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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
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: 00-25439
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TROY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 16-1559508
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
32 SECOND STREET 12180
TROY, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(518) 270-3313
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(NOT APPLICABLE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK ($0.0001 PAR VALUE PER SHARE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K (Section 299.405 of this chapter) is not contained herein,
and will not be contained, to the best of the 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]
Based upon the closing price of the registrant's common stock as of December 26,
2002, the aggregate market value of the voting stock held by non-affiliates of
the registrant is $198.4 million.
The number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date is:
CLASS: COMMON STOCK, PAR VALUE $0.0001 PER SHARE
OUTSTANDING AT DECEMBER 26, 2002: 9,480,894 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to shareholders for fiscal year ended
September 30, 2002 are incorporated by reference into Part II,
Items 7, 7A and 8 of this Form 10-K
(2) Portions of the definitive Proxy Statement for the Registrant's Annual
Meeting of Shareholders to be held on February 13, 2003 are
incorporated by reference into Part III, Items 10, 11,
12 and 13 of this Form 10-K.
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PART I
ITEM 1. BUSINESS
BUSINESS OF TROY FINANCIAL CORPORATION
Troy Financial Corporation ("Troy Financial" or the "Company") is a Delaware
corporation and the bank holding company for The Troy Savings Bank (the "Savings
Bank") and The Troy Commercial Bank (the "Commercial Bank") (collectively, the
"Banks"). Troy Financial's primary business is the business of the Banks.
Presently, Troy Financial and the Commercial Bank have no plans to own or lease
any property, but instead use the premises and equipment of the Savings Bank.
Troy Financial does not employ any persons other than certain officers of the
Savings Bank who are not separately compensated by Troy Financial or the
Commercial Bank. Troy Financial and the Commercial Bank may utilize the support
staff of the Savings Bank from time to time, if needed, and additional employees
will be hired as appropriate to the extent Troy Financial or the Commercial Bank
expand their business in the future. Troy Financial was incorporated in 1998.
Troy Financial is subject to regulation and supervision by the Board of
Governors of the Federal Reserve System (the "Federal Reserve"). See
"Regulation."
The Savings Bank is a community-based savings bank headquartered in Troy, New
York. The Savings Bank operates through 21 full service branch offices in an
eight-county market area. As a full service financial institution, the Savings
Bank places a particular emphasis on residential and commercial real estate loan
products, as well as retail and business banking products and services. The
Savings Bank and its subsidiaries also offer a complete range of trust,
insurance and investments services, including securities brokerage, annuity and
mutual funds sales, money management and retirement plan services, and other
traditional investment/brokerage activities to individuals, families and
businesses throughout the eight New York State counties of Albany, Greene,
Rensselaer, Saratoga, Schenectady, Schoharie, Warren and Washington.
In August 2000, the Company established the Commercial Bank, which is a
commercial bank headquartered in Troy, New York. The Commercial Bank's primary
purpose is to generate municipal deposits, which under New York State law cannot
be collected by the Savings Bank.
On November 10, 2000, the Company acquired Catskill Financial Corporation
("Catskill") in a cash transaction for $23.00 per share, for a total transaction
value of approximately $89.8 million. The seven former offices of Catskill
Savings Bank are now full-service offices of the Savings Bank. In accordance
with the purchase method of accounting for business combinations, the assets
acquired and liabilities assumed were recorded by the Company at their estimated
fair value. Related operating results have been included in the Company's
consolidated financial statements from the date of acquisition.
The Company's goal is to be the primary source of financial products and
services for its business, retail, and municipal customers. The Company's
business strategy is to serve as a community-based, full-service financial
services firm offering a wide variety of business, retail, municipal banking,
trust, insurance, investment management and brokerage services throughout its
market area.
The Company delivers its products and services and interacts with its customers
primarily through its 21 branches and 23 proprietary automated teller machines
("ATMs") and its 24-hour telephone banking service ("Time$aver"). The Company's
branches are staffed by managers, branch operations supervisors and customer
sales and service representatives ("CSSRs") who are trained and encouraged to
market and service the Company's products, including those of the Company's
nonbanking subsidiaries.
The Savings Bank and the Commercial Bank are subject to regulation, examination
and supervision by Federal Deposit Insurance Corporation (the "FDIC") and the
New York State Banking Department ("NYSBD"). Deposits in the Banks are insured
by the FDIC to the maximum extent provided by law. See "Regulation." The Savings
Bank is a member of the Federal Home Loan Bank System ("FHLB System").
LENDING ACTIVITY
The Company focuses its lending activity primarily on the origination of
commercial real estate, commercial business, residential mortgage and consumer
loans. The types of loans that the Company may originate are subject to federal
and state law and regulations. Interest rates charged by the Company on loans
are affected principally by the demand for such loans, the supply of money
-2-
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, monetary
policies of the Federal government, including the Federal Reserve, legislative
tax policies and governmental budget matters. All loan approvals are made
locally, by individual loan officers, or loan committees, depending upon the
size of the loan. The Company makes every effort to respond to all loan requests
in a prompt and timely manner.
LOAN PORTFOLIO COMPOSITION. At September 30, 2002, the Company's loan portfolio
totaled $765.1 million, or 59.4% of total assets, and consisted primarily of
single-family residential mortgages, commercial real estate, construction,
commercial business, and consumer loans.
The commercial real estate loan portfolio totaled $299.0 million, or 39.0% of
the Company's total loans and 23.2% of total assets, at September 30, 2002.
Approximately 75.0% of the loans are secured by properties located in the
Company's eight county market area, and an additional 8.7% are secured by
properties located elsewhere in Upstate New York and the same amount in the New
York City area. Approximately 29.8% of the properties securing the loans are
office buildings and warehouses, 26.6% are apartment buildings and cooperatives,
and 24.0% are retail buildings. The Company's commercial real estate loans range
in size up to $11.9 million, and the average principal balance outstanding at
September 30, 2002 was approximately $888 thousand. The 20 largest commercial
real estate loans range in size from $3.0 million to $11.9 million, and the
Company had 71 loans with outstanding balances of more than $1.0 million at
September 30, 2002. The Company's largest commercial real estate exposure
involving a single relationship was $34.7 million, of which $32.2 million was
outstanding at September 30, 2002, to Morris Massry and his related real estate
interests with whom the Company has had a sixteen-year lending relationship. Mr.
Massry is a director of the Company and is a local real estate developer. All of
the real estate loans are secured by garden style apartment buildings.
The commercial business loan portfolio totaled $118.3 million, or 14.3% of the
Company's loans and 9.2% of total assets, at September 30, 2002. The portfolio
includes fixed and adjustable rate loans, as well as adjustable rate lines of
credit to a diverse customer base including manufacturers, wholesalers,
retailers, service providers, educational institutions and government-funded
entities. The Company's commercial business loans range in size up to $10.1
million, with an average principal balance outstanding of approximately $300
thousand at September 30, 2002. The Company's 20 largest commercial business
loans at that date ranged in terms of total exposure, including balances
outstanding and unfunded commitments, from $3.3 million to $10.1 million.
The Company's portfolio of single family residential mortgage loans totaled
$300.8 million, or 39.2% of total loans and 23.3% of total assets, at September
30, 2002. The portfolio consisted primarily of fixed rate and adjustable rate
loans secured by detached, single family homes located in the Company's market
area, as well as home improvement loans. As of September 30, 2002, the Company's
largest single-family residential mortgage loan had an outstanding balance of
$750,000. As of that date, the typical residential mortgage loan held by the
Company in its portfolio had an average principal balance of approximately $70.6
thousand, with an initial loan-to-value ("LTV") ratio of 80%, secured by
detached single family homes.
The consumer loan portfolio totaled $31.5 million, or 4.1% of total loans and
2.4% of total assets, at September 30, 2002. The Company's consumer loan
portfolio includes home equity lines of credit, auto loans, fixed rate consumer
loans, overdraft protection and "Creative Loans", which start with a modest,
below market interest rate that increases each year. The Company's home equity
lines of credit represented 47.0% of the Company's consumer loan portfolio and
its auto loans represented 26.7% of the portfolio, at September 30, 2002.
-3-
The following table presents the composition of the Company's loan portfolio,
excluding loans held for sale, in dollar amounts and percentages at the dates
indicated:
AT SEPTEMBER 30, 2002 2001 2000 1999 1998
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PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
(DOLLARS IN THOUSANDS) AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
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Real estate loans:
Residential $300,776 39.2 % $326,074 42.8 % $226,961 37.9 % $221,721 39.1 % $202,511 43.4 %
Commercial 298,995 39.0 269,520 35.3 233,334 38.9 216,700 38.2 166,186 35.7
Construction 17,075 2.3 16,379 2.2 7,300 1.2 13,761 2.4 10,052 2.2
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Total real estate loans 616,846 80.5 611,973 80.3 467,595 78.0 452,182 79.7 378,749 81.3
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Commercial business loans 118,349 15.4 109,284 14.3 95,586 16.0 72,268 12.7 45,156 9.7
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Consumer loans:
Home equity lines 14,796 1.9 7,108 0.9 5,019 0.8 6,776 1.2 8,575 1.8
Other consumer 16,678 2.2 34,192 4.5 30,901 5.2 36,087 6.4 33,445 7.2
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Total consumer loans 31,474 4.1 41,300 5.4 35,920 6.0 42,863 7.6 42,020 9.0
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Gross loans $766,669 100.0 % $762,557 100.0 % $599,101 100.0 % $567,313 100.0 % $465,925 100.0 %
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Net deferred loan fees/costs
and unearned discounts (1,602) (1,774) (364) (407) (344)
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Total loans $765,067 $760,783 $598,737 $566,906 $465,581
Allowance for loan losses (14,538) (14,333) (11,891) (10,764) (8,260)
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Total loans receivable,
net $750,529 $746,450 $586,846 $556,142 $457,321
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The following table presents as of September 30, 2002, the dollar amount of all
loans in the Company's portfolio, excluding loans held for sale, that are
contractually due after September 30, 2003, and indicates whether such loans
have fixed or adjustable interest rates:
DUE AFTER SEPTEMBER 30, 2003 FIXED ADJUSTABLE
(DOLLARS IN THOUSANDS) AMOUNT PERCENT AMOUNT PERCENT TOTAL
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Residential mortgage $241,129 33.3% $ 57,021 7.9% $298,150
Commercial mortgage 232,072 32.2% 51,742 7.2% 283,814
Construction 5,290 .7% 2,468 .3% 7,758
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Total real estate loans 478,491 66.2% 111,231 15.4% 589,722
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Commercial business 31,072 4.3% 73,611 10.2% 104,683
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Consumer:
Home equity lines of credit -- -- 14,796 2.1% 14,796
Other consumer 11,277 1.6% 1,245 .2% 12,522
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Total consumer 11,277 1.6% 16,041 2.3% 27,318
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Total loans $520,840 72.1% $200,883 27.9% $721,723
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-4-
LOAN MATURITY. The following table shows the contractual maturity of the
Company's loan portfolio at September 30, 2002. The table does not include loans
held for sale, and does include possible prepayments or scheduled principal
amortization.
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AT SEPTEMBER 30, 2002
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HOME
EQUITY
RESIDENTIAL COMMERCIAL COMMERCIAL LINES OF OTHER
(Dollars in thousands) MORTGAGE MORTGAGE CONSTRUCTION BUSINESS CREDIT CONSUMER TOTAL
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Amounts due:
Within one year $ 2,626 $ 15,181 $ 9,317 $ 13,666 $ -- $ 4,156 $ 44,996
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After one year:
one to five years 14,271 129,765 6,758 56,204 -- 11,901 218,899
five to ten years 39,128 119,999 1,000 16,658 14,796 621 192,202
ten to twenty years 144,142 25,712 -- 2,213 -- -- 172,067
more than twenty years 100,609 8,338 -- 29,608 -- -- 138,555
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Total due after one year 298,150 283,814 7,758 104,683 14,796 12,522 721,723
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Total amount due $ 300,776 $ 298,995 $ 17,075 $ 118,349 $ 14,796 $ 16,678 $ 766,669
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Less: Net deferred loan fees/costs
and unearned discount (1,602)
Allowance for loan losses (14,538)
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Loan receivable, net $ 750,529
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The Company participates with other financial institutions in certain larger
credits (both selling and purchasing interests) and also purchases loans from
other financial institutions and brokers. The Company also sells or enters into
commitments to sell certain fixed rate mortgage loans to Freddie Mac, as well as
to other third parties. Historically, the Company has sold substantially all its
30-year conforming fixed rate mortgage loans and, from time to time as
conditions warrant, its 15-year conforming fixed rate mortgage loans into the
secondary mortgage market. During fiscal 2002 and 2001, the Company sold $10.7
million and $27.2 million, respectively, of 30-year fixed-rate mortgage loans in
the secondary mortgage market. To reduce the interest rate risk associated with
mortgage loans held for sale, outstanding loan commitments and uncommitted loan
applications with rate lock agreements, which are intended to be held for sale,
the Company enters into mandatory forward sales commitments and option
agreements to sell loans in the secondary market. The Company typically retains
servicing rights on loans sold in order to generate fee income. At September 30,
2002, the Company serviced mortgage loans for others with an aggregate principal
balance of $185.0 million.
The following is a more detailed discussion of the Company's current lending
practices.
COMMERCIAL REAL ESTATE LENDING. The Company originates commercial real estate
loans primarily in its eight-county market area; as well as, New York City,
central/western New York, Florida and to a lesser extent in other states. The
Metropolitan New York portfolio is primarily apartments and co-op buildings in
Bronx (56.4%), Queens County (25.6%), Kings County (6.8%) and Westchester
(5.8%). At September 30, 2002, the Company's commercial real estate loan
portfolio by sector is secured as follows: 26.6% by apartment buildings and
cooperatives; 30.8% by office and warehouse buildings; 24.0% by retail
buildings; 3.0% by buildings owned by non-profit organizations; 3.8% by
hospitality industry; and 11.8% by other property types.
The Company's commercial real estate loans outstanding increased $29.5 million
or 10.9%, in fiscal 2002, compared to growth of $36.2 million or 15.5% in fiscal
2001 and $16.6 million or 7.7% in fiscal 2000. Loans originated in fiscal year
2002 and 2001 were $113.0 million and $100.8 million, respectively. The
Company's commercial real estate lending marketing efforts include: loan
officers calling on prospective borrowers, soliciting existing customers for
additional business, referrals from the branch system, networking with
professionals within the local real estate industry and maintaining contacts
with other commercial real estate lenders (banks, insurance companies and the
conduits).
In addition to business development, the Company's commercial real estate loan
officers are also responsible for the initial review of proposed commercial real
estate loans. Credit memorandums are generally prepared by the department's
underwriting staff. The Company's underwriting standards focus on: a review of
the property's cash flow, appraisal value, leases, occupancy percentages,
physical condition of the property, credit worthiness of major tenants and the
financial condition and credit history of the borrowers and any guarantors.
-5-
A few of the important underwriting benchmarks are the property's ability to
support (cover) the annual debt service. Typically the Company looks for at
least a 1.20 debt coverage ratio. Property occupancy percentage generally needs
to be at least at break-even level, though it can be less if the appropriate
risk mitigants are in place. Loan to value ("LTV") ratios (per bank ordered
appraisals) in general go up to 80%. If additional collateral or credit
enhancement is provided, the "LTV" can exceed 80%.
The Company prices its commercial real estate loans using the following indices:
Prime, London Inter-bank Offer Rate ("LIBOR"), the Treasury Constant Maturities
Index and Federal Home Loan Bank of NY borrowing rates. The Company adds a
premium (a "spread") to the index to determine the interest rate. These spreads
vary depending on the risk profile of the credit. Generally, permanent loans
have interest rate and loan maturities of five to ten years and are amortized
over 10-25 years. Construction loans are written for terms up to twenty-four
months. Typically, construction loans are priced to float over the prime rate or
the 30, 60 or 90 day LIBOR. Spread is typically added to the index. Commitment
fees may also be earned on new transactions. Generally fees range from .25% to
1.00% of the loan balance.
The Company's lending authority empowers the Vice President & Director of
Commercial Mortgage Lending to approve unsecured loans up to $100,000 and up to
$300,700 for loans secured by real estate. The Company's Commercial Mortgage
Credit Committee approves unsecured loans over $100,000 and real estate secured
loans over $300,700 up to $1.5 million. The Committee also reviews and
recommends for approval loans over $1.5 million; loans in excess of $1.5 million
require the approval of the Board of Directors' Loan Committee.
Department management is responsible for monitoring the Company's commercial
mortgage portfolio. Under management's direction, department staff collects
delinquent loans, reviews annual financial statements, performs property
inspections and prepares annual loan reviews. The purpose of the annual review
is to determine the property's current economics and whether the present loan
rating reflects the current risk. If the loan review warrants a change in loan
grade, it is indicated on the loan review form. The Company employs an outside
consultant, who was previously a senior credit officer for a large commercial
bank, to review the annual loan evaluations prepared by the department. The
scope of the consultant's annual review covers 75% to 80% of the Company's
commercial mortgage portfolio. The consultant issues his reports as to the
effectiveness of the department's loan review process and renders an opinion on
the risk profile of the portfolio.
COMMERCIAL BUSINESS LENDING. The Company has actively sought to originate
commercial business loans in its market area. The Company originated $51.5
million and $40.3 million of commercial business loans in fiscal years 2002 and
2001, respectively. The Company's commercial loans generally range in size up to
$10.0 million, and the borrowers are principally located within the Company's
market area. The Company offers both fixed rate loans, with terms ranging from
three to seven years and adjustable rate lines of credit. At September 30, 2002,
40.0% of the Company's outstanding commercial loan portfolio consisted of
variable rate loans. As a general rule, the Company sets the interest rates on
its loans based on the prime rate, LIBOR, or other index rates, plus a spread,
and its variable-rate loans reprice at least every 90 days. The Company's
commercial loans include loans to finance equipment acquisitions, working
capital and accounts receivable. These loans are made to a diverse customer base
that includes manufacturers, wholesalers, retailers, service providers,
educational institutions and government funded entities. The Company also
participates in two syndicated credits on businesses located in its market area.
At September 30, 2002, the total outstanding balance on these syndicated loans
was $7.3 million and the unused commitment available was $6.9 million.
The Company solicits commercial loan business through its commercial loan
officers, who call on potential borrowers and follow up on referrals from other
Company employees. The commercial loan officers market the Company's commercial
loan products by focusing on the Company's competitive pricing, the Company's
reputation for service and the Company's ties to the local business community.
In many cases, the Company's senior management, including the President, meet
with prospective borrowers.
The Company also has a small business lending program whereby the Company lends
money to small, locally-owned and operated businesses. During the fiscal year
ended September 30, 2002, the Company originated $10.3 million of new small
business loans, up from $8.4 million in the prior year. At September 30, 2002,
the Company had $24.1 million of such loans outstanding. Approximately 10% of
the Company's small business loans are secured by cash collateral or marketable
securities or are guaranteed up to 90% of the principal amount by the Small
Business Administration. At the end of fiscal year 2002, the Company developed a
credit scoring system to underwrite and monitor small business lines of credit
tied to a commercial checking account. It is expected that this new product will
efficiently serve a significant segment of its small business customer base,
with minimal cost. The product will be marketed and distributed through the
Company's branch system, but underwritten and monitored in a centralized section
of the commercial business department.
-6-
In addition to developing business, the Company's commercial loan officers are
responsible for underwriting the commercial loans and monitoring the ongoing
relationship between the borrower and the Company. Following the loan officer's
initial underwriting and preparation of a credit memorandum, the loan
application is reviewed by the Vice President and Director of Commercial
Lending, who has authority to approve loans if less than $100 thousand. Loans
between $100 thousand and $1.0 million require approval of the Company's
Commercial Loan Credit Committee, and loans in excess of $1.0 million require
approval of the Board of Directors' Loan Committee. The Company's underwriting
standards focus on a review of the potential borrower's cash flow, as well as
the borrower's leverage and working capital ratios. To a lesser extent, the
Company will consider the collateral securing the loan and whether there is a
personal guarantee on the loan.
To assist with the initial underwriting and ongoing maintenance of the Company's
commercial loans, the Company employs the same risk rating system used by the
Company's commercial real estate loan department. See " Commercial Real Estate
Lending." At the time a loan is initially underwritten, as well as every time a
loan is reviewed, the Company assigns a risk rating. In addition, the Company
employs an annual review process, in which an outside consultant reviews 75% to
80% of the Company's commercial loan portfolio to confirm the Company's assigned
risk rating and to review the Company's overall monitoring of the loan
portfolio.
The Company monitors its commercial loan portfolio by closely watching all loans
with a risk rating which indicates certain adverse factors, such as insufficient
debt ratio or cash flow issues. In addition, the Company receives delinquency
reports beginning on the 10th of every month. If a loan payment is more than 20
days late, the commercial loan officer begins active loan management, which
initially includes calling the borrower or sending a written notice. Moreover,
because the Company's lines of credit expire every 12 months, or five months
after the borrower's fiscal year end, and the borrower is required to renew the
line of credit at such time, the Company, in effect, re-underwrites the loan
annually. A term loan often includes a line of credit, in which case the status
of the borrower and loan is reviewed annually because of the line of credit
review. In all reviews, the Company analyzes the borrower's most current
financial statements, and in most cases will visit the borrower or inspect the
borrower's business and properties.
SINGLE FAMILY RESIDENTIAL LENDING. The Company originated $60.2 million and
$53.9 million of single-family residential real estate loans in fiscal years
2002 and 2001, respectively. Substantially all the Savings Bank's residential
mortgage loans were originated through Family Mortgage Banking Co., Inc.
("FMBC"), the Savings Bank's mortgage banking subsidiary. FMBC currently employs
two full-time and two part-time loan counselors, who are responsible for
developing the Company's mortgage business by meeting with referrals, networking
with representatives of the local real estate industry and sponsoring home
buying seminars. In addition, the Company's CSSRs are trained to refer potential
mortgage customers to FMBC. Although FMBC meets with applicants and assists with
the application process, the Company handles the processing, underwriting,
funding and closing of all residential mortgage loans. Single-family residential
mortgage loans not originated through FMBC generally are originated through
independent mortgage brokers or by the Savings Bank.
The Company currently makes a variety of fixed rate and adjustable rate mortgage
loans ("ARMs") , which are secured by one- to four-family residences located in
the Company's eight-county market area. The Company originates mortgage loans
that conform to Freddie Mac guidelines, as well as jumbo loans, which are loans
in amounts over $300,700, and loans with other non-conforming features. The
Company will underwrite a single family residential mortgage loan with an LTV
ratio of up to 95% with private mortgage insurance, and the Company's fixed rate
mortgages generally have contractual maturities of 10 to 30 years.
The Company offers a variety of ARM programs based on market demand. The Company
generally amortizes an ARM over 30 years. On certain ARMs, the Company offers a
conversion option, whereby the borrower, at his or her option, can convert the
loan to a fixed interest rate, after a predetermined period of time, generally
10 to 57 months. Interest rates are generally adjusted based on a specified
margin over the Constant Treasury Maturity Index. Interest rate adjustments on
such loans are limited by both annual adjustment caps and maximum rate
adjustments over the life of the loan. The origination of ARMs, as opposed to
fixed rate loans, helps to reduce the Company's exposure to increases in
interest rates. However, during periods of rising interest rates, ARMs may
increase credit risks not inherent in fixed rate loans, primarily because as
interest rates rise, the payment obligations of the borrower rises, thereby
increasing the potential for default. The annual and lifetime adjustable caps
however, help to reduce this risk. The volume and type of ARMs originated
through FMBC are affected by numerous market factors, including the level of
interest rates, competition, consumer preferences and the availability of funds.
At September 30, 2002, the Company held $54.5 million of ARMs in its loan
portfolio, most of which reprice annually.
-7-
Single-family residential loans are generally underwritten according to Freddie
Mac guidelines. The Company requires borrowers who obtain mortgage loans with an
LTV ratio greater than 80% to obtain private mortgage insurance in an amount
sufficient to reduce the Company's exposure to not more than 80% of the purchase
price or appraised value, whichever is lower. In addition, the Company requires
escrow accounts for the payment of taxes and insurance, if the LTV ratio exceeds
80%, but permits borrowers to request an escrow account waiver, if the LTV ratio
is less than 80%. Substantially all mortgage loans originated by the Company
include due-on-transfer clauses, which generally provide the Company the
contractual right to deem the loan immediately due and payable if the borrower
transfers ownership of the property without the Company's consent. The Company's
staff underwriters have authority to approve loans in amounts up to $300,700.
Loans between $300,700 and $1.5 million require the approval of the Company's
Commercial Mortgage Credit Committee, and loans in excess of $1.5 million
require the approval of the Loan Committee of the Board of Directors.
To help low and moderate income home buyers in the Company's communities, the
Company participates in residential mortgage programs and products sponsored by
the State of New York Mortgage Agency ("SONYMA") and the Federal Housing
Authority ("FHA"). SONYMA and FHA mortgage programs provide low and moderate
income households with smaller down payments and below market interest rates.
The Company sells its SONYMA loans back to SONYMA for resale in the secondary
market. The Company also is a charter member of the Capital District Affordable
Housing Partnership, a local lending consortium that makes mortgage funds
available to homebuyers who are unable to obtain conventional financing. The
Company also participates in the Capital District Community Loan Fund and the
FHLB Home Buyer's Club. Since 1993, the Company has also made available to low
to moderate income first-time homebuyers over $15.0 million of conventional no
down payment mortgages.
To complement the Company's portfolio of residential mortgage loan products, the
Company also originates fixed rate home equity mortgage loans. A first or second
mortgage on the owner-occupied property secures these loans. During fiscal 2002,
the Company originated $1.7 million of home equity mortgage loans. As of
September 30, 2002, the average size of the Company's outstanding home equity
mortgage loans in its residential mortgage loan portfolio was $17 thousand.
CONSUMER LENDING. In addition to the Company's residential mortgage loans, the
Company offers a variety of consumer credit products, including home equity
lines of credit, variable rate or Creative Loans, auto loans, fixed rate
consumer loans and overdraft protection. The objective of the Company's consumer
lending program is to maintain a profitable loan portfolio and to serve the
credit needs of the Company's customers and the communities in which it does
business, while providing for adequate liquidity, higher yielding short duration
assets, as well as portfolio diversification.
The Company offers home equity lines of credit in amounts up to $100,000. During
fiscal year 2002, the Company approved new lines of credit totaling $16.4
million. With the Prime Rate at its lowest point in over forty years, the
Company will take this opportunity in fiscal 2003 to generate new home equity
credit lines and loans and has commenced an aggressive campaign to increase
outstandings. These products represent a significant growth opportunity to the
consumer loan portfolio, as rates are very favorable (variable rate funding) and
this type of financing continues to be in high demand, as evidenced by a record
breaking home equity origination in 2001. The campaign was introduced throughout
the Bank's market area (Capital and Catskill Regions) via an internal branch
effort and externally through newspaper, direct mail, radio and billboard. The
campaign will be for six weeks from mid-October through the end of November. The
home equity lines of credit have variable interest rates and are available only
if the LTV ratio is less than 90%.
The Company's fixed rate consumer loans are typically made to finance the
purchase of new or used automobiles. In such cases, the Company offers 100%
financing on new automobiles for terms up to 60 months and 80% financing on used
automobiles for terms dependent on the age of the vehicle. The Company also
offers unsecured lines of credit or overdraft protection to credit qualified
depositors who maintain checking accounts with the Company. In addition to
covering overdrafts on checking accounts, these unsecured lines of credit are
accessible to borrowers from ATMs throughout the world.
The Company markets its consumer credit products through its branches, local
advertisements and direct mailings. Applications can be completed at any branch
of the Company, and, in most cases, the Company will respond to a customer's
completed credit application within 24 hours, including the funding of approved
loans. Individual authority to approve consumer loans varies by the amount of
the loan and whether it is real estate related. Consumer loans are underwritten
according to the Company's Consumer Loans Underwriting practices, and loan
approval is based primarily on review of the borrower's employment status,
credit report and credit score.
-8-
CONSTRUCTION LENDING. The Company offers residential construction loans to
individuals who are constructing their own homes in the Company's market area.
Generally, in these cases, the Company is familiar with the builders utilized by
the Company's borrowers and has a long-standing relationship with them. The
Company's residential mortgage loan origination group monitors the periodic
disbursements of all construction loans. Before advances are made, the Company's
independent appraisers provide reports comparing the progress of the
construction to the pre-construction schedule. In many cases, the Company
converts construction loans to traditional residential or commercial mortgage
loans, following completion of construction. At September 30, 2002, the Company
had $2.5 million of residential construction loans outstanding, which are
reported with residential mortgage loans.
The Company's construction loans generally have terms up to six months, and
require payment of interest only. If construction is not completed on schedule,
the Company charges the borrower additional fees in connection with an extension
of the loan. The Company's staff underwriters have approval authority of up to
$300,700. Loans in excess of $300,700 require approval of the Commercial
Mortgage Credit Committee, and loans in excess of $1.5 million require approval
of the Loan Committee of the Board of Directors. The Company will not make
construction loans in excess of $1.5 million, or greater than 95% of the
estimated cost of construction.
Construction lending generally involves greater credit risk than permanent
financing on owner-occupied real estate. The risk of loss is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction, compared to the estimated cost of construction, including
interest, and the ability of the builder to complete the project. If the
estimate of the value proves to be inaccurate, then the Company may be
confronted with a project that, when completed, has a value that is insufficient
to assure full repayment of the loan.
The Company also makes construction loans on commercial real estate projects
where the borrowers are well known to the Company and have the necessary
liquidity and financial capacity to support the projects through to completion
and the source of permanent financing, whether the Company or another
institution, can be verified. All commercial real estate construction lending is
done on a recourse basis. As of September 30, 2002, the Company had $17.1
million of commercial real estate construction loans outstanding, or 2.3% of the
Company's loans and 1.4% of total assets.
LOAN REVIEW. As part of the portfolio monitoring process, commercial business
loans over $750,000, and commercial real estate loans over $1 million are
subjected to an annual detailed loan review. Classified loans over $100,000 (see
below) in both portfolios are subjected to this process quarterly. Current
financial information is analyzed and the loan rating is evaluated to determine
if it still accurately represents the level of risk posed by the credit. These
reviews are then analyzed by an outside consultant who decides on the
reasonableness of the loan officers' conclusions with respect to the loans risk
rating and the related allowance for loan loss, if any. For classified loans,
these reviews are complemented by a quarterly loan officer meeting with the
outside consultant and the Company's Chief Credit Officer. The conclusions
reached at these meetings become an integral part of the quarterly review of
loan loss reserve adequacy.
DELINQUENT LOANS. It is the policy of management to monitor the Company's loan
portfolio to anticipate and address potential and actual delinquencies. The
procedures taken by the Company vary depending on the type of loan.
With respect to single family residential mortgage loans and consumer loans,
when a borrower fails to make a payment on the loan, the Company takes immediate
steps to have the delinquency cured and the loan restored to current status. On
the 15th of every month, the Credit Administration Department prepares
delinquency reports. The Company's collection manager and his staff then contact
the borrower by telephone to ascertain the reason for the delinquency and the
prospects of repayment. Written notices are also sent at that time. The borrower
is again contacted by telephone on the 20th and 26th of the month, if payment
has not been received. After 30 days another notice is sent and the borrower is
reported as delinquent. The Credit Administration Department continues to call
the borrower and if payment has not been received by the 60th day, another
notice is sent informing the borrower that the loan must be brought current
within the next 30 days or foreclosure proceedings will be commenced. Generally,
the Company does not accrue interest on loans more than 90 days past due. The
Company's procedures for single family residential loans which have previously
been sold by the Company, but which the Company currently services are similar
during the first 60 days. After 60 days, the Company follows the Freddie Mac or
applicable investor guidelines and timeframes regarding delinquent loan
accounts.
With respect to commercial real estate and commercial business loans, the Credit
Administration Department delivers delinquency reports to the respective
departments beginning on the 10th of every month. If a loan payment is more than
20 days late, the loan officer begins active loan management.
CLASSIFIED ASSETS. The Company's policies require the classification of loans
and other assets, such as debt and equity securities, considered to be of lesser
quality, as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the borrower or of the collateral pledged, if any.
-9-
Substandard assets include those characterized by the distinct possibility that
the institution will sustain some loss if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified as substandard, with the added characteristic that the weaknesses
present make collection or liquidation in full improbable. Assets classified, as
"loss" are those considered uncollectible and of such little value that there
continuance as assets without the establishment of a specific loss reserve is
not warranted. At September 30, 2002, the Company had classified $6.0 million of
assets as "substandard" and $226 thousand of assets as "doubtful." At such date,
the Company did not have any assets classified as "loss."
In addition to classified assets, the Company also has certain "special mention"
or "watch list" assets that have characteristics, features or other potential
weaknesses that warrant special attention. At September 30, 2002, special
mention assets totaled $14.9 million, or 1.9% of total loans and 1.2% of total
assets.
NON-PERFORMING ASSETS. The Company places a loan on non-accrual status when the
loan is contractually past due 90 days or more, or when, in the opinion of
management, the collection of principal and/or interest is doubtful. At such
time, all accrued but unpaid interest is reversed against current period income
and as long as the loan remains on non-accrual status, interest is recognized
only when received, if considered appropriate by management. In certain cases,
the Company will not classify a loan that is contractually past due 90 days or
more as non-accruing, if management determines that the particular loan is well
secured and in the process of collection. In such cases, the loan is simply
reported as "past due." Loans are removed from non-accrual status when they
become current as to principal and interest, or when in the opinion of
management, the loans are expected to be fully collectible as to principal and
interest. The Company did not have any loans classified as 90 days past due and
still accruing interest at September 30, 2002. Non-performing loans also include
troubled debt restructurings ("TDRs"). TDRs are loans whose repayment criteria
have been renegotiated to below market terms given the credit risk inherent in
the loan due to the borrowers' inability to repay the loans in accordance with
the loans' original terms. At September 30, 2002, the Company had no loans
classified as TDRs.
The Company classifies property that it acquires through foreclosure or
settlement in lieu thereof as other real estate owned ("OREO"). The Company
records OREO at the lower of the unpaid principal balance or fair value less
estimated costs to sell at the date of acquisition and subsequently recognizes
any decrease in fair value by a charge to non-interest expenses. At September
30, 2002, the Company had $227 thousand of OREO resulting from single family
residential mortgage loans, and $125 thousand from commercial real estate loans.
-10-
The following presents the amounts and categories of non-performing assets at
the dates indicated:
AT SEPTEMBER 30, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
Real estate loans:
Residential $ 1,147 $ 1,825 $ 2,424 $ 2,707 $ 2,900
Commercial 555 898 2,829 4,210 6,327
Construction -- -- -- -- --
- -----------------------------------------------------------------------------------------------------
Total real estate loans 1,702 2,723 5,253 6,917 9,227
Commercial business loans 264 283 103 10 31
Home equity lines 30 83 84 58 259
Other consumer loans 101 160 160 282 50
- -----------------------------------------------------------------------------------------------------
Total non-accrual loans 2,097 3,249 5,600 7,267 9,567
Troubled debt restructurings -- -- 53 616 2,081
- -----------------------------------------------------------------------------------------------------
Total non-performing loans $ 2,097 $ 3,249 $ 5,653 $ 7,883 $11,648
- -----------------------------------------------------------------------------------------------------
Other real estate owned :
Residential real estate 227 140 240 76 345
Commercial real estate 125 125 1,033 1,769 1,527
- -----------------------------------------------------------------------------------------------------
Total other real estate owned 352 265 1,273 1,845 1,872
- -----------------------------------------------------------------------------------------------------
Total non-performing assets $ 2,449 $ 3,514 $ 6,926 $ 9,728 $13,520
=====================================================================================================
Allowance for loan losses $14,538 $14,333 $11,891 $10,764 $ 8,260
=====================================================================================================
Allowance for loan losses as a
percentage of total loans 1.90% 1.88% 1.99% 1.90% 1.77%
=====================================================================================================
Allowance for loan losses as a
percentage of non-performing loans 693.28% 441.15% 210.35% 136.55% 70.91%
=====================================================================================================
Non-performing loans as
a percentage of total loans 0.27% 0.43% 0.94% 1.39% 2.50%
=====================================================================================================
Non-performing assets as
a percentage of total assets 0.19% 0.30% 0.75% 1.06% 1.89%
=====================================================================================================
For the years ended September 30, 2002, 2001 and 2000, the interest income that
would have been recorded if the non-accrual loans were on an accrual basis, or
had the rate not been reduced with respect to the loans restructured in troubled
debt restructuring, amounted to $123 thousand, $210 thousand, and $186 thousand,
respectively.
ALLOWANCE FOR LOAN LOSSES. In originating loans, there is a substantial
likelihood that loan losses will be experienced. The risk of loss varies with,
among other things, general economic conditions, the type of loan,
creditworthiness of the borrower and in the case of a collateralized loan, the
quality of the collateral securing the loan. In an effort to minimize loan
losses, the Company monitors its loan portfolio by reviewing delinquent loans
and taking appropriate measures. In addition, with respect to the Company's
commercial real estate and commercial business loans, the Company closely
watches all loans with a risk rating that indicates potential adverse factors.
Moreover, on an annual basis, the Company reviews borrowers' financial
statements, including rent rolls if appropriate, and in some cases, inspects
borrowers' properties in connection with the annual renewal of lines of credit.
Furthermore, the Company's outside consultant periodically reviews the credit
quality of the loans in the commercial real estate and commercial business loan
portfolios, and, together with the Company's Commercial Loan Credit Committee,
reviews quarterly, all classified loans over $100,000 with a risk rating that
indicates the loan has certain weaknesses.
Based on management's on-going review of the Company's loan portfolio, including
the inherent risks therein, historical loan loss experience, general economic
conditions, and trends and other factors, the Company maintains an allowance for
loan losses to cover probable loan losses. The allowance for loan losses is
established through a provision for loan losses charged to operations. The
provision for loan losses is based upon a number of factors including;
historical loan loss experience, changes in the types and volume of the loan
portfolio, overall portfolio quality including past due and non-accrual trends,
loan concentrations, review of specific problem loans, changes in lending policy
-11-
and procedures including underwriting, industry trends, and general economic
conditions which may effect the borrowers' abilities to pay. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of all or a portion of the principal is unlikely. The allowance
is an amount that management believes will be adequate to absorb probable losses
on existing loans. Based on information currently known, management considers
the current level of reserves adequate to cover probable loan losses, although
there can be no assurance that such reserves will in fact be sufficient to cover
actual losses. At September 30, 2002, the Company's allowance for loan losses
was $14.5 million, or 1.90% of total loans and 693.28% of non-performing loans.
Net charge-offs during the year ended September 30, 2002 were $961 thousand,
down $279 thousand or 22.5%, from fiscal 2001. The Company continues to monitor
and modify its allowance for loan losses as conditions dictate. The following
table is a summary of the activity in the Company's allowance for loan losses
over the last five years:
FOR THE YEARS ENDED SEPTEMBER 30, 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Total loans outstanding at end of period $ 765,067 $ 760,783 $ 598,737 $ 566,906 $ 465,581
===================================================================================================================================
Average total loans outstanding $ 761,682 $ 741,709 $ 594,570 $ 505,489 $ 467,406
===================================================================================================================================
Allowance for loan losses at beginning of year $ 14,333 $ 11,891 $ 10,764 $ 8,260 $ 6,429
Loan charge-offs:
Residential real estate (120) (258) (412) (362) (521)
Commercial real estate (128) (20) (550) (252) (1,612)
Construction -- (89) (375) -- (130)
Commercial business (374) (184) (40) (75) (51)
Home equity lines -- -- -- -- --
Other consumer loans (595) (1,041) (565) (306) (132)
- -----------------------------------------------------------------------------------------------------------------------------------
Total charge-offs (1,217) (1,592) (1,942) (995) (2,446)
- -----------------------------------------------------------------------------------------------------------------------------------
Loan recoveries:
Residential real estate 19 26 84 40 147
Commercial real estate 4 71 155 176 57
Construction 31 32 219 13 --
Commercial business 69 22 6 8 4
Home equity lines -- -- -- -- --
Other consumer loans 133 201 42 12 19
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries 256 352 506 249 227
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs (961) (1,240) (1,436) (746) (2,219)
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,166 1,498 2,563 3,250 4,050
Allowance acquired -- 2,184 -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $ 14,538 $ 14,333 $ 11,891 $ 10,764 $ 8,260
===================================================================================================================================
Net charge-offs to average loans .13% .17% .24% .15% .48%
Allowance as a percentage of non-performing loans 693.28% 441.15% 210.35% 136.55% 70.91%
Allowance as a percentage of period-end loans 1.90% 1.88% 1.99% 1.90% 1.77%
===================================================================================================================================
-12-
The following table presents an allocation of the Company's allowance for loan
losses, the percent of allowance for loan losses to total allowance and the
percent of loans to total loans in each of the categories listed at the dates
indicated. This allocation is management's assessment of the risk
characteristics of each of the component parts of the total loan portfolio
outstanding and is subject to change. The allocation is neither indicative of
the specific amounts or the loan categories in which future charge-offs may
occur nor is it an indicator of future loss trends. The allocation of the
allowance to each category does not restrict the use of the allowance to absorb
losses in any category.
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
( Dollars in thousands) AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
- ---------------------------------------------------------------------------------------------------------------------------------
Allocation of allowance
for loan losses:
Real estate loans:
Residential mortgage $ 1,444 9.9% 39.2% $ 2,085 14.5% 42.8% $ 2,062 17.3% 37.9%
Commercial mortgage 6,548 45.1% 39.0% 5,504 38.4% 35.3% 5,533 46.5% 38.9%
Construction 454 3.1% 2.3% 470 3.3% 2.2% 297 2.5% 1.2%
Commerical business loans 2,723 18.7% 15.4% 2,636 18.4% 14.3% 2,059 17.3% 16.0%
Home equity lines of credit 406 2.8% 1.9% 211 1.4% 0.9% 128 1.1% 0.8%
Other consumer loans 468 3.2% 2.2% 1,012 7.1% 4.5% 685 5.8% 5.2%
Unallocated 2,495 17.2% 2,415 16.9% 1,127 9.5%
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 14,538 100.0% 100.0% $ 14,333 100.0% 100.0% $ 11,891 100.0% 100.0%
=================================================================================================================================
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 1999 1998
- -------------------------------------------------------------------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
( Dollars in thousands) AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
- -------------------------------------------------------------------------------------------------
Allocation of allowance
for loan losses:
Real estate loans:
Residential mortgage $ 1,967 18.2% 39.1% $1,316 15.9% 43.4%
Commercial mortgage 5,379 50.0% 38.2% 3,964 48.0% 35.7%
Construction 95 0.9% 2.4% 131 1.6% 2.2%
Commerical business loans 1,716 15.9% 12.7% 1,503 18.2% 9.7%
Home equity lines of credit 117 1.1% 1.2% 125 1.5% 1.8%
Other consumer loans 534 5.0% 6.4% 394 4.8% 7.2%
Unallocated 956 8.9% 827 10.0%
- -------------------------------------------------------------------------------------------------
Total $ 10,764 100.0% 100.0% $8,260 100.0% 100.0%
=================================================================================================
-13-
SECURITIES
The Company securities portfolio is comprised of securities available for sale
and securities held to maturity. At September 30, 2002, the Company had $394.1
million, or 30.6% of total assets, in securities available for sale and $883
thousand, or less than 0.1% of total assets, in securities held to maturity. The
portfolios consist primarily of U.S. government securities and agency
obligations, corporate debt securities, municipal securities, mortgage-backed
securities, mutual funds and equity securities. 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, then
they are classified as securities held to maturity and are carried at amortized
cost. Securities if any, that are identified as trading account assets for
resale over a short period are stated at fair value with unrealized gains and
losses reflected in current earnings. All other debt and equity securities are
classified as securities available for sale and are reported at fair value, with
net unrealized gains or losses reported, net of income taxes, as a separate
component of equity. At September 30, 2002, the Company did not hold any
securities considered to be trading securities. As a member of the FHLB of New
York, the Company is also required to hold FHLB stock, which is carried at cost
because the FHLB stock is not transferable and may only be redeemed by the FHLB.
At September 30, 2002, the Company did not hold the securities of any one issuer
in an amount that exceeded 10% of the Company's equity, except for securities
issued by the U.S. Government, or its agencies.
The Company's investment policy focuses investment decisions on maintaining a
balance of high quality, diversified investments. In making its investments, the
Company also considers optimal balance sheet structure, including repricing,
liquidity, collateral for pledging purposes, and earnings. Investment decisions
are made by the Company's Chief Financial Officer who has authority to purchase,
sell or trade securities qualifying as eligible investments under applicable law
and in conformity with the Company's investment policy. In addition, the
Company's Vice President and Director of Municipal Finance is authorized to
purchase municipal securities for the Commercial Bank's portfolio.
Under the Company's investment policy, securities eligible for the Company to
purchase include: U.S. Treasury obligations, securitized loans from the
Company's loan portfolio, municipal securities, certain corporate obligations,
equity mutual funds, common stock, preferred stock, convertible preferred stock,
convertible notes and bonds, U.S. governmental agency or agency-sponsored
obligations, collateralized mortgage obligations and REMICs, banker's
acceptances and commercial paper, certificates of deposit and federal funds.
The following table presents the composition of the Company's securities
available for sale and securities held to maturity in dollar amounts and
percentages at the dates indicated.
- ----------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------------
CARRYING PERCENT CARRYING PERCENT CARRYING PERCENT
(Dollars in thousands) VALUE OF TOTAL VALUE OF TOTAL VALUE OF TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
Securities available for sale (at fair value):
U.S. Government securities and agency obligations $146,313 37.1% $ 60,463 24.3% $161,184 60.4%
Obligations of states and political subdivisions 143,989 36.5% 87,308 35.1% 80,359 30.1%
Mortgage-backed securities 47,471 12.1% 50,312 20.3% 2,149 0.8%
Corporate debt securities 25,274 6.4% 13,639 5.5% 12,345 4.7%
Mutual funds and marketable equity securities 25,717 6.5% 28,669 11.5% 1,865 0.7%
Non-marketable equity securities 5,303 1.4% 8,078 3.3% 8,848 3.3%
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 394,067 100.0% 248,469 100.0% 266,750 100.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity (at amortized cost)
Mortgage-backed securities 883 100.0% 1,130 53.1% 1,301 56.6%
Corporate and other debt securities -- 0.0% 1,000 46.9% 1,000 43.4%
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 883 100.0% 2,130 100.0% 2,301 100.0%
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities portfolio $394,950 $250,599 $269,051
==================================================================================================================================
-14-
The following table presents information regarding the amortized cost, weighted
average yields and contractual maturities of the Company's securities available
for sale and securities held to maturity debt portfolios (excludes mutual fund
shares and equities) as of September 30, 2002. Weighted average yields are based
on amortized cost.
- -----------------------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------------
MORE THAN ONE YEAR TO MORE THAN FIVE YEARS TO
ONE YEAR OR LESS FIVE YEARS TEN YEARS MORE THAN TEN YEARS
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
(Dollars in thousands) COST YIELD COST YIELD COST YIELD COST YIELD
- -----------------------------------------------------------------------------------------------------------------------------------
Securities available for sale :
U.S. Government securities
and agency obligations $ 124,953 1.50% $ 20,118 4.89% $ -- $ --
Obligations of states and
political subdivisions 100,443 3.17% 34,315 4.54% 7,609 7.03% 266 6.94%
Mortgage-backed securities 80 6.82% 587 7.11% 3,179 7.12% 41,342 6.08%
Corporate debt securities -- 22,832 4.62% 2,300 5.15% --
- -----------------------------------------------------------------------------------------------------------------------------------
Total available for sale $ 225,476 2.25% $ 77,852 4.67% $ 13,088 6.56% $ 41,608 6.09%
- -----------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity:
Mortgage-backed securities -- 28 7.50% 563 8.73% 292 7.27%
- -----------------------------------------------------------------------------------------------------------------------------------
Total securities $ -- $ 28 7.50% $ 563 8.73% $ 292 7.27%
===================================================================================================================================
- ---------------------------------------------------------
AT SEPTEMBER 30, 2002
- ---------------------------------------------------------
TOTAL
- ---------------------------------------------------------
WEIGHTED
AMORTIZED AVERAGE
(Dollars in thousands) COST YIELD
- ---------------------------------------------------------
Securities available for sale:
U.S. Government securities
and agency obligations $ 145,071 1.97%
Obligations of states and
political subdivisions 142,633 3.64%
Mortgage-backed securities 45,188 6.17%
Corporate debt securities 25,132 4.48%
- ---------------------------------------------------------
Total available for sale $ 358,024 3.34%
- ---------------------------------------------------------
Securities held to maturity:
Mortgage-backed securities 883 8.21%
- ---------------------------------------------------------
Total securities $ 883 8.21%
=========================================================
(1) Weighted average yields are presented on a tax equivalent basis, using an
assumed Federal tax rate of 34%.
The following is a more detailed discussion of the Company's securities
available for sale and securities held to maturity portfolios:
U.S GOVERNMENT SECURITIES AND AGENCY OBLIGATIONS. The Company invests in U.S.
Treasury securities, debt securities and mortgage-backed securities issued by
government agencies and government sponsored agencies such as Fannie Mae, the
FHLBs, the Government National Mortgage Association ("Ginnie Mae") and the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). At September 30, 2002,
the Company held, as available for sale, $20.1 million of non-government
guaranteed bonds issued by the FHLBs, Freddie Mac and Fannie Mae. These
securities had an average yield of 4.89% and all of these securities were rated
"AAA." The Company's investment policy does not limit the amount of U.S.
government and agency obligations that, the Company can be hold.
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS. At September 30, 2002, $138.5
million of the Company's securities consisted of tax-exempt municipal bonds and
notes, all of which were classified as available for sale. Of that total, $79.1
million were invested in general obligations of jurisdictions in the State of
New York representing relationship investments in municipalities, including
counties, cities, school districts, towns, villages and fire districts. In
addition, the Company held $59.4 million in bonds of various municipalities
throughout the United States. The Company also held $4.1 million of taxable
municipal bonds of municipalities within New York State. The Company's municipal
securities have a weighted average maturity of just over one-year and a taxable
equivalent yield of 3.64% at September 30, 2002. Interest earned on municipal
bonds is exempt from Federal income taxes and, for issues in the State of New
York, a portion is excludable from state income taxes. The Company's investment
policy limits the amount of municipal securities it may hold to 25.0% of the
Company's total assets, or approximately $322.2 million at September 30, 2002,
however, the Company continuously monitors its tax-exempt portfolio to avoid
being subject to the alternative minimum tax.
CORPORATE DEBT SECURITIES. The Company's corporate debt securities portfolio at
September 30, 2002 totaled $25.1 million and consisted of general corporate
obligations and an asset-backed security. All of the Company's corporate debt
securities at September 30, 2002, were rated single "A" or higher by at least
one of the rating agencies, and all were classified as available for sale. The
Company's investment policy limits the amount of corporate debt securities to
25.0% of the Company's total assets or approximately $322.2 million at September
30, 2002.
-15-
MUTUAL FUNDS AND EQUITY SECURITIES. At September 30, 2002, the Company's mutual
funds and equity securities portfolio totaled $30.1 million, all of which were
classified as available for sale. The largest investment in one issuer was $20.8
million in a Federated Adjustable Rate Securities Fund and $5.2 million in FHLB
of New York stock which the Company is required to hold as a member. At
September 30, 2002, the Company also had $1.9 million invested in common stocks,
primarily shares of publicly traded financial institutions, and an additional
$2.2 million of preferred stocks of nationally recognized corporations.
SOURCES OF FUNDS
The Company's lending and securities activities are primarily funded by
deposits, repayments and prepayments of loans and securities, proceeds from the
sale of loans and securities, proceeds from maturing securities and cash flows
from operations. In addition, the Company borrows from the FHLB of New York to
fund its operations.
DEPOSITS. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposit accounts consist of interest
bearing checking, non-interest bearing checking and business checking, regular
savings, money market savings and time deposit accounts. The maturities of the
Company's time deposit accounts range from three months to five years. In
addition, the Company offers IRAs and Keogh accounts. To enhance its deposit
products and increase its market share, the Company offers overdraft protection
and direct deposit for its retail banking customers and cash management services
for its business customers. In addition, the Company offers a low-cost interest
bearing checking account service to its customers over 55 years of age. The
Company's ALCO Committee sets the rates for all deposit products.
At September 30, 2002, the Company's deposits totaled $883.0 million or 68.5% of
total assets. At September 30, 2002, the balance of core deposits, which is
defined to include NOW accounts, money market accounts, savings accounts and
non-interest bearing checking accounts, totaled $586.0 million, or 66.4% of
total deposits and represented 45.4% of total assets. At September 30, 2002, the
Company had a total of $297.0 million in time deposit accounts, or 33.6% of
total deposits. Time deposits of $238.6 million or 80.4% of total time deposits
mature in one year, or less.
The flow of deposits is influenced significantly by general economic conditions,
changes in interest rates and competition. The Company's deposits are obtained
primarily from the eight counties in which the Company's branches are located.
The Company relies primarily on competitive pricing of its deposit products and
customer service and long-standing relationships to attract and retain these
deposits, although market interest rates and rates offered by competing
financial institutions affect the Company's ability to attract and retain
deposits. The Company uses traditional means of advertising its deposit
products, including local radio and print media, and does not solicit deposits
from outside its market area. During fiscal 2002, the Company did not use
brokers to obtain deposits, and at September 30, 2002, the Company had no
brokered deposits. However, the Company may, from time to time, consider these
funding opportunities.
In fiscal 2002, the Commercial Bank increased its municipal deposits $60.5
million. The Company expects the Commercial Bank to continue providing an
alternative source of funding through the generation of municipal deposits.
At September 30, 2002, the Company had $297.0 million in time deposit accounts,
with the following maturities:
------------------------------------------------------------------------
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
------------------------------------------------------------------------
(Dollars in thousands)
TIME DEPOSITS LESS THAN $100,000:
Three months or less $ 63,382 2.93%
Over three months through six months 64,881 2.78%
Over six months through 12 months 57,315 2.95%
Over 12 months 51,670 4.02%
------------------------------------------------------------------------
Total $237,248 3.13%
========================================================================
TIME DEPOSITS MORE THAN $100,000:
Three months or less $ 28,813 2.37%
Over three months through six months 10,491 2.38%
Over six months through 12 months 13,767 2.96%
Over 12 months 6,650 4.10%
------------------------------------------------------------------------
Total $ 59,721 2.70%
========================================================================
Total $296,969 3.05%
========================================================================
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BORROWINGS. The principal source of the Company's borrowings is through the FHLB
and repurchase agreements. The FHLB system functions in a reserve credit
capacity for member savings associations and certain other home financing
institutions. The Company uses FHLB advances as an alternative funding source to
fund its lending activities when it determines that it can profitably invest the
borrowed funds over their term. At September 30, 2002, the Company had long-term
borrowings of $75.0 million and no outstanding FHLB short-term advances.
Long-term fixed rate borrowings totaled $65.0 million, with a weighted average
interest rate of 4.51% and a weighted average term of 3.2 years. The Company
also had $10.0 of long-term borrowings, which adjust monthly at a spread over
thirty-day Libor. In addition, the Company had $12.5 million of non-recourse
mortgage debt associated with the real estate joint venture established in May
2002. The mortgage debt had an original term of 30 years at a fixed rate of
7.48% and at September 30, 2002, has approximately 26 years remaining.
At September 30, 2002, the Company had $134.9 million of borrowed funds in the
form of securities sold under agreements to repurchase, with a weighted average
interest rate of 2.16%. All securities repurchase agreements at September 30,
2002 mature within thirty days, except for $10.0 million of repurchase
agreements with the FHLB, which mature in 2008.
TRUST SERVICES
The Trust Department offers a full range of services, including living trusts,
executor services, testamentary trusts, employee benefit plan management,
custody services and investment management, primarily to individuals,
corporations, unions and other institutions. The Trust Department has retained
the services of two independent investment services firms to provide investment
research. A Trust Committee that consists of the Vice President Trust &
Investment Officer and the President, as well as four members of the Company's
Board of Directors who rotate committee membership on a semi-annual basis,
oversees operations of the Trust Department. The Trust Department markets its
services through its trust officers, who call on the Company's existing
customers, referrals from attorneys and accountants, the Company's CSSRs and
branch managers who cross-sell the Trust Department's services and free seminars
open to the public. As of September 30, 2002, the Trust Department managed over
$351.5 million of assets, which includes $110.9 million over which the Trust
Department has discretionary investment authority. The Trust Department's fee
income, which totaled $753 thousand for the year ended September 30, 2002,
supplements the Company's rate-sensitive interest income.
SAVINGS BANK LIFE INSURANCE
The Company offers a wide variety of low-cost insurance policies, including
whole life, single premium life, senior life and children's term, to its
customers who live or work in the State of New York. Management believes that
offering insurance is beneficial to the Company's relationship with its
customers. The Company receives commission income from the sale and the renewal
of life insurance policies.
SUBSIDIARY ACTIVITIES
The following are descriptions of the Savings Bank's wholly owned subsidiaries,
which are indirectly owned by Troy Financial.
TROY FINANCIAL INVESTMENT SERVICES GROUP. Troy Financial Investment Services
Group, ("TFISG"), which was incorporated in May 1989, is the Savings Bank's
wholly owned full-service brokerage firm, offering a complete range of
investment products, including mutual funds, debt, equity and government
securities, on a fee-per-transaction basis. TFISG's goal is to market its
products and services to the Company's existing customers who seek alternatives
to traditional financial institution savings products. TFISG has six full time
employees who monitor the Company's branches to facilitate referrals from the
CSSRs and branch managers, as well as a manager and two sales support staff who
assist customers with investment decisions and trading. At September 30, 2002,
TFISG managed approximately $83.7 million of customer assets. TFISG is a member
of the National Association of Securities Dealers and is insured by the
Securities Insurance Protection Corporation.
FAMILY MORTGAGE BANKING CO., INC. FMBC, which was incorporated in April 1987, is
the Savings Bank's wholly owned mortgage-banking subsidiary. The Company
originates the majority of its residential real estate and residential
construction loans through applications received from commissioned employees of
FMBC.
INVESTMENT IN REAL ESTATE PARTNERSHIPS. As an extension of the Company's
commercial real estate lending activity, the Company, through its subsidiaries,
has invested in two joint ventures as of September 30, 2002. The Company,
through TSB Real Property, Inc., has a 50% interest in B.A. Park Group, LLC
("B.A Park"). The carrying amount of the Company's investment at September 30,
2002 was $2.2 million. B.A. Park owns land and office buildings within an office
park. The office park is a suburban Class "A" complex containing approximately
1.2 million sq.ft. The park is 96% occupied and its tenant mix includes large,
publicly traded companies as well as regional and local businesses. B.A. Park
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owns three office buildings with an additional building under construction. B.A.
Park owns additional land sufficient to build at least one more office building.
The Company, through TSB Real Property, Inc., is obligated to invest an
additional $325,000 upon completion of each new office building; as mentioned,
one building is under construction with completion likely in late spring 2003.
The last building to be constructed by B.A. Park is to be larger, approximately
100,000-sq. ft., with a start date yet to be determined.
The Company, through its subsidiary 32 Second Street Corp., invested $5.8
million for a 90% percent ownership interest in Altamont Avenue Associates.
Altamont Avenue Associates owns a 209,603 sq.ft. neighborhood shopping center
anchored by a Hannaford Brothers supermarket. At September 30, 2002, the center
was 89% occupied. The tenant mix includes some national companies as well as
many smaller locally owned businesses. The center is fully developed so no
additional equity investment by the Company is anticipated.
TROY REALTY FUNDING CORP. Troy Realty Funding Corp. ("TRFC") is a real estate
investment trust formed in 1999. The Savings Bank funded TRFC with approximately
$97 million in commercial real estate mortgages. The interest income earned on
those mortgages and any other earning assets, net of expenses, is distributed to
the Savings Bank in the form of dividends.
OTHER SUBSIDIARIES. The Savings Bank has nine other wholly owned subsidiaries.
The Family Advertising Co. is an inactive advertising agency. T.S. Capital Corp.
is licensed by the Small Business Administration as a Small Business Investment
Company in order to offer small business loans and make equity investments in
small businesses. The Family Insurance Agency, Inc. is an insurance agency that
offers a full range of life and health insurance products, as well as
taxed-deferred annuities. Catskill Financial Services Inc. is an inactive
insurance agency. T.S. Real Property Inc., Troy SB Real Estate Co., Camel Hill
Corporation, 507 Heights and Realty Umbrella, Ltd. are all related to the
management of, or investment in, the Company's foreclosed or purchased real
estate.
COMPETITION
The Company faces significant competition for both deposits and loans. The
deregulation of the financial services industry and the commoditization of
savings and lending products has led to increased competition among banks and
other financial institutions for a significant portion of the deposit and
lending activity that had traditionally been the arena of savings banks and
savings and loan associations. The Company competes for deposits with other
savings banks, savings and loan associations, commercial banks, credit unions,
money market and other mutual funds, insurance companies, brokerage firms and
other financial institutions, many of which are substantially larger in size and
have greater financial resources than the Company.
The Company's competition for loans comes principally from savings banks,
commercial banks, mortgage banks, credit unions, finance companies and other
institutional lenders, many of whom maintain offices in the Company's market
area. The Company's principal strategy to address this competition includes
providing competitive loan and deposit pricing, personalized customer service,
access to senior management of the Company and continuity of banking
relationships.
Although the Company is subject to competition from other financial
institutions, some of which have much greater financial and marketing resources,
the Company believes it benefits by its position as a community oriented
financial services provider with a long history of serving its market area.
Management believes that the variety, depth and stability of the communities
that the Company services support the service and lending activities conducted
by the Company.
REGULATION
Troy Financial, as a bank holding company, is subject to regulation,
supervision, and examination by the Federal Reserve. The Savings Bank, as a New
York State chartered savings bank, and the Commercial Bank, as a New York State
chartered bank, are subject to regulation, supervision, and examination by the
FDIC as their primary federal regulator and by the NYSBD as their state
regulator.
BANK HOLDING COMPANY REGULATION
As a bank holding company, Troy Financial is subject to the regulation,
supervision, and examination of the Federal Reserve under the Bank Holding
Company Act. Troy Financial is required to file periodic reports and other
information with the Federal Reserve, and the Federal Reserve may conduct
examinations of Troy Financial.
Troy Financial is subject to capital adequacy guidelines of the Federal Reserve.
The guidelines apply on a consolidated basis and require bank holding companies
to maintain a minimum ratio of tier 1 capital to total assets of 4.0%. The
minimum ratio is 3.0% for the most highly rated bank holding companies. The
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Federal Reserve's capital adequacy guidelines also require bank holding
companies to maintain a minimum ratio of qualifying total capital to
risk-weighted assets of 8.0%, and a minimum ratio of tier 1 capital to
risk-weighted assets of 4.0%. As of September 30, 2002, Troy Financial's ratio
of tier 1 capital to total assets was 10.98%, its ratio of tier 1 capital to
risk-weighted assets was 16.45%, and its ratio of qualifying total capital to
risk-weighted assets was 17.72%.
Troy Financial's ability to pay dividends to its shareholders and expand its
line of business through the acquisition of new banking or non-banking
subsidiaries can be restricted if its capital falls below levels established by
the Federal Reserve's guidelines. In addition, any bank holding company whose
capital does not meet the minimum capital adequacy guidelines is considered to
be undercapitalized and is required to submit an acceptable plan to the Federal
Reserve for achieving capital adequacy.
The Federal Reserve is empowered to initiate cease and desist proceedings and
other supervisory actions for violations of the Bank Holding Company Act or the
Federal Reserve's regulations, orders or notices issued thereunder. Federal
Reserve approval is required if Troy Financial seeks to acquire direct or
indirect ownership or control of any voting shares of a bank or bank holding
company if, after such acquisition, Troy Financial would own or control,
directly or indirectly, 5% or more of any class of the voting shares of the bank
or bank holding company. Federal Reserve approval also must be obtained for Troy
Financial to acquire all or substantially all the assets of a bank or merge or
consolidate with another bank holding company. These provisions also would apply
to a bank holding company that sought to acquire 5% or more of the common stock
of or to merge or consolidate with Troy Financial.
Bank holding companies like Troy Financial are currently prohibited from
engaging in activities other than banking and activities so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
Federal Reserve regulations contain a list of permissible non-banking
activities, that are closely related to banking or managing or controlling banks
and the Federal Reserve has identified a limited number of additional activities
by order. These activities include lending activities, certain data processing
activities, and securities brokerage and investment advisory services, trust
activities and leasing activities. A bank holding company must file an
application or a notice with the Federal Reserve prior to acquiring more than 5%
of the voting shares of a company engaged in such activities. A bank holding
company that is well capitalized and well managed and meets other conditions may
provide notice after making the acquisition.
On November 12, 1999, President Clinton signed legislation to reform the U.S.
banking laws, including the Bank Holding Company Act. The changes made to the
Bank Holding Company Act by this legislation, referred to as the
Gramm-Leach-Bliley Act, amended the Bank Holding Company Act and expanded the
permissible activities of bank holding companies under certain circumstances. In
order to take advantage of the new authority, a bank holding company must elect
to be treated as a financial holding company and its depository institution
subsidiaries must be well capitalized and well managed and have at least a
satisfactory record of performance under the Community Reinvestment Act.
Financial holding companies that meet certain conditions are now permitted to,
or may engage in activities that are financial in nature or incidental to
financial activities, or activities that are complementary to a financial
activity and do not pose a substantial risk to the safety and soundness of
depository institutions or the financial system generally. The legislation
identifies certain activities that are deemed to be financial in nature,
including non-banking activities currently permissible for bank holding
companies to engage in both within and outside the United States, as well as
insurance and securities underwriting and merchant banking activities. The
Federal Reserve is authorized under the legislation to identify additional
activities that are permissible financial activities, but only after
consultation with the Department of the Treasury. No prior notice to the Federal
Reserve would be required to acquire a company engaged in these activities or to
commence these activities directly or indirectly through a subsidiary.
In order to take advantage of this new authority, a bank holding company must
elect to be treated as a financial holding company and its depository
institution subsidiaries must be well capitalized and well managed and have at
least a satisfactory record of performance under the Community Reinvestment Act.
Troy Financial has not elected to be treated as a financial holding company
since it has no current plans to use the new authority to engage in expanded
activities.
Under the Change in Bank Control Act, persons who intend to acquire control of a
bank holding company, either directly or indirectly or through or in concert
with one or more persons must give 60 days' prior written notice to the Federal
Reserve. "Control" would exist when an acquiring party directly or indirectly
has voting control of at least 25% of Troy Financial's voting securities or the
power to direct the management or policies of the company. Under Federal Reserve
regulations, a rebuttable presumption of control would arise with respect to an
acquisition where, after the transaction, the acquiring party has ownership
control, or the power to vote at least 10% (but less than 25%) of Troy
Financial's common stock.
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The New York Banking Law requires prior approval of the New York Banking Board
before any action is taken that causes any company to acquire direct or indirect
control of a banking institution that is organized in the State of New York. The
term "control" is defined generally to mean the power to direct or cause the
direction of the management and policies of the banking institution and is
presumed to exist if the company owns, controls or holds with power to vote 10%
or more of the voting stock of the banking institution.
BANK REGULATION
The Banks are New York State-chartered institutions, and their deposit accounts
are insured up to applicable limits by the FDIC under the Bank Insurance Fund
("BIF"). The Banks are subject to extensive regulation by the NYSBD as their
chartering agency, and by the FDIC as their deposit insurer. The Banks must file
reports with the NYSBD and the FDIC concerning their activities and financial
condition, and they must obtain regulatory approval prior to entering into
certain transactions, such as mergers with, or acquisitions of, other depository
institutions and opening or acquiring branch offices. The NYSBD and the FDIC
conduct periodic examinations to assess the Banks' compliance with various
regulatory requirements. This regulation and supervision is intended primarily
for the protection of the deposit insurance funds and depositors. The regulatory
authorities have extensive discretion in connection with the exercise of their
supervisory and enforcement activities, including the setting of policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.
The Banks derive their lending, investment and other powers primarily from the
applicable provisions of the New York Banking Law and the regulations adopted
thereunder. Under these laws and regulations, the Savings Bank may invest in
real estate mortgages, consumer and commercial loans, certain types of debt
securities, including certain corporate debt securities and obligations of
federal, state and local governments and agencies, certain types of corporate
equity securities and certain other assets. It also may exercise trust powers
upon approval of the NYSBD. The Commercial Bank currently limits its activities
to accepting municipal deposits and acquiring primarily municipal and other
securities.
Under the New York Banking Law, neither Bank is permitted to declare, credit or
pay any dividends if its capital stock is impaired or would be impaired as a
result of the dividend. In addition, the New York Banking Law provides that
neither Bank can declare and pay dividends in any calendar year in excess of its
"net profits" for such year combined with its "retained net profits" of the two
preceding years, less any required transfer to surplus or a fund for the
retirement of preferred stock, without prior regulatory approval.
The Banks are subject to minimum capital requirements imposed by the FDIC that
are substantially similar to the capital requirements imposed on Troy Financial.
The FDIC regulations require that each Bank maintain a minimum ratio of
qualifying total capital to risk-weighted assets of 8.0%, and a minimum ratio of
tier 1 capital to risk-weighted assets of 4.0%. In addition, under the minimum
leverage-based capital requirement adopted by the FDIC, each Bank must maintain
a ratio of tier 1 capital to average total assets (leverage ratio) of at least
3% to 5%, depending on the Banks' CAMELS composite examination rating. As a
recently chartered bank, the Commercial Bank must maintain a leverage ratio of
at least 8% during its first three years of operations. At September 30, 2002,
the Savings Bank's ratio of Tier 1 capital to risk-weighted assets was 8.69%,
its ratio of tier 1 capital to risk-weighted assets was 12.39%, and its ratio of
tier 1 capital to average total assets was 13.65%. At September 30, 2002, the
Commercial Bank's ratio of Tier 1 capital to risk-weighted assets was 13.22%,
and its ratio of tier 1 capital to risk-weighted assets was 53.09%, as was its
ratio of tier 1 capital to average total assets. Capital requirements higher
than the generally applicable minimum requirements may be established for a
particular bank if the FDIC determines that a bank's capital is, or may become,
inadequate in view of its particular circumstances. Failure to meet capital
guidelines could subject a bank to a variety of enforcement actions, including
actions under the FDIC's prompt corrective action regulations.
State banks are limited in their investments and the activities they may engage
in as principal to those permissible under applicable state law and that are
permissible for national banks and their subsidiaries, unless such investments
and activities are specifically permitted by the Federal Deposit Insurance Act
or the FDIC determines that such activity or investment would pose no
significant risk to the BIF. The FDIC has by regulation determined that certain
real estate investment and securities underwriting activities do not present a
significant risk to the BIF provided they are conducted in accordance with the
regulations. Provisions of the Gramm-Leach-Bliley Act which became effective on
March 11, 2000, expanded the permissible activities of national banks to include
the activities noted above that are permissible for bank holding companies, as
noted above, other than insurance underwriting, merchant banking and real estate
development or investment activities.
The FDIC, as well as and the NYSBD has had extensive enforcement authority over
insured savings and commercial banks. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
-20-
The Banks are subject to quarterly payments on semiannual insurance premium
assessments for its their FDIC deposit insurance. The FDIC implements a
risk-based deposit insurance assessment system. Deposit insurance assessment
rates currently are within a range of $0.00 to $0.27 per $100 of insured
deposits, depending on the assessment risk classification assigned to each
institution. Under current FDIC assessment guidelines, the Banks do not pay any
insurance assessment. However, the deposit insurance assessments are subject to
change based on the level of reserves in the BIF, and the current system for
assigning assessment risk classifications to insured depository institutions is
under review by the FDIC. The Banks are subject to separate assessments to repay
bonds ("FICO bonds") issued in the late 1980's to recapitalize the former
Federal Savings and Loan Insurance Corporation. The annual rate for the payments
on the FICO bonds for the quarter beginning October 1, 2002 is 1.68 basis points
of BIF-assessable deposits for both of the Banks.
Transactions between the Banks and any of their affiliates (including Troy
Financial) are governed by Sections 23A and 23B of the Federal Reserve Act. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. A subsidiary of a bank that is not also a
depository institution is not treated as an affiliate of a bank for purposes of
Sections 23A and 23B unless it engages in activities not permissible for a
national bank to engage in directly. Generally, Sections 23A and 23B (i) limit
the extent to which a bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and limit such transactions with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such transactions be on terms that are consistent with safe and
sound banking practices. The term "covered transaction" includes the making of
loans to an affiliate, the purchase of or investment in securities issued by an
affiliate, the purchase of assets from an affiliate, the issuance of a guarantee
for the benefit of an affiliate, and similar transactions. Most loans by a bank
to any of its affiliates must be secured by collateral in amounts ranging from
100 to 130 percent of the loan amount, depending on the nature of the
collateral. In addition, any covered transaction by a bank with an affiliate and
any sale of assets or provision of services to an affiliate must be on terms
that are substantially the same, or at least as favorable, to the bank as those
prevailing at the time for comparable transactions with nonaffiliated companies.
The Banks are also are restricted in the loans they may make to their executive
officers, and directors, the executive officers and directors of Troy Financial,
any owner of 10% or more of their stock or the stock of Troy Financial, and
certain entities affiliated with any such person.
On October 31, 2002, the Federal Reserve issued a new regulation, Regulation W,
effective April 1, 2003, that comprehensively implements sections 23A and 23B of
the Federal Reserve Act, which are intended to protect insured depository
institutions from suffering losses arising from transactions with affiliates.
The regulation unifies and updates staff interpretations issued over the years,
incorporates several new interpretative proposals (such as to clarify when
transactions with an unrelated third party will be attributed to an affiliate)
and addresses new issues arising as a result of the expanded scope of nonbanking
activities engaged in by banks and bank holding companies in recent years and
authorized for financial holding companies under the Gramm-Leach-Bliley Act.
The Banks are subject to certain FDIC standards designed to maintain the safety
and soundness of individual banks and the banking system. The FDIC has
prescribed safety and soundness guidelines relating to (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate exposure; (v) asset growth and quality;
(vi) earnings; and (vii) compensation and benefit standards for officers,
directors, employees and principal stockholders. A state nonmember bank not
meeting one or more of the safety and soundness guidelines may be required to
file a compliance plan with the FDIC.
Under the FDIC's prompt corrective action regulations, an insured institutions
will be is considered (i) "well capitalized" if the institution has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater (provided that the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive to meet and maintain a specified capital
level for any capital measure), (ii) "adequately capitalized" if the institution
has a total risk-based capital ratio of 8% or greater, a Tier 1 risk based
capital ratio of 4% or greater and a leverage ratio of 4% or greater (3% or
greater if the institution is rated composite CAMELS 1 has the highest composite
examination rating in its most recent report of examination and is not
experiencing or anticipating significant growth), (iii) "undercapitalized" if
the institution has a total risk-based capital ratio that is less than 8%, or a
Tier 1 risk-based ratio of less than 4% and a leverage ratio that is less than
4% (3% if the institution is rated composite CAMELS 1 has the highest composite
examination rating in its most recent report of examination and is not
experiencing or anticipating significant growth), (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, Tier 1 risk-based capital ratio of less than 3% or a leverage
ratio that is less than 3%, and (v) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%. Under certain circumstances, the FDIC can reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At September 30, 2001, each Bank was classified as
a "well capitalized" institution.
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An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency,
which would be the FDIC for the Banks would be the FDIC. An undercapitalized
institution also is generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches, or engaging in any new
line of business, except in accordance with an accepted capital restoration plan
or with the approval of the FDIC. In addition, the FDIC may take any other
action that it determines will better carry out the purpose of prompt corrective
action initiatives.
At September 30, 2002, each Bank was "well capitalized" under the FDIC's
criteria.
Neither Bank is permitted to pay a dividend if, as the result of the payment, it
would become undercapitalized, as defined in under the FDIC's prompt corrective
action regulations of the FDIC. In addition, if a Bank were to become
"undercapitalized" under these regulations, payment of dividends by the Bank
would be prohibited without the prior approval of the FDIC. Either Bank also
could be made subject to these dividend restrictions if the FDIC determines that
the Bank was in an unsafe or unsound condition or was engaging in an unsafe or
unsound practice.
Under Federal Reserve regulations, the Banks are required to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve regulations require that
reserves of 3% must be maintained against aggregate transaction accounts up to
$47.8 million or less (subject to adjustment by the Federal Reserve). Reserves
of and 10% (subject to adjustment by the Federal Reserve between 8% and 14%)
must be maintained against that portion of total aggregate transaction accounts
in excess of $47.8 million. The first $4.9 million of otherwise reservable
balances (subject to adjustment by the Federal Reserve) are exempted from the
reserve requirements. The Banks are in compliance with these requirements.
Because required reserves must be maintained in the form of either vault cash, a
non-interest-bearing account at a Federal Reserve Bank or a pass-through account
as defined by the Federal Reserve, the effect of this reserve requirement is to
reduce the Banks' interest-earning assets.
The Savings Bank is a member of the FHLB System. The FHLB System consists of 12
regional Federal Home Loan Banks and provides a central credit facility
primarily for member institutions. The Savings Bank, as a member of the FHLB of
New York, is required to acquire and hold shares of capital stock in the FHLB of
New York in an amount equal to the greater of; 1.0% of the aggregate unpaid
principal amount of its residential mortgage loans at the beginning of each
year, 5.0% of its advances from the FHLB of New York advances outstanding, or
0.3% of its total assets. At September 30, 2002, the Savings Bank was in
compliance with this requirement and owned $5.2 million of FHLB of New York
common stock.
Advances from the FHLB of New York are secured by a member's shares of stock in
the capital stock of the FHLB of New York and certain types of mortgages and
other assets. Interest rates charged for advances vary depending upon maturity
and cost of funds to the FHLB of New York. As of September 30, 2002, the limit
on the Savings Bank's borrowings was 25% of total assets, or approximately
$299.8 million, and the Savings Bank had $85.0 million of outstanding advances
from the FHLB of New York.
Under the Gramm-Leach-Bliley Act, all financial institutions, including the
Company and the Banks, are required to establish policies and procedures to
protect customer data. The Company and the Banks do not sell personal
information to anyone. By law, the Company is permitted to share experience,
transaction and other personal data such as information obtained from
applications or credit reporting agencies with its affiliates and other third
parties to allow them to provide products and services of interest to its
customers. The customer, however, has the option to direct the Company not to
share such personal information except that which is permitted by law.
As part of the Uniting and Strengthening America by Providing Appropriate Tools
Required to Intercept and Obstruct Terrorism Act of 2001 ("USA Patriot Act"),
Congress adopted the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 ("IMLAFATA"). IMLAFATA amended the Bank Secrecy Act
and adopted certain additional measures that increase the obligation of
financial institutions, including the Banks, to identify their customers, watch
for and report upon suspicious transactions, respond to requests for information
by federal banking regulatory authorities and law enforcement agencies, and
share information with other financial institutions. The Secretary of the
Treasury has adopted several regulations to implement these provisions. The
Banks also are barred from dealing with foreign "shell" banks. In addition,
IMLAFATA expands the circumstances under which funds in a bank account may be
forfeited. IMLAFATA also amended the Bank Holding Company Act and the Bank
Merger Act to require the federal banking regulatory authorities to consider the
effectiveness of a financial institution's anti-money laundering activities when
reviewing an application to expand operations. The Company has in place a Bank
Secrecy Act compliance program, and it engages in very few transactions of any
kind with foreign financial institutions or foreign persons.
-22-
EMPLOYEES
At September 30, 2002, the Company had 283 full-time employees and 33 part-time
employees. The Company's employees are not presently represented by any
collective bargaining group.
ITEM 2. PROPERTIES
The Company currently conducts its business through 21 full-service banking
offices. The following table sets forth-certain information on the Company's
offices as of September 30, 2002:
- -----------------------------------------------------------------------------------------------------------------------------------
NET BOOK VALUE
OF PROPERTY OR
LEASEHOLD
DATE OF ORIGINAL IMPROVEMENTS AT
LEASED OR LEASE YEAR LEASED SEPTEMBER 30, 2002
LOCATION ADDRESS OWNED EXPIRATION OR ACQUIRED (In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
HEADQUARTERS: 32 Second Street Owned N/A 1871
Main Office Troy, NY 12180 $3,893
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATIONS CENTER 433 River St. Leased 8/31/04 1993 313
Troy, NY 12180
- -----------------------------------------------------------------------------------------------------------------------------------
TRUST SERVICES 50 Second Street Owned N/A 1989 213
Troy, NY 12180
- -----------------------------------------------------------------------------------------------------------------------------------
BRANCH OFFICES:
Hudson Valley Plaza 75 Vandenburgh Avenue Leased 12/31/05 1983 12
Troy, NY 12180
- -----------------------------------------------------------------------------------------------------------------------------------
East Greenbush 615 Columbia Pike Owned N/A 1969 256
East Greenbush, NY 12061
- -----------------------------------------------------------------------------------------------------------------------------------
Albany 120 State Street Owned N/A 1995 1,596
Albany, NY 12207
- -----------------------------------------------------------------------------------------------------------------------------------
Watervliet 1601 Broadway Leased 3/1/03 1983 16
Watervliet, NY 12189
- -----------------------------------------------------------------------------------------------------------------------------------
Latham 545 Troy-Schenectady Rd Leased 6/30/04 1989 343
Latham, NY 12110
- -----------------------------------------------------------------------------------------------------------------------------------
Colonie 103 Wolf Road Leased 3/31/07 1994 17
Colonie, NY 12205
- -----------------------------------------------------------------------------------------------------------------------------------
Guilderland 1704 Western Avenue Leased 6/9/07 1997 258
Guilderland, NY 12203
- -----------------------------------------------------------------------------------------------------------------------------------
Schenectady 1626 Union Street Owned N/A 1987 217
Schenectady, NY 12309
- -----------------------------------------------------------------------------------------------------------------------------------
Clifton Park/Halfmoon 2 Tower Way Owned N/A 1999 1,042
Clifton Park, NY 12065
- -----------------------------------------------------------------------------------------------------------------------------------
Quaker Road 44 Quaker Road Owned N/A 1995 1,575
Queensbury, NY 12804
- -----------------------------------------------------------------------------------------------------------------------------------
Queensbury 739 Upper Glen Street Leased 9/30/04 1979 63
Queensbury, NY 12804
- -----------------------------------------------------------------------------------------------------------------------------------
Whitehall 184 Broadway Owned N/A 1971 215
Whitehall, NY 12887
- -----------------------------------------------------------------------------------------------------------------------------------
Wyantskill 86 Main Avenue Owned N/A 1999 1,251
Wynantskill, NY 12198
- -----------------------------------------------------------------------------------------------------------------------------------
Catskill 341 Main Street Owned N/A 2000 733
Catskill, NY 12414
- -----------------------------------------------------------------------------------------------------------------------------------
Greenville Route 32 Bryant's Super
Market Leased 04/13/13 2000 165
Greenville, NY 12083
- -----------------------------------------------------------------------------------------------------------------------------------
Middleburgh Route 30 & Mill Lane Owned N/A 2000 473
Middleburgh, NY 12122
- -----------------------------------------------------------------------------------------------------------------------------------
Oak Hill Route 145, P.O. Box D Owned N/A 2000 381
Oak Hill, NY 12460
- -----------------------------------------------------------------------------------------------------------------------------------
Ravena Route 9W, P.O. Box 397 Owned N/A 2000 386
Ravena, NY 12143
- -----------------------------------------------------------------------------------------------------------------------------------
West Side 245 West Bridge Street Owned N/A 2000 595
Catskill, NY 12414
- -----------------------------------------------------------------------------------------------------------------------------------
Windham Route 296, P.O. Box 1001 Owned N/A 2000 415
Windham, NY 12496
- -----------------------------------------------------------------------------------------------------------------------------------
-23-
ITEM 3. LEGAL PROCEEDINGS
There is no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which Troy Financial or any of its
subsidiaries is a party or of which their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of Troy Financial Corporation ("Common Stock") is quoted on the
Nasdaq Stock Market National Market Tier under the symbol "TRYF". The following
table sets forth the high and low market prices for the Common Stock for the
periods indicated (All per share amounts have been adjusted for the 5% stock
dividend issued on March 29, 2002.)
------------------------------------------------------------------
HIGH LOW DIVIDEND
------------------------------------------------------------------
2001
1st quarter $ 13.03 $ 11.07 $ .08
2nd quarter 15.00 14.17 .08
3rd quarter 18.57 14.05 .10
4th quarter 21.81 16.72 .10
2002
1st quarter 25.20 20.44 .11
2nd quarter 27.82 24.76 .11
3rd quarter 30.25 24.36 .12
4th quarter 30.00 25.75 .14
------------------------------------------------------------------
The closing price of the Common Stock on September 30, 2002 was $26.08. The
approximate number of holders of record of the Company's Common Stock on
December 24, 2002 was 3,918.
The following is a summary of the Company's Equity Compensation plans:
- -------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
AVAILABLE FOR FUTURE
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE EXERCISE ISSUANCE UNDER EQUITY
BE ISSUED UPON EXERCISE PRICE OF OUTSTANDING COMPENSATION PLANS
OF OUTSTANDING OPTIONS, OPTIONS, WARRANTS AND (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS RIGHTS REFLECTED IN COLUMN(A))
- -------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
- -------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved 992,419 $10.61 178,942
by security holders (1)
- -------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not -- -- --
approved by security holders:
- -------------------------------------------------------------------------------------------------------------------------
Total 992,419 $10.61 178,942
- -------------------------------------------------------------------------------------------------------------------------
(1) Shares shown do not include the Company's restricted stock plan, which has
granted, but unvested shares of 310,062 as of September 30, 2002. There are
also 10,307 shares available for future issuance.
-24-
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial and other information about the Company is
derived from the Company's audited consolidated financial statements for each of
the five fiscal years ended September 30, 2002:
- -------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------
AT SEPTEMBER 30, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL DATA:
Total assets $1,288,877 $1,161,578 $ 922,028 $ 915,096 $ 716,649
Loans receivable, net 750,529 746,450 586,846 556,142 457,321
Securities available for sale
(fair value) 394,067 248,469 266,750 280,871 197,758
Securities held to maturity
(amortized cost) 883 2,130 2,301 2,534 3,483
Deposits 882,968 808,518 555,972 563,373 578,202
Borrowings 222,355 162,971 178,808 148,933 47,464
Shareholders' equity 157,854 164,746 167,278 180,439 71,029
- -------------------------------------------------------------------------------------------------------------------
-25-
- -------------------------------------------------------------------------------------------------------------------------------
YEARS ENDED SEPTEMBER 30, 2002 2001 2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
SELECTED OPERATING DATA:
Interest and dividend income $ 65,991 $ 71,213 $ 57,506 $ 51,802 $ 48,030
Interest expense 24,444 32,709 24,358 23,782 24,193
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 41,547 38,504 33,148 28,020 23,837
- -------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,166 1,498 2,563 3,250 4,050
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 40,381 37,006 30,585 24,770 19,787
- -------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Service charges on deposits 1,920 1,611 1,076 892 858
Net rental income from real estate partnerships 631 -- -- -- --
Loan servicing fees 221 400 504 523 432
Commissions from annuity sales 761 67 -- -- --
Trust service fees 753 839 704 665 459
Net gains (losses) from securities transactions 151 (105) (283) 17 8
Net gains (losses) from mortgage loan sales 96 68 (45) 245 76
Other income 2,436 2,353 1,723 705 719
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 6,969 5,233 3,679 3,047 2,552
- -------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and employee benefits 16,771 14,777 12,587 10,839 10,218
Net occupancy 2,415 2,362 1,972 2,094 2,101
Furniture, fixtures, and equipment 931 949 802 728 1,080
Computer charges 1,972 1,869 1,647 1,508 1,424
Professional, legal and other fees 1,028 1,242 1,222 1,205 924
Printing, postage and telephone 1,046 858 904 707 614
Other real estate expenses (income), net 22 121 (241) 781 1,087
Goodwill and other intangibles amortization 48 1,485 48 47 47
Contributions 17 159 205 4,706 4,759
Merger related integration costs -- 1,972 -- -- --
Other expenses 3,463 3,095 3,054 3,210 2,837
- -------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 27,713 28,889 22,200 25,825 25,091
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense
(benefit) 19,637 13,350 12,064 1,992 (2,752)
Income tax expense (benefit) 6,438 4,276 3,454 (85) (1,874)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 13,199 $ 9,074 $ 8,610 $ 2,077 $ (878)
- -------------------------------------------------------------------------------------------------------------------------------
SHARE AND PER SHARE DATA:(1)
Basic earnings per share $ 1.47 $ .95 $ .82 .31(2) --
Diluted earnings per share 1.38 .92 .81 .31(2) --
Book value per share 16.30 15.93 15.01 14.16 --
Tangible book value per share 13.07 12.91 14.97 14.12 --
Market value at period end 26.08 20.13 11.19 10.30 --
- -------------------------------------------------------------------------------------------------------------------------------
Average shares outstanding, diluted 9,569,314 9,885,522 10,569,906 12,102,446 --
- -------------------------------------------------------------------------------------------------------------------------------
(1) All share and per share amounts have been adjusted for the 5% stock dividend
issued on March 29, 2002.
(2) Earnings per share calculations do not include earnings prior to the initial
public offering on March 31, 1999.
(Continued on following page)
-26-
- ------------------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEARS ENDED SEPTEMBER 30, 2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets 1.18% .86%(1) 1.02% 0.26%(2) (.13)%(3)
Return on average equity 8.09 5.43 (1) 5.02 1.57 (2) (1.21) (3)
Average equity to average total assets 14.58 15.82 20.37 16.60 10.72
Equity to total assets (period-end) 12.25 14.18 18.14 19.72 9.91
Average earning assets to average interest
bearing liabilities 116.91 118.36 130.31 122.89 113.96
Net interest spread (4) 3.89 3.57 3.46 3.17 3.32
Net interest margin (5) 4.30 4.19 4.39 3.89 3.84
Efficiency ratio (6) 54.79 62.90 (1) 57.83 77.57 (2) 87.44 (3)
Operating expenses to average assets 2.47 2.72 (1) 2.66 3.15 (2) 3.54 (3)
ASSET QUALITY RATIOS:
Non-performing loans to total loans .27 .43 0.94 1.39 2.50
Non-performing assets to total assets .19 .30 0.75 1.06 1.89
Allowance for loan losses to total loans 1.90 1.88 1.99 1.90 1.77
Allowance for loan losses to non-performing
loans 693.28 441.15 210.35 136.55 70.91
REGULATORY CAPITAL RATIOS (CONSOLIDATED):
Leverage capital 10.98 12.28 19.88 21.21 9.89
Tier I risk-based capital 16.45 17.56 25.01 28.71 14.02
Total risk-based capital 17.72 18.83 26.28 29.96 15.27
OTHER DATA:
Full-service banking offices 21 21 14 14 14
Number of deposit accounts 83,386 91,129 64,614 68,117 70,057
- ------------------------------------------------------------------------------------------------------------------------------
(1) Ratios include $2.0 million of pre-tax merger-related integration costs
associated with the acquisition of Catskill Financial Corporation.
Excluding these costs, return on average assets and average equity would
have been .97% and 6.14%, respectively. Operating expenses to average
assets would have been 2.54% and the efficiency ratio 58.59%.
(2) Ratios include the effect of the $4.1 million stock contribution to The
Troy Savings Bank Community Foundation. Excluding these costs, return on
average assets and average equity would have been .57% and 3.43%,
respectively. Operating expenses to average assets would have been 2.64%
and the efficiency ratio 64.92%.
(3) Ratios include the effect of the $4.5 million cash contribution to The Troy
Savings Bank Charitable Foundation. Excluding these costs, return on
average assets and average equity would have been .27% and 2.49%,
respectively. Operating expenses to average assets would have been 2.88%
and the efficiency ratio 71.22%.
(4) Net interest spread represents the difference between the tax equivalent
yield on average earning assets and the rate on average interest-bearing
liabilities.
(5) Net interest margin represents tax-equivalent net interest income as a
percentage of average earning assets.
(6) The efficiency ratio represents non-interest expenses less other real
estate owned expense (income), divided by the sum of net interest income on
a tax equivalent basis and non-interest income, excluding securities gains
and losses.
-27-
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPT 30, JUNE 30, MARCH 31, DEC 31, SEPT 30, JUNE 30, MARCH 31, DEC 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2002 2002 2001 2001 2001 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST AND DIVIDEND INCOME $ 16,106 $ 16,259 $ 16,535 $ 17,091 $ 17,642 $ 18,118 $ 18,384 $ 17,069
INTEREST EXPENSE 5,714 5,882 5,983 6,865 7,744 8,314 8,637 8,014
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 10,392 10,377 10,552 10,226 9,898 9,804 9,747 9,055
- ----------------------------------------------------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES 190 290 320 366 366 366 400 366
TOTAL NON-INTEREST INCOME 1,921 2,036 1,518 1,494 1,391 1,435 1,275 1,132
TOTAL NON-INTEREST EXPENSES (1) 6,985 7,074 6,901 6,753 6,867 6,979 6,823 8,220
- ----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 5,138 5,049 4,849 4,601 4,056 3,894 3,799 1,601
INCOME TAX EXPENSE 1,687 1,646 1,603 1,502 1,388 1,272 1,249 367
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 3,451 $ 3,403 $ 3,246 $ 3,099 $ 2,668 $ 2,622 $ 2,550 $ 1,234
- ----------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE (2) $ 0.39 $ 0.38 $ 0.36 $ 0.34 $ 0.29 $ 0.28 $ 0.26 $ 0.13
DILUTED EARNINGS PER SHARE (2) 0.37 0.36 0.34 0.32 0.27 0.27 0.26 0.12
- ----------------------------------------------------------------------------------------------------------------------------
(1) Non-interest expenses for the three-months ended December 31, 2000, include
$2.0 million of merger-related integration costs associated with the
acquisition of Catskill Financial Corporation, or $1.2 million after-tax
and $.12 per diluted share.
(2) All per share data has been adjusted for the 5% stock dividend issued on
March 29, 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference from Troy Financial's 2002
Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The required information is incorporated herein by reference from Troy
Financial's 2002 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required information is incorporated herein by reference from Troy
Financial's 2002 Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required is incorporated herein by reference from Troy
Financial's definitive Proxy Statement for its annual meeting of shareholders to
be held on February 13, 2003 (the "Proxy Statement"), which will be filed with
the Securities and Exchange Commission within 120 days of Troy Financial's 2002
fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required is incorporated herein by reference from the Proxy
Statement.
-28-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is incorporated herein by reference from the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is incorporated herein by reference from the Proxy
Statement.
ITEM 14. CONTROLS AND PROCEDURES
(a) The Company's management, including the Chief Executive Officer and Chief
Financial Officer evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under
the Securities Exchange Act of 1934, as amended) (the "Exchange Act") as of a
date (the "Evaluation Date") within 90 days prior to the filing date of this
report. Based upon that evaluation, the Company's management, including the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures were effective
in timely alerting them to any material information relating to the Company and
its subsidiaries required to be included in the Company's Exchange Act filings.
(b) There were no significant changes made in the Company's internal controls or
in other factors that that could significantly affect these internal controls
subsequent to the date of the evaluation performed by the Company's Chief
Executive Officer and Chief Financial Officer.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are incorporated by
reference from Item 8 hereof:
Consolidated Statements of Financial Condition -- September 30, 2002
and 2001.
Consolidated Statements of Income -- Years Ended September 30, 2002,
2001, and 2000.
Consolidated Statements of Changes in Shareholders' Equity -- Years
Ended September 30, 2002, 2001 and 2000.
Consolidated Statements of Cash Flows -- Years Ended September 30,
2002, 2001 and 2000.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(a)(2) There are no financial statement schedules that are required to be
filed as part of this form since they are not applicable or the
information is included in the consolidated financial statements.
(a)(3) See (c) below for all exhibits filed herewith and the Exhibit Index.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
(c) Exhibits. The following exhibits are either filed as part of this annual
report on Form 10-K, or are incorporated herein by reference:
-29-
EXHIBIT NO. DESCRIPTION
----------- ------------
3.1 Certificate of Incorporation of Troy Financial
Corporation ("Troy Financial") (filed as Exhibit 3.1
to Troy Financial's Form S-1 Registration Statement
(SEC File No. 333-68813) filed with the Securities
and Exchange Commission (the "SEC") on December 11,
1998 and incorporated herein by reference).
3.2 Bylaws, as amended, of Troy Financial (Filed as
Exhibit 3.2 to Troy Financial's Form 10-K for the
fiscal year ended September 30, 2000 and incorporated
herein by reference).
4.1 Specimen certificate evidencing shares of common
stock of Troy Financial (filed as Exhibit 4.3 to Troy
Financial's Form S-1 Registration Statement (SEC File
No. 333-68813) filed with the SEC on December 11,
1998 and incorporated herein by reference).
10.1 Troy Financial Corporation Long-Term Equity
Compensation Plan (filed as Exhibit 10.1 to Troy
Financial's Annual Report on Form 10-K for the fiscal
year ended September 30, 1999 and incorporated herein
by reference).
10.2 Form of Employment Agreements, by and among The Troy
Savings Bank, Troy Financial and the following
executives: Daniel J. Hogarty, Jr., Michael C. Mahar
and Kevin M. O'Bryan (filed as Exhibit 10.1 to
Pre-Effective Amendment No. 2 to Troy Financial's
Form S-1 Registration Statement (SEC File No.
333-68813) filed with the SEC on February 11, 1999
and incorporated herein by reference).
10.3 Form of Employment Protection Agreements with The
Troy Savings Bank and Troy Financial (filed as
Exhibit 10.2 to Pre-Effective Amendment No. 2 to Troy
Financial's Form S-1 Registration Statement (SEC File
No. 333-68813) filed with the SEC on February 11,
1999 and incorporated herein by reference).
10.4 Form of The Troy Savings Bank Employee Change of
Control Severance Plan (filed as Exhibit 10.3 to
Pre-Effective Amendment No. 2 to Troy Financial's
Form S-1 Registration Statement (SEC File No.
333-68813) filed with the SEC on February 11, 1999
and incorporated herein by reference).
10.5 Form of The Troy Savings Bank Supplemental Retirement
and Benefits Restoration Plan (filed as Exhibit 10.1
to Pre-Effective Amendment No. 2 to Troy Financial's
Form S-1 Registration Statement (SEC File No.
333-68813) filed with the SEC on February 11, 1999
and incorporated herein by reference). 10.6 Form of
Employment Agreement by and among The Troy Savings
Bank, Troy Financial and David J. DeLuca (filed as
exhibit 10.1 to Troy Financial's Form 10-Q for the
quarter ended March 31, 2001 and incorporated herein
by reference).
10.7 Agreement and Plan of Merger, dated as of June 7,
2000, by and among Troy Financial Corporation,
Charlie Acquisition Corporation and Catskill
Financial Corporation (incorporated herein by
reference to Exhibit 10 to Troy's Form 10-Q, File No.
000-25439, filed with the Securities and Exchange
Commission on August 11, 2000).
13 Portions of Troy Financial's 2002 Annual Report. 21
Subsidiaries of Troy Financial.
23 Consent of KPMG LLP.
99.1 Certification of C hief Executive Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002
(d) There are no other financial statements and financial statement schedules,
which were excluded from the Annual Report which are required to be
included herein.
- ------------
-30-
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, Troy Financial Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TROY FINANCIAL CORPORATION
(Registrant)
December 27, 2002
/s/ Daniel J. Hogarty, Jr.
---------------------------
Daniel J. Hogarty, Jr.
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Daniel J. Hogarty, Jr. /s/ David J. DeLuca
-------------------------- ----------------------------
Daniel J. Hogarty, Jr. David J. DeLuca
Chairman, President and Chief Executive Senior Vice President and Chief
Officer (Principal Executive Officer) Financial Officer (Principal
Date: December 27, 2002 Financial Officer)
Date: December 27, 2002
/s/ George H. Arakelian /s/ Thomas B. Healy
-------------------------- ----------------------------
George H. Arakelian, Director Thomas B. Healy, Director
Date: December 27, 2002 Date: December 27, 2002
/s/ Wilbur J. Cross /s/ Morris Massry
-------------------------- ----------------------------
Wilbur J. Cross, Director Morris Massry, Director
Date: December 27, 2002 Date: December 27, 2002
/s/ Richard B. Devane /s/ Edward G. O'Haire
-------------------------- ----------------------------
Richard B. Devane, Director Edward G. O'Haire, Director
Date: December 27, 2002 Date: December 27, 2002
/s/ Michael E. Fleming /s/ Maureen Joyce
-------------------------- ----------------------------
Michael E. Fleming, Director Sister Maureen Joyce, RSM, Director
Date: December 27, 2002 Date: December 27, 2002
/s/ Willie A. Hammett
--------------------------
Willie A. Hammett, Director
Date: December 27, 2002
-31-
CERTIFICATIONS
I, Daniel J. Hogarty Jr., certify that:
1. I have reviewed this annual report on Form 10-K of Troy Financial
Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 27, 2002
By: /s/ Daniel J. Hogarty Jr.
-------------------------
Daniel J. Hogarty Jr.
Chairman, President and Chief Executive Officer
-32-
CERTIFICATIONS
I, David J. DeLuca, certify that:
1. I have reviewed this annual report on Form 10-K of Troy Financial
Corporation.
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operations of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: December 27, 2002
By: /s/ David J. DeLuca
-------------------------
David J. DeLuca
Chief Financial Officer
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