet other thrift definition tests for New York State tax purposes. The unrecognized deferred tax liability at December 31, 1998 with respect to the Federal base-year reserve was approximately $1.8 million. The unrecognized deferred tax liability at December 31, 1998 with respect to the state base-year reserve was approximately $598,000 (net of Federal benefit). (12) Employee Benefit Plans (a) Pension Plan The Bank maintains a non-contributory pension plan with the RSI Retirement Trust, covering substantially all employees age 21 and over with 1 year of service, with the exception of hourly paid employees. Benefits are computed as two percent of the highest three year average annual earnings multiplied by credited service, up to a maximum of 35 years. The amounts contributed to the plan are determined annually on the basis of (a) the maximum amount that can be deducted for Federal income tax purposes, or (b) the amount certified by a consulting actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Assets of the plan are primarily invested in pooled equity funds and fixed income funds. The following table provides a summary of the changes in the plan's projected benefit obligation and the fair value of the plan's assets for the years ended December 31, and a reconciliation of the plan's funded status at December 31: 1998 1997 ------ ------ (In thousands) Changes in the projected benefit obligation: Projected benefit obligation at January 1 ........... $ 4,508 4,060 Service cost ................................... 219 183 Interest cost .................................. 318 304 Benefits paid .................................. (224) (238) Settlements .................................... -- (2) Actuarial loss ................................. 435 201 ------ ------ Projected benefit obligation at December 31 ......... 5,256 4,508 ------ ------ Changes in the fair value of plan assets: Fair value of plan assets at January 1 .............. 5,994 5,093 Actual (loss) return on plan assets ............ (10) 1,104 Benefits paid .................................. (224) (238) Employer contributions ......................... -- 37 Settlements .................................... -- (2) ------ ------ Fair value of plan assets at December 31 ............ 5,760 5,994 ------ ------ Funded status: Funded status at December 31 ........................ 504 1,486 Unrecognized portion of net asset at transition ..... (39) (85) Unrecognized prior service cost ..................... 9 12 Unrecognized net loss (gain) ........................ 131 (806) ------ ------ Prepaid pension asset recognized in other assets $ 605 607 ====== ======
The following table provides the components of net periodic pension cost for the years ended December 31: 1998 1997 1996 ----- ----- ----- (In thousands) Service cost - benefits earned during the year $ 219 183 187 Interest cost on projected benefit obligation 318 304 288 Expected return on plan assets ............... (471) (398) (362) Amortization of unrecognized net asset at transition ................................. (46) (46) (46) Amortization of unrecognized prior service cost ....................................... 3 3 3 Amortization of unrecognized net actuarial gain ....................................... (22) -- -- ----- ----- ----- Net periodic pension cost ............... $ 1 46 70 ===== ===== ===== Prior service costs are amortized on a straight-line basis over the average future service period of active plan participants. Unrecognized net actuarial gains or losses in excess of 10% of the greater of the projected benefit obligation or the fair value of the plan assets are amortized over the average remaining service period of active plan participants. The assumptions used in the measurement of the Company's projected benefit obligation and net periodic pension cost are shown in the table below: 1998 1997 1996 ----- ----- ----- Weighted-average assumptions at December 31: Discount rate 6.50% 7.25% 7.75% Rate of increase in future compensation levels 4.50 5.00 5.50 Expected return on plan assets 8.00 8.00 8.00 (b) 401(k) Savings Plan The Company maintains a defined contribution 401(k) savings plan, covering all full time employees who have attained age 21 and have completed one year of employment. Prior to March 1, 1997, the Company matched 50% of employee contributions that were less than or equal to 3% of the employee's salary. After that date, there were no employee matching contributions. Total expense related to the 401(k) plan during 1997 and 1996 was approximately $5,000 and $38,000, respectively (none in 1998). (c) Employee Stock Ownership Plan As part of the conversion discussed in note 3, an employee stock ownership plan (ESOP) was established to provide substantially all employees of the Company the opportunity to become shareholders. The ESOP borrowed $4.3 million from the Company and used the funds to purchase 433,780 shares of Company common stock issued in the conversion. The loan will be repaid principally from the Company's discretionary contributions to the ESOP over a period of ten years. At December 31, 1998 and 1997, the loan had an outstanding balance of $3.0 million and $3.5 million, respectively. The loan obligation is reduced by the amount of loan repayments made by the ESOP. Shares are released for allocation and unearned compensation is amortized over the loan repayment period based on the amount of principal and interest paid on the loan as a percentage of the total principal and interest to be paid on the loan over its entire term. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants on the basis of compensation in the year of allocation. The Company accounts for the ESOP in accordance with the American Institute of Certified Public Accountants' Statement of Position No. 93-6, "Employers' Accounting for Employee Stock Ownership Plans." Accordingly, the shares pledged as collateral are reported as unallocated ESOP shares in shareholders' equity. As shares are released from collateral, the Company reports compensation expense equal to the average market price of the shares (during the applicable service period), and the shares become outstanding for earnings per share computations. Unallocated ESOP shares are not included in the earnings per share computations. The Company recorded approximately $816,000, $766,000 and $527,000 of compensation expense related to the ESOP during the years ended December 31, 1998, 1997 and 1996, respectively. The ESOP shares as of December 31, 1998 were as follows: Allocated shares 103,525 Shares released for allocation 48,498 Unallocated shares 281,757 ----------- 433,780 =========== Market value of unallocated shares at December 31, 1998 $5,001,187 =========== (d) Stock Option Plan On May 23, 1997, the Company's shareholders approved the 1997 Stock Option and Incentive Plan ("Stock Option Plan"). The primary objective of the Stock Option Plan is to provide officers and directors with a proprietary interest in the Company as an incentive to encourage such persons to remain with the Company. The Stock Option Plan provides for awards in the form of stock options, stock appreciation rights and limited stock appreciation rights. Under the Stock Option Plan, 542,225 authorized but unissued shares are reserved for issuance upon option exercises. The Company also has the alternative to fund the Stock Option Plan with treasury stock. Options under the plan may be either non-qualified stock options or incentive stock options. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair value on the date of grant. Options expire no later than ten years following the date of grant. Upon shareholder ratification of the Stock Option Plan, options to purchase 373,974 shares were awarded at an exercise price of $13.75 per share. These shares have a ten-year term and vest at a rate of 25% per year from the grant date. In addition, under the terms of the merger agreement with AFSALA discussed in note 2, the Company issued 154,206 fully-vested options with an exercise price of $12.97 in exchange for 144,118 fully-vested AFSALA options with an exercise price of $13.88. The estimated fair value of these options was $9.95 per option. The issuance of these options was included in the computation of goodwill, with the offsetting credit to additional paid-in capital. A summary of the stock option activity for the years ended December 31, 1998 and 1997 is presented below: Weighted-Avg. No. of Exercise Shares Price -------- ------ Granted on May 23, 1997 and outstanding at December 31, 1997 373,974 $ 13.75 Exercised .............. (9,489) 13.75 Forfeited .............. (77,947) 13.75 Issued in acquisition .. 154,206 12.97 -------- ------ Outstanding at December 31, 1998 440,744 $ 13.48 ======== ====== The following table summarizes information about the Company's stock options at December 31, 1998: Weighted-Avg. Exercise Remaining Price Outstanding Contractual Life Exercisable -------- ----------- ---------------- ----------- $12.97 154,206 8.4 years 154,206 13.75 286,538 8.4 years 84,005 --------- --------- 440,744 238,211 ========= ========= All options have been granted at an exercise price equal to the fair value of the common stock at the grant date. Accordingly, no compensation expense has been recognized for the Stock Option Plan. SFAS No. 123 requires companies not using a fair-value-based method of accounting for employee stock options or similar plans, to provide pro forma disclosures of net income and earnings per share as if that method of accounting had been applied. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997: dividend yield of 1.32%; expected volatility of 40.90%; risk free interest rate of 5.48%; and expected option life of 5 years. The estimated fair value of the options granted in 1997 was $5.30. Pro-forma disclosures for the Company for the years ended December 31, 1998 and 1997 are as follows: (In thousands, except per share data) 1998 1997 ---- ---- Net income: As reported... $ 1,031 2,760 Pro-forma .... 740 2,533 Basic EPS: As reported... 0.26 0.70 Pro-forma .... 0.19 0.64 Diluted EPS: As reported... 0.26 0.69 Pro-forma .... 0.19 0.64 The full impact of calculating compensation expense for stock options under SFAS No. 123 is not reflected in the pro-forma net income amounts presented above because compensation expense is reflected over the options' vesting period of four years. Because the Company's employee stock options have characteristics significantly different from those of traded options for which the Black-Scholes model was developed, and because changes in the subjective input assumptions can materially affect the fair value estimate, the existing models, in management's opinion, do not necessarily provide a reliable single measure of the fair value of its stock options. (e) Recognition and Retention Plan On May 23, 1997, the Company's shareholders also approved the Ambanc Holding Co., Inc. Recognition and Retention Plan (RRP). The purpose of the plan is to promote the long-term interests of the Company and its shareholders by providing a stock-based compensation program to attract and retain officers and directors. Under the RRP, 216,890 shares of authorized but unissued shares are reserved for issuance under the plan. The Company also has the alternative to fund the RRP with treasury stock. On May 23, 1997, 131,285 shares were awarded under the RRP. The shares vest in four equal installments commencing one year from the date of grant. The fair market value of the shares awarded under the plan at the grant date was $13.75 per share and is being amortized to expense on a straight-line basis over the four year vesting period. During 1998, 29,331 unvested RRP shares were forfeited and transferred to treasury stock at the grant date fair market value of $13.75 per share. (f) Postretirement Benefits Certain postretirement health insurance benefits have been committed to a closed group of retired employees. The Company has formally adopted measures to not offer these benefits to any additional employees. The annual health insurance increase and discount rate used to calculate the transition obligation were 6.0% and 8.5%, respectively. There are no plan assets. The estimated transition obligation at January 1, 1995 was $260,000. The net periodic postretirement benefit cost in 1998, 1997 and 1996 was approximately $26,000 in each year. (g) Directors' Deferred Compensation Agreements Under the Directors' Deferred Compensation Agreements, the Company's directors were eligible to elect to defer fees for services that were otherwise currently payable. Fees were deferred over a period of five years. The Company utilized the deferred fees to purchase life insurance policies to fund the benefits on each director with the Bank named as the beneficiary. Each director participating in such agreements deferred their fees over a five year period with a set amount established as an annual payout over a ten year period after five years from the date of the agreement or upon reaching the age of 65, whichever is later. The present value of the remaining installments due under these agreements was approximately $616,000 and $562,000 at December 31, 1998 and 1997, respectively, and is included in other liabilities in the consolidated statements of financial condition. The cash surrender value of the life insurance policies was approximately $221,000 and $214,000 at December 31, 1998 and 1997, respectively, and is included in other assets in the consolidated statements of financial condition. (13) Earnings Per Share The calculation of basic EPS and diluted EPS is as follows:
Weighted Net Average Per Share Income Shares Amount -------- --------- --------- (In thousands, except share and per share data) For the year ended December 31, 1998 Basic EPS Net income available to common shareholders $ 1,031 3,916,047 $0.26 ======== ===== Effect of Dilutive Securities Stock options 49,043 Unvested RRP shares 24,155 --------- Diluted EPS Net income available to common shareholders plus assumed conversions $ 1,031 3,989,245 $0.26 ======== ========= ===== Weighted Net Average Per Share Income Shares Amount -------- --------- --------- (In thousands, except share and per share data) For the year ended December 31, 1997 Basic EPS Net income available to common shareholders $ 2,760 3,940,867 $0.70 ======== ===== Effect of Dilutive Securities Stock options 24,285 Unvested RRP shares 16,374 --------- Diluted EPS Net income available to common shareholders plus assumed conversions $ 2,760 3,981,526 $0.69 ======== ========= =====
Weighted Net Average Per Share Income Shares Amount -------- --------- --------- (In thousands, except share and per share data) For the year ended December 31, 1996 Basic EPS Net loss applicable to common shareholders $ (3,836) 4,761,393 $(0.81) ======== ===== Effect of Dilutive Securities No dilutive securities during 1996 Diluted EPS Net loss applicable to common shareholders $ (3,836) 4,761,393 $(0.81) ======== ========= =====
(14) Commitments and Contingent Liabilities (a) Legal Proceedings The Company and its subsidiaries may, from time to time, be defendants in legal proceedings relating to the conduct of their business. In the best judgments of management, the consolidated financial position of the Company and its subsidiaries will not be affected materially by the outcome of any pending legal proceedings. The Bank was a defendant in an action brought by the current owners of F. H. Doherty Associates, Inc., a company which the Bank sold to the current owners. The action sought to rescind the sale of stock, recover any additional capital contributions made by the plaintiffs, as well as certain punitive damages and indemnification on a potential claim. During 1996, the Bank stipulated to a settlement and agreed to pay $262,500 to the plaintiffs. The Bank charged $175,000 against the allowance for probable loss which was established for this matter in 1995. The remaining $87,500 was charged to 1996 operations. (b) Nationar Receivables On February 6, 1995, the Superintendent of Banks for the State of New York ("Superintendent") seized Nationar, a check-clearing and trust company, freezing all of Nationar's assets. On that date, the Bank had a demand account balance of $233,000, and a Nationar debenture of $100,000 collateralized by a $1,000,000 investment security. On September 26, 1995, the Company entered into a standby letter of credit with the Superintendent for $1,086,250 which replaced the $1,000,000 pledged security. As of December 31, 1995, the Company charged off the Nationar debenture of $100,000 and established an additional reserve of $105,000 for potential losses on the demand account and standby letter of credit. During 1996, the Company received a cash payment of $233,000 for its demand account balance, issued a new standby letter of credit for $150,000 to the Superintendent, and cancelled the initial standby letter of credit. Concurrent with the new standby letter of credit, the Company was required to pay $58,000 under the original standby letter of credit agreement, which was charged against the reserve. Subsequently, the $150,000 standby letter of credit was canceled and the Company was released from any further liability in connection with its agreement with the Superintendent. During 1997, the Bank received approximately $45,000 from the Superintendent as a partial recovery of the amounts previously charged off, which is included in other income. (c) Lease Commitments The Company leases certain branch facilities and office space under noncancelable operating leases. Minimum rental commitments under these leases are as follows: (In thousands) Years ending December 31, 1999 $ 493 2000 281 2001 214 2002 152 2003 106 2004 and thereafter 816 ---------------- $ 2,062 ================ Amounts charged to rent expense were approximately $385,000, $315,000 and $225,000 for the years ended December 31, 1998, 1997 and 1996. (d) Off-Balance Sheet Financial Instruments and Concentrations of Credit The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amounts recognized on the consolidated statement of financial condition. The contract amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the commitments to extend credit, unused lines of credit and standby letters of credit is represented by the contractual notional amount of these instruments. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Unless otherwise noted, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral, if any, required by the Company upon the extension of credit is based on management's credit evaluation of the customer. Mortgage commitments are secured by a first lien on real estate. Collateral on extensions of credit for commercial loans varies but may include property, plant and equipment, and income producing commercial property. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support borrowing arrangements. The credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan facilities to customers. Contract amounts of financial instruments with off-balance-sheet credit risk as of December 31, 1998 and 1997 at fixed and variable interest rates are as follows: Fixed Variable Total ------- -------- ------- (In thousands) 1998: Commitments to extend credit $12,004 514 12,518 Unused lines of credit ..... 2,665 3,375 6,040 Standby letters of credit .. -- 30 30 ------- ------- ------- $14,669 3,919 18,588 ======= ======= ======= 1997: Commitments to extend credit $ 3,797 393 4,190 Unused lines of credit ..... 1,025 4,336 5,361 Standby letters of credit .. -- 100 100 ------- ------- ------- $ 4,822 4,829 9,651 ======= ======= ======= The range of interest rates on fixed rate commitments was 6.50% to 12.50% at December 31, 1998 and 5.50% to 8.75% at December 31, 1997. All variable rate commitments were at 8.75% at December 31, 1998, and ranged from 6.75% to 7.25% at December 31, 1997. (15) Fair Values of Financial Instruments A financial instrument is defined as cash, evidence of ownership interest in an entity, or a contract that imposes on one entity a contractual obligation to deliver cash or another financial instrument to a second entity or to exchange other financial instruments on potentially unfavorable terms with a second entity and conveys to that second entity a contractual right to receive cash or another financial instrument from the first entity or to exchange other financial instruments on potentially favorable terms with the first entity. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected net cash flows, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial assets or liabilities include the deferred tax assets and liabilities, and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates of fair value. There also are significant intangible assets that the fair value estimates do not recognize, such as the value of "core deposits" and the Company's branch network. Financial Assets and Liabilities The specific estimation methods and assumptions used can have a substantial impact on the resulting fair values ascribed to financial assets and liabilities The following is a brief summary of the significant methods and assumptions used: Securities Available for Sale The fair value of securities, except certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market prices of similar instruments, adjusted for differences between the quoted instruments and the instruments being valued. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as one-to-four family residential loans, consumer loans and commercial loans. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and non-performing categories. The fair value of performing loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan. The estimate of maturity is based on the contractual term of the loans to maturity, taking into consideration certain prepayment assumptions. The fair value for significant non-performing loans is based on recent external appraisals and discounted cash flow analyses. Estimated cash flows are discounted using a rate commensurate with the risk associated with the estimated cash flows. Assumptions regarding credit risk, cash flows, and discount rates are judgmentally determined using available market information and specific borrower information. Deposit Liabilities The fair value of deposits with no stated maturity, such as non-interest bearing demand deposits, savings accounts, NOW accounts and money market accounts, is the amount payable on demand. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits with similar remaining maturities. The fair value estimates above do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. FHLB Advances and Securities Sold Under Agreements to Repurchase The fair value of FHLB advances and securities sold under agreements to repurchase due in 90 days or less, or that reprice in 90 days or less, is estimated to approximate the carrying amounts. The fair value of longer-term FHLB advances and securities sold under agreements to repurchase is estimated by discounting scheduled cash flows based on current rates available to the Company for similar types of borrowing arrangements. Other Items The following items are considered to have a fair value equal to the carrying value due to the nature of the financial instrument and the period within which it will be settled or repriced: cash and cash equivalents, FHLB stock, accrued interest receivable, advances from borrowers for taxes and insurance, accrued interest payable and due to brokers. The carrying values and estimated fair values of financial assets and liabilities as of December 31, 1998 and 1997 were as follows:
1998 1997 ---------------------- ---------------------- Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value --------- --------- --------- --------- (In thousands) Financial assets: Cash and cash equivalents .................... $ 42,815 42,815 10,259 10,259 Securities available for sale ................ 244,241 244,241 205,808 205,808 FHLB of New York stock ....................... 7,215 7,215 3,291 3,291 Loans ........................................ 425,824 423,163 284,930 280,765 Less: Allowance for loan losses ........... (4,891) -- (3,807) -- --------- --------- --------- --------- Loans receivable, net .............. 420,933 423,163 281,123 280,765 ========= ========= ========= ========= Accrued interest receivable .................. 4,115 4,115 3,734 3,734 Financial liabilities: Deposits: Demand, savings, money market, and NOW accounts ............................. 233,408 233,408 149,933 149,933 Time deposits ........................... 228,005 230,399 183,332 184,208 FHLB overnight advances ...................... -- -- 12,300 12,300 FHLB term advances ........................... 21,410 21,419 -- -- Securities sold under agreements to repurchase 152,400 153,340 99,250 98,706 Advances from borrowers for taxes and insurance ............................... 2,436 2,436 1,902 1,902 Accrued interest payable ..................... 1,426 1,426 819 819 Due to brokers ............................... 6,000 6,000 -- --
Commitments to Extend Credit and Standby Letters of Credit The fair value of commitments to extend credit is estimated based on the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed rate loan commitments, fair value also considers the difference between current interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties. The Company believes that the carrying value of these off-balance sheet financial instruments equals fair value and the amounts are not significant. (16) Regulatory Capital Requirements Office of Thrift Supervision (OTS) capital regulations require savings institutions to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 1998, the Bank was required to maintain a minimum ratio of tangible capital to total tangible assets of 1.5%; a minimum leverage ratio of core (Tier 1) capital to total adjusted tangible assets of 3.0% to 4.0%; and a minimum ratio of total capital (core capital and supplementary capital) to risk-weighted assets of 8.0%, of which 4.0% must be core (Tier 1) capital. Under the prompt corrective action regulations, the OTS is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on an institution's financial statements. The regulations establish a framework for the classification of savings institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally, an institution is considered well capitalized if it has a core (Tier 1) capital ratio of at least 5.0% (based on average total assets); a core (Tier 1) risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors. Management believes that, as of December 31, 1998 and 1997, the Bank met all capital adequacy requirements to which it was subject. Further, the most recent OTS notification categorized the Bank as a well capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 1998 and 1997. Although the OTS capital regulations apply at the Bank level only, the Company's consolidated capital amounts and ratios are also presented. The OTS does not have a holding company capital requirement. 1998 1997 ----------------- ----------------- Amount Ratio Amount Ratio ------ ----- ------ ----- (Dollars in thousands) Bank ---- Tangible capital .... $63,509 8.83% $49,722 9.88% Tier 1 (core) capital 63,509 8.83 49,722 9.88 Risk-based capital: Tier 1 ............ 63,509 20.73 49,722 23.42 Total ............. 67,351 21.99 52,390 24.68 Consolidated ------------ Tangible capital .... 77,600 10.68 61,476 11.99 Tier 1 (core) capital 77,600 10.68 61,476 11.99 Risk-based capital: Tier 1 ............ 77,600 25.17 61,476 28.79 Total ............. 81,442 26.42 64,159 30.04 (17) Holding Company Financial Information The Holding Company's statements of financial condition as of December 31, 1998 and 1997, and the related statements of income and cash flows for the years ended December 31, 1998, 1997 and 1996 are presented below. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto. Statements of Financial Condition 1998 1997 ------ ------ (In thousands) Assets Cash and cash equivalents .......................... $ 3,516 1,046 Securities available for sale* ..................... 6,097 9,400 Loan receivable from subsidiary .................... 3,036 3,470 Accrued interest receivable ........................ 64 115 Investment in subsidiary ........................... 71,797 49,467 Other assets ....................................... 1,570 334 ------ ------ Total assets ............................. $ 86,080 63,832 ====== ====== Liabilities and Shareholders' Equity Liabilities: Security sold under agreement to repurchase** . $ -- 2,600 Other liabilities ............................. 187 30 Shareholders' equity ............................... 85,893 61,202 ------ ------ Total liabilities and shareholders' equity $ 86,080 63,832 ====== ====== * The Holding Company's securities available for sale consisted of U.S. Government agency and mortgage-backed securities with a contractual weighted-average maturity of 9.1 years (2.2 years to call date) and 2.9 years (none callable) at December 31, 1998 and 1997, respectively. ** Weighted-average rate at December 31, 1997 was 5.91% with a maturity date of February 20, 1998.
Statements of Income 1998 1997 1996 ------ ------ ------ (In thousands) Income: Dividends from bank subsidiary ................. $ 5,000 -- -- Interest income ................................ 649 868 1,128 Other income ................................... 1 -- -- ------ ------ ------ Total income .............................. 5,650 868 1,128 ------ ------ ------ Expenses: Interest expense ............................... 34 170 2 Net loss (gain) on securities transactions ..... -- 153 (1) RRP expense .................................... 371 272 -- Other expenses ................................. 735 221 310 ------ ------ ------ Total expenses ............................ 1,140 816 311 ------ ------ ------ Income before taxes and effect of subsidiary earnings and distributions .............................. 4,510 52 817 Income tax (benefit) expense ........................ (199) 21 328 ------ ------ ------ Income before effect of subsidiary earnings and distributions .................................. 4,709 31 489 Effect of subsidiary earnings and distributions: Distributions in excess of earnings .......... (3,678) -- -- Equity in undistributed earnings (loss) ...... -- 2,729 (4,325) ------ ------ ------ Net income (loss) ................................... $ 1,031 2,760 (3,836) ====== ====== ======
Statements of Cash Flows 1998 1997 1996 -------- -------- -------- (In thousands) Increase (decrease) in cash and cash equivalents: Cash flows from operating activities: Net income (loss) .............................................. $ 1,031 2,760 (3,836) Adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities: Distributions in excess of subsidiary earnings ......... 3,678 -- -- Equity in undistributed (earnings) loss of subsidiary .. -- (2,729) 4,325 Net loss (gain) on securities transactions ............. -- 153 (1) RRP expense ............................................ 371 272 -- Increase in accrued interest receivable and other assets (1,124) (274) (163) Increase (decrease) in other liabilities ............... 157 (341) 371 -------- -------- -------- Net cash provided by (used in) operating activities .................... 4,113 (159) 696 -------- -------- -------- Cash flows from investing activities: Purchases of securities available for sale ..................... (7,998) (11,052) (19,985) Proceeds from principal paydowns and maturities of securities available for sale ........................................ 11,338 8,159 3,984 Proceeds from sales of securities available for sale ........... -- 7,515 1,796 Payments received on loan receivable from subsidiary ........... 434 434 434 Net cash acquired in acquisition ............................... 2,297 -- -- -------- -------- -------- Net cash provided by (used in) investing activities .............................. 6,071 5,056 (13,771) -------- -------- -------- Cash flows from financing activities: Net (decrease) increase in securities sold under agreements to repurchase ................................................ (2,600) (400) 3,000 Purchases of treasury stock .................................... (4,111) (3,488) (11,208) Exercises of stock options ..................................... 130 -- -- Dividends paid ................................................. (1,133) (432) -- -------- -------- -------- Net cash used in financing activities ........ (7,714) (4,320) (8,208) -------- -------- -------- Net increase (decrease) in cash and cash equivalents ............. 2,470 577 (21,283) Cash and cash equivalents: Beginning of year ........................................... 1,046 469 21,752 -------- -------- -------- End of year ................................................. $ 3,516 1,046 469 ======== ======== ========
CORPORATE AND SHAREHOLDER INFORMATION Company and Bank Address 11 Division Street Amsterdam, New York 12010-4303 Telephone: (518) 842-7200 Fax: (518) 842-7500 Stock Price Information The Company's stock is traded on The Nasdaq National Market System under the symbol "AHCI". The table below shows the range of high and low bid prices of the Company's Common Stock during 1997 and 1998. The information set forth in the table below was provided by The Nasdaq Stock Market. Such information reflects interdealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions. Dividends High Low Per Share 1997 First Quarter 14.875 11.125 $0.00 1997 Second Quarter 16.625 12.500 0.00 1997 Third Quarter 16.500 15.125 0.05 1997 Fourth Quarter 19.750 15.375 0.05 1998 First Quarter 19.375 16.750 $0.06 1998 Second Quarter 20.000 16.500 0.06 1998 Third Quarter 19.250 11.750 0.06 1998 Fourth Quarter 17.750 12.000 0.07 For information regarding restrictions on dividends, see Note 3 to the Notes to Consolidated Financial Statements. As of March 29, 1999, the Company had approximately 1,382 shareholders of record and 5,315,463 outstanding shares of Common Stock. Special Counsel Silver, Freedman & Taff, L.L.P. 1100 New York Avenue, N.W. Washington, D.C. 20005-3934 Telephone: (202) 414-6100 Independent Auditors KPMG LLP 515 Broadway Albany, NY 12207 Telephone: (518) 427-4600 Investor Relations Shareholders, investors and analysts interested in additional information may contact: Sandra Hammond, Assistant Vice President Executive Asst./Investor Relations Ambanc Holding Co., Inc. 11 Division Street Amsterdam, New York 12010-4303 Telephone: (518) 842-7200 Fax: (518) 842-1688 Annual Report on Form 10-K Copies of Ambanc Holding Co., Inc.'s Annual Report for year ended December 31, 1998 on Form 10-K filed with the Securities and Exchange Commission are available without charge to shareholders upon written request to: Investor Relations Ambanc Holding Co., Inc. 11 Division Street Amsterdam, New York 12010-4303 Annual Meeting The annual meeting of shareholders will be held at 10:00 a.m., New York time, on Friday, May 28, 1999 at the Best Western, located at 10 Market Street, Amsterdam, New York. Stock Transfer Agent and Registrar Ambanc Holding Co., Inc.'s transfer agent, American Stock Transfer & Trust, maintains all shareholder records and can assist with stock transfer and registration address changes, changes or corrections in social security or tax identification numbers and 1099 tax reporting questions. If you have questions, please contact the stock transfer agent at the address below: American Stock Transfer & Trust 40 Wall Street, 46th Floor New York, New York 10005 Telephone: (718) 921-8290 Mohawk Community Bank Offices: Corporate 11 Division Street Amsterdam, N.Y. 12010 (518) 842-7200 Traditional Branches: 11 Division Street, Amsterdam, NY 12010 161 Church Street, Amsterdam, NY 12010 Route 30N, Amsterdam, NY 12010 Route 30 & Maple Avenue, Amsterdam, NY 12010 Riverfront Center, Amsterdam, NY 12010 Grand Union Plaza, Route 50, Ballston Spa, NY 12020 Village Plaza, Clifton Park, NY 12068 19 River Street, Fort Plain, NY 13339 Arterial at Fifth Avenue, Gloversville, NY 12078 5 New Karner Road, Guilderland, NY 12084 Supermarket Branches: Price Chopper Supermarkets: Sanford Farms Plaza, Amsterdam, NY 12010 873 New Loudon Rd., Latham, NY 12110 1640 Eastern Parkway, Schenectady, NY 12309 115 Ballston Avenue, Saratoga, NY 12866 Route 50, Saratoga, NY 12866 5631 State Highway 12, Norwich, NY 13815 Hannaford Supermarkets: 235 Fifth Avenue Ext., Gloversville, NY 12078 Route 28, Oneonta, NY 13850 Operations Center 35 East Main Street Amsterdam, N.Y. 12010 DIRECTORS AND OFFICERS Board of Directors - - ------------------ (Ambanc Holding Co., Inc. and Mohawk Community Bank) Year appointed to Bank Board Lauren T. Barnett, Barnett Agency, Inc., Chairman of the Board 1966 John M. Lisicki, President & Chief Executive Officer 1998 Paul W. Baker, Retired, Morrison & Putman Music Store 1963 James J. Bettini, Vice President, Farm Family Insurance 1998 John J. Daly, Alpin Haus 1988 Robert J. Dunning D.D.S., Dentist 1972 Lionel H. Fallows, Retired, Lieutenant Colonel 1981 Dr. Daniel J. Greco, Retired, School Superintendent 1998 Marvin R. LeRoy, Jr., Alzheimers Association, Northeastern NY Chapter 1996 Charles S. Pedersen, Independent Manufacturers' Representative 1977 Carl A. Schmidt, Jr., Sofco, Inc. 1974 Dr. Ronald S. Tecler, Dentist 1998 John A. Tesiero, Jr., Owner, Construction Supply Business 1998 William A. Wilde, Jr., Amsterdam Printing and Litho Corp. 1966 Charles E. Wright, President, WW Custom Clad 1998 Executive Officers of Ambanc Holding Co., Inc. and Mohawk Community Bank - - ------------------------------------------------------------------------ John M. Lisicki President/Chief Executive Officer James J. Alescio Sr.Vice President/Treasurer/Chief Financial Officer Benjamin Ziskin Sr. Vice President/Sr. Consumer Lending Officer Thomas Nachod Sr. Vice President/Sr. Commercial Lending Officer Robert Kelly Vice President/General Counsel/Secretary EX-21 4 SUBSIDIARIES OF THE REGISTRANT Subsidiary Name State of Incorporation - - ------------------------------- ---------------------- Mohawk Community Bank New York ASB Insurance Agency, Inc. New York EX-23 5 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT Exhibit 23 Consent of Independent Certified Public Accountants The Board of Directors Ambanc Holding Co., Inc. We consent to incorporation by reference in the following registration statements: File No. 333-50973 on Form S-8, and File No. 333-50975 on Form S-8 of Ambanc Holding Co., Inc. of our report dated February 12, 1999, relating to the consolidated statements of financial condition of Ambanc Holding Co., Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998 Annual Report on Form 10-K of Ambanc Holding Co., Inc. /s/ KPMG LLP Albany, New York March 26, 1999 EX-27 6 FDS -- 12/31/98
9 THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 1998 OF AMBANC HOLDING CO., INC. AND ITS SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1000 12-mos DEC-31-1998 DEC-31-1998 9,225 3,390 30,200 0 244,241 0 0 425,824 4,891 735,472 461,413 22,400 14,356 151,410 0 0 54 85,839 735,472 24,623 13,479 871 38,973 13,822 22,441 16,532 900 (165) 15,075 1,701 1,701 0 0 1,031 0.26 0.26 3.04 1,610 580 714 4,037 3,807 1,226 295 4,891 4,107 0 784
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