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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
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
TROY, NEW YORK 12180
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(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 has (1) 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 1, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $109.8 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 1, 1999: 11,511,921 SHARES
Documents incorporated by reference
(1) Portions of the Definitive Proxy Statement for the Registrant's Annual
Meeting of Shareholders to be held on February 10, 2000 are incorporated by
reference into Part III, Items 10, 11, 12 and 13 of this Form 10-K.
ITEM 1. BUSINESS
BUSINESS OF TROY FINANCIAL CORPORATION
Troy Financial Corporation ("Troy Financial") is a Delaware corporation
that has registered with the Federal Reserve as the bank holding company for The
Troy Savings Bank (the "Bank"). Troy Financial's primary business is the
business of the Bank and the Bank's subsidiary companies. Troy Financial and the
Bank are collectively referred to as the "Company".
Presently, Troy Financial has no plans to own or lease any property, but
instead uses the premises and equipment of the Bank. Troy Financial does not
employ any persons other than certain officers of the Bank who are not
separately compensated by Troy Financial. Troy Financial may utilize the support
staff of the Bank from time to time, if needed, and additional employees will be
hired as appropriate to the extent Troy Financial expands its business in the
future.
Troy Financial is subject to regulation and supervision by the Federal
Reserve. See "--Regulation."
The Troy Savings Bank is a community oriented savings bank headquartered in
Troy, New York. The Bank operates through 14 full service branch offices in a
six county market area. As a full service financial institution, the Bank places
a particular emphasis on residential and commercial real estate loan products,
as well as retail and business banking products and services. The 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 six New York State counties of Albany, Saratoga, Schenectady,
Warren, Washington and Rensselaer, the county in which Troy is located.
The Company's goal is to be the primary source of financial products and
services for its business and retail customers. The Company's business strategy
is to serve as a community based, full-service financial services firm by
offering a wide variety of business and retail banking products, and trust,
insurance, investment management and brokerage services to its potential and
existing customers throughout its market area. In addition, Troy Financial
intends to establish or acquire a commercial bank and trust company that can
accept municipal deposits to complement the Company's municipal investment
activities.
The Company delivers its products and services and interacts with its
customers primarily through its 14 branches and 15 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 and services, including
those of the Company's subsidiaries.
The Bank is subject to regulation, examination and supervision by the FDIC
and the New York State Banking Department ("NYSBD"), and is a member of the
Federal Home Loan Bank System ("FHLB System"). The Bank's deposits are insured
by the FDIC to the maximum extent provided by law. See "--Regulation."
LENDING ACTIVITY
The Company focuses its lending activity primarily on the origination of
commercial real estate loans, commercial business loans, residential mortgage
loans 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 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
approval decisions are made locally, by individual loan officers or loan
committees, depending upon the size of the loan, and the Company responds to all
loan requests in a prompt and timely manner.
LOAN PORTFOLIO COMPOSITION. At September 30, 1999, the Company's loan
portfolio totaled $566.9 million, or 62.0% of total assets, and consisted
primarily of single family residential mortgage loans and commercial real estate
loans, as well as construction loans, commercial business loans and consumer
loans.
- 2 -
The commercial real estate loan portfolio totaled $216.7 million, or 38.2%
and 23.7% of the Company's loans and total assets, respectively, at September
30, 1999. Approximately 75% of the loans are secured by properties located in
the Company's six county market area, and an additional 11% are secured by
properties located in the New York City area. Approximately 26% of the
properties securing the loans are apartment buildings and cooperatives, 26% are
office buildings and warehouses and 17% are retail buildings. The Company's
commercial real estate loans range in size from $89,000 to $10.0 million, and
the median outstanding principal balance at September 30, 1999 was approximately
$230,000. The 20 largest commercial real estate loans range in size from $2.8
million to $10.0 million, and the Company had 55 loans with outstanding balances
of more than $1.0 million at September 30, 1999. The Company's largest
commercial real estate exposure at September 30, 1999 involving a single entity
was $27.0 million to a local real estate investor and related real estate
interests with whom the Company has had a fourteen year relationship.
The commercial business loan portfolio totaled $66.3 million, or 11.7% of
the Company's loans and 7.2% of total assets, at September 30, 1999, and
includes fixed and adjustable rate loans and adjustable rate lines of credit to
a diverse customer base which includes manufacturers, wholesalers, retailers,
service providers, educational institutions and government funded entities. The
Company's commercial business loans range in size from $10,000 to $10.0 million,
with an average principal balance outstanding of approximately $151,000 as of
September 30, 1999. The Company's 20 largest commercial business loans at that
date ranged in terms of total exposure, including outstanding balances and
unfunded commitments, from $2.0 million to $10.0 million.
The Company's portfolio of single family residential mortgage loans totaled
$221.7 million, or 39.1% of loans and 24.2% of total assets, at September 30,
1999, and 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
secured home equity and home improvement loans. As of September 30, 1999, the
Company's largest single family residential mortgage loan had an outstanding
balance of $744,000. As of that date, the typical residential mortgage loan held
by the Company in its portfolio had an average principal balance of
approximately $80,000, an initial loan-to-value ("LTV") ratio of 80% and was
secured by a detached, single family home.
The consumer loan portfolio totaled $48.9 million, or 8.6% of the Company's
loans and 5.3% of total assets, at September 30, 1999. The Company's consumer
loan portfolio includes home equity lines of credit, 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 and Creative Loans represented 13.9% and 18.9% of the Company's
consumer loan portfolio, respectively, at September 30, 1999. Personal fixed
rate loans originated through direct mail marketing programs represented $21.3
million, or 43.6% of the Company's consumer loan portfolio at September 30,
1999.
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,
------------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- ----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ---------- -------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Real estate loans:
Residential mortgage........ $221,721 39.11% $ 202,511 43.50% $ 214,638 45.23%
Commercial.................. 216,700 38.22 166,186 35.69 184,561 38.89
Construction................ 13,761 2.43 10,052 2.16 15,508 3.27
-------- --------- --------- ------- --------- ------
Total real estate loans 452,182 79.76 378,749 81.35 414,707 87.39
-------- --------- --------- ------- --------- ------
Commercial business loans....... 66,274 11.69 45,156 9.70 29,961 6.31
-------- --------- --------- ------- --------- ------
Consumer loans:
Home equity lines of credit. 6,776 1.20 8,575 1.84 9,883 2.08
Other consumer.............. 42,081 7.42 33,445 7.18 20,539 4.33
-------- --------- --------- ------- --------- ------
Total consumer loans... 48,857 8.62 42,020 9.02 30,422 6.41
Net deferred loan fees and costs
and unearned discount........... . (407) (0.07) (344) (0.07) (501) (0.11)
-------- --------- --------- ------- --------- ------
Total loans............ 566,906 100.00% 465,581 100.00% 474,589 100.00%
Less:
Allowance for loan losses... (10,764) (8,260) (6,429)
-------- --------- ---------
Total loans receivable,
net.................. $556,142 $ 457,321 $ 468,160
======== ========= =========
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AT SEPTEMBER 30,
-------------------------------------------
1996 1995
--------------------- --------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Real estate loans:
Residential mortgage............... $ 204,879 44.92% $ 193,720 46.92%
Commercial......................... 191,624 42.01 171,830 41.61
Construction....................... 12,999 2.85 9,354 2.27
--------- ------ --------- ------
Total real estate loans....... 409,502 89.78 374,904 90.80
--------- ------ --------- ------
Commercial business loans.............. 24,762 5.43 19,038 4.61
--------- ------ --------- ------
Consumer loans:
Home equity lines of credit........ 9,387 2.06 8,620 2.09
Other consumer..................... 13,159 2.88 11,140 2.69
--------- ------ --------- ------
Total consumer loans.......... 22,546 4.94 19,760 4.78
Net deferred loan fees and costs and
unearned discount...................... (684) (0.15) (790) (0.19)
--------- ------ --------- ------
Total loans................... 456,126 100.00% 412,912 100.00%
Less:
Allowance for loan losses.......... (4,304) (4,297)
--------- ---------
Total loans receivable, net... $ 451,822 $ 408,615
========= =========
The following table presents, at September 30, 1999, the dollar amount of
all loans in the Company's portfolio, excluding loans held for sale, and
contractually due after September 30, 2000, and whether such loans have fixed or
adjustable interest rates.
DUE AFTER
SEPTEMBER 30, 2000
-----------------------
AMOUNT PERCENT
---------- ----------
(DOLLARS IN THOUSANDS)
FIXED:
Residential mortgage... $ 160,514 31.54%
Commercial mortgage.... 127,871 25.13
Construction........... --- --
--------- --------
Total real estate
loans........... 288,385 56.67
Commercial business.... 30,531 6.00
Consumer:
Home equity lines of
credit............... --- --
Other consumer......... 30,082 5.91
Total consumer.... 30,082 5.91
--------- --------
Total fixed rate loans...... 348,997 68.58
ADJUSTABLE:
Residential mortgage... 60,777 11.94
Commercial mortgage.... 65,812 12.93
Construction........... 586 0.12
--------- --------
Total real estate
loans.......... 127,175 24.99
Commercial business.... 14,608 2.87
Consumer:
Home equity lines of
credit.............. 6,776 1.33
Other consumer......... 11,364 2.23
------- -------
Total consumer.... 18,140 3.56
--------- --------
Total adjustable rate loans. 159,924 31.42
--------- --------
Total loans................. $ 508,921 100.00%
========= ========
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Loan Maturity and Repricing. The following table shows the contractual
maturities of the Company's loan portfolio at September 30, 1999. The table does
not include loans held for sale, and does not take into account possible
prepayments or scheduled principal amortization.
At September 30, 1999
---------------------------------------------------------------------------------------
Real Estate Loans Home
-------------------------------------- Equity
Residential Commercial Lines Other
Mortgage Commercial Construction Business of Credit Consumer Total
-------- ---------- ------------ -------- --------- -------- -----
(In thousands)
Amounts due:
Within one year............... $ 430 $ 23,017 $ 13,175 $ 21,135 $ -- $ 635 $ 58,392
After one year:
More than one year to five years 2,872 90,040 586 17,507 -- 32,799 143,804
More than five years to ten
years........................ 27,042 80,970 -- 20,884 6,776 6,312 141,984
More than ten years to twenty
years........................ 93,738 22,532 -- 6,410 -- 2,335 125,015
More than twenty years........ 97,639 141 -- 338 -- -- 98,118
---------- -------- -------- -------- ------- ------- ---------
Total due after
September 30, 2000........ 221,291 193,683 586 45,139 6,776 41,446 508,921
---------- -------- -------- -------- ------- ------- ---------
Total amount due........ $221,721 $216,700 $ 13,761 $ 66,274 $ 6,776 $42,081 $ 567,313
========== ======== ======== ======== ======= ======= ---------
Less:
Net deferred loan fees and
costs and unearned discount.. (407)
Allowance for loans losses.... (10,764)
---------
Loans receivable, net....... $ 556,142
=========
The Company generally does not purchase loans from other financial
institutions. The Company does, however, sell or enter into commitments to sell
certain of its fixed rate mortgage loans to Freddie Mac, as well as to other
parties. Historically the Company has sold substantially all of its 15- and
30-year conforming fixed rate mortgage loans into the secondary mortgage market.
During 1999 and 1998 the Company sold $46.7 million and $44.5 million of fixed
rate mortgage loans into the secondary mortgage market. In late fiscal year
1998, the Company began to hold certain 15-year fixed rate mortgage loans in its
loan portfolio. In order to reduce the interest rate risk associated with
mortgage loans held for sale, as well as outstanding loan commitments and
uncommitted loan applications with rate lock agreements which are intended to be
held for sale, the Company enters into formal commitments to sell loans in the
secondary market, and may also enter into option agreements. The Company
typically retains servicing rights on loans sold in order to generate fee
income. As of September 30, 1999, the Company was servicing mortgage loans for
others, with an aggregate outstanding principal balance of $230.6 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 six county market area, as well as New York City
and northern New York, and to a lesser extent in other states. Approximately
11%, 9% and 6%, respectively, of the Company's commercial real estate loans are
secured by real estate located in New York City, primarily Manhattan, Brooklyn
and the Bronx; northern New York; and states other than New York. At September
30, 1999, the Company's commercial real estate loan portfolio by sector is as
follows: 36% in apartment buildings and cooperatives; 29% in office and
warehouse buildings; 19% in retail buildings; 4% in buildings owned by
non-profit organizations; 4% in the hospitality industry; and 8% in other
property types.
The volume of the Company's commercial real estate lending increased
substantially in fiscal 1999 after relatively consistent activity in the prior
two years. The Company has originated $105.2 million, $27.4 million and $30.5
million of new loans in fiscal years 1999, 1998 and 1997, respectively. As part
of the Company's commercial real estate lending marketing effort, the Company's
commercial real estate loan officers call on prospective borrowers, follow up on
branch walk-ins and referrals and interact with representatives of the local
real estate industry.
In addition to developing business, the Company's commercial real estate
loan officers are responsible for the underwriting of commercial real estate
loans. The Company's underwriting standards focus on a review of the potential
borrower's cash flow, LTV ratios and rent-rolls, as well as the borrower's
leverage and working capital ratios, the real estate securing the loan, personal
guarantees and the borrower's other on-going projects. In general,
- 5 -
the Company seeks to underwrite loans with an LTV ratio of 75% or less, although
under certain circumstances it will accept an LTV ratio of up to 90%.
The Company assigns each commercial real estate loan a risk rating which
focuses on the loan's risk of loss. Following the loan officer's initial
underwriting and preparation of a credit memorandum, the loan file is reviewed
by the Vice President and Director of Commercial Real Estate Lending who then
has authority to approve the loan if the loan amount is less than $100,000, in
the case of unsecured loans, and less than $227,150, in the case of loans
secured by commercial real estate. Unsecured loans between $100,000 and $1.5
million and secured loans between $227,000 and $1.5 million require approval of
the Company's Commercial Mortgage Credit Committee. All loans in excess of $1.5
million require approval of the Loan Committee of the Board of Directors.
The commercial real estate loan officers are also responsible for
monitoring the Company's portfolio of commercial real estate loans on an
on-going basis, which includes reviewing annual financial statements,
verification that loan covenants have not been violated and property
inspections. In addition, the Company employs an annual review process in which
an outside consultant, who was previously the director of commercial lending for
a large New York commercial bank, reviews 75% to 80% of the Company's commercial
real estate portfolio to confirm the Company's assigned risk rating and to
review the Company's overall monitoring of the loan portfolio.
Commercial Business Lending. Since 1993, the Company has actively sought to
originate commercial business loans in its market area. During the year-ended
September 30, 1999, the Company originated $52 million of commercial business
loans. The Company's commercial loans generally range in size up to $10.0
million, and the borrowers are 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. As of September 30, 1999, 40.0% of
the Company's outstanding commercial loan portfolio consisted of variable rate
loan products. As a general rule, the Company sets the interest rates on its
loans based on the Company's prime rate or other index rates, plus a premium,
and its variable-rate loans reprice at least every 90 days. The Company's
commercial loans includes loans used for equipment financing, working capital
and accounts receivable, and these loans are made to a diverse customer base
which includes manufacturers, wholesalers, retailers, service providers,
educational institutions and government funded entities.
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 communities.
In many cases, the Company's senior management, including the President, will
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
year-ending September 30, 1999, the Company originated 124 new small business
loans of up to $50,000, and as of September 30, 1999, the Company had over $14.0
million of such loans outstanding. Many of the Company's small business loans
are secured by cash collateral or marketable securities or are guaranteed by the
Small Business Administration.
In addition to developing business, the Company's commercial loan officers
are responsible for the underwriting of the commercial loans and the monitoring
of the ongoing relationship between the borrower and the Company. Following the
loan officer's initial underwriting and preparation of a credit memorandum, the
potential loan is reviewed by the Vice President and Director of Commercial
Lending who then has authority to approve the loan if the loan amount is less
than $100,000. Loans between $100,000 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 Loan Committee of the Board of Directors. 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 as
is 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.
- 6 -
The Company monitors its commercial loan portfolio by closely watching all
loans with a risk rating which indicates certain adverse factors, such as debt
ratios 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, then the commercial loan officer begins active loan management, which
initially will include 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, reunderwrites the
loan annually. Because a term loan often includes a line of credit, 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 some cases will visit the borrower or inspect the
borrower's business and properties.
Single Family Residential Lending. During the year ending September 30,
1999, the Company originated $95.8 million of single family residential real
estate loans. Substantially all of the Company's residential mortgage loans were
originated through the Family Mortgage Banking Co., Inc. (the "FMB"), the
Company's mortgage banking subsidiary. FMB currently employs six 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 FMB. Although FMB meets
with applicants and assists with the application process, the Company handles
the processing, underwriting, funding and closing of all residential mortgage
loans. The single family residential mortgage loans not originated through FMB
generally are originated through independent mortgage brokers or by the Company.
The Company currently makes a variety of fixed rate and adjustable rate
("ARMs") mortgage loans which are secured by one- to four-family residences
located in the Company's six county market area. The Company offers mortgage
loans that conform to Freddie Mac guidelines, as well as jumbo loans, which
presently are loans in amounts over $227,150, 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 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 select 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 to both annual adjustment caps and a
maximum adjustment 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. During periods of rising interest rates, however, ARMs may
increase credit risks not inherent in fixed rate loans, primarily because, as
interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. The annual and lifetime adjustable caps do
however help to reduce such risks. The volume and type of ARMs originated
through FMB are affected by numerous market factors, including the level of
interest rates, competition, consumer preferences and the availability of funds.
At September 30, 1999, the Company held $55.5 million of ARMs in its loan
portfolio, most of which were one-year ARMs.
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
lower of the purchase price or appraised value. In addition, the Company
requires escrow accounts for the payment of taxes and insurance if the LTV ratio
exceeds 80%, but will permit 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 provide the Company with the
contractual right to deem the loan immediately due and payable, in most
instances, 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 $227,150. Loans between $227,150 and $1.0 million require
the approval of the Company's Commercial Mortgage Credit Committee, and loans in
excess of $1.0 million require the approval of the Loan Committee of the Board
of Directors.
- 7 -
In an effort 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 payment and below-market rate
loans. The Company typically sells the SONYMA loans back to SONYMA for sale in
the secondary market. The Company is also a charter member of the Capital
District Affordable Housing Partnership, a local lending consortium which makes
mortgage funds available to home buyers who are unable to obtain conventional
financing. The Company participates in the Capital District Community Loan and
the FHLB Home Buyer's Club. In the past five years, the Company has also made
available to low-to-moderate income first-time home buyers over $15 million of
conventional no down payment mortgages for its loan portfolio.
To complement the Company's portfolio of residential mortgage loan
products, the Company also originates fixed rate home equity mortgage loans.
These loans are secured by a first or second mortgage on the owner-occupied
property. During fiscal 1999, the Company originated $7.8 million of home equity
mortgage loans. As of September 30, 1999, the average size of the Company's
outstanding home equity mortgage loans in its residential mortgage loan
portfolio was $19,000.
Consumer Lending. In addition to the Company's residential mortgage and
construction loans, the Company offers a variety of consumer credit products,
including home equity lines of credit, variable rate or Creative 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, diversification and safe and
sound banking practices.
The Company offers home equity lines of credit in amounts up to $100,000.
The home equity lines of credit have fixed interest rates and are available only
if the LTV ratio is less than 80%. The Company's Creative Loans begin with a
modest below market interest rate which increases each year, and are generally
secured by personal property and do not carry prepayment penalties. The average
balance on the Company's Creative Loans for fiscal 1999 was $11.1 million.
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 with terms available up to 60 months and 80%
financing on used automobiles with loan terms dependent upon the year of
vehicles. 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 the loan if the borrower is approved. 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.
Construction Lending. The Company offers residential construction loans to
individuals who are constructing their own homes in the Company's market area.
Generally, the builders utilized by the Company's construction loan borrowers
are ones with whom the Company is familiar and has a long-standing relationship.
The Company's loan administration group monitors the periodic disbursements of
all construction loans, and before advances are made the Company's independent
appraisers provide reports comparing the progress of the construction to the
preconstruction schedule. In many cases, the Company converts construction loans
to traditional residential or commercial mortgage loans, as the case may be,
following completion of construction. During the year ended September 30, 1999,
the Company originated $6.5 million of residential construction loans.
Residential construction loans outstandings are reported with residential
mortgage loans. As of September 30, 1999, the Company had $13.8 million of
commercial real estate construction loans outstanding, or 2.4% of the Company's
loans and 1.5% of total assets.
- 8 -
The Company's construction loans generally have terms of up to six months,
and require payments 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 $227,150. Loans in excess of $227,150 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, including interest, of
construction, 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 which 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 where the source of permanent financing, either the Company or
another institution, can be verified. All commercial real estate construction
lending is done on a recourse basis. As of September 30, 1999, the Company had
$13.8 million of commercial real estate construction loans outstanding, or 2.4%
of the Company's loans and 1.5% of total assets.
Loan Review. As part of the portfolio monitoring process, all commercial
business loans, regardless of size, and all commercial real estate loans over
$750,000 are subjected to an annual detailed loan review process. All classified
loans (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 reviewed by an outside consultant who opines on
the reasonableness of the loan officers' conclusions with respect to the loan's
risk rating and the related allowance for loan loss, if any. For the classified
loans, these quarterly reviews and review by the consultant are complemented by
a quarterly loan officers' meeting with the consultant and the Company's Chief
Credit Officer. The conclusions reached at these meetings become an integral
part of the quarterly analysis of loan loss reserve adequacy.
Delinquent Loans. It is the policy of the management of the Company 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 runs
delinquency reports. The Company's collection manager and her 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, then 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 identical
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, then the loan officer begins active loan management.
Classified Assets. The Company's classification 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
- 9 -
borrower or of the collateral pledged, if any. 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, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as "loss" are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. At September 30,
1999, the Company had classified $10.7 million and $10,000 of assets as
"substandard" and "doubtful," respectively. At such date, the Company did not
have any assets classified as "loss."
At September 30, 1999, the Company had three lending relationships each
with an outstanding principal balance in excess of $1.0 million which had an
internal adverse classification. Each of the classified loans was a commercial
real estate loan and classified as "substandard." A brief description of the
loans follows:
o One commercial real estate loan with an outstanding principal
balance of $2.4 million. The loan is secured by a warehouse industrial
property located outside of New York State and is also personally
guaranteed. As of September 30, 1999, the loan was on non-accrual status
and considered impaired. Subsequent to September 30, 1999, the Company
foreclosed on the loan and sold the property.
o A $1.9 million commercial real estate loan secured by a
multi-family residential property located outside of New York State. The
property which secures the loan, prior to the borrower's purchase, was
the subject of the Company's foreclosure proceedings. As of September
30, 1999, the loan is current and the borrower is seeking to refinance
with other financial institutions.
o Three cross-collateralized commercial real estate loans totalling
$1.3 million and secured by multi-family residential apartment projects
located in upstate New York outside of the Company's market area. As of
September 30, 1999, the loans were on non-accrual status and considered
impaired. The Company has begun foreclosure proceedings.
In addition to classified assets, the Company also has certain "special
mention" or "watch list" assets which have characteristics, features or other
potential weaknesses that warrant special attention. At September 30, 1999,
special mention assets totaled $4.2 million, or 0.46% of total assets.
Non-Performing Assets. It is the policy of the Company to place 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 in doubt. 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 which 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 such loans 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,
1999. 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, 1999, the Company classified $616,000, or 0.07% of total assets,
as TDRs.
The Company classifies property that it acquires as a result of 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 income. At September 30, 1999, the
Company had $76,000 of OREO resulting from single family residential mortgage
loans, and $1.8 million of OREO resulting from commercial real estate loans.
- 10 -
The following presents the amounts and categories of non-performing assets
at the dates indicated.
AT SEPTEMBER 30,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Real estate loans:
Residential mortgage........... $2,707 $ 2,900 $ 2,598 $ 3,418 $ 3,676
Commercial mortgage............ 4,210 6,327 3,438 6,613 4,241
Construction................... -- -- 350 516 --
-------- -------- -------- -------- --------
Total real estate loans... 6,917 9,227 6,386 10,547 7,917
Commercial business loans......... 10 31 33 105 236
Home equity lines of credit....... 58 259 -- -- --
Other consumer loans.............. 282 50 40 17 2
-------- -------- -------- -------- --------
Total non-accrual loans... 7,267 9,567 6,459 10,669 8,155
Loans contractually past due 90 days or
more other than non-accruing...... -- -- -- -- 4
Troubled debt restructurings... 616 2,081 2,256 1,810 3,602
-------- -------- -------- -------- --------
Total non-performing loans 7,883 11,648 8,715 12,479 11,761
Other real estate owned assets:
Residential real estate........ 76 345 589 622 67
Commercial real estate......... 1,769 1,527 2,101 1,903 2,122
-------- -------- -------- -------- --------
Total other real estate
owned................... 1,845 1,872 2,690 2,525 2,189
Total non-performing assets $ 9,728 $ 13,520 $ 11,405 $ 15,004 $ 13,950
========= ======== ======== ======== ========
Allowance for loan losses........... $ 10,764 $ 8,260 $ 6,429 $ 4,304 $ 4,297
========= ======== ======== ======== ========
Allowance for loan losses as a
percentage of non-performing loans.. 136.55% 70.91% 73.77% 34.49% 36.54%
Non-performing loans as a percentage of
total loans....................... 1.39% 2.50% 1.84% 2.74% 2.85%
Non-performing assets as a percentage
of total assets...................... 1.06% 1.89% 1.72% 2.28% 2.22%
For the fiscal years ended 1999, 1998 and 1997, the gross interest income
that would have been recorded had the non-accrual loans been on an accrual basis
or had the rate not been reduced with respect to the loans restructured in
trouble debt restructurings amounted to $553,000, $591,000 and $528,000,
respectively. The amounts included in interest income on these loans were
$227,000, $411,000 and $99,000 for the fiscal years ended 1999, 1998 and 1997,
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, the
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.
The Company's outside consultant periodically reviews the credit quality of the
loans in the Company's commercial real estate and commercial business loan
portfolios, and, together with the Company's Commercial Loan Credit Committee,
reviews on a quarterly basis 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 risks inherent in the portfolio, 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 the historical loan loss experience, changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of specific problem
loans, industry trends, and general economic conditions that may affect
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 that may become
uncollectible based on evaluation of the collectibility of loans and prior loan
loss experience. Based on information currently known to
- 11 -
management, 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, 1999, the
Company's allowance for loan losses was $10.8 million, or 1.90% of total loans,
and 136.6% of non-performing loans at that date. Net charge-offs during the year
ending September 30, 1999 were $746,000. As a result of the current level of
non-performing loans and net charge-offs, as well as consideration of the
general economic trends in the Company's market area, the Company anticipates
that its provision for loan losses will remain at approximately its current
levels through at least the first fiscal quarter ending December 31, 1999. There
can be no assurance, however, that such loan losses will not exceed estimated
amounts or that the provision for loan losses will not increase in future
periods. The Company will continue 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 for the last five years:
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Total loans outstanding (at end of
period)............................... $566,906 $ 465,581 $ 474,589 $ 456,126 $ 412,912
========= ========= ========= ========= =========
Average total loans outstanding $505,489 $ 467,406 $ 471,779 $ 432,569 $ 398,793
========= ========= ========= ========= =========
Allowance for loan losses at beginning of
Year.................................. $ 8,260 $ 6,429 $ 4,304 $ 4,297 $ 4,190
---------- --------- --------- --------- ---------
Loan charge-offs:
Residential real estate............ (362) (521) (320) (578) (199)
Commercial real estate............. (252) (1,612) (1,286) (165) (392)
Construction real estate........... -- (130) (140) (401) (82)
Commercial business................ (75) (51) (110) (17) (286)
Home equity lines of credit........ -- -- -- -- (3)
Other consumer loans............... (306) (132) (34) (8) (72)
---------- --------- --------- --------- ---------
Total charge-offs............. (995) (2,446) (1,890) (1,169) (1,034)
---------- --------- --------- --------- ---------
Loan recoveries:
Residential real estate............ 40 147 80 92 34
Commercial real estate............. 176 57 13 83 94
Construction real estate........... 13 -- -- 58 --
Commercial business................ 8 4 12 9 9
Home equity lines of credit........ -- -- -- 1 4
Other consumer loans............... 12 19 10 5 35
---------- --------- --------- --------- ---------
Total recoveries.............. 249 227 115 248 176
---------- --------- --------- --------- ---------
Loan charge-offs (net of recoveries).... (746) (2,219) (1,775) (921) (858)
Provision charged to operations......... 3,250 4,050 3,900 928 965
---------- --------- --------- --------- ---------
Allowance for loan losses at end of year $10,764 $ 8,260 $ 6,429 $ 4,304 $ 4,297
========= ========= ========= ========= =========
Ratio of net charge-offs during the year
to average loans outstanding during the
year.................................. .15% .48% .38% .21% .22%
Allowance as a percentage of
non-performing loans.................... 136.55% 70.91% 73.77% 34.49% 36.54%
Allowance as a percentage of total loans
(end of year)......................... 1.90% 1.77% 1.35% .94% 1.04%
- 12 -
The following table presents the Company's 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 based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is neither indicative of the specific amounts or the loan categories
in which future charge-offs may be taken 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,
-------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- --------------------------------
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
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ----- ------ --------- ----- ------ --------- -----
(DOLLARS IN THOUSANDS)
ALLOCATION OF ALLOWANCE
FOR LOAN LOSSES:
Real estate loans:
Residential mortgage $ 1,967 18.28% 39.11% $ 1,316 15.93% 43.50% $ 878 13.66% 45.23%
Commercial mortgage. 5,379 49.97 38.22 3,964 47.99 35.69 3,240 50.39 38.89
Construction........ 95 .88 2.43 131 1.59 2.16 127 1.98 3.27
Commercial business
Loans................. 1,716 15.94 11.69 1,503 18.20 9.70 1,275 19.84 6.31
Home equity lines of
Credit................ 6 .06 1.20 31 .37 1.84 31 .48 2.08
Other consumer loans.... 645 5.99 7.42 488 5.91 7.18 278 4.32 4.33
Net deferred loan fees and
costs and unearned discount -- -- (.07) -- -- (.07) -- -- (.11)
Unallocated............. 956 8.88 827 10.01 -- 600 9.33 --
------- ----- ----- -------- ----- ----- ------- ----- -----
Total........... $10,764 100% 100% $ 8,260 100% 100% $ 6,429 100% 100%
======= === === ======== === === ======= === ===
AT SEPTEMBER 30,
----------------------------------------------------------------
1996 1995
------------------------------ --------------------------------
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
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ----- ------ --------- -----
(DOLLARS IN THOUSANDS)
ALLOCATION OF ALLOWANCE
FOR LOAN LOSSES:
Real estate loans:
Residential mortgage $ 372 8.64% 44.92% $ 308 7.17% 46.92%
Commercial mortgage. 2,624 60.97 42.01 2,549 59.32 41.60
Construction........ 149 3.46 2.85 458 10.66 2.27
Commercial business
loans................. 801 18.61 5.43 814 18.94 4.61
Home equity lines of
credit................ 31 .72 2.06 27 .63 2.09
Consumer and other loans 96 2.23 2.88 83 1.93 2.69
Net deferred loan fees
and costs and unearned -- -- (.15) -- -- (.19)
discount................
Unallocated............. 231 5.37 -- 58 1.35 --
------ ----- ----- ------ ----- ----
Total........... $4,304 100% 100% $4,297 100% 100%
====== ==== ===== ====== ==== ====
Securities
The Company separates its securities portfolio into securities available
for sale and investment securities held to maturity. At September 30, 1999, the
Company had $280.9 million, or 30.7% of total assets in securities available for
sale and $2.5 million, or 0.3% of total assets, in investment securities held to
maturity. These portfolios consist primarily of U.S. government securities and
agency obligations, corporate debt securities, municipal securities,
- 13 -
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 investment securities held to maturity and
are carried at amortized cost. Securities 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, 1999, the Company did not
hold any securities considered to be trading securities. As a member of the FHLB
of New York, the Company is required to hold FHLB stock, which is carried at
cost because the FHLB stock is not marketable and may only be resold to the FHLB
of New York.
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 liquidity, the potential need for collateral to be
used for pledging purposes, and earnings. Investment decisions are made by the
Company's Trust and Investment Officer who has authority to purchase, sell or
trade securities qualifying as eligible investments under applicable law and in
conformance with the Company's investment policy. In addition, the Company's
Director of Municipal Finance is authorized to purchase municipal securities for
the Company'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,
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.
- 14 -
The following table presents the composition of the Company's securities
available for sale and investment securities held to maturity in dollar amounts
and percentages at the dates indicated.
AT SEPTEMBER 30,
---------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
CARRYING PERCENT CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL VALUE OF TOTAL
----- -------- ----- -------- ----- --------
(DOLLARS IN THOUSANDS)
Securities available for sale
(fair value):
U.S. Government securities
and agency obligations.... $171,992 61.24% $ 117,220 59.27% $ 57,620 49.02%
Obligations of states and
political subdivisions... 73,262 26.08 51,681 26.13 20,833 17.72
Mortgage-backed securities. 17,132 6.10 3,744 1.89 4,653 3.96
Corporate debt securities.. 5,661 2.02 16,984 8.59 27,168 23.11
Mutual funds and marketable
equity securities........ 5,486 1.95 4,822 2.44 3,971 3.38
Non-marketable equity
securities............... 7,338 2.61 3,307 1.68 3,307 2.81
-------- ------ --------- ------ -------- ------
Total securities
available for sale.. 280,871 100.00% 197,758 100.00% 117,552 100.00%
-------- ------ --------- ------ -------- ------
Investment securities held to
Maturity (amortized cost):
Mortgage-backed securities. 1,535 60.58% 1,980 56.85% 2,497 62.42%
Corporate and other debt
securities............... 999 39.42 1,503 43.15 1,503 37.58
-------- ------ --------- ------ -------- ------
Total investment
securities held to
maturity............ 2,534 100.00% 3,483 100.00% 4,000 100.00%
-------- ------ --------- ------ -------- ------
Total securities portfolio...... $283,405 $ 201,241 $121,552
======== ========= ========
- 15 -
The following table presents information regarding the carrying value,
weighted average yields and contractual maturities of the Company's debt
securities available for sale and investment securities held to maturity
portfolios as of September 30, 1999. Weighted average yields are based on
amortized cost.
AT SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE THAN
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS TEN YEARS TOTAL
-------------------- ------------------------------------------ ---------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
Securities available
for sale (fair value):
U.S. Government
securities
and agency
obligations $ 129,948 5.23% $ 34,775 6.22% $ 7,269 6.85% $ % $171,992 5.50%
Obligations of
states and
Political
subdivisions(1) 43,576 5.41 19,855 6.24 9,053 6.89 778 6.60 73,262 5.83
Mortgage-backed
securities 220 6.57 1,063 7.10 15,849 6.60 17,132 6.63
Corporate debt
securities 1,018 9.09 4,643 6.11 5,661 6.65
--------- -------- ------- ------- --------
Total due... $ 174,542 5.30% $ 59,493 6.22% $17,385 6.88% $16,627 6.60% $268,047 5.69%
========= ======== ======= ======= ========
Investment securities
held to maturity
(amortized cost):
Mortgage-backed
securities 770 8.73 765 8.07 1,535 8.40
Corporate debt
securities 999 7.13 999 7.13
--------- -------- --------
Total due... $ 770 8.73% $ 1,764 7.54% $ 2,534 7.90%
========= ======== ======= ======= ========
- ----------
(1) Weighted average yields are presented on a tax equivalent basis, using an
assumed tax rate of 35%.
- 16 -
The following is a more detailed discussion of the Company's securities
available for sale and investment securities held to maturity portfolios.
U.S. Government Securities and Agency Obligations. The Company invests in
U.S. Treasury securities, and also debt securities and mortgage-backed
securities issued by government agencies and government- sponsored agencies such
as Fannie Mae, the FHLBs, Ginnie Mae and Freddie Mac. At September 30, 1999, the
Company's investment in U.S. Treasury securities totaled $10.3 million,
comprised of $309,000 of U.S. Treasury Bills with an average yield of 4.89% and
$10.0 million of U.S. Treasury Notes with an average yield of 5.25%. At
September 30, 1999, all such securities were classified as available for sale.
At the same date, the Company also held, as available for sale, $161.6 million
of non-government guaranteed bonds issued by the FHLBs, Freddie Mac and Fannie
Mae, of which $129.6 million are discount notes. These securities had an average
yield of 5.52%, and of these securities which were rated, all had ratings of
"AAA." The Company's investment policy does not limit the amount of U.S.
government and agency obligations that can be held.
Corporate Debt Securities. The Company's corporate debt securities
portfolio, at September 30, 1999, totaled $6.7 million, and consisted of general
corporate obligations, public utility and telephone bonds. All of the Company's
corporate debt securities were rated "BBB" or higher, and $5.7 million and $1.0
million were classified as available for sale and held to maturity,
respectively. The Company's investment policy limits the amount of corporate
debt securities to 25% of the Company's total securities portfolio or
approximately $70.9 million at September 30, 1999.
Municipal Securities. At September 30, 1999, $64.2 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 $64.2 million, $44.8
million were invested in general obligations of jurisdictions in the State of
New York, of which $40.5 million represented relationship investments in 54
separate municipalities, including counties, cities, school districts, towns,
villages and fire districts. In addition, the Company held $19.4 million in
bonds of various municipalities throughout the United States. The Company also
held $9.1 million in taxable municipal securities in bonds of municipalities
within New York State. The Company's municipal securities have a weighted
average maturity of 13 months and a taxable equivalent yield of 5.83% at
September 30, 1999. Interest earned on municipal bonds is exempt from federal
and, in some cases, state income taxes. The Company's investment policy limits
the amount of municipal securities to 15% of the Company's total assets or
approximately $137.3 million at September 30, 1999.
Mutual Funds and Equity Securities. At September 30, 1999, the Company's
mutual funds and equity securities portfolio totaled $12.8 million, all of which
was classified as available for sale. The single largest investment in one
issuer was $7.3 million of FHLB of New York stock, which the Company is required
to hold as a member institution. At September 30, 1999, the Company also had a
$5.4 million investment in Federated mutual funds, consisting of $4.0 million in
a Federated ARMs Fund, which invests primarily in adjustable and floating rate
mortgage securities, and $1.4 million in various other Federated mutual funds,
which invest primarily in the common stock of nationally recognized
corporations. The Company's investment policy limits the Company's investments
in common and preferred stock and mutual funds to 3% of the Company's total
assets, or $27.5 million at September 30, 1999. The investment policy presently
limits the Company's investment in the securities of any single issuer to
$500,000 and limits an investment in any stock mutual fund to .75% of total
assets ($6.9 million at September 30, 1999).
SOURCES OF FUNDS
The Company's lending and investment 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, 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
- 17 -
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. Rates on deposit
products are set by the Company's ALCO Committee.
At September 30, 1999, the Company's deposits totaled $563.4 million or
83.2% of interest bearing liabilities. At September 30, 1999, the balance of
core deposits, which is defined to include NOW accounts, money market accounts,
savings accounts and non-interest bearing checking accounts, totaled $335.7
million, or 59.6% of total deposits. At September 30, 1999, the Company had a
total of $227.7 million in time deposit accounts, or 40.4% of total deposits,
and $177.2 million had maturities of 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 six counties in which the Company's branches are
located. The Company relies primarily on the 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. In addition, the Company does not use brokers to
obtain deposits, and at September 30, 1999, the Company had no brokered
deposits.
The following table presents the dollar amount and percent of deposits in
the various types of deposit programs offered by the Company as of the dates
indicated.
AT SEPTEMBER 30,
----------------------------------------------------------------
1999 1998 1997
------------------ --------------------- --------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Savings accounts............. $ 191,968 34.08% $ 198,509 34.33% $198,929 34.75%
--------- ------ --------- ----- -------- -----
Time deposit accounts:
2.00 - 3.99%............ 6,209 1.10 682 0.12 268 0.04
4.00 - 4.99%............ 160,315 28.46 10,174 1.76 5,893 1.03
5.00 - 5.99%............ 53,587 9.51 236,312 40.87 246,686 43.10
6.00 - 6.99%............ 4,833 0.86 6,679 1.15 11,762 2.06
7.00 - 7.99%............ 2,768 0.49 2,698 0.47 2,578 0.45
8.00 - 9.99%............ -- -- 129 0.02 160 0.03
-------- -------- -------- ---- --------- -----
Total.............. 227,712 40.42 256,674 44.39 267,345 46.71
Money market accounts........ 20,348 3.61 15,708 2.72 13,121 2.29
NOW and Super NOW accounts... 86,305 15.32 76,195 13.18 71,442 12.48
--------- ----- --------- ----- -------- -----
Total interest
bearing Accounts. 526,333 93.43 547,086 94.62 550,838 96.23
Demand accounts.............. 37,040 6.57 31,116 5.38 21,560 3.77
--------- ----- --------- ----- -------- -----
Total deposits..... $ 563,373 100% $ 578,202 100% $572,397 100%
========= ===== ========= ===== ======== ====
- 18 -
The following table sets forth, by various rate categories, the amount of
the Company's time deposit accounts outstanding by maturities at the dates
indicated.
AMOUNTS DUE AT SEPTEMBER 30, 1999
-----------------------------------------------------------
ONE YEAR ONE TO TWO TO THREE TO
OR LESS TWO YEARS THREE YEARS FIVE YEARS TOTAL
------- --------- ----------- ---------- -----
(IN THOUSANDS)
Time deposit accounts:
2.00 - 3.99%.... $ 6,209 $ -- $ -- $ -- $ 6,209
4.00 - 4.99%.... 131,952 20,064 4,303 3,996 160,315
5.00 - 5.99%.... 31,415 14,897 3,732 3,543 53,587
6.00 - 6.99%.... 4,833 4,833
7.00 - 7.99%.... 2,768 2,768
--------- -------- -------- ------ --------
Total...... $ 177,177 $ 34,961 $ 8,035 $7,539 $227,712
========= ======== ======== ====== ========
At September 30, 1999, the Company had outstanding $227.7 million in time
deposit accounts, maturing as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------ ------------
(DOLLARS IN THOUSANDS)
TIME DEPOSITS LESS THAN $100,000:
Three months or less............ $ 42,680 4.53%
Over three months through six
months........................ 58,241 4.64
Over six months through 12 months 56,578 4.75
Over 12 months.................. 45,724 5.08
---------
Total...................... $ 203,223 4.74%
=========
TIME DEPOSITS MORE THAN $100,000:
Three months or less............ $ 7,896 4.29%
Over three months through six
months....................... 7,782 4.68
Over six months through 12 months 4,000 4.55
Over 12 months.................. 4,811 5.11
---------
Total...................... $ 24,489 4.62%
=========
Borrowings. The principal source of the Company's borrowing is through FHLB
advances and repurchase agreements. The FHLB system functions in a reserve
credit capacity for member savings associations and certain other home financing
institutions. Members of a FHLB are required to own stock in the FHLB, and, at
September 30, 1999, the Company owned approximately $7.3 million of FHLB stock.
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. As of September 30, 1999, the Company had outstanding
FHLB advances of approximately $145.2 million. Such borrowings had a weighted
average interest rate of 5.49% and a weighted average term of 1.9 years.
At September 30, 1999, the Company also had $3.7 million of borrowed funds
in the form of securities sold under agreements to repurchase at an agreed upon
price and date. The Company generally enters into these agreements only as an
accommodation to its business customers but may utilize this funding source more
often in the future.
TRUST SERVICES
The Trust Department of the Company offers a full range of services,
including living trusts, executor services, testamentary trusts, employee
benefit plan management, custody services and investment management, primarily
to corporations, unions and other institutions. The Trust Department has
retained the services of two independent financial services firms to provide
investment advice and to ratify the decisions of the Trust Department. Operation
of the Trust Department is overseen by a Trust Committee which consists of two
trust officers and four members of the Company's Board of Directors who rotate
on a semi-annual basis. The Trust Department markets its services through its
trust officers who call on the Company's existing customers, 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, 1999, the Trust Department
managed over $315.3 million of assets, which includes $113.7 million over which
the Trust Department has discretionary investment authority. The Trust
Department's fee income, which totaled $665,000 for the year ended September 30,
1999, supplements the Company's rate-sensitive interest income.
- 19 -
SAVINGS BANK LIFE INSURANCE
Since 1939, the Company, through its Savings Bank Life Insurance Department
("SBLI"), has been offering 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. New York law mandates
that SBLI activities be segregated from those of the Company and, while the SBLI
does not directly affect the Company's earnings, management believes that
offering SBLI is beneficial to the Company's relationship with its customers.
The SBLI pays its own expenses and reimburses the Company for expenses incurred
on its behalf.
SUBSIDIARY ACTIVITIES
The following are descriptions of the Bank's wholly owned subsidiaries,
which are indirectly owned by Troy Financial.
The Family Investment Services Co., Inc. The Family Investment Services Co.
("FISC"), which was incorporated in May 1989, is the Bank's wholly owed
full-service brokerage firm, offering a complete range of investment products,
including mutual funds and debt, equity and government securities, on a
fee-per-transaction basis. FISC's goal is to market its products and services to
the Company's existing customers who seek alternatives to traditional financial
institution savings products. As a complement to the Company's municipal
investment activities, FISC intends to begin underwriting general obligation
securities of state and political subdivisions. FISC has two full time employees
who interface with the Company's branches to facilitate referrals from the CSSRs
and branch managers, as well as one officer who assists customers with
investment decisions and trading. As of September 30, 1999, FISC held
approximately $79.0 million of customer assets. FISC is a member of the National
Association of Securities Dealers and is insured by the Securities Insurance
Protection Corporation.
Family Mortgage Banking Co. FMB, which was incorporated in April 1987, is
the Bank's wholly owned mortgage banking subsidiary. The Company originates the
majority of its residential real estate and residential construction loans
through FMB.
Other Subsidiaries. The Bank has ten other wholly owned subsidiaries: The
Family Advertising Co. is an advertising agency; T.S. Capital is licensed by the
Small Business Administration as a Small Business Investment Corporation 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; and T.S. Real Property Inc., Troy SB Real Estate Co., 32 Second
Street, Camel Hill Corporation, 507 Heights Corp. and Realty Umbrella, Ltd. are
all related to the management of, or investment in, the Company's foreclosed or
purchased real estate. Troy Realty Funding Corp. is a real estate investment
trust formed in 1999 to enhance both portfolio yields and capital growth. The
Bank funded Troy Realty Funding Corp with approximately $197 million in
commercial real estate mortgages. The interest income earned on those assets is
passed through to the Bank in the form of dividends.
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 savings
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,
savings and loan associations, 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 methods of competition
include providing competitive loan and deposit pricing, personalized customer
service, access to senior management of the Company and continuity of banking
relationships.
- 20 -
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
which 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 Board. The Bank, as a New
York-chartered bank and trust company, is subject to regulation, supervision,
and examination by the FDIC as its primary federal regulator and by the
Superintendent as its state regulator.
Bank Holding Company Regulation
Troy Financial is a bank holding company subject to the regulation,
supervision, and examination of the Federal Reserve Board 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 and the Bank.
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 ratio of tier 1 capital to total assets of 4.0% to 5.0%.
There is a minimum ratio of 3.0% established for the most highly rated bank
holding companies. The 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, 1999, Troy Financial's
ratio of tier 1 capital to total assets was 21.21%, its ratio of tier 1 capital
to risk-weighted assets was 28.71%, and its ratio of qualifying total capital to
risk-weighted assets was 29.96%.
Troy Financial's ability to pay dividends to its stockholders and expand
its line of business through the acquisition of new banking or nonbanking
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 falls below levels specified in the guidelines can be required to
implement a plan to increase capital.
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. Under
Federal Reserve regulations, banks and bank holding companies which do not meet
minimum capital adequacy guidelines are considered to be undercapitalized and
are required to submit an acceptable plan for achieving capital adequacy.
Federal Reserve approval is required if Troy Financial seeks to acquire
direct or indirect ownership or control of any voting shares of a bank if, after
such acquisition, Troy Financial would own or control directly or indirectly
more than 5% of the voting stock of the bank. Federal Reserve approval also must
be obtained if a bank holding company acquires all or substantially all of the
assets of a bank or merges or consolidates with another bank holding company.
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 nonbanking activities
that are closely related to banking or managing or controlling banks. These
activities include lending activities, certain data processing activities,
securities brokerage and investment advisory services, trust activities and
leasing activities. A bank holding company must file an application or notice
with the Federal Reserve prior to acquiring more than 5% of the voting shares of
a company engaged in such activities.
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
- 21 -
as the Gramm-Leach-Bliley Act, will be effective on March 11, 2000, and will
expand the permissible activities of bank holding companies like Troy Financial.
Upon the effective date of the legislation, Troy Financial will be permitted to
own and control depository institutions and to 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 nonbanking 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.
In order to take advantage of this new authority, a bank holding company's
depository institution subsidiaries must be well capitalized and well managed
and have at least a satisfactory record of performance under the Community
Reinvestment Act. The Bank currently meets these requirements. No prior notice
to the Federal Reserve would be required to acquire a company engaging in these
activities or to commence these activities directly or indirectly through a
subsidiary.
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.
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 Bank is a New York-chartered savings bank, and its deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
(the "FDIC") under the Bank Insurance Fund ("BIF"). The Bank is subject to
extensive regulation by the New York State Banking Department ("NYSBD") as its
chartering agency, and by the FDIC as the deposit insurer. The Bank must file
reports with the NYSBD and the FDIC concerning its activities and financial
condition, and it 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 Bank's 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 Bank derives its 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, savings banks, including
the 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. A savings bank
may also exercise trust powers upon approval of the NYSBD. Under the New York
Banking Law, the Bank is not permitted to declare, credit or pay any dividends
if capital stock is impaired or would be impaired as a result of the dividend.
In addition, the New York Banking Law provides that the Bank cannot 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.
- 22 -
The Bank is 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 the 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, the Bank must
maintain a ratio of tier 1 capital to average total assets (leverage ratio) of
at least 3% to 5%, depending on the Bank's CAMELS rating. As of September 30,
1999, the Bank's ratio of total capital to risk-weighted assets was 20.61%, its
ratio of tier 1 capital to risk-weighted assets was 19.36%, and the Bank's ratio
of tier 1 capital to average total assets was 14.48%. 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 activities engaged 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 will be effective on
March 11, 2000, will expand the permissible activities of national banks to
include the activities noted above that will be permissible for bank holding
companies, other than insurance underwriting, merchant banking and real estate
development or investment activities.
The FDIC, as well as the NYSBD, has extensive enforcement authority over
insured savings banks, including the Bank. 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.
The Bank is subject to quarterly payments on semiannual insurance premium
assessments for its 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 Bank expects that it will not
incur any FDIC deposit insurance assessments during the next fiscal year,
although the current system for assigning assessment risk classifications to
insured depository institutions is being reviewed by the FDIC and the deposit
insurance assessments are subject to change. The Bank is 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 of assessments for the payments on the FICO bonds for the quarter
beginning on October 1, 1999 is 1.184 basis points for BIF-assessable deposits
and 5.92 basis points for SAIF-assessable deposits.
Transactions between the Bank and any of its affiliates 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. Currently, 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, but the Gramm-Leach-Bliley Act provides that certain subsidiaries
of the Bank which engage in activities not permissible for a national bank to
engage in directly would be considered affiliates for purposes of Sections 23A
and 23B. 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, purchase of or investment in
securities issued by the affiliate, purchase of assets, issuance of guarantees
and other similar types of 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 Bank is also restricted in the loans it may make to its executive officers,
directors, any owner of 10% or more of its stock and to certain entities
affiliated with any such person.
- 23 -
The Bank is 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, insured institutions
will be 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 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 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, 1999, the Bank was classified as a "well capitalized" institution.
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 Bank. 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.
The Bank is not permitted to pay dividends if, as the result of the
payment, it would become undercapitalized, as defined in the prompt corrective
action regulations of the FDIC. In addition, if the Bank becomes
"undercapitalized" under these regulations, payment of dividends would be
prohibited without the prior approval of the FDIC. The Bank also could be
subject to these dividend restrictions if the FDIC determines that the Bank is
in an unsafe or unsound condition or engaging in an unsafe or unsound practice.
Under Federal Reserve regulations, the Bank is required to maintain
non-interest-earning reserves against its transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve regulations require that
reserves of 3% must be maintained against aggregate transaction accounts of
$44.3 million or less (subject to adjustment by the Federal Reserve). Reserves
of 10% (subject to adjustment by the Federal Reserve between 8% and 14%) must be
maintained against that portion of total transaction accounts in excess of $44.3
million. The first $5.0 million of otherwise reservable balances (subject to
adjustment by the Federal Reserve) are exempted from the reserve requirements.
The Bank is in compliance with the foregoing 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 Bank's interest-earning assets.
Various proposals have been before Congress, which would permit the payment
of interest on required reserve balances. The Bank is unable to predict whether
or when such legislation will be enacted.
The Bank is a member of the Federal Home Loan Bank System (the "FHLB
System"). The FHLB System consists of 12 regional Federal Home Loan Banks and
provides a central credit facility primarily for member
- 24 -
institutions. The Bank, as a member of 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 principal amount of its unpaid residential
mortgage loans, home purchase contracts and similar obligations at the beginning
of each year, 5% of its FHLB of New York advances outstanding, or one per cent
of thirty per cent of total assets. At September 30, 1999, the Bank owned $7.3
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 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, 1999, the Company had $145.2
million of outstanding advances from the FHLB of New York.
ITEM 2. PROPERTIES
The Company currently conducts its business through 14 full-service banking
offices. The following table sets forth the Company's offices as of September
30, 1999.
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR DATE OF LEASEHOLD
LEASED OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION SEPTEMBER 30, 1999
-------- ----- -------- -----------------------------
HEADQUARTERS:
Troy Office............. Owned 1871 N/A $4,046,447
32 Second Street
Troy, NY 12180
BRANCH OFFICES:
Hudson Valley Plaza Office Leased 1983 12/31/05 22,543
75 Vandenburgh Avenue
Troy, NY 12180
East Greenbush Office... Owned 1969 N/A 107,728
615 Columbia Pike
East Greenbush, NY 12061
Albany Office............. Owned 1995 N/A 1,342,822
120 State Street
Albany, NY 12207
Watervliet Office......... Leased 1983 3/1/03 2,668
1601 Broadway
Watervliet, NY 12189
Latham Office............. Leased 1989 6/30/04 388,877
545 Troy-Schenectady Rd
Latham, NY 12110
Colonie Office............ Leased 1994 3/31/07 30,929
103 Wolf Road
Colonie, NY 12205
Guilderland Office........ Leased 1997 6/9/07 309,115
1704 Western Avenue
Guilderland, NY 12203
Schenectady Office........ Owned 1987 N/A 242,184
1626 Union Street
Schenectady, NY 12309
Clifton Park/Halfmoon Office Owned 1999 N/A 721,767
2 Tower Way
Clifton Park, NY 12065
Clifton Park-Hannaford Office Leased 1995 8/14/00 60,079
9 Clifton Country Road
Clifton Park, NY 12065
Quaker Road Office........ Owned 1995 N/A 1,220,516
44 Quaker Road
Queensbury, NY 12804
Queensbury Office......... Leased 1979 9/30/04 145,298
739 Upper Glen Street
Queensbury, NY 12804
Whitehall Office.......... Owned 1971 N/A 232,710
184 Broadway
Whitehall, NY 12887
- 25 -
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is its property the subject of, any
material pending legal proceeding, other than ordinary routine litigation
incidental to the business of the Company.
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 is currently traded over the counter and quoted on the
Nasdaq Stock Market National Market Tier under the symbol "TRYF." Because Troy
Financial first issued stock on March 31, 1999, closing sale prices are
available for the last two quarters of fiscal 1999 only. The following table
sets forth the closing sale prices for the Common Stock for the periods
indicated.
HIGH LOW
---- ---
1999
3rd quarter $10.625 $10.000
4th quarter $11.250 $10.688
No dividends were paid in fiscal 1999. The closing price of the Common
Stock on September 30, 1999 was $10.8125. The approximate number of holders of
record of the Company's Common Stock at September 30, 1999 was 4,600.
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 ending September 30, 1999, 1998, 1997, 1996 and 1995.
AT SEPTEMBER 30,
---------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------------------ ---------- ---------
(IN THOUSANDS)
SELECTED FINANCIAL DATA:
Total assets................. $ 915,096 $ 716,649 $ 662,448 $ 657,524 $ 629,652
Loans receivable, net........ 556,142 457,321 468,160 451,822 408,615
Securities available for sale
(fair value)............... 280,871 197,758 117,552 148,917 44,725
Investment securities held to
maturity (amortized cost)... 2,534 3,483 4,000 4,515 102,096
Deposits..................... 563,373 578,202 572,397 564,606 552,462
Borrowings................... 148,933 47,464 4,728 9,899 842
Total equity................. 180,439 71,029 71,542 67,408 62,782
- 26 -
YEAR ENDED SEPTEMBER 30,,
---------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- ------------- ----------- ---------
(IN THOUSANDS)
SUMMARY OF OPERATIONS:
Interest and dividend income...... $ 51,802 $ 48,030 $ 48,287 $ 46,862 $ 44,578
Interest expense............. 23,782 24,193 23,351 23,017 20,883
--------- --------- ------------- ----------- ---------
Net interest income........ 28,020 23,837 24,936 23,845 23,695
Provision for loan losses.... 3,250 4,050 3,900 928 965
--------- --------- ------------- ----------- ---------
Net interest income after
provision for loan losses 24,770 19,787 21,036 22,917 22,730
--------- --------- ------------- ----------- ---------
Non-interest income:
Service charges on deposits 892 858 822 802 809
Loan servicing fees........ 523 432 460 443 430
Trust service fees......... 665 459 362 293 234
Net gains from securities
transactions 17 8 4 1 34
Net gains (losses) from
mortgage loan sales..... 245 76 14 (14) 18
Other income............... 705 719 1,075 1,340 784
--------- --------- ------------- ----------- ---------
Total non-interest income 3,047 2,552 2,737 2,865 2,309
--------- --------- ------------- ----------- ---------
Non-interest expense:
Compensation and employee
Benefits................ 10,839 10,218 9,573 9,009 7,596
Occupancy.................. 2,094 2,101 2,089 1,956 1,519
Furniture, fixtures, and
Equipment............... 728 1,080 901 961 884
Computer charges........... 1,508 1,424 1,322 1,248 1,221
Professional, legal, and
other Fees.............. 1,362 924 726 658 670
Printing, postage and
Telephone............... 707 614 559 543 521
Other real estate owned 781 1,087 380 499 (1,343)
Contributions ............. 4,706 4,759 102 479 90
Other expenses............. 3,100 2,884 2,887 2,845 3,918
--------- --------- ------------- ----------- ---------
Total non-interest expense 25,825 25,091 18,539 18,198 15,076
--------- --------- ------------- ----------- ---------
Income (loss) before income
tax (benefit) expense...... 1,992 (2,752) 5,234 7,584 9,963
Income tax (benefit) expense. (85) (1,874) 1,576 2,506 2,895
---------- --------- ------------- ----------- ---------
Net income (loss)............ $ 2,077 $ (878) $ 3,658 $ 5,078 $ 7,068
========= ========= ============= =========== =========
(continued on following page)
- 27 -
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- ---------
SELECTED FINANCIAL RATIOS AND
OTHER DATA
Performance Ratios:
Return (loss) on average assets 0.57% (1) 0.27% (2) 0.55% 0.79% 1.15%
Return (loss) on average equity 3.43(1) 2.49(2) 5.22 7.84 11.97
Average equity to average total
Assets.................... 16.60 10.80 10.57 10.05 9.56
Equity to total assets (period
end )....................... 19.72 9.91 10.80 10.25 9.97
Average interest earning
assets to
average interest bearing 122.89 113.96 112.29 110.80 110.12
liabilities...............
Net interest rate spread(3).. 3.17 3.32 3.50 3.49 3.65
Net interest rate margin(4).. 3.89 3.84 3.96 3.90 4.01
Efficiency ratio(5).......... 64.92(1) 71.22(2) 65.48 66.27 63.22
Operating expenses to average
assets ratio.............. 2.64(1) 2.88(2) 2.74 2.75 2.66
ASSET QUALITY RATIOS:
Non-performing loans to total
Loans..................... 1.39 2.50 1.84 2.74 2.85
Non-performing assets to total
Assets.................... 1.06 1.89 1.72 2.28 2.22
Allowance for loan losses to
total Loans............... 1.90 1.77 1.35 0.94 1.04
Allowance for loan losses to
Non-performing loans...... 136.55 70.91 73.77 34.49 36.54
REGULATORY CAPITAL RATIOS
(CONSOLIDATED):
Leverage capital............. 21.21 9.89 10.64 10.20 9.83
Tier I risk-based capital.... 28.71 14.02 15.01 14.48 15.21
Total risk-based capital..... 29.96 15.27 16.37 15.41 16.27
OTHER DATA:
Full-service banking offices. 14 14 13 13 13
Number of deposit accounts... 68,117 70,057 70,185 71,458 72,531
- ----------
(1) Excludes effect of the $4.1 million stock contribution to The Troy Savings
Bank Community Foundation..
(2) Excludes effect of the $4.5 million contribution to The Troy Savings Bank
Charitable Foundation.
(3) Net interest rate spread represents the difference between the tax effected
yield on average interest earning assets and the rate on average interest
bearing liabilities.
(4) Net interest rate margin represents the tax effected net interest income as
a percentage of average interest earning assets.
(5) The efficiency ratio represents non-interest expenses less other real
estate owned expense, divided by recurring revenues, such as net interest
income on a tax effected basis and non-interest income, excluding gains and
losses on securities.
- 28 -
SELECTED QUARTERLY DATA
Three Months Ended Sep 30, Jun 30, Mar. 31, Dec 31, Sep 30, Jun 30, Mar. 31, Dec 31,
(In thousands, except per share data ) 1999 1999 1999 1998 1998 1998 1998 1997
- --------------------------------------------------------------------------------------------------------------------------------
Interest and dividend income $13,994 $13,346 $12,295 $12,167 $ 12,240 $11,762 $11,973 $ 12,055
Interest expense 5,894 5,580 6,108 6,200 6,409 5,893 5,903 5,988
- --------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,100 7,766 6,187 5,967 5,831 5,869 6,070 6,067
- --------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 813 812 812 813 1,017 1,011 1,011 1,011
Total non-interest income 798 780 846 623 618 619 665 650
Total non-interest expense 5,666 4,900 10,418 4,841 10,178 4,886 4,589 5,438
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax
Expense (benefit) 2,419 2,834 (4,197) 936 (4,746) 591 1,135 268
Income tax expense (benefit) 656 874 (1,848) 233 (2,380) 138 301 67
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,763 $ 1,960 $ (2,349) $ 703 $ (2,366) $ 453 $ 834 $201
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share (1) $ 0.16 $ 0.16 -- -- -- -- -- --
Diluted earnings per share (1) $ 0.16 $ 0.16 -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
(1) Earnings per share data only applies to periods since the Company's initial
public offering on March 31, 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Troy Financial was formed in December 1998 to be the bank holding company
of the Bank upon the Bank's conversion from a New York-chartered mutual savings
bank to a New York-chartered stock savings bank. Upon the Bank's conversion on
March 31, 1999, Troy Financial completed its initial public offering of stock,
issuing 12,139,021 shares of common stock, par value $.0001 per share ("Common
Stock"), including 408,446 shares contributed to The Troy Savings Bank Community
Foundation ( the "Foundation"). Troy Financial sold 11,730,575 shares of Common
Stock at a price of $10 per share through a subscription offering to certain
depositors of the Bank. Net proceeds to Troy Financial from the offering were
$113.7 million after conversion costs and offering costs. Troy Financial
invested approximately $57 million of the net proceeds as capital of the Bank,
and Troy Financial used $9.6 million of the net proceeds from the conversion to
fund a loan to the Bank's employee stock ownership plan (the "ESOP") which
allowed the ESOP to purchase 971,122 shares of Common Stock in the open market.
Troy Financial's Common Stock is traded on the Nasdaq Stock Market's National
Market Tier under the symbol "TRYF."
The consolidated financial condition and operating results of Troy
Financial are primarily dependent upon its wholly owned subsidiary, the Bank,
and the Bank's subsidiaries, and all references to Troy Financial prior to March
31, 1999, except where otherwise indicated, are to the Bank.
The Bank is a community based, full service financial institution offering
a wide variety of business and retail banking products. The Bank and its
subsidiaries also offer a full range of trust, insurance, and investment
services. Troy Financial also intends to apply to establish a commercial bank
and trust company that can accept municipal deposits to complement Troy
Financial's municipal investment activities. The Bank's primary sources of funds
are deposits and borrowings, which it uses to originate real estate mortgages,
both residential and commercial, commercial business loans, and consumer loans
throughout its primary market area which consists of the six New York counties
of Albany, Saratoga, Schenectady, Warren, Washington, and Rensselaer (Troy).
Troy Financial's profitability, like many financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between the interest it receives on interest earning assets, such as
loans and investments, and the interest it pays on interest bearing liabilities,
principally deposits and borrowings.
Results of operations are also affected by the Bank's provision for loan
losses, non-interest expenses such as salaries and employee benefits, occupancy
and other operating expenses and to a lesser extent, non-interest income
- 29 -
such as mortgage servicing fees and service charges on deposit accounts.
Financial institutions in general, including Troy Financial, are significantly
affected by economic conditions, competition and the monetary and fiscal
policies of the federal government. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, interest rate
conditions and funds availability. Deposit balances and cost of funds are
influenced by prevailing market rates on competing investments, customer
preferences and levels of personal income and savings in the Bank's primary
market area.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Troy Financial's total assets were $915.1 million at September 30, 1999, an
increase of $198.5 million, or 27.7% from the $716.6 million at September 30,
1998. The $198.5 million increase was principally due to net proceeds from Troy
Financial's initial stock offering of $113.7 million as well as a $100.3 million
increase in borrowings from the Federal Home Loan Bank of New York ("FHLB"),
which was partially offset by a $14.8 million decrease in deposits, primarily
attributable to authorized withdrawals from deposit accounts to pay for
subscription orders in the stock offering. The funds were principally invested
in loans and securities available for sale, primarily commercial real estate
loans, commercial business loans, and U. S. Government agency discount bonds.
Cash and cash equivalents were $35.9 million at September 30, 1999, an
increase of $18.0 million from the $17.9 million at September 30, 1998. The
increase principally reflects the Bank's determination to hold excess cash
reserves in anticipation of an increased demand for cash by depositors in the
quarter ending December 31, 1999 in anticipation of Year 2000 liquidity needs.
The Bank's securities available for sale portfolio was $280.9 million at
September 30, 1999, an increase of $83.1 million, or 42% over the $197.8 million
as of September 30, 1998. The increase in securities was principally due to a
$54.8 million increase in U.S. Government securities and agency obligations, a
$21.6 million increase in obligations of states and political subdivisions, a
$4.0 million increase in FHLB stock, and a $13.4 million increase in mortgage
backed securities, partially offset by a $11.3 million decrease in corporate
debt securities. The Bank used approximately eighty percent of its FHLB
borrowings to fund the purchase of government discount bonds in order to
maintain its qualifying assets ratio at its current level to preserve favorable
New York State bad debt deduction rates.
- 30 -
Total loans receivable were $566.9 million as of September 30, 1999, an
increase of $101.3 million or 21.8% over the $465.6 million as of September 30,
1998. Commercial real estate loans increased $50.5 million to $216.7 million at
September 30, 1999 or 38.2% of total loans, from $166.2 million at September 30,
1998, or 35.7% of total loans. Commercial business loans increased $21.1 million
to $66.3 million, or 11.7% of total loans at September 30, 1999, up from $45.2
million, or 9.7% of total loans at September 30, 1998. The increase in
commercial real estate loans and commercial business loans is consistent with
Troy Financial's strategy to increase these loan portfolios as part of its
emphasis on commercial banking activities. Residential real estate loans
increased $19.2 million, or 9.5%, as Troy Financial elected to hold 15 year
fixed rate residential mortgages in its portfolio instead of selling them in the
secondary mortgage market. Residential loans as a percentage of total loans
decreased from 43.5% to 39.1%. The consumer loan portfolio increased $6.9
million from $42.0 million at September 30, 1998 to $48.9 million at September
30, 1999. The increase in the consumer loan portfolio was principally the result
of a direct mail marketing program implemented in the quarter ended June 30,
1999. Although the consumer loan portfolio increased in dollars, as a percentage
of total loans it decreased from 9.0% at September 30, 1998 to 8.6% at September
30, 1999.
At September 30,
1999 1998 1997 1996
-------- -------- -------- --------
% of % of % of
Amount Total Amount Total Amount Total Amount
-------------------------------------------------------------------------------------------
(Dollars in thousands)
Real estate loans:
Residential mortgage $221,721 39.11% $202,511 43.50% $214,638 45.23% $204,879
Commercial 216,700 38.22% 166,186 35.69% 184,561 38.89% 191,624
Construction 13,761 2.43% 10,052 2.16% 15,508 3.27% 12,999
Total real estate loans 452,182 79.76% 378,749 81.35% 414,707 87.39% 409,502
Commercial business loans 66,274 11.69% 45,156 9.70% 29,961 6.31% 24,762
Consumer loans:
Home equity lines of credit 6,776 1.20% 8,575 1.84% 9,883 2.08% 9,387
Other consumer 42,081 7.42% 33,445 7.18% 20,539 4.33% 13,159
Total consumer loans 48,857 8.62% 42,020 9.02% 30,422 6.41% 22,546
Gross loans 567,313 465,925 475,090 456,810
Net deferred loan fees and
costs and unearned
discount -407 -0.07% -344 -0.07% -501 -0.11% -684
Total loans $566,906 100.00% $465,581 100.00% $474,589 100.00% $456,126
Allowance for loan losses -10,764 -8,260 -6,429 -4,304
Total loans receivable, net $556,142 $457,321 $468,160 $451,822
1995
------
% of % of
Total Amount Total
----------------------------------------
(Dollars in thousands)
Real estate loans:
Residential mortgage 44.92% $193,720 46.92%
Commercial 42.01% 171,830 41.61%
Construction 2.85% 9,354 2.27%
Total real estate loans 89.78% 374,904 90.80%
Commercial business loans 5.43% 19,038 4.61%
Consumer loans:
Home equity lines of credit 2.06% 8,620 2.09%
Other consumer 2.88% 11,140 2.69%
Total consumer loans 4.94% 19,760 4.78%
Gross loans 413,702
Net deferred loan fees and
costs and unearned
discount -0.15% -790 -0.19%
Total loans 100.00% $412,912 100.00%
Allowance for loan losses -4,297
Total loans receivable, net $408,615
- 31 -
Non-performing assets at September 30, 1999 were $9.7 million, or 1.06% of
total assets, compared to $13.5 million, or 1.89% of total assets at September
30, 1998. The $3.8 million decrease in non-performing loans at September 30,
1999 as compared to September 30, 1998 was attributable primarily to the
repayment during fiscal 1999 of three commercial real estate loans.
Non-performing Assets Schedule
September 30,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------
( DOLLARS IN THOUSANDS )
Non-accrual Loans:
Real Estate Loans:
Residential Mortgage $2,707 $2,900 $2,598 $3,418 $3,676
Commercial Mortgage 4,210 6,327 3,438 6,613 4,241
Construction -- -- 350 516 --
Total Real Estate Loans 6,917 9,227 6,386 10,547 7,917
Commercial Business Loans 10 31 33 105 236
Home Equity Lines of Credit 58 259 -- -- --
Other Consumer Loans 282 50 40 17 2
-----------------------------------------------------------------------------------------------
Total Non-accrual Loans 7,267 9,567 6,459 10,669 8,155
-----------------------------------------------------------------------------------------------
Loans Contractually Past Due
90 Days or More
Other Than Non-accruing -- -- -- -- 4
Troubled Debt Restructurings 616 2,081 2,256 1,810 3,602
-----------------------------------------------------------------------------------------------
Total Non-performing Loans 7,883 11,648 8,715 12,479 11,761
Other Real Estate Owned Assets:
Residential Real Estate 76 345 589 622 67
Commercial Real Estate 1,769 1,527 2,101 1,903 2,122
-----------------------------------------------------------------------------------------------
Total Real Estate Owned 1,845 1,872 2,690 2,525 2,189
Total Non-performing Assets $9,728 $13,520 $11,405 $15,004 $13,950
===============================================================================================
Allowance for Loan Losses $10,764 $8,260 $6,429 $4,304 $4,297
===============================================================================================
Allowance for Loan Losses
as a Percentage of
Non-performing Loans 136.55% 70.91% 73.77% 34.49% 36.54%
===============================================================================================
Non-performing Loans
as a Percentage of
Total Loans 1.39% 2.50% 1.84% 2.74% 2.85%
===============================================================================================
Non-performing Assets
as a Percentage of
Total Assets 1.06% 1.89% 1.72% 2.28% 2.22%
===============================================================================================
- 32 -
The allowance for loan losses is established through a provision for loan
losses charged to earnings based on Troy Financial's evaluation of risks
inherent in its entire loan portfolio. Such evaluation, which includes a review
of all known loans for which full collectibility may not be reasonably assured,
considers the market value of the underlying collateral, growth and composition
of the loan portfolio, delinquency trends, adverse situations that may affect
borrowers' ability to repay, prevailing economic conditions and trends and other
factors that warrant recognition in providing for an adequate allowance for loan
losses.
Allowance for loan losses
For the years ended September 30, 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------
( Dollars in thousands )
Total loans outstanding
( at end of period ) $566,906 $465,581 $474,589 $456,126 $412,912
=======================================================================================
Average total loans outstanding $505,489 $467,406 $471,779 $432,569 $398,793
=======================================================================================
Allowance for loan losses
at beginning of year $8,260 $6,429 $4,304 $4,297 $4,190
---------------------------------------------------------------------------------------
Loan charge-offs:
Residential Real Estate (362) (521) (320) (578) (199)
Commercial Real Estate (252) (1,612) (1,286) (165) (392)
Construction Real Estate -- (130) (140) (401) (82)
Commercial Business (75) (51) (110) (17) (286)
Home Equity Lines of Credit -- -- -- -- (3)
Other Consumer Loans (306) (132) (34) (8) (72)
--------------------------------------------------------------------------------------
Total charge-offs (995) (2,446) (1,890) (1,169) (1,034)
--------------------------------------------------------------------------------------
Loan recoveries:
Residential Real Estate 40 147 80 92 34
Commercial Real Estate 176 57 13 83 94
Construction Real Estate 13 -- -- 58 --
Commercial Business 8 4 12 9 9
Home Equity Lines of Credit -- -- -- 1 4
Other Consumer Loans 12 19 10 5 35
--------------------------------------------------------------------------------------
Total recoveries 249 227 115 248 176
--------------------------------------------------------------------------------------
Loan charge-offs ( net of recoveries ) (746) (2,219) (1,775) (921) (858)
Provision charged to operations 3,250 4,050 3,900 928 968
--------------------------------------------------------------------------------------
Allowance for loan losses, at end of year $10,764 $8,260 $6,429 $4,304 $4,297
======================================================================================
Ratio of net charge-offs during the year
to Average loans outstanding during
the year 0.15% 0.48% 0.38% 0.21% 0.22%
Allowance as a percentage of
non-performing loans 136.55% 70.91% 73.77% 34.49% 36.54%
Allowance as a percentage of total loans
( end of year ) 1.90% 1.77% 1.35% 0.94% 1.04%
- 33 -
While Troy Financial believes it uses the best information available to
determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected if circumstances differ substantially
from the assumptions used in making the final determination. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review Troy Financial's allowance for loan losses and other real
estate owned. Such agencies may require Troy Financial to recognize additions to
the allowance for loan losses or writedowns of other real estate owned based on
their judgements about information available to them at the time of their
examination which may not be currently available to management. Management
believes Troy Financial's allowance for loan losses is adequate at September 30,
1999; however, future adjustments could be necessary and Troy Financial's
results of operations could be adversely affected if circumstances differ
substantially from the assumptions used in the determination of the allowance
for loan losses.
ANALYSIS OF NET INTEREST INCOME
Troy Financial's earnings are dependent largely on its net interest income,
which is the difference between the amount that Troy Financial receives from its
interest earning assets and the amount that Troy Financial pays out on its
interest bearing liabilities.
- 34 -
Average Balance Sheet. The following table sets forth certain information
relating to Troy Financial's interest earning assets and interest bearing
liabilities for the periods indicated. The yields and rates were derived by
dividing tax effected interest income or interest expense by the average balance
of assets or liabilities, respectively, for the periods shown. Statutory tax
rates were used to calculate tax exempt income on a tax equivalent basis.
Average balances were computed based on average monthly balances. Management
believes that the use of average monthly balances instead of daily balances does
not have a material effect on the information presented. The yields on loans
include deferred fees and discounts which are considered yield adjustments.
Non-accruing loans have been included in loan balances. The yield on securities
available for sale is computed based on amortized cost.
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1999 1998
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------------------
( DOLLARS IN THOUSANDS )
INTEREST EARNING ASSETS:
Total loans $505,489 $39,523 7.82% $467,405 $38,315 8.20%
Loans held for sale 5,803 406 6.99% 6,830 527 7.72%
Investment securities held
to maturity 2,826 222 7.86% 3,753 300 7.99%
Securities available for sale
Taxable 132,689 7,108 5.36% 69,171 4,121 5.96%
Tax-exempt 58,020 3,407 5.87% 55,996 3,286 5.87%
-------------------------------------------------------------------------------------
Total securities available for sale 190,709 10,515 5.51% 125,167 7,407 5.92%
Federal funds sold and other
Short-term investments 46,745 2,371 5.07% 45,631 2,553 5.59%
-------------------------------------------------------------------------------------
Total earning assets 751,572 53,037 7.06% 648,786 49,102 7.57%
------ ------
Allowance for loan losses (9,702) (6,725)
Cash & due from banks 16,898 10,782
Other non-earning assets 35,653 25,311
------ ------
Total assets $794,421 $678,154
======== ========
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------
1997
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
------------------------------------------
( DOLLARS IN THOUSANDS )
Interest earning assets:
Total loans $471,779 $38,851 8.23%
Loans held for sale 2,743 199 7.25%
Investment securities held
to maturity 4,266 353 8.27%
Securities available for sale
Taxable 121,483 7,262 5.98%
Tax-exempt 3,195 184 5.76%
------------------------------------------
Total securities available for sale 124,678 7,446 5.97%
Federal funds sold and other
Short-term investments 27,560 1,503 5.45%
------------------------------------------
Total earning assets 631,026 48,352 7.66%
------
Allowance for loan losses (4,703)
Cash & due from banks 12,077
Other non-earning assets 23,822
------
Total assets $662,222
========
(continued)
- 35 -
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------
1999 1998
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE
-------------------------------------------------------------------------------------
( DOLLARS IN THOUSANDS )
INTEREST BEARING LIABILITIES:
Deposits:
NOW and Super N.O.W. accounts $80,596 $1,758 2.18% $77,010 $1,696 2.20%
Money market deposit accounts 18,500 555 3.00% 13,995 431 3.08%
Savings accounts 195,558 5,581 2.85% 195,177 6,451 3.31%
Time deposits accounts 243,978 12,261 5.04% 264,538 14,701 5.56%
Stock subscription funds in Escrow 9,069 253 2.79% - - -
Escrow accounts 3,277 62 1.89% 3,704 60 1.62%
-------------------------------------------------------------------------------------
Total interest-bearing deposits 550,978 20,470 3.72% 554,424 23,339 4.21%
Borrowings:
Securities sold under agreements to
Repurchase 3,286 102 3.10% 1,222 33 2.70%
Other short-term borrowings 12,581 633 5.04% - - -
Long term-debt 44,720 2,577 5.76% 13,681 821 6.00%
-------------------------------------------------------------------------------------
Total borrowings 60,587 3,312 5.47% 14,903 854 5.73%
Total interest-bearing 611,565 23,782 3.89% 569,327 24,193 4.25%
liabilities
Demand deposits 33,860 25,399
Other non-interest bearing liabilities 17,088 10,726
Total shareholders' equity 131,908 72,702
------- ------
Total liabilities and shareholders' $794,421 $678,154
======== ========
equity
Interest rate spread 3.17% 3.32%
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AND
NET INTEREST MARGIN 29,255 3.89% 24,909 3.84%
============================ ============================
Ratio of interest-earning assets to
Interest-bearing liabilities 122.89% 113.96%
Tax equivalent adjustment 1,235 1,072
Net interest income as per consolidated
financial statements $28,020 $23,837
============== ==============
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------
1997
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST RATE
------------------------------------------
( DOLLARS IN THOUSANDS )
Interest bearing liabilities:
Deposits:
NOW and Super N.O.W. accounts $71,581 $1,590 2.22%
Money market deposit accounts 14,168 433 3.06%
Savings accounts 201,612 6,647 3.30%
Time deposits accounts 261,032 14,087 5.40%
Stock subscription funds in Escrow - - -
Escrow accounts 3,941 55 1.40%
------------------------------------------
Total interest-bearing deposits 552,334 22,812 4.13%
Borrowings:
Securities sold under agreements to
Repurchase 704 29 4.12%
Other short-term borrowings 4,403 242 5.50%
Long term-debt 4,540 268 5.90%
------------------------------------------
Total borrowings 9,647 539 5.59%
Total interest-bearing 561,981 23,351 4.16%
liabilities
Demand deposits 20,676
Other non-interest bearing liabilities 9,554
Total shareholders' equity 70,011
------
Total liabilities and shareholders' $662,222
equity ========
Interest rate spread 3.50%
- ------------------------------------------------------------------------------------
Net interest income and
Net interest margin 25,001 3.96%
=============================
Ratio of interest-earning assets to
Interest-bearing liabilities 112.29%
Tax equivalent adjustment 65
Net interest income as per consolidated
financial statements $24,936
==============
- 36 -
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest earning assets
and interest bearing liabilities have affected Troy Financial's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to:
(1) changes attributable to changes in volume (changes in volume
multiplied by prior year rate);
(2) changes attributable to changes in rate (changes in rate multiplied by
prior year volume); and
The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
-------------------------------------------------------------------------------
FOR THE YEAR ENDED SEPTEMBER 30, 1999 FOR THE YEAR ENDED SEPTEMBER 30, 1998
COMPARED TO COMPARED TO
THE YEAR ENDED SEPTEMBER 30, 1998 THE YEAR ENDED SEPTEMBER 30, 1997
--------------------------------------- ---------------------------------------
-------------------------------------------------------------------------------
INCREASE (DECREASE)
DUE TO DUE TO
------------------------ --------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
INTEREST-EARNING ASSETS:
TOTAL LOANS 3,636 (2,427) 1,209 (342) (194) (536)
LOANS HELD FOR SALE (75) (47) (122) 315 13 328
INVESTMENT SECURITIES (73) (5) (78) (41) (12) (53)
SECURITIES AVAILABLE FOR SALE
TAXABLE 3,355 (368) 2,987 (3,117) (24) (3,141)
TAX-EXEMPT 119 2 121 3,098 4 3,102
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES AVAILABLE FOR SALE 3,474 (366) 3,108 (19) (20) (39)
FEDERAL FUNDS SOLD AND
OTHER SHORT-TERM INVESTMENTS 65 (247) (182) 1,011 39 1,050
- ----------------------------------------------------------------------------------------------------------------------
TOTAL EARNING ASSETS 7,027 (3,092) 3,935 924 (174) 750
INTEREST-BEARING LIABILITIES:
DEPOSITS:
N.O.W. AND SUPER N.O.W. ACCOUNTS 78 (17) 61 120 (14) 106
MONEY MARKET DEPOSIT ACCOUNTS 135 (11) 124 (5) 3 (2)
SAVINGS ACCOUNTS 13 (882) (869) (216) 20 (196)
TIME DEPOSIT ACCOUNTS (1,093) (1,346) (2,439) 189 425 614
STOCK SUBSCRIPTION FUNDS IN ESCROW 127 126 253 -- --
ESCROW ACCOUNTS (4) 6 2 (2) 7 5
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING DEPOSITS (744) (2,124) (2,868) 86 441 527
BORROWINGS:
SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE 63 5 68 7 (3) 4
OTHER SHORT-TERM BORROWINGS 634 0 634 (121) (121) (242)
LONG-TERM DEBT 1,787 (32) 1,755 548 5 553
- ----------------------------------------------------------------------------------------------------------------------
TOTAL BORROWINGS 2,484 (27) 2,457 434 (119) 315
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST-BEARING LIABILITIES 1,740 (2,151) (411) 520 322 842
- ----------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 5,287 (941) 4,346 404 (496) (92)
=========================================================================
- 37 -
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998
General. Troy Financial recorded net income of $2.1 million for the year
ended September 30, 1999, compared to a net loss of $878,000 for the year ended
September 30, 1998. The increase was principally the result of higher net
interest income, lower provision for loan losses, and higher non-interest
income, partially offset by higher non-interest expenses and income tax expense.
Troy Financial's earnings per share were $0.32 for the period April 1, 1999
through September 30, 1999, following the initial public offering.
Net Interest Income. Net interest income on a tax equivalent basis for the
year ended September 30, 1999, was $29.3 million, an increase of $4.3 million,
or 17.4%, when compared to the year ended September 30, 1998. The increase was
primarily attributable to a $102.8 million increase in average interest earning
assets which more than offset the $42.2 million increase in average interest
bearing liabilities. The increase in interest earning assets was principally
funded by the net proceeds received from the initial public offering and a $45.7
million increase in average borrowings. Net interest income was also positively
affected by the 36 basis point decrease in average cost of funds, which
partially offset the 51 basis point decrease in average yield on average
interest earning assets. Troy Financial has utilized longer term borrowings with
the FHLB to provide some stability in its funding costs and to match the
maturities of some of its longer term commercial real estate loans.
Interest and dividend income for the year ended September 30, 1999 was
$53.0 million on a tax equivalent basis, an increase of $3.9 million, or 8.0%,
over the prior year. The increase in the volume of earning assets more than
offset the 51 basis point decrease in the average yield on earning assets.
The average balance of taxable available for sale securities increased by
$63.5 million for the year ended September 30, 1999, compared to 1998, which
offset the 60 basis points decrease in average yield. Troy Financial has
invested primarily in short-term government agency discount bonds providing
liquidity comparable to federal funds while still offering a yield greater than
the 5.07% average yield for federal funds sold and other short term investments.
The average loan yield for the year ended September 30, 1999 was 7.82%, down 38
basis points from the previous year, but 246 basis points higher than the 5.36%
average yield on taxable available for sale securities. Troy Financial has also
invested in tax-exempt municipal securities, primarily maturing within one year.
The average tax equivalent yield on these securities for 1999 was 5.87%, similar
to the yield in 1998 and 80 basis points higher than the average yield on
federal funds sold and other short term investments for the year ended September
30, 1999.
Interest expense for the year ended September 30, 1999, was $23.8 million,
a decrease of $411,000, or 1.7% over the year ended September 30, 1998. The
change was principally due to a 36 basis point decrease in the average cost of
funds, which more than offset the increase in average volume of interest bearing
liabilities. The average balance of interest bearing liabilities was $611.6
million for the year ended September 30, 1999, an increase of $42.2 million, or
7.4%, primarily attributable to an increase in average borrowings of $45.7
million, which offset a $3.4 million decrease in average interest bearing
deposits, primarily the result of approximately $26 million in authorized
withdrawals from deposit accounts to pay for stock subscription orders, net of
deposit growth. The average balance of FHLB borrowings was $57.3 million for the
year ended September 30, 1999, as compared to $13.7 million in the previous
year. The increase in average FHLB debt more than offset the $20.6 million
decline in average time deposit accounts, which Troy Financial experienced as a
result of the decrease in time deposits rates.
Troy Financial's net interest margin was 3.89% for the year ended September
30, 1999, compared to 3.84% for 1998. The slight increase in net interest margin
reflects a $102.8 million increase in average earning assets, due primarily to
Troy Financial's initial public offering and higher borrowings, which more than
offset the 51 basis point decline in average yield on earning assets, and the 36
basis point decrease in average cost of funds, which more than offset the
increase in average interest bearing liabilities. The decline in average cost of
funds was principally caused by the decrease in rates paid on savings accounts
and time deposits as well as the decrease in average rates paid on FHLB
borrowings, which was partially offset by the increase in average borrowings.
The decrease in the yield on interest earning assets was caused by the
investment of a substantial portion of the offering proceeds in short-term
government agency bonds and federal funds, with lower yields than long-term
securities, but which provide the liquidity required to fund higher yielding
loan growth.
- 38 -
Provision For Loan Losses. The provision for loan losses was $3.3 million
for fiscal 1999, compared to $4.1 million for fiscal 1998. The decrease in the
provision was primarily attributable to a reduction in non-performing loans of
$3.8 million from $11.6 million at September 30, 1998 to $7.9 million at
September 30, 1999. The allowance for loan losses provides coverage of 136.6% of
non-performing loans at September 30, 1999, as compared to 70.9% as of September
30, 1998. The percentage of the allowance for loan losses to period end loans
was 1.90% and 1.77% for fiscal years ended 1999 and 1998, respectively. The
decrease in provision was also the result of a decrease of $1.5 million in net
charge-offs to $746,000 for the year ended September 30, 1999 compared to the
prior year.
In determining the appropriate provision for loan losses, management also
considers general economic conditions and real estate trends in Troy Financial's
market area, both of which can impact the inherent risk of loss in Troy
Financial's current loan portfolio. Troy Financial anticipates its provision for
loan losses to remain at approximately its current levels through at least the
first fiscal quarter ending December 31, 1999 and for its allowance for loan
losses to continue to increase, as the mix of Troy Financial's loan portfolio
includes an increasing percentage of higher credit risk loan types, such as
commercial real estate loans and commercial business loans. Commercial real
estate loans and commercial business loans now represent 49.9% of the total loan
portfolio at September 30, 1999 compared to 45.4% at September 30, 1998.
Non-Interest Income. Non-interest income was $3.0 million for the year
ended September 30, 1999, an increase of $495,000, or 19.4% from the year ended
September 30, 1998. The increase was principally caused by increases in net
gains from mortgage loan sales, trust service fees, loan servicing fees, and
service charges on deposits. Net gains from mortgage loan sales were up
$169,000, or 222.4%, during the year ended September 30, 1999, as compared to
1998. Trust service fees were up $206,000, or 44.9%, as a result of a higher
balance of assets managed than in the prior year. Loan servicing fees were up
$91,000, or 21.1% as a result of a higher balance of loans serviced for the year
ended September 30, 1999, as compared to the year ended September 30, 1998.
Service charges on deposit accounts were up $34,000, or 4.0%, compared to the
prior year, due primarily to a $20.7 million increase in transaction accounts
from September 30, 1999 to September 30, 1998.
Non-Interest Expense. Non-interest expense for the year ended September 30,
1999 was $25.8 million, an increase of $734,000, or 2.9%, over the prior year.
During fiscal 1999, Troy Financial established a Community Foundation to which
it contributed 408,446 shares of common stock. In connection with this
contribution of common stock to the Community Foundation, Troy Financial
recorded a pre-tax expense equal to the value of the contribution ($4.1 million
) in the second quarter of fiscal 1999. In fiscal 1999, in addition to the
contribution of common stock to the Community Foundation, Troy Financial also
contributed the Troy Savings Bank Music Hall to the Music Hall Foundation. The
pre-tax expense related to this contribution was $229,000. Under the Internal
Revenue Code ("IRC"), there is an annual charitable deduction limitation of 10%
of our annual, pre-contribution, taxable income. The non-deductible part of our
contribution expense, however, may be carried forward for five years, subject to
the annual 10% limitation. To the extent that our charitable deductions exceed
this 10% deduction limitation, based on estimated future taxable income, we
would not be able to recognize the full tax benefit associated with our
contributions. However, based on anticipated future taxable income we believe
that we will be able to deduct the full amount of the contributions over the
next five years. The contribution of common stock to the Community Foundation is
intended to allow our local communities to share in our potential growth and any
profitability over the long term.
Troy Financial's future contribution expense will decline as a result of
these foundations. In fiscal years 1999, 1998 and 1997, the direct costs paid by
Troy Financial, excluding any allocated cost, associated with operating the
Music Hall were $81,000, $78,000 and $88,000, respectively. As Troy Financial no
longer owns the Music Hall, these expenses will no longer impact Troy
Financial's financial results.
Also contributing to Troy Financial's increased non-interest expense
for the year ended September 30, 1999 was a $621,000 increase in compensation
and employee benefits expense during the year ended September 30, 1999, as
compared to the prior year, as Troy Financial began to record expenses for its
employee stock ownership plan and supplemental retirement and benefit
restoration plan for certain executive officers, both of which were adopted in
connection with the Bank's conversion to the stock form. The increase in expense
was partially offset by a reduction in staffing levels over the comparable
period last year. Professional, legal and other fees increased by $438,000, or
47.4% for the year ended September 30, 1999, over the prior year, primarily
caused by increased fees
- 39 -
associated with operating a stock form organization as compared to a mutual
savings bank. Other real estate owned expense was down $306,000, or 28.2%, for
the year ended September 30, 1999, as compared to 1998. The decrease in expense
was principally caused by a decrease in foreclosure costs. Other expense
increased by $216,000, or 7.5%, for the year ended September 30, 1999, as
compared to 1998. This increase was primarily attributable to $408,000 for Y2K
remediation expenses, an increase of $107,000 for advertising, partially offset
by a reduction in subsidiary operating expenses in the year ended September 30,
1999.
Income Taxes. Income tax benefit for the year ended September 30, 1999, was
$85,000, as compared to an income tax benefit of $1.9 million for 1998. The
decrease in income tax benefit was primarily caused by the $4.7 million increase
in income before taxes for the year ended September 30, 1999, as compared to the
prior year.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
General. The Company had a net loss of $878,000 for the year ended
September 30, 1998, compared to net income of $3.7 million for the year ended
September 30, 1997. The 1998 net loss was primarily the result of a $4.8 million
contribution expense, $4.5 million of which was related to the Company's cash
contribution and commitment to The Troy Savings Bank Charitable Foundation
("Charitable Foundation"). Also contributing to the loss were increases in the
Company's other real estate owned expense and compensation and employee benefits
expense of $707,000 and $645,000, respectively, for the year ended September 30,
1998. These increased expenses were partially offset by a $3.5 million decrease
in income tax expense in fiscal 1998 as compared to fiscal 1997, primarily
associated with the tax benefit recorded in connection with the Company's
contribution and binding, irrevocable commitment to the Charitable Foundation
and otherwise reduced income before taxes.
Net Interest Income. The Company's tax equivalent net interest income for
the year ended September 30, 1998 was $24.9 million, down $92,000, compared to
the year ended September 30, 1997. This decrease was primarily the result of a
nine basis point decrease in yield on average interest earning assets and a nine
basis point increase in the rate paid on average interest bearing liabilities. A
$17.8 million increase in average interest earning assets, which exceeded the
$7.3 million increase in average interest bearing liabilities by $10.5 million,
partially offset the impact of the decline in yields on the Company's interest
earning assets. The Company's net interest margin for the year ended September
30, 1998 was 3.84%, a decrease of 12 basis points from 3.96% for the year ended
September 30, 1997. The yield on average interest earning assets decreased from
7.66% to 7.57%, while the rate paid on average interest bearing liabilities
increased from 4.16% to 4.25%.
Interest Income. The Company's interest income for the year ended September
30, 1998 was $49.1 million, an increase from $48.4 million for the year ended
September 30, 1997. Interest on loans decreased $536,000 from $38.9 million for
the year ended September 30, 1997 to $38.3 million for the year ended September
30, 1998. The average balance of loans decreased $4.4 million to $467.4 million,
and the average yield on loans decreased three basis points from 8.23% to 8.20%
for the year ended September 30, 1998. Tax equivalent interest income on
securities available for sale decreased by $39,000 and interest income on
investment securities held to maturity declined by $53,000 for the year ended
September 30, 1998. The average balance of securities available for sale
increased only slightly from $124.7 million for the year ended September 30,
1997 to $125.2 million for the year ended September 30, 1998. At the same time,
the tax effected average yield on securities available for sale decreased five
basis points from 5.97% to 5.92%. The interest income on federal funds sold
increased $1.0 million to $2.5 million, and the average balance of federal funds
sold and other short-term investments increased from $27.6 million to $45.6
million. Reductions in market interest rates throughout 1998 led to changes in
the mix of the Company's interest earning assets and changes in interest income.
Lower loan rates resulted in increased residential loan refinancings and fixed
rate loans. Because the Company sold most of its fixed rate residential loans,
interest income on loans held for sale increased. The interest rate environment
also resulted in increased refinancings by commercial mortgage customers, some
of which refinanced with other institutions. The Company sought to take
advantage of the interest rate environment by borrowing funds from the FHLB, and
investing in short-term investments, thereby increasing short term interest
income by $1.1 million. The Company continued to invest in short term federal
funds due to the favorable short term interest rates offered by these
instruments compared to other comparable investment alternatives. The average
yield on federal funds sold and other short-term investments increased from
5.45% to 5.59%.
- 40 -
Interest Expense. The Company's interest expense increased by $842,000 to
$24.2 million for the year ended September 30, 1998. The increase is
attributable to increased average balances and rates paid on deposits and
borrowings. The two largest categories of interest bearing deposits are savings
accounts and time deposits. Interest expense on savings accounts decreased by
$196,000 to $6.5 million for the year ended September 30, 1998, primarily due to
a $6.4 million decrease in the average balance of savings accounts. Interest on
time deposits for the year ended September 30, 1998 was $14.7 million, up
$614,000 from the year ended September 30, 1997. This increase was the result
primarily of a 16 basis point increase in the rates paid on these deposits and a
$3.5 million increase in the average balance of time deposits for the year ended
September 30, 1998. Interest expense on the Company's NOW and money market
accounts was relatively flat, increasing only $104,000 from fiscal 1997 to
fiscal 1998. The slight increase was attributable to a $5.3 million increase in
the average balances of these deposits accounts. Interest expense on the
Company's borrowings increased $315,000 in fiscal 1998 compared to fiscal 1997.
The increase is attributable to a $5.3 million increase in the average balance
of borrowings, coupled with a 14 basis point increase in the average rate paid
on borrowings. The increase in borrowings reflects the Company's use of
alternative funding sources in lieu of relatively higher cost time deposit
accounts.
Provision for Loan Losses. The provision for loan losses was $4.1 million
for fiscal 1998, compared to $3.9 million for fiscal 1997. Many of the adverse
credit quality trends noted in fiscal 1997 continued into fiscal 1998. During
fiscal 1998, net loan charge-offs were $2.2 million, representing a 25.0%
increase from fiscal 1997, when net loan charge-offs were $1.8 million. In
addition, nonperforming loans increased from $8.7 million at September 30, 1997
to $11.6 million at September 30, 1998. This increase is consistent with the
trends noted at September 30, 1997 when significant increases in classified
loans and loans 60 to 89 days delinquent were noted. In determining the
appropriate provision for loan losses, management also considers general
economic conditions and real estate trends in the Company's market area, both of
which can impact the inherent risk of loss in the Company's current loan
portfolio. Management believes that there has been a general decline in the real
estate values in the Company's market area, resulting in a decrease in the
values of the collateral securing much of the Company's loan portfolio.
Management believes that this trend is reflected in the increased level of net
loan charge-offs experienced in fiscal years 1998 and 1997 compared to fiscal
years 1996, 1995 and 1994. In fiscal years 1998 and 1997, net loan charge-offs
as a percentage of average loans were .48% and .38%, respectively, as compared
to .21%, .22%, and .15% in fiscal years 1996, 1995, and 1994, respectively. The
increased provision in fiscal 1998 also reflects the change in the mix of assets
in the Company's loan portfolio as commercial business loans and consumer loans
increased as a percentage of total loans from 6.31% and 6.41%, respectively, at
September 30, 1997 to 9.70% and 9.02%, respectively, at September 30, 1998.
Non-interest Income. The Company's non-interest income decreased by
$185,000 to $2.6 million for the year ended September 30, 1998. A $356,000
decrease in the Company's other income and a $28,000 decrease in the Company's
loan servicing fees contributed to the decline in non-interest income. Such
declines were partially offset by the Company's trust service fees, net gains
from mortgage loan sales and deposit service charges, which increased by
$97,000, $62,000 and $36,000, respectively, from fiscal 1997 to fiscal 1998. The
Company's other non-interest income in 1997 includes a one-time $389,000 federal
affordable housing award. Service charges on deposits increased due to increases
in demand deposit account balances and additional commercial relationships.
Trust service fees increased due to increases in assets under management. These
increases reflect the Company's strategy of becoming a more full service
relationship institution. Net gains from mortgage loan sales increased as a
result of the decline in mortgage rates and a corresponding increase in fixed
rate loans held for sale.
Non-interest Expense. The Company's non-interest expense increased 35.3%
from $18.5 million for the year ended September 30, 1997 to $25.1 million for
the year ended September 30, 1998. The primary cause of this increase was a $4.8
million contribution expense, all but $306,000 of which was related to The
Company's cash contribution and binding, irrevocable commitment to the
Charitable Foundation.
Also contributing to the Company's increased non-interest expense for the
year ended September 30, 1998 was a $707,000 increase in other real estate owned
expense, a $645,000 increase in compensation and employee benefits expense, and
a $198,000 increase in professional, legal and other fees expense. The increase
in other real estate owned expense is attributable to losses on the disposals
of, and additional writedowns taken on, the Company's foreclosed assets or other
real estate owned. The increase in compensation expense was primarily related to
general merit increases for the Company's employees during the year ended
September 30, 1998, and, to a lesser extent, increased staffing levels and
health insurance costs. The increase in professional, legal and other fees is a
result of
- 41 -
additional services relating to establishment of the Charitable Foundation,
general business counseling and consulting costs, and costs associated with Year
2000 issues and system conversions.
Income Taxes. For fiscal 1998, the Company recognized a $1.9 million income
tax benefit, as compared to a $1.6 million income expense for the year ended
September 30, 1997. The reduction in income tax expense is primarily the result
of the fiscal 1998 pre-tax loss of $2.8 million as compared to the fiscal 1997
pre-tax income of $5.2 million. Also contributing to the change in income tax
expense was an increase in the level of investments in tax exempt securities
from an average investment of $3.2 million during fiscal 1997 to an average
investment of $56.0 million during fiscal 1998, the result of which was a
significant increase in tax exempt income.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability to generate cash flow to meet present
and future financial obligations and commitments. Troy Financial's liquid assets
include cash and cash equivalents, loans held for sale, securities held to
maturity that mature within one year and securities available for sale. At
September 30, 1999, Troy Financial's liquid assets as a percentage of deposits
which have no withdrawal restrictions, time deposits which mature within one
year, short-term borrowings (including repurchase agreements) and long-term debt
maturing within one year was 52%.
Troy Financial's primary sources of funds are deposits, borrowings and
proceeds from the redemption and maturity of federal funds sold and other
short-term securities. Although not a recurring source of funds, the sale of
shares in the initial public offering provided significant funding in fiscal
1999. Troy Financial's primary cash outflows are new loan originations,
purchases of securities, and deposit withdrawals. Management monitors its
liquidity position on a daily basis. Although maturities and scheduled
amortization of loans are a predictable source of funds, deposit outflows,
mortgage prepayments and mortgage loan sales are greatly influenced by changes
in interest rates, economic conditions, and competitors.
Troy Financial attempts to provide stable and flexible sources of funding
through the management of its liabilities, including core deposit products
offered through its branch network, as well as FHLB advances. Management
believes that the level of Troy Financial's liquid assets combined with daily
monitoring of cash inflows and outflows provide adequate liquidity to fund
outstanding loan commitments, meet daily withdrawal requirements of Troy
Financial's depositors, and meet all other daily obligations of Troy Financial.
Consistent with its goals to operate a sound and profitable financial
organization, Troy Financial actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. As of September 30, 1999
and 1998, total equity was $180.4 million and $71.0 million, respectively, or
19.7% and 9.9% of total assets at those respective dates. As of September 30,
1999, Troy Financial exceeded all of the capital requirements of the Federal
Reserve Bank and the Bank exceeded all of the capital requirements of the FDIC.
See note 17 to the consolidated financial statements for further information
regarding regulatory capital requirements. Troy Financial has received approval
to purchase up to 9% of its stock, or 1.1 million shares, as part of a stock
repurchase program to be completed by March 31, 2000.
MANAGEMENT OF INTEREST RATE RISK
Interest rate risk is the most significant market risk affecting Troy
Financial. Other types of market risk, such as movements in foreign currency
exchange rates and commodity prices, do not arise in the normal course of Troy
Financial's business operations. Interest rate risk can be defined as an
exposure to a movement in interest rates that could have an adverse effect on
Troy Financial's net interest income. Interest rate risk arises naturally from
the imbalance in the repricing, maturity and/or cash flow characteristics of
assets and liabilities.
A significant portion of Troy Financial's loans are adjustable or variable
rate which could result in reduced levels of interest income during periods of
falling rates. In addition, in periods of falling interest rates, prepayments of
loans typically increase, which would lead to reduced net interest income if
such proceeds could not be reinvested at a comparable spread. Also in a falling
rate environment, certain categories of deposits may reach a point where market
forces prevent further reduction in the interest rate paid on those instruments.
Generally, during extended
- 42 -
periods when short-term and long-term interest rates are relatively close, a
flat yield curve, net interest margins could become smaller, thereby reducing
net interest income. The net effect of these circumstances is reduced interest
income, offset only by a nominal decrease in interest expense, thereby narrowing
the net interest margin.
The principal objectives of Troy Financial's interest rate risk management
program are to:
(a) measure, monitor, evaluate and develop strategies in response to
the interest rate risk profile inherent in Troy Financial's assets and
liabilities,
(b) determine the appropriate level of risk, given Troy Financial's
business strategy, operating environment, capital and liquidity
requirements, and performance objectives and
(c) manage the risk consistent with Troy Financial's guidelines.
Through such management, Troy Financial seeks to reduce the vulnerability
of its operations to changes in interest rates by matching the maturities of
Troy Financial's assets with those of Troy Financial's liabilities and
off-balance sheet financial instruments.
The responsibility for interest rate risk management oversight is the
function of Troy Financial's Asset/ Liability Management Committee ("ALCO").
Troy Financial's ALCO reviews Troy Financial's asset/liability policies and
interest rate risk position. Troy Financial's ALCO is chaired by Troy
Financial's chief financial officer, and includes Troy Financial's President,
Trust and Investment Officer and other members of Troy Financial's senior
management team. The ALCO meets at least monthly to review consolidated
statement of condition structure, formulate strategy in light of expected
economic conditions and review performance against guidelines established to
control exposure to the various types of inherent risk, and reports Troy
Financial's interest rate risk position to Troy Financial's Board of Directors
on a quarterly basis. Troy Financial's ALCO considers variability of net
interest income under various rate scenarios. The ALCO also evaluates the
overall risk profile and determines actions to maintain and achieve a posture
consistent with policy guidelines. Troy Financial, of course, cannot predict the
future movement of interest rates, and such movement could have an adverse
impact on Troy Financial's consolidated financial condition and results of
operations.
In recent years, Troy Financial has primarily utilized the following
strategies to manage interest rate risk:
(a) emphasizing the origination of adjustable rate loans such as,
adjustable residential loans ( although in the current rate environment
adjustable rate loan originations have slowed) , and to a lesser extent
commercial real estate, commercial business and consumer loans;
(b) selling substantially all of its 30 year fixed rate residential
mortgage loans in the secondary market;
(c) utilizing FHLB advances to better structure the maturities of its
interest rate sensitive liabilities; and
(d) investing in short-term securities which generally bear lower
yields, compared to longer-term investments, but which better position Troy
Financial for increases in interest rates.
In addition, although Troy Financial has generally sold all of its 15- and
30-year conforming fixed rate mortgage loans into the secondary mortgage market,
beginning in late fiscal 1998, Troy Financial determined to hold in its loan
portfolio substantially all of its 15-year fixed rate mortgage loans in order to
increase its interest income. Troy Financial will periodically review the
strategy to hold 15-year loans in portfolio as part of its monitoring of
interest rate risk.
In order to reduce the interest rate risk associated with the portfolio of
conventional mortgage loans held for sale, as well as outstanding loan
commitments and uncommitted loan applications with rate lock agreements which
are intended to be held for sale, Troy Financial enters into agreements to sell
loans in the secondary market to
- 43 -
unrelated investors, and may also enter into option agreements. At September 30,
1999, Troy Financial had mandatory commitments and cancelable options to sell
fixed rate mortgage loans at set prices amounting to approximately $9.0 million.
The primary tool utilized by management to measure interest rate risk is a
balance sheet/income statement simulation model. The model is used to execute
simulations of Troy Financial's net interest income performance based upon
potential changes in interest rates over a select period of time. The model's
input data includes earning assets and interest-bearing liabilities, their
associated cash flow characteristics, repricing opportunities, maturities and
current rates. In addition, management makes certain assumptions in relation to
prepayment speeds for all assets and liabilities which possess optionality,
including loans and mortgage-backed securities. These assumptions are based on
industry standards for prepayments.
The model is first run under an assumption of a flat rate scenario ( i.e.
no change in current interest rates ) over a twelve month period. A second and
third model are run in which a gradual increase and decrease, respectively, of
200 basis points takes place over a twelve month period. Under these scenarios,
assets subject to repricing or prepayment are adjusted to account for faster or
slower prepayment assumptions. The resultant changes in net interest income are
then measured against the flat rate scenario.
The following table summarizes the percentage change in interest income and
interest expense by major earning asset and interest-bearing liability
categories as of September 30, 1999 in the rising and declining rate scenarios
from the forecasted interest income and interest expense amounts in a flat rate
scenario. Under the declining rate scenario, net interest income is expected to
increase from the flat rate scenario by less than 1% over a twelve month period.
Under the rising rate scenario, net interest income is expected to increase from
the flat rate scenario by less than one-half of one percent over a twelve month
period. This level of variability is well within interest rate risk profile
guidelines acceptable to Troy Financial.
Interest rate risk Percentage Change in Net Interest Income From Flat Rate Scenario
Declining Rate Scenario Rising Rate Scenario
Federal funds sold and other short term investments (22.70) 23.55
Investment securities ( held to maturity and
available for sale ) (9.90) 9.43
Loans, net (1.83) 1.65
Total interest income (4.12) 3.87
Core deposits (18.41) 12.12
Time deposits (6.75) 6.74
Total deposits (11.48) 8.92
Borrowings (5.83) 5.82
Total interest expense (9.66) 7.93
Net interest income .91 .19
YEAR 2000 READINESS DISCLOSURE STATEMENT
The "Year 2000" issue is the result of computer programs and equipment that
depend on embedded chip technology and software using two digits rather than
four digits to define the applicable year. For dates on or after January 1,
2000, software and hardware as well as embedded processors may not be able to
recognize or process dates correctly. This could result in system failures or
miscalculations causing disruption of operations, including, among other things,
system or equipment shutdowns, malfunctions or a temporary inability to process
transactions or engage in normal business activities.
- 44 -
Troy Financial began testing certain in-house systems in October 1998, and
performed all necessary testing of critical core banking systems by June 30,
1999. The economic cost of the Year 2000 Project includes not only direct
incremental amounts expended by Troy Financial for upgrading or replacing
software, systems and equipment, but also the use of internal resources devoted
to the Year 2000 Project that would have otherwise been devoted to other
business opportunities. It is difficult to quantify the economic costs of
internal resources so re-directed.
During the fiscal year ended September 30, 1999, Troy Financial expensed
approximately $408,000 on Year 2000-related matters and capitalized
approximately $760,000 for a new branch automation system. During the first
quarter of fiscal 2000, we expect to capitalize approximately $450,000 in
additional costs as we complete the upgrades to the new branch automation
system. The upgrades for the new branch automation system, although not
considered by Troy Financial as mission critical, were accelerated as a result
of the Year 2000 Project. During the quarter ended March 31, 1999, Troy
Financial engaged an independent information technology consultant to provide
verification and validation of Troy Financial's risk and cost estimates, systems
testing and contingency plans. The results of the study showed no significant
exceptions.
Troy Financial's investment subsidiary changed its primary data processing
service provider during the quarter ended June 30, 1999. Troy Financial is
monitoring the Year 2000 readiness of this provider and anticipates that there
will be no significant exceptions.
The potential impact of Year 2000 on Troy Financial's customers, both
borrowers and depositors, has been examined. Troy Financial is aware that if
significant commercial borrowers suffer losses or illiquidity because of their
own Year 2000 problems, including those of others with whom they do business or
on whom they are dependent, Troy Financial may suffer losses from or experience
illiquidity. Troy Financial's standard loan documentation programs were revised
to take into account customers' Year 2000 compliance in evaluating and rating
credit risk. Loan documentation generally includes representations from
borrowers about Year 2000 readiness and provides the right to examine the
borrowers' systems and procedures in order to determine Year 2000 compliance.
The Year 2000 Project has resulted in Troy Financial's core banking
systems' hardware, software, and firmware being tested and certified as Year
2000 compliant so as to ensure continuation of all aspects of its core business
processes. For non-mission critical systems, Troy Financial and its subsidiaries
have developed contingency plans for non-compliant systems. The contingency
plans vary with the affected systems.
Troy Financial has obtained assurances that its primary vendors, key
service providers, and, as noted above, significant credit customers are Year
2000 compliant. Beginning in January 1999, Troy Financial commenced testing and
validating its vendors' confirmations of Year 2000 compliance, except in
situations involving non-mission critical systems and processes or situations
where contingency plans indicate less than one day of interruptions before
replacement, correction or changes are possible. In those situations, Troy
Financial will rely upon vendors' confirmations. Troy Financial is monitoring
the Year 2000 readiness of major vendors which Troy Financial relies upon for
bank operations. Troy Financial intends to pursue legal action against vendors
in situations where it finds that such vendors' representations concerning Year
2000 compliance are found to be false. Troy Financial is not aware of any
limitation that would preclude such actions. Contingency plans and alternative
arrangements have been made, or will be made in advance, wherever possible.
Failure of Troy Financial's mission critical systems could impair the
ability of Troy Financial to do business and service its customers; failure of
large or numerous borrowers to repay their loans could impair Troy Financial's
capital; failure of utilities and the public infrastructure could adversely
affect Troy Financial's operations. Despite Troy Financial's efforts with
respect to Year 2000 readiness, including its Year 2000 Project, there can be no
assurance that partial or total systems interruptions or business interruptions
or the associated costs would not have an adverse effect upon Troy Financial's
business, consolidated financial condition, results of operations and business
prospects.
IMPACT ON INFLATION AND CHANGING PRICES
Troy Financial's consolidated financial statements are prepared in
accordance with generally accepted accounting principles which require the
measurement of financial condition and operating results in terms of
- 45 -
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increasing cost of Troy Financial's operations. Unlike those of most
industrial companies, Troy Financial's assets and liabilities are nearly all
monetary. As a result, interest rates have a greater impact on Troy Financial's
performance than do the effects of general levels of inflation. In addition,
interest rates do not necessarily move in the direction, or to the same extent,
as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In November 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock Based Compensation" ("SFAS No. 123"). This statement establishes financial
accounting standards for stock-based employee compensation plans. SFAS No. 123
permits Troy Financial to choose either a new fair value based method or the
Accounting Principles Board ("APB") Opinion 25 intrinsic value based method of
accounting for its stock-based compensation arrangements. SFAS No. 123 requires
pro forma disclosures of net income and earnings per share computed as if the
fair value based method had been applied in financial statements of companies
that follow accounting for such arrangements under APB Opinion 25. SFAS No. 123
applies to all stock-based employee compensation plans in which an employer
grants shares of its stock or other equity instruments to employees except for
employee stock ownership plans. SFAS No. 123 also applies to plans in which the
employer incurs liabilities to employees in amounts based on the price of the
employer's stock (e.g., stock option plans, stock purchase plans, restricted
stock plans and stock appreciation rights). This statement also specifies the
accounting for transactions in which a company issues stock options or other
equity for services provided by nonemployees or to acquire goods or services
from outside suppliers or vendors. Troy Financial will utilize the intrinsic
value based method prescribed by APB Opinion No. 25 to account for its
stock-based compensation plans. Accordingly, the impact of adopting this
statement will not be material to Troy Financial's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. As amended
by SFAS No. 137, this statement is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. Troy Financial is currently evaluating the
impact of this statement on its consolidated financial statements.
FORWARD-LOOKING STATEMENTS
When used in this annual report or other filings by Troy Financial with the
Securities and Exchange Commission, in Troy Financial's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the adequacy
of the allowance for loan losses or an analysis of the interest rate sensitivity
of Troy Financial's assets and liabilities, are inherently based upon
predictions of future events and circumstances. Furthermore, from time to time,
Troy Financial may publish other forward-looking statements relating to such
matters as anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements. In order to comply with the terms of the safe
harbor, Troy Financial notes that a variety of factors could cause Troy
Financial's actual results and experience to differ materially from the
anticipated results or other expectations expressed in Troy Financial's
forward-looking statements. Some of the risks and uncertainties that may affect
the operations, performance, development and results of Troy Financial's
business, the interest rate sensitivity of its assets and liabilities, and the
adequacy of its allowance for loan losses, include but are not limited to the
following:
o deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase
in loan delinquencies, a decrease in property values, or a change
in the housing turnover rate;
- 46 -
o the effect of certain customers and vendors of critical systems
or services failing to adequately address issues relating
becoming Year 2000 compliant;
o changes in market interest rates or changes in the speed at which
market interest rates change;
o changes in laws and regulations affecting the financial service
industry;
o changes in competition; and
o changes in consumer preferences.
Troy Financial wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect Troy
Financial's financial performance and could cause Troy Financial's actual
results or circumstances for future periods to differ materially from those
anticipated or projected.
Troy Financial does not undertake, and specifically disclaims any
obligation, to publicly release any revisions to any forward-looking statements
to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The information required herein is incorporated by reference from the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in Item 7 above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
TROY FINANCIAL CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report.........................................................................
Consolidated Statements of Condition at September 30, 1999 and 1998..................................
Consolidated Statements of Income for the Years Ended September 30, 1999, 1998 and 1999..............
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
September 30, 1999, 1998 and 1997....................................................................
Consolidated Statements of Cash Flows for the Years Ended September 30,
1999, 1998 and 1997..................................................................................
Notes to Consolidated Financial Statements...........................................................
- 47 -
INDEPENDENT AUDITORS' REPORT
The Shareholders and the Board of Directors
Troy Financial Corporation:
We have audited the accompanying consolidated statements of condition of Troy
Financial Corporation and subsidiary (the "Company") as of September 30, 1999
and 1998, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Troy Financial
Corporation and subsidiary as of September 30, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Albany, New York
November 5, 1999
- 48 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Condition
September 30, 1999 and 1998
(In thousands, except share and per share data)
ASSETS 1999 1998
Cash and due from banks $ 35,885 12,330
Federal funds sold 50 5,585
Cash and cash equivalents 35,935 17,915
Loans held for sale 4,064 11,096
Securities available for sale, at fair value 280,871 197,758
Investment securities held to maturity (fair value of $2,582 and
$3,621 at September 30, 1999 and 1998, respectively) 2,534 3,483
Net loans receivable 556,142 457,321
Accrued interest receivable 5,270 4,287
Other real estate owned 1,845 1,872
Premises and equipment, net 15,049 14,096
Other assets 13,386 8,821
Total assets $ 915,096 716,649
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Savings accounts 191,968 198,509
Money market accounts 20,348 15,708
N.O.W. and demand accounts 123,345 107,311
Time accounts 227,712 256,674
Total deposits 563,373 578,202
Mortgagors' escrow accounts 1,596 1,900
Securities sold under agreements to repurchase 3,736 2,524
Short-term borrowings 100,700 --
Long-term debt 44,497 44,940
Accrued interest payable 487 360
Official bank checks 9,651 8,841
Contributions payable 2,664 3,453
Other liabilities and accrued expenses 7,953 5,400
Total liabilities 734,657 645,620
Commitments and contingent liabilities (note 15)
Shareholders' equity:
Preferred stock, $0.0001 par value, authorized 15,000,000 shares; none
issued -- --
Common stock, $0.0001 par value, authorized 60,000,000 shares;
12,139,021 shares issued at September 30, 1999 1 --
Additional paid-in capital 117,759 --
Unallocated common stock held by ESOP (9,620) --
Retained earnings, substantially restricted 72,699 70,622
Accumulated other comprehensive (loss) income (400) 407
Total shareholders' equity 180,439 71,029
Total liabilities and shareholders' equity $ 915,096 716,649
See accompanying notes to consolidated financial statements.
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TROY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Years ended September 30, 1999, 1998 and 1997
(In thousands, except per share data)
1999 1998 1997
Interest and dividend income:
Interest and fees on loans $ 39,794 38,842 39,050
Securities available for sale:
Taxable 7,108 4,121 7,262
Tax exempt 2,307 2,214 119
9,415 6,335 7,381
Investment securities held to maturity 222 300 353
Federal funds sold 2,371 2,553 1,503
Total interest and dividend income 51,802 48,030 48,287
Interest expense:
Deposits and escrow accounts 20,470 23,339 22,812
Short-term borrowings 735 33 271
Long-term debt 2,577 821 268
Total interest expense 23,782 24,193 23,351
Net interest income 28,020 23,837 24,936
Provision for loan losses 3,250 4,050 3,900
Net interest income after provision for loan losses 24,770 19,787 21,036
Non-interest income:
Service charges on deposits 892 858 822
Loan servicing fees 523 432 460
Trust service fees 665 459 362
Net gains from securities transactions 17 8 4
Net gains from mortgage loan sales 245 76 14
Other income 705 719 1,075
Total non-interest income 3,047 2,552 2,737
Non-interest expense:
Compensation and employee benefits 10,839 10,218 9,573
Occupancy 2,094 2,101 2,089
Furniture, fixtures and equipment 728 1,080 901
Computer charges 1,508 1,424 1,322
Professional, legal and other fees 1,362 924 726
Printing, postage and telephone 707 614 559
Other real estate owned 781 1,087 380
Contributions 4,706 4,759 102
Other 3,100 2,884 2,887
Total non-interest expense 25,825 25,091 18,539
Income (loss) before income tax expense (benefit) 1,992 (2,752) 5,234
Income tax (benefit) expense (85) (1,874) 1,576
Net income (loss) $ 2,077 (878) 3,658
Basic earnings per share $ 0.32
See accompanying notes to consolidated financial statements.
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TROY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Changes in Shareholders' Equity
Years ended September 30, 1999, 1998 and 1997
(In thousands, except share and per share data)
1999 1998 1997
COMMON STOCK
Balance at beginning of year $ -- -- --
Issuance of 11,730,575 shares of $0.0001 par
value common stock in initial public offering 1 -- --
Issuance of 408,446 shares of $0.0001 par value
common stock to The Troy Savings Bank
Community Foundation -- -- --
Balance at end of year 1 -- --
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year -- -- --
Issuance of 11,730,575 shares of common stock
in initial public offering, net of offering costs
of $3,630 113,675 -- --
Issuance of 408,446 shares of common stock to
The Troy Savings Bank Community Foundation 4,084 -- --
Balance at end of year 117,759 -- --
UNALLOCATED COMMON STOCK HELD BY ESOP
Balance at beginning of year -- -- --
Acquisition of 971,122 shares of common stock
by ESOP (9,620) -- --
Balance at end of year (9,620) -- --
RETAINED EARNINGS
Balance at beginning of year 70,622 71,500 67,842
Net income (loss) 2,077 $ 2,077 (878) $ (878) 3,658 $ 3,658
Balance at end of year 72,699 70,622 71,500
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance at beginning of year 407 42 (434)
Unrealized net holding gains (losses) on securities
available for sale arising during the year (pre-tax
of ($1,346), $619 and $797, respectively) (802) 370 478
Reclassification adjustment for net gains on securities
available for sale realized in net income (loss)
(pre-tax of $9, $8 and $4, respectively) (5) (5) (2)
Other comprehensive (loss) income (807) (807) 365 365 476 476
Comprehensive income (loss) $ 1,270 $ (513) $ 4,134
Balance at end of year (400) 407 42
Total shareholders' equity at September 30 $ 180,439 $ 71,029 $ 71,542
See accompanying notes to consolidated financial statements.
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TROY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
Increase (decrease) in cash and cash equivalents:
Net cash flows from operating activities:
Net income (loss) $ 2,077 (878) 3,658
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 1,317 1,615 1,426
Provision for loan losses 3,250 4,050 3,900
Non-cash contribution expense 4,524 3,453 --
Net (accretion) amortization of
(discount) premium on securities (3,255) 65 85
Deferred tax benefit (2,924) (3,027) (1,442)
Net gains from securities transactions (17) (8) (4)
Net gains from mortgage loan sales (245) (76) (14)
Net gain on sales of premises and equipment (102) -- --
Net loss on sales of other real estate owned 11 106 12
Writedowns of other real estate owned 556 326 --
Proceeds from sales of loans held for sale 46,669 44,496 13,443
Net loans made to customers and held for sale (39,392) (51,813) (15,660)
(Increase) decrease in accrued interest
receivable (983) 47 439
(Increase) decrease in other assets (1,102) (215) 93
Increase (decrease) in accrued interest payable 127 300 (59)
Increase (decrease) in official bank checks,
contributions payable, and other liabilities
and accrued expenses 2,363 2,436 (2,015)
Net cash provided by operating activities 12,874 877 3,862
Cash flows from investing activities:
Proceeds from sales of securities available for sale 44,136 54,782 --
Proceeds from maturities and redemptions of securities
available for sale 653,858 110,223 78,199
Purchases of securities available for sale (779,186) (244,657) (46,125)
Proceeds from maturities and redemptions of
investment securities held to maturity 954 517 519
Proceeds from sales of other real estate owned 730 963 2,629
Net loans (made to) repaid by customers (103,341) 6,212 (22,701)
Purchases of premises and equipment (2,810) (1,977) (930)
Proceeds from sales of premises and equipment 413 -- --
Net cash (used in) provided by
investing activities (185,246) (73,937) 11,591
(Continued)
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TROY FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended September 30, 1999, 1998 and 1997
(In thousands)
1999 1998 1997
Cash flows from financing activities:
Net (decrease) increase in deposits $ (14,829) 5,805 7,790
Net decrease in mortgagors' escrow accounts (304) (16) (473)
Net increase in securities sold under agreements
to repurchase 1,212 2,152 222
Net increase (decrease) in short-term borrowings 100,700 -- (5,000)
Proceeds from issuance of long-term debt -- 41,000 --
Payments on long-term debt (443) (417) (393)
Net proceeds from stock offering 113,676 -- --
Acquisition of common stock by ESOP (9,620) -- --
Net cash provided by financing activities 190,392 48,524 2,146
Net increase (decrease) in cash and cash equivalents 18,020 (24,536) 17,599
Cash and cash equivalents at beginning of year 17,915 42,451 24,852
Cash and cash equivalents at end of year $ 35,935 17,915 42,451
Supplemental information:
Cash paid for:
Interest on deposits and borrowings $ 23,655 23,893 23,410
Income taxes $ 1,181 1,569 3,826
Supplemental schedule of non-cash investing and financing activities:
Net reduction in loans resulting from the transfer
to other real estate owned $ 1,270 577 2,462
Adjustment of securities available for sale to fair value,
net of tax $ (807) 365 476
See accompanying notes to consolidated financial statements.
- 53 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Troy Financial Corporation (the
"Parent Company") and its subsidiary (referred to together as the
"Company") conform to generally accepted accounting principles and
reporting practices followed by the banking industry. The more significant
policies are described below.
(A) ORGANIZATION
The Company is a bank-based financial services company. The Parent
Company's subsidiary, The Troy Savings Bank ("the Bank"), provides a
wide range of banking, financing, fiduciary and other financial
services to corporate, individual and institutional customers through
its branch offices and subsidiary companies. The Bank is regulated by
the Federal Deposit Insurance Corporation ("FDIC") and the New York
State Banking Department.
The Bank completed its conversion from a mutual savings bank to a
stock savings bank on March 31, 1999. Concurrent with the Bank's
conversion, the Parent Company completed its initial public offering
of common stock and used 50% of the net proceeds to purchase all of
the common stock of the Bank issued in the conversion. Prior to its
initial public offering, the Parent Company had no significant results
of operations; therefore, financial information prior to March 31,
1999 reflects the operations of the Bank.
(B) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Parent Company and the Bank. All material intercompany accounts and
transactions have been eliminated. The Company utilizes the accrual
method of accounting for financial reporting purposes. Amounts in the
prior years' consolidated financial statements have been reclassified
whenever necessary to conform with the current year's presentation.
(C) USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
- 54 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance
for loan losses and the valuation of other real estate owned acquired
in connection with foreclosures. In connection with the determination
of the allowance for loan losses and the valuation of other real
estate owned, management obtains appraisals for properties.
Management believes that the allowance for loan losses is adequate and
that other real estate owned is recorded at its fair value less an
estimate of the costs to sell the properties. While management uses
available information to recognize losses on loans and other real
estate owned, future additions to the allowance for loan losses or
writedowns of other real estate owned may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and other
real estate owned. Such agencies may require the Company to recognize
additions to the allowance for loan losses or writedowns of other real
estate owned based on their judgments about information available to
them at the time of their examination which may not be currently
available to management.
A substantial portion of the Company's loans are secured by real
estate located throughout the six New York State counties of Albany,
Rensselaer, Saratoga, Schenectady, Warren and Washington. In addition,
a substantial portion of the other real estate owned is located in
those same markets. Accordingly, the ultimate collectibility of a
substantial portion of the Company's loan portfolio and the recovery
of a substantial portion of the carrying amount of other real estate
owned is dependent upon general economic and real estate market
conditions in these counties.
(D) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and
cash equivalents consists of cash on hand, due from banks and federal
funds sold.
(E) LOANS HELD FOR SALE
Loans held for sale are recorded at the lower of cost or fair value,
determined on an aggregate basis. It is the intention of management to
sell these loans in the near future. Gains and losses on the
disposition of loans held for sale are determined on the specific
identification method.
Loans held for sale, as well as commitments to originate fixed rate
mortgage loans at a set interest rate, which will subsequently be sold
in the secondary mortgage market, are regularly evaluated and, if
necessary, a valuation allowance is recorded for unrealized losses
attributable to changes in market interest rates.
- 55 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(F) MORTGAGE SERVICING RIGHTS
The Company accounts for mortgage servicing rights applicable to
mortgage loans sold on or after January 1, 1997 in accordance with
Statement of Financial Accounting Standards (SFAS) No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS No. 125 requires entities to
recognize as separate assets the rights to service mortgage loans for
others, regardless of how those servicing rights were acquired.
Mortgage servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income. Additionally, capitalized
mortgage servicing rights are assessed for impairment based on the
fair value of those rights, and any impairment is recognized through a
valuation allowance by a charge to income.
(G) SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES HELD TO
MATURITY
Management determines the appropriate classification of securities at
the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity, they are classified as
investment securities held to maturity and are carried at amortized
cost. Securities 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, in accumulated other comprehensive
income or loss (a separate component of shareholders' equity). At
September 30, 1999 and 1998, the Company did not hold any securities
considered to be trading securities. As a member of the Federal Home
Loan Bank of New York (FHLB), the Bank is required to hold FHLB stock,
which is carried at cost since there is no readily available market
value.
Unrealized losses on securities which reflect a decline in value which
is other than temporary, if any, are charged to income. Gains or
losses on disposition of securities are based on the net proceeds and
the amortized cost of the securities sold, using the specific
identification method. The amortized cost of securities is adjusted
for amortization of premium and accretion of discount, which is
calculated on an effective interest method.
(H) NET LOANS RECEIVABLE
Loans receivable are reported at the principal amount outstanding, net
of unearned discount, net deferred loan fees and costs, and the
allowance for loan losses. Unearned discounts and net loan fees and
costs are accreted to income using an effective interest method.
- 56 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Loans considered doubtful of collection by management are placed on a
non-accrual status for the recording of interest. Generally, loans
past due 90 days or more as to principal or interest are placed on
non-accrual status except for (1) those loans which, in management's
judgment, are adequately secured and in the process of collection and
(2) certain consumer and open-end credit loans which are usually
charged-off when they become 120 days past due. When a loan is placed
on non-accrual status, all previously accrued income that has not been
collected is reversed from current year interest income. Subsequent
cash receipts are generally applied to reduce the unpaid principal
balance, however, interest on loans can also be recognized as cash is
received. Amortization of the related unearned discount and net
deferred loan fees and costs is suspended when a loan is placed on
non-accrual status. 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.
(I) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased through a provision for
loan losses charged to operations. 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. Management's evaluation of
the adequacy of the allowance for loan losses is performed on a
periodic basis and takes into consideration such factors as the
historical loan loss experience, changes in the nature and volume of
the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect
borrowers' ability to pay.
A loan is considered impaired when it is probable that the borrower
will not repay the loan according to the original contractual terms of
the loan agreement, or when a loan (of any loan type) is restructured
in a troubled debt restructuring subsequent to October 1, 1995. The
allowance for loan losses related to impaired loans is based on
discounted cash flows using the loan's initial effective interest rate
or the fair value of the collateral for certain loans where repayment
of the loan is expected to be provided solely by the underlying
collateral (collateral dependent loans). The Company's impaired loans
are generally commercial-type loans which are collateral dependent.
- 57 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(J) OTHER REAL ESTATE OWNED
Other real estate owned, representing properties acquired in
settlement of loans, is recorded on an individual asset basis at the
lower of cost (defined as the fair value at foreclosure or
repossession) or the fair value of the asset acquired less an estimate
of the costs to sell the property. At the time of foreclosure, the
excess, if any, of the recorded investment in the loan over the fair
value of the property received is charged to the allowance for loan
losses. Subsequent declines in the value of such property and net
operating expenses of such properties are charged directly to
non-interest expenses. Properties are regularly reappraised and
written down to the fair value less the estimated cost to sell the
property, if necessary.
The recognition of gains and losses from the sale of other real estate
owned is dependent on a number of factors relating to the nature of
the property sold, terms of the sale, and the future involvement of
the Company in the property sold. If a real estate transaction does
not meet certain down payment and loan amortization requirements,
income recognition is deferred and recognized under an alternative
method.
(K) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated
depreciation and amortization. Depreciation is computed on the
straight-line method over the estimated useful lives of the assets.
Leasehold improvements are amortized over the shorter of the terms of
the related leases or the useful lives of the assets.
(L) INCOME TAXES
The Bank accounts for income taxes in accordance with the asset and
liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases, and for unused tax
carryforwards. Deferred tax assets are recognized subject to
management's judgment that those assets will more likely than not be
realized. A valuation allowance is recognized if, based on an analysis
of available evidence, management believes that all or a portion of
the deferred tax assets will not be realized. Adjustments to increase
or decrease the valuation allowance are charged or credited,
respectively, to income tax expense. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which the temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
- 58 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(M) FINANCIAL INSTRUMENTS
In the normal course of business, the Company is a party to certain
financial instruments with off-balance-sheet risk such as commitments
to extend credit, unused lines of credit and standby letters of
credit. The Company's policy is to record such instruments when
funded.
(N) OFFICIAL BANK CHECKS
The Company's official checks (including tellers' checks, loan
disbursement checks, interest checks, expense checks, money orders and
payroll checks) are drawn on deposit accounts at the Company and are
ultimately paid through the Company's Federal Reserve Bank
correspondent account.
(O) TRUST ASSETS AND SERVICE FEES
Assets held by the Company in a fiduciary or agency capacity for its
customers are not included in the consolidated statements of condition
since these assets are not assets of the Company. Trust service fees
are reported on the accrual basis.
(P) EMPLOYEE BENEFIT COSTS
The Company maintains a non-contributory pension plan covering
substantially all employees, as well as a supplemental retirement and
benefit restoration plan covering certain executive officers selected
by the Board of Directors. The costs of these plans, based on
actuarial computations of current and future benefits for employees,
are charged to current operating expenses. The Company also provides
certain post-retirement medical, dental and life insurance benefits to
substantially all employees and retirees. The cost of post-retirement
benefits other than pensions is recognized on an accrual basis as
employees perform services to earn the benefits.
Compensation expense is recognized for the Company's Employee Stock
Ownership Plan ("ESOP") equal to the average fair value of shares
committed to be released for allocation to participant accounts. Any
difference between the average fair value of the shares committed to
be released for allocation and the ESOP's original acquisition cost is
charged or credited to shareholders' equity (additional paid-in
capital). The cost of unallocated ESOP shares (shares not yet released
for allocation) is reflected as a reduction of shareholders' equity.
- 59 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(Q) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the
period. Diluted earnings per share is computed in a manner similar to
that of basic earnings per share except that the weighted-average
number of common shares outstanding is increased to include the number
of additional common shares that would have been outstanding if all
potentially dilutive common shares (such as stock options and unvested
restricted stock) were issued during the reporting period. The Company
did not have any potentially dilutive common shares outstanding as of
or for the year ended September 30, 1999. Unallocated common shares
held by the ESOP are not included in the weighted-average number of
common shares outstanding for either the basic or diluted earnings per
share calculations.
(R) COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and items of
"other comprehensive income," which are reported directly in
shareholders' equity, net of tax, such as the change in the net
unrealized gain or loss on securities available for sale. The Company
has reported comprehensive income and its components in the
consolidated statements of changes in shareholders' equity.
Accumulated other comprehensive income or loss, which is a component
of shareholders' equity, represents the net unrealized gain or loss on
securities available for sale, net of tax.
(S) SEGMENT REPORTING
During the year ended September 30, 1999, the Company adopted SFAS No.
131, "Disclosures about Segments of an Enterprise and Related
Information." This Statement requires public companies to report
certain financial and other information about significant
revenue-producing segments of the business for which such information
is available and is utilized by the chief operating decision maker, if
the segment meets certain quantitative requirements as defined by SFAS
No. 131. The Company's operations are solely in the financial services
industry and include providing to its customers traditional banking
services. The Company operates primarily in the geographical regions
of Rensselaer, Albany, Schenectady, Saratoga, Washington and Warren
counties of New York. Management makes operating decisions and
assesses performance based on an ongoing review of its traditional
banking operations, which constitute the Company's only reportable
segment under SFAS No. 131.
- 60 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(2) LOANS HELD FOR SALE AND MORTGAGE SERVICING RIGHTS
At September 30, 1999 and 1998, loans held for sale consisted of
conventional residential mortgages originated for subsequent sale. At
September 30, 1999 and 1998, there was no valuation reserve necessary for
loans held for sale.
The company retains the servicing rights on certain mortgage loans sold. At
September 30, 1999 and 1998, the unamortized balance of mortgage servicing
rights on loans sold with servicing retained was approximately $774
thousand and $318 thousand, respectively. The estimated fair value of these
mortgage servicing rights was in excess of their carrying value at both
September 30, 1999 and 1998, and therefore no impairment reserve was
necessary.
(3) SECURITIES AVAILABLE FOR SALE
The amortized cost and approximate fair value of securities available for
sale at September 30 are as follows:
1999
-------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands)
U.S. Government securities and
agencies obligations $ 172,544 3 (555) 171,992
Obligations of states and
political subdivisions 73,126 221 (85) 73,262
Mortgage-backed securities 17,344 28 (240) 17,132
Corporate debt securities 5,651 27 (17) 5,661
---------- ------ -------- ----------
Total debt securities
available for sale 268,665 279 (897) 268,047
Mutual funds and marketable equity
securities 5,534 100 (148) 5,486
Non-marketable equity securities 7,338 - - 7,338
---------- ------ ------- ----------
Total securities available
for sale $ 281,537 379 (1,045) 280,871
========== ====== ======= ==========
- 61 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
1998
------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands)
U.S. Government securities and
agencies obligations $ 117,174 46 - 117,220
Obligations of states and
political subdivisions 51,324 357 - 51,681
Mortgage-backed securities 3,616 128 - 3,744
Corporate debt securities 16,826 160 (2) 16,984
---------- ------ ------ ----------
Total debt securities
available for sale 188,940 691 (2) 189,629
Mutual funds and marketable equity
securities 4,831 74 (83) 4,822
Non-marketable equity securities 3,307 - - 3,307
---------- ------ ------ ----------
Total securities available
for sale $ 197,078 765 (85) 197,758
========== ====== ====== ==========
During 1999, proceeds from sales of securities available for sale totaled
$44.1 million, with gross gains of $9 thousand. During 1998, proceeds from
sales of securities available for sale totaled $54.8 million, with gross
gains of $9 thousand and gross losses of $1 thousand. During 1997, there
were no sales of securities available for sale.
As of September 30, 1999, the contractual maturity of debt securities
available for sale (mortgage-backed securities are shown separately) at
amortized cost and approximate fair value is as follows:
APPROXIMATE
AMORTIZED FAIR
MATURITY RANGES COST VALUE
--------------- ---- -----
(In thousands)
Within one year $ 174,547 174,542
After one year to five years 59,567 59,273
After five years to ten years 16,416 16,322
Over ten years 791 778
Mortgage-backed securities 17,344 17,132
-------------------- --------------------
$ 268,665 268,047
==================== ====================
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
- 62 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Mortgage-backed securities available for sale consist entirely of direct
pass-through Freddie Mac and Ginnie Mae securities.
Other than U.S. government sponsored enterprise securities (securities
issued by Freddie Mac or Fannie Mae) at September 30, 1999, and U.S.
Treasury securities at September 30, 1998, there were no securities of a
single issuer that exceeded 10% of shareholders' equity at each
respective date.
(4) INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and approximate fair value of investment securities held
to maturity as of September 30 are as follows:
1999
------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands)
Mortgage-backed securities $ 1,535 62 (5) 1,592
Corporate and other debt securities 999 5 (14) 990
-------- ------ ------- --------
Total investment securities $ 2,534 67 (19) 2,582
======== ====== ======= ========
1998
------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---- ----- ------ -----
(In thousands)
Mortgage-backed securities $ 1,980 118 - 2,098
Corporate and other debt securities 1,503 20 - 1,523
-------- ------ ------- --------
Total investment securities $ 3,483 138 - 3,621
======== ====== ======= ========
The amortized cost and approximate fair value of investment securities held
to maturity at September 30, 1999, by contractual maturity (mortgage-backed
securities are shown separately), are as follows:
AMORTIZED APPROXIMATE
MATURITY RANGES COST FAIR VALUE
--------------- ---- ----------
(In thousands)
Over ten years $ 999 990
Mortgage-backed securities 1,535 1,592
-------------------- --------------------
Total $ 2,534 2,582
==================== ====================
- 63 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Mortgage-backed securities held to maturity consist entirely of direct
pass-through Ginnie Mae securities.
(5) Net Loans Receivable
A summary of net loans receivable at September 30 is as follows:
1999 1998
-------------------- --------------------
(In thousands)
Loans secured by real estate:
Residential $ 221,721 202,511
Commercial 216,700 166,186
Construction 13,761 10,052
-------------------- --------------------
Total real estate loans 452,182 378,749
-------------------- --------------------
Commercial business loans 66,274 45,156
-------------------- --------------------
Home equity lines of credit 6,776 8,575
Other consumer loans 42,081 33,445
-------------------- --------------------
Total consumer loans 48,857 42,020
-------------------- --------------------
Total gross loans 567,313 465,925
Less: Unearned discount and net deferred fees and costs (407) (344)
Allowance for loan losses (10,764) (8,260)
-------------------- --------------------
Net loans receivable $ 556,142 457,321
==================== ====================
Non-performing loans at September 30 are as follows:
1999 1998 1997
-------------------- -------------------- --------------------
(In thousands)
Non-accrual loans $ 7,267 9,567 6,459
Restructured loans 616 2,081 2,256
-------------------- -------------------- --------------------
Total $ 7,883 11,648 8,715
==================== ==================== ====================
- 64 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
All restructured loans were performing according to their modified terms at
September 30, 1999, 1998 and 1997.
Had the above non-accrual loans been on accrual status, or had the interest
rate not been reduced with respect to the loans restructured in trouble
debt restructurings, the additional interest that would have been earned
was approximately $326 thousand, $180 thousand and $429 thousand for 1999,
1998 and 1997, respectively. There are no commitments to extend further
credit on the restructured loans.
Changes in the allowance for loan losses for the years ended September 30
were as follows:
1999 1998 1997
-------------------- -------------------- --------------------
(In thousands)
Balance at beginning of year $ 8,260 6,429 4,304
Provision charged to operations 3,250 4,050 3,900
Loans charged-off (995) (2,446) (1,890)
Recoveries on loans charged-off 249 227 115
-------------------- -------------------- --------------------
Balance at end of year $ 10,764 8,260 6,429
==================== ==================== ====================
At September 30, 1999 and 1998, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 totaled $4.9 million and $8.4
million, respectively, for which the related allowance for loan losses was
$373 thousand and $1.2 million, respectively. As of September 30, 1999 and
1998, there were no impaired loans which did not have an allowance for loan
loss. The average recorded investment in impaired loans for the years ended
September 30, 1999, 1998 and 1997 was $6.0 million, $5.9 million and $7.0
million, respectively. The total interest income recognized on impaired
loans during the period of impairment was approximately $200 thousand, $0
thousand and $99 thousand for 1999, 1998 and 1997, respectively. The
interest income recognized on impaired loans during the period of
impairment using the cash basis of income recognition was approximately
$137 thousand, $0 thousand and $98 thousand for 1999, 1998 and 1997,
respectively.
Certain executive officers of the Company were customers of and had other
transactions with the Company in the ordinary course of business. Loans to
these parties were made in the ordinary course of business at the Company's
normal credit terms, including interest rate and collateralization. The
aggregate of such loans totaled less than 5% of total shareholders' equity
at September 30, 1999 and 1998.
- 65 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at September 30:
1999 1998
-------------------- --------------------
(In thousands)
Loans $ 3,084 2,770
Securities available for sale 2,169 1,494
Investment securities held to maturity 17 23
-------------------- --------------------
$ 5,270 4,287
==================== ====================
(7) OTHER REAL ESTATE OWNED
Other real estate owned at September 30 consists of the following:
1999 1998
-------------------- --------------------
(In thousands)
Commercial properties $ 1,769 1,527
Residential properties (1-4 family) 76 345
-------------------- --------------------
$ 1,845 1,872
==================== ====================
(8) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at September 30 is as follows:
1999 1998
-------------------- --------------------
(In thousands)
Land $1,633 1,423
Buildings 12,260 12,621
Furniture, fixtures and equipment 8,474 8,002
Leasehold improvements 3,457 3,450
Construction in progress 2,400 1,225
-------------------- --------------------
28,224 26,721
Less accumulated depreciation and amortization (13,175) (12,625)
-------------------- --------------------
Premises and equipment, net $ 15,049 14,096
==================== ====================
Depreciation and amortization expense was approximately $1.3 million, $1.6
million and $1.4 million for the years ended September 30, 1999, 1998 and
1997, respectively.
- 66 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(9) DEPOSITS
A summary of deposits at September 30 is as follows:
1999 1998
-------------------- --------------------
(In thousands)
Savings accounts (2.75% to 5.50%) $ 191,968 198,509
Time deposits:
2.00% to 3.99% 6,209 682
4.00% to 4.99% 160,315 10,174
5.00% to 5.99% 53,587 236,312
6.00% to 6.99% 4,833 6,679
7.00% to 7.99% 2,768 2,698
8.00% to 9.99% - 129
-------------------- --------------------
Total time deposits 227,712 256,674
-------------------- --------------------
Money market accounts (2.00% to 3.00%) 20,348 15,708
N.O.W. and Super N.O.W. accounts (2.00% to 2.35%) 86,305 76,195
Demand deposit accounts (non-interest bearing) 37,040 31,116
-------------------- --------------------
Total transaction accounts 143,693 123,019
-------------------- --------------------
Total deposits $ 563,373 578,202
==================== ====================
The contractual maturities of time deposits for the years subsequent to
September 30, 1999 are as follows:
Years ending September 30,
(In thousands)
--------------
2000 $ 177,177
2001 34,961
2002 8,035
2003 4,794
2004 2,745
--------------------
$ 227,712
====================
- 67 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Interest expense on deposits and escrow accounts for the years ended
September 30 consisted of the following:
1999 1998 1997
-------------------- -------------------- --------------------
(In thousands)
Time accounts $ 12,514 14,701 14,087
Savings accounts 5,581 6,451 6,647
Money market accounts 555 431 433
N.O.W. and Super N.O.W. accounts 1,758 1,696 1,590
Escrow accounts 62 60 55
-------------------- -------------------- --------------------
$ 20,470 23,339 22,812
==================== ==================== ====================
Individual time deposits in excess of $100 thousand totaled approximately
$24.5 million and $33.4 million at September 30, 1999 and 1998,
respectively.
(10) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM BORROWINGS
A summary of securities sold under agreements to repurchase and short-term
borrowings as of September 30 and for the years then ended is presented
below:
1999 1998 1997
------------ ----------- -----------
(Dollars in thousands)
Securities Sold Under Agreements to
Repurchase:
Balance at September 30 $ 3,736 2,524 372
Maximum month-end balance 4,745 2,544 2,352
Average balance during the year 3,286 1,222 704
Average rate during the year 3.10% 2.70% 4.12%
Weighted-average rate at September 30 3.00% 3.45% 5.10%
Short-Term Borrowings with the FHLB:
Balance at September 30 $ 100,700 - -
Maximum month-end balance 100,700 - 10,000
Average balance during the year 12,581 - 4,403
Average rate during the year 5.04% - 5.50%
Weighted-average rate at September 30 5.34% - -
Average aggregate borrowing rate during the year 4.64% 2.70% 5.30%
- 68 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Securities sold under agreements to repurchase generally mature within
ninety days. The Company maintains control over the securities underlying
the agreements. Short-term borrowings represent borrowings with original
maturities of one year or less.
The Company has established overnight and term lines of credit with the
FHLB. If advanced, such lines of credit will be collateralized by
qualifying loans, securities and FHLB stock. Total availability under these
lines was approximately $84.6 million and $67.1 million at September 30,
1999 and 1998, respectively. Participation in the FHLB program requires an
investment in FHLB stock. The recorded investment in FHLB stock, included
in securities available for sale on the consolidated statements of
condition, amounted to $7.3 million and $3.3 million at September 30, 1999
and 1998, respectively.
(11) LONG-TERM DEBT
At September 30, 1999, long-term debt included a $3.5 million, 5.89% fixed
rate amortizing loan and other long-term borrowings of $41.0 million with a
weighted-average interest rate of 5.81%. All long-term debt is with the
FHLB. The following table sets forth maturities of the long-term debt as of
September 30, 1999:
Years ending September 30,
(In thousands)
--------------
2000 $ 470
2001 3,027
2002 -
2003 10,000
2004 -
2005 and thereafter 31,000
--------------------
$ 44,497
====================
Collateral for the long-term debt at September 30, 1999 includes a blanket
lien on general assets of the Company and approximately $20.3 million of
pledged securities.
(12) INCOME TAXES
The components of income tax (benefit) expense for the years ended
September 30 are as follows:
1999 1998 1997
-------------------- -------------------- --------------------
(In thousands)
Current tax expense:
Federal $ 2,319 850 2,694
State 520 303 324
Deferred tax benefit (2,924) (3,027) (1,442)
-------------------- -------------------- --------------------
Income tax (benefit) expense $ (85) (1,874) 1,576
==================== ==================== ====================
- 69 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
The following is a reconciliation of the expected income tax (benefit)
expense and the actual income tax (benefit) expense for the years ended
September 30. The expected income tax (benefit) expense has been computed
by applying the statutory federal tax rate to income before income tax
(benefit) expense:
1999 1998 1997
-------------------- -------------------- --------------------
(Dollars in thousands)
Income tax expense (benefit) at
applicable federal statutory
rate $ 677 (936) 1,780
Increase (decrease) in income tax
(benefit) expense resulting
from:
Tax exempt securities income (712) (637) (46)
State income tax expense
(benefit), net of Federal
impact 60 (276) 214
Reduction in New York State
bad debt reserve
resulting from tax law
changes - - (349)
Other (110) (25) (23)
-------------------- -------------------- --------------------
Income tax (benefit)
expense $ (85) (1,874) 1,576
==================== ==================== ====================
Effective tax rate (4.3)% (68.1)% 30.1%
==================== ==================== ====================
- 70 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30 are presented below:
1999 1998
-------------------- --------------------
(In thousands)
Deferred tax assets:
Allowance for loan losses $ 3,823 2,815
Other real estate owned 340 248
Charitable contribution carryforward 3,140 1,639
Accrued expenses 1,367 1,050
Depreciation 702 603
Deferred compensation 560 386
-------------------- --------------------
Total gross deferred tax assets 9,932 6,741
-------------------- --------------------
Deferred tax liabilities:
Pension costs (147) (178)
prepaid expenses (293) (259)
Deferred net loan origination fees and costs (122) (157)
Mortgage servicing rights (302) (127)
Other items (124) -
-------------------- --------------------
Total gross deferred tax liabilities (988) (721)
-------------------- --------------------
Net deferred tax asset at end of year 8,944 6,020
Net deferred tax asset at beginning of year 6,020 2,993
-------------------- --------------------
Deferred tax benefit for the year $ (2,924) (3,027)
==================== ====================
In addition to the deferred tax assets and liabilities described above, the
Company had a deferred tax asset of $266 thousand at September 30, 1999,
and a deferred tax liability of $273 thousand at September 30, 1998,
related to the net unrealized gain or loss on securities available for
sale.
A corporation's annual tax deduction for charitable contributions is
subject to a limitation based on a percentage of taxable income.
Contributions in excess of this limitation are carried forward and may be
deducted in one or more of the succeeding five tax years. As a result of
the cash contributions and commitment to The Troy Savings Bank Charitable
Foundation, as well as the contribution of common stock to the Troy Savings
Bank Community Foundation, at September 30, 1999, the Company had an unused
charitable contribution carryforward of approximately $8.0 million ($3.1
million after-tax), which is available for deduction through 2003 and 2004.
Deferred tax assets are recognized subject to management's judgement that
realization is more likely than not. Based on the sufficiency of temporary
taxable items, historical taxable income, as well as estimates of future
taxable income, the Company believes it is more likely than not that the
gross deferred tax assets at September 30, 1999 and 1998 will be realized.
- 71 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically
have been determined using methods based on loss experience or a percentage
of taxable income. Tax bad debt reserves are maintained equal to the excess
of allowable deductions over actual bad debt losses and other reserve
reductions. These reserves consist of a defined base-year amount, plus
additional amounts ("excess reserves") accumulated after the base year.
SFAS No. 109 requires recognition of deferred tax liabilities with respect
to such excess reserves, as well as any portion of the base-year amount
which is expected to become taxable (or "recaptured") in the foreseeable
future.
Certain amendments to the Federal and New York State tax laws regarding bad
debt deductions were enacted in July and August 1996, respectively. The
Federal amendments include elimination of the percentage of taxable income
method for tax years beginning after December 31, 1995, and imposition of a
requirement to recapture into taxable income (over a period of
approximately six years) the bad debt reserves in excess of the base-year
amounts. The Bank previously established, and will continue to maintain, a
deferred tax liability with respect to such excess Federal reserves. The
New York State amendments redesignate the Bank's state bad debt reserves at
December 31, 1995 as the base-year amount and also provide for future
additions to the base-year reserve using the percentage of taxable income
method. As a result of the redesignation of the New York State base-year
reserve, the Bank reduced its deferred tax liabilities related to the
previous excess New York State reserve resulting in a deferred tax benefit
in fiscal 1997 of approximately $349 thousand.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal base-year reserve of $7.9 million
and "supplemental" reserve (as defined) of $1.0 million at September 30,
1999, and the state base-year reserve of $18.9 million at September 30,
1999, since the Company does not expect that these amounts will become
taxable in the foreseeable future. Under the tax laws, as amended, events
that would result in taxation of these reserves include (1) redemptions of
the Bank's stock or certain excess distributions to the Parent Company and
(2) failure of the Bank to maintain a specified qualifying assets ratio or
meet other thrift definition tests for New York State tax purposes. The
unrecognized deferred tax liability at September 30, 1999 with respect to
the Federal base-year reserve and supplemental reserve was $2.7 million and
$340 thousand, respectively. The unrecognized deferred tax liability at
September 30, 1999 with respect to the state base-year reserve was
approximately $1.1 million (net of Federal benefit).
- 72 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(13) EARNINGS PER SHARE
The following table sets forth certain information regarding the
calculation of basic earnings per share for the year ended September 30,
1999, based on net income for the six-month period from April 1, 1999 to
September 30, 1999. Earnings per share information for periods prior to the
Company's initial public offering on March 31, 1999 is not applicable.
Unallocated ESOP shares are not considered outstanding for earnings per
share computations. The shares become outstanding for earnings per share
computations when they are released for allocation. During the year ended
September 30, 1999, the Company did not have any potentially dilutive
securities outstanding.
WEIGHTED-
NET AVERAGE PER SHARE
INCOME SHARES AMOUNT
------ ------ ------
(In thousands)
Basic earnings per share $ 3,723 11,526,139 $0.32
==================== ==================== ====================
On October 1, 1999, the Company granted 1,015,617 stock options with an
exercise price of $10.813 and 446,165 shares of restricted stock with a
grant date fair value of $10.813 per share. The options have a term of ten
years and vest in equal annual installments over a five year period. The
restricted shares vest in equal annual installments over a five year
period.
(14) EMPLOYEE BENEFIT PLANS
The Company maintains a non-contributory pension plan with Retirement
System Group, Inc. covering substantially all its full-time employees. The
benefits are generally computed as two percent of the highest three year
"average annual earnings" multiplied by years of credited service, subject
to various caps and adjustments as provided for in the plan. The amounts
contributed to the plan are determined annually on the basis of (a) the
maximum amount that can be deducted for federal income tax purposes or (b)
the amount certified by an actuary as necessary to avoid an accumulated
funding deficiency as defined by the Employee Retirement Income Security
Act of 1974. Contributions are intended to provide not only for benefits
attributed to service to date but also those expected to be earned in the
future. Assets of the plan are primarily invested in pooled equity and
fixed income funds.
- 73 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
The following table sets forth the pension plan's funded status and amounts
recognized in the Company's consolidated financial statements at September
30:
1999 1998
-------------------- --------------------
(In thousands)
Reconciliation of projected benefit obligation:
Obligation at beginning of year $ 12,458 10,388
Service cost 660 580
Interest cost 829 752
Benefit payments (493) (412)
Actuarial (gain) loss (872) 1,150
-------------------- --------------------
Obligation at end of year $ 12,582 12,458
==================== ====================
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year 12,805 13,160
Actual return on plan assets 2,295 18
Employer contributions 383 39
Benefit payments (493) (412)
-------------------- --------------------
Fair value of plan assets at end of year $ 14,990 12,805
==================== ====================
Reconciliation of funded status:
Funded status at end of year 2,408 347
Unrecognized net actuarial gain (2,323) (241)
Unrecognized prior service cost 292 339
-------------------- --------------------
Prepaid pension cost at end of year $ 377 445
==================== ====================
Net periodic pension cost recognized in the Company's consolidated
statements of income for the years ended September 30 included the
following components:
1999 1998 1997
-------------------- -------------------- --------------------
(In thousands)
Service cost $ 660 580 482
Interest cost 829 752 699
Expected return on plan assets (1,085) (1,038) (868)
Net amortization and deferral 48 (68) (51)
-------------------- -------------------- --------------------
Net periodic pension cost $ 452 226 262
==================== ==================== ====================
- 74 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
The actuarial assumptions used in determining the actuarial present value
of the projected benefit obligations as of September 30 were as follows:
1999 1998 1997
-------------------- -------------------- --------------------
Discount rate 7.25% 6.50% 7.25%
Long-term rate of return 8.50% 8.00% 8.00%
Salary increase rate 4.50% 4.50% 5.00%
The Company maintains a 401(k) savings plan covering all salaried and
commissioned employees who become eligible to participate upon attaining
the age of twenty-one and completing one year of service. Participants may
contribute from 2% to 15% of their compensation. The Company made matching
contributions equal to 50% of the participants' contributions (up to a
limit of 3% of the participants' compensation) in fiscal 1997 and 1998, and
through March 31, 1999 of fiscal 1999. Employer matching contributions vest
20% per year beginning after one year of participation in the plan.
Employer matching contributions were approximately $77 thousand, $146
thousand and $125 thousand for the years ended September 30, 1999, 1998 and
1997, respectively. The plan was amended effective April 1, 1999 to
discontinue employer matching contributions.
The Company has established a self-funded employee welfare benefit plan to
provide health care coverage (hospital medical, major medical and
prescription drug) for eligible employees and their dependents who enroll
in the plan. This self insurance program is administered by an unrelated
company. Under the terms of the self insurance program, the Company could
incur up to a maximum of approximately $913 thousand for the cost of
covered claims for the plan year ending December 31, 1999. The Company has
purchased a $1.0 million insurance policy to cover claims in excess of the
maximum costs under the plan. In addition, there are lower maximum cost
limitations for individual claims.
The Company provides certain medical, dental and life insurance benefits
for retired employees (post-retirement benefits). Substantially all of the
Company's employees will become eligible for those benefits if they reach
normal retirement age while working for the Company and have the required
years of service.
- 75 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
The following table sets forth the post-retirement benefit plan's funded
status and amounts recognized in the Company's consolidated financial
statements at September 30:
1999 1998
-------------------- --------------------
(In thousands)
Reconciliation of accumulated post-retirement benefit obligation:
Obligation at beginning of year $ 3,437 3,453
Service cost 189 170
Interest cost 223 204
Benefit payments (186) (156)
Actuarial gain (188) (234)
-------------------- --------------------
Obligation at end of year $ 3,475 3,437
==================== ====================
Reconciliation of funded status:
Unfunded post-retirement benefit obligation (3,475) (3,437)
Unrecognized transition obligation 2,168 2,304
Unrecognized net actuarial (gain) loss (192) 15
-------------------- --------------------
Accrued post-retirement benefit
liability $ (1,499) (1,118)
==================== ====================
Net periodic post-retirement benefit cost recognized in the Company's
consolidated statements of income for the years ended September 30 included
the following components:
1999 1998 1997
-------------------- -------------------- --------------------
(In thousands)
Service cost $ 189 170 124
Interest cost 223 204 237
Amortization of transition
obligation 136 136 136
-------------------- -------------------- --------------------
Net periodic
post-retirement
benefit cost $ 548 510 497
==================== ==================== ====================
The weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 7.25%, 6.50% and 7.25% as of
September 30, 1999, 1998 and 1997, respectively.
- 76 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
For measurement purposes, 5% and 3% annual rates of increase in the per
capita cost of covered medical and dental costs, respectively, were assumed
for fiscal 1999 and thereafter. The medical and dental cost trend rate
assumptions have a significant effect on the amounts reported. To
illustrate, increasing the assumed medical and dental cost trend rates one
percentage point in each year would increase the accumulated
post-retirement benefit obligation as of September 30, 1999 by
approximately $319 thousand (9.2%) and increase the aggregate of the
service and interest cost components of net periodic post-retirement
benefit cost for fiscal 1999 by approximately $49 thousand (11.9%).
Decreasing the assumed medical and dental cost trend rates one percentage
in each year would decrease the accumulated post-retirement benefit
obligation as of September 30, 1999 by approximately $288 thousand (8.3%)
and decrease the aggregate of the service and interest cost components of
net periodic post-retirement benefit cost for fiscal 1999 by approximately
$43 thousand (10.4%).
The Company established an ESOP in conjunction with the Company's initial
public offering to provide substantially all employees of the Company the
opportunity to also become shareholders. The ESOP borrowed $9.6 million
from the Company and used the funds to purchase 971,122 shares of the
common stock of the Company in the open market. The loan will be repaid
principally from the Company's discretionary contributions to the ESOP over
a period of fifteen years. At September 30, 1999, the loan had an
outstanding balance of $9.6 million and an interest rate of 7.00%. Both the
loan obligation and the unearned compensation will be reduced by the amount
of loan repayments to be made by the ESOP at the end of each plan year
ending on December 31. Shares purchased with the loan proceeds are held in
a suspense account for allocation among participants as the loan is repaid.
Shares released from the suspense account are allocated among participants
at the end of the plan year on the basis of relative compensation in the
year of allocation.
Unallocated ESOP shares are pledged as collateral on the loan and are
reported as a reduction of shareholders' equity. The Company reports
compensation expense equal to the average market price of the shares to be
released from collateral at the end of the plan year. The Company recorded
approximately $423 thousand of compensation expense related to the ESOP for
the year ended September 30, 1999.
- 77 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
The ESOP shares as of September 30, 1999 were as follows:
Allocated shares -
Shares released for allocation -
Unallocated shares 971,122
Total ESOP shares 971,122
Market value of unallocated shares at September 30, 1999 (In thousands) $ 10,500
====================
During the year ended September 30, 1999, the Company adopted a
supplemental retirement and benefit restoration plan for certain executive
officers to restore certain benefits that may be reduced due to Internal
Revenue Service regulations and to provide supplemental benefits to
selected participants in the ESOP who retire or otherwise terminate
employment before the ESOP has repaid the loan it incurred to purchase the
Company's common stock. The benefits under this plan are unfunded and as of
September 30, 1999, the accumulated benefit obligation was approximately
$896 thousand. The Company recorded an expense of approximately $158
thousand relating to this plan during the year ended September 30, 1999.
(15) COMMITMENTS AND CONTINGENT LIABILITIES
(A) LEASE OBLIGATIONS
The Company leases several banking office facilities under various
noncancellable operating leases. These leases expire (excluding
renewal options) in periods ranging from one to ten years. Minimum
rental commitments under lease contracts are as follows:
Years ending September 30,
(In thousands)
--------------
2000 $ 678
2001 652
2002 652
2003 603
2004 569
Thereafter 578
--------------------
$ 3,732
====================
- 78 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(B) DATA PROCESSING AGREEMENT
During the year ended September 30, 1997, the Company renewed its data
processing agreement through January 2002. At September 30, 1999,
remaining commitments under this agreement were approximately $2.1
million.
(C) OFF-BALANCE-SHEET FINANCING AND CONCENTRATIONS OF CREDIT
The Company is a party to certain financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit, unused lines of credit and standby
letters of credit. These instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized on the
consolidated financial statements. The contract amounts of these
instruments reflect the extent of involvement the Company has in
particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance
by the other party to the commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of
those instruments. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
Contract amounts of financial instruments that represent the future
extension of credit as of September 30 at fixed and variable interest
rates are as follows:
1999
--------------------------------------------------
FIXED VARIABLE TOTAL
----- -------- -----
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments outstanding:
Conventional mortgages $ 12,088 1,368 13,456
Commercial real estate - 18,380 18,380
Construction loans - 20,270 20,270
-------------- --------------- --------------
12,088 40,018 52,106
-------------- --------------- --------------
Unused lines of credit:
Home equity - 5,974 5,974
Commercial 6,412 58,445 64,857
Overdraft - 2,863 2,863
-------------- --------------- --------------
6,412 67,282 73,694
-------------- --------------- --------------
Standby letters of credit - 1,684 1,684
-------------- --------------- --------------
$ 18,500 108,984 127,484
============== =============== ==============
- 79 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
1998
---------------------------------------------------
FIXED VARIABLE TOTAL
----- -------- -----
(In thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments outstanding:
Conventional mortgages $ 10,212 601 10,813
Commercial real estate - 12,886 12,886
Construction loans - 14,575 14,575
-------------- --------------- --------------
10,212 28,062 38,274
-------------- --------------- --------------
Unused lines of credit:
Home equity - 6,242 6,242
Commercial 25,846 25,077 50,923
Overdraft - 1,572 1,572
-------------- --------------- --------------
25,846 32,891 58,737
-------------- --------------- --------------
Standby letters of credit - 2,721 2,721
-------------- --------------- --------------
$ 36,058 63,674 99,732
============== =============== ==============
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since not all of
the commitments are expected to be funded, the total commitment
amounts do not necessarily represent future cash requirements. The
Company evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral, if any, required by the Company upon
the extension of credit is based on management's credit evaluation of
the customer. Mortgage and construction loan commitments are secured
by a first lien on real estate. Collateral on extensions of credit for
commercial loans varies but may include accounts receivable,
inventory, property, plant and equipment, and income producing
commercial property.
Commitments to extend credit may be written on a fixed rate basis
exposing the Company to interest rate risk given the possibility that
market rates may change between commitment and actual extension of
credit.
- 80 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Standby letters of credit are conditional commitments issued by the
Company to guarantee payment on behalf of a customer and guarantee the
performance of a customer to a third party. The credit risk involved
in issuing these instruments is essentially the same as that involved
in extending loans to customers. Since a portion of these instruments
will expire unused, the total amounts do not necessarily represent
future cash requirements. Each customer is evaluated individually for
creditworthiness under the same underwriting standards used for
commitments to extend credit and on-balance sheet instruments. Company
policies governing loan collateral apply to standby letters of credit
at the time of credit extension.
Certain residential mortgage loans are written on an adjustable-rate
basis and include interest rate caps which limit annual and lifetime
increases in the interest rates on such loans. Generally, adjustable
rate residential mortgages have an annual rate increase cap of 2% and
a lifetime rate increase cap of 5% to 6%. These caps expose the
Company to interest rate risk should market rates increase above these
limits. At September 30, 1999 and 1998 approximately $55.5 million and
$75.6 million of adjustable rate residential loans had interest rate
caps.
The Company generally enters into rate lock agreements at the time
that residential mortgage loan applications are taken. These rate lock
agreements fix the interest rate at which the loan, if ultimately
made, will be originated. Such agreements may exist with borrowers
with whom commitments to extend loans have been made, as well as with
individuals who have not yet received a commitment. The Company makes
its determination of whether or not to identify a loan as held for
sale at the time rate lock agreements are entered into. Accordingly,
the Company is exposed to interest rate risk to the extent that a rate
lock agreement is associated with a loan application or a loan
commitment which is intended to be held for sale, as well as with
respect to loans held for sale.
At September 30, 1999 and 1998, the Company had rate lock agreements
(certain of which relate to loan applications for which no formal
commitment has been made) and conventional mortgage loans held for
sale amounting to approximately $8.5 million and $20.3 million,
respectively.
In order to reduce the interest rate risk associated with the
portfolio of conventional mortgage loans held for sale, as well as
outstanding loan commitments and uncommitted loan applications with
rate lock agreements which are intended to be held for sale, the
Company enters into agreements to sell loans in the secondary market
to unrelated investors, and may also enter into option agreements. At
September 30, 1999 and 1998, the Company had mandatory commitments and
cancelable options to sell conventional fixed rate mortgage loans at
set prices amounting to approximately $9.0 million and $25.0 million,
respectively. The Company believes that it will be able to meet these
commitments without incurring any material losses.
- 81 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(D) SERVICED LOANS
Total loans serviced by the Company for unrelated third parties were
approximately $230.6 million and $195.7 million at September 30, 1999
and 1998, respectively.
(E) CONTINGENT LIABILITIES
In the ordinary course of business there are various legal proceedings
pending against the Company. Based on consultation with outside
counsel, management believes that the aggregate exposure, if any,
arising from such litigation would not have a material adverse effect
on the Company's consolidated financial statements.
(F) CHARITABLE FOUNDATION CONTRIBUTION COMMITMENT
In fiscal 1998, the Bank contributed $1.0 million in cash to The Troy
Savings Bank Charitable Foundation (the "Foundation") and entered into
a binding, unconditional commitment to contribute an additional $4.0
million in cash to the Foundation over the next three years. In fiscal
1999, the Bank contributed an additional $1.0 million in cash to the
Foundation. The remaining cash contributions due to the Foundation are
$1.5 million for each of the next two fiscal years.
As of September 30, 1999 and 1998, the present value of the above
commitment was $3.5 million and $2.7 million, respectively, and was
recorded as a liability in the consolidated statements of condition. A
related contribution expense of $4.5 million was recorded in the 1998
consolidated statement of income. The difference between the present
value of the initial commitment and the gross amounts due to the
Foundation is being amortized into contribution expense over the
initial three year payment period. Such amortization was $211 thousand
in fiscal 1999.
(G) CONCENTRATIONS OF CREDIT
The Company grants commercial, consumer and residential loans
primarily to customers throughout the six New York State counties of
Albany, Rensselaer, Saratoga, Schenectady, Warren and Washington.
Although the Company has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent
upon the real estate and construction related sectors of the economy.
- 82 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(H) RESERVE REQUIREMENT
The Company is required to maintain certain reserves of vault cash
and/or deposits with the Federal Reserve Bank. The amount of this
reserve requirement, included in cash and due from banks, was
approximately $1.1 million and $1.0 million at September 30, 1999 and
1998, respectively.
(I) LIQUIDATION ACCOUNT AND DIVIDEND RESTRICTIONS
As part of the Bank's conversion from a mutual savings bank to a stock
savings bank, the Company established a liquidation account in an
amount equal to the Bank's total equity as of September 30, 1998. The
liquidation account is maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank after
the conversion. The liquidation account is reduced annually to the
extent that eligible depositors have reduced their qualifying
deposits. Subsequent increases do not restore an eligible account
holder's interest in the liquidation account. In the event of a
complete liquidation, each eligible depositor will be entitled to
receive a distribution from the liquidation account in an amount
proportionate to the current adjusted qualifying balances for accounts
then held. Neither the Company nor the Bank may pay dividends that
would reduce shareholders' equity below the required liquidation
account balance.
Dividend payments by the Parent company must be within certain
guidelines of the Federal Reserve Bank which provide, among other
things, that dividends generally should be paid only from current
earnings. The Bank's ability to pay dividends to the Parent Company is
also subject to various restrictions. Under New York State Banking
Law, dividends may be declared and paid only from the Bank's net
profits, as defined. The approval of the Superintendent of Banks of
the State of New York is required if the total of all dividends
declared in any year will exceed the net profit for the year plus the
retained net profits of the preceding two years. At September 30,
1999, the Bank had approximately $6.8 million in retained net profits
which were available for dividend payments.
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires that the Company disclose estimated fair values for its financial
instruments. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. Because no market exists for
a significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected net cash flows,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
- 83 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities include
the deferred tax assets and liabilities and premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates of fair value under
SFAS No. 107.
In addition there are significant intangible assets that SFAS No. 107 does
not recognize, such as the value of core deposits, the Company's branch
network, and other items generally referred to as "goodwill."
Short-Term Financial Instruments
The fair values of certain financial instruments are estimated to
approximate their carrying values because the remaining term to maturity of
the financial instrument is less than 90 days or the financial instrument
reprices in 90 days or less. Such financial instruments include cash and
cash equivalents, accrued interest receivable, accrued interest payable and
securities sold under agreements to repurchase.
Loans Held for Sale
The estimated fair value of loans held for sale is calculated by either
using quoted market rates or, in the case where a firm commitment has been
made to sell the loan, the firm committed price.
Securities Available for Sale and Investment Securities Held to Maturity
Securities available for sale and investment securities held to maturity
are financial instruments which are usually traded in broad markets. Fair
values are based upon market prices. If a quoted market price is not
available for a particular security, the fair value is determined by
reference to quoted market prices for securities with similar
characteristics.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type including residential real
estate, commercial real estate, construction, commercial loans and consumer
loans.
The estimated fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in
the respective loan portfolio. The estimated fair value for non-performing
loans is based on recent external appraisals or estimated cash flows
discounted using a rate commensurate with the risk associated with the
estimated cash flows. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined using available market
information and specific borrower information.
- 84 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Management has made estimates of fair value discount rates that it believes
to be reasonable. However, because there is no active market for many of
these loans, management has no basis to determine whether the estimated
fair value would be indicative of the value negotiated in an actual sale.
Deposit Liabilities
The estimated fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings accounts, N.O.W. and Super
N.O.W. accounts, money market accounts and mortgagors' escrow deposits, is
regarded to be the amount payable on demand. The estimated fair value of
time deposits is based on the discounted value of contractual cash flows.
The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The fair value estimates for
deposits do not include the benefit that results from the low-cost funding
provided by the deposit liabilities as compared to the cost of borrowing
funds in the market.
Short-Term Borrowings and Long-Term Debt
The estimated fair value of short-term borrowings and long-term debt is
based on the discounted value of contractual cash flows. The discount rate
is estimated using the rates currently offered for borrowings with similar
maturities.
Contributions Payable
Contributions payable are recorded in the consolidated statements of
condition at the present value of the remaining commitments, therefore the
estimated fair value approximates the carrying value.
Commitments to Extend Credit, Unused Lines of Credit and Standby Letters of
Credit
The fair value of commitments to extend credit, unused lines of credit and
standby-letters of credit is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of
the agreements and the present credit-worthiness of the counterparties. For
fixed rate commitments to extend credit and unused lines of credit, fair
value also considers the difference between current levels of interest
rates and the committed rates. Based upon the estimated fair value of
commitments to extend credit, unused lines of credit and standby letters of
credit, there are no significant unrealized gains or losses associated with
these financial instruments.
- 85 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as
of September 30 were as follows:
1999 1998
-------------------------------- -------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----- ----- ----- -----
(In thousands)
Financial assets:
Cash and cash equivalents $ 35,935 35,935 17,915 17,915
Loans held for sale 4,064 4,064 11,096 11,096
Securities available for sale 280,871 280,871 197,758 197,758
Investment securities held to
maturity 2,534 2,582 3,483 3,621
Loans 566,906 544,259 465,581 469,713
Less: Allowance for loan losses (10,764) - (8,260) -
------------ ------------ ------------- ------------
Net loans 556,142 544,259 457,321 469,713
============ ============ ============= ============
Accrued interest receivable 5,270 5,270 4,287 4,287
Financial liabilities:
Deposits:
Demand, savings, money market,
N.O.W. and Super N.O.W.
accounts 335,661 335,661 321,528 321,528
Time accounts 227,712 227,928 256,674 258,254
Mortgagors' escrow accounts 1,596 1,596 1,900 1,900
Securities sold under agreements
to repurchase 3,736 3,736 2,524 2,524
Short-term borrowings 100,700 100,644 - -
Long-term debt 44,497 42,229 44,940 44,940
Accrued interest payable 487 487 360 360
Contributions payable 2,664 2,664 3,453 3,453
- 86 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(17) REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require savings institutions to maintain a minimum level
of regulatory capital. Under the regulations in effect at September 30,
1999 and 1998, the Bank was required to maintain a minimum leverage ratio
of Tier I ("leverage" or "core") capital to adjusted quarterly average
assets of 4.0%; and minimum ratios of Tier I capital and total capital to
risk-weighted assets of 4.0% and 8.0%, respectively. The Federal Reserve
Bank has also adopted capital adequacy guidelines for bank holding
companies on a consolidated basis substantially similar to those of the
FDIC.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification of
savings institutions into five categories: well capitalized, adequately
capitalized, under capitalized, significantly under capitalized, and
critically under capitalized. Generally an institution is considered well
capitalized if it has a Tier I capital ratio of at least 5.0% (based on
total adjusted quarterly average assets); a Tier I risk-based capital ratio
of at least 6.0%; and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk-weighting and other factors.
Management believes that, as of September 30, 1999 and 1998, the Bank and
the Company met all capital adequacy requirements to which they were
subject. Further, the most recent FDIC notification categorized the Bank as
a well capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
- 87 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
The following is a summary of the actual capital amounts and actual and
required capital ratios as of September 30 for the Bank and the
consolidated Company:
1999
----------------------------------------------------------------------
REQUIRED RATIOS
------------------------------------
ACTUAL CAPITAL MINIMUM CLASSIFICATION
------------------------------- CAPITAL AS WELL
AMOUNT RATIO ADEQUACY CAPITALIZED
------ ----- -------- -----------
(Dollars in thousands)
Tier 1 Capital:
Bank $ 121,358 14.48% 4.00% 5.00%
Consolidated 180,339 21.21 4.00 5.00
Tier 1 Risk-Based Capital:
Bank 121,358 19.36 4.00 6.00
Consolidated 180,339 28.71 4.00 6.00
Total Risk-Based Capital:
Bank 129,193 20.61 8.00 10.00
Consolidated 188,191 29.96 8.00 10.00
1998
----------------------------------------------------------------------
REQUIRED RATIOS
------------------------------------
ACTUAL CAPITAL MINIMUM CLASSIFICATION
------------------------------- CAPITAL AS WELL
AMOUNT RATIO ADEQUACY CAPITALIZED
------ ----- -------- -----------
(Dollars in thousands)
Tier 1 Capital:
Bank $ 70,114 9.89% 4.00% 5.00%
Tier 1 Risk-Based Capital:
Bank 70,114 14.02 4.00 6.00
Total Risk-Based Capital:
Bank 76,368 15.27 8.00 10.00
- 88 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
(18) CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
The Parent Company began operations in conjunction with the Bank's
mutual-to-stock conversion and the Parent Company's initial public offering
of its common stock. The following represents the Parent Company's balance
sheet as of September 30, 1999, and its income statement and statement of
cash flows for the period April 1, 1999 through September 30, 1999.
BALANCE SHEET
(In thousands)
ASSETS
Cash and cash equivalents $ 15
Loan receivable from subsidiary bank 48,169
Loan receivable from ESOP 9,620
Accrued interest receivable 273
Other assets 2,293
Investment in equity of subsidiary bank 121,456
-------------------
Total assets $ 181,826
===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Payable to subsidiary bank 1,387
Total shareholders' equity 180,439
Total liabilities and shareholders' equity $ 181,826
===================
- 89 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
INCOME STATEMENT
(In thousands)
For the period April 1, 1999
through September 30, 1999
--------------------------
Interest income:
Loans to subsidiary bank and ESOP $ 567
Federal funds sold and interest-bearing deposits 322
-------------------
Total interest income 889
-------------------
Total non-interest expenses 38
-------------------
Income before income tax expense and equity in
undistributed earnings of subsidiary bank 851
Income tax expense (341)
Equity in undistributed earnings of subsidiary bank 3,213
-------------------
Net income $ 3,723
===================
- 90 -
TROY FINANCIAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
September 30, 1999, 1998 and 1997
STATEMENT OF CASH FLOWS
(In thousands)
For the period April 1, 1999
through September 30, 1999
--------------------------
Cash flows from operating activities:
Net income $ 3,723
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary bank (3,213)
Increase in accrued interest receivable (273)
Net increase in other assets (659)
Net increase in intercompany payable to
subsidiary bank 1,387
-------------------
Net cash provided by operating activities 965
-------------------
Cash flows from investing activities:
Investment in equity of subsidiary bank (56,837)
Loan made to subsidiary bank (48,169)
Loan made to ESOP (9,620)
-------------------
Net cash used in investing activities (114,626)
-------------------
Cash flows from financing activities:
Net proceeds from stock offering 113,676
Net cash provided by financing activities 113,676
Net increase in cash and cash equivalents 15
Cash and cash equivalents at beginning of period -
-------------------
Cash and cash equivalents at end of period $ 15
===================
Supplemental disclosures of non-cash investing and financing activities:
Recognition of subsidiary bank's total equity on date of Parent
Company's investment in equity of subsidiary bank $ 62,020
===================
Adjustment of subsidiary bank's securities available for sale to fair value, net of tax $ (614)
================
- 91 -
ITEM 9. CHARGES 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 herein is incorporated by reference from Troy
Financial's definitive Proxy Statement for its annual meeting of shareholders to
be held in February 2000, (the "Proxy Statement") which will be filed with the
Securities and Exchange Commission within 120 days of Troy Financial's 1999
fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from the Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated by reference from the Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from the Proxy
Statement.
PART IV
ITEM 14. 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 Condition -- September 30, 1999 and 1998.
Consolidated Statements of Income -- Years Ended September 30, 1999,
1998, and 1997.
Consolidated Statements of Changes in Shareholders' Equity -- Years
Ended September 30, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows -- Years Ended September 30,
1999, 1998, and 1997.
Notes to Consolidated Financial Statements.
Independent Auditors' Report.
(a)(2) There are no financial statements schedules which are required to be
filed as part of this form since they are not applicable.
(a)(3) See (c) below for all exhibits filed herewith and the Exhibit Index.
(b) Reports on Form 8-K
On September 30, 1999, Troy Financial filed a Form 8-K that included a
press release dated September 29, 1999, stating its intention to repurchase
up to 4% of its outstanding stock and to reissue the stock under its
Long-Term Equity Compensation Plan.
- 92 -
(c) Exhibits. The following exhibits are either filed as part of this
annual report on Form 10-K, or are incorporated herein by reference:
Exhibit No. Exhibit
----------- -------
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference herein to Exhibit 3.1 to
the Company's Registration Statement on Form S-1, File No.
333-68813)
3.2 Bylaws of the Company (incorporated by reference herein to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1, File No. 333-68813)
4.1 Certificate of Incorporation of the Company (filed as Exhibit
3.1 hereto)
4.2 Bylaws of the Company (filed as Exhibit 3.2 hereto)
4.3 Specimen certificate evidencing shares of Common Stock of the
(incorporated by reference herein to Exhibit 4.3 to the
Company's Registration Statement on Form S-1, File No.
333-68813)
10.1 1999 Long-Term Equity Compensation Plan
10.2 Form of Employment Agreements (incorporated by reference
herein to Exhibit 10.1 to the Company's Registration Statement
on Form S-1, File No. 333-68813)
10.3 Form of Employment Protection Agreements (incorporated by
reference herein to Exhibit 10.2 to the Company's Registration
Statement on Form S-1, File No. 333-68813)
10.4 Form of Employee Change of Control Severance Plan
(incorporated by reference herein to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, File No.
333-68813)
10.5 Form of Supplemental Retirement and Benefits Restoration Plan
(incorporated by reference herein to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, File No.
333-68813)
21.1 Subsidiaries of Troy Financial Corporation
27.1 Financial Data Schedule
(d) There are no other financial statements and financial statement
schedules which were excluded form the Annual Report which are
required to be included herein.
- ------------
- 93 -
SIGNATURES
Pursuant to the requirements of Section 13 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 20, 1999
/s/ Daniel J. Hogarty
--------------------------------
Daniel J. Hogarty, Jr.
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.
By: /s/ Daniel J. Hogarty
---------------------------------
Daniel J. Hogarty, Jr.
President, Chief Executive Officer
and Director (Principal Executive
Officer)
Date: 12/20/99
-----------------------
By: /s/ Edward M. Maziejka
-------------------------
Edward M. Maziejka, Jr.
Chief Financial Officer (Principal
Financial Officer)
Date: 12/20/99
-----------------------
By: /s/ George H. Arakelian
-------------------------
George H. Arakelian, Director
Date: 12/20/99
-----------------------
By: /s/ Richard B. Devane
-------------------------
Richard B. Devane, Director
Date: 12/20/99
-----------------------
By: /s/ Michael E. Fleming
-------------------------
Michael E. Fleming, Director
Date: 12/20/99
- 94 -
By: /s/ Willie A. Hammett
---------------------------
Willie A. Hammett, Director
Date: 12/20/99
-------------------------
By: /s/ Thomas B. Healy
---------------------------
Thomas B. Healy, Director
Date: 12/20/99
------------------------
By: /s/ Keith D. Millsop
--------------------------
Keith D. Millsop, Director
Date: 12/20/99
------------------------
By: /s/ Edward G. O'Haire
--------------------------
Edward G. O'Haire, Director
Date: 12/20/99
By: /s/ Marvin L. Wulf
-------------------------
Marvin L. Wulf, Director
Date: 12/20/99
- 95 -
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
----------- -------
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference herein to Exhibit 3.1 to
the Company's Registration Statement on Form S-1, File No.
333-68813)
3.2 Bylaws of the Company (incorporated by reference herein to
Exhibit 3.2 to the Company's Registration Statement on Form
S-1, File No. 333-68813)
4.1 Certificate of Incorporation of the Company (filed as Exhibit
3.1 hereto)
4.2 Bylaws of the Company (filed as Exhibit 3.2 hereto)
4.3 Specimen certificate evidencing shares of Common Stock of the
(incorporated by reference herein to Exhibit 4.3 to the
Company's Registration Statement on Form S-1, File No.
333-68813)
10.1 1999 Long-Term Equity Compensation Plan
10.6 Form of Employment Agreements (incorporated by reference
herein to Exhibit 10.1 to the Company's Registration Statement
on Form S-1, File No. 333-68813)
10.7 Form of Employment Protection Agreements (incorporated by
reference herein to Exhibit 10.2 to the Company's Registration
Statement on Form S-1, File No. 333-68813)
10.8 Form of Employee Change of Control Severance Plan
(incorporated by reference herein to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, File No.
333-68813)
10.9 Form of Supplemental Retirement and Benefits Restoration Plan
(incorporated by reference herein to Exhibit 10.5 to the
Company's Registration Statement on Form S-1, File No.
333-68813)
21.1 Subsidiaries of Troy Financial Corporation
27.1 Financial Data Schedule