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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER: 00-25439
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TROY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 16-1559508
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(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
32 SECOND STREET 12180
TROY, NEW YORK ----------
--------------------------------------- (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(518) 270-3313
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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(NOT APPLICABLE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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COMMON STOCK ($0.0001 PAR VALUE PER SHARE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Based upon the closing price of the registrant's common stock as of December 18,
2003, the aggregate market value of the voting stock held by non-affiliates of
the registrant is $249.8 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 18, 2003: 9,351,539 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
(NOT APPLICABLE)
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PART I
ITEM 1. BUSINESS
BUSINESS OF TROY FINANCIAL CORPORATION
Troy Financial Corporation ("Troy Financial" or the "Company") is a Delaware
corporation and the bank holding company for The Troy Savings Bank (the "Savings
Bank") and The Troy Commercial Bank (the "Commercial Bank") (collectively, the
"Banks"). Troy Financial's primary business is the business of the Banks.
Presently, Troy Financial and the Commercial Bank have no plans to own or lease
any property, but instead use the premises and equipment of the Savings Bank.
Troy Financial and the Commercial Bank do not employ any persons other than
certain officers of the Savings Bank who are not separately compensated by Troy
Financial or the Commercial Bank. Troy Financial and the Commercial Bank may
utilize the support staff of the Savings Bank from time to time, if needed, and
additional employees will be hired as appropriate to the extent Troy Financial
or the Commercial Bank expand their business in the future. Troy Financial was
incorporated in 1998.
Troy Financial is subject to regulation and supervision by the Board of
Governors of the Federal Reserve System (the "Federal Reserve"). See
"Regulation."
The Savings Bank is a community-based savings bank headquartered in Troy, New
York. The Savings Bank operates through 21 full service branch offices in an
eight-county market area. As a full service financial institution, the Savings
Bank places a particular emphasis on residential and commercial real estate loan
products, as well as retail and business banking products and services. The
Savings Bank and its subsidiaries also offer a complete range of trust,
insurance and investments services, including securities brokerage, annuity and
mutual funds sales, money management and retirement plan services, and other
traditional investment/brokerage activities to individuals, families and
businesses throughout the eight New York State counties of Albany, Greene,
Rensselaer, Saratoga, Schenectady, Schoharie, Warren and Washington.
In August 2000, the Company established the Commercial Bank, which is a special
purpose commercial bank headquartered in Troy, New York. The Commercial Bank's
primary purpose is to generate municipal deposits, which under New York State
law cannot be collected by the Savings Bank.
On November 10, 2000, the Company acquired Catskill Financial Corporation
("Catskill") in a cash transaction for $23.00 per share, for a total transaction
value of approximately $89.8 million. The seven former offices of Catskill
Savings Bank are now full-service offices of the Savings Bank. In accordance
with the purchase method of accounting for business combinations, the assets
acquired and liabilities assumed were recorded by the Company at their estimated
fair value. Related operating results have been included in the Company's
consolidated financial statements from the date of acquisition.
On August 10, 2003, the Company and First Niagara Financial Group, Inc. ("First
Niagara") entered into an Agreement and Plan of Merger (the "Agreement") which
provides for, among other things, the acquisition of the Company by First
Niagara. Contemporaneous with the completion of the acquisition, The Troy
Savings Bank, a wholly-owned subsidiary of the Company, will merge with and into
First Niagara Bank, a wholly-owned subsidiary of First Niagara. The Agreement
provides that shareholders of the Company will receive either First Niagara
stock, cash or a combination of First Niagara stock and cash for each share of
Company common stock. The Boards of Directors of the Company and First Niagara
expect the transaction to close in January 2004.
Prior to the merger, the Company's goal has been to be the primary source of
financial products and services for its business, retail, and municipal
customers. The Company's business strategy is to serve as a community-based,
full-service financial services firm offering a wide variety of business,
retail, municipal banking, trust, insurance, investment management and brokerage
services throughout its market area.
The Company delivers its products and services and interacts with its customers
primarily through its 21 branches and 23 proprietary automated teller machines
("ATMs") and its 24-hour telephone banking service ("Time$aver"). The Company's
branches are staffed by managers, branch operations supervisors and customer
sales and service representatives ("CSSRs") who are trained and compensated to
market and service the Company's products, including those of the Company's
nonbanking subsidiaries.
3
The Company makes its periodic and current reports available, free of charge, on
its website, www.troysavingsbank.com, as soon as reasonably practicable after
such material is electronically filed with the Securities and Exchange
Commission ("SEC").
The Savings Bank and the Commercial Bank are subject to regulation, examination
and supervision by Federal Deposit Insurance Corporation (the "FDIC") and the
New York State Banking Department ("NYSBD"). Deposits in the Banks are insured
by the FDIC to the maximum extent provided by law. See "Regulation." The Savings
Bank is a member of the Federal Home Loan Bank System ("FHLB System").
LENDING ACTIVITY
The Company focuses its lending activity primarily on the origination of
commercial real estate, commercial business, residential mortgage and consumer
loans. The types of loans that the Company may originate are subject to federal
and state law and regulations. Interest rates charged by the Company on loans
are affected principally by the demand for such loans, the supply of funds
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, monetary
policies of the Federal government, including the Federal Reserve, legislative
tax policies and governmental budget matters. All loan approvals are made
locally, by individual loan officers, or loan committees, depending upon the
size of the loan. The Company makes every effort to respond to all loan requests
in a prompt and timely manner.
LOAN PORTFOLIO COMPOSITION. At September 30, 2003 the Company's loan portfolio
totaled $759.5 million, or 55.6% of total assets, and consisted primarily of
commercial real estate, construction, commercial business, single-family
residential mortgages and consumer loans.
The commercial real estate loan portfolio totaled $356.7 million, or 46.9% of
the Company's total loans and 26.1% of total assets, at September 30, 2003. Of
the loans managed by the Company's commercial real estate department,
approximately 71.5% of the loans are secured by properties located in the
Company's eight county market area, and an additional 9.0% and 8.5% are secured
by properties located elsewhere in Upstate New York and in the New York City
area, respectively. Approximately 29.4% of the properties securing the loans are
office buildings and warehouses, 26.7% are apartment buildings and cooperatives,
and 26.4% are retail buildings. The Company's commercial real estate loans range
in size up to $13.2 million, and the average principal balance outstanding at
September 30, 2003 was approximately $1.0 million. The 20 largest commercial
real estate loans range in size from $3.5 million to $13.2 million, and the
Company had 88 loans with outstanding balances of more than $1.0 million at
September 30, 2003. The Company's largest commercial real estate exposure
involving a single relationship was $35.4 million, all of which was outstanding
at September 30, 2003, to Morris Massry and his related real estate interests
with whom the Company has had a sixteen-year lending relationship. Mr. Massry is
a director of the Company and is a local real estate developer. All of the real
estate loans are secured by garden style apartment buildings.
The commercial business loan portfolio totaled $111.5 million, or 14.6% of the
Company's loans and 8.2% of total assets, at September 30, 2003. The loans
managed by the Company's commercial business department include fixed and
adjustable rate loans, as well as adjustable rate lines of credit to a diverse
customer base, including educational institutions, manufacturers, retailers,
wholesalers, service providers, and government-funded entities. The Company's
commercial business loans range in size up to $5.5 million, with an average
principal balance outstanding of approximately $155 thousand at September 30,
2003. The Company's 20 largest commercial business loans at that date ranged in
terms of total exposure, including balances outstanding and unfunded
commitments, from $868 thousand to $10.0 million.
The Company's portfolio of single family residential mortgage loans totaled
$239.7 million, or 31.5% of total loans and 17.6% of total assets, at September
30, 2003. The portfolio consisted primarily of fixed rate and adjustable rate
loans secured by detached, single family homes located in the Company's market
area, as well as home improvement loans. As of September 30, 2003, the Company's
largest single-family residential mortgage loan had an outstanding balance of
$820 thousand. As of that date, the typical residential mortgage loan held by
the Company in its portfolio had an average principal balance of approximately
$62.6 thousand, with an initial loan-to-value ("LTV") ratio of 80%, secured by
detached single family homes.
The consumer loan portfolio totaled $37.9 million, or 5.0% of total loans and
2.8% of total assets, at September 30, 2003. The Company's consumer loan
portfolio includes home equity lines of credit, auto loans, fixed rate consumer
loans, overdraft protection and "Creative Loans", which start with a modest,
below market interest rate that increases each year. The Company's home equity
lines of credit represented 74.1% of the Company's consumer loan portfolio and
its auto loans represented 10.5% of the portfolio, at September 30, 2003.
4
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,
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2003 2002 2001 2000 1999
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PERCENT PERCENT PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
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(Dollars in thousands)
Real estate loans:
Residential $ 239,704 31.5% $ 300,776 39.2% $ 326,074 42.8% $ 226,961 37.9% $ 221,721 39.1%
Commercial 356,688 46.9% 298,995 39.0% 269,520 35.3% 233,334 38.9% 216,700 38.2%
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Construction 15,427 2.0% 17,075 2.3% 16,379 2.2% 7,300 1.2% 13,761 2.4%
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Total real estate loans 611,819 80.4% 616,846 80.5% 611,973 80.3% 467,595 78.0% 452,182 79.7%
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Commerical business loans 111,454 14.6% 118,349 15.4% 109,284 14.3% 95,586 16.0% 72,268 12.7%
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Consumer loans:
Home equity lines 28,045 3.7% 14,796 1.9% 7,108 0.9% 5,019 0.8% 6,776 1.2%
Other consumer 9,816 1.3% 16,678 2.2% 34,192 4.5% 30,901 5.2% 36,087 6.4%
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Total consumer loans 37,861 5.0% 31,474 4.1% 41,300 5.4% 35,920 6.0% 42,863 7.6%
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Gross loans $ 761,134 100.0% $ 766,669 100.0% $ 762,557 100.0% $ 599,101 100.0% $ 567,313 100.0%
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Net deferred loan
fees/costs and
unearned discounts (1,657) (1,602) (1,774) (364) (407)
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Total loans $ 759,477 $ 765,067 $ 760,783 $ 598,737 $ 566,906
Allowance for loan losses (14,646) (14,538) (14,333) (11,891) (10,764)
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Total loans receivable,
net $ 744,831 $ 750,529 $ 746,450 $ 586,846 $ 556,142
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The following table presents as of September 30, 2003, the dollar amount of all
loans in the Company's portfolio, excluding loans held for sale, that are
contractually due after September 30, 2004, and indicates whether such loans
have fixed or adjustable interest rates:
DUE AFTER SEPTEMBER 30, 2004
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FIXED ADJUSTABLE
AMOUNT PERCENT AMOUNT PERCENT TOTAL
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(Dollars in thousands)
Real estate loans:
Residential $ 187,040 26.2% $ 49,599 6.9% $ 236,639
Commercial 301,420 42.2% 42,325 5.9% 343,745
Construction 500 0.1% 1,713 0.2% 2,213
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Total real estate loans 488,960 68.5% 93,637 13.0% 582,597
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Commerical business loans 32,479 4.5% 66,189 9.3% 98,668
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Consumer loans:
Home equity lines -- -- 28,045 3.9% 28,045
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Other consumer 5,578 0.8% 350 0.0% 5,928
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Total consumer loans 5,578 0.8% 28,395 3.9% 33,973
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Total gross loans $ 527,017 73.8% $ 188,221 26.2% $ 715,238
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5
LOAN MATURITY. The following table shows the contractual maturity of the
Company's loan portfolio at September 30, 2003. The table does not include loans
held for sale, possible prepayments or scheduled principal amortization.
AT SEPTEMBER 30, 2003
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HOME
EQUITY
RESIDENTIAL COMMERCIAL COMMERCIAL LINES OF OTHER
MORTGAGE MORTGAGE CONSTRUCTION BUSINESS CREDIT CONSUMER TOTAL
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(Dollars in thousands)
Amounts due:
Within one year $ 3,065 $ 12,943 $ 13,214 $ 12,786 $ -- $ 3,888 $ 45,896
After one year:
one to five years 10,702 112,901 1,713 46,292 -- 5,507 177,115
five to ten years 37,608 182,035 500 18,087 28,045 421 266,696
ten to twenty years 135,488 35,437 -- 2,645 -- -- 173,570
more than twenty years 52,841 13,372 -- 31,644 -- -- 97,857
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Total due after one
year 236,639 343,745 2,213 98,668 28,045 5,928 715,238
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Total amount due $ 239,704 $ 356,688 $ 15,427 $ 111,454 $ 28,045 $ 9,816 $ 761,134
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Less:
Net deferred loan fees/costs
and unearned discounts (1,657)
Allowance for loan losses (14,646)
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Loans receivable, net $ 744,831
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The Company participates with other financial institutions in certain larger
credits (both selling and purchasing interests) and also purchases loans from
other financial institutions and brokers. The Company also sells or enters into
commitments to sell certain fixed rate mortgage loans to Freddie Mac, as well as
to other third parties. Historically, the Company has sold substantially all of
its 30-year conforming fixed rate mortgage loans and, from time to time as
conditions warrant, its 15-year conforming fixed rate mortgage loans into the
secondary mortgage market. During fiscal 2003 and 2002, the Company sold $17.1
million and $10.7 million, respectively, of 30-year fixed-rate mortgage loans in
the secondary mortgage market. The Company enters into mandatory commitments and
option agreements to reduce the interest rate risk associated with mortgage
loans held for sale, outstanding loan commitments and uncommitted loan
applications with rate lock agreements, which are intended to be held for sale.
The Company typically retains servicing rights on loans sold in order to
generate loan servicing fee income. At September 30, 2003, the Company serviced
mortgage loans for others with an aggregate principal balance of $122.5 million,
and had mortgage servicing rights of $641 thousand.
The following is a more detailed discussion of the Company's current lending
practices.
COMMERCIAL REAL ESTATE LENDING. The Company originates commercial real estate
loans primarily in its eight-county market area; as well as, New York City,
central/western New York, Florida and to a lesser extent in other states. The
Metropolitan New York portfolio is secured primarily by apartments and co-op
buildings in the Bronx (56.6%), Queens County (22.5%), Kings County (6.8%) and
Westchester (4.3%). At September 30, 2003, the Company's commercial real estate
loan portfolio by sector is secured as follows: 29.4% by office and warehouse
buildings, 26.7% by apartment buildings and cooperatives; 26.4% by retail
buildings; 1.8% by buildings owned by non-profit organizations; 1.2% by
hospitality industry; and 14.5% by other property types.
The Company's commercial real estate loans outstanding increased $57.7 million
or 19.3%, in fiscal 2003, compared to growth of $29.5 million or 10.9% in fiscal
2002 and $36.2 million or 15.5% in fiscal 2001. Loans originated in fiscal year
2003 and 2002 were $92.3 million and $46.4 million, respectively. The Company's
commercial real estate lending marketing efforts include: loan officers calling
on prospective borrowers, soliciting existing customers for additional business,
referrals from the branch system, networking with professionals within the local
real estate industry and maintaining contacts with other commercial real estate
lenders (banks, insurance companies and the conduits).
6
In addition to business development, the Company's commercial real estate loan
officers are also responsible for the initial review of proposed commercial real
estate loans. Credit memorandums are generally prepared by the department's
underwriting staff. The Company's underwriting standards focus on: a review of
the property's cash flow, appraisal value, leases, occupancy percentages,
physical condition of the property, credit worthiness of major tenants and the
financial condition and credit history of the borrowers and any guarantors.
A few of the important underwriting benchmarks are the property's ability to
support (cover) the annual debt service. Typically the Company looks for at
least a 1.20 debt coverage ratio. Property occupancy percentage generally needs
to be at least at break-even level, though it can be less if the appropriate
risk mitigants are in place. Loan to value ("LTV") ratios (per bank ordered
appraisals) generally do not exceed 75% to 80%. If additional collateral or
credit enhancement is provided, the "LTV" can exceed 80%.
The Company prices its commercial real estate loans using the following indices:
Prime, London Inter-bank Offer Rate ("LIBOR"), the Treasury Constant Maturities
Index and Federal Home Loan Bank of NY borrowing rates. The Company adds a
premium (a "spread") to the index to determine the interest rate. These spreads
vary depending on the risk profile of the credit. Generally, loans have
maturities of five to ten years and are amortized over 10-25 years. Construction
loans are generally written for terms up to twenty-four months. Typically,
construction loans are priced to float over the prime rate or the 30, 60 or 90
day LIBOR, with a spread. Commitment fees may also be earned on new
transactions. Generally fees range from .25% to 1.00% of the commitment amount.
The Company's lending authority empowers the Vice President & Director of
Commercial Mortgage Lending to approve unsecured loans up to $75,000 and up to
$322,700 for loans secured by real estate. The Company's Commercial Mortgage
Credit Committee approves real estate secured loans (and total relationship
exposure) over $322,700 up to $1.5 million. The Committee also reviews and
recommends for approval loans (and total relationship exposure) over $1.5
million; loans in excess of $1.5 million require the approval of the Board of
Directors' Loan Committee.
Department management is responsible for monitoring the Company's commercial
mortgage portfolio. Under management's direction, department staff collect
delinquent loans, review annual financial statements, perform property
inspections and prepare annual loan reviews. The purpose of the annual review is
to determine the property's current status and whether the present loan rating
reflects the current risk. If the loan review warrants a change in loan grade,
it is indicated on the loan review form. The Company employs an outside
consultant, who was previously a senior credit officer for a large commercial
bank, to evaluate the annual loan reviews prepared by the department. The scope
of the consultant's annual review covers approximately 75% to 80% of the
Company's commercial real estate portfolio. The consultant issues his reports as
to the effectiveness of the department's loan review process and renders an
opinion on the risk profile of the overall portfolio.
COMMERCIAL BUSINESS LENDING. The Company has actively sought to originate
commercial business loans in its market area. The Company originated $40.8
million and $51.5 million of commercial business loans in fiscal years 2003 and
2002, respectively. The Company's commercial loans generally range in size up to
$10.0 million, and the borrowers are principally located within the Company's
market area. The Company offers both fixed rate loans, with terms ranging from
three to seven years and adjustable rate lines of credit. At September 30, 2003,
68.0% of the Company's outstanding commercial loan portfolio consisted of
variable rate loans. As a general rule, the Company sets the interest rates on
its loans based on the prime rate, LIBOR, or other index rates, plus a spread,
and its variable-rate loans reprice at least every 90 days. The Company's
commercial loans include loans to finance equipment, working capital and
accounts receivable. These loans are made to a diverse customer base that
includes manufacturers, wholesalers, retailers, service providers, educational
institutions and government funded entities. The Company also participates in
two syndicated credits on businesses located in its market area. At September
30, 2003, the total outstanding balance on these syndicated loans was $10.1
million and the unused commitment available was $10.4 million.
The Company solicits commercial loan business through its commercial loan
officers, who call on potential borrowers and follow up on referrals from other
Company employees. The commercial loan officers market the Company's commercial
loan products by focusing on the Company's competitive pricing, the Company's
reputation for service and the Company's ties to the local business community.
In many cases, the Company's senior management, including the President, meet
with prospective borrowers.
The Company also has a small business lending program whereby the Company lends
money to small, locally-owned and operated businesses. During the fiscal year
ended September 30, 2003, the Company originated $5.1 million of new small
business loans, down from $10.3 million in the prior year. At September 30,
2003, the Company had $23.8 million of such loans outstanding.
7
Approximately 10% of the Company's small business loans are secured by cash
collateral or marketable securities or are guaranteed up to 90% of the principal
amount by the Small Business Administration.
In addition to developing business, the Company's commercial loan officers are
responsible for underwriting the commercial loans and monitoring the ongoing
relationship between the borrower and the Company. Following the loan officer's
initial underwriting and preparation of a credit memorandum, the loan
application is reviewed by the Vice President and Director of Commercial
Lending, who has authority to approve loans of less than $250 thousand. Loans
between $250 thousand and $1.0 million require approval of the Company's
Commercial Loan Credit Committee, and loans in excess of $1.0 million require
approval of the Board of Directors' Loan Committee. The Company's underwriting
standards focus on a review of the potential borrower's cash flow, as well as
the borrower's leverage and working capital ratios. To a lesser extent, the
Company will consider the collateral securing the loan and whether there is a
personal guarantee on the loan.
To assist with the initial underwriting and ongoing maintenance of the Company's
commercial loans, the Company employs the same risk rating system used by the
Company's commercial real estate loan department. See "Commercial Real Estate
Lending". At the time a loan is initially underwritten, as well as every time a
loan is reviewed, the Company assigns a risk rating. In addition, the Company
employs an annual review process, in which an outside consultant reviews 75% to
80% of the Company's commercial loan portfolio to confirm the Company's assigned
risk rating and to review the Company's overall monitoring of the loan
portfolio.
The Company monitors its commercial loan portfolio by closely watching all loans
with a risk rating which indicates certain adverse factors, such as insufficient
debt service ratio or cash flow issues. In addition, the Company receives
delinquency reports beginning on the 10th of every month. If a loan payment is
more than 20 days late, the commercial loan officer begins active loan
management, which initially includes calling the borrower or sending a written
notice. Moreover, because the Company's lines of credit expire every 12 months,
or five months after the borrower's fiscal year end, and the borrower is
required to renew the line of credit at such time, the Company, in effect,
re-underwrites the loan annually. A term loan often includes a line of credit,
in which case the status of the borrower and loan is reviewed annually because
of the line of credit review. In all reviews, the Company analyzes the
borrower's most current financial statements, and in most cases will visit the
borrower or inspect the borrower's business and properties.
SINGLE FAMILY RESIDENTIAL LENDING. The Company originated $79.7 million and
$60.2 million of single-family residential real estate loans in fiscal years
2003 and 2002, respectively. Substantially all the Savings Bank's residential
mortgage loans were originated through Family Mortgage Banking Co., Inc.
("FMBC"), the Savings Bank's mortgage banking subsidiary. FMBC currently employs
two full-time and two part-time loan counselors, who are responsible for
developing the Company's mortgage business by meeting with referrals, networking
with representatives of the local real estate industry and sponsoring home
buying seminars. In addition, the Company's CSSRs are trained to refer potential
mortgage customers to FMBC. Although FMBC meets with applicants and assists with
the application process, the Company handles the processing, underwriting,
funding and closing of all residential mortgage loans. Single-family residential
mortgage loans not originated through FMBC generally are originated through
independent mortgage brokers or by the Savings Bank.
The Company currently makes a variety of fixed rate and adjustable rate mortgage
loans ("ARMs"), which are secured by one-to four-family residences located in
the Company's eight-county market area. The Company originates mortgage loans
that conform to Freddie Mac guidelines, as well as jumbo loans, which are loans
in amounts over $322,700, and loans with other non-conforming features. The
Company will underwrite a single family residential mortgage loan with an LTV
ratio of up to 95% with private mortgage insurance, and the Company's fixed rate
mortgages generally have contractual maturities of 10 to 30 years.
The Company offers a variety of ARM programs based on market demand. The Company
generally amortizes an ARM loan over 30 years. On certain ARMs, the Company
offers a conversion option, whereby the borrower, at his or her option, can
convert the loan to a fixed interest rate, after a predetermined period of time,
generally 10 to 57 months. Interest rates are generally adjusted based on a
specified margin over the Constant Treasury Maturity Index. Interest rate
adjustments on such loans are limited by both annual adjustment caps and maximum
rate adjustments over the life of the loan. The origination of ARMs, as opposed
to fixed rate loans, helps reduce the Company's exposure to increases in
interest rates. However, during periods of rising interest rates, ARMs may
increase credit risks not inherent in fixed rate loans, primarily because as
interest rates rise, the payment obligations of the borrower rises, thereby
increasing the potential for default. The annual and lifetime adjustable caps
however, help to reduce this risk. The volume and type of ARMs originated
through FMBC are affected by numerous market factors, including the level of
interest rates, competition, consumer preferences and the availability of funds.
At September 30, 2003, the Company held $49.7 million of ARMs in its loan
portfolio, most of which reprice annually after their initial pricing period,
which can range up to five years.
8
Single-family residential loans are generally underwritten according to Freddie
Mac guidelines. The Company requires borrowers who obtain mortgage loans with an
LTV ratio greater than 80% to obtain private mortgage insurance in an amount
sufficient to reduce the Company's exposure to not more than 80% of the purchase
price or appraised value, whichever is lower. In addition, the Company requires
escrow accounts for the payment of taxes and insurance, if the LTV ratio exceeds
80%, but permits borrowers to request an escrow account waiver, if the LTV ratio
is less than 80%. Substantially all mortgage loans originated by the Company
include due-on-transfer clauses, which generally provide the Company the
contractual right to deem the loan immediately due and payable if the borrower
transfers ownership of the property without the Company's consent. The Company's
staff underwriters have authority to approve loans in amounts up to $322,700.
Loans between $322,700 and $1.5 million require the approval of the Company's
Commercial Mortgage Credit Committee, and loans in excess of $1.5 million
require the approval of the Loan Committee of the Board of Directors.
To help low and moderate income home buyers in the Company's communities, the
Company participates in residential mortgage programs and products sponsored by
the State of New York Mortgage Agency ("SONYMA") and the Federal Housing
Authority ("FHA"). SONYMA and FHA mortgage programs provide low and moderate
income households with smaller down payments and below market interest rates.
The Company sells its SONYMA loans back to SONYMA for resale in the secondary
market. The Company also is a charter member of the Capital District Affordable
Housing Partnership, a local lending consortium that makes mortgage funds
available to homebuyers who are unable to obtain conventional financing. The
Company also participates in the Capital District Community Loan Fund and the
FHLB Home Buyer's Club. Since 1993, the Company has made available to low to
moderate income first-time homebuyers over $15.0 million of conventional no down
payment mortgages.
To complement the Company's portfolio of residential mortgage loan products, the
Company also originates fixed rate home equity mortgage loans. A first or second
mortgage on the owner-occupied property secures these loans. During fiscal 2003,
the Company originated $1.3 million of home equity mortgage loans. As of
September 30, 2003, the average size of the Company's outstanding home equity
mortgage loans in its residential mortgage loan portfolio was $20 thousand.
CONSUMER LENDING. In addition to the Company's residential mortgage loans, the
Company offers a variety of consumer credit products, including home equity
lines of credit, variable rate or Creative Loans, auto loans, fixed rate
consumer loans and overdraft protection. The objective of the Company's consumer
lending program is to maintain a profitable loan portfolio and to serve the
credit needs of the Company's customers and the communities, in which it does
business, while providing for adequate liquidity, higher yielding short duration
assets, as well as portfolio diversification.
The Company offers home equity lines of credit in amounts up to $100,000. During
fiscal year 2003, the Company approved new lines of credit totaling $28.0
million. With the Prime Rate at its lowest point in over forty years, the
Company took this opportunity in fiscal 2003 to generate new home equity credit
lines and loans and has commenced an aggressive campaign to increase
outstandings. These products represent a significant growth opportunity to the
consumer loan portfolio, as rates are very favorable (variable rate funding) and
this type of financing continues to be in high demand, as evidenced by a record
breaking home equity origination in 2003. The campaign was introduced throughout
the Bank's market area (Capital and Catskill Regions) via an internal branch
effort and externally through newspaper, direct mail, radio and billboard. The
home equity lines of credit have variable interest rates and are available only
if the LTV ratio is less than 90%.
The Company's fixed rate consumer loans are typically made to finance the
purchase of new or used automobiles. In such cases, the Company offers 100%
financing on new automobiles for terms up to 60 months and 80% financing on used
automobiles for terms dependent on the age of the vehicle. The Company also
offers unsecured lines of credit or overdraft protection to credit qualified
depositors who maintain checking accounts with the Company. In addition to
covering overdrafts on checking accounts, these unsecured lines of credit are
accessible to borrowers from ATMs throughout the world.
The Company markets its consumer credit products through its branches, local
advertisements and direct mailings. Applications can be completed at any branch
of the Company, and, in most cases, the Company will respond to a customer's
completed credit application within 24 hours, including the funding of approved
loans. Individual authority to approve consumer loans varies by the amount of
the loan and whether it is real estate related. Consumer loans are underwritten
according to the Company's Consumer Loans Underwriting practices, and loan
approval is based primarily on review of the borrower's employment status,
credit report and credit score.
CONSTRUCTION LENDING. The Company offers residential construction loans to
individuals who are constructing their own homes in the Company's market area.
Generally, in these cases, the Company is familiar with the builders utilized by
the Company's borrowers and has a long-standing relationship with them. The
Company's residential mortgage loan origination group monitors the periodic
9
disbursements of all construction loans. Before advances are made, the Company's
independent appraisers provide reports comparing the progress of the
construction to the pre-construction schedule. In many cases, the Company
converts construction loans to traditional residential mortgage loans, following
completion of construction. At September 30, 2003, the Company had $1.7 million
of residential construction loans outstanding, which are reported with
residential mortgage loans.
The Company's construction loans generally have terms up to six months, and
require payment of interest only. If construction is not completed on schedule,
the Company charges the borrower additional fees in connection with an extension
of the loan. The Company's staff underwriters have approval authority of up to
$322,700. Loans in excess of $322,700 require approval of the Commercial
Mortgage Credit Committee, and loans in excess of $1.5 million require approval
of the Loan Committee of the Board of Directors.
Construction lending generally involves greater credit risk than permanent
financing on owner-occupied real estate. The risk of loss is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction, compared to the estimated cost of construction, including
interest, and the ability of the builder to complete the project. If the
estimate of the value proves to be inaccurate, then the Company may be
confronted with a project that, when completed, has a value that is insufficient
to assure full repayment of the loan.
The Company also makes construction loans on commercial real estate projects
where the borrowers are well known to the Company and have the necessary
liquidity and financial capacity to support the projects through to completion
and the source of permanent financing, whether the Company or another
institution, can be verified. All commercial real estate construction lending is
done on a recourse basis. As of September 30, 2003, the Company had $15.4
million of commercial real estate construction loans outstanding, or 2.0% of the
Company's loans and 1.1% of total assets.
LOAN REVIEW. As part of the portfolio monitoring process, commercial business
loans and commercial real estate loans over $1 million are subjected to an
annual detailed loan review. Classified loans over $100,000 (see below) in both
portfolios are subjected to this process quarterly. Current financial
information is analyzed and the loan rating is evaluated to determine if it
still accurately represents the level of risk posed by the credit. These reviews
are then analyzed by an outside consultant who decides on the reasonableness of
the loan officers' conclusions with respect to the loans risk rating and the
related allowance for loan loss, if any. For classified loans, these reviews are
complemented by a quarterly loan officer meeting with the outside consultant and
the Company's Chief Credit Officer. The conclusions reached at these meetings
become an integral part of the quarterly review of loan loss reserve adequacy.
DELINQUENT LOANS. It is the policy of management to monitor the Company's loan
portfolio to anticipate and promptly 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 and consumer loans, when a
borrower fails to make a payment on the loan, the Company takes immediate steps
to have the delinquency cured and the loan restored to current status. On the
15th of every month, the Credit Administration Department prepares delinquency
reports. The Company's collection manager and his staff then contact the
borrower by telephone to ascertain the reason for the delinquency and the
prospects of repayment. Written notices are also sent at that time. The borrower
is again contacted by telephone on the 20th and 26th of the month, if payment
has not been received. After 30 days another notice is sent and the borrower is
reported as delinquent. The Credit Administration Department continues to call
the borrower and if payment has not been received by the 60th day, another
notice is sent informing the borrower that the loan must be brought current
within the next 30 days or foreclosure proceedings will be commenced. Generally,
the Company does not accrue interest on loans more than 90 days past due. The
Company's procedures for single family residential loans which have previously
been sold by the Company, but which the Company currently services are similar
during the first 60 days. After 60 days, the Company follows the Freddie Mac or
applicable investor guidelines and timeframes regarding delinquent loan
accounts.
With respect to commercial real estate and commercial business loans, the Credit
Administration Department delivers delinquency reports to the respective
departments beginning on the 10th of every month. If a loan payment is more than
20 days late, the loan officer begins active loan management.
CLASSIFIED ASSETS. The Company's policies require the classification of loans
and other assets, such as debt and equity securities, considered to be of lesser
quality, as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the current net worth and
paying capacity of the borrower or of the collateral pledged, if any.
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
10
characteristic that the weaknesses present make collection or liquidation in
full improbable. Assets classified, as "loss" are those considered uncollectible
and of such little value that there continuance as assets without the
establishment of a specific loss reserve is not warranted. At September 30,
2003, the Company had classified $4.0 million of assets as "substandard" and
$714 thousand of assets as "doubtful." At such date, the Company did not have
any assets classified as "loss."
In addition to classified assets, the Company also has certain "special mention"
or "watch list" assets that have characteristics, features or other potential
weaknesses that warrant special attention. At September 30, 2003, that were
twenty loan relationships classified as special mention totaling $13.1 million,
or 1.7% of total loans and 1.0% of total assets. The majority of these twenty
relationships are well secured by real estate or other collateral. The largest
single relationship is approximately $4.9 million and is secured by office
buildings. The credit for this relationship is criticized due to vacancies below
the level needed to service the debt.
NON-PERFORMING ASSETS. The Company places a loan on non-accrual status when the
loan is contractually past due 90 days or more, or when, in the opinion of
management, the collection of principal and/or interest is doubtful. At such
time, all accrued but unpaid interest is reversed against current period income
and as long as the loan remains on non-accrual status, interest is recognized
only when received, if considered appropriate by management. In certain cases,
the Company will not classify a loan that is contractually past due 90 days or
more as non-accruing, if management determines that the particular loan is well
secured and in the process of collection. In such cases, the loan is simply
reported as "past due." Loans are removed from non-accrual status when they
become current as to principal and interest, or when in the opinion of
management, the loans are expected to be fully collectible as to principal and
interest. The Company did not have any loans classified as 90 days past due and
still accruing interest at September 30, 2003. 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, 2003, the Company had one commercial
mortgage loan secured by real estate for $500 thousand classified as a TDR.
Additionally, at September 30, 2003, the Company identified approximately $2.7
million of loans that have more than normal credit risk, including the ability
of such borrowers to comply with their present loan repayment terms. This
represents a decrease of $2.7 million from the $5.4 million reported at
September 30, 2002. Substantially all of these loans are unsecured commercial
business loans. The Company believes that if economic or business conditions
deteriorate in its lending area, some of these loans could become
non-performing, however the Company has already considered these loans in
determining the adequacy of its allowance for loan losses.
The Company classifies property that it acquires through foreclosure or
settlement in lieu thereof as other real estate owned ("OREO"). The Company
records OREO at the lower of the unpaid principal balance or fair value less
estimated costs to sell at the date of acquisition and subsequently recognizes
any decrease in fair value by a charge to non-interest expenses. At September
30, 2003, the Company had $129 thousand of OREO resulting from single family
residential mortgage loans, and $287 thousand from commercial real estate loans.
11
The following presents the amounts and categories of non-performing assets at
the dates indicated:
AT SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans:
Real estate loans:
Residential $ 1,015 $ 1,147 $ 1,825 $ 2,424 $ 2,707
Commercial 366 555 898 2,829 4,210
Construction -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total real estate loans 1,381 1,702 2,723 5,253 6,917
Commercial business loans 717 264 283 103 10
Home equity lines 21 30 83 84 58
Other consumer loans 47 101 160 160 282
- ---------------------------------------------------------------------------------------------------------------------------
Total non-accrual loans 2,166 2,097 3,249 5,600 7,267
- ---------------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings 500 -- -- 53 616
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing loans 2,666 2,097 3,249 5,653 7,883
- ---------------------------------------------------------------------------------------------------------------------------
Other real estate owned:
Residential real estate 129 227 140 240 76
Commercial real estate 287 125 125 1,033 1,769
- ---------------------------------------------------------------------------------------------------------------------------
Total other real estate owned 416 352 265 1,273 1,845
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing assets $ 3,082 $ 2,449 $ 3,514 $ 6,926 $ 9,728
===========================================================================================================================
Allowance for loan losses $ 14,646 $ 14,538 $ 14,333 $ 11,891 $ 10,764
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses as a percentage of
total loans 1.93% 1.90% 1.88% 1.99% 1.90%
Allowance for loan losses as a percentage of
non-performing loans 549.36% 693.28% 441.15% 210.35% 136.55%
Non-performing loans as a percentage of
total loans 0.35% 0.27% 0.43% 0.94% 1.39%
Non-performing assets as a percentage of
total assets 0.23% 0.19% 0.30% 0.75% 1.06%
===========================================================================================================================
For the years ended September 30, 2003, 2002 and 2001, the interest income that
would have been recorded if the non-accrual loans were on an accrual basis, or
had the rate not been reduced with respect to the loans restructured in troubled
debt restructuring, amounted to $148 thousand, $123 thousand, and $210 thousand,
respectively.
ALLOWANCE FOR LOAN LOSSES. In originating loans, there is a substantial
likelihood that loan losses will be experienced. The risk of loss varies with,
among other things, general economic conditions, the type of loan,
creditworthiness of the borrower and in the case of a collateralized loan, the
quality of the collateral securing the loan. In an effort to minimize loan
losses, the Company monitors its loan portfolio by reviewing delinquent loans
and taking appropriate measures. In addition, with respect to the Company's
commercial real estate and commercial business loans, the Company closely
watches all loans with a risk rating that indicates potential adverse factors.
Moreover, on an annual basis, the Company reviews borrowers' financial
statements, including rent rolls if appropriate, and in some cases, inspects
borrowers' properties in connection with the annual renewal of lines of credit.
Furthermore, the Company's outside consultant periodically reviews the credit
quality of the loans in the commercial real estate and commercial business loan
portfolios, and, together with the Company's Commercial Loan Credit Committee,
reviews quarterly, all classified loans over $100,000 with a risk rating that
indicates the loan has certain weaknesses.
Based on management's on-going review of the Company's loan portfolio, including
the inherent risks therein, historical loan loss experience, general economic
conditions, and trends and other factors, the Company maintains an allowance for
loan losses to cover probable loan losses. The allowance for loan losses is
established through a provision for loan losses charged to operations. The
12
provision for loan losses is based on a number of factors including; historical
loan loss experience, changes in the types and volume of the loan portfolio,
overall portfolio quality including past due and non-accrual trends, loan
concentrations, review of specific problem loans, changes in lending policy and
procedures including underwriting, industry trends, and general economic
conditions which may effect the borrowers' ability to pay. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of all or a portion of the principal is unlikely. The allowance
is an amount that management believes will be adequate to absorb probable losses
on existing loans. Based on information currently known, management considers
the current level of reserves adequate to cover probable loan losses, although
there can be no assurance that such reserves will in fact be sufficient to cover
actual losses. At September 30, 2003, the Company's allowance for loan losses
was $14.6 million, or 1.93% of total loans and 549.36% of non-performing loans.
Net charge-offs during the year ended September 30, 2003 were $452 thousand,
down $509 thousand or 53.0%, from fiscal 2002. The Company continues to monitor
and modify its allowance for loan losses as conditions dictate. The following
table is a summary of the activity in the Company's allowance for loan losses
over the last five years:
FOR THE YEARS ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Total loans outstanding at end of period $ 759,477 $ 765,067 $ 760,783 $ 598,737 $ 566,906
- ---------------------------------------------------------------------------------------------------------------------------
Average total loans outstanding $ 770,507 $ 761,682 $ 741,709 $ 594,570 $ 505,489
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at beginning of year $ 14,538 $ 14,333 $ 11,891 $ 10,764 $ 8,260
Loan charge-offs:
Residential real estate (154) (120) (258) (412) (362)
Commercial real estate (4) (128) (20) (550) (252)
Construction -- -- (89) (375) --
Commercial business (93) (374) (184) (40) (75)
Home equity lines -- -- -- -- --
Other consumer loans (343) (595) (1,041) (565) (306)
- ---------------------------------------------------------------------------------------------------------------------------
Total charge-offs (594) (1,217) (1,592) (1,942) (995)
- ---------------------------------------------------------------------------------------------------------------------------
Loan recoveries:
Residential real estate 4 19 26 84 40
Commercial real estate 5 4 71 155 176
Construction 17 31 32 219 13
Commercial business 19 69 22 6 8
Home equity lines -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Other consumer loans 97 133 201 42 12
- ---------------------------------------------------------------------------------------------------------------------------
Total recoveries 142 256 352 506 249
- ---------------------------------------------------------------------------------------------------------------------------
Net charge-offs (452) (961) (1,240) (1,436) (746)
- ---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 560 1,166 1,498 2,563 3,250
- ---------------------------------------------------------------------------------------------------------------------------
Allowance acquired -- -- 2,184 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $ 14,646 $ 14,538 $ 14,333 $ 11,891 $ 10,764
===========================================================================================================================
Net charge-offs to average loans 0.06% 0.13% 0.17% 0.24% 0.15%
- ---------------------------------------------------------------------------------------------------------------------------
Allowance as a percentage of non-performing loans 549.36% 693.28% 441.15% 210.35% 136.55%
- ---------------------------------------------------------------------------------------------------------------------------
Allowance as a percentage of period-end loans 1.93% 1.90% 1.88% 1.99% 1.90%
- ---------------------------------------------------------------------------------------------------------------------------
13
The following table presents an allocation of the Company's allowance for loan
losses, the percent of allowance for loan losses to total allowance and the
percent of loans to total loans in each of the categories listed at the dates
indicated. This allocation is management's assessment of the risk
characteristics of each of the component parts of the total loan portfolio
outstanding and is subject to change. The allocation is neither indicative of
the specific amounts or the loan categories in which future charge-offs may
occur nor is it an indicator of future loss trends. The allocation of the
allowance to each category does not restrict the use of the allowance to absorb
losses in any category.
AT SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
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 $ 1,072 7.3% 31.5% $ 1,444 9.9% 39.2% $ 2,085 14.5% 42.8%
Commercial mortgage 6,630 45.3% 46.9% 6,548 45.1% 39.0% 5,504 38.4% 35.3%
Construction 439 3.0% 2.0% 454 3.1% 2.3% 470 3.3% 2.2%
Commercial business loans 2,823 19.3% 14.6% 2,723 18.7% 15.4% 2,636 18.4% 14.3%
Home equity lines of
credit 701 4.8% 3.7% 406 2.8% 1.9% 211 1.4% 0.9%
Other consumer loans 238 1.6% 1.3% 468 3.2% 2.2% 1,012 7.1% 4.5%
Unallocated 2,743 18.7% 2,495 17.2% 2,415 16.9%
- -----------------------------------------------------------------------------------------------------------------------
Total $ 14,646 100.0% 100.0% $ 14,538 100.0% 100.0% $ 14,333 100.0% 100.0%
=======================================================================================================================
- --------------------------------------------------------------------------------------------------
2000 1999
- --------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------
Allocation of allowance
for loan losses:
Real estate loans:
Residential mortgage $ 2,062 17.3% 37.9% $ 1,967 18.2% 39.1%
Commercial mortgage 5,533 46.5% 38.9% 5,379 50.0% 38.2%
Construction 297 2.5% 1.2% 95 0.9% 2.4%
Commercial business loans 2,059 17.3% 16.0% 1,716 15.9% 12.7%
Home equity lines of
credit 128 1.1% 0.8% 117 1.1% 1.2%
Other consumer loans 685 5.8% 5.2% 534 5.0% 6.4%
Unallocated 1,127 9.5% 956 8.9%
- --------------------------------------------------------------------------------------------------
Total $ 11,891 100.0% 100.0% $ 10,764 100.0% 100.0%
==================================================================================================
14
SECURITIES
The Company's securities portfolio is comprised of securities available for sale
and securities held to maturity. At September 30, 2003, the Company had $414.3
million, or 30.3% of total assets, in securities available for sale and $661
thousand, or less than 0.1% of total assets, in securities held to maturity. The
portfolios consist primarily of U.S. government securities and agency
obligations, corporate debt securities, municipal securities, mortgage-backed
securities, mutual funds and equity securities. Management determines the
appropriate classification of securities at the time of purchase. If management
has the positive intent and ability to hold debt securities to maturity, then
they are classified as securities held to maturity and are carried at amortized
cost. Securities if any, that are identified as trading account assets for
resale over a short period are stated at fair value with unrealized gains and
losses reflected in current earnings. All other debt and equity securities are
classified as securities available for sale and are reported at fair value, with
net unrealized gains or losses reported, net of income taxes, as a separate
component of equity. At September 30, 2003, the Company did not hold any
securities considered to be trading securities. As a member of the FHLB of New
York ("FHLB"), the Company is also required to hold FHLB stock, which is carried
at cost because the FHLB stock is not transferable and may only be redeemed by
the FHLB. At September 30, 2003, the Company did not hold the securities of any
one issuer in an amount that exceeded 10% of the Company's equity, except for
securities issued by the U.S. Government, or its agencies.
The Company's investment policy focuses investment decisions on maintaining a
balance of high quality, diversified investments. In making its investments, the
Company also considers optimal balance sheet structure, including repricing,
liquidity, collateral for pledging purposes, and earnings. Investment decisions
are made by the Company's Chief Financial Officer who has authority to purchase,
sell or trade securities qualifying as eligible investments under applicable law
and in conformity with the Company's investment policy. In addition, the
Company's Vice President and Director of Municipal Finance is authorized to
purchase municipal securities for the Commercial Bank's portfolio.
Under the Company's investment policy, eligible securities include: U.S.
Treasury obligations, securitized loans from the Company's loan portfolio,
municipal securities, corporate debt securities, mutual funds, common stock,
preferred stock, convertible preferred stock, convertible notes and bonds, U.S.
governmental agency or agency-sponsored obligations, collateralized mortgage
obligations and REMICs, banker's acceptances and commercial paper, certificates
of deposit and federal funds.
The following table presents the composition of the Company's securities
available for sale and securities held to maturity in dollar amounts and
percentages at the dates indicated.
AT SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
CARRYING PERCENT CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL VALUE OF TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Securities available for sale (at fair value)
U.S. Government securities and agency obligations $ 84,958 20.5% $ 146,313 37.1% $ 60,463 24.3%
Obligations of states and political subdivisions 262,714 63.4% 143,989 36.5% 87,308 35.1%
Mortgage-backed securities 34,364 8.3% 47,471 12.1% 50,312 20.3%
Corporate debt securities 19,897 4.8% 25,274 6.4% 13,639 5.5%
Mutual funds and marketable equity securities 3,750 0.9% 25,717 6.5% 28,669 11.5%
Non-marketable equity securities 8,582 2.1% 5,303 1.4% 8,078 3.3%
- ------------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 414,265 100.0% 394,067 100.0% 248,469 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
Securities held to maturity (at amortized cost):
Mortgage-backed securities 661 100.0% 883 100.0% 1,130 53.1%
Corporate and other debt securities -- 0.0% -- 0.0% 1,000 46.9%
- -----------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity 661 100.0% 883 100.0% 2,130 100.0%
- ------------------------------------------------------------------------------------------------------------------------------
Total securities portfolio $414,926 $ 394,950 $ 250,599
==============================================================================================================================
15
The following table presents information regarding the amortized cost, weighted
average yields and contractual maturities of the Company's securities available
for sale and securities held to maturity debt portfolios (excludes mutual fund
shares and equities) as of September 30, 2003. Weighted average yields are based
on amortized cost.
AT SEPTEMBER 30, 2003
- ---------------------------------------------------------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS MORE THAN TEN YEARS TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE AMORTIZED AVERAGE
COST YIELD(1) COST YIELD(1) COST YIELD(1) COST YIELD(1) COST YIELD(1)
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Securities available for
sale:
U.S. Government
securities
and agency obligations $ 84,959 0.96% $ -- $ -- $ -- $ 84,959 0.96%
Obligations of states
and political
subdivisions 161,758 2.35% 94,162 2.63% 5,345 5.72% 50 6.67% 261,315 2.52%
Mortgage-backed
securities 5 6.74% 426 7.01% 1,893 7.16% 30,873 5.02% 33,197 5.17%
Corporate debt
securities -- 12,300 2.55% -- 7,589 2.72% 19,889 2.61%
- ---------------------------------------------------------------------------------------------------------------------------------
Total available for
sale $246,722 1.87% $ 106,888 2.63% $7,238 6.10% $38,512 4.57% $399,360 2.41%
=================================================================================================================================
Securities held to maturity:
Mortgage-backed
securities -- 126 8.21% 535 8.06% 661 8.09%
- ---------------------------------------------------------------------------------------------------------------------------------
Total held to maturity $ -- $ 126 8.21% $ 535 8.06% $ -- $ 661 8.09%
=================================================================================================================================
(1) Weighted average yields are presented on a tax equivalent basis, using an
assumed Federal tax rate of 35%.
The following is a more detailed discussion of the Company's securities
available for sale and securities held to maturity portfolios:
U.S GOVERNMENT SECURITIES AND AGENCY OBLIGATIONS. The Company invests in U.S.
Treasury securities, debt securities and mortgage-backed securities issued by
government agencies and government sponsored entities such as Fannie Mae, the
FHLBs, the Government National Mortgage Association ("Ginnie Mae") and the
Federal Home Loan Mortgage Corporation ("Freddie Mac"). At September 30, 2003,
the Company held, as available for sale, $85.0 million of non-government
guaranteed bonds issued by the FHLBs, Freddie Mac and Fannie Mae. These
securities had an average yield of 0.96%, weighted average life of less than
one-month and were rated "AAA". The Company's investment policy does not limit
the amount of U.S. government and agency obligations that the Company can hold.
OBLIGATIONS OF STATES AND POLITICAL SUBDIVISIONS. At September 30, 2003, $200.9
million of the Company's securities consisted of tax-exempt municipal bonds and
notes, all of which were classified as available for sale. Of that total, $71.3
million were invested in general and revenue obligations of jurisdictions in the
State of New York representing relationship investments in municipalities,
including counties, cities, school districts, towns, villages and fire
districts. In addition, the Company held $60.4 million in taxable municipal
bonds of various municipalities throughout the United States, of which, $24.5
million were taxable municipal bonds of municipalities within New York State.
The Company's municipal securities have a weighted average maturity of just over
one-year and a taxable equivalent yield of 2.52% at September 30, 2003. Interest
earned on tax-exempt municipal bonds is exempt from Federal income taxes and,
for issues in the State of New York, a portion is excludable from state income
taxes. The Company's investment policy limits the amount of tax-exempt municipal
securities it may hold to 25.0% of the Company's total assets, or approximately
$341.4 million at September 30, 2003, however, the Company continuously monitors
its tax-exempt portfolio to avoid being subject to the alternative minimum tax.
CORPORATE DEBT SECURITIES. The Company's corporate debt securities portfolio at
September 30, 2003 totaled $19.9 million and consisted of general corporate
obligations and an asset-backed security. All of the Company's corporate debt
securities at September 30, 2003, were rated single "A" or higher by at least
one of the rating agencies, and all were classified as available for sale. The
Company's investment policy limits the amount of corporate debt securities to
25.0% of the Company's total assets or approximately $341.4 million at September
30, 2003.
16
MUTUAL FUNDS AND EQUITY SECURITIES. At September 30, 2003, the Company's mutual
funds and equity securities portfolio totaled $12.3 million, all of which were
classified as available for sale. The largest investment in one issuer was $7.7
million in FHLB of New York stock which the Company is required to hold as a
member. Within this portfolio, the Company had $2.0 million of preferred stocks
of a nationally recognized corporation at September 30, 2003.
SOURCES OF FUNDS
The Company's lending and securities activities are primarily funded by
deposits, repayments and prepayments of loans and securities, proceeds from the
sale of loans and securities, proceeds from maturing securities and cash flows
from operations. In addition, the Company borrows from the FHLB of New York to
fund its operations.
DEPOSITS. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposit accounts consist of interest
bearing checking, non-interest bearing checking, regular savings, money market
savings and time deposit accounts. The maturities of the Company's time deposit
accounts range from one month to five years. In addition, the Company offers
IRAs and Keogh accounts. To enhance its deposit products and increase its market
share, the Company offers overdraft protection and direct deposit for its retail
banking customers and cash management services for its business customers. In
addition, the Company offers a low-cost interest bearing checking account
service to its customers over 55 years of age. The Company's ALCO Committee sets
the rates for all deposit products.
At September 30, 2003, the Company's deposits totaled $967.0 million or 70.8% of
total assets. At September 30, 2003, the balance of core deposits, which is
defined to include interest bearing checking, money market, savings and
non-interest bearing checking accounts, totaled $723.5 million, or 74.8% of
total deposits and represented 53.0% of total assets. At September 30, 2003, the
Company had a total of $243.5 million in time deposit accounts, or 25.2% of
total deposits and represented 17.8% of total assets. Time deposits of $193.4
million or 79.4% of total time deposits mature in one year, or less.
The flow of deposits is influenced significantly by general economic conditions,
changes in interest rates and competition. The Company's deposits are obtained
primarily from the eight counties in which the Company's branches are located.
The Company relies primarily on competitive pricing of its deposit products and
customer service and long-standing relationships to attract and retain these
deposits, although market interest rates and rates offered by competing
financial institutions affect the Company's ability to attract and retain
deposits. The Company uses traditional means of advertising its deposit
products, including local radio and print media, and does not solicit deposits
from outside its market area. During fiscal 2003, the Company did not use
brokers to obtain deposits, and at September 30, 2003, the Company had no
brokered deposits. However, the Company may, from time to time, consider these
funding opportunities.
At September 30, 2003, the Company's Commercial Bank had municipal deposits of
$153.5 million, an increase of $76.2 million from the prior fiscal year. The
Company expects the Commercial Bank to continue providing an alternative source
of funding through the generation of municipal deposits.
At September 30, 2003, the Company had $243.5 million in time deposit accounts,
with the following maturities:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- -----------------------------------------------------------------------------
(Dollars in thousands)
Time deposits less than $100,000:
Three months or less $ 54,574 1.96%
Over three months through six months 53,504 1.82%
Over six months through 12 months 55,559 2.01%
Over 12 months 44,395 3.10%
- -----------------------------------------------------------------------------
Total $ 208,032 2.18%
- -----------------------------------------------------------------------------
Time deposits more than $100,000:
Three months or less $ 11,535 1.67%
Over three months through six months 9,973 1.54%
Over six months through 12 months 8,293 1.87%
Over 12 months 5,651 3.33%
- -----------------------------------------------------------------------------
Total $ 35,452 1.94%
- -----------------------------------------------------------------------------
Total time deposits $ 243,484 2.15%
=============================================================================
17
BORROWINGS. The principal source of the Company's borrowings is through the FHLB
and repurchase agreements. The FHLB system functions in a reserve credit
capacity for member savings associations and certain other home financing
institutions. The Company uses FHLB advances as an alternative funding source to
fund its lending activities when it determines that it can profitably invest the
borrowed funds over their term. At September 30, 2003 the Company had $50.0
million in overnight advances from the FHLB and $15.0 million in overnight
federal funds purchased. At September 30, 2003, the Company had long-term
borrowings of $94.9 million outstanding with the FHLB. FHLB long-term fixed rate
borrowings totaled $84.9 million, with a weighted average interest rate of 4.12%
and a weighted average term of 3.6 years. The Company also had $10.0 million of
FHLB long-term borrowings, which adjust monthly at a spread over thirty-day
Libor. In addition, the Company had $12.3 million of long-term non-recourse
mortgage debt associated with the real estate joint venture established in May
2002. The mortgage debt had an original term of 30 years at a fixed rate of
7.48% and at September 30, 2003, has approximately 25 years remaining.
At September 30, 2003, the Company had $34.5 million of borrowed funds in the
form of securities sold under agreements to repurchase, with a weighted average
interest rate of 2.24%. The company had $10.0 million of repurchase agreements
with the FHLB which mature in 2008, and the additional $24.5 million of
repurchase agreements matures within thirty days.
TRUST SERVICES
The Trust Department offers a full range of services, including living trusts,
executor services, testamentary trusts, employee benefit plan management,
custody services and investment management, primarily to individuals,
corporations, unions and other institutions. The Trust Department has retained
the services of two independent investment services firms to provide investment
research. A Trust Committee that consists of the Vice President Trust &
Investment Officer and the President, as well as four members of the Company's
Board of Directors who rotate committee membership on a semi-annual basis,
oversees operations of the Trust Department. The Trust Department markets its
services through its trust officers, who call on the Company's existing
customers, referrals from attorneys and accountants, the Company's CSSRs and
branch managers who cross-sell the Trust Department's services and free seminars
open to the public. As of September 30, 2003, the Trust Department managed over
$374.4 million of assets, which includes $110.1 million over which the Trust
Department has discretionary investment authority. The Trust Department's fee
income, which totaled $715 thousand for the year ended September 30, 2003,
supplements the Company's rate-sensitive interest income.
SAVINGS BANK LIFE INSURANCE
The Company offers a wide variety of low-cost insurance policies, including
whole life, single premium life, senior life and children's term, to its
customers who live or work in the State of New York. Management believes that
offering insurance is beneficial to the Company's relationship with its
customers. The Company receives commission income from the sale and the renewal
of life insurance policies.
SUBSIDIARY ACTIVITIES
The following are descriptions of the Savings Bank's subsidiaries, which are
indirectly owned by Troy Financial.
TROY FINANCIAL INVESTMENT SERVICES GROUP. Troy Financial Investment Services
Group, ("TFISG"), which was incorporated in May 1989, is the Savings Bank's
wholly owned full-service brokerage firm, offering a complete range of
investment products, including mutual funds, debt, equity and government
securities, on a fee-per-transaction basis. TFISG's goal is to market its
products and services to the Company's existing customers who seek alternatives
to traditional financial institution savings products. TFISG has five full time
employees who monitor the Company's branches to facilitate referrals from the
CSSRs and branch managers, as well as two sales support staff who assist
customers with investment decisions and trading. At September 30, 2003, TFISG
managed approximately $90.5 million of customer assets. TFISG is a member of the
National Association of Securities Dealers and is insured by the Securities
Insurance Protection Corporation.
FAMILY MORTGAGE BANKING CO., INC. FMBC, which was incorporated in April 1987, is
the Savings Bank's wholly owned mortgage-banking subsidiary. The Company
originates the majority of its residential real estate and residential
construction loans through applications received from commissioned employees of
FMBC.
INVESTMENT IN REAL ESTATE PARTNERSHIPS. As an extension of the Company's
commercial real estate lending activity, the Company, through its subsidiaries,
has invested in two joint ventures as of September 30, 2003. The Company,
through TSB Real Property, Inc., has a 50% interest in B.A. Park Group, LLC
("B.A. Park"). The carrying amount of the Company's investment at September 30,
2003 was $2.4 million. B.A. Park owns land and office buildings within an office
park. The
18
office park is a suburban Class "A" complex containing approximately 1.2 million
sq.ft. As of September 30, 2003 the park is 95% occupied and its tenant mix
includes large, publicly traded companies as well as regional and local
businesses. B.A. Park owns four office buildings as well as additional land
sufficient to build at least one more office building. The Company, through TSB
Real Property, Inc., is obligated to invest an additional $325,000 upon
completion of the last office building. The last building to be constructed by
B.A. Park is to be larger, approximately 100,000-sq. ft., with a start date yet
to be determined.
The Company, through its subsidiary 32 Second Street Corp., has a 90% percent
ownership interest in Altamont Avenue Associates, with a real estate carrying
value of $17.0 million and a corresponding non-recourse loan payable of $12.3
million at September 30, 2003. Altamont Avenue Associates owns a 209,603 sq.ft.
neighborhood shopping center anchored by a Hannaford Brothers supermarket. At
September 30, 2003, the center was 83% occupied. The tenant mix includes some
national companies as well as many smaller locally owned businesses. The center
is fully developed so no additional equity investment by the Company is
anticipated.
TROY REALTY FUNDING CORP. Troy Realty Funding Corp. ("TRFC") is a real estate
investment trust formed in 1999. The Savings Bank funded TRFC with approximately
$97 million in commercial real estate mortgages. At September 30, 2003 TRFC held
$98.8 million in commercial real estate mortgages. The interest income earned on
those mortgages and any other earning assets, net of expenses, is distributed to
the Savings Bank in the form of dividends.
OTHER SUBSIDIARIES. The Savings Bank has nine other wholly owned subsidiaries.
T.S. Capital Corp., which has investments of $2.5 million at September 30, 2003,
is licensed by the Small Business Administration as a Small Business Investment
Company in order to offer small business loans and make equity investments in
small businesses. The Family Insurance Agency, Inc., which is active, is an
insurance agency that offers a full range of life and health insurance products,
as well as taxed-deferred annuities. The Family Advertising Co. is an inactive
advertising agency. Catskill Financial Services Inc. is an inactive insurance
agency. T.S. Real Property Inc., Troy SB Real Estate Co., Camel Hill
Corporation, 507 Heights and Realty Umbrella, Ltd. are all related to the
management of, or investment in, the Company's foreclosed or purchased real
estate.
COMPETITION
The Company faces significant competition for both deposits and loans. The
deregulation of the financial services industry and the commoditization of
savings and lending products has led to increased competition among banks and
other financial institutions for a significant portion of the deposit and
lending activity that had traditionally been the arena of savings banks and
savings and loan associations. The Company competes for deposits with other
savings banks, savings and loan associations, commercial banks, credit unions,
money market and other mutual funds, insurance companies, brokerage firms and
other financial institutions, many of which are substantially larger in size and
have greater financial resources than the Company.
The Company's competition for loans comes principally from savings banks,
commercial banks, mortgage banks, credit unions, finance companies and other
institutional lenders, many of whom maintain offices in the Company's market
area. The Company's principal strategy to address this competition includes
providing competitive loan and deposit pricing, personalized customer service,
access to senior management of the Company and continuity of banking
relationships.
Although the Company is subject to competition from other financial
institutions, some of which have much greater financial and marketing resources,
the Company believes it benefits by its position as a community oriented
financial services provider with a long history of serving its market area.
Management believes that the variety, depth and stability of the communities
that the Company services support the service and lending activities conducted
by the Company.
REGULATION
Troy Financial, as a bank holding company, is subject to regulation,
supervision, and examination by the Federal Reserve. The Savings Bank, as a New
York State chartered savings bank, and the Commercial Bank, as a New York State
chartered commercial bank, are subject to regulation, supervision, and
examination by the FDIC as their primary federal regulator and by the NYSBD as
their state regulator.
BANK HOLDING COMPANY REGULATION
19
As a bank holding company, Troy Financial is subject to the regulation,
supervision, and examination of the Federal Reserve under the Bank Holding
Company Act. Troy Financial is required to file periodic reports and other
information with the Federal Reserve, and the Federal Reserve may conduct
examinations of Troy Financial.
Troy Financial is subject to capital adequacy guidelines of the Federal Reserve.
The guidelines apply on a consolidated basis and require bank holding companies
to maintain a minimum ratio of tier 1 capital to total assets of 4.0%. The
minimum ratio is 3.0% for the most highly rated bank holding companies. The
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, 2003, Troy Financial's ratio
of tier 1 capital to total assets was 9.89%, its ratio of tier 1 capital to
risk-weighted assets was 15.35%, and its ratio of qualifying total capital to
risk-weighted assets was 16.61%.
Troy Financial's ability to pay dividends to its shareholders and expand its
line of business through the acquisition of new banking or non-banking
subsidiaries can be restricted if its capital falls below levels established by
the Federal Reserve's guidelines. In addition, any bank holding company whose
capital does not meet the minimum capital adequacy guidelines is considered to
be undercapitalized and is required to submit an acceptable plan to the Federal
Reserve for achieving capital adequacy.
The Federal Reserve is empowered to initiate cease and desist proceedings and
other supervisory actions for violations of the Bank Holding Company Act or the
Federal Reserve's regulations, orders or notices issued thereunder. Federal
Reserve approval is required if Troy Financial seeks to acquire direct or
indirect ownership or control of any voting shares of a bank or bank holding
company if, after such acquisition, Troy Financial would own or control,
directly or indirectly, 5% or more of any class of the voting shares of the bank
or bank holding company. Federal Reserve approval also must be obtained for Troy
Financial to acquire all or substantially all the assets of a bank or merge or
consolidate with another bank holding company. These provisions also would apply
to a bank holding company that sought to acquire 5% or more of the common stock
of or, in the case of First Niagara Financial Group, Inc. to merge or
consolidate with Troy Financial.
Bank holding companies like Troy Financial are currently prohibited from
engaging in activities other than banking and activities so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
Federal Reserve regulations contain a list of permissible non-banking activities
that are closely related to banking or managing or controlling banks, and the
Federal Reserve has identified a limited number of additional activities by
order. These activities include lending activities, certain data processing
activities, and securities brokerage and investment advisory services, trust
activities and leasing activities. A bank holding company must file an
application or a notice with the Federal Reserve prior to acquiring more than 5%
of the voting shares of a company engaged in such activities. A bank holding
company that is well capitalized and well managed and meets other conditions may
provide notice after making the acquisition.
Under the Gramm-Leach-Bliley Act, bank holding companies that meet certain
conditions and elect to be treated as financial holding companies may engage in
activities that are financial in nature or incidental to financial activities,
or activities that are complementary to a financial activity and do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally. The Act identifies certain activities that are
deemed to be financial in nature, including non-banking activities currently
permissible for bank holding companies to engage in both within and outside the
United States, as well as insurance and securities underwriting and merchant
banking activities. The Federal Reserve is authorized to identify additional
activities that are permissible financial activities, but only after
consultation with the Department of the Treasury. A financial holding company is
not required to provide prior notice to the Federal Reserve to acquire a company
engaged in these activities or to commence these activities directly or
indirectly through a subsidiary.
To qualify as a financial holding company, 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.
Troy Financial has not elected to be treated as a financial holding company
since it has no current plans to use this authority to engage in expanded
activities.
Under the Change in Bank Control Act, persons who intend to acquire control of a
bank holding company, either directly or indirectly or through or in concert
with one or more persons must give 60 days' prior written notice to the Federal
Reserve. "Control" exists when an acquiring party directly or indirectly has
voting control of at least 25% of a class of voting securities of a bank holding
company or the power to direct the management or policies of the company. Under
Federal Reserve regulations, a rebuttable presumption of control arises with
respect to an acquisition when, after the acquisition, the acquiring party has
ownership, control, or the power to vote at least 10% (but less than 25%) of a
class of a bank holding company's common stock.
20
The New York Banking Law requires prior approval of the New York Banking Board
before any action is taken that causes any company to acquire direct or indirect
control of a banking institution that is organized in the State of New York. The
term "control" is defined generally to mean the power to direct or cause the
direction of the management and policies of the banking institution and is
presumed to exist if the company owns, controls or holds with power to vote 10%
or more of the voting stock of the banking institution.
BANK REGULATION
The Banks are New York State-chartered institutions, and their deposit accounts
are insured up to applicable limits by the FDIC under the Bank Insurance Fund
("BIF"). The Banks are subject to extensive regulation by the NYSBD as their
chartering agency and by the FDIC as their deposit insurer. The Banks must file
reports with the NYSBD and the FDIC concerning their activities and financial
condition, and they must obtain regulatory approval prior to entering into
certain transactions, such as mergers with, or acquisitions of, other depository
institutions and opening or acquiring branch offices. The NYSBD and the FDIC
conduct periodic examinations to assess the Banks' compliance with various
regulatory requirements. This regulation and supervision is intended primarily
for the protection of the deposit insurance funds and depositors. The regulatory
authorities have extensive discretion in connection with the exercise of their
supervisory and enforcement activities, including the setting of policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.
The Banks derive their lending, investment and other powers primarily from the
applicable provisions of the New York Banking Law and the regulations adopted
thereunder. Under these laws and regulations, the Savings Bank may invest in
real estate mortgages, consumer and commercial loans, certain types of debt
securities, including certain corporate debt securities and obligations of
federal, state and local governments and agencies, certain types of corporate
equity securities and certain other assets. It also may exercise trust powers
upon approval of the NYSBD. The Commercial Bank currently limits its activities
to accepting municipal deposits and acquiring primarily municipal and other
securities.
Under New York Banking Law, neither Bank is permitted to declare, credit or pay
any dividends if its capital stock is impaired or would be impaired as a result
of the dividend. In addition, the New York Banking Law provides that neither
Bank can declare and pay dividends in any calendar year in excess of its "net
profits" for such year combined with its "retained net profits" of the two
preceding years, less any required transfer to surplus or a fund for the
retirement of preferred stock, without prior regulatory approval.
The Banks are subject to minimum capital requirements imposed by the FDIC that
are substantially similar to the capital requirements imposed on Troy Financial.
The FDIC regulations require that each Bank maintain a minimum ratio of
qualifying total capital to risk-weighted assets of 8.0%, and a minimum ratio of
tier 1 capital to risk-weighted assets of 4.0%. In addition, under the minimum
leverage-based capital requirement adopted by the FDIC, each Bank must maintain
a ratio of tier 1 capital to average total assets (leverage ratio) of at least
3% to 5%, depending on the Banks' CAMELS composite examination rating. At
September 30, 2003, the Savings Bank's ratio of Tier 1 capital to risk-weighted
assets was 9.37%, its ratio of tier 1 capital to risk-weighted assets was
13.28%, and its ratio of tier 1 capital to average total assets was 14.54%. At
September 30, 2003, the Commercial Bank's ratio of Tier 1 capital to
risk-weighted assets was 6.64%, its ratio of tier 1 capital to risk-weighted
assets was 27.96%, and its ratio of tier 1 capital to average total assets was
27.98%. 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 the bank's
particular circumstances. Failure to meet capital guidelines could subject a
bank to a variety of enforcement actions, including actions under the FDIC's
prompt corrective action regulations.
State banks are limited in their investments and the activities they may engage
in as principal to those permissible under applicable state law and those
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 deposit insurance funds. The FDIC has by regulation
determined that certain real estate investment and securities underwriting
activities do not present such a risk, provided they are conducted in accordance
with the regulations. The Gramm-Leach-Bliley Act permits national banks to
engage in the activities that are permissible for financial holding companies,
as noted above, other than insurance underwriting, merchant banking, and real
estate development or investment activities.
The FDIC and the NYSBD have extensive enforcement authority over insured savings
banks and commercial banks. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and desist
orders and to remove directors and officers. In general, these enforcement
actions may be initiated in response to violations of laws and regulations and
to unsafe or unsound practices.
21
The Banks are subject to quarterly payments on semiannual insurance premium
assessments for their FDIC deposit insurance. The FDIC implements a risk-based
deposit insurance assessment system. Deposit insurance assessment rates
currently are within a range of $0.00 to $0.27 per $100 of insured deposits,
depending on the assessment risk classification assigned to each institution.
Under current FDIC assessment guidelines, the Banks do not pay any insurance
assessment. However, the deposit insurance assessments are subject to change
based on the level of reserves in the BIF. The Banks are subject to separate
assessments to repay bonds ("FICO bonds") issued in the late 1980s to
recapitalize the former Federal Savings and Loan Insurance Corporation. The
annual rate for the payments on the FICO bonds for the quarter beginning October
1, 2003 is 1.54 basis points of BIF-assessable deposits for both of the Banks.
Transactions between the Banks and any of their affiliates (including Troy
Financial) are governed by Sections 23A and 23B of the Federal Reserve Act. An
affiliate of a bank is any company or entity that controls, is controlled by or
is under common control with the bank. A subsidiary of a bank that is not also a
depository institution is not treated as an affiliate of a bank for purposes of
Sections 23A and 23B unless it engages in activities not permissible for a
national bank to engage in directly. Generally, Sections 23A and 23B (i) limit
the extent to which a bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, and limit such transactions with all
affiliates as a group to an amount equal to 20% of such capital stock and
surplus, and (ii) require that all such transactions be on terms that are
consistent with safe and sound banking practices. The term "covered transaction"
includes the making of loans to an affiliate, the purchase of or investment in
securities issued by an affiliate, the purchase of assets from an affiliate, the
issuance of a guarantee for the benefit of an affiliate, and similar
transactions. Most loans by a bank to any of its affiliates must be secured by
collateral in amounts ranging from 100 to 130 percent of the loan amount,
depending on the nature of the collateral. In addition, any covered transaction
by a bank with an affiliate and any sale of assets or provision of services to
an affiliate must be on terms that are substantially the same, or at least as
favorable, to the bank as those prevailing at the time for comparable
transactions with nonaffiliated companies. The Banks are also are restricted in
the loans they may make to their executive officers and directors, the executive
officers and directors of Troy Financial and its banking and non-banking
subsidiaries, any owner of 10% or more of their stock or the stock of Troy
Financial, and certain entities affiliated with any such person.
Effective April 1, 2003, the Federal Reserve issued Regulation W, which
comprehensively implements Sections 23A and 23B. The regulation unifies and
updates staff interpretations issued over the years, incorporates several new
interpretative proposals (such as to clarify when transactions with an unrelated
third party will be attributed to an affiliate) and addresses new issues arising
as a result of the expanded scope of non-banking activities engaged in by banks
and bank holding companies in recent years and authorized for financial holding
companies under the Gramm-Leach-Bliley Act.
The Banks are subject to certain FDIC standards designed to maintain the safety
and soundness of individual banks and the banking system. The FDIC has
prescribed safety and soundness guidelines relating to (i) internal controls,
information systems and internal audit systems; (ii) loan documentation; (iii)
credit underwriting; (iv) interest rate exposure; (v) asset growth and quality;
(vi) earnings; and (vii) compensation and benefit standards for officers,
directors, employees and principal stockholders. A state nonmember bank not
meeting one or more of the safety and soundness guidelines may be required to
file a compliance plan with the FDIC.
Under the FDIC's prompt corrective action regulations, an insured depository
institution is considered (i) "well capitalized" if the institution has a total
risk-based capital ratio of 10% or greater, a Tier 1 risk-based capital ratio of
6% or greater, and a leverage ratio of 5% or greater (provided that the
institution is not subject to an order, written agreement, capital directive or
prompt corrective action directive to meet and maintain a specified capital
level for any capital measure), (ii) "adequately capitalized" if the institution
has a total risk-based capital ratio of 8% or greater, a Tier 1 risk based
capital ratio of 4% or greater and a leverage ratio of 4% or greater (3% or
greater if the institution is rated composite CAMELS 1 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, 2003, each 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
22
Banks. 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.
Neither Bank is permitted to pay a dividend if, as a result of the payment, it
would become undercapitalized, as defined in under the FDIC's prompt corrective
action regulations. In addition, if a Bank were to become "undercapitalized"
under these regulations, payment of dividends by the Bank would be prohibited
without the prior approval of the FDIC. Either Bank also could be made subject
to dividend restrictions if the FDIC determines that the Bank was in an unsafe
or unsound condition or was engaging in an unsafe or unsound practice.
Under Federal Reserve regulations, the Banks are required to maintain
non-interest-earning reserves against their transaction accounts (primarily NOW
and regular checking accounts). The Federal Reserve regulations require that
reserves of 3% must be maintained against aggregate transaction accounts up to
$36.1 million (subject to adjustment by the Federal Reserve). Reserves of 10%
(subject to adjustment between 8% and 14% by the Federal Reserve) must be
maintained against that portion of total aggregate transaction accounts in
excess of $36.1 million (as adjusted). The first $4.8 million of otherwise
reservable balances (subject to adjustment by the Federal Reserve) are exempted
from the reserve requirements. The Banks are in compliance with these
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve, the effect of this
reserve requirement is to reduce the Banks' interest-earning assets.
The Savings Bank is a member of the FHLB System. The FHLB System consists of 12
regional Federal Home Loan Banks and provides a central credit facility
primarily for member institutions. The Savings Bank, as a member of the FHLB of
New York, is required to hold shares of capital stock of the FHLB of New York in
an amount equal to the greater of 1.0% of the aggregate unpaid principal amount
of its residential mortgage loans at the beginning of each year, 5.0% of its
advances from the FHLB of New York, or 0.3% of its total assets. At September
30, 2003, the Savings Bank was in compliance with this requirement and owned
$7.7 million of FHLB of New York common stock.
Advances from the FHLB of New York are secured by a member's shares of the
capital stock of the FHLB of New York and certain types of mortgages and other
assets. Interest rates charged for advances vary depending upon maturity and
cost of funds to the FHLB of New York. As of September 30, 2003, the limit on
the Savings Bank's borrowings was 25% of total assets, or approximately $299.6
million, and the Savings Bank had $154.9 million of outstanding advances from
the FHLB of New York.
Under the Gramm-Leach-Bliley Act, all financial institutions, including the
Company and the Banks, are required to establish policies and procedures to
protect customer data. The Company and the Banks do not sell personal
information to anyone. By law, the Company is permitted to share experience,
transaction and other personal data such as information obtained from
applications or credit reporting agencies with its affiliates and other third
parties to allow them to provide products and services of interest to the
Company's customers. The customer, however, has the option to direct the Company
not to share such personal information except as otherwise permitted by law.
On December 4, 2003, the Fair and Accurate Credit Transactions Act of 2003 was
signed into law. The Act includes many provisions concerning national credit
reporting standards, and permits consumers, including the customers of the
Company and the Banks, to opt out of information sharing among affiliated
companies for marketing purposes. The Act also requires financial institutions,
including banks, to notify their customers if they report negative information
about them to credit bureaus or if the credit that is granted to them is on less
favorable terms than are generally available. Banks also must comply with
guidelines to be established by their federal banking regulators to help detect
identity theft.
Title III of the USA PATRIOT Act, adopted in October 2001, increased the
obligation of financial institutions, including the Banks, to identify their
customers, watch for and report upon suspicious transactions, respond to
requests for information by federal banking regulatory authorities and law
enforcement agencies, and share information with other financial institutions.
The Secretary of the Treasury has adopted several regulations to implement these
provisions. The Banks also are barred from dealing with foreign "shell" banks.
In addition, the USA PATRIOT Act expands the circumstances under which funds in
a bank account may be forfeited. The USA PATRIOT Act also amended the Bank
Holding Company Act and the Bank Merger Act to require the federal banking
regulatory authorities to consider the effectiveness of a financial
institution's anti-money laundering activities when reviewing an application to
expand operations. The Company has in place a Bank Secrecy Act compliance
program, and it engages in very few transactions of any kind with foreign
financial institutions or foreign persons.
23
The Sarbanes-Oxley Act, signed into law on July 30, 2002 ("SOA"), addresses,
among other issues, director and officer responsibilities for proper corporate
governance of publicly traded companies, including the establishment of audit
committees, certification of financial statements, auditor independence and
accounting standards, executive compensation, insider loans, whistleblower
protection, and enhanced and timely disclosure of corporate information. In
general, SOA is intended to allow stockholders to monitor more effectively the
performance of publicly traded companies and their management. Provisions of SOA
became effective at various times up to one year from the date of enactment. The
Securities and Exchange Commission has enacted rules to implement various
provisions of SOA. The federal banking regulators have adopted generally similar
requirements concerning the certification of financial statements
EMPLOYEES
At September 30, 2003, the Company had 279 full-time employees and 29 part-time
employees. The Company's employees are not presently represented by any
collective bargaining group.
24
ITEM 2. PROPERTIES
The Company currently conducts its business through 21 full-service banking
offices. The following table sets forth-certain information on the Company's
offices as of September 30, 2003:
- ------------------------------------------------------------------------------------------------------------------------------
NET BOOK VALUE
ORIGINAL OF PROPERTY OR
DATE OF YEAR LEASEHOLD
LEASED OR LEASE LEASED OR IMPROVEMENTS AT
LOCATION ADDRESS OWNED EXPIRATION ACQUIRED SEPTEMBER 30, 2003
- ------------------------------------------------------------------------------------------------------------------------------
HEADQUARTERS: (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------
Main Office 32 Second Street Owned N/A 1871 $3,551
Troy, NY 12180
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONS CENTER 433 River Street Leased 3/31/05 1993 186
Troy, NY 12180
- ------------------------------------------------------------------------------------------------------------------------------
TRUST SERVICES 50 Second Street Owned N/A 1989 159
Troy, NY 12180
- ------------------------------------------------------------------------------------------------------------------------------
BRANCH OFFICES:
Hudson Valley Plaza 75 Vandenburgh Avenue Leased 12/31/05 1983 16
Troy, NY 12180
- ------------------------------------------------------------------------------------------------------------------------------
East Greenbush 615 Columbia Pike Owned N/A 1969 72
East Greenbush, NY 12061
- ------------------------------------------------------------------------------------------------------------------------------
Albany 120 State Street Owned N/A 1995 1,321
Albany, NY 12207
- ------------------------------------------------------------------------------------------------------------------------------
Watervliet 1601 Broadway Leased 3/31/14 1983 12
Watervliet, NY 12189
- ------------------------------------------------------------------------------------------------------------------------------
Latham 545 Troy-Schenectady Road Leased 6/30/04 1989 324
Latham, NY 12110
- ------------------------------------------------------------------------------------------------------------------------------
Colonie 103 Wolf Road Leased 3/31/07 1994 13
Colonie, NY 12205
- ------------------------------------------------------------------------------------------------------------------------------
Guilderland 1704 Western Avenue Leased 6/9/07 1997 247
Guilderland, NY 12203
- ------------------------------------------------------------------------------------------------------------------------------
Schenectady 1626 Union Street Owned N/A 1987 206
Schenectady, NY 12309
- ------------------------------------------------------------------------------------------------------------------------------
Clifton Park/Halfmoon 2 Tower Way Owned N/A 1999 682
Clifton Park, NY 12065
- ------------------------------------------------------------------------------------------------------------------------------
Quaker Road 44 Quaker Road Owned N/A 1995 1,069
Queensbury, NY 12804
- ------------------------------------------------------------------------------------------------------------------------------
Queensbury 739 Upper Glen Street Leased 9/30/04 1979 35
Queensbury, NY 12804
- ------------------------------------------------------------------------------------------------------------------------------
Whitehall 184 Broadway Owned N/A 1971 170
Whitehall, NY 12887
- ------------------------------------------------------------------------------------------------------------------------------
Wynantskill 86 Main Avenue Owned N/A 1999 777
Wynantskill, NY 12198
- ------------------------------------------------------------------------------------------------------------------------------
Catskill 341 Main Street Owned N/A 2000 431
Catskill, NY 12414
- ------------------------------------------------------------------------------------------------------------------------------
Greenville Route 32 Bryant's Super Market Leased 4/13/03 2000 149
Greenville, NY 12083
- ------------------------------------------------------------------------------------------------------------------------------
Middleburgh Route 30 & Mill Lane Owned N/A 2000 449
Middleburgh, NY 12122
- ------------------------------------------------------------------------------------------------------------------------------
Oak Hill Route 145, P.O. Box D Owned N/A 2000 346
Oak Hill, NY 12460
- ------------------------------------------------------------------------------------------------------------------------------
Ravena Route 9W, P.O. Box 397 Owned N/A 2000 219
Ravena, NY 12143
- ------------------------------------------------------------------------------------------------------------------------------
West Side 245 West Bridge Street Owned N/A 2000 489
Catskill, NY 12414
- ------------------------------------------------------------------------------------------------------------------------------
Windham Route 296, P.O. Box 1001 Owned N/A 2000 482
Windham, NY 12496
- ------------------------------------------------------------------------------------------------------------------------------
25
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to the business, to which Troy Financial or any of its
subsidiaries is a party or of which their property is the subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The common stock of Troy Financial Corporation ("Common Stock") is quoted on the
Nasdaq Stock Market National Market Tier under the symbol "TRYF". The following
table sets forth the high and low market prices for the Common Stock for the
periods indicated (All per share amounts have been adjusted for the 5% stock
dividend issued on March 29, 2002.)
- -----------------------------------------------------------------------------
HIGH LOW DIVIDEND
- -----------------------------------------------------------------------------
FISCAL 2003
1st quarter $28.29 $22.84 $0.14
2nd quarter 27.23 23.87 0.21(1)
3rd quarter 28.65 24.90 0.16
4th quarter 35.69 26.64 0.16
FISCAL 2002
1st quarter 25.20 20.44 0.11
2nd quarter 27.82 24.76 0.11
3rd quarter 30.25 24.36 0.12
4th quarter 30.00 25.75 0.14
- -----------------------------------------------------------------------------
(1) Includes a special dividend of $0.05 per share declared by Troy Financial
Corporation in February 2003.
The closing price of the Common Stock on September 30, 2003 was $35.05. The
approximate number of holders of record of the Company's Common Stock on
December 18, 2003 was 3,589.
The following is a summary of the Company's Equity Compensation plans:
NUMBER OF SECURITIES
AVAILABLE FOR FUTURE
NUMBER OF SECURITIES TO BE WEIGHTED-AVERAGE ISSUANCE UNDER EQUITY
ISSUED UPON EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (A))
- ------------------------------------------------------------------------------------------------------------------------
(a) (b) (c)
Equity compensation plans 919,787 $ 10.87 177,955
approved by security holders (1)
Equity compensation plans not
approved by security holders -- $ -- --
- ------------------------------------------------------------------------------------------------------------------------
Total 919,787 $ 10.87 177,955
========================================================================================================================
(1) Shares shown do not include the Company's restricted stock plan, which has
granted, but unvested shares of 210,407 as of September 30, 2003. There are
also 10,622 shares available for future issuance under this plan.
26
ITEM 6. SELECTED FINANCIAL DATA
The following summary financial and other information about the Company is
derived principally from the Company's audited consolidated financial statements
for each of the five fiscal years ended September 30, 2003:
AT OR FOR THE YEARS ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
SELECTED FINANCIAL CONDITION DATA
Total assets $ 1,365,456 $1,288,877 $1,161,578 $ 922,028 $ 915,096
Loans receivable, net 744,831 750,529 746,450 586,846 556,142
Securities available for sale (at fair value) 414,265 394,067 248,469 266,750 280,871
Securities held to maturity (at amortized cost) 661 883 2,130 2,301 2,534
Deposits 967,016 882,968 808,518 555,972 563,373
Borrowings 206,730 222,355 162,971 178,808 148,933
Shareholders' equity 154,712 157,854 164,746 167,278 180,439
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED OPERATING DATA
Interest and dividend income $ 61,104 $ 65,991 $ 71,213 $ 57,506 $ 51,802
Interest expense 18,880 24,444 32,709 24,358 23,782
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income 42,224 41,547 38,504 33,148 28,020
Provision for loan losses 560 1,166 1,498 2,563 3,250
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 41,664 40,381 37,006 30,585 24,770
Total non-interest income 9,220 6,969 5,233 3,679 3,047
Total non-interest expense 31,765 27,713 28,889 22,200 25,825
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense (benefit) 19,119 19,637 13,350 12,064 1,992
Income tax expense (benefit) 6,320 6,438 4,276 3,454 (85)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $ 12,799 $ 13,199 $ 9,074 $ 8,610 $ 2,077
- ---------------------------------------------------------------------------------------------------------------------------------
SHARE AND PER SHARE DATA (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 1.52 $ 1.47 $ 0.95 $ 0.82 $ 0.31(3)
Diluted earnings per share 1.43 1.38 0.92 0.81 0.31(3)
Cash dividends per share 0.67 0.49 0.34 0.22 --
- ---------------------------------------------------------------------------------------------------------------------------------
Book value per share 16.68 16.30 15.93 15.01 14.16
Tangible book value per share 13.32 13.07 12.91 14.97 14.12
Market price at period end $ 35.05 $ 26.08 $ 20.13 $ 11.19 $ 10.30
Average shares outstanding, diluted 8,975,967 9,569,314 9,885,522 10,569,906 12,102,446
- ---------------------------------------------------------------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
PERFORMANCE RATIOS:
Return on average assets 1.05% 1.18% 0.86%(2) 1.02% 0.26%(4)
Return on average equity 8.25% 8.09% 5.43%(2) 5.02% 1.57%(4)
Net interest spread 3.80% 3.89% 3.57% 3.46% 3.17%
Net interest margin 4.04% 4.30% 4.19% 4.39% 3.89%
Operating expenses to average assets 2.55% 2.47% 2.72%(2) 2.66% 3.15%(4)
Efficiency ratio 60.29% 54.79% 62.90%(2) 57.83% 77.57%(4)
Average equity to average assets 12.70% 14.58% 15.82% 20.37% 16.60%
- ---------------------------------------------------------------------------------------------------------------------------------
ASSET QUALITY RATIOS:
Non-performing loans to total loans 0.35% 0.27% 0.43% 0.94% 1.39%
Non-performing assets to total assets 0.23% 0.19% 0.30% 0.75% 1.06%
Allowance for loan losses to total loans 1.93% 1.90% 1.88% 1.99% 1.90%
Allowance for loan losses to non-performing loans 549.36% 693.28% 441.15% 210.35% 136.55%
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Full-service banking offices 21 21 21 14 14
Number of deposit accounts 79,451 83,372 91,129 64,614 68,117
- ---------------------------------------------------------------------------------------------------------------------------------
(1) All share and per share amounts have been adjusted for the 5% stock
dividend issued on March 29, 2002.
(2) Ratios include $2.0 million of pre-tax merger related integration costs
associated with the acquisition of Catskill Financial Corporation.
Excluding these costs, return on average assets and average equity would
have been 0.97% and 6.14%, respectively. Operating expenses to average
assets would have been 2.54% and the efficiency ratio 58.59%.
(3) Earnings per share calculations do not include earnings prior to the
Company's initial public offering on March 31, 1999.
(4) Ratios include effect of the $4.1 million stock contribution to The Troy
Savings Bank Community Foundation. Excluding these costs, return on average
assets and average equity would have been 0.57% and 3.43%, respectively.
Operating expenses to average assets would have been 2.64% and the
efficiency ratio 64.92%.
27
THREE MONTHS ENDED
- -------------------------------------------------------------------------------------------------------------------------------
SEPT 30, JUNE 30, MARCH 31, DEC 31, SEPT 30, JUNE 30, MARCH 31, DEC 31,
2003 2003 2003 2002 2002 2002 2002 2001
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands, expcept per share data)
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Interest and dividend income $ 14,275 $ 15,292 $ 15,600 $ 15,937 $ 16,106 $ 16,259 $ 16,535 $ 17,091
Interest expense 4,110 4,547 4,910 5,313 5,714 5,882 5,983 6,865
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 10,165 10,745 10,690 10,624 10,392 10,377 10,552 10,226
- -------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 140 120 150 150 190 290 320 366
Total non-interest income 3,634 1,871 1,851 1,864 1,921 2,036 1,518 1,494
Total non-interest expense 9,537 7,403 7,402 7,423 6,985 7,074 6,901 6,753
- -------------------------------------------------------------------------------------------------------------------------------
Income before income tax
expense 4,122 5,093 4,989 4,915 5,138 5,049 4,849 4,601
Income tax expense 1,460 1,666 1,614 1,580 1,687 1,646 1,603 1,502
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,662 $ 3,427 $ 3,375 $ 3,335 $ 3,451 $ 3,403 $ 3,246 $ 3,099
===============================================================================================================================
Basic earnings per share (1) $ 0.32 $ 0.41 $ 0.40 $ 0.39 $ 0.39 $ 0.38 $ 0.36 $ 0.34
Diluted earnings per share (1) 0.30 0.39 0.38 0.37 0.37 0.36 0.34 0.32
- -------------------------------------------------------------------------------------------------------------------------------
(1) All per share data has been adjusted for the 5% stock dividend issued on
March 29, 2002.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Troy Financial Corporation (the "Company") is a community based, full-service
financial services company, offering a wide variety of business, retail, and
municipal banking products, as well as a full range of trust, insurance, and
investment services. The Company is the bank holding company of The Troy Savings
Bank (the "Savings Bank") and The Troy Commercial Bank (the "Commercial Bank").
The Company'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 eight New York counties of Albany, Greene, Rensselaer,
Saratoga, Schenectady, Schoharie, Warren and Washington. The Company's Common
Stock is traded on the Nasdaq Stock Market National Market Tier under the symbol
"TRYF."
On August 10, 2003, the Company and First Niagara Financial Group, Inc. ("First
Niagara") entered into an Agreement and Plan of Merger (the "Agreement") which
provides for, among other things, the acquisition of the Company by First
Niagara. Contemporaneous with the completion of the acquisition, The Troy
Savings Bank, a wholly-owned subsidiary of the Company, will merge with and into
First Niagara Bank, a wholly-owned subsidiary of First Niagara. The Agreement
provides that shareholders of the Company will receive either First Niagara
stock, cash or a combination of First Niagara stock and cash for each share of
Company common stock. The Boards of Directors of the Company and First Niagara
expect the transaction to close in January 2004.
The Company's profitability, like that of many financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between the interest it receives on earning assets, such as loans and
securities, and the interest it pays on interest-bearing liabilities,
principally deposits and borrowings.
Results of operations are also affected by the provision for loan losses,
non-interest expenses such as salaries and employee benefits, occupancy and
other operating expenses, including income taxes, and to a lesser extent,
non-interest income such as service charges on deposit accounts, net rental
income from real estate partnerships, trust service fees, and loan servicing
fees. Economic conditions, competition and the monetary and fiscal policies of
the Federal government in general, significantly affect financial institutions,
including the Company. Lending activities are influenced by the demand for and
supply of housing, competition among lenders, interest rate conditions and
prevailing market rates on competing investments, customer preferences and
levels of personal income and savings in the Company's primary market area.
28
On November 10, 2000, the Company completed the acquisition of Catskill
Financial Corporation ("Catskill") in a cash transaction for $23.00 per share,
for a total transaction value of approximately $89.8 million. The seven former
offices of Catskill Savings Bank are now full-service offices of the Savings
Bank. In accordance with the purchase method of accounting for business
combinations, the Company recorded the assets acquired and liabilities assumed
at their estimated fair value. Operating results have been included in the
Company's consolidated financial statements from the date of acquisition.
CRITICAL ACCOUNTING POLICIES
Management of the Company considers the accounting policies relating to the
allowance for loan losses and goodwill to be critical accounting policies. The
allowance for loan losses is deemed critical due to the uncertainty in
evaluating the level of the allowance required to cover credit losses inherent
in the loan portfolio and the material effect that such judgments can have on
the results of operations. Accounting for goodwill is a critical policy given
the inherent uncertainty in evaluating whether or not goodwill is impaired. The
Company's policy on the allowance for loan losses and goodwill are disclosed in
note 1 to the consolidated financial statements. A more detailed description of
the Company's methodology for determining the allowance for loan losses is
included in the "Lending Activities" section of this annual report. All
accounting policies are important, and as such, the Company encourages the
reader to review each of the policies included in note 1 to obtain a better
understanding on how the Company's financial performance is reported.
FORWARD-LOOKING STATEMENTS
When used in this Annual Report or future filings by the Company with the
Securities and Exchange Commission, in the Company'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 the Company's assets and liabilities, are inherently based upon predictions
of future events and circumstances. Furthermore, from time to time, the Company
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, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
Some of the risks and uncertainties that may affect the operations, performance,
development and results of the Company'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;
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 services industry;
o changes in competition; and
o changes in consumer preferences.
The Company 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 the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected.
Except as required by law, the Company 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.
29
FINANCIAL CONDITION
Total assets were $1.4 billion at September 30, 2003, an increase of $76.6
million, or 5.9% from the $1.3 billion at September 30, 2002. The increase was
principally in cash and cash equivalents and securities available for sale. The
increases were a result of the Company meeting certain qualifying asset tests
for state tax purposes. The increase in cash and cash equivalents and
securities available for sale were funded by short-term borrowings and
securities sold under agreement to repurchase, respectively.
Cash and cash equivalents were $98.3 million at September 30, 2003, an increase
of $64.2 million, or 188.8% from the $34.0 million at September 30, 2002. The
increase was principally due to the increase in cash and cash equivalents as the
Company met certain qualifying asset tests for state tax purposes.
Securities available for sale ("AFS") were $414.3 million at September 30, 2003,
up $20.2 million, or 5.1% from $394.1 million as of September 30, 2002.
Securities available for sale increased primarily due to purchases of
obligations of various municipalities throughout the United States to provide
collateral to support the Company's municipal deposit growth. Offsetting this
increase were decreases in the Company's Government agency securities, corporate
bond and equity securities portfolios, as the Company sold portions of these
portfolios to generate additional taxable income in order to utilize tax-benefit
carryforwards, which may otherwise expire.
Loans receivable were $759.5 million at September 30, 2003, down $5.6 million,
or .7% from the $765.1 million at September 30, 2002. See Item 1 of this
document for a loan portfolio composition table as of the respective statement
of financial condition dates. Loan growth was outpaced by loan run-off during
the period, as growth in the commercial real estate and home equity line
portfolios was offset by the run-off in the Company's residential mortgage,
commercial business, and other consumer loan portfolios. The Company continues
to expand its commercial loan portfolio, which includes commercial real estate,
construction and commercial business loans, and now represents 63.5% of total
loans up from 56.7% at September 30, 2002. The Company experienced accelerated
prepayments in the residential portfolio as existing customers continued to
refinance into 30 year fixed rate loans due to lower rates. Since the Company
does not hold its 30-year loan production, but instead sells the loans in the
secondary market, portfolio run-off has exceeded retained production. The
decrease in the commercial business portfolio was principally due to the pay-off
of a large relationship which was refinanced elsewhere, as management elected
not to participate in the credit. The Company also continues to promote a home
equity line of credit product, which is indexed to prime and has a lower initial
offering rate. Subject to market conditions, the Company intends to continue to
emphasize increasing its commercial real estate and commercial business loan
portfolios as part of its strategy to diversify its loan portfolio and increase
commercial banking activities.
Non-performing assets at September 30, 2003 were $3.1 million, or .23% of total
assets, up $.6 million or 25.8% from the $2.4 million or .19% of total assets at
September 30, 2002. See Item 1 of this document for a the table that sets forth
the amounts and categories of the Company's non-performing assets at the
respective statement of financial condition dates. The increase in
non-performing loans at September 30, 2003 as compared to September 30, 2002 was
principally due to a well-secured commercial real estate loan, which was
restructured, and a commercial business relationship, which is no longer
performing under its original terms and was classified as non accrual. Losses on
the commercial business relationship, if any, will be minimal due to a
government guarantee.
Additionally, at September 30, 2003, the Company identified approximately $2.7
million of loans that have more than normal credit risk, including the ability
of such borrowers to comply with their present loan repayment terms. This
represents a decrease of $2.7 million from the $5.4 million reported at
September 30, 2002. Substantially all of these loans are unsecured commercial
business loans. The Company believes that if economic or business conditions
deteriorate in its lending area, some of these loans could become
non-performing, however the Company has already considered these loans in
determining the adequacy of its allowance for loan losses.
30
The allowance for loan losses was $14.6 million or 1.93% of period end loans at
September 30, 2003, providing coverage of non-performing loans of 549.36%, as
compared to coverage of non-performing loans of 693.28% and an allowance to
period end loans of 1.90% at September 30, 2002. See Item 1 of this document for
the table that summarizes the activity for the past five years in the allowance
for loan losses.
Total deposits were $967.0 million at September 30, 2003, up $84.0 million or
9.5% from the $883.0 million at September 30, 2002. The following table shows
the deposit composition:
AT SEPTEMBER 30,
- ----------------------------------------------------------------------------------------------
2003 2002
AMOUNT % OF DEPOSITS AMOUNT % OF DEPOSITS
- ----------------------------------------------------------------------------------------------
(Dollars in thousands)
Savings accounts $ 275,426 28.5% $ 271,632 30.8%
Money market accounts 225,561 23,3% 108,635 12.3%
Interest bearing demand accounts 141,896 14.7% 124,319 14.1%
Non-interest bearing demand accounts 80,649 8.3% 81,413 9.2%
- ----------------------------------------------------------------------------------------------
Total core deposits 723,532 74.8% 585,999 66.4%
Time deposit accounts 243,484 25.2% 296,969 33.6%
- ----------------------------------------------------------------------------------------------
Total deposits $ 967,016 100.0% $ 882,968 100.0%
==============================================================================================
Deposits increased principally from growth in municipal money market deposits
which more than offset the run-off in higher costing time deposit accounts. At
September 30, 2003, the Company's Commercial Bank had municipal deposits of
$153.5 million, and increase of $76.2 million from the prior fiscal year. The
Company has aggressively lowered rates on its time deposits in an effort to
replace these higher costing deposits with lower costing core deposits (all
deposit accounts other than time deposits). As a result of these efforts, time
deposits were down $53.5 million, or 18.0% from September 30, 2002. Core
deposits are up $137.5 million, or 23.5% and now represent 74.8% of total
deposits up from 66.4% at September 30, 2002. The Company expects time deposits
to continue to decrease, as scheduled maturities in the next several months are
at higher rates than the Company's current offering rates.
The Company decreased its total borrowings to $206.7 million at September 30,
2003, a decrease of $15.6 million, or 7.0% from the $222.4 million at September
30, 2002. Short-term borrowings (including repurchase agreements) decreased
$35.4 million, or 26.2%, whereas long-term borrowings increased $19.7 million or
22.6%, as the Company took advantage of the lower interest rates to lock-in some
long-term financing. The decrease in short-term borrowings is due to the Company
using less of these funds to obtain certain qualifying assets for state tax
purposes at September 30, 2003 compared with the prior year. At September 30,
2003 the Company had $89.5 million of short-term borrowings, that were paid down
shortly after September 30, 2003 principally from Company cash on hand and
proceeds from scheduled maturities of short-term U.S. Governmental Agencies that
were held to meet certain qualifying asset tests for state tax purposes. At
September 30, 2003, the Company still had additional available credit of $50.0
million under its one-month advance program with the FHLB and did not have any
available credit under its overnight line with the FHLB.
Shareholders' equity at September 30, 2003 was $154.7 million, a decrease of
$3.1 million or 2.0% from the $157.9 million at September 30, 2002. The decrease
was principally due to the $13.2 million cost to repurchase 492,555 shares of
the Company's common stock. Offsetting this decrease were the $6.9 million of
net income retained after cash dividends, the $2.2 million increase due to the
release of ESOP shares, the $1.6 million increase due to the amortization of
restricted stock awards, including the tax benefits on shares vesting, and the
$967 thousand increase from stock option exercises, including the tax benefits.
Shareholders' equity as a percentage of total assets was 11.3% at September 30,
2003, down from 12.3% at September 30, 2002. Book value per common share was
$16.68 at September 30, 2003, compared to $16.30 at September 30, 2002.
31
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2003
AND 2002
GENERAL. For the fiscal year ended September 30, 2003, the Company recorded net
income of $12.8 million, down $.4 million, or 3.0%, compared to the fiscal year
ended September 30, 2002. Basic and diluted earnings per share were $1.52 and
$1.43 respectively, an increase of 3.4% and 3.6% compared to basic and diluted
earnings per share of $1.47 and $1.38 for the fiscal year ended September 30,
2002. All share and per share amounts have been adjusted for the 5% stock
dividend issued on March 29, 2002. For the fiscal year ended September 30, 2003,
weighted average common shares - basic were 8,446,152, down 561,972, or 6.2%,
from the prior year due to the Company's share repurchase programs. Weighted
average shares - diluted were down 593,347 or 6.2% due to the share repurchase
programs.
Earnings for the year and the quarter ended September 30, 2003 were adversely
impacted by the $1.2 million ($714 thousand after tax, or $.08 per diluted
share) increase in the cost of stock-based deferred compensation plans. In
addition, the Company incurred non-deductible merger related transactions costs
of approximately $497 thousand, or $.06 per diluted share, both due to the
Company's pending merger with First Niagara.
Return on average assets for the year ended September 30, 2003 was 1.05% and for
2002 was 1.18%. Return on average equity was 8.25% for the year ended September
30, 2003 and 8.09% for 2002.
NET INTEREST INCOME. Net interest income on a tax equivalent basis for the year
ended September 30, 2003, was $44.6 million, an increase of $.9 million, or
2.0%, when compared to the year ended September 30, 2002. The increase was
principally volume related with average earning assets up $87.3 million, or
8.6%, while the Company's net interest margin decreased 26 basis points to
4.04%, and the net interest spread decreased 9 basis points to 3.80%. These
decreases were primarily as a result of the continued downward repricing of the
Company's loan portfolio and lower rates on new investments added to the
Company's securities portfolio.
Interest income for the year ended September 30, 2003 was $63.5 million on a tax
equivalent basis, down $4.7 million, or 6.9% from the prior year. The effect of
the 95 basis point drop in the yield on average earning assets reduced interest
income but was partially offset by the interest income earned on the additional
$87.3 million of average earning assets.
Average earning assets increased principally in the loan and securities
available for sale portfolios, which on average grew 1.2% and 30.1%,
respectively. Average loans increased $8.8 million principally from increases in
the Company's commercial real estate loans, as the Company continues to
emphasize its commercial banking strategy. Additionally, the Company
supplemented the growth in the commercial portfolio with growth in the home
equity loan portfolio due to a successful promotional campaign. The yield on the
Company's average loan portfolio decreased 61 basis points, as the Company's
commercial business loan portfolio, which is principally variable rate and
represents approximately 15.7% of total average loans, re-priced lower due to
the reduction in short-term market interest rates since the prior year.
Furthermore, the yield on the Company's residential portfolio was adversely
impacted by refinancing of higher yielding fixed rate loans, as well as the
continued downward repricing of the Company's adjustable rate mortgage
portfolio. The Company expects its interest income to be adversely impacted by
the on-going repricing of its adjustable rate mortgage portfolio, as well as the
repricing of its commercial mortgage portfolio due to scheduled and
customer-driven repricing, however they have slowed down from prior periods.
Average securities available for sale increased $75.9 million or 30.1%,
principally from an increase in the municipal securities portfolio (both
tax-exempt and taxable), where purchases were made to provide collateral for
municipal deposit growth. The yield on the average securities portfolio
decreased 133 basis points as the Company's relatively short average life
securities portfolio re-priced faster in response to the decrease in overall
market interest rates. In addition, recent purchases in the municipal securities
portfolio (most of which have a maturity of one-year or less) have been
purchased at rates much lower than the current average portfolio yield due to
the lower interest rate environment.
Interest expense for the year ended September 30, 2003, was $18.9 million, a
decrease of $5.6 million or 22.8% from the prior year. Average interest bearing
liabilities increased $97.8 million or 11.2%, principally due to money market
municipal deposits generated by the Commercial Bank (money market deposits for
the Commercial Bank averaged $86.8 million for fiscal 2003 compared with $26.8
million for the prior fiscal year). The Company has aggressively re-priced its
deposits, especially its time deposits, resulting in an 86 basis point reduction
in the average cost of funds to 1.95%. The average cost of time deposits was
2.58% for the year ended September 30, 2003, down 122 basis points from the
prior year.
32
The Company's net interest margin was 4.04% for the year ended September 30,
2003, down 26 basis points from the prior year. The net interest margin decrease
was principally from the 9 basis point drop in the net interest spread from the
prior year, as the Company's earning asset growth this period has been
principally in lower yielding short-term municipal securities. Although this has
adversely impacted the margin in the short-term, it did generate net interest
income and the Company has positioned itself to reinvest at higher rates, should
interest rates rise. The Company expects its net interest margin to decrease
modestly over the next quarter due to the continued re-pricing of assets and the
sale of portions of its corporate and equity securities portfolios. The Company
expects to continue to reduce its cost of funds, as approximately $66.1 million
of time deposits will be re-pricing over the next three months at lower rates.
The Company had $136.6 million of average earning assets with no funding costs
for the year ended September 30, 2003, down from the $147.1 million for the year
ended September 30, 2002, due principally to the cost of the Company's share
repurchase program. The $10.4 million or 15.7% increase in average
non-interest-bearing deposits in fiscal 2003, partially offset the $14.7 million
or 14.5% increase in non-earning assets, primarily due to the cost of the
Company's real estate joint venture investment in May of 2002.
33
The following table sets forth certain information relating to the Company's
average earning assets and average interest-bearing liabilities for the periods
indicated. The yields and rates were derived by dividing tax equivalent 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 daily balances. The yields on loans include net deferred fees
and costs 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,
- ---------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Earning assets:
Total loans $ 770,507 $ 51,432 6.68% $ 761,682 $ 55,503 7.29% $ 741,709 $ 58,290 7.86%
Loans held for sale 1,793 120 6.69% 1,340 98 7.31% 4,066 310 7.62%
Securities held to maturity 773 63 8.15% 1,162 95 8.18% 2,224 183 8.23%
Securities available for sale:
Taxable 151,806 6,405 4.22% 129,655 7,251 5.59% 128,629 8,856 6.88%
Tax-exempt 176,060 5,435 3.09% 122,313 5,200 4.25% 74,026 4,879 6.59%
- ---------------------------------------------------------------------------------------------------------------------------------
Total securities available for
sale 327,866 11,840 3.61% 251,968 12,451 4.94% 202,655 13,735 6.78%
Federal funds sold and other 3,609 32 0.89% 1,080 20 1.85% 14,190 586 4.13%
- ---------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,104,548 63,487 5.75% 1,017,232 68,167 6.70% 964,844 73,104 7.58%
Allowance for loan losses (14,655) (14,538) (14,035)
Other assets, net 131,266 116,413 105,477
- ---------------------------------------------------------------------------------------------------------------------------------
Total assets $1,221,159 $1,119,107 $1,056,286
=================================================================================================================================
Interest bearing liabilities:
Interest bearing deposits
Interest bearing demand
accounts $ 128,824 $ 863 0.67% $ 118,664 $ 1,176 0.99% $ 112,004 $ 2,258 2.02%
Money market accounts 155,278 2,251 1.45% 69,478 1,496 2.15% 30,627 885 2.89%
Savings accounts 274,837 3,118 1.13% 262,202 5,101 1.95% 242,902 6,538 2.69%
Time deposit accounts 273,351 7,063 2.58% 307,806 11,691 3.80% 322,765 16,954 5.25%
Escrow accounts 3,800 59 1.55% 4,398 81 1.84% 4,847 94 1.94%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
deposits 836,090 13,354 1.60% 762,548 19,545 2.56% 713,145 26,729 3.75%
- ---------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Securities sold U/A to
repurchase 11,665 585 5.02% 13,468 689 5.12% 12,865 696 5.41%
Short-term borrowings 15,933 217 1.36% 22,334 677 3.03% 37,925 2,340 6.17%
Long-term debt 104,222 4,724 4.53% 71,733 3,533 4.93% 51,244 2,944 5.75%
- ---------------------------------------------------------------------------------------------------------------------------------
Total borrowings 131,820 5,526 4.19% 107,535 4,899 4.56% 102,034 5,980 5.86%
- ---------------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 967,910 18,880 1.95% 870,083 24,444 2.81% 815,179 32,709 4.01%
Non-interest bearing deposits 76,176 65,813 53,914
Other liabilities 21,952 20,051 20,071
Shareholders' equity 155,121 163,160 167,122
- ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities & equity $1,221,159 $1,119,107 $1,056,286
=================================================================================================================================
Net interest spread 3.80% 3.89% 3.57%
Net interest income/net interest
margin $ 44,607 4.04% $ 43,723 4.30% $40,395 4.19%
Ratio of earning assets to
interest bearing liabilities 114.12% 116.91% 118.36%
Less: tax equivalent adjustment 2,383 2,176 1,891
- ---------------------------------------------------------------------------------------------------------------------------------
Net interest income as per
consolidated financial statements $ 42,224 $ 41,547 $ 38,504
=================================================================================================================================
34
RATE/VOLUME ANALYSIS. The following table presents the extent to which changes
in interest rates and changes in the volume of earning assets and
interest-bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to: (1) changes attributable to volume (change in volume
multiplied by prior year rate); and (2) changes attributable to rate (change in
rate multiplied by prior year volume). 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 YEARS ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------
2003 VS. 2002 2002 VS. 2001
- -----------------------------------------------------------------------------------------------------------------------------
VOLUME RATE NET VOLUME RATE NET
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Earning assets:
Total loans $ 654 $ (4,725) $ (4,071) $ 1,646 $ (4,433) $ (2,787)
Loans held for sale 29 (7) 22 (200) (12) (212)
Securities held to maturity (32) - (32) (87) (1) (88)
Securities available for sale:
Taxable 1,947 (2,793) (846) 71 (1,676) (1,605)
Tax-exempt 620 (385) 235 705 (384) 321
- -----------------------------------------------------------------------------------------------------------------------------
Total securities available for sale 2,567 (3,178) (611) 776 (2,060) (1,284)
Federal funds sold and other 15 (3) 12 (354) (212) (566)
- -----------------------------------------------------------------------------------------------------------------------------
Total earning assets $ 3,233 $ (7,913) $ (4,680) $ 1,781 $ (6,718) $ (4,937)
=============================================================================================================================
Interest bearing liabilities
Interest bearing deposits
Interest bearing demand accounts $ 113 $ (426) $ (313) $ 143 $ (1,225) $ (1,082)
Money market accounts 1,025 (270) 755 766 (155) 611
Savings accounts 257 (2,240) (1,983) 584 (2,021) (1,437)
Time deposit accounts (1,196) (3,432) (4,628) (756) (4,507) (5,263)
Escrow accounts (10) (12) (22) (8) (5) (13)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest bearing deposits 189 (6,380) (6,191) 729 (7,913) (7,184)
- -----------------------------------------------------------------------------------------------------------------------------
Borrowings:
- -----------------------------------------------------------------------------------------------------------------------------
Securities sold U/A to repurchase (91) (13) (104) 34 (41) (7)
- -----------------------------------------------------------------------------------------------------------------------------
Short-term borrowings (157) (303) (460) (714) (949) (1,663)
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt 1,451 (260) 1,191 906 (317) 589
- -----------------------------------------------------------------------------------------------------------------------------
Total borrowings 1,203 (576) 627 226 (1,307) (1,081)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 1,392 (6,956) (5,564) 955 (9,220) (8,265)
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income $ 1,841 $ (957) $ 884 $ 826 $ 2,502 $ 3,328
=============================================================================================================================
PROVISION FOR LOAN LOSSES. The Company establishes an allowance for loan losses
based on an analysis of the risk in its loan portfolio including concentrations
of credit, past loan loss experience, current economic conditions, amount and
composition of the loan portfolio, estimated fair value of underlying
collateral, delinquencies and other factors. Accordingly, the analysis of the
adequacy of the allowance for loan losses is not based solely on the level of
non-performing loans, or any other single factor.
The provision for loan losses was $560 thousand, or .07% of average loans for
the year ended September 30, 2003, down $606 thousand, or 52.0% from the $1.2
million for the year ended September 30, 2002, which represented .15% of average
loans, primarily due to lower net charge-offs and lower outstanding loan
balances. Net charge-offs were $452 thousand, or .06% of average loans for the
year ended September 30, 2003, down $509 thousand or 53.0%, compared to net
charge-offs of $961 thousand, or .13% of average loans in the prior year.
Non-performing loans were $2.7 million or .35% of total loans at September 30,
2003, up from the $2.1 million or .27% of total loans at September 30, 2002. The
increase in non-performing loans at September 30, 2003 as compared to September
30, 2002 was principally due to a well-secured commercial real estate loan,
which was restructured and, a commerical business relationship which is no
longer performing under its original terms and was classified as non-accrual.
Losses on the commerical business relationship, if any, will be minimal
due to a government guarantee.
NON-INTEREST INCOME. Non-interest income was $9.2 million for the year ended
September 30, 2003, up $2.3 million, or 32.3% from the year ended September 30,
2002. The increase from the 2002 period was principally from the $1.9 million
increase in net gains from securities transactions, $927 thousand increase in
net rental income from real estate partnerships, and $407 thousand increase in
service charges on deposit accounts. The increase in the net gains from
securities transactions was a result of the Company selling portions of its
equity and corporate bond portfolio to generate additional taxable income in
order to utilize tax-benefit carryforwards, which may otherwise expire. The
increase in the net rental income from real
35
estate partnerships is a result of the prior fiscal year including only 5 months
of net rental income, since the partnership was entered into in May 2002.
Service charges on deposit accounts increased 21.2% due in part to a new
overdraft protection product, as well as higher service fees on commercial
business accounts. Somewhat offsetting these increases were lower commissions
from annuity sales, loan servicing fees and a decrease in other income.
Commissions from annuity sales decreased $469 thousand due to product promotions
with higher rates in the prior year. Loan servicing fees were adversely impacted
by higher levels of prepayments, also brokerage commissions which are part of
other income, declined due to current market conditions. Also, adversely
impacting other income this period was a net loss of $69 thousand for the
Company's equity method real estate partnership, compared to net income of $74
thousand in the prior period. The net loss is a result of lower net rental
income due to a building vacancy. Also, the Company recognized fewer gains on
the sale of other assets in the current period.
NON-INTEREST EXPENSES. Non-interest expenses were $31.8 million for the year
ended September 30, 2003, up $4.1 million, or 14.6%. The increase was primarily
due to higher other expenses, increased compensation and employee benefit costs,
and merger related costs. Other expenses increased $2.0 million due to increased
stock based deferred compensation plans which increased $1.4 million, primarily
due to the higher Company stock price at period end. In addition, the Company
wrote-down $350 thousand on a venture capital investment due to poor operating
performance and the continuing economic uncertainty of its core business,
including the need for additional financing. Furthermore, non-reimbursable
operating costs of the Company's real estate partnerships increased $222
thousand as a result of the prior fiscal year including only 5 months of similar
costs, since the partnership was entered into in May 2002. The $1.6 million or
9.4% increase in compensation and employee benefit costs was a result of higher
medical, pension, and ESOP costs. Pension costs increased $649 thousand, as
lower interest rates increased pension liabilities and weak investment
performance in the prior fiscal year reduced plan assets. The Company also
experienced a $125 thousand increase in ESOP-related compensation costs, due to
the higher average market price of its stock during the period. Furthermore,
compensation costs increased due to normal merit increases. Non-deductible
merger related costs, incurred as a result of the Company's pending merger with
First Niagara were $497 thousand.
INCOME TAX EXPENSE. Income tax expense for the year ended September 30, 2003,
was $6.3 million, a decrease of $118 thousand, or 1.8% from the prior fiscal
year. The Company's effective tax rates for the years ended September 30, 2003
and 2002, were 33.1% and 32.8%, respectively. The decrease in income tax expense
is principally due to the impact of the lower income before income tax this
year; the higher effective tax rate reflects the impact of non-deductible merger
related transaction costs.
COMPARISON OF OPERATING RESULTS FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2002
AND 2001
GENERAL. For the fiscal year ended September 30, 2002, the Company recorded net
income of $13.2 million, up $4.1 million, or 45.5%, compared to the fiscal year
ended September 30, 2001. Basic and diluted earnings per share were $1.47 and
$1.38 respectively, an increase of 54.7% and 50.0% compared to basic and diluted
earnings per share of $.95 and $.92 for the fiscal year ended September 30,
2001. All share and per share amounts have been adjusted for the 5% stock
dividend issued on March 29, 2002. For the fiscal year ended September 30, 2002,
weighted average common shares - basic were 9,008,124, down 521,280, or 5.5%,
from the prior year due to the Company's share repurchase programs. Weighted
average shares - diluted were down only 316,208 or 3.2% due to the higher
average market price of the Company's stock during the fiscal year ended
September 30, 2002, which increased the number of shares to be included for
dilution.
The Company's net income and basic and diluted earnings per share for the year
ended September 30, 2001, include the impact of $2.0 million, or $1.2 million
after-tax and $.12 per diluted share, of merger related integration costs
incurred as part of the acquisition and integration of Catskill. In addition,
under accounting standards that became effective at the beginning of fiscal year
2002, the Company no longer amortizes goodwill. Amortization of goodwill
amounted to $1.4 million, or $.15 per diluted share in the year ended September
30, 2001.
Return on average assets for the year ended September 30, 2002 was 1.18% and for
2001 was .86%. Return on average equity was 8.09% for the year ended September
30, 2002 and 5.43% for 2001.
NET INTEREST INCOME. Net interest income on a tax equivalent basis for the year
ended September 30, 2002, was $43.7 million, an increase of $3.3 million, or
8.2%, when compared to the year ended September 30, 2001. The increase was
principally volume related with average earning assets up $52.4 million, or
5.4%. However, the Company's net interest margin improved
36
11 basis points to 4.30%, and the net interest spread increased 32 basis points
to 3.89%, primarily because the Company was able to reduce its average cost of
funds.
Interest income for the year ended September 30, 2002 was $68.2 million on a tax
equivalent basis, down $4.9 million, or 6.8% from the prior year. The effect of
the 88 basis point drop in the yield on average earning assets reduced interest
income but was partially offset by the interest income earned on the additional
$52.4 million of average earning assets.
Average earning assets increased principally in the loan and securities
available for sale portfolios, which on average grew 2.7% and 24.3%,
respectively. Average loans increased $20.0 million principally due to the loan
portfolio acquired from Catskill, which was included for the full fiscal year,
compared to only part of the prior fiscal year. The balance of the increase was
in the Company's commercial real estate and commercial business loan portfolios,
as the Company continues to emphasize its commercial banking strategy. The yield
on the Company's average loan portfolio decreased 57 basis points, as the
Company's commercial business loan portfolio, which is principally variable rate
and represents approximately 14.5% of total average loans, re-priced lower due
to the reduction in short-term market interest rates since the prior year.
Average securities available for sale increased $49.3 million or 24.3%,
principally from an increase in the tax-exempt municipal portfolio and the
securities portfolio acquired from Catskill, which was included for the full
year. The yield on the average securities portfolio decreased 184 basis points
as the Company's relatively short average life tax-exempt securities portfolio
re-priced faster (yield on average municipal securities portfolio decreased 234
basis points) in response to the decrease in overall market interest rates. In
addition, recent purchases in the tax-exempt municipal securities portfolio
(most of which have a maturity of one-year or less) have been purchased at rates
much lower than the current average portfolio yield due to the lower interest
rate environment.
Interest expense for the year ended September 30, 2002, was $24.4 million, a
decrease of $8.3 million or 25.3% from the prior year. Average interest bearing
liabilities increased $54.9 million or 6.7%, principally due to money market
municipal deposits generated by the Commercial Bank as well as deposits from the
Catskill acquisition being included for the full year. The Company has
aggressively re-priced its deposits, especially its CD's, resulting in a 120
basis point reduction in the average cost of funds to 2.81%. The average cost of
CD's was 3.80% for the year ended September 30, 2002, down 145 basis points from
the prior year.
The Company's net interest margin was 4.30% for the year ended September 30,
2002, up 11 basis points from the prior year. The increase was principally from
the 32 basis point improvement in the net interest spread due principally to
aggressive re-pricing of the Company's interest-bearing liabilities. The Company
expects its net interest margin to decrease modestly over the next quarter due
to the continued re-pricing of assets, especially with the recent Federal Open
Market Committee action to lower the federal funds rate. The Company expects to
continue to reduce its cost of funds, as approximately $92.1 million of time
deposits will be re-pricing over the next three months at lower rates, and the
Company has recently lowered its savings deposit rate. The Company had $147.1
million of average earning assets with no funding costs for the year ended
September 30, 2002, essentially unchanged from the $149.7 million for the year
September 30, 2001. The $11.9 million or 22.1% increase in average
non-interest-bearing deposits in fiscal 2002, more than offset the increase in
non-earning assets, primarily due to the Company's real estate joint venture
investment and goodwill from the Catskill acquisition being included for the
full year.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $1.2 million, or
..15% of average loans for the year ended September 30, 2002, down $332 thousand,
or 22.2% from the year ended September 30, 2001, which represented .20% of
average loans, due to lower net charge-offs and improved asset quality. Net
charge-offs were $961 thousand, or .13% of average loans for the year ended
September 30, 2002, down $279 thousand or 22.5%, compared to net charge-offs of
$1.2 million, or .17% of average loans in the comparable year. Non-performing
loans were $2.1 million or .27% of total loans at September 30, 2002, down from
the $3.2 million or .43% of total loans at September 30, 2001.
37
NON-INTEREST INCOME. Non-interest income was $7.0 million for the year ended
September 30, 2002, up $1.7 million, or 33.2% from the year ended September 30,
2001. The increase from the 2001 period to the 2002 period was principally from
the $694 thousand increase in fees earned on annuity sales as the Company
expanded its product offering; fees in the prior period were nominal. In
addition, the Company had net rental income of $631 thousand from its real
estate joint venture investment in the current year (none in the prior fiscal
year). Service charges on deposits were $1.9 million, up $309 thousand or 19.2%
from the comparable year. This increase was principally due to the Catskill
acquisition and the increase in transaction accounts, including commercial
business accounts. The Company also benefited by $284 thousand from the change
in net gains (losses) on security and mortgage loan sales between the two
periods.
NON-INTEREST EXPENSES. Non-interest expenses were $27.7 million for the year
ended September 30, 2002, down $1.2 million, or 4.1%. The decrease was primarily
due to the $2.0 million of merger related integration costs that were included
in the prior fiscal year, as well as the fact that the Company is no longer
amortizing goodwill. In accordance with newly effective Financial Accounting
Standards Board rules, goodwill is no longer being amortized, but will be
subject to impairment testing at least annually. The Company adopted the new
standard on October 1, 2001 and has determined that there was no impairment of
its existing goodwill totaling $30.9 million. Amortization of goodwill amounted
to $1.4 million (which was not tax deductible) for the year ended September 30,
2001. Excluding the merger related integration costs and goodwill amortization,
non-interest expenses were up $2.2 million, or 8.8%, primarily in compensation
and benefits. Some of the increase is due to the on-going costs associated with
Catskill's seven full-service branch offices being included for the twelve-month
period this fiscal year, as compared to only a partial period in the prior
fiscal year. The Company also experienced a $767 thousand, or 57.8% increase in
ESOP- related compensation costs, due to the higher average market price of its
stock during the period. Furthermore, compensation costs increased due to normal
merit increases, as well as additional incentive-based compensation from higher
annuity sales.
INCOME TAX EXPENSE. Income tax expense for the year ended September 30, 2002,
was $6.4 million, an increase of $2.2 million, or 50.6% from the prior fiscal
year. The Company's effective tax rates for the years ended September 30, 2002
and 2001, were 32.8% and 32.0%, respectively. The increase in income tax expense
is principally due to the impact of the higher income before income tax this
year; the higher effective tax rate reflects tax-exempt income that represented
a smaller portion of the Company's income before income tax in this period,
compared to the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to generate cash flows to meet present and expected
future funding needs. Management monitors the Company's liquidity position on a
daily basis to evaluate its ability to meet expected and unexpected depositor
withdrawals, fund loan commitments, and make new loans or investments.
The Company's primary sources of funds for operations are deposits, borrowings,
principal and interest payments on loans, and maturities of securities available
for sale.
The Company 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 the Company'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 the Company's depositors, and
meet all other obligations of the Company.
Net cash provided by operating activities was $30.8 million for the year ended
September 30, 2003, up $13.7 million from the prior fiscal year. The increase
was principally due to changes in other liabilities and accrued expenses between
the comparable periods. Other liabilities increased from the comparable period
of the prior year primarily due to amounts due to brokers, as this period
included approximately $10.7 million of securities purchased which had not yet
settled, as well as higher stock based deferred compensation costs.
Investing activities used net cash of $16.7 million during the fiscal year ended
September 30, 2003. Net securities activities used $21.4 million as the sales,
maturities, calls and paydowns on securities nearly offset the Company's
purchases. Somewhat offsetting the securities portfolio increase was a net
reduction in loans outstanding of $5.0 million.
Financing activities provided net cash of $50.1 million, as the Company had
deposit growth of $84.0 million and had additional long-term borrowings of $20.0
million. Offsetting these increases, was a reduction in the Company's short-term
38
borrowings (including securities sold under agreement to repurchase) of $35.4
million. Furthermore, $13.2 million was used to repurchase 492,555 shares of
common stock and $5.9 million to pay cash dividends.
An important source of the Company's funds is the Company's core deposits.
Management believes that a substantial portion of the Company's $967.0 million
of deposits are a dependable source of funds due to long-term customer
relationships. As of September 30, 2003, time deposit accounts having balances
in excess of $100 thousand, totaled $35.5 million, or approximately 3.7% of
total deposits. The Company does not currently use brokered deposits as a source
of funds.
On April 16, 2002, the Company announced a plan to repurchase up to 1,009,276
shares of its common stock or approximately 10.0% of its outstanding shares.
Since the announcement, the Company has repurchased 939,120 shares of its stock
at a cost of $26.9 million. The Company still has authority under this stock
repurchase program to repurchase 70,156 additional shares. Furthermore, on April
28, 2003, the Company announced an additional 10% stock repurchase plan,
representing approximately 917,657 of its outstanding shares remaining after
completion of the earlier program. As part of the Company's merger agreement
with First Niagara, the Company is precluded from purchasing any additional
outstanding shares, except those repurchased in connection with the Company's
long-term equity compensation plans.
On an unconsolidated basis, the Company's primary source of funds is dividends
from the Banks. At September 30, 2003, the Company had $6.4 million of cash and
securities available for sale at the holding company level on an unconsolidated
basis to use for direct activities of the Company. New York State Banking law
provides that all dividends declared in any calendar year shall not exceed the
total of the Bank's net profits for the year combined with its retained net
profits of the preceding two years, less any required transfer to surplus,
without the prior approval from the Superintendent of Banks. The Savings Bank
had received approval to pay dividends to the Parent Company in calendar year
2002 in excess of that amount. The Company expects the Savings Bank to continue
to pay cash dividends to the Parent Company in 2003. The Savings Bank has earned
$9.3 million in net profits in calendar year 2003, $3.3 million of which is
available for distribution. The Commercial Bank has earned $2.2 million in net
profits since its inception in July 2000, and has paid cash dividends of $1.9
million; the balance is available for distribution. Prior to June 30, 2003, as
part of the Commercial Bank's charter approval, the Commercial Bank had to
maintain a tier 1 capital ratio of at least 8%. The Commercial Bank is no longer
subject to this limitation.
OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
Off Balance Sheet Arrangements:
- ------------------------------
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
in 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.
39
Contract amounts of financial instruments that represent potential future
extensions of credit as of September 30, 2003 at fixed and variable interest
rates are as follows:
2003
- --------------------------------------------------------------------------------------------
FIXED VARIABLE TOTAL
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
Financial instruments whose contract amounts
represent credit risk:
Commitments outstanding:
Residential mortgages $ 5,403 $ 554 $ 5,957
Commercial real estate and commercial business 540 24,205 24,745
- --------------------------------------------------------------------------------------------
Construction loans 793 11,523 12,316
- --------------------------------------------------------------------------------------------
Total 6,736 36,282 43,018
- --------------------------------------------------------------------------------------------
Unused lines of credit:
Home equity -- 18,608 18,608
Commercial -- 105,189 105,189
Overdraft -- 5,077 5,077
- --------------------------------------------------------------------------------------------
Total -- 128,874 128,874
- --------------------------------------------------------------------------------------------
Standby letters of credit -- 15,693 15,693
- --------------------------------------------------------------------------------------------
Total $ 6,736 $ 180,849 $ 187,585
============================================================================================
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 the Company does not expect all of the
commitments 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.
The Company has issued conditional commitments in the form of standby letters of
credit to guarantee payment on behalf of customers and to guarantee the
performance of customers to third parties. Standby letters of credit generally
arise in connection with lending relationships. The credit risk involved in
issuing these instruments is essentially the same as that involved in extending
loans to customers. Contingent obligations under standby letters of credit
totaled $15.7 million at September 30, 2003 and represent the maximum potential
future payments the Company could be required to make. Typically, these
instruments have terms of one year or less and expire unused; therefore, 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 for on-balance
sheet instruments. Company policies governing loan collateral apply to standby
letters of credit at the time of credit extension. Loan-to-value ratios will
generally range from 50% for movable assets, such as inventory, 75% for real
estate, and 100% for liquid assets, such as bank certificates of deposit. The
Company had performance and financial standby letters of credit at September 30,
2003 of $15.1 million and $600 thousand, respectively. The fair value of the
Company's standby letter of credits was not material at September 30, 2003.
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, 2003 and 2002, approximately $46.5
million and $54.5 million, respectively, of adjustable rate residential mortgage
loans had interest rate caps.
40
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, 2003 and 2002, 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 $6.6
million and $7.3 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 mandatory forward
sales commitments and option agreements to sell loans in the secondary market to
unrelated investors. At September 30, 2003 and 2002, the Company had mandatory
commitments and cancelable options to sell conventional fixed rate mortgage
loans at set prices amounting to approximately $2.0 million and $4.0 million,
respectively. The Company believes that it will be able to meet the mandatory
commitments without incurring any material losses.
Contractual Obligations:
- -----------------------
The following table sets forth contractual obligations of the Company at
September 30, 2003:
PAYMENTS DUE WITHIN
------------------------------------------------------------------------------
LESS THAN 1 YEAR TO 3 YEAR TO MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 3 YEARS 5 YEARS 5 YEARS
- ------------------------------------------------------------------------------------------------------------------
Long-term debt obligations $ 107,230 $ 20,585 $ 31,259 $ 41,380 $ 14,006
Operating lease obligations 2,354 716 705 354 579
Data processing 3,866 1,164 2,328 374 --
Purchase obligations 10,677 10,677 -- -- --
- ------------------------------------------------------------------------------------------------------------------
Total $ 124,127 $ 33,142 $ 34,292 $ 42,108 $ 14,585
==================================================================================================================
IMPACT OF NEW ACCOUNTING STANDARDS
On October 1, 2001, the Company adopted Financial Accounting Standards Board
("FASB") Statement No. 141, "Business Combinations," and Statement No. 142,
"Goodwill and Other Intangible Assets." Statement No. 141 supercedes Accounting
Principles Board ("APB") Opinion No. 16, "Business Combinations," and requires
all business combinations to be accounted for under the purchase method of
accounting, thus eliminating the pooling of interests method of accounting. The
Statement did not change many of the provisions of APB Opinion No.16 related to
the application of the purchase method. However, the Statement does specify
criteria for recognizing intangible assets separate from goodwill and requires
additional disclosures regarding business combinations.
Statement No. 142 requires acquired intangible assets (other than goodwill) to
be amortized over their useful economic lives, while goodwill and any acquired
intangible assets with an indefinite useful economic life would not be
amortized, but would be reviewed for impairment on an annual basis based upon
guidelines specified by the Statement. Statement No.142 also requires additional
disclosures pertaining to goodwill and intangible assets.
On October 1, 2001, the Company had goodwill of approximately $30.9 million. The
Company has determined that as of October 1, 2001, and during the year ended
September 30, 2003 and 2002, there was no impairment of its goodwill, and thus
the carrying value is also $30.9 million as of September 30, 2003. The adoption
of Statement No. 142 had a significant effect on the Company's results of
operations for the fiscal year ended September 30, 2003 and 2002, since the
non-amortization of goodwill reduced non-interest expenses.
41
The following table presents reported net income and earnings per share, as well
as net income and earnings per share, as adjusted to exclude goodwill
amortization as if the Company had adopted Statement No. 142 on October 1, 2000:
FOR THE YEARS ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Reported net income $ 12,799 $ 13,199 $ 9,074
Add: Goodwill amortization (not-tax deductible) -- -- 1,437
- ------------------------------------------------------------------------------------------
Net income, as adjusted $ 12,799 $ 13,199 $ 10,511
==========================================================================================
Reported basic earnings per share $ 1.52 $ 1.47 $ 0.95
Add: Goodwill amortization -- -- 0.15
- ------------------------------------------------------------------------------------------
Basic earnings per share, as adjusted $ 1.52 $ 1.47 $ 1.10
==========================================================================================
Reported diluted earnings per share $ 1.43 $ 1.38 $ 0.92
Add: Goodwill amortization -- -- 0.14
- ------------------------------------------------------------------------------------------
Diluted earnings per share, as adjusted $ 1.43 $ 1.38 $ 1.06
==========================================================================================
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an Amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." This statement removes acquisitions of financial
institutions from the scope of both Statement No. 72 and Interpretation No. 9
and requires that those transactions be accounted for in accordance with SFAS
No. 141, "Business Combinations" and No. 142, "Goodwill and Other Intangible
Assets." As a result, the requirement in SFAS No. 72 to recognize (and
subsequently amortize) any excess of the fair value of liabilities assumed over
the fair value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset (SFAS No. 72 goodwill) no longer applies to
acquisitions considered to be business combinations under SFAS No. 141. The
Company does not currently have any SFAS No. 72 goodwill and, as a result, the
adoption did not have a material impact on the Company's consolidated financial
statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN No. 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others; an Interpretation of FASB
Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN
No. 45 requires certain new disclosures and potential liability-recognition for
the fair value at issuance of guarantees that fall within its scope. Under FIN
No. 45, the Company does not issue any guarantees that would require
liability-recognition or disclosure, other than its standby letters of credit,
as discussed in Note 19.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation" and provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require more prominent and
more frequent disclosures in financial statements about the effects of
stock-based compensation. The Company adopted the new disclosure requirements of
SFAS No. 148 and it does not expect that SFAS No. 148 will have a material
impact on its consolidated financial statements, as the Company does not
currently intend to change its method of accounting for stock-based employee
compensation unless mandated by the FASB.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," ("FIN No. 46") which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements." More
specifically, FIN No. 46 explains how to identify variable interest entities and
how to determine whether or not those entities should be consolidated. The
Interpretation requires the primary beneficiaries of variable interest entities
to consolidate the variable interest entities if they are subject to a majority
of the risk of loss or are entitled to receive a majority of the residual
returns. FIN No. 46 also requires that both the primary beneficiary and all
other enterprises with a significant variable interest in a variable interest
entity make certain disclosures. FIN No. 46 applies immediately to variable
interest entities created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest after that date. It applies
in the first fiscal year or interim period ending after December 15, 2003, to
variable interest entities in which a public enterprise
42
holds a variable interest that it acquired before February 1, 2003. The
provisions of this FIN No. 46 are not expected to have a material impact on the
Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities, ("SFAS No. 149"). SFAS No. 149
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS No. 133. In particular, SFAS No. 149 clarifies under what
circumstances a contract within an initial net investment meets the
characteristic of a derivative and when a derivative contains a financing
component that warrants special reporting in the statement of cash flows. SFAS
No. 149 is generally effective for contracts entered into or modified after June
30, 2003, and did not to have a material impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). SFAS No. 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. For certain financial instruments, the
classification and measurment provisions of SFAS No. 150 have been deferred
indefinitely. The adoption of SFAS No. 150 did not have a material impact on the
Company's consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
MANAGEMENT OF INTEREST RATE RISK
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as movements in foreign currency exchange rates
and commodity prices, do not arise in the normal course of the Company'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 the Company's
net interest income. Interest rate risk arises naturally from the imbalance in
the repricing, maturity and/or cash flow characteristics of the Company's assets
and liabilities.
Some of the Company's loans are adjustable or variable rate, which result in
reduced levels of interest income during periods of falling rates, such as in
2002 and into 2003. In addition, in periods of falling interest rates,
prepayments of loans typically increase, which would lead to lower net interest
income since such proceeds could not be reinvested at a comparable rate. 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 periods when short-term and long-term
interest rates are relatively close, 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 the Company's interest rate risk management program
are to:
o measure, monitor, evaluate and develop strategies in response to the
interest rate risk profile inherent in the Company's assets and
liabilities,
o determine the appropriate level of risk given the Company's business
strategy, operating environment, capital and liquidity requirements, and
o manage the risk consistent with the Company's guidelines.
Through such management, the Company seeks to reduce the vulnerability of its
net interest income to changes in interest rates by matching the maturities of
the Company's assets with those of the Company's liabilities and off-balance
sheet financial instruments.
The responsibility for interest rate risk management rests with the Company's
Asset/Liability Management Committee ("ALCO"). The Company's ALCO reviews the
Company's asset/liability policies and interest rate risk position. The
Company's ALCO is chaired by the Company's chief financial officer, and other
members include the Company's senior management team. The ALCO meets monthly to
review the consolidated statement of financial condition composition, formulate
strategy in light of expected economic conditions and review performance against
guidelines
43
established to control exposure to the various types of interest rate risk. ALCO
also reports the Company's interest rate risk position to the Company's Board of
Directors on a quarterly basis. The Company'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. The Company, of course, cannot predict the
future movement of interest rates, and such movement could have an adverse
impact on the Company's consolidated financial condition and results of
operations.
In recent years, the Company has primarily used the following strategies to
manage interest rate risk:
o 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 commercial real estate, commercial
business and consumer loans, including home equity lines;
o selling substantially all of its 30 year fixed rate residential mortgage
loan production in the secondary market, and from time to time, as
conditions warrant, selling its 15 year fixed rate residential mortgage
loans in the secondary market;
o utilizing FHLB advances to better structure the maturities of its interest
rate sensitive liabilities, or match fund various earning assets; and
o investing in short-term securities which generally bear lower yields,
compared to longer-term investments, but which better position the Company
for reinvestment in higher yielding securities, if interest rates should
rise.
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 held for sale with rate lock
agreements, the Company enters into mandatory forward sales commitments and
option agreements to sell loans in the secondary market. At September 30, 2003,
the Company had mandatory commitments and cancelable options to sell fixed rate
loans at set prices amounting to approximately $2.0 million. The Company
believes that it will be able to meet the mandatory commitments without
incurring material losses.
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 the Company's net interest income performance based upon
potential changes in interest rates over a select period of time. The model's
input data includes interest-earning assets and interest-bearing liabilities,
their associated cash flow characteristics, repricing opportunities, maturities
and current rates. In addition, management makes certain assumptions on
prepayment speeds for all assets and liabilities which have optionality,
including loans and mortgage-backed securities, as well as securities and
borrowings with calls. These assumptions are generally based on industry
standards for prepayments, where available.
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 (except in the current historically low interest rate environment
the decrease was limited to 50 basis points) 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 changes in net interest
income are then measured against the flat rate scenario.
44
The following table summarizes the percentage change in interest income and
interest expense by major interest-earning asset and interest-bearing liability
categories as of September 30, 2003 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
decrease from the flat rate scenario by 2.5% over a twelve-month period. Under
the rising rate scenario, net interest income is expected to increase from the
flat rate scenario by 2.7 over a twelve-month period. This level of variability
is well within the Company's interest rate risk guidelines.
PERCENTAGE CHANGE IN NET INTEREST INCOME
INTEREST RATE RISK FROM FLAT RATE SCENARIO
- -----------------------------------------------------------------------------------------------------------
DECLINING RATE SCENARIO RISING RATE SCENARIO
- -----------------------------------------------------------------------------------------------------------
Federal funds sold and other short-term investments -45.7% 81.5%
Securities (held to maturity and available for sale) -4.7% 4.8%
Loans -3.5% 3.5%
- -----------------------------------------------------------------------------------------------------------
Total interest income -4.0% 4.3%
- -----------------------------------------------------------------------------------------------------------
Core deposits -17.7% 18.8%
Time deposits -5.9% 5.8%
- -----------------------------------------------------------------------------------------------------------
Total deposits -12.3% 12.9%
- -----------------------------------------------------------------------------------------------------------
Borrowings -1.0% 1.0%
- -----------------------------------------------------------------------------------------------------------
Total interest expense -8.5% 8.9%
- -----------------------------------------------------------------------------------------------------------
Net interest income -2.5% 2.7%
===========================================================================================================
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/replacement of asset and liability cashflows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make assurances as to the predictive
nature of these assumptions, including how customer preferences or competitor
influences might change. Also, as market conditions vary from those assumed in
the sensitivity analysis, actual results will differ from:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate changes on caps and floors on adjustable rate assets,
the potential effect of changing debt service levels on customers with
adjustable rate loans, depositors' early withdrawals and product preference
changes, and other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or
anticipating changes in interest rates.
IMPACT ON INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require the measurement of financial condition and operating results in terms of
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 the Company's operations. Unlike those of most
industrial companies, the Company's assets and liabilities are nearly all
monetary. As a result, interest rates have a greater impact on the Company'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.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF CONDITION AS OF SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
Assets
Cash and cash equivalents $ 98,263 $ 34,020
Loans held for sale 1,182 891
Securities available for sale, at fair value 414,265 394,067
Securities held to maturity (fair value of $708
and $954 at September 30,
2003 and 2002, respectively) 661 883
Net loans receivable 744,831 750,529
Accrued interest receivable 5,863 6,129
Other real estate owned 416 352
Investment in real estate partnerships 19,461 19,566
Premises and equipment, net 15,866 16,268
Goodwill 30,909 30,909
Core deposit intangible, net 265 311
Bank-owned life insurance 12,065 11,487
Other assets 21,409 23,465
- -----------------------------------------------------------------------------------------------------------
Total assets $ 1,365,456 $ 1,288,877
===========================================================================================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Non-interest bearing $ 80,649 $ 81,413
Interest bearing 886,367 801,555
----------- ------------
Total deposits 967,016 882,968
Mortgagors' escrow accounts 1,527 1,575
Securities sold under agreements to repurchase 34,500 134,872
Short-term borrowings 65,000 --
Long-term debt 107,230 87,483
Other liabilities and accrued expenses 35,471 24,125
- -----------------------------------------------------------------------------------------------------------
Total liabilities 1,210,744 1,131,023
- -----------------------------------------------------------------------------------------------------------
Shareholders' equity:
Preferred stock, $.0001 par value per share; 15,000,000
shares authorized, none issued -- --
Common stock, $.0001 par value per share; 60,000,000 shares authorized,
12,139,021 shares issued 1 1
Additional paid-in capital 127,138 125,583
Unallocated common stock held by ESOP (6,638) (7,406)
Unvested restricted stock awards (1,553) (2,548)
Treasury stock, at cost (2,864,937 shares at September 30, 2003 and
2,453,186 shares at September 30, 2002) (52,837) (41,116)
Retained earnings, substantially restricted 86,995 80,078
Accumulated other comprehensive income 1,606 3,262
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 154,712 157,854
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,365,456 $ 1,288,877
===========================================================================================================
See accompanying notes to consolidated financial statements.
46
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
Interest and dividend income:
Interest and fees on loans $ 51,086 $ 55,241 $ 58,386
Securities available for sale:
Taxable 6,336 7,190 8,815
Tax-exempt 3,587 3,445 3,243
- -----------------------------------------------------------------------------------------------------------
Total securities available for sale 9,923 10,635 12,058
- -----------------------------------------------------------------------------------------------------------
Securities held to maturity 63 95 183
Federal funds sold and other 32 20 586
- -----------------------------------------------------------------------------------------------------------
Total interest and dividend income 61,104 65,991 71,213
- -----------------------------------------------------------------------------------------------------------
Interest expense:
Deposit and escrow accounts 13,354 19,545 26,729
Short-term borrowings 802 1,366 3,036
Long-term debt 4,724 3,533 2,944
- -----------------------------------------------------------------------------------------------------------
Total interest expense 18,880 24,444 32,709
- -----------------------------------------------------------------------------------------------------------
Net interest income 42,224 41,547 38,504
Provision for loan losses 560 1,166 1,498
- -----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 41,664 40,381 37,006
- -----------------------------------------------------------------------------------------------------------
Non-interest income:
Service charges on deposits 2,327 1,920 1,611
Net rental income from real estate partnerships 1,558 631 --
Loan servicing fees 122 221 400
Trust service fees 715 753 839
Commission from annuity sales 292 761 67
Net gains (losses) from securities transactions 2,093 151 (105)
Net gains from mortgage loan sales 291 96 68
Other income 1,822 2,436 2,353
- -----------------------------------------------------------------------------------------------------------
Total non-interest income 9,220 6,969 5,233
- -----------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and employee benefits 18,341 16,771 14,777
Net occupancy 2,583 2,415 2,362
Furniture, fixtures and equipment 783 931 949
Computer charges 2,090 1,972 1,869
Professional, legal and other fees 972 1,028 1,242
Printing, postage and telephone 906 1,046 858
Other real estate expenses, net 77 22 121
Goodwill amortization -- -- 1,437
Core deposit intangible amortization 48 48 48
Merger related costs 497 -- 1,972
Other expenses 5,468 3,480 3,254
- -----------------------------------------------------------------------------------------------------------
Total non-interest expenses 31,765 27,713 28,889
- -----------------------------------------------------------------------------------------------------------
Income before income tax expense 19,119 19,637 13,350
Income tax expense 6,320 6,438 4,276
- -----------------------------------------------------------------------------------------------------------
Net income $ 12,799 $ 13,199 $ 9,074
===========================================================================================================
Earnings per common share:
Basic $ 1.52 $ 1.47 $ 0.95
Diluted $ 1.43 $ 1.38 $ 0.92
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
47
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEARS ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share and per share data)
COMMON STOCK
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at beginning and end of period $ 1 $ 1 $ 1
- ---------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period $ 125,583 $ 118,018 $ 117,804
Adjustment for ESOP shares released for allocation 1,419 713 88
Adjustment for stock options exercised (546) (213) (12)
Tax benefit from vesting of restricted stock awards 548 338 --
Tax benefit from exercise of non-qualified stock options 64 155 33
Stock dividend issued -- 6,347 --
Adjustment for grant of restricted stock awards 70 225 105
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 127,138 $ 125,583 $ 118,018
- ---------------------------------------------------------------------------------------------------------------------------------
UNALLOCATED COMMON STOCK HELD BY ESOP
Balance at beginning of period $ (7,406) $ (8,202) $ (9,027)
ESOP shares released for allocation (81,346, 84,411 and
87,477 shares, respectively) 768 796 825
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (6,638) $ (7,406) $ (8,202)
- ---------------------------------------------------------------------------------------------------------------------------------
UNVESTED RESTRICTED STOCK AWARDS
Balance at beginning of period $ (2,548) $ (3,136) $ (3,847)
Grant of restricted stock awards (7,500, 19,614 and 27,458 shares,
respectively) (205) (486) (405)
Amortization of restricted stock awards 1,086 1,066 976
Forfeiture of restricted stock awards (7,815, 788 and 13,650 shares,
respectively) 114 8 140
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (1,553) $ (2,548) $ (3,136)
- ---------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK
Balance at beginning of period $ (41,116) $ (29,554) $ (16,020)
Purchase of treasury stock (492,555, 747,964 and 842,602 shares,
respectively) (13,191) (19,371) (13,927)
Grant of restricted stock awards (7,500, 19,614 and 27,458 shares,
respectively) 135 261 300
Stock dividend issued (5% or 480,868 shares) -- 6,550 --
Forfeiture of restricted stock awards (7,815, 788 and 13,650 shares,
respectively) (114) (8) (140)
Stock options exercised (81,119, 74,250 and 21,486 shares,
respectively) 1,449 1,006 233
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ (52,837) $ (41,116) $ (29,554)
- ---------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of period $ 80,078 $ 84,380 $ 78,543
Net income 12,799 12,799 13,199 13,199 9,074 9,074
Stock dividend issued -- (12,897) --
Cash dividends ($0.67, $0.49 and $0.34 per share, respectively) (5,882) (4,604) (3,237)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 86,995 $ 80,078 $ 84,380
- ---------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME
Balance at beginning of period $ 3,262 $ 3,239 $ (176)
Unrealized net holding (losses) gains on available for sale
securities arising during the period (pre-tax ($662), $189
and $5,552,respectively) (398) 115 3,352
Reclassification adjustment for net (gains) losses on available for
sale securities realized in net income (pre-tax ($2,093), ($151)
and $105, respectively) (1,258) (92) 63
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (1,656) (1,656) 23 23 3,415 3,415
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $11,143 $13,222 $12,489
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 1,606 $ 3,262 $ 3,239
- ---------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity $ 154,712 $ 157,854 $ 164,746
- ---------------------------------------------------------------------------------------------------------------------------------
All share and per share data has ben adjusted for the 5% stock dividend issued
on March 29, 2002.
See accompanying notes to consolidated financial statements.
48
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30,
- -----------------------------------------------------------------------------------------------------------------------------
2003 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (Dollars in thousands)
Net income $ 12,799 $ 13,199 $ 9,074
Adjustments to reconcile net income to net cash provided by operating activites:
Depreciation 1,330 1,640 1,467
Goodwill and other intangibles amortization 48 48 1,485
Loss (income) from equity method real estate partnership, net of distributions 69 (74) (128)
Net premium amortization on securities 1,132 537 198
Provision for loan losses 560 1,166 1,498
Amortization of restricted stock awards 1,086 1,066 976
ESOP compensation expense 2,218 2,093 1,326
Net accretion of purchase accounting adjustments (474) (510) (603)
Net gains on sales of other real estate owned (30) (77) (172)
Write-downs of other real estate owned 63 33 --
Net gains on sales of other assets (59) (206) (314)
Net (gains) losses from securities transactions (2,093) (151) 105
Net gains from mortgage loan sales (291) (96) (68)
Proceeds from sales of loans held for sale 17,080 10,700 27,163
Net loans made to customers and held for sale (17,080) (9,747) (26,827)
Net decrease (increase) in accrued interest receivable, bank-owned life
insurance, investments in real estate partnerships and other assets 1,728 (3,511) 270
Net increase in other liabilities and accrued expenses 13,031 963 5,137
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 31,117 17,073 20,587
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in acquisition activity, including majority-owned real estate
partnership (325) (5,800) (50,739)
Proceeds from maturities/calls/paydowns of securities held to maturity 222 1,259 171
Net loans repaid by (made to) customers 5,017 (5,374) 3,824
Purchase of available for sale ("AFS") securities (438,902) (338,968) (237,940)
Proceeds from sales of AFS securities 198,670 21,068 71,054
Proceeds from maturities/calls/paydowns of AFS securities 218,595 171,912 267,151
Capital expenditures, net (926) (445) (513)
Proceeds from sales of other assets 195 750 1,233
Proceeds from sales of other real estate owned 469 589 1,915
- -----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (16,985) (155,009) 56,156
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 83,978 74,380 32,999
Net decrease in mortgagors' escrow accounts (48) (682) (1,169)
Net (decrease) increase in securities sold under agreements to repurchase (100,396) 121,855 (102,740)
Net increase (decrease) in short-term borrowings 65,000 (100,000) 65,000
Payments on long-term debt (253) (33) (3,027)
Proceeds from long-term debt 20,000 25,000 --
Cash dividends paid on common stock (5,882) (4,604) (3,237)
Proceeds from stock options exercised 903 793 221
Purchase of common stock for treasury (13,191) (19,371) (13,927)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 50,111 97,338 (25,880)
- -----------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 64,243 (40,598) 50,863
Cash and cash equivalents at beginning of period 34,020 74,618 23,755
- -----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 98,263 $ 34,020 $ 74,618
=======================================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 18,957 $ 24,460 $ 32,678
Income taxes paid 4,484 6,500 2,668
Transfer of loans to other real estate owned 566 632 686
Adjustment of securities available for sale to fair value, net of tax (1,656) 23 3,415
Grant of restricted stock awards (at fair value on grant date), net of
forfeitures 21 253 160
Acquisition activity (including real estate subsidiary):
Fair value of non-cash assets acquired -- 18,316 261,789
Fair value of liabilities assumed -- 12,516 243,722
=======================================================================================================================
See accompanying notes to consolidated financial statements.
49
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Troy Financial Corporation (the
"Parent Company") and its subsidiaries (referred to together as the
"Company") conform to accounting principles generally accepted in the
United States of America and reporting practices followed by the banking
industry. The more significant policies are described below.
ORGANIZATION
The Company is a financial services company. The Parent Company's
savings bank subsidiary, The Troy Savings Bank (the "Savings
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 Parent Company's commercial bank subsidiary, The
Troy Commercial Bank (the "Commercial Bank"), provides banking and
financing services to municipalities. The Commercial Bank began
operations during fiscal 2000. The Parent Company is regulated by
the Board of Governors of the Federal Reserve of New York. The
Federal Deposit Insurance Corporation ("FDIC") and the New York
State Banking Department regulate the Savings Bank and the
Commercial Bank.
On August 10, 2003, the Company and First Niagara Financial Group,
Inc. ("First Niagara") entered into an Agreement and Plan of
Merger (the "Agreement") which provides for, among other things,
the acquisition of the Company by First Niagara. Contemporaneous
with the completion of the acquisition, The Troy Savings Bank, a
wholly-owned subsidiary of the Company, will merge with and into
First Niagara Bank, a wholly-owned subsidiary of First Niagara.
The Agreement provides that shareholders of the Company will
receive either First Niagara stock, cash or a combination of First
Niagara stock and cash for each share of Company common stock. The
Boards of Directors of the Company and First Niagara expect the
transaction to close in January 2004.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Parent Company and its majority-owned subsidiaries. All material
intercompany accounts and transactions have been eliminated. The
equity method of accounting is used for investments in which the
Company has significant influence, generally ownership of common
stocks or partnership interests of at least 20% and not more than
50%. 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 to the current year's presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States of America 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.
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.
50
A substantial portion of the Company's loans are secured by real
estate located throughout the eight New York State counties of
Albany, Greene, Rensselaer, Saratoga, Schenectady, Schoharie,
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.
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
bank certificates of deposit with maturities less than thirty
days.
LOANS HELD FOR SALE
Loans held for sale are reported at the lower of cost or fair
value, determined on an aggregate basis. It is the intention of
management to sell these loans. 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 by a charge to income for unrealized losses attributable
to changes in market interest rates.
MORTGAGE SERVICING RIGHTS
The Company recognizes 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 loan servicing fee income.
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, they are classified
as securities held to maturity and are carried at amortized cost.
Securities that are identified as trading securities 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, 2003 and 2002, the Company
did not hold any 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 included in securities available for sale, at
cost, since there is no readily available market value.
Unrealized losses on securities reflecting a decline in value
which is other than temporary, if any, are charged to income.
Gains or losses on the 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.
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 deferred
loan fees and costs are accreted to income using an effective
interest method.
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 four payments past
due. When a loan is placed on non-accrual status, all previously
accrued income that has
51
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 non-accrual loans
can also be recognized in income as cash is received, if the loan
is expected to be fully collectible. 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.
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
composition and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans and current economic
conditions that may affect the borrowers' ability to pay.
Commercial real estate and commercial business loans are
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. The allowance for loan losses
related to impaired loans equals the excess of the loan carrying
amount over (1) expected cash flows discounted using the loan's
initial effective interest rate or (2) the fair value of the
collateral for loans where repayment is expected to be provided
solely by the underlying collateral (collateral dependent loans).
The Company's impaired loans are generally collateral dependent.
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 the recorded investment in the loan 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 re-appraised and
written down to the fair value less the estimated costs 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, gain recognition is deferred and
recognized under an alternative method.
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.
INVESTMENT IN REAL ESTATE PARTNERSHIPS
Investments in real estate partnerships that are majority-owned
are consolidated, with the underlying real estate assets carried
at cost less accumulated depreciation and amortization.
Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the assets. The equity
method of accounting is used for other real estate partnership
interests when the Company owns at least 20% and not more than 50%
of the entity, and in which the Company has significant influence.
GOODWILL AND OTHER INTANGIBLE ASSETS
Prior to the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
(see "Recently Adopted Accounting Standards"), goodwill, which
represents the excess of the purchase price over the fair value of
net assets acquired for transactions accounted for using purchase
52
accounting, was amortized on a straight-line basis over 20 years.
In addition, goodwill was assessed for recoverability by
determining whether the amortization of the goodwill balance over
its remaining life could be recovered through future operating
cash flows of the acquired operation. Core deposit intangibles are
being amortized on a straight-line basis over a period of 12
years.
BANK-OWNED LIFE INSURANCE
Bank-owned life insurance is carried at the cash surrender value
of the underlying policies. Income on the investments in the
policies, net of insurance costs and other asset related changes,
is recorded as non-interest income.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
In securities repurchase agreements, the Company transfers the
underlying securities to a third party custodian's account that
explicitly recognizes the Company's interest in the securities.
These agreements are accounted for as secured financing
transactions provided the Company maintains effective control over
the transferred securities and meets other criteria for such
accounting as specified in SFAS No. 140. The Company's agreements
are accounted for as secured financings; accordingly, the
transaction proceeds are recorded as borrowed funds and the
underlying securities continue to be carried in the Company's
securities available for sale portfolio.
INCOME TAXES
The Company 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.
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.
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
financial condition since these assets are not assets of the
Company. Trust service fees are reported on the accrual basis.
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.
STOCK-BASED COMPENSATION
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
53
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 remaining cost of unallocated ESOP shares
(shares not yet released for allocation) is reflected as a
reduction of shareholders' equity.
The Company accounts for stock options granted under its Long-Term
Equity Compensation Plan in accordance with the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations.
Accordingly, for fixed stock option awards, compensation expense
is recognized only if the exercise price of the option is less
than the fair value of the underlying stock at the grant date.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires
entities to provide pro forma disclosures of net income and
earnings per share as if the fair value of all stock-based awards
was recognized as compensation expense over the vesting period of
the awards.
Restricted stock awards granted under the Long-Term Equity
Compensation Plan are also accounted for in accordance with APB
Opinion No. 25. The fair value of the shares awarded, measured as
of the grant date, is recognized as unearned compensation (a
component of shareholders' equity) and amortized to compensation
expense over the vesting period of the awards.
The fair value of each option grant is estimated on the grant date
using the Black-Scholes option-pricing model. The following
weighted-average assumptions were used for grants made in fiscal
2003, 2002 and 2001:
2003 2002 2001
-------------------------------------------------------------------------------------------------------------
Dividend yield 2.22% 2.17% 2.27%
Expected stock price volatility 26.9% 27.2% 20.0%
Risk-free interest rate 2.79% 4.27% 5.00%
Expected option lives 5 years 5 years 5 years
Estimated weighted average fair value of options
granted during the period $ 6.01 $ 6.22 $ 3.04
Pro forma disclosures for the years ended September 30, 2003, 2002
and 2001, utilizing the estimated fair value of the options
granted, are as follows:
2003 2002 2001
-------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
-------------------------------------------------------------------------------------------------------------
Net income as reported $ 12,799 $ 13,199 $ 9,074
Add:
Stock based compensation expense included in reported
net income, net of related tax benefits 652 648 589
Deduct:
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects (938) (928) (858)
-------------------------------------------------------------------------------------------------------------
Pro forma net income $ 12,513 $ 12,919 $ 8,805
=============================================================================================================
Basic earnings per share:
As reported $ 1.52 $ 1.47 $ 0.95
Pro forma 1.48 1.43 0.92
Diluted earnings per share
As reported $ 1.43 $ 1.38 $ 0.92
Pro forma 1.39 1.35 0.89
The Company's stock options have characteristics significantly
different from those of traded options for which the Black-Scholes
model was developed. Since changes in the subjective input
assumptions can materially
54
affect the fair value estimates, the existing model, in
management's opinion, does not necessarily provide a single
reliable measure of the fair value of its stock options. In
addition, the pro forma effect on reported net income and
earnings per share for the years ended September 30, 2003, 2002
and 2001, may not be representative of the pro forma effects on
reported net income and earnings per share for future years.
EARNINGS PER SHARE
Basic earnings per share are 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 using the treasury stock method. 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.
COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and items of
other comprehensive income or loss, 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.
SEGMENT REPORTING
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 Albany, Greene, Rensselaer, Saratoga,
Schenectady, Schoharie, 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.
DERIVATIVES AND HEDGING ACTIVITIES
The Company recognizes all derivative instruments as either assets
or liabilities in the statement of financial condition and
measures those instruments at fair value. Changes in the fair
value of derivative instruments are reported in either earnings or
comprehensive income, depending on the use of the derivative and
whether or not it qualifies for hedge accounting.
Special hedge accounting treatment is permitted only if specific
criteria are met, including a requirement that the hedging
relationship be highly effective both at inception and on an
ongoing basis. Accounting for hedges varies based on the type of
hedge - fair value or cash flow. Results of effective hedges are
recognized in current earnings for fair value hedges and initially
in other comprehensive income for cash flow hedges. Ineffective
portions of hedges are recognized immediately in earnings.
The derivative instruments held by the Company consist solely of
forward sale commitments used to hedge interest rate risk and loan
origination commitments related to the Company's mortgage banking
activities which are not significant. The amounts recognized in
the consolidated statements of income for changes in the fair
value of the derivatives were not significant.
RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations" (SFAS No. 141) and
SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No.
142). SFAS No. 141 was effective for business combinations
initiated after June 30, 2001, and requires that the purchase
method of accounting be used for all business combinations, thus
eliminating the pooling of interests method of accounting.
SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. SFAS No. 142 also
requires that intangible assets with estimable useful lives be
55
amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment.
The Company adopted the provisions of SFAS No. 142 as of October
1, 2001. As of October 1, 2001, the Company had goodwill of
approximately $30.9 million. The amortization of goodwill, which
is not tax-deductible, ceased upon adoption of SFAS No. 142.
Amortization expense related to goodwill was approximately $1.4
million, or $0.15 per diluted share, for the year ended September
30, 2001.
In connection with SFAS No. 142's transitional goodwill impairment
evaluation, the Statement required the Company to perform an
assessment of whether there was an indication that goodwill was
impaired as of the date of adoption. Based on the Company's
assessment, it was determined that the goodwill was not impaired
as of the date of adoption, as well as through September 30, 2003.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions - an Amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9." This statement
removes acquisitions of financial institutions from the scope of
both Statement No. 72 and Interpretation No. 9 and requires that
those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations" and No. 142, "Goodwill and Other
Intangible Assets." As a result, the requirement in SFAS No. 72 to
recognize (and subsequently amortize) any excess of the fair value
of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable
intangible asset (SFAS No. 72 goodwill) no longer applies to
acquisitions considered to be business combinations under SFAS No.
141. The Company does not currently have any SFAS No. 72 goodwill
and, as a result, the adoption did not have a material impact on
the Company's consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (FIN
No. 45), "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others; an Interpretation of FASB Statements No. 5, 57, and 107
and Rescission of FASB Interpretation No. 34." FIN No. 45 requires
certain new disclosures and potential liability-recognition for
the fair value at issuance of guarantees that fall within its
scope. Under FIN No. 45, the Company does not issue any guarantees
that would require liability-recognition or disclosure, other than
its standby letters of credit, as discussed in Note 19.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS No.
148"). SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation" and provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In addition,
SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial
statements about the effects of stock-based compensation. The
Company adopted the new disclosure requirements of SFAS No. 148,
and it does not expect that SFAS No. 148 will have a material
impact on its consolidated financial statements, as the Company
does not currently intend to change its method of accounting for
stock-based employee compensation unless mandated by the FASB.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," ("FIN No. 46")
which clarifies the application of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements." More specifically,
FIN No. 46 explains how to identify variable interest entities and
how to determine whether or not those entities should be
consolidated. The Interpretation requires the primary
beneficiaries of variable interest entities to consolidate the
variable interest entities if they are subject to a majority of
the risk of loss or are entitled to receive a majority of the
residual returns. FIN No. 46 also requires that both the primary
beneficiary and all other enterprises with a significant variable
interest in a variable interest entity make certain disclosures.
FIN No. 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. It
applies in the first fiscal year or interim period ending after
December 15, 2003, to variable interest entities in which a public
enterprise holds a variable interest that it acquired before
February 1, 2003. The provisions of this FIN No. 46 are not
expected to have a material impact on the Company's consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities,
("SFAS No. 149"). SFAS No. 149 amends and clarifies accounting for
derivative
56
instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under SFAS No. 133.
In particular, SFAS No. 149 clarifies under what circumstances a
contract within an initial net investment meets the
characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the
statement of cash flows. SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003, and did
not to have a material impact on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and
Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity.
SFAS No. 150 requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in
some circumstances). Many of those instruments were previously
classified as equity. SFAS No. 150 is effective for financial
instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. For certain financial
instruments, the classification and measurement provisions of SFAS
No. 150 have been deferred indefinitely. The adoption of SFAS No.
150 did not have a material impact on the Company's consolidated
financial statements.
(2) BUSINESS COMBINATION
On August 10, 2003, the Company and First Niagara Financial Group, Inc.
("First Niagara") entered into an Agreement and Plan of Merger (the
"Agreement") which provides for, among other things, the acquisition of
the Company by First Niagara. Contemporaneous with the completion of the
acquisition, The Troy Savings Bank, a wholly-owned subsidiary of the
Company, will merge with and into First Niagara Bank, a wholly-owned
subsidiary of First Niagara. The Agreement provides that shareholders of
the Company will receive either First Niagara stock, cash or a
combination of First Niagara stock and cash for each share of Company
common stock. The Boards of Directors of the Company and First Niagara
expect the transaction to close in January 2004.
On November 10, 2000, the Company acquired Catskill Financial Corporation
("Catskill"), a community-based financial services company headquartered
in Catskill, New York. On the acquisition date, Catskill had assets of
$305.0 million, loans of $170.5 million, deposits of $220.1 million and
seven full service branches. Catskill shareholders received cash of $23
per share, representing total consideration paid of $89.8 million. The
acquisition was accounted for using the purchase method of accounting.
The assets acquired and liabilities assumed from Catskill were recorded
at their estimated fair values. The acquisition of Catskill resulted in
the recognition of approximately $32.3 million of goodwill, representing
the excess of the Company's purchase cost over the fair value of the net
assets acquired. Prior to the adoption of SFAS No. 142 as of October 1,
2001 (see Note 1), goodwill was being amortized to expense over a period
of 20 years using the straight-line method. The results of operations of
Catskill have been included in the Company's consolidated statements of
income from the date of acquisition.
The following increases (decreases) were recorded to the historical cost
basis of Catskill's assets and liabilities in order to record these
assets and liabilities at their estimated fair values at the acquisition
date (dollars in thousands):
Securities available for sale $ (681)
Loans (2,663)
Premises and equipment 192
Other assets 983
Time deposits (211)
Borrowings (111)
The premiums and discounts above are being amortized over the estimated
period to maturity or repricing of the respective interest-bearing assets
and liabilities, or, in the case of premises and equipment, over the
estimated remaining lives of the assets. For the years ended September
30, 2003, 2002 and 2001 the impact of the net accretion of the premiums
and discounts was to increase income before income tax expense by
approximately $474 thousand, $510 thousand and $603 thousand,
respectively.
57
(3) LOANS HELD FOR SALE AND MORTGAGE SERVICING RIGHTS
At September 30, 2003 and 2002, loans held for sale consisted of
conventional residential mortgages originated for subsequent sale. At
September 30, 2003 and 2002, there was no valuation reserve necessary for
loans held for sale.
Mortgage loans are sold without recourse and the company retains the
servicing rights on certain mortgage loans sold. At September 30, 2003
and 2002, the unamortized balance of mortgage servicing rights on loans
sold with servicing retained was approximately $641 thousand and $712
thousand, respectively. The estimated fair value of these mortgage
servicing rights was in excess of their carrying value at both September
30, 2003 and 2002, and therefore no impairment reserve was necessary.
(4) SECURITIES AVAILABLE FOR SALE
The amortized cost and approximate fair value of securities available for
sale at September 30 are as follows:
2003
-------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Government securities and agencies obligations $ 84,959 $ -- $ (1) $ 84,958
Obligations of states and political subdivisions 261,315 1,470 (71) 262,714
Mortgage-backed securities 33,197 1,194 (27) 34,364
Corporate debt securities 19,889 8 -- 19,897
-------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale 399,360 2,672 (99) 401,933
Mutual funds and marketable equity securities 3,651 108 (9) 3,750
Non-marketable equity securities 8,582 -- -- 8,582
-------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 411,593 $ 2,780 $ (108) $ 414,265
===================================================================================================================
2002
-------------------------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
U.S. Government securities and agencies obligations $ 145,071 $ 1,242 $ -- $ 146,313
Obligations of states and political subdivisions 142,633 1,365 (9) 143,989
Mortgage-backed securities 45,188 2,283 -- 47,471
Corporate debt securities 25,132 180 (38) 25,274
-------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale 358,024 5,070 (47) 363,047
Mutual funds and marketable equity securities 25,368 371 (22) 25,717
Non-marketable equity securities 5,303 -- -- 5,303
--------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 388,695 $ 5,441 $ (69) $ 394,067
====================================================================================================================
During 2003, proceeds from sales of securities available for sale totaled
$198.7 million, with gross gains of $2.1 million and gross losses of $47
thousand. During 2002, proceeds from sales of securities available for
sale totaled $21.1 million, with gross gains of $156 thousand and gross
losses of $5 thousand. During 2001, proceeds from sales of securities
available for sale totaled $71.1 million, with gross gains of $120
thousand and gross losses of $225 thousand.
58
As of September 30, 2003, 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:
------------------------------------------------------------------------
AMORTIZED APPROXIMATE
COST FAIR VALUE
------------------------------------------------------------------------
(Dollars in thousands)
MATURITY RANGES
Within one year $ 246,717 $ 247,015
After one year to five years 106,462 107,270
After five years to ten years 5,345 5,628
Over ten years 7,639 7,656
Mortgage-backed securities 33,197 34,364
------------------------------------------------------------------------
Total $ 399,360 $ 401,933
========================================================================
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 available for sale consist entirely of direct
pass-through Freddie Mac, Fannie Mae and Ginnie Mae securities.
Other than U.S. government sponsored enterprise securities (securities
issued by Freddie Mac or Fannie Mae), and securities issued by the
Federal Home Loan Bank of New York, there were no securities of a single
issuer that exceeded 10% of shareholders' equity at September 30, 2003
and 2002.
The carrying value of securities available for sale pledged to secure
borrowings, municipal deposits and for other purposes was approximately
$191.0 million at September 30, 2003.
(5) SECURITIES HELD TO MATURITY
The amortized cost and approximate fair value of securities held to
maturity as of September 30 are as follows:
2003
---------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage-backed securities 661 47 -- 708
---------------------------------------------------------------------------------------------------
Total securities held to maturity $ 661 $ 47 $ -- $ 708
===================================================================================================
2002
---------------------------------------------------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED APPROXIMATE
COST GAINS LOSSES FAIR VALUE
---------------------------------------------------------------------------------------------------
(Dollars in thousands)
Mortgage-backed securities 883 71 -- 954
---------------------------------------------------------------------------------------------------
Total securities held to maturity $ 883 $ 71 $ -- $ 954
===================================================================================================
Mortgage-backed securities held to maturity consist entirely of direct
pass-through Ginnie Mae securities. At September 30, 2003, $126 thousand
of the mortgage-backed securities held to maturity have contractual
maturities after one year but before five years. The remainder of the
portfolio has contractual maturities after five years but before ten
years.
59
(6) NET LOANS RECEIVABLE
A summary of net loans receivable at September 30 follows:
2003 2002
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans secured by real estate:
Residential $ 239,704 $ 300,776
Commercial 356,688 298,995
Construction 15,427 17,075
-----------------------------------------------------------------------------------------------------------
Total real estate loans 611,819 616,846
-----------------------------------------------------------------------------------------------------------
Commercial business loans 111,454 118,349
-----------------------------------------------------------------------------------------------------------
Home equity lines of credit 28,045 14,796
Other consumer loans 9,816 16,678
-----------------------------------------------------------------------------------------------------------
Total consumer loans 37,861 31,474
-----------------------------------------------------------------------------------------------------------
Total gross loans 761,134 766,669
-----------------------------------------------------------------------------------------------------------
Less:
Unearned discount and net deferred fees and costs (1,657) (1,602)
Allowance for loan losses (14,646) (14,538)
-----------------------------------------------------------------------------------------------------------
Net loans receivable $ 744,831 $ 750,529
===========================================================================================================
Non-performing loans at September 30 are as follows:
2003 2002 2001
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Non-accrual loans $ 2,166 $ 2,097 $ 3,249
Restructured loans 500 -- --
----------------------------------------------------------------------------------------------------------
Total non-performing loans $ 2,666 $ 2,097 $ 3,249
==========================================================================================================
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
troubled debt restructurings, the additional interest that would have
been earned was approximately $148 thousand, $123 thousand and $210
thousand for 2003, 2002 and 2001, respectively. There are no commitments
to extend further credit on non-performing loans.
Changes in the allowance for loan losses for the years ended September 30
were as follows:
2003 2002 2001
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at beginning of year: $ 14,538 $ 14,333 $ 11,891
Provision charged to operations 560 1,166 1,498
Allowance acquired -- -- 2,184
Loans charged-off (594) (1,217) (1,592)
Recoveries on loans charged-off 142 256 352
-----------------------------------------------------------------------------------------------------------
Balance at end of year $ 14,646 $ 14,538 $ 14,333
============================================================================================================
At September 30, 2003 and 2002, the recorded investment in loans that are
considered to be impaired totaled $1.6 million and $819 thousand,
respectively, for which the related allowance for loan losses was $44
thousand and $60 thousand, respectively. As of September 30, 2003 and
2002, 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, 2003,
60
2002 and 2001 was $677 thousand, $978 thousand and $1.6 million,
respectively. The total interest income that would have been recognized
on impaired loans during the period of impairment was approximately $49
thousand, $86 thousand and $95 thousand for 2003, 2002 and 2001,
respectively. Interest income on impaired loans recognized on the cash
basis during the period of impairment was not significant in any year.
Certain executive officers, directors and associates of such persons were
customers of and had other transactions with the Company in the ordinary
course of business. At September 30, 2003 and 2002, total loans
outstanding to such persons aggregated $34.6 million and $32.2 million,
respectively. The following table illustrates the activity regarding such
loans during fiscal 2003:
2003
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Balance at September 30, 2002: $ 32,228
Advances from modifications of credit 5,888
Purchased from participating investors 2,880
Sold to participating investors (2,853)
Principal paydowns (3,518)
------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003: $ 34,625
============================================================================================================
Loans to these parties were made in the ordinary course of business, at
the Company's normal credit terms, including interest rate and
collateral, as those prevailing at the time for comparable transaction
with others.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at September 30:
2003 2002
------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Loans $ 3,387 $ 3,830
Securities available for sale 2,472 2,293
Securities held to maturity 4 6
------------------------------------------------------------------------------------------------------------
Total accrued interest receivable $ 5,863 $ 6,129
=================================================================================-==========================
(8) OTHER REAL ESTATE OWNED
Other real estate owned at September 30 consists of the following:
2003 2002
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Commercial properties $ 287 $ 125
Residential properties (1-4 family) 129 227
-----------------------------------------------------------------------------------------------------------
Total other real estate owned $ 416 $ 352
===========================================================================================================
61
(9) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at September 30 is as follows:
2003 2002
-----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Land $ 2,996 $ 2,996
Buildings 16,359 16,191
Furniture, fixtures and equipment 9,197 9,065
Leasehold improvements 3,273 3,459
Construction in progress 765 285
-----------------------------------------------------------------------------------------------------------
Gross premises and equipment 32,590 31,996
Less accumulated depreciation and amortization (16,724) (15,728)
-----------------------------------------------------------------------------------------------------------
Premises and equipment, net $ 15,866 $ 16,268
===========================================================================================================
Depreciation and amortization expense on premises and equipment was
approximately $1.3 million, $1.6 million and $1.5 million for the years
ended September 30, 2003, 2002 and 2001, respectively.
(10) INVESTMENT IN REAL ESTATE PARTNERSHIPS
In May 2002, the Company invested $5.8 million in a real estate joint
venture, organized as a limited liability company. Since the Company
controls the venture through its majority ownership, the Company has
reported the joint venture as a consolidated subsidiary in its financial
statements. Included in the Company's consolidated statement of financial
condition at September 30, 2003, is the joint venture's $17.0 million
investment in a multi-tenant retail shopping plaza located in the
Company's market area, as well as certain prepaid expenses and mortgage
escrows, which are not significant. Furthermore, the financial statements
include the joint venture's non-recourse mortgage debt of $12.3 million
(included in long-term debt) and the other partners' minority interest
(included in other liabilities). The mortgage debt had an original term
of 30 years at a fixed rate of 7.48% and has approximately 25 years
remaining.
In addition, the Company has an interest in another partnership, which
owns several commercial office buildings in the Company's market area and
which is accounted for using the equity method. At September 30, 2003 and
2002, the investment in the partnership had a carrying value of $2.4
million and $2.2 million, respectively.
(11) GOODWILL AND OTHER INTANGIBLE ASSETS
The following table reconciles reported net income as if the provisions
of SFAS No. 142 were in effect during the year ended September 30, 2001:
2001
----------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Reported net income $ 9,074
Add: Goodwill amortization (non-tax deductible) 1,437
----------------------------------------------------------------------------------------
Net income, as adjusted $ 10,511
========================================================================================
Reported basic earnings per share $ 0.95
Add: Goodwill amortization (non-tax deductible) 0.15
----------------------------------------------------------------------------------------
Basic earnings per share, as adjusted $ 1.10
========================================================================================
Reported diluted earnings per share $ 0.92
Add: Goodwill amortization (non-tax deductible) 0.14
----------------------------------------------------------------------------------------
Diluted earnings per share, as adjusted $ 1.06
========================================================================================
62
The net carrying amount of the core deposit intangibles was $265 thousand
(gross amount of $700 thousand, net of accumulated amortization of $435
thousand) as of September 30, 2003. Amortization expense related to the
core deposit intangibles was $48 thousand for each of the years ended
September 30, 2003, 2002 and 2001. Estimated amortization expense for
each of the next five years is $48 thousand per year, and $25 thousand
thereafter.
(12) DEPOSITS
A summary of deposits at September 30 is as follows:
2003 2002
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Savings accounts (0.50% to 4.46% for 2003 and 1.73% to 4.46% for 2002) $ 275,426 $ 271,632
-------------------------------------------------------------------------------------------------------------------
Time deposits:
0.86% to 0.99% 3,781 1,175
1.00% to 1.99% 162,561 41,790
2.00% to 2.99% 35,016 152,167
3.00% to 3.99% 15,790 31,084
4.00% to 4.99% 9,275 39,409
5.00% to 5.99% 12,970 23,982
6.00% to 6.99% 4,091 7,362
-------------------------------------------------------------------------------------------------------------------
Total time deposits 243,484 296,969
-------------------------------------------------------------------------------------------------------------------
Money market accounts (1.00% to 1.25% for 2003 and 1.24% to 1.85% for 2002) 225,561 108,635
Interest bearing checking accounts (0.50% for 2003 and 0.65% to 1.01% for 2002) 141,896 124,319
Non interest bearing checking accounts 80,649 81,413
-------------------------------------------------------------------------------------------------------------------
Total transaction accounts 448,106 314,367
-------------------------------------------------------------------------------------------------------------------
Total deposits $ 967,016 $ 882,968
===================================================================================================================
The contractual maturities of time deposits for the years subsequent to
September 30, 2003 are as follows:
YEARS ENDING SEPTEMBER 30, (Dollars in
thousands)
-----------------------------------------------------------------------
2004 $ 193,438
2005 29,360
2006 12,545
2007 4,153
2008 3,914
2009 and thereafter 74
-----------------------------------------------------------------------
Total $ 243,484
=======================================================================
Individual time deposits with a balance of $100 thousand or greater
totaled approximately $35.5 million and $59.7 million at September 30,
2003 and 2002, respectively.
63
Interest expense on deposits and escrow accounts for the years ended
September 30 consisted of the following:
2003 2002 2001
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Time accounts $ 7,063 $ 11,691 $ 16,954
Savings accounts 3,118 5,101 6,538
Money market accounts 2,251 1,496 885
Interest bearing checking accounts 863 1,176 2,258
Escrow accounts 59 81 94
--------------------------------------------------------------------------------------------------------
Total interest expense on deposits and escrow $ 13,354 $ 19,545 $ 26,729
========================================================================================================
(13) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SHORT-TERM BORROWINGS
Short-term borrowings represent borrowings with original maturities of
one year or less. 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:
2003 2002 2001
--------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Securities sold under agreements to repurchase:
Balance at September 30 $ 34,500 $ 134,872 $ 12,971
Maximum month-end balance 34,500 134,872 14,628
Average balance during the year 11,358 13,468 12,865
Average rate during the year 5.02% 5.12% 5.41%
Weighted-average rate at September 30 2.24% 2.16% 4.81%
Short-term borrowings:
Balance at September 30 $ 65,000 $ -- $ 100,000
Maximum month-end balance 65,000 33,800 110,000
Average balance during the year 16,240 22,334 37,925
Average rate during the year 1.36% 3.03% 6.17%
Weighted-average rate at September 30 1.33% -- 4.14%
Average aggregate borrowing rate during the year 2.91% 3.82% 5.98%
--------------------------------------------------------------------------------------------------------
All securities repurchase agreements at September 30, 2003 mature within
thirty days, except for $10.0 million with the FHLB, which can be called
quarterly, but mature in 2008. As of September 30, 2003, there was
approximately $129 thousand of accrued interest payable on the repurchase
agreements. The fair value of the securities subject to the repurchase
agreements was approximately $46.2 million at September 30, 2003, plus
accrued interest receivable of approximately $96 thousand.
The Company has established overnight and term lines of credit with the
FHLB and other correspondent banks. If advanced, FHLB lines of credit
will be collateralized by qualifying loans, securities and FHLB stock.
Total credit under FHLB lines was approximately $100.0 million, $50
million of which was available at September 30, 2003 as the Company used
$50 million of the overnight line of credit at that date. Participation
in the FHLB borrowing programs requires an investment in FHLB stock. The
recorded investment in FHLB stock, included in securities available for
sale on the consolidated statements of financial condition, amounted to
$7.7 million and $5.2 million at September 30, 2003 and 2002,
respectively.
64
(14) LONG-TERM DEBT
At September 30, 2003, long-term debt included borrowings of $94.9
million from the FHLB and $12.3 million of non-recourse mortgage debt
related to the Company's real estate joint venture investment. Of the
$94.9 million of FHLB borrowings, $84.9 million have fixed interest
rates, with the interest rate on the remaining $10.0 million tied to
LIBOR, adjusted monthly. The weighted-average contractual maturity of the
fixed rate FHLB borrowings is 3.6 years with a weighted-average interest
rate of 4.12%. The mortgage debt had an original term of 30 years at a
fixed rate of 7.48% and has approximately 25 years remaining.
The following table sets forth the contractual maturities of the
long-term debt as of September 30, 2003:
YEARS ENDING SEPTEMBER 30, (Dollars in
thousands)
------------------------------------------------------------------------
2004 $ 20,585
2005 20,615
2006 10,644
2007 10,675
2008 30,705
2009 and thereafter 14,006
------------------------------------------------------------------------
Total $ 107,230
========================================================================
As of September 30, 2003, the limit on the Savings Bank's total
borrowings was 25% of total assets, or approximately $299.6 million, and
the Savings Bank had $154.9 million of outstanding advances (both short-
and long-term) from the FHLB.
Collateral for the FHLB long-term borrowings at September 30, 2003
includes a blanket lien on general assets of the Company and
approximately $13.8 million of specifically pledged securities.
Collateral for the mortgage debt is a lien on the underlying commercial
property.
(15) INCOME TAXES
The components of income tax expense for the years ended September 30
are as follows:
2003 2002 2001
-------------------------------------------------------------------------------
(Dollars in thousands)
Current tax expense:
Federal $ 6,823 $ 4,088 $ 2,575
State 1,230 716 515
Deferred tax (benefit) expense (1,733) 1,634 1,186
-------------------------------------------------------------------------------
Total income tax expense $ 6,320 $ 6,438 $ 4,276
===============================================================================
65
The following is a reconciliation of the expected income tax expense and
the actual income tax expense for the years ended September 30. The
expected income tax expense has been computed by applying the federal
statutory tax rate to income before income tax expense:
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Income tax expense at applicable Federal statutory rate $ 6,692 $ 6,873 $ 4,540
Increase (decrease) in tax expense resulting from:
Tax-exempt income (1,660) (1,497) (1,309)
Non-deductible portion of ESOP expense 464 427 159
Non-deductible goodwill amortization -- -- 489
Non-deductible merger related costs 174 -- --
State income tax expense, net of Federal benefit 732 737 485
Other, net (82) (102) (88)
-------------------------------------------------------------------------------------------------------------------
Income tax expense $ 6,320 $ 6,438 $ 4,276
===================================================================================================================
Effective tax rate 33.1% 32.8% 32.0%
-------------------------------------------------------------------------------------------------------------------
The tax effects of temporary differences and carryforwards that give rise
to significant portions of the deferred tax assets and deferred tax
liabilities at September 30 are presented below:
2003 2002
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax assets:
Allowance for loan losses $ 5,757 $ 5,631
Charitable contribution carryforward 2,016 2,814
Accrued expenses 2,817 2,579
Purchase accounting adjustments, net -- 97
Depreciation 249 161
Deferred compensation 1,766 1,433
Other 91 72
-------------------------------------------------------------------------------------------------------------------
Total deferred tax assets 12,696 12,787
-------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Prepaid pension (1,363) (1,489)
Prepaid expenses (411) (349)
Net deferred loan origination fees (97) (218)
Purchase accounting adjustments, net (219) --
Mortgage servicing rights (256) (284)
Income of subsidiaries not consolidated for tax (226) (2,057)
Other (3) (2)
-------------------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (2,575) (4,399)
-------------------------------------------------------------------------------------------------------------------
Net deferred tax asset at end of year 10,121 8,388
Net deferred tax asset at beginning of year 8,388 10,022
-------------------------------------------------------------------------------------------------------------------
Change in net deferred tax asset 1,733 (1,634)
===================================================================================================================
In addition to the deferred tax assets and liabilities described above,
the Company had a deferred tax liability of $1.1 million and $2.1 million
at September 30, 2003 and 2002, respectively, related to the net
unrealized gain on securities available for sale.
The Company's tax deduction for charitable contributions is subject to
limitations 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
66
succeeding five tax years. As a result of the cash contributions 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, 2003, the Company had unused charitable contribution carryforwards of
approximately $5.0 million. The carryforwards are available for deduction
through 2006.
Deferred tax assets are recognized subject to management's judgment that
realization is more likely than not. Based on the temporary taxable
items, historical taxable income, estimates of future taxable income, as
well as available tax planning strategies, the Company believes it is
more likely than not that the deferred tax assets at September 30, 2003
will be realized.
As a thrift institution, the Savings 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. Tax
bad debt reserves consist of a defined "base-year" amount, plus
additional amounts ("excess reserves") accumulated after the base year.
Deferred tax liabilities are recognized with respect to such excess
reserves, as well as any portion of the base-year amount that is expected
to become taxable (or "recaptured") in the foreseeable future. Federal
tax laws include a requirement to recapture into taxable income (over a
six-year period) the Federal bad debt reserves in excess of the base-year
amounts. The Savings Bank has established a deferred tax liability with
respect to such excess Federal reserves. New York State tax laws
designate all state bad debt reserves as the base-year amount.
Deferred tax liabilities have not been recognized with respect to the
Federal base-year reserve of $11.6 million and "supplemental" reserve (as
defined) of $1.0 million at September 30, 2003, and the state base-year
reserve of $28.1 million at September 30, 2003, since the Company does
not expect that the base-year reserves will become taxable in the
foreseeable future. Under the tax laws, events that would result in
taxation of these reserves include (i) redemption of the Savings Bank's
stock or certain excess distributions by the Savings Bank to the Parent
Company, and (ii) failure of the Savings 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, 2003 with respect to the Federal base-year reserve and
supplemental reserve was $4.1 million and $350 thousand, respectively.
The unrecognized deferred tax liability at September 30, 2003 with
respect to the state base-year reserve was approximately $1.4 million
(net of Federal benefit).
(16) EARNINGS PER SHARE
The following table sets forth certain information regarding the
calculation of basic and diluted earnings per share for the years ended
September 30 (all share and per share amounts have been restated to
reflect the 5% stock dividend issued on March 29, 2002):
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except share and per share data)
Net income $ 12,799 $ 13,199 $ 9,074
-------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 8,446,152 9,008,124 9,529,404
Dilutive effect of potential additional common shares 529,815 561,190 356,118
-------------------------------------------------------------------------------------------------------------------
Weighted average common shares assuming dilution 8,975,967 9,569,314 9,885,522
===================================================================================================================
Basic earnings per share $ 1.52 $ 1.47 $ 0.95
Diluted earnings per share 1.43 1.38 0.92
Dilutive shares include the Company's stock options and restricted stock
awards and represent the number of incremental shares outstanding
computed using the treasury stock method.
67
(17) 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 have generally been computed as 2.00% of the highest three
year average annual earnings (as defined by the plan) multiplied by years
of credited service, subject to various caps and adjustments as provided
for in the plan. Effective May 1, 2001, the Plan was amended to decrease
the rate to 1.67% from 2.00% for service after April 30, 2001. 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.
The following table sets forth the pension plan's funded status and
amounts recognized in the Company's consolidated financial statements at
September 30:
2003 2002
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Reconciliation of projected benefit obligation:
Obligation at beginning of year $ 21,319 $ 18,666
Service cost 715 621
Interest cost 1,397 1,335
Benefit payments (898) (904)
Actuarial loss 951 1,489
Plan amendments -- 112
-------------------------------------------------------------------------------------------------------------------
Obligation at end of year $ 23,484 $ 21,319
===================================================================================================================
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning of year $ 18,933 $ 18,529
Actual gain (loss) on plan assets 2,213 (2,327)
Benefit payments (898) (904)
Employer contributions 930 3,635
-------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 21,178 $ 18,933
===================================================================================================================
Reconciliation of funded status:
Funded status at end of year $ (2,306) $ (2,386)
Unrecognized net actuarial loss 6,942 7,027
Unrecognized prior service cost 202 261
-------------------------------------------------------------------------------------------------------------------
Prepaid pension cost at end of year $ 4,838 $ 4,902
===================================================================================================================
Net periodic pension cost that was recognized in the Company's
consolidated statements of income for the years ended September 30
included the following components:
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 715 $ 621 $ 637
Interest cost 1,397 1,335 1,173
Expected return on plan assets (1,686) (1,658) (1,715)
Net amortization and deferral 568 47 (66)
-------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 994 $ 345 $ 29
===================================================================================================================
The actuarial assumptions used in determining the actuarial present value
of the projected benefit obligations as of September 30 were as follows:
68
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
Discount rate 6.25% 6.63% 7.25%
Long-term rate of return 9.00% 9.00% 9.00%
Salary increase rate 3.50% 4.00% 4.50%
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 does not
match participants' 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, retirees and their dependents
that enroll in the plan. An unrelated company administers this
self-insurance program. Under the terms of the self-insurance program,
the Company could incur up to a maximum of approximately $1.5 million for
the cost of covered claims for the plan year ending December 31, 2003.
The Company has purchased an insurance policy to cover the next $1.0
million of claims in excess of the maximum. In addition, the policy has a
maximum cost for individual claims of $100 thousand. Any claims in excess
of $2.5 million are self-insured by the Company.
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. Effective May 1, 2003, the Plan was frozen and
does not admit any new employees hired after May 1, 2003. Additionally,
effective May 1, 2003 spouses of eligible retirees are not eligible,
except for a closed group of retirees. Furthermore, effective May 1,
2003, the Company's share of the premium was set at 2% per year of
service up to 32.5 years (65% maximum), and the Company's cost per
participant was capped at $3,500 per year except for a closed group of
retirees and spouses.
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:
2003 2002
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Reconciliation of accumulated post-retirement benefit obligation:
Obligation at beginning of year $ 4,489 $ 3,936
Service cost 94 105
Interest cost 276 275
Benefit payments (332) (308)
Actuarial loss 553 481
Plan amendments (912) --
-------------------------------------------------------------------------------------------------------------------
Obligation at end of year $ 4,168 $ 4,489
===================================================================================================================
Reconciliation of funded status:
Unfunded post-retirement benefit obligation $ (4,168) $ (4,489)
Unrecognized transition obligation 743 1,760
Unrecognized net actuarial loss (gain) 380 (174)
-------------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit liability $ (3,045) $ (2,903)
===================================================================================================================
69
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:
2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Service cost $ 94 $ 105 $ 97
Interest cost 276 275 283
Amortization of transition obligation 105 136 136
Amortization of unrecognized gain -- (21) (5)
-------------------------------------------------------------------------------------------------------------------
Net periodic post-retirement benefit cost $ 475 $ 495 $ 511
===================================================================================================================
The weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 6.25%, 6.63% and 7.25% as of
September 30, 2003, 2002 and 2001, respectively.
For measurement purposes in fiscal 2003, a 10.0% annual rate of increase
in the per capita cost of covered medical costs was used; dental costs
were assumed to increase 3.0% annually. In future years, medical costs
were assumed to trend down gradually to an annual rate of 3.75% in fiscal
2010 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, 2003 by approximately $158 thousand
(3.8%), and increase the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost for fiscal 2003
by approximately $37 thousand (10.1%). Decreasing the assumed medical and
dental cost trend rates one percentage point in each year would decrease
the accumulated post-retirement benefit obligation as of September 30,
2003 by approximately $391 thousand (9.4%), and decrease the aggregate of
the service and interest cost components of net periodic post-retirement
benefit cost for fiscal 2003 by approximately $33 thousand (8.9%).
On March 31, 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, 2003
and 2002, the accumulated benefit obligation was approximately $2.1
million and $1.8 million, respectively. At September 30, 2003 and 2002,
the Company had an accrued benefit liability of $1.6 million and $1.1
million, respectively, related to this plan. The Company recorded an
expense of approximately $469 thousand, $396 thousand and $301 thousand
related to this plan during the years ended September 30, 2003, 2002 and
2001, respectively.
70
(18) STOCK-BASED COMPENSATION PLANS
Employee Stock Ownership Plan
-----------------------------
The Company established the ESOP in March 1999 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 $9.7 million from the Company and used the funds to purchase, in
the open market, approximately 8.0% of the shares issued in the offering,
or 971,122 shares (1,019,678 shares as adjusted for the 5% stock dividend
issued on March 29, 2002). The loan will be repaid principally from the
Company's discretionary contributions to the ESOP over a period of
fifteen years. At September 30, 2003, the loan had an outstanding balance
of $7.3 million and an interest rate of 7.00%. Both the loan obligation
and the unearned compensation are reduced by the amount of loan
repayments made to the ESOP 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 principally based on 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
scheduled to be released at the end of the plan year. The Company
recorded approximately $2.2 million, $2.1 million and $1.3 million of
compensation expense related to the ESOP for the years ended September
30, 2003, 2002 and 2001, respectively.
The ESOP shares as of September 30, 2003 were as follows
--------------------------------------------------------------------
Allocated shares 284,695
Shares released for allocation --
Unallocated shares 703,616
--------------------------------------------------------------------
Total ESOP shares 988,311
====================================================================
Market value of unallocated shares at September 30, 2003
(dollars in thousands) $ 24,662
--------------------------------------------------------------------
Long-Term Equity Compensation Plan
----------------------------------
On October 1, 1999, the Company's shareholders approved the Troy
Financial Corporation Long-Term Equity Compensation Plan (the "LTECP").
The LTECP consists of a stock option plan and a Management Recognition
Plan (the "MRP"). The primary objective of the LTECP is to enhance the
Company's ability to attract and retain highly qualified officers,
employees and directors, by providing such persons with stronger
incentives to continue to serve the Company and its subsidiaries and to
expend maximum effort to improve the business results and earnings of the
Company.
71
Under the LTECP, 1,274,597 shares (as adjusted for the 5% stock dividend
issued on March 29, 2002) of authorized but unissued common stock are
reserved for issuance upon option exercises. The Company also has the
alternative to fund option exercises with treasury stock. Options under
the LTECP may be either nonqualified stock options or incentive stock
options. Each option entitles the holder to purchase one share of common
stock at an exercise price equal to the fair market value of the stock on
the grant date. Options expire no later than ten years following the
grant date and vest at a rate of 20% per year. The following is a summary
of the Company's stock option plan as of and for the years ended
September 30:
2003 2002 2001
--------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 992,419 $ 10.61 1,058,885 $ 10.49 1,056,159 $ 10.30
Granted 16,500 27.18 9,863 24.73 48,825 14.38
Exercised (81,119) 11.14 (74,250) 10.69 (21,486) 10.30
Forfeited (8,013) 10.30 (2,079) 10.30 (24,613) 10.30
--------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 919,787 $ 10.87 992,419 $ 10.61 1,058,885 $ 10.49
====================================================================================================================
Exercisable at end of year 466,679 $ 10.32 330,337 $ 10.33 184,824 $ 10.30
--------------------------------------------------------------------------------------------------------------------
The following table summarizes information on the Company's stock options
at September 30, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE REMAINING OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING PRICE LIFE (YEARS) EXERCISABLE PRICE
--------------------------------------------------------------------------------------------------------------------
$10.30 to $12.50 863,529 $ 10.30 6.0 464,106 $ 10.30
$12.51 to $15.00 24,150 13.17 7.2 2,100 12.98
$15.01 to $20.00 7,245 18.01 7.7 -- --
$20.01 to $25.00 2,363 20.38 8.1 473 20.38
$25.01 to $27.31 22,500 26.89 9.1 -- --
--------------------------------------------------------------------------------------------------------------------
$10.30 to $27.31 919,787 $ 10.87 6.1 466,679 $ 10.32
====================================================================================================================
72
Under the MRP, 509,839 shares (as adjusted for 5% stock dividend issued
on March 29, 2002) of authorized but unissued shares are reserved for
issuance. The Company also can fund the MRP with treasury stock. The fair
market value of the shares awarded under the MRP are being amortized to
expense on a straight-line basis over the five year vesting period of the
underlying shares. Compensation expense related to the MRP was $1.1
million, $1.1 million and $976 thousand for the years ended September 30,
2003, 2002 and 2001, respectively. The remaining unearned compensation
cost of $1.6 million was reported as unvested restricted stock awards, (a
reduction of shareholders' equity) at September 30, 2003. Shares awarded
under the MRP were transferred from treasury stock at cost with the
difference between the fair market value on the grant date and the cost
basis of the shares recorded as an increase in additional paid-in
capital.
The following is a summary of the MRP plan as of and for the years ended
September 30:
2003 2002 2001
--------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
GRANT GRANT GRANT
SHARES PRICE SHARES PRICE SHARES PRICE
--------------------------------------------------------------------------------------------------------------------
Beginning of year 310,062 $ 11.53 387,326 $ 10.61 466,898 $ 10.30
Granted 7,500 27.33 19,614 24.79 27,458 14.72
Forfeited (7,815) 10.30 (788) 10.30 (13,650) 10.30
Vested (99,340) 10.99 (96,090) 10.55 (93,380) 10.30
--------------------------------------------------------------------------------------------------------------------
End of year 210,407 $ 12.39 310,062 $ 11.53 387,326 $ 10.61
====================================================================================================================
73
(19) COMMITMENTS AND CONTINGENT LIABILITIES
Lease and Data Processing Obligations
-------------------------------------
The Company leases several banking office facilities under various
non-cancelable operating leases. The leases expire (excluding renewal
options) in various periods through 2013. In addition, in fiscal 2002 the
Company entered into a data processing agreement, which expires in
January 2007. The agreement does provide various termination options to
the Company, which would reduce the minimum obligation due. Minimum
commitments due under the leases and data processing agreement are as
follows:
DATA
YEARS ENDING SEPTEMBER 30, LEASES PROCESSING
----------------------------------------------------------------------------------------------------
(Dollars in thousands)
2004 $ 716 1,164
2005 453 1,164
2006 252 1,164
2007 210 374
2008 144 --
2009 and thereafter 579 --
----------------------------------------------------------------------------------------------------
Total $ 2,354 $ 3,866
====================================================================================================
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 in 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.
74
Contract amounts of financial instruments that represent potential future
extensions of credit as of September 30 at fixed and variable interest
rates are as follows:
2003
------------------------------------------------------------------------------------------------------------------
FIXED VARIABLE TOTAL
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments outstanding:
Residential mortgages $ 5,403 $ 554 $ 5,957
Commercial real estate and commercial business 540 24,205 24,745
Construction loans 793 11,523 12,316
------------------------------------------------------------------------------------------------------------------
Total 6,736 36,282 43,018
------------------------------------------------------------------------------------------------------------------
Unused lines of credit:
Home equity -- 18,608 18,608
Commercial -- 105,189 105,189
Overdraft -- 5,077 5,077
------------------------------------------------------------------------------------------------------------------
Total -- 128,874 128,874
------------------------------------------------------------------------------------------------------------------
Standby letters of credit -- 15,693 15,693
------------------------------------------------------------------------------------------------------------------
$ 6,736 $ 180,849 $ 187,585
==================================================================================================================
2002
------------------------------------------------------------------------------------------------------------------
FIXED VARIABLE TOTAL
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments outstanding:
Residential mortgages $ 6,416 $ 1,321 $ 7,737
Commercial real estate and commercial business 6,004 4,735 10,739
Construction loans 152 29,981 30,133
------------------------------------------------------------------------------------------------------------------
Total 12,572 36,037 48,609
------------------------------------------------------------------------------------------------------------------
Unused lines of credit:
Home equity -- 9,346 9,346
Commercial -- 87,255 87,255
Overdraft -- 5,822 5,822
------------------------------------------------------------------------------------------------------------------
Total -- 102,423 102,423
------------------------------------------------------------------------------------------------------------------
Standby letters of credit -- 14,662 14,662
------------------------------------------------------------------------------------------------------------------
$ 12,572 $ 153,122 $ 165,694
==================================================================================================================
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 the Company does not
expect all of the commitments 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.
75
The Company has issued conditional commitments in the form of standby
letters of credit to guarantee payment on behalf of customers and to
guarantee the performance of customers to third parties. Standby letters
of credit generally arise in connection with lending relationships. The
credit risk involved in issuing these instruments is essentially the same
as that involved in extending loans to customers. Contingent obligations
under standby letters of credit totaled $15.7 million at September 30,
2003 and represent the maximum potential future payments the Company
could be required to make. Typically, these instruments have terms of one
year or less and expire unused; therefore, 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 for on-balance sheet
instruments. Company policies governing loan collateral apply to standby
letters of credit at the time of credit extension. Loan-to-value ratios
will generally range from 50% for movable assets, such as inventory, 75%
for real estate, and 100% for liquid assets, such as bank certificates of
deposit. The Company had performance and financial standby letters of
credit at September 30, 2003 of $15.1 million and $600 thousand,
respectively. The fair value of the Company's standby letter of credits
was not material at September 30, 2003.
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, 2003 and 2002, approximately $46.5 million and $54.5
million, respectively, of adjustable rate residential mortgage 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, 2003 and 2002, 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 $6.6 million and $7.3 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 mandatory
forward sales commitments and option agreements to sell loans in the
secondary market to unrelated investors. At September 30, 2003 and 2002,
the Company had mandatory commitments and cancelable options to sell
conventional fixed rate mortgage loans at set prices amounting to
approximately $2.0 million and $4.0 million, respectively. The Company
believes that it will be able to meet the mandatory commitments without
incurring any material losses.
Serviced Loans
--------------
Total loans serviced by the Company for unrelated third parties were
approximately $122.5 million and $185.0 million at September 30, 2003 and
2002, respectively.
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.
Concentrations of Credit
------------------------
The Company grants commercial, consumer and residential loans primarily
to customers throughout the eight New York State counties of Albany,
Greene, Rensselaer, Saratoga, Schenectady, Schoharie, Warren and
Washington.
76
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.
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 $1.0
million at both September 30, 2003 and 2002.
Liquidation Account and Dividend Restrictions
---------------------------------------------
As part of the Savings Bank's conversion from a mutual savings bank to a
stock savings bank, the Savings Bank established a liquidation account in
an amount equal to the Savings Bank's total equity as of September 30,
1998, or $70.6 million. The liquidation account is maintained for the
benefit of eligible depositors who continue to maintain their accounts at
the Savings 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. the
Savings Bank may not pay any dividends that would reduce shareholders'
equity below the required liquidation account balance.
The ability of the Savings Bank and the Commercial Bank to pay dividends
to the Parent Company is subject to various restrictions. Under New York
State Banking Law, dividends may be declared and paid only from the
banks' respective 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. The
Savings Bank has earned $9.3 million in net profits in calendar year
2003, $3.3 million of which is available for distribution. The Commercial
Bank has earned $2.2 million in net profits since its inception in July
2000, and has paid cash dividends of $1.9 million to the Parent Company;
the balance is available for distribution.
(20) FAIR VALUE OF 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.
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 goodwill, bank-owned life insurance, investment in real estate
partnerships, 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.
In addition there are significant unrecognized intangible assets that are
not considered, such as the value of core deposits and the Company's
branch network.
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 official bank checks, which are included in other
liabilities.
77
Loans Held for Sale
-------------------
The estimated fair value of loans held for sale is determined 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 Securities Held to Maturity
-------------------------------------------------------------
Securities available for sale and securities held to maturity are
financial instruments which are usually traded in national markets,
except for certain obligations of states and political subdivisions. 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.
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, interest bearing
checking 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.
Securities Sold Under Agreements to Repurchase, Short-term Borrowings and
-------------------------------------------------------------------------
Long-term Debt
---------------
The estimated fair value of securities sold under agreements to
repurchase, 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.
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 counter-parties. 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.
78
Table of Financial Instruments
------------------------------
The carrying values and estimated fair values of financial instruments as
of September 30 were as follows:
2003 2002
-----------------------------------------------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
FINANCIAL ASSETS
Cash and cash equivalents $ 98,263 $ 98,263 $ 34,020 $ 34,020
Loans held for sale 1,182 1,182 891 891
Securities available for sale 414,265 414,265 394,067 394,067
Securities held to maturity 661 708 883 954
Loans 759,477 763,171 765,067 788,842
Less: Allowance for loan losses (14,646) -- (14,538) --
-----------------------------------------------------------------------------------------------------------------
Net loans 744,831 763,171 750,529 788,842
-----------------------------------------------------------------------------------------------------------------
Accrued interest receivable 5,863 5,863 6,129 6,129
-----------------------------------------------------------------------------------------------------------------
FINANCIAL LIABILITIES
Deposits:
Checking, savings, and money market 723,532 723,532 585,999 585,999
Time accounts 243,484 245,100 296,969 299,030
Mortgagors' escrow accounts 1,527 1,527 1,575 1,575
Securities sold under agreement to repurchase 34,500 34,500 134,872 134,872
Short-term borrowings 65,000 65,000 -- --
Long-term debt 107,230 111,383 87,483 92,221
Accrued interest payable 650 650 727 727
Official bank checks 10,455 10,455 9,686 9,686
-----------------------------------------------------------------------------------------------------------------
(21) REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require institutions to maintain a minimum level of
regulatory capital. At September 30, 2003 and 2002, banks were 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 Board has also adopted capital
adequacy guidelines for bank holding companies on a consolidated basis
substantially similar to those of the FDIC. Prior to June 30, 2003, as
part of the Commercial Bank's charter approval, the Commercial Bank had
to maintain a tier 1 capital ratio of at least 8%. The Commercial Bank is
no longer subject to this limitation.
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 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.
As of September 30, 2003 and 2002, the Savings Bank, the Commercial Bank
and the Company met all capital requirements to which they were subject.
Also as of those dates, each of the Savings Bank, the Commercial Bank and
the Company met the standards to be a well capitalized institution under
the applicable regulations.
79
The following is a summary of the actual capital amounts and actual and
required capital ratios as of September 30 for the Savings Bank, the
Commercial Bank and the consolidated Company:
ACTUAL CAPITAL REQUIRED RATIOS
-------------------------------------------------------------------------------------------------------------------
2003 2002 MINIMUM CLASSIFICATION
------------------------------------------------------------------------------------ CAPITAL AS WELL
AMOUNT RATIO AMOUNT RATIO ADEQUACY CAPITALIZED
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
TIER 1 (LEVERAGE) CAPITAL:
Savings Bank $100,695 9.37% $ 90,249 8.69% 4.00% 5.00%
Commercial Bank 10,805 6.64% 10,488 13.22% 4.00% 5.00%
Consolidated 121,425 9.89% 123,400 10.98% 4.00% 5.00%
-------------------------------------------------------------------------------------------------------------------
TIER 1 RISK-BASED CAPITAL:
Savings Bank 100,695 13.28% 90,249 12.39% 4.00% 6.00%
Commercial Bank 10,805 27.96% 10,488 53.09% 4.00% 6.00%
Consolidated 121,425 15.35% 123,400 16.45% 4.00% 6.00%
-------------------------------------------------------------------------------------------------------------------
TOTAL RISK-BASED CAPITAL:
Savings Bank 110,260 14.54% 99,467 13.65% 8.00% 10.00%
Commercial Bank 10,811 27.98% 10,488 53.09% 8.00% 10.00%
Consolidated 131,419 16.61% 133,001 17.72% 8.00% 10.00%
-------------------------------------------------------------------------------------------------------------------
80
(22) CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
The following represents the Parent Company's statements of financial
condition as of September 30, 2003 and 2002, and its statements of income
and cash flows for each of the three years ended September 30, 2003.
These financial statements should be read in conjunction with the
Company's consolidated financial statements and notes thereto.
AS OF SEPTEMBER 30,
-------------------------------------------------------------------------------------------------------------------
STATEMENTS OF FINANCIAL CONDITION 2003 2002
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets
Cash and cash equivalents $ 4,554 $ 4,064
Securities available for sale 1,812 10,946
Loan receivable from ESOP 7,252 7,896
Accrued interest receivable 407 479
Other assets 1,378 1,461
Investment in equity of subsidiary banks 144,222 135,032
-------------------------------------------------------------------------------------------------------------------
Total assets $ 159,625 $ 159,878
===================================================================================================================
Liabilities and Shareholders' Equity
Other liabilities and accrued expenses $ 4,913 $ 2,024
-------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 154,712 157,854
-------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 159,625 $ 159,878
===================================================================================================================
FOR THE YEARS ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------------------------------
STATEMENTS OF INCOME 2003 2002 2001
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Interest and dividend income:
Dividends from subsidiaries $ 7,292 $ 25,986 $ 74,195
Loan receivable from ESOP 519 564 605
Securities available for sale 169 220 531
Federal funds sold and interest-bearing deposits -- -- 29
-------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 7,980 26,770 75,360
-------------------------------------------------------------------------------------------------------------------
Net gains from securities transactions 632 117 62
Other income 58 210 426
-------------------------------------------------------------------------------------------------------------------
Total non-interest income 690 327 488
-------------------------------------------------------------------------------------------------------------------
Compensation and employee benefits 7 -- 65
Professional, legal and other fees 106 267 238
Printing, postage and telephone 73 68 44
Merger related costs 497 -- --
Other expenses 1,513 330 300
-------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 2,196 665 647
-------------------------------------------------------------------------------------------------------------------
Income before income taxes and effect of subsidiaries'
earnings and distributions 6,474 26,432 75,201
Income tax (benefit) expense (211) 115 232
Subsidiaries' earnings (in excess of) less than distributions (6,114) 13,118 65,895
-------------------------------------------------------------------------------------------------------------------
Net income $ 12,799 $ 13,199 $ 9,074
===================================================================================================================
81
FOR THE YEARS ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------------------------
2003 2002 2001
------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 12,799 $ 13,199 $ 9,074
Adjustments to reconcile net income to net cash provided by
operating activities:
Subsidiaries' earnings (in excess of) less than distributions (6,114) 13,118 65,895
Net (accretion) amortization of securities 2 (8) 55
Net gains from securities transactions (632) (117) (62)
Net gains on sale of other assets (59) (206) (314)
Decrease in accrued interest receivable 72 11 851
Net (increase) decrease in other assets (469) 3,323 (2,742)
Net increase (decrease) in other liabilities and accrued expenses 3,043 (665) 1,059
------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 8,642 28,655 73,816
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in acquisition activity -- -- (81,383)
Proceeds from subsidiary for issuance of MRP shares,
net of forfeitures 90 478 5,088
Investment in equity of subsidiary banks (450) -- --
Proceeds from sales, maturities and calls of available
for sale securities 12,012 2,351 64,815
Purchase of securities available for sale (2,473) (8,700) (18,473)
Principal payments on loan receivable from ESOP 644 645 645
Proceeds from sales of other assets 195 750 1,233
------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 10,018 (4,476) (28,075)
------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid on common stock (5,882) (4,604) (3,237)
Purchase of common stock for treasury (13,191) (19,371) (13,927)
Proceeds from stock options exercised 903 793 221
Net decrease in payable to Savings Bank -- -- (28,467)
------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (18,170) (23,182) (45,410)
------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 490 997 331
Cash and cash equivalens at beginning of year 4,064 3,067 2,736
------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 4,554 $ 4,064 $ 3,067
==================================================================================================================
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Adjustment of subsidiary banks' securities available for sale
to fair value, net of tax $ (1,519) $ (23) $ 3,370
Acquisition activity:
Fair value of non-cash assets acquired -- -- 1,476
Fair value of liabilities assumed -- -- 269
------------------------------------------------------------------------------------------------------------------
82
The Shareholders and the Board of Directors
Troy Financial Corporation:
We have audited the accompanying consolidated statements of condition of Troy
Financial Corporation and subsidiaries (the "Company") as of September 30, 2003
and 2002, 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, 2003. 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 auditing standards generally accepted
in the United States of America. 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 subsidiaries as of September 30, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets," as of October 1, 2001, and as a result ceased amortizing
goodwill.
Albany, New York
November 7, 2003
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 9A. CONTROLS & PROCEDURES
The Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures
(as defined in Rule 13a-15(e) and 15(d)-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of September
30, 2003. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls
and procedures were effective in ensuring that information required to
be disclosed by the Company in reports that it files or submits under
the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commissions
rules and forms.
There were no changes made in the Company's internal controls over
financial reporting that occurred during the Company's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial
reporting.
84
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the Board of Directors' of Troy Financial at September
30, 2003. Also in the table is each person's age at October 31, 2003, the
periods during which that person has served as a director of the Company or its
subsidiary, The Troy Savings Bank ("Troy Savings"), and positions currently held
with the Company.
AGE AT DIRECTOR EXPIRATION POSITIONS HELD WITH
DIRECTOR OCTOBER 31, 2003 SINCE OF TERM TROY FINANCIAL
- -------- ---------------- -------- ----------- -------------------
Daniel J. Hogarty 64 1985 2006 Chairman of the Board,
President and Chief
Executive Officer
George H. Arakelian 69 1988 2004 Director
Wilbur J. Cross 61 2000 2006 Director
Richard B. Devane 69 1970 2004 Director
Michael E. Fleming 73 1980 2005 Director
Willie A. Hammet 59 1990 2006 Director
Thomas B. Healy 57 1995 2006 Director
Sister Maureen Joyce, RSM 61 2002 2005 Director
Morris Massry 74 2002 2005 Director
Edward G. O'Haire 72 1979 2004 Director
Biographical Information
- ------------------------
Provided below is a brief description of the principal occupation for the past
five years of each of Troy Financial's directors.
Daniel J. Hogarty, Jr. has been Chairman of the Board, President and Chief
Executive Officer of Troy Financial since its formation in 1998. He joined Troy
Savings in 1985 and has been Troy Savings' President, Chief Executive Officer
and a trustee/director since that time. He also has served as the President,
Chief Executive Officer and a director of The Troy Commercial Bank ("Troy
Commercial") since its formation in July 2000. In addition, Mr. Hogarty serves
as President and/or director of ten of Troy Savings' subsidiaries.
George H. Arakelian has been a Director of Troy Financial since its formation in
1998. He has served as a trustee/director of Troy Savings since 1988 and a
director of Troy Commercial since its formation in July 2000. Mr. Arakelian is
President and Chairman of the Board of Standard Manufacturing Co., Inc., a
manufacturer of outerwear and sportswear located in Troy, New York.
Wilbur J. Cross has been a Director of Troy Financial and a director of Troy
Savings since the Company acquired Catskill Financial Corporation in November
2000. Prior to the Catskill acquisition, Mr. Cross was the Chairman of the
Board, President and Chief Executive Officer of Catskill Financial Corporation
and its subsidiary, Catskill Savings Bank.
Richard B. Devane has been a Director of Troy Financial since its formation in
1998. He has served as a trustee/director of Troy Savings since 1970 and a
director of Troy Commercial since its formation in July 2000. Mr. Devane is
President of Devane's Inc., a carpet and flooring contractor, and is a real
estate broker with Devane Realty, both of which are located in Troy, New York.
Michael E. Fleming, DDS has been a Director of Troy Financial since its
formation in 1998. He has served as a trustee/director of Troy Savings since
1980 and a director of Troy Commercial since its formation in July 2000. Dr.
Fleming is a retired orthodontist in Troy, New York.
Willie A. Hammett has been a Director of Troy Financial since its formation in
1998. He has served as a trustee/director of Troy Savings since 1990 and a
director of Troy Commercial since its formation in July 2000. Mr. Hammett is
Vice President of Student Services at Hudson Valley Community College located in
Troy, New York.
Thomas B. Healy has been a Director of Troy Financial since its formation in
1998. He has served as a trustee/director of Troy Savings since 1995 and a
director of Troy Commercial since its formation in July 2000. Since November
1996, Mr. Healy has been Senior Vice President of Investments at Prudential
Securities, Inc., located in Albany, New York.
85
Sister Maureen Joyce, RSM, has been a Director of Troy Financial since 2002.
Sister Joyce has served as Executive Director of Catholic Charities since 1990.
Sister Joyce is currently a member of the boards of directors of Albany County
Community Services, Community Loan Fund, DePaul Management, LaSalle School for
Boys, St. Anne Institute, St. Catherine's Center for Children and St. Peter's
Health Care Services. Prior to becoming executive director of Catholic
Charities, Sister Joyce founded and directed Community Maternity Services, an
organization formed to provide assistance to pregnant and parenting adolescents.
Morris Massry has been a Director of Troy Financial since 2002. Mr. Massry is a
principal of Massry Realty. Mr. Massry is a member of the board of directors of
Pointe Financial Corporation. Mr. Massry is also a member of the board of
directors of Excelsior College, Proctors Theatre in Schenectady, Center for the
Disabled and the University at Albany Foundation. Mr. Massry is the past
president of St. Mary's Hospital Foundation, Daughter of Sarah Nursing Home,
Doane Stuart School and the Troy Jewish Community Center.
Edward G. O'Haire has been a Director of Troy Financial since its formation in
1998. He has served as a trustee/director of Troy Savings since 1979 and a
director of Troy Commercial since its formation in July 2000. Mr. O'Haire has
served as President of Ryan & O'Haire Agency, Inc., an insurance agency, located
in Troy, New York and presently continues as an insurance broker.
Executive Officers of Troy Financial
- ------------------------------------
The following table lists the executive officers of Troy Financial, which are
the same as the executive officers of Troy Savings. They also hold officer
positions with Troy Commercial. They are appointed annually and hold office
until their respective successors are chosen and qualified or until their
earlier death, resignation or removal from office. The following table shows
information regarding the executive officers at September 30, 2003.
AGE AT POSITIONS HELD WITH TROY FINANCIAL,
EXECUTIVE OFFICER OCTOBER 31, 2003 TROY SAVINGS AND TROY COMMERCIAL
- ----------------- ---------------- --------------------------------
Daniel J. Hogarty 64 Chairman of the Board of Troy Financial; Director
of Troy Savings and Troy Commercial; President
and Chief Executive Officer of each entity
Kevin M. O'Bryan 54 Senior Vice President and Secretary of each
entity; Chief Credit Officer of Troy Savings
David J. DeLuca 51 Senior Vice President and Chief Financial Officer
of each entity
Michael C. Mahar 56 Senior Vice President of each entity
The Company has adopted a code of ethics that applies to all executive officers,
including its chief executive officer and chief financial officer. A copy of
the code of ethics will be available at no charge to any person upon written
request to:
Troy Financial Corporation
32 Second Street
Troy, New York 12180
Attn: Chief Financial Officer
Biographical Information
- ------------------------
Provided below is a brief description of the principal occupation for the past
five years of each of Troy Financial's executive officers other than Mr.
Hogarty. For information regarding Mr. Hogarty, see above "Biographical
Information" for Directors of Troy Financial.
Kevin M. O'Bryan has been Senior Vice President and Secretary of Troy Financial
since its formation in 1998. He joined Troy Savings in 1976 and is a Senior Vice
President, Chief Credit Officer and Secretary of Troy Savings. Mr. O'Bryan's
primary responsibilities include oversight of all of Troy Savings' lending
departments. Prior to his appointment as Senior Vice President and Chief Credit
Officer in 1992, Mr. O'Bryan held numerous positions in Troy Savings' commercial
mortgage department. Mr. O'Bryan is also Senior Vice President and Secretary of
Troy Commercial. In addition, Mr. O'Bryan is Secretary and Director of ten of
Troy Savings' subsidiaries.
David J. DeLuca has been Senior Vice President and Chief Financial Officer of
Troy Financial, Troy Savings and Troy Commercial since December 2000. He served
as Vice President of Troy Savings from November 2000 to December 2000. He joined
Troy
86
Savings when the Company acquired Catskill Financial Corporation in November
2000. From August 1996 to November 2000, Mr. DeLuca served as Vice President and
Chief Financial Officer of Catskill Financial Corporation and its subsidiary,
Catskill Savings Bank, and Treasurer of Catskill Financial Corporation. He is a
certified public accountant.
Michael C. Mahar has been Senior Vice President of Troy Financial since its
formation in 1998. He joined Troy Savings in 1988 and is a Senior Vice President
of Troy Savings and Troy Commercial. Mr. Mahar's primary responsibilities
include oversight of Troy Savings' retail banking, deposit services, sales and
marketing, and operations.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the cash and certain other compensation paid by
the Company for services rendered in all capacities during fiscal 2003, 2002
and 2001, to the President and Chief Executive Officer and all executive
officers who received annual salary and bonus compensation in excess of $100,000
(the "named executive officers"). The Company has not granted any stock
appreciation rights to its executive officers.
ANNUAL COMPENSATION LONG-TERM COMPENSATION AWARDS
- -----------------------------------------------------------------------------------------------------------------------------------
RESTRICTED SECURITIES ALL OTHER
NAME AND STOCK AWARDS UNDERLYING COMPENSATION
PRINCIPAL POSITIONS YEAR SALARY BONUS (1) OPTIONS (2)
- -----------------------------------------------------------------------------------------------------------------------------------
Daniel J. Hogarty, Jr. 2003 $ 647,779(3) $ -- $ -- -- $ 62,193
Chairman of the Board, President 2002 636,500(3) -- -- -- 51,882
and Chief Executive Officer 2001 621,571(3) 175,000 -- -- 34,133
Kevin M. O'Bryan 2003 $ 194,923 $ -- $ -- -- $ 65,618
Senior Vice President, Secretary, and 2002 191,000 -- -- -- 54,657
Chief Lending Officer 2001 185,400 30,000 -- -- 34,962
David J. DeLuca 2003 $ 177,029 $ -- $ -- -- $ 38,324
Senior Vice President and 2002 163,753 -- 124,000(4) -- 306
Chief Financial Officer 2001 128,269 15,000 209,063(5) 26,250 306
Michael C. Mahar 2003 $ 142,942 $ -- $ -- -- $ 57,115
Senior Vice President 2002 140,000 -- -- -- 47,794
2001 128,750 30,000 -- -- 27,761
(1) At September 30, 2003, the executive officers held the following shares of
unvested restricted stock granted under the Company `s Long-Term Equity
Compensation Plan: Mr. Hogarty, 50,820 shares with a value of $1,781,241;
Mr. O'Bryan, 21,000 shares with a value of $736,050; Mr. DeLuca, 13,650
shares with a value of $478,433; and Mr. Mahar, 10,500 shares with a value
of $368,025. All share and per share amounts have been adjusted for the 5%
stock dividend distributed on March 29, 2002. The shares are valued based
on the closing market price of the Company's Common Stock on the Nasdaq
National Market of $35.05 on September 30, 2003.
(2) All other compensation includes life insurance premiums, allocable Employee
Stock Ownership Plan ("ESOP") contributions, automobile allowances and
country club dues, as applicable. Life insurance premiums for fiscal 2003,
2002 and 2001 were $1,188 and $414 for Messrs. Hogarty and O'Bryan,
respectively; $414, $306, $306 for Mr. DeLuca, respectively; and $714,
$504, $504 for Mr. Mahar, respectively. ESOP allocations in fiscal year
2003 were $57,354 for Mr. Hogarty, $56,059 for Mr. O'Bryan, $37,910 for Mr.
DeLuca and $53,401 for Mr. Mahar. ESOP allocations for fiscal 2002 were
$47,101 for Mr. Hogarty, $46,098 for Mr. O'Bryan and $44,290 for Mr. Mahar.
ESOP allocations for fiscal 2001 were $29,374 for Mr. Hogarty, $27,548 for
Mr. O'Bryan and $24,257 for Mr. Mahar. Mr. Deluca was not eligible to
participate in the ESOP allocations in fiscal 2002 or 2001. Automobile
allowances for Mr. Hogarty were $3,651 for fiscal 2003, $3,593 for fiscal
2002 and $3,571 for fiscal 2001. Automobile allowances for fiscal 2003,
2002 and 2001 were $3,000 for each year for Messrs. O'Bryan and Mahar.
Country club dues for Mr. O'Bryan were $6,145 for fiscal 2003, $5,145 for
fiscal 2002 and $4,000 for fiscal 2001.
(3) Includes deferred compensation for fiscal 2003 of $174,265, for fiscal 2002
$52,000 and for fiscal 2001 $143,000.
(4) Calculated based on the closing market price of the Company's Common Stock
on the Nasdaq National Market of $23.62 on December 28, 2001, the grant
date. The 5,250 shares of restricted stock granted to Mr. DeLuca vest in
five annual installments beginning on December 28, 2002. All share and per
share amounts have been adjusted for the 5% stock dividend distributed on
March 29, 2002. Dividends are being paid on the restricted stock.
(5) Calculated based on the closing market price of the Company's Common Stock
on the Nasdaq National Market of $13.27 on January 2, 2001, the grant date.
The 15,750 shares of restricted stock granted to Mr. DeLuca vest in five
annual installments beginning January 2, 2002. All share and per share
amounts have been adjusted for the 5% stock dividend distributed on March
29, 2002. Dividends are being paid on the restricted stock.
87
Director Compensation
Effective January 2002, the Company implemented an annual retainer of $12,000
per non-employee director and reduced its monthly Board meeting fee to $1,000
from $1,375 per director. Furthermore, the Audit and Compensation committee fees
were increased from $600 and $250, to $750 and $500, respectively. Directors of
Troy Savings also participate in monthly loan and trust committee meetings. Fees
for these meetings are $750 and $500, respectively. No separate fees are paid to
directors in their role as directors of Troy Financial or Troy Commercial. In
fiscal 2000, each of the non-employee directors of Troy Financial serving at
October 1, 1999, received grants of 16,994 shares (as adjusted for 5% stock
dividend issued March 29, 2002) of restricted Common Stock and an option to
acquire 42,485 shares of Common Stock at an exercise price of $10.30 per share,
the market value on the grant date. The restricted stock and option grants were
under the Company's Long-Term Equity Compensation Plan, and vest in five annual
installments beginning on October 1, 2000.
In addition, Troy Savings has implemented a Trustees Deferred Compensation Plan
(the "Deferred Compensation Plan") that allows its directors to make pre-tax
contributions to any of the following benefit accounts: retirement, education or
fixed period. Retirement benefits can be paid in one lump sum payment, in
installments for up to 10 years or as a life annuity. The payments may be
deferred for up to 10 years beyond a participant's retirement date. Education
accounts can be opened for up to four students, who are 13 years old or younger.
Payments are made in four installments beginning after January 1 of the year in
which the student turns 18. Fixed period distributions are made as soon as
possible after January 1 of the year in which the account matures. The minimum
maturity date is five years. Troy Savings retains the right to contribute
additional funds to a participant's account. All amounts contributed to the
Deferred Compensation Plan are always 100% vested. In the event of termination,
death, or disability, a participant or his beneficiary will receive a lump sum
payment distribution from his accounts. For calendar year 2003, Messrs.
Arakelian and Healy elected to defer compensation.
OPTION GRANTS
There were no stock options granted to Troy Financial's named executive officers
during the year ended September 30, 2003.
Option Exercises and Values
The following table shows the aggregate option exercises in fiscal 2003 and
fiscal year-end option values.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE MONEY OPTIONS
ACQUIRED OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END (1)
ON VALUE ----------------------------------------------------------------
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- -------------------------------------------------------------------------------------------------------------------------
Daniel J. Hogarty, Jr. -- -- 160,650 / 107,100 $3,976,409 / $2,650,939
Kevin M. O'Bryan 19,366 $ 331,197 21,269 / 33,600 $526,450 / $831,667
David J. DeLuca 5,250 $ 70,592 -- / 15,750 -- / $342,975
Michael C. Mahar -- -- 19,950 / 16,800 $493,802 / $415,834
- -------------------------------------------------------------------------------------------------------------------------
(1) Based on the closing price per share of the Company's Common Stock on the
Nasdaq National Market of $35.05 on September 30, 2003, less the exercise
price, of all exercisable and unexercisable stock options having an exercise
price less than that closing price per share.
Employment Agreements
Troy Financial has entered into employment agreements with Messrs. Hogarty,
O'Bryan, DeLuca and Mahar (the "Employment Agreements"). These Employment
Agreements have an initial term of three years. Subject to annual review and
approval by the Board of Directors, the Employment Agreements may be extended by
written notice from Troy Financial to the executive for an additional
consecutive 12-month period as of the first anniversary of the date of the
Employment Agreements and every subsequent anniversary date of the Employment
Agreements thereafter, unless the executive has given contrary written notice at
least three months before any such renewal date. Pursuant to the Employment
Agreements, the executives are entitled to a specified annual salary, plus
annual cost of living and merit increases, discretionary bonuses, participation
in all benefit and compensation plans and, except for Mr. DeLuca an automobile
allowance. As of October 1, 2003, the base salaries for Messrs. Hogarty,
O'Bryan, DeLuca and Mahar are $648,000, $195,000, $178,500 and $143,000,
respectively.
88
Troy Financial and Troy Savings may terminate an executive officer's employment
at any time during the term of an Employment Agreement. Unless the termination
is for "cause" (as defined in the Employment Agreement), Troy Financial and Troy
Savings will be required to pay each executive officer three times his annual
base salary plus bonus and the value of additional retirement benefits that the
executive officer would have been entitled to receive under Troy Savings'
qualified benefit plans and Supplemental Retirement and Benefit Restoration Plan
("Supplemental Plan") if the executive officer had continued to be employed for
three years. These amounts will be paid in a lump sum.
Troy Financial and Troy Savings will also provide the terminated executive with
insurance and other non-pension benefits, outplacement services, indemnification
and director and officer liability insurance for three years.
In addition, following a termination without cause or if an executive officer
terminates his employment agreement with "good reason" (as defined in the
Employment Agreements), the executive officer will be fully vested, except to
the extent limited by applicable regulations, in stock options, restricted
stock, the Supplemental Plan and any other benefit that would otherwise be
forfeited.
If the executive officer is subject to the federal excise tax imposed on excess
parachute payments, Troy Financial and Troy Savings will pay to the executive
officer a gross-up amount sufficient, after all taxes, to pay the excise tax and
any interest and penalties. However, if making the gross-up payment would not
produce a net after-tax benefit to the executive officer of at least $50,000
more than the amount the executive officer could receive without triggering the
excise tax, the amounts payable to the executive officer will be reduced as
necessary to avoid the excise tax.
After termination, the executive officer cannot be employed during a specified
noncompetition period with a substantial competitor (as defined in the
Employment Agreements) of Troy Savings or Troy Financial if the executive
officer terminates his employment without consent and without good reason or if
Troy Financial and Troy Savings terminate the officer's employment for cause.
The noncompetition period is one year or the remaining term of the agreement
plus six months, whichever is less. The Employment Agreements also contain
provisions relating to unauthorized disclosure of confidential information and
return of written materials upon termination of employment.
Defined Benefit Pension Plan
Troy Savings maintains a non-contributory defined benefit pension plan covering
substantially all of its full-time employees (the "Pension Plan"). A participant
is 100% vested after five years of service, upon attaining normal retirement age
or upon a change of control.
The normal retirement benefit (generally at age 65) is based on the
participant's highest three-year average annual earnings during the
participant's final 10-years of participation, subject to a limitation on the
amount of compensation that can be taken into account under the Internal Revenue
Code of 1986, as amended (the "IRC"). The annual benefit provided to a
participant at normal retirement age is:
o 2% of average annual earnings, times years of credited service, up to 32.5
years, through April 30, 2001, and effective May 1, 2001, 1.67% for service
after April 30, 2001, plus
o 4% of average annual earnings that exceed 50% of the Social Security wage
base, times years of credited service, up to 30 years through April 30,
2001, and effective May 1, 2001, this provision was eliminated for all
service after April 30, 2001.
An unreduced annual retirement benefit, calculated in the same manner as
described above, will be provided to a participant who:
o is eligible for an early retirement benefit (generally age 60 with five
years of service or age 55 with 10 years of service) and elects to defer
the payment of the benefit to normal retirement age;
o has attained age 60 and completed 30 years of service, or attained age 62
and completed 25 years of service, and elects to receive payment of the
benefit before normal retirement age; or
o postpones annual benefits beyond normal retirement age.
If a participant begins receiving early retirement benefits before satisfying
the foregoing age and service requirements, his benefits will be actuarially
reduced.
The Pension Plan also provides a surviving spouse benefit if the participant
dies before retirement or other termination of employment with a vested
retirement benefit.
89
Supplemental Retirement and Benefit Restoration Plan
Troy Savings has implemented a non-tax qualified Supplemental Retirement and
Benefit Restoration Plan (the "Supplemental Plan") to provide additional
benefits to designated employees. Messrs. Hogarty, O'Bryan, DeLuca and Mahar
participate in the Supplemental Plan. Participants receive additional retirement
benefits that cannot be provided under Troy Savings' qualified retirement plans,
because of limitations in effect under the Internal Revenue Code. In addition,
the Supplemental Plan makes up for benefits lost under the Employee Stock
Ownership Plan ("ESOP") allocation, if participants retire or otherwise
terminate employment before the ESOP has repaid the funds it borrowed to
purchase the Common Stock.
Each participant in the Supplemental Plan is entitled to an annual pension
amount at age 65 equal to 65% of his average annual earnings (the "Pension
Amount"), reduced by any amounts actually payable under the Pension Plan and an
offset amount. No more than $500,000 of Mr. Hogarty's annual compensation will
be counted. The benefit will be fully vested upon completion of five years of
service, including service before adoption, and will be reduced in proportion to
years of service if the participant retires or terminates employment before age
65. In the event of the participant's death, the Pension Amount (reduced by the
death benefit payable under the Pension Plan) will be paid to his surviving
spouse for life, beginning when the participant would have reached age 65. The
Pension Amount will be actuarially reduced if benefits are paid before the
participant attains age 65, unless the participant is eligible for an unreduced
early retirement benefit under the Pension Plan, and will be reduced by the
benefit payable at that time under the Pension Plan.
Each participant in the Supplemental Plan is also entitled to an annual defined
contribution amount, based on the matching contribution Troy Savings would make
to the 401(k) Plan, if any, if the participant made the maximum allowable
pre-tax contribution, and there were no nondiscrimination limitations, reduced
by the maximum matching contribution that could actually be made under such
circumstances, but applying existing nondiscrimination provisions. Effective
April 1, 1999, the Company discontinued matching contributions, so there is no
benefit being accrued at this time.
Each participant in the Supplemental Plan is also entitled, at retirement or
other termination of employment, to an additional benefit if shares have not
been allocated under the ESOP because the ESOP has not repaid its loan. The
benefit will be based on the number of shares of Common Stock that were
allocated to the participant under the ESOP during the last plan year before the
retirement, termination of employment or change of control, multiplied by the
number of years remaining in the term of the ESOP loan. The vesting provisions
of the ESOP apply to the ESOP replacement benefit.
Participants' rights to benefits under the Supplemental Plan are limited to
those of general unsecured creditors of Troy Savings. Troy Savings may establish
a trust to provide funds to pay benefits under the Supplemental Plan, but the
assets of the trust will be subject to claims of Troy Savings' creditors in the
event of insolvency and, if the trust invests in Troy Financial's Common Stock,
Troy Savings will have the right to substitute other assets for the Common
Stock.
The following table sets forth, as of September 30, 2003, estimated annual
Supplemental Plan benefits, including benefits received under the Pension Plan,
for individuals at age 65 for various levels of compensation. The figures in
this table are based upon the assumption that the Supplemental Plan continues in
its present form and do not reflect Social Security benefits and benefits
payable under the ESOP.
YEARS OF SERVICE
FINAL -------------------------------------------------------------------------------------
AVERAGE SALARY 15 20 25 30 35
- --------------------------------------------------------------------------------------------------------------
$125,000 $ 37,088 $ 49,588 $ 62,088 $ 74,588 $ 80,838
150,000 44,505 59,505 74,505 89,505 97,005
175,000 51,923 69,423 86,923 104,423 113,173
200,000 59,340 79,340 99,340 119,340 129,340
300,000 89,010 119,010 149,010 179,010 194,010
400,000 118,680 158,680 198,680 238,680 258,680
500,000 148,350 198,350 248,350 298,350 323,350
600,000 148,350 198,350 248,350 298,350 323,350
- --------------------------------------------------------------------------------------------------------------
90
The base compensation as of October 1, 2003 for Messrs. Hogarty, O'Bryan, DeLuca
and Mahar are $648,000, $195,000, $178,500 and $143,000, respectively. The
estimated years of credited service for Messrs. Hogarty, O'Bryan, DeLuca and
Mahar was 18, 27, 7 and 15 years, respectively.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board of Directors comprises all of the
non-employee directors. The Committee determines executive officer salaries,
bonuses and certain other forms of compensation, and recommends long-term
incentive awards. In fiscal 1999, in connection with the conversion of Troy
Savings to the stock form of organization, Troy Financial retained an
independent compensation consultant, and in that regard received an opinion that
the total compensation was reasonable in comparison to the total compensation
provided by similarly situated publicly-traded financial institutions. The
Compensation Committee also sought the advice of that consultant in connection
with the grant of stock options and restricted stock in fiscal 2000. Set forth
below is a report addressing Troy Financial's compensation policies for fiscal
year 2003 as they affected Troy Financial's executive officers.
Compensation Policies for Executive Officers. Troy Financial's executive
compensation policies are designed to provide competitive levels of
compensation, to assist Troy Financial in attracting and retaining qualified
executives and to encourage superior performance. In determining levels of
executive officers' overall compensation, the Compensation Committee considers
the qualifications and experience of the persons concerned, the size of the
Company and the complexity of its operations, the financial condition, including
income, of the Company, the compensation paid to other persons employed by the
Company and the compensation paid to persons having similar duties and
responsibilities in comparable financial institutions. Compensation paid or
awarded to Troy Financial's executive officers in fiscal 2003 consisted of the
following components: base salary and employee benefits. The Compensation
Committee has in the past employed outside consultants and refers to published
survey data in establishing compensation.
Base Salary. The Compensation Committee reviews executive base salaries
annually. Base salary is intended to signal the internal value of the position
and to track with the external marketplace. All current executive officers
presently serve pursuant to employment agreements that provide for a minimum
base salary that may not be reduced without the consent of the executive
officer. In establishing the fiscal 2003 salary for each executive officer, the
Compensation Committee considered the officer's responsibilities, qualifications
and experience, the size of the Company and the complexity of its operations,
the financial condition of the Company (based on levels of income, asset quality
and capital), and compensation paid to persons having similar duties and
responsibilities in comparable financial institutions.
Stock Compensation Plan. In October 1999, Troy Financial's shareholders approved
the Long-Term Equity Compensation Plan that provides directors, officers,
employees and independent contractors with a proprietary interest in Troy
Financial as an incentive to contribute to its success. In fiscal 2003, stock
options for 16,500 shares and restricted stock for 7,500 shares were granted to
officers and employees pursuant to the plan, but none were granted to executive
officers of the Company.
Other. In addition to the compensation paid to executive officers as described
above, executive officers received, along with and on the same terms as other
employees, certain benefits pursuant to a 401(k) Savings Plan and the ESOP. All
salaried or commissioned employees who have attained age 21 and completed one
year of employment are eligible to participate in the 401(k) Savings Plan.
Participants may contribute from 2% to 15% of their base compensation to the
401(k) Savings Plan on a pre-tax basis. Participants are permitted to borrow
against their account balances in the 401(k) Savings Plan and are eligible to
receive hardship distributions from their pre-tax contributions. For the fiscal
year ended September 30, 2003, Troy Savings did not make contributions to the
401(k) Savings Plan.
In addition, Troy Savings has implemented the ESOP, which is a noncontributory,
tax-qualified stock purchase plan that invests primarily in Common Stock of Troy
Financial. The ESOP is designed to meet the applicable requirements of a
leveraged employee stock ownership plan as described in the IRC and the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and, as such, the
ESOP is permitted to borrow in order to finance purchases of Common Stock.
CEO Compensation. The Compensation Committee, in determining the compensation
for the Chief Executive Officer, considers Troy Financial's size and complexity,
financial condition and results, including progress in meeting strategic
objectives. The Chief Executive Officer's fiscal 2003 salary was $647,779, an
increase of 1.8%, compared to $636,500 in fiscal 2002. The Compensation
Committee also sought the advice of that consultant in connection with the grant
of options in fiscal 2000. For the fiscal year 2003, the Compensation Committee
concluded that total compensation for the Chief Executive Officer was reasonable
in comparison to similarly situated publicly-traded financial institutions.
91
Internal Revenue Code Section 162(m). In 1993, the IRC was amended to disallow
publicly traded companies from receiving a tax deduction on compensation paid to
executive officers in excess of $1 million (section 162(m) of the IRC), unless,
among other things, the compensation meets the requirements for
performance-based compensation. In structuring Troy Financial's compensation
programs and in determining executive compensation, the Committee takes into
consideration the deductibility limit for compensation.
Compensation Committee Members:
Richard B. Devane (Chairman)
George H. Arakelian
Wilbur J. Cross
Michael E. Fleming
Willie A. Hammett
Thomas B. Healy
Sister Maureen Joyce
Morris Massry
Edward G. O'Haire
92
COMPARATIVE COMPANY PERFORMANCE
The following graph sets forth comparative information regarding Troy
Financial's cumulative shareholder return on its Common Stock since March 31,
1999. Total shareholder return is measured by dividing total dividends (assuming
dividend reinvestment) for the measurement period plus share price change for
the period by the share price at the beginning of the measurement period. Troy
Financial's cumulative shareholder return is based on an investment of $100 on
March 31, 1999, which was the date of Troy Financial's initial public offering,
and is compared to the cumulative total return of the Standard & Poor's 500
Index ("S&P 500 Index"), the NASDAQ Bank Index and the SNL Securities LC Thrift
Index for thrifts with total assets between $1.0 and $5.0 billion (the "SNL
Thrift ($1B to $5B) Index").
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
TROY, S&P 500 INDEX, NASDAQ BANK INDEX AND SNL THRIFT ($1B TO $5B) INDEX
FROM MARCH 31, 1999 TO SEPTEMBER 30, 2003
[INSERT GRAPH]
PERIOD ENDING
--------------------------------------------------------------------------
INDEX 03/31/99 09/30/99 09/30/00 09/30/01 09/30/02 09/30/03
- ------------------------------------------------------------------------------------------------------------
Troy Financial Corporation 100.00 108.12 120.12 220.92 291.74 401.45
S&P 500 Index 100.00 100.36 113.70 83.43 66.30 82.07
NASDAQ Bank Index* 100.00 97.71 104.73 118.77 125.40 146.09
SNL $1B-$5B Thrift Index 100.00 98.60 105.27 148.25 201.79 277.83
- ------------------------------------------------------------------------------------------------------------
93
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of December 18, 2003, with respect
to the Company's Common Stock beneficially owned by each director of the
Company, each of the named executive officers and by all directors and executive
officers of the Company as a group.
SHARES
BENEFICIALLY
DIRECTORS AND EXECUTIVE OFFICERS OWNED (2) PERCENT OF CLASS
-------------------------------- ------------ ----------------
Daniel J. Hogarty, Jr. 499,121 (b) 5.21%
Chairman of the Board, Director
President and Chief Executive Officer
George H. Arakelian 264,677 (c) 2.82%
Director
Wilbur J. Cross 6,250 *
Director
Richard B. Devane 38,062 (d) *
Director
Michael E. Fleming 90,655 (e) *
Director
Willie A. Hammett 51,352 (f) *
Director
Thomas B. Healy 111,978 (g) 1.19%
Director
Sister Maureen Joyce, RSM -- --
Director
Morris Massry 694,562 7.43%
Director
Edward G. O'Haire 92,901 (h) *
Director
David J. DeLuca 53,725 (i) *
Senior Vice President and Chief Financial Officer
Michael C. Mahar 72,534 (j) *
Senior Vice President
Kevin M. O'Bryan 130,118 (k) 1.39%
Senior Vice President and Secretary
All Directors and Executive Officers as a Group (13 persons) 2,105,199 (l) 20.25%
94
The following table presents information known to the Company regarding the
beneficial ownership of Common Stock as of December 18, 2003 by each person
believed by management to be the beneficial owner of more than 5% of the
outstanding Common Stock of the Company.
SHARES
BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED (a) PERCENT OF CLASS
------------------------------------ -------------- ----------------
The Troy Savings Bank Employee Stock Ownership Plan Trust
(the "ESOP Trust")
c/o Troy Financial Corporation 988,311 (m) 10.57%
32 Second Street
Troy, NY 12180
Private Capital Management ("PCM") 701,399 (o) 7.50%
8889 Pelican Bay Blvd.
Naples, FL 34108
Morris Massry 694,562 (n) 7.43%
c/o Executive Park North
2 Tower Place
Albany, NY 12203
Daniel J. Hogarty, Jr.
Chairman of the Board, 499,121 (b) 5.21%
Director and Chief Executive
Officer
- -------------------------------------------------------------------------------------------------------------
* less than one percent
(a) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, as
amended, a person is deemed to be the beneficial owner of a security for
purposes of the Rule if such person has or shares voting power or
investment power with respect to such security or has the right to acquire
beneficial ownership at any time within 60 days. As used herein, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares.
(b) Mr. Hogarty's share ownership includes (a) 136,371 shares held directly by
Mr. Hogarty, (b) 27,387 shares held in Mr. Hogarty's Individual Retirement
Account ("IRA"), (c) 30,461 shares held in the Company's 401(k) plan, (d)
8,032 shares held in the Company's ESOP, (e) 52,962 shares held by Mr.
Hogarty's wife, as to which Mr. Hogarty disclaims beneficial ownership, (f)
15,000 shares held by the Hogarty Family Foundation, as to which Mr.
Hogarty disclaims beneficial ownership, and (g) options to purchase 228,908
shares of Common Stock.
(c) Mr. Arakelian's share ownership includes (a) 81,656 shares held directly by
Mr. Arakelian, (b) 56,536 shares held in Mr. Arakelian's IRA, (c) 52,500
shares held by Mr. Arakelian's wife, as to which Mr. Arakelian disclaims
beneficial ownership, (d) 31,500 shares held by Standard Manufacturing Co.,
Inc. of which Mr. Arakelian is President and Chairman of the Board, and (e)
options to purchase 42,485 shares of Common Stock.
(d) Mr. Devane's share ownership includes 12,569 shares held directly by Mr.
Devane and options to purchase 25,493 shares of Common Stock.
(e) Dr. Fleming's share ownership includes (a) 16,670 shares held directly by
Dr. Fleming, (b) 15,750 shares held with his wife as joint tenants, (c)
15,750 shares held in Dr. Fleming's IRA and (d) options to purchase 42,485
shares of Common Stock.
(f) Mr. Hammett's share ownership includes (a) 6,115 shares held directly by
Mr. Hammett, (b) 766 shares held in Mr. Hammett's IRA, (c) 11,986 shares
held in his wife's IRA, as to which Mr. Hammett disclaims beneficial
ownership, and (d) options to purchase 32,485 shares of Common Stock.
(g) Mr. Healy's share ownership includes (a) 39,883 shares held directly by Mr.
Healy, (b) 29,610 shares held in Mr. Healy's IRAs and (c) options to
purchase 42,485 shares of Common Stock.
(h) Mr. O'Haire's share ownership includes (a) 16,272 shares held directly by
Mr. O'Haire, (b) 18,681 shares held in Mr. O'Haire's IRA (c) 9,450 shares
held by Mr. O'Haire's wife, as to which Mr. O'Haire disclaims beneficial
ownership, (d) 2,863 shares held by his wife's IRA, as to which Mr. O'Haire
disclaims beneficial ownership, (e) options to purchase 42,485 shares of
Common
95
Stock, and (f) 3,150 shares held by Ryan & O'Haire Agency, Inc. Mr. O'Haire
serves as president of Ryan & O'Haire Agency and, as such, is deemed to
exercise beneficial ownership over Ryan & O'Haire's shares.
(i) Mr. DeLuca's share ownership includes (a) 31,500 shares held directly by
Mr. DeLuca, (b) 5,070 shares held in the Company's 401(k) Plan, and (c)
1,405 shares held by the Company's ESOP and (d) options to purchase 15,750
shares of Common Stock.
(j) Mr. Mahar's share ownership includes (a) 22,322 shares held directly by Mr.
Mahar, (b) 6,825 shares held in the Company's 401(k) Plan, (c) 6,637 shares
held by the Company's ESOP and (d) options to purchase 36,750 shares of
Common Stock.
(k) Mr. O'Bryan's share ownership includes (a) 66,137 shares held directly by
Mr. O'Bryan, (b) 11,079 shares held in the Company's 401(k) Plan, (c) 7,534
shares held by the Company's ESOP, (d) 210 shares held by Mr. O'Bryan's
son, as to which Mr. O'Bryan disclaims beneficial ownership, and (e)
options to purchase 45,158 shares of Common Stock.
(l) Includes options to purchase 554,484 shares of Common Stock.
(m) Based on the Schedule 13G/A dated February 14, 2003 filed by the ESOP
Trust, the ESOP Trust has sole voting power and sole dispositive power over
703,616 shares and shared voting power and shared dispositive power over
284,695 shares.
(n) Mr. Massry filed a Schedule 13D/A dated February 5, 2003 reporting sole
voting power and sole dispositive power over these shares.
(o) Based on the Schedule 13F filed by PCM, PCM has shared voting and
dispositive power over these shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Directors and officers of Troy Financial or Troy Savings are permitted to borrow
from Troy Savings to the extent permitted by New York law and the regulations of
the Board of Governors of the Federal Reserve System. Under applicable New York
law, Troy Savings may make first or second mortgage loans to officers provided
that each such loan is secured by the officer's primary residence and is
authorized in writing by the Board of Directors. In addition, Troy Savings makes
consumer loans and commercial real estate and commercial business loans to
officers and directors and related persons consistent with applicable laws. All
loans made by Troy Savings to directors or their associates and related entities
have been made in the ordinary course of business, on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons. It is the belief of management
that, at the time of origination, these loans neither involved more than the
normal risk of collectibility nor presented any other unfavorable features. The
Savings Bank has made a number of loans to Mr. Massry and his related interests
and entities controlled by Mr. Massry. At September 30, 2003, these loans
aggregated $34.6 million and included unsecured lines of credit and loans
secured by commercial and other real estate. In addition, in 1983, Troy Savings
entered into a 10 year commercial lease, with two options to extend for
additional 10 year periods, with Watervliet Shores Associates for the Bank's
branch in Watervliet, New York. Watervliet Shores Associates is an entity
affiliated with Massry Realty and Mr. Massry is a principal of Massry Realty.
During fiscal 2003, Troy Savings paid Watervliet Shores Associates approximately
$87,000 for rent and shared operating costs.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
KPMG LLP has served as the independent auditors of Troy Financial since the
Company's formation in 1998.
Audit Fees
The aggregate fees billed by KPMG LLP for professional services rendered for the
audit of Troy Financial's consolidated financial statements for the fiscal year
ended September 30, 2003 and the reviews of the financial statements included in
Troy Financial's Quarterly Reports on Form 10-Q for that fiscal year were
approximately $135,900.
Financial Information Systems Design and Implementation Fees
There were no fees billed by KPMG LLP for professional services related to
financial systems design and implementation for the fiscal year ended September
30, 2003.
96
All Other Fees
The aggregate fees billed by KPMG LLP for services rendered other than the
services described above under "Audit Fees" and "Financial Information Systems
Design and Implementation Fees" for the fiscal year ended September 30, 2003 was
approximately $142,000. These fees were primarily related to tax return
preparation and research, and audits of subsidiary companies and employee
benefit plans. Additionally, the Company has been billed by KPMG LLP
approximately $100,000 primarily relating to due dilligence, comfort letters,
and Form S-4 review services as a result of the pending merger with First
Niagara.
The Audit Committee of the Board of Directors has considered and decided that
the provision of the services covered by "All Other Fees" is compatible with
maintaining the independence of KPMG LLP.
97
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) The following consolidated financial statements are included on this
Form 10-K as follows:
Consolidated Statements of Condition-- September 30, 2003 and 2002 -
page 46
Consolidated Statements of Income -- Years Ended September 30, 2003,
2002, and 2001 - page 47
Consolidated Statements of Changes in Shareholders' Equity -- Years
Ended September 30, 2003, 2002 and 2001 - page 48
Consolidated Statements of Cash Flows -- Years Ended September 30,
2003, 2002 and 2001 - page 49
Notes to Consolidated Financial Statements - pages 50-82
Independent Auditors' Report - page 83
(a)(2) There are no financial statement schedules that are required to be
filed as part of this form since they are not applicable or the
information is included in the consolidated financial statements.
(a)(3) See (c) below for all exhibits filed herewith and the Exhibit Index.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K with the Securities
Commission on July 25, 2003 (regarding a press release announcing the
results of operations for the three-month period ended June 30, 2003).
(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. DESCRIPTION
----------- -----------
2.1 Agreement and Plan of Merger, dated as of August
10, 2003, by an among First Niagara Financial
Group, Inc., First Niagara Bank, Troy Financial
Corporation and The Troy Savings Bank (filed as
Exhibit 99.1 to First Niagara Financial Group,
Inc.'s current report on Form 8-K filed on August
11, 2003 (SEC File No. 000-23975).
3.1 Certificate of Incorporation of Troy Financial
Corporation ("Troy Financial") (filed as Exhibit
3.1 to Troy Financial's Form S-1 Registration
Statement (SEC File No. 333-68813) filed with the
Securities and Exchange Commission (the "SEC") on
December 11, 1998 and incorporated herein by
reference).
3.2 Bylaws, as amended, of Troy Financial (Filed as
Exhibit 3.2 to Troy Financial's Form 10-K for the
fiscal year ended September 30, 2000 and
incorporated herein by reference).
4.1 Specimen certificate evidencing shares of common
stock of Troy Financial (filed as Exhibit 4.3 to
Troy Financial's Form S-1 Registration Statement
(SEC File No. 333-68813) filed with the SEC on
December 11, 1998 and incorporated herein by
reference).
10.1 Troy Financial Corporation Long-Term Equity
Compensation Plan (filed as Exhibit 10.1 to Troy
Financial's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999 and
incorporated herein by reference).
10.2 Form of Employment Agreements, by and among The
Troy Savings Bank, Troy Financial and the
following executives: Daniel J. Hogarty, Jr.,
Michael C. Mahar and Kevin M. O'Bryan (filed as
Exhibit 10.1 to Pre-Effective Amendment No. 2 to
Troy Financial's Form S-1 Registration Statement
(SEC File No. 333-68813) filed with the SEC on
February 11, 1999 and incorporated herein by
reference).
98
10.3 Form of Employment Protection Agreements with The
Troy Savings Bank and Troy Financial (filed as
Exhibit 10.2 to Pre-Effective Amendment No. 2 to
Troy Financial's Form S-1 Registration Statement
(SEC File No. 333-68813) filed with the SEC on
February 11, 1999 and incorporated herein by
reference).
10.4 Form of The Troy Savings Bank Employee Change of
Control Severance Plan (filed as Exhibit 10.3 to
Pre-Effective Amendment No. 2 to Troy Financial's
Form S-1 Registration Statement (SEC File No.
333-68813) filed with the SEC on February 11, 1999
and incorporated herein by reference).
10.5 Form of The Troy Savings Bank Supplemental
Retirement and Benefits Restoration Plan (filed as
Exhibit 10.1 to Pre-Effective Amendment No. 2 to
Troy Financial's Form S-1 Registration Statement
(SEC File No. 333-68813) filed with the SEC on
February 11, 1999 and incorporated herein by
reference).
10.6 Form of Employment Agreement by and among The Troy
Savings Bank, Troy Financial and David J. DeLuca
(filed as exhibit 10.1 to Troy Financial's Form
10-Q for the quarter ended March 31, 2001 and
incorporated herein by reference).
21 Subsidiaries of Troy Financial.
23 Consent of KPMG LLP.
31.1 Certification of Chief Executive Officer pursuant
to Section 302 of Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant
to Section 302 of Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant
to Section 906 of Sarbanes-Oxley Act of 2002
(d) There are no other financial statements and financial statement schedules,
which were excluded from the Annual Report which are required to be
included herein.
- ---------------
99
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, Troy Financial Corporation has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
TROY FINANCIAL CORPORATION
(Registrant)
December 29, 2003
/s/ Daniel J. Hogarty, Jr.
---------------------------
Daniel J. Hogarty, Jr.
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Daniel J. Hogarty, Jr. /s/ David J. DeLuca
-------------------------- ----------------------
Daniel J. Hogarty, Jr. David J. DeLuca
Chairman, President and Chief Senior Vice President and Chief
Executive Officer (Principal Financial Officer (Principal
Executive Officer) Financial Officer)
Date: December 29, 2003 Date: December 29, 2003
/s/ George H. Arakelian /s/ Thomas B. Healy
------------------------ ----------------------
George H. Arakelian, Director Thomas B. Healy, Director
Date: December 29, 2003 Date: December 29, 2003
/s/ Wilbur J. Cross /s/ Morris Massey
-------------------- ----------------------
Wilbur J. Cross, Director Morris Massey, Director
Date: December 29, 2003 Date: December 29, 2003
/s/ Richard B. Devane /s/ Edward G. O'Haire
--------------------- ----------------------
Richard B. Devane, Director Edward G. O'Haire, Director
Date: December 29, 2003 Date: December 29, 2003
/s/ Michael E. Fleming /s/ Maureen Joyce
---------------------- ----------------------
Michael E. Fleming, Director Sister Maureen Joyce, RSM, Director
Date: December 29, 2003 Date: December 29, 2003
/s/ Willie A. Hammett
---------------------
Willie A. Hammett, Director
Date: December 29, 2003
100