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".
At December 31, 2000, the Company had $706.6 million of assets and shareholders' equity of $77.1 million or 10.9% 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. Recently, the Bank has also been focusing on the origination of commercial-type loans,including entering into participation agreements with other financial institutions 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 Commission, in the Company's press releases or other public or shareholder communications, and in oral statements made with the approval of an authorized executive officer, the words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results and those presently anticipated or projected, including, but not limited to, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
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, sixteen 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, 2000, the Company's net loan portfolio totaled $460.0 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, 2000, 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.
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.
The following table shows the composition of the Company's loan portfolio by fixed- and adjustable-rate at the dates indicated.
The following table illustrates the maturity of the Company's loan portfolio at December 31, 2000. Loans 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.
As of December 31, 2000, the total amount of loans due after December 31, 2001 which have fixed interest rates was $354.4 million, while the total amount of loans due after such date which have floating or adjustable interest rates was $55.3 million.
One- to Four-Family Residential Real Estate Lending
The Company's residential mortgage loans consist primarily of first lien one-to four-family, owner-occupied mortgage loans. At December 31, 2000, $291.7 million, or 62.9%,of the Company's gross loans consisted of one- to four-family residential first mortgage loans. Approximately 83.3% of the Company's one- to four-family residential 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 adjustable rate mortgage ("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 for loan underwriting purposes at a rate 2.0% above the initial interest rate. 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%. 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, 2000, the Company's construction loan portfolio totaled $2.4 million, or 0.5% 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, 2000, 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 with 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 ten 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, 2000, the Company had $89.8 million in home equity loans and lines of credit outstanding, with an additional $4.0 million of unused home equity lines of credit.
Commercial and Multi-Family Real Estate Lending
The Company has engaged in commercial and multi-family real estate lending secured primarily by apartment buildings, small office buildings, motels, warehouses, nursing homes, strip shopping centers and churches located in the Company's primary market area. At December 31, 2000, the Company had $40.7 million and $3.7 million of commercial real estate and multi-family real estate loans, respectively, which represented 8.8% and 0.8%, 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 or reprice in five years or less. Terms to maturity generally 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 75%. 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.
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 and the effect of general economic conditions on income producing properties. 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. At December 31, 2000, $502,000 or 1.1% of the Company's multi-family and commercial real estate loan portfolio was non-performing.
Consumer Lending
The Company offers a variety of secured consumer loans, including loans secured by automobiles and recreational vehicles ("RV's"). In addition, the Company offers other secured and unsecured consumer loans. The Company currently originates substantially all of its consumer loans in its primary market area. The Company originates consumer loans on a direct basis only, where the Company extends credit directly to the borrower. At December 31, 2000 the Company's consumer loan portfolio totaled $21.3 million, or 4.6% of the gross loan portfolio. At December 31, 2000, 97.8% of the Company's consumer loans were fixed-rate loans and 2.2% were adjustable-rate loans.
Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower. Terms to maturity range up to 15 years for manufactured homes and certain RV's and up to 60 months for other secured and unsecured consumer loans. The Company offers both open- and closed-end credit. Open-end credit is extended through lines of credit that are generally tied to a checking account. These credit lines currently bear interest at rates 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 the 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, 2000, automobile loans and RV loans (such as motor homes, boats, motorcycles, snowmobiles and other types of recreational vehicles) totaled $ 8.0 million and $2.7 million or 37.7% and 12.7% of the Company's total consumer loan portfolio, and 1.7% and 0.6% 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, 2000 totaled $34,000 or 0.2% of the Company's consumer loan portfolio.
Of the RV loan balance, approximately $2.0 million and $673,000 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, 2000, RV loans totaling $175,000 or 6.5% 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, 2000, a total of $428,000, or 2.0%, of the Company's consumer loan portfolio was non-performing (including the non-performing automobile and RV loans previously discussed). There can be no assurances that additional delinquencies will not occur in the future.
Commercial Business Lending
The Company also originates commercial business loans and during the past two years has been focusing on the origination of commercial loans, with a particular emphasis on small business lending. At December 31, 2000, commercial business loans comprised $14.0 million, or 3.0% 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 and equipment. Commercial business 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.The repayment of lines of credit is normally dervied from the conversion of trading assets (account receivables and inventory) to cash. 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, such as residential mortgage loans.
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 and the purchase of $14.0 million of commercial real estate loans and commercial business loans in 2000 through participation agreements with another financial institution, 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, 2000, the Company originated $ 66.0 million of loans compared to $138.7 million and $120.9 million in 1999 and 1998, respectively. The Company purchased $14.0 million of commercial real estate and commercial business loans during 2000 through participation agreements with another financial institution. These loans were located within the Company's primary market area and surrounding areas. The Company also purchased $31.9 million in residential mortgage loans during 1998. These loans were located in Ohio and New Jersey. The current balance of the loans purchased in 1998 is $15.5 million. During 1999, 1998 and 1997 the Company increased its originations of one- to four-family mortgages through the referrals of several local brokers. The Company de-emphasized the use of brokers during 2000.
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.
Delinquency Monitoring
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 refinancing or restructuring with the Bank, excluding troubled debt restructurings (TDRs), or where the Bank has been notified by the borrower that the outstanding loan balance plus accrued interest and late fees will be paid-in-full within a relatively short period of time from the date of such notification. Foreclosed assets includes assets acquired in settlement of loans.
For the year ended December 31, 2000, gross interest income which would have been recorded had the year end non-performing loans been current in accordance with their original terms amounted to $372,000 ($291,000 from non-accruing loans and $81,000 from restructured loans). The amount that was included in interest income on such loans was $216,000 ($166,000 from non-accruing loans and $50,000 from restructured loans), which represented actual receipts. Consequently, $156,000 ($125,000 from non-accruing loans and $31,000 from restructured loans) was not recognized in gross interest income for the period.
Non-Accruing Loans
At December 31, 2000, the Company had $2.4 million in non-accruing loans, which constituted 0.5% 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, 2000, the Company had $257,000 of accruing loans delinquent more than 90 days. Of these loans, $247,000 were FHA insured or VA guaranteed one-to four-family residential loans. The remaining $10,000 represented nine (9) consumer loans for which management believes that all contractual payments are collectible.
Restructured Loans
As of December 31, 2000, the Company had restructured loans of $541,000. The Company's restructured loans at that date consisted of one (1) one- to four-family residential mortgage loan, three (3) commercial real estate loans, and one (1) commercial business loan.
Foreclosed and Reposessed Assets
As of December 31, 2000, the Company had $373,000 in carrying value of foreclosed and repossessed assets. One-to four-family real estate represented 62.2% of the Company's foreclosed and repossessed property, consisting of five (5) properties. Commercial real estate represented 30.0% of the Company's foreclosed and repossessed assets and consisted of one (1) property. Repossessed consumer assets represented 7.8% of the Company's foreclosed and repossessed properties, consisting of four (4) automobiles.
Other Loans of Concern
As of December 31, 2000, there were $926,000 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.There were no other loans of concern in excess of $500,000.Other loans of concern with balances less than $500,000 at December 31, 2000 consisted of 8 commercial and multi-family real estate loans totaling $580,000, 2 commercial business loans totaling $178,000, 5 one-to four-family mortgage loans totaling $153,000, and 2 consumer loans totaling $15,000. 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.
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, 2000, the Company had a total allowance for loan losses of $5.7 million, representing 177.0% of non-performing loans at that date.
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, the asset's recorded value is written down by a charge to income.
The following table sets forth an analysis of the activity in the Company's allowance for loan losses.
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:
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, 2000, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings deposits and current borrowings) was 31.3%.
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 objectives. 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 mortgage obligations.
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, 2000, 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, 2000 were $139.0 million and $141.3 million, respectively. For additional information on the Company's securities, see Note 4 of the Notes to Consolidated Financial Statements in the Annual Report to Shareholders filed as Exhibit 13 to this document (the "Annual Report).
At December 31, 2000, the fair value and amortized cost of the Company's collaterized mortgage obligations ("CMOs") were $25.8 million and $26.1 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. At December 31,2000, the fair value and amortized cost of the Company's mortgage-backed securities were $57.3 million and $58.0 million, respectively. All mortgage-backed securitied are issued, insured or guaranteed either directly or indirectly by a federal agency.
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, 2000, $22.1 million or 26.7% 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 are 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, 2000, the final contractual maturity of 95.5% 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 and FHLB stock at the dates indicated.
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, 2000, 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.
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, 2000, did not have brokered deposits. The Company relies primarily on competitive pricing policies, advertising and customer service to attract and retain these deposits. The Company has utilized premiums and promotional gifts for new accounts in connection with the opening of new branches or with club accounts. At times the Company also uses small advertising give-aways in the aisles of the supermarkets where it maintains branches. For information regarding average balances and rate information on deposit accounts, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report and for information on the dollar amount of deposits in the various deposit types offered by the Company, see Note 8 of the Notes to Consolidated Financial Statements in the Annual Report.
The flow of deposits is influenced significantly by general economic conditions, changes in money market and prevailing interest rates, and competition. The variety of deposit 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, 2000, the Company's certificates of deposit totaled $248.9 million. These certificates of deposit were issued at interest rates ranging from 3.21% to 7.14%. For additional information regarding certificate of deposit interest rates, see Note 8 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, 2000.
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 $47,850 $29,666 $81,808 $56,907 $216,231
Certificates of deposit of $100,000 or more 4,468 3,369 15,905 8,901 32,643 --------- -------- -------- -------- --------
Total certificates of deposit $52,318 $33,035 $97,713 $65,808 $248,874 ========= ======== ======== ======== ========
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, 2000, the Company had $71.4 million in FHLB advances. The Company also borrows funds through the use of securities repurchase agreements. At December 31, 2000, securities repurchase agreements totaled $ 72.5 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 that earned on other types of assets and liabilities. For further information regarding the Company's borrowings, see Note 9 of the Notes to Consolidated Financial Statements contained in the Annual Report.
Subsidiary and Other Activities
During 2000, Mohawk Valley Realty Corp. ("MVRC"), was incorporated as a special purpose real estate investment trust under New York State law. The Bank funded MVRC with approximately $104.5 million in residential real estate loans. The net income of MVRC is passed through to the Bank in the form of dividends.
As a federally chartered savings association, the Bank is permitted by OTS regulations to invest up to 2% of its assets, or $14.0 million at December 31, 2000, in the stock of, or in loans to, 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 $122,000 and $122,800 for the years ended December 31, 2000 and 1999, respectively.
Regulation
General
The Bank is a federally chartered savings bank, the deposits of which are federally insured by the FDIC (up to certain limits) 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 (the "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.
As a result of the acquisition of AFSALA and its subsidiary savings association, a portion of the deposits of the Bank are insured by the Savings Association Insurance Fund (the "SAIF"). The rules and regulations governing the SAIF are similar in many ways to those for the BIF.
Certain of these regulatory requirements and restrictions are discussed below or elsewhere in this document.
Federal Regulation of Savings Associations
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 June 30, 2000. 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, 2000, was $135,300.
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, 2000, 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 and SAIF, which are 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 2000 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").
A portion of the insurance premium paid by the Bank is assessed for the SAIF because a portion of the deposits of the Bank are insured by the SAIF. For these deposits, the FDIC assesses a premium to maintain the reserve ratio of the SAIF at 1.25% of SAIF insured deposits. During the past several years, the FICO Premium rates for SAIF members were higher than those for BIF members. However, begining in 2000, the FICO Premium rates are the same for BIF and SAIF-insured deposits. SAIF members were also required to pay a special assessment to the SAIF in 1996.
In general, the FDIC limits the insurance that may be paid to a person or entity through all of that person's or entity's deposit accounts to $100,000. The FDIC is considering whether to propose an increase in this limit, possibly to $200,000. Any increase in insurance could result in an increase in the premiums paid by all BIF and SAIF members. The FDIC is authorized to increase deposit insurance rates on a semi-annual basis if it determines that this action is necessary to cause the balance in the SAIF or BIF to reach the designated reserve ratio of 1.25% of insured deposits within a reasonable period of time. The FDIC may impose special assessments on SAIF or BIF members for any reason deemed necessary by the FDIC.
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, 2000, the Bank was in compliance with its regulatory capital requirements. See Note 15 of the Notes to Consolidated Financial Statements contained in the Annual Report.
The OTS and the FDIC are authorized and, under certain circumstances required, to take certain actions against savings associations that fail to meet their capital requirements. The OTS is generally required to take action to restrict the activities of an "undercapitalized association" (generally defined to be one with less than either a 4% core capital ratio, a 4% Tier 1 risked-based capital ratio or an 8% risk-based capital ratio). Any such association must submit a capital restoration plan and until such plan is approved by the OTS may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The OTS is authorized to impose the additional restrictions that are applicable to significantly undercapitalized associations.
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. For additional information on the limitations on dividends and other capital distributions, see Note 15 to the Notes to Consolidated Financial Statements in the Annual Report.
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, 2000, 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 1999 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 many 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 banking law was materially affected by the passage of the Gramm-Leach-Bliley Act. However, this act may not materially impact the Company or the Bank unless the Company chooses to become a financial holding company. This act, effective in March 2000, allows, among other things, qualifying bank holding companies to become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other activities that are financial in nature or incidental to a financial activity. In addition, the act enacts a number of consumer protections, including provisions intended to protect privacy of bank customers' financial information and provisions requiring disclosure of ATM fees imposed by banks on customers of other banks. Other parts of the act, affecting newly created savings and loan holding companies, do not impact existing savings and loan holding companies such as the 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 calendar 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% (being scaled down to 7.5% over a number of years) 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, 1998. With respect to years examined by the State Department of Taxation and Finance, either all deficiencies have been satisfied or sufficient reserves have been established to satisfy asserted deficiencies.
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, 2000, the Company had a total of 218 employees, including 34 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 42, 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 39, 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 its formation.
Thomas Nachod, age 59, is Senior Vice President of the Company and the Bank. Mr. Nachod joined the Company in December 1998. Between July 1997 to November 1998, he held the position of Senior Vice President at ALBANK. From November 1990 to June 1997, Mr. Nachod worked in a variety of rolls at KeyBank. In addition, Mr. Nachod served as Chief Executive Officer of two banks, Connecticut Community Bank in Greenwich, CT and Fidelity Bank of Scottsdale, AZ.
Robert Kelly, age 53, 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.
Item 2. Description of Property
The Company conducts its business at its main office, sixteen other banking offices and an operations office in its primary market area. The Company owns its Main Office, its operations center and three 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, 2000 was $5.3 million. See Note 7 of the 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.
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.
Item 4.
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, 2000.
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters
The information required herein is incorporated by reference to the section entitled "Stock Price Information" in the Annual Report.
Item 6.
Item 6. Selected Financial Data
The information required herein is incorporated by reference to the section entitled "Selected Consolidated Financial Information" in the Annual Report.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information required herein is incorporated by reference to the indentically captioned section in the Annual Report.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated by reference to the section entitled "Market Risk" in the Annual Report.
Item 8.
Item 8. Financial Statements and Supplementary Data
Financial statements listed in response to Item 14 of this report are herein incorporated by reference. Supplementary data included under the caption "Unaudited Consolidated Quarterly Financial Information" in the Annual Report is herein incorporated by reference.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
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 18, 2001, 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, 2000, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with.
Item 11.
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 18, 2001, 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.
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 18, 2001, 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.
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 18, 2001, 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.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
The following information appearing in the Annual Report (Exhibit 13), is incorporated by reference:
- Independent Auditors' Report - Consolidated Statements of Financial Condition as of December 31, 2000 and 1999 - Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 - Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 - Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is not required under the related instructions, is inapplicable, or is included in the consolidated financial statements and notes thereto.
(a) (3) Exhibits:
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 amended on October 22, 1999 and currently in effect, filed as an exhibit to Current Report on Form 8-K, filed on February 8, 2000, 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 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, filed as Exchibit 10.3 to Registrant's December 31, 1998 Form 10-K.
10.4 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.
10.5 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.
10.6 Standstill agreement with L. Seidman, filed as Ex-10.8 to Registrant's December 31,1999 Form 10-K
10.7 Registrant's 2001 Stock Option and Incentive Plan.
10.8 Amended Employment Agreement between the Registrant and John M. Lisicki.
11 Statement re: computation of per share earnings (see Notes 1(n) and 12 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 (only those portions incorporated by reference in this document are deemed filed).
21 Subsidiaries of the Registrant
23 Consent of Independent Certified Public Accountants
(b) Reports on Form 8-K:
No current reports on Form 8-K were filed during the last quarter of the period covered by this report.
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 26, 2001 By: /s/ John M. Lisicki ------------------------------ ---------------------- John M. Lisicki, President and Chief Executive Officer (Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on March 26, 2001:
/s/ John M. Lisicki /s/ James J. Alescio - ----------------------------------- ------------------------------------- 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/ Lauren T. Barnett /s/ James J. Bettini - ----------------------------------- ------------------------------------- Lauren T. Barnett, Director James J. Bettini, Director
/s/ John J. Daly /s/ Dr. Daniel J. Greco - ----------------------------------- -------------------------------------- John J. Daly, Director Dr. Daniel J. Greco, Director
/s/ Seymour Holtzman /s/ Marvin R. LeRoy, Jr. - ----------------------------------- ------------------------------------- Seymour Holtzman, Director Marvin R. LeRoy, Jr., Director
/s/ Allan R. Lyons /s/ Charles S. Pedersen - ----------------------------------- ------------------------------------- Allan R. Lyons, Director Charles S. Pedersen, Director
/s/ William L. Petrosino /s/ Lawrence B. Seidman - ----------------------------------- ------------------------------------- William L. Petrosino, Director Lawrence B. Seidman
/s/ Dr. Ronald S. Tecler /s/ John A. Tesiero - ----------------------------------- ------------------------------------- Dr. Ronald S. Tecler, Director John A. Tesiero, Jr., Director
/s/ Charles E. Wright - ----------------------------------- Charles E. Wright, Director