<PAGE> 1
As filed with the Securities and Exchange Commission on December 11, 1998
Registration No. 333-______
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
TROY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
--------------------
<TABLE>
<S> <C> <C>
Delaware 6712 16-1559508
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
--------------------
32 Second Street
Troy, New York 12180
(518) 270-3313
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------
Daniel J. Hogarty, Jr.
President and Chief Executive Officer
Troy Financial Corporation
32 Second Street
Troy, New York 12180
(518) 270-3313
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------
Copies to:
<TABLE>
<S> <C>
Stuart G. Stein, Esquire Joseph A. Muldoon, Jr., Esquire
Roger A. Seiken, Esquire Muldoon, Murphy & Faucette
Hogan & Hartson L.L.P. 5101 Wisconsin Avenue, N.W.
555 Thirteenth Street, N.W. Washington, D.C. 20016
Washington, D.C. 20004 (202) 362-0840
(202) 637-5600
</TABLE>
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
--------------------
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
--------------------
<TABLE>
<CAPTION>
Calculation of Registration Fee
- -----------------------------------------------------------------------------------------------------------------
Title of Proposed Maximum Proposed Maximum Amount of
Securities to Amount to Offering Price Aggregate Offering Registration
be Registered be Registered Per Share (1) Price(1) Fee
------------- ------------- ---------------- ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock, par 10,487,425 shares $10.00 $104,874,250 $29,155
value $.0001 per share
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of computing the registration fee.
------------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with the provisions of
section 8(a) of the securities act of 1933, as amended, or until this
registration statement shall become effective on such date as the securities and
exchange commission, acting pursuant to said section 8(a), may determine.
<PAGE> 2
SUBJECT TO COMPLETION, DATED DECEMBER 11, 1998
PROSPECTUS
TROY FINANCIAL CORPORATION
(PROPOSED HOLDING COMPANY FOR THE TROY SAVINGS BANK)
9,119,500 SHARES OF COMMON STOCK
(ANTICIPATED MAXIMUM OF APPRAISAL RANGE)
- --------------------------------------------------------------------------------
The Troy Savings Bank is converting from the mutual form to the stock form of
organization. As part of this conversion, the Bank will become a wholly owned
subsidiary of Troy Financial Corporation, and Troy Financial Corporation is
offering its common stock, par value $.0001 per share, to certain depositors and
members of the public in accordance with the Bank's plan of conversion. Prior to
the conversion and common stock offering, a majority of the voting depositors of
the Bank must approve the plan of conversion. The subscription offering will
terminate at ___ p.m., New York time, on ____, 1999. If there is a community or
public offering, it may terminate at any time without notice, but no later than
____, 1999, without regulatory approval. Subscription payments will be placed in
an interest bearing segregated account at the Bank, and will earn interest at
the Bank's passbook rate from the date of receipt to the completion or
termination of the conversion. Depositors who pay for their stock by withdrawal
from their accounts will receive interest at the contractual rates on their
accounts until the completion or termination of the conversion. The minimum
purchase is 25 shares (or $250), and the maximum purchase is 50,000 shares (or
$500,000), subject to adjustment. Troy Financial Corporation anticipates that
its common stock will be quoted on the Nasdaq Stock Market National Market under
the symbol "TROY." For additional information on how to purchase stock, please
read this prospectus. Further assistance may be obtained by calling the Troy
Conversion Center at 1-800-___.
- --------------------------------------------------------------------------------
TERMS OF OFFERING
FinPro, Inc., an independent appraiser hired by the Bank, has estimated the
market value of the Common Stock on a post-conversion basis to be between
$67,405,000 and $91,195,000, which is the Estimated Price Range, and which
establishes the number of shares to be offered (6,740,500 to 9,119,500), based
on an offering price of $10.00 per share. These figures do not give effect to
our intended contribution to a charitable foundation of 8% of the number of
shares of Common Stock sold in the conversion. If the appraised market value of
the Common Stock changes due to market or financial conditions, then, without
notice to you, we may be required to offer up to an additional 15% above the
maximum number of shares or 10,487,425 shares. Based on these estimates, we are
making the following offering of shares of Common Stock:
<TABLE>
<S> <C>
- PRICE PER SHARE $10.00
- NUMBER OF SHARES OFFERED
(Minimum/Midpoint/Maximum/Maximum plus 15%): 6,740,500 / 7,930,000 / 9,119,500 / 10,487,425
- ESTIMATED PRICE RANGE OF COMMON STOCK OFFERED
(Minimum/Midpoint/Maximum/Maximum plus 15%): $67,405,000 / $79,300,000 / $91,195,000 / $104,874,250
- ESTIMATED UNDERWRITING DISCOUNTS, COMMISSIONS
AND OTHER EXPENSES
(Minimum/Midpoint/Maximum/Maximum plus 15%): $1,795,000 / $1,914,000 / $2,034,000 / $2,171,000
- ESTIMATED NET PROCEEDS TO TROY FINANCIAL CORPORATION
(Minimum/Midpoint/Maximum/Maximum plus 15%): $65,610,000 / $77,386,000 / $89,161,000 / $102,703,250
</TABLE>
---------------
PLEASE READ THE RISK FACTORS ON PAGE 1 BEFORE SUBSCRIBING FOR ANY COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION NOR THE NEW YORK STATE
BANKING DEPARTMENT HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
---------------
Sandler O'Neill & Partners, L.P. will use its best efforts to help us sell at
least the minimum number of securities offered but is not required to sell any
specific amount of Common Stock.
---------------
SANDLER O'NEILL & PARTNERS, L.P.
, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE> 3
[MAP/PICTURE OF HEADQUARTERS--MUSIC HALL]
This prospectus contains certain forward-looking statements and
information relating to Troy Financial Corporation and The Troy Savings Bank.
The words "believes," "expects," "may," "will," "should," "projected,"
"contemplates," "anticipates" or similar terminology are intended to identify
forward-looking statements. These statements are based on the beliefs of
management as well as assumptions made using information currently available to
management. Because such statements reflect the current views of management
concerning future events, such statements involve certain risks, uncertainties
and assumptions. Therefore, actual future results may differ significantly from
the results discussed in the forward-looking statements. Some, but not all, of
the factors that may cause such a difference include those discussed in the Risk
Factors section beginning on page 1 of this prospectus.
Please see the Glossary beginning on page G-1 for the meaning of
capitalized terms that are not defined in this prospectus.
<PAGE> 4
QUESTIONS AND ANSWERS
Q: WHAT IS THE CONVERSION?
A: The Conversion is the simultaneous conversion of The Troy Savings Bank
from mutual to stock form of organization, the issuance of all of the
Bank's capital stock to Troy Financial Corporation and the offer and sale
of Troy Financial Corporation's Common Stock to certain depositors and
members of the public in accordance with the Bank's Plan of Conversion.
Q: WHAT IS THE PLAN OF CONVERSION?
A: The Plan of Conversion is the legal document that governs the Conversion
and establishes who is eligible to purchase our Common Stock. The Bank's
Board of Trustees unanimously approved the Plan of Conversion. In
addition, a majority of the voting depositors and the Superintendent of
Banks of the State of New York (New York Superintendent) must also
approve the Plan of Conversion, and the Federal Deposit Insurance
Corporation (FDIC) must not object to the Plan of Conversion. A summary
of the Conversion, as set forth in the Plan of Conversion, is contained
in this prospectus.
Q: WHAT IS THE PURPOSE OF THE CONVERSION?
A: The Board of Trustees of the Bank has determined that the mutual to stock
conversion and the stock offering are in the best interests of the Bank,
its depositors and its communities. The stock offering will increase the
Bank's capital and the amount of funds available for the Bank to use for
lending and investment activities, and will provide the Bank with greater
flexibility to diversify and expand its operations in the future. As a
bank holding company, we will have an enhanced ability to access the
capital markets in the future. If you choose to purchase our Common
Stock, then you will have the opportunity to share in our future as a
stockholder.
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. We are offering for sale up to a maximum of 9,119,500 shares of Common
Stock at a subscription price of $10.00 per share. If the appraised
market value of the Common Stock changes due to market or financial
conditions, then, without notice to you, we may be required to offer up
to an additional 15% above the maximum number of shares or 10,487,425
shares.
Q: WHO IS ELIGIBLE TO PARTICIPATE IN THE CONVERSION'S STOCK OFFERING?
A: Pursuant to the Plan of Conversion and as part of a Subscription
Offering, we will issue non-transferable subscription rights to purchase
our Common Stock in the following order of priority:
1. ELIGIBLE ACCOUNT HOLDERS -- those persons who held deposit
accounts (containing balances of at least $100) at the Bank on
June 30, 1997.
2. ESOP -- a tax-qualified employee stock ownership plan (ESOP)
established by the Bank to purchase Common Stock in the
Conversion.
3. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS -- those persons (other than
Eligible Account Holders) who held deposit accounts (containing
balances of at least $100) with the Bank on [December 31, 1998].
i
<PAGE> 5
If not all of the shares of the Common Stock are subscribed for in the
Subscription Offering, then we will offer the remaining shares for sale
to the public as part of a Community Offering and/or a Syndicated
Community Offering.
Q. WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A. A properly signed order form with the required payment must be received
by us on or before ______ p.m., New York time, on ____________, 1999. If
we receive your payment or order form after the expiration date, you will
not be eligible to purchase our Common Stock in the Subscription Offering
on a priority basis.
Q: HOW DO I PURCHASE THE STOCK?
A: First, you should read this prospectus. Then, you must complete and
return the enclosed stock order and certification form, together with
your subscription payment, to us, either in person to any branch office
of the Bank during regular banking hours, or by mail in the enclosed
YELLOW postage-paid envelope marked "STOCK ORDER RETURN." WE MUST
RECEIVE YOUR PAYMENT AND ORDER FORM ON OR BEFORE _____ P.M., NEW YORK
TIME, ON ___, 1999. If the Conversion is not completed by ______ and if
not otherwise extended, then all funds will be returned promptly with
interest, and all withdrawal authorizations will be canceled.
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A. No. After we receive your order form and subscription payment, you may
not cancel or modify your order.
Q: HOW CAN I PAY FOR THE STOCK?
A: You have three options: (i) you may pay cash if it is delivered to us in
person; (ii) you may send us a check or money order; or (iii) you may
authorize us to withdraw the money from your deposit account at the Bank
(without any penalty for early withdrawal). PLEASE DO NOT SEND CASH IN
THE MAIL. Subscriptions payments will be placed in an interest bearing
segregated account at the Bank, and will earn interest at the Bank's
passbook rate from the date of receipt to the completion or termination
of the Conversion. Depositors who elect to pay by withdrawal will receive
interest on their accounts until the completion or termination of the
Conversion. Please see "Procedure for Purchasing Shares in the
Subscription and Community Offerings" on page __ for more information.
Q. CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY INDIVIDUAL RETIREMENT
ACCOUNT (IRA) AT THE BANK?
A. Although applicable regulations do not permit the purchase of Common
Stock with your existing IRA at the Bank, you may, however, establish a
"self-directed" trust account with an outside trustee in order to
subscribe for Common Stock using your retirement funds. Please call our
Conversion Center (1-800-____) to get more information about this option.
Please understand that transfer of funds takes time, so please make
arrangements as soon as possible.
Q: HOW MUCH STOCK MAY I PURCHASE?
A: The minimum purchase is 25 shares (or $250). In general, each person with
subscription rights may purchase up to 50,000 shares (or $500,000) in the
Subscription Offering, subject to adjustment. Account holders, whether
purchasing separately or together, with their affiliates or other persons
acting in concert, may not in the aggregate exceed these purchase
limitations.
ii
<PAGE> 6
If we have a Community Offering and/or a Syndicated Community Offering,
then each purchaser may purchase up to 50,000 shares (or $500,000) in
that offering or offerings, subject to adjustment. Your purchases,
through the Subscription Offering and Community Offering and/or
Syndicated Community Offering, when added together, however, may not
exceed 104,874 shares (or $1,048,743) at the maximum plus 15% of the
Estimated Price Range.
Q: CAN I PURCHASE STOCK ON BEHALF OF SOMEONE ELSE?
A: No. As an eligible participant in the Subscription Offering, you may not
transfer your subscription rights. Before purchasing shares, you will be
required to certify that you are purchasing shares solely for your own
account and that you have no agreement or understanding with another
person involving the transfer of the shares that you purchase. We will
not honor orders for shares by anyone known to us to be a party to such
an agreement and we will pursue all legal remedies against any person who
is a party to such an agreement.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES OF STOCK TO FILL ALL ORDERS?
A: You may not receive any or all of the shares you want to purchase. If
there is an oversubscription, then our Common Stock will be offered
according to the following priority basis: Eligible Account Holders, the
ESOP and Supplemental Account Holders.
Q. WHAT IS THE CHARITABLE FOUNDATION THAT IS RECEIVING A CONTRIBUTION OF
STOCK UPON COMPLETION OF THE CONVERSION?
A. Upon completion of the Conversion, we intend to transfer, for a nominal
consideration, Common Stock equal to 8% of the number of shares of Common
Stock sold in the Conversion to The Troy Savings Bank Community
Foundation, a new charitable foundation that we will organize (Community
Foundation). Thus, if we sell 6,740,500 (minimum), 7,930,000 (midpoint),
9,119,500 (maximum) or 10,487,425 (maximum plus 15%) shares of Common
Stock in the Conversion, we intend to contribute 539,240, 634,400,
729,560 or 838,994 shares of Common Stock, respectively, to the Community
Foundation. The contribution in connection with the Conversion is in
addition to the Bank having recently established The Troy Savings Bank
Charitable Foundation (Charitable Foundation). The Bank contributed $1.0
million in cash to the Charitable Foundation in fiscal 1998, and entered
into a binding, irrevocable commitment to make a total of $4.0 million in
additional scheduled payments to the Charitable Foundation. We will make
the scheduled payments in fiscal years 1999, 2000 and 2001. The Bank has
established The Troy Savings Bank Music Hall Foundation (Music Hall
Foundation) and intends to contribute The Troy Savings Bank Music Hall,
which is in the Bank's headquarters building in Troy, New York, to the
Music Hall Foundation.
The purpose of these charitable foundations is to continue the Bank's
long standing commitment to its communities, and all three are dedicated
to charitable purposes within our communities.
Q. WHAT IMPACT WILL THE CONTRIBUTION OF STOCK TO THE COMMUNITY FOUNDATION
HAVE ON OUR STOCKHOLDERS' EQUITY AND EARNINGS?
A. Our intended contribution of 8% of the number of shares of Common Stock
sold in the Conversion will impact our stockholders' equity and will have
an adverse effect on our earnings in the period in which we make the
contribution, which we expect to be the second quarter of fiscal 1999.
The establishment of, and intended contribution of Common Stock to, the
Community Foundation, however, was considered in FinPro, Inc.'s
independent appraisal of the aggregate pro forma market value of our
Common Stock. In addition, there are certain
iii
<PAGE> 7
tax effects, regulatory considerations and other matters with respect to
the Community Foundation.
Q. IF I PURCHASE SHARES IN THE CONVERSION, WILL MY INTERESTS BE DILUTED AS A
RESULT OF THE COMMUNITY FOUNDATION?
A. Yes. Upon completion of the Conversion, the Community Foundation will
receive an amount of newly issued shares of our Common Stock equal to 8%
of the number of shares of our Common Stock sold in the Conversion. As a
result, persons purchasing shares in the Conversion will have their
ownership and voting interests diluted by 7.4%.
Q: WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER TO
PURCHASE THE STOCK?
A: There are many important factors for you to consider before making an
investment decision. Therefore, you should read this entire prospectus,
including the Risk Factors on pages 1 through ___, before making your
decision.
Q: AFTER THE CONVERSION, WILL THE TROY SAVINGS BANK REMAIN A COMMUNITY BANK?
A: Yes. We will continue to operate the Bank as we did before the
Conversion, but we will now have greater operational and expansion
flexibility. In addition, many members of our communities will now be
able to share in our future by purchasing our Common Stock and becoming
an owner of their local financial services company. To ensure our
long-term commitment to our communities, upon completion of the
Conversion, we will have established three charitable foundations
dedicated to charitable purposes within our local communities, including
the Community Foundation to which we intend to contribute newly issued
shares of Common Stock equal to 8% of the number of shares of Common
Stock sold in the Conversion.
Q. WILL THERE BE DIVIDENDS PAID ON OUR STOCK?
A. At this time, our Board of Directors has not made a decision as to the
payment of dividends. Such decision will depend upon many factors,
including earnings and capital.
Q. WILL MY STOCK BE COVERED BY DEPOSIT INSURANCE OR GUARANTEED BY ANY
GOVERNMENT AGENCY?
A. No. Unlike insured deposit accounts at the Bank, our Common Stock will
not be insured or guaranteed by the FDIC or any other government agency.
Q: WILL I BE ABLE TO SELL STOCK AFTER I PURCHASE IT?
A: Unless you are one of our insiders or affiliates (such as an officer or
director), the Common Stock will be freely transferable. We anticipate
having our Common Stock quoted on the Nasdaq Stock Market National
Market under the symbol "TROY." Please understand, however, that there
can be no assurance that someone will want to buy your shares or that
you will be able to sell them for more money than you originally paid.
Q: WHO WILL ASSIST WITH THE CONVERSION?
A: We have hired Sandler O'Neill & Partners, L.P., an investment banking
firm, to consult with and advise us in connection with the Conversion. In
addition, Sandler O'Neill has agreed to use its best efforts to assist us
with the sale of our Common Stock, although Sandler O'Neill
iv
<PAGE> 8
is not obligated to purchase any shares or to sell a certain amount. We
will pay a fee to Sandler O'Neill which will be based on the total amount
of Common Stock sold.
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE CONVERSION
AND STOCK OFFERING?
A: In order to make an informed investment decision, you should read this
entire prospectus, including the Risk Factors on pages 1 through ____.
For answers to other questions or to obtain a copy of the complete Plan
of Conversion, you may call us (1-800-____), Monday through Friday,
between the hours of 10:00 a.m. and 4:00 p.m., or write us at:
Troy Conversion Center
------------
Troy, New York ____
Please note that the Troy Conversion Center will be closed for bank
holidays. TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48
HOURS PRIOR TO THE EXPIRATION DATE OF _______, 1999 IN ACCORDANCE WITH
FEDERAL LAW, NO PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR
TO _____, 1999 OR HAND DELIVERED ANY LATER THAN TWO DAYS PRIOR TO _____,
1999.
v
<PAGE> 9
SUMMARY
This summary highlights selected information from this prospectus and
does not contain all the information that you need to know before making an
informed investment decision. To understand the Conversion fully, you should
read this entire prospectus, including the consolidated financial statements and
the related notes beginning on page F-1. References in this document to "we,"
"us," "our," and the "Company" refer to Troy Financial Corporation, and
references to the "Bank" refer to The Troy Savings Bank. In certain instances
where appropriate, "we," "us" or "our" refers to both Troy Financial Corporation
and The Troy Savings Bank.
THE COMPANIES
TROY FINANCIAL CORPORATION
32 Second Street
Troy, New York 12180
(518) 270-3133
Troy Financial Corporation has not engaged in any significant business to
date. The Company was established in December 1998 as a Delaware corporation to
be the bank holding company for The Troy Savings Bank upon the Conversion.
Please see pages __.
THE TROY SAVINGS BANK
32 Second Street
Troy, New York 12180
(518) 270-3133
The Troy Savings Bank is a community oriented mutual savings bank
headquartered in Troy, New York. The Bank, which was chartered in 1823, provides
full service business and retail banking, and trust and investment services to
individuals, families and businesses throughout the six New York State Counties
of Albany, Rensselaer (Troy), Saratoga, Schenectady, Warren and Washington.
Since the mid-1980s, the Bank's strategy has been to provide a wide variety of
financial products and services to attract a wide variety of customers. In
addition to offering traditional banking products and services, the Bank and its
subsidiaries offer trust, insurance, investment management and brokerage
services in an effort to meet the financial needs of a broad spectrum of
customers. At September 30, 1998, the Bank had total assets of $716.6 million,
deposits of $578.2 million and equity of $71.0 million. Please see pages ____.
The Bank also is recognized as home to the renowned Troy Savings Bank
Music Hall, a 1,200 seat facility located on the upper floors of the Bank's
headquarters. The Music Hall has been an integral part of the Troy community
since it opened in 1875. The Bank has a history, which it is committed to
preserve, of ensuring that the Music Hall is available to its patrons and the
community, thereby fulfilling the purpose designated by its founders.
THE CONVERSION
The Bank's Board of Trustees has adopted the Plan of Conversion by which
the Bank will convert from a mutual to a stock form savings bank. At the same
time, the Bank will issue all of its capital stock to us, and we will then offer
and sell our Common Stock to certain depositors of the Bank, and, if enough
stock is available, to the ESOP and members of the public in accordance with the
Plan of Conversion. We believe that the Conversion offers a number of
advantages. The Conversion will allow us to access the capital markets in order
to raise additional capital as needed. The bank holding company and corporate
stock form of organization will enable us to compete more effectively with other
financial service providers, and will facilitate our establishment or
acquisition of a commercial bank and trust company that can accept municipal
deposits to complement the Bank's municipal investment activities. The newly
raised capital may also be used to increase our presence in the communities in
which we serve and attract new customers through expanded
vi
<PAGE> 10
operations, acquisitions of other financial institutions or branches and
diversification of operations. Other than as discussed in this prospectus
regarding our business, there are no current arrangements, understandings or
agreements regarding any such opportunities. Please see pages ____.
THE TROY SAVINGS BANK COMMUNITY FOUNDATION
An important feature of the Conversion involves the contribution of newly
issued shares of Common Stock to the Community Foundation. Immediately after the
Conversion, we intend to incorporate the Community Foundation under Delaware law
as a non-stock corporation. The Community Foundation will be operated by the
Bank's directors and will be dedicated to charitable purposes within our local
communities. The contribution of Common Stock to the Community Foundation as
part of the Conversion is intended to allow our local communities to share in
our potential growth and any profitability over the long-term. The contribution,
which is expected to occur immediately following the Conversion, will be newly
issued shares of Common Stock in an amount equal to 8% of the number of shares
of Common Stock sold in the Conversion (539,240, 634,400, 729,560 or 838,994
shares at the minimum, midpoint, maximum and maximum plus 15%, respectively, of
the Estimated Price Range). Such contribution, once made, will not be
recoverable by us or the Bank. Assuming the sale of shares of Common Stock at
the maximum of the Estimated Price Range and the contribution of 729,560 shares
to the Community Foundation, we will have 9,849,060 shares issued and
outstanding, of which the Community Foundation will own 729,560 shares, or 7.4%
of our Common Stock. DUE TO THE ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK TO
THE COMMUNITY FOUNDATION IMMEDIATELY FOLLOWING THE CONVERSION, PURCHASERS OF
COMMON STOCK IN THE CONVERSION WILL HAVE THEIR OWNERSHIP AND VOTING INTERESTS
DILUTED BY 7.4%.
In connection with our contribution of Common Stock to the Community
Foundation, we will record an expense equal to the value of the contribution
during the quarter in which it is made, which we expect to be the second quarter
of fiscal 1999. In fiscal 1999, in addition to our intended contribution of
Common Stock to the Community Foundation, we also intend to contribute the Music
Hall to the Music Hall Foundation (we estimate the pre-tax cost of this
contribution will be $300,000). These contribution expenses are expected to be
partially offset by a tax benefit related to the contributions. Under the
Internal Revenue Code (IRC), there is an annual charitable deduction limitation
of 10% of our annual (pre-contribution) taxable income. The non-deductible part
of our contribution expense, however, may be carried forward for five years,
subject to the annual 10% limitation. To the extent that our charitable
deductions exceed this 10% deduction limitation, based on estimated future
taxable income, we would not be able to recognize the full tax benefit
associated with our contributions. Given the levels of past and anticipated
contributions and estimates of our future taxable income, we do not expect to
recognize the entire tax benefit associated with our contributions of Common
Stock to the Community Foundation and the Music Hall to the Music Hall
Foundation.
At this time, we estimate the tax benefit of the contribution of Common
Stock to the Community Foundation to be between approximately $1.1 million
(assuming contribution of 634,400 shares at the midpoint of the Estimate Price
Range, a $10.00 per share price and a combined tax rate of 35%) and $1.2 million
(assuming contribution of 838,994 shares at the maximum plus 15% of the
Estimated Price Range, a $10.00 per share price and a combined tax rate of 35%).
If we were able to realize the entire tax benefit on this contribution, then,
under the same assumptions, such tax benefit would range between $2.2 million
and $2.5 million. Although it presently appears that we may not be able to
realize the full tax benefit associated with our contributions to our three
charitable foundations, we believe that the contemplated contributions are
justified given the Bank's capital position and its earnings, the substantial
capital being raised in the Conversion and the potential benefits of the
contributions to our communities. Please see pages ____.
In fiscal 1998, the Bank established and contributed to the Charitable
Foundation $1.0 million in cash and entered into a binding, irrevocable
commitment to make a total of $4.0 million in
vii
<PAGE> 11
scheduled payments to the Charitable Foundation. The scheduled payments will
occur in each of fiscal years 1999, 2000 and 2001. In connection with the Bank's
cash contribution and future binding commitment, the Bank recorded a
contribution expense of $4.5 million, which represents the $1.0 million cash
contributed and the present value of the $4.0 million in future scheduled
contributions. In fiscal 1998, the Bank recognized the entire tax benefit
associated with this contribution expense. Notwithstanding the tax benefit, the
contribution expense contributed significantly to the Bank's fiscal 1998 net
loss of $878,000. If this contribution expense had not been incurred in fiscal
1998, the Bank's net income would have been approximately $1.8 million.
THE STOCK OFFERING
We are selling between 6,740,500 and 9,119,500 shares of Common Stock at
a price of $10.00 per share. Prior to completion of the Conversion, if the
appraised market value of the Common Stock changes due to market or financial
conditions, then, without notice to you, we may be required to offer up to an
additional 15% above the maximum number of shares or 10,487,425 shares. Please
see pages ____.
STOCK PURCHASES
We will offer the Common Stock on the basis of priorities set forth in
the Bank's Plan of Conversion. Both the Bank's depositors who had qualifying
accounts with the Bank on predetermined dates and the ESOP will receive
non-transferable subscription rights to purchase shares of Common Stock in the
Subscription Offering. We will sell any remaining shares to the general public
in a Community Offering and/or a Syndicated Community Offering. Sandler O'Neill
will assist us on a best efforts basis with the sale of the Common Stock, but is
under no obligation to purchase or sell any Common Stock. Please see pages
_____.
SUBSCRIPTION RIGHTS
You may not sell or assign your subscription rights, and any transfer of
subscription rights is prohibited by law. If you exercise your subscription
rights, you will be required to certify that you are purchasing shares solely
for your own account and that you have no agreement or understanding regarding
the sale or transfer of shares. We intend to pursue any and all legal and
equitable remedies if we become aware of the transfer of subscription rights and
will not honor orders known by us to involve the transfer of such rights. Please
see pages ____.
THE OFFERING RANGE AND DETERMINATION OF THE PRICE PER SHARE
The offering range is based on an independent appraisal of the pro forma
market value of our Common Stock. FinPro, Inc., an independent appraisal firm
experienced in appraisals of savings banks, performed the appraisal, and has
estimated that, in its opinion, at December 10, 1998, the aggregate pro forma
market value (Estimated Price Range) of our Common Stock ranged between
$67,405,000 and $91,195,000 (with a midpoint of $79,300,000). This translates to
between 6,740,500 and 9,119,500 shares, assuming an offering price of $10.00 per
share. The pro forma market value of our Common Stock is our market value after
taking into account the sale of the Common Stock in the Conversion. The
appraisal was based in part upon the Bank's financial condition and operations
and the effect of the additional capital raised by the sale of Common Stock. The
$10.00 price per share was determined by our Board of Trustees. If the pro forma
market value of the Common Stock changes to either below $67,405,000 or above
$104,874,250, we will notify you and provide you with the opportunity to modify
or cancel your order. Please see pages _____.
TERMINATION OF THE OFFERING
The Subscription Offering will terminate at ____ p.m., New York time, on
_____, 1999. The Community Offering and/or Syndicated Community Offering, if
any, may terminate at any time
viii
<PAGE> 12
without notice, but no later than _____, 1999, without approval by the New York
Superintendent and the FDIC. Please see pages ____.
BENEFITS TO MANAGEMENT FROM THE CONVERSION
The Bank's Board of Trustees has determined that the benefit plans
described below would provide a means by which we could retain and attract high
caliber executive officers and employees, maintain their attention and loyalty
in change of control situations and align their interests with those of our
stockholders. Because the Board of Trustees has concluded that the cost of
establishing and maintaining these benefit plans would be justified by these
benefits, we intend to adopt the following benefit plans:
LONG-TERM EQUITY COMPENSATION PLAN. Following the Conversion, we intend
to adopt an Equity Compensation Plan, subject to stockholder approval. The
Equity Compensation Plan will consist of a stock option plan and a management
recognition plan (MRP) that will provide for grants of options and shares of
restricted stock, respectively, to directors, officers, employees and
independent contractors. We anticipate that a number of shares equal to 10% of
the Common Stock to be issued in the Conversion, including the shares
contributed to the Community Foundation, would be reserved for issuance under
stock options that we will grant under the Equity Compensation Plan. The Bank
expects to create a trust that will hold, in the aggregate, up to 4% of the
shares of Common Stock to be issued in the Conversion, including the shares
contributed to the Community Foundation. We intend to make grants of restricted
stock from the shares that are held by the Trust. We have not determined the
specific terms of the Equity Compensation Plan (including the MRP), how the MRP
will be funded or the amount of awards we will make, all of which would be
subject to applicable regulations.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP). We have established the ESOP for
the benefit of eligible employees and officers. The ESOP intends to subscribe
for up to 8% of the Common Stock to be issued in the Conversion, including the
shares contributed to the Community Foundation, and to finance its subscription
with funds borrowed from us for a period of 10-15 years at an interest rate of
___% per annum. If the ESOP is not able to purchase shares of Common Stock in
the Conversion by reason of oversubscription, the ESOP will purchase such shares
in the open market. Subject to receipt of any necessary regulatory approvals or
opinions, we intend to make cash contributions to the ESOP as required to
service the ESOP's debt. The ESOP's Common Stock will be distributed to eligible
employees as the loan is repaid.
SUPPLEMENTAL RETIREMENT AND BENEFIT RESTORATION PLAN (SUPPLEMENTAL PLAN).
We intend to implement a non-tax qualified Supplemental Plan to provide
additional retirement benefits to certain executive officers and/or highly
compensated employees after the Conversion. The Supplemental Plan will provide
these participants with additional retirement benefits that we cannot provide
under our other tax-qualified retirement plans because of limitations in effect
under the IRC.
EMPLOYMENT AGREEMENTS, EMPLOYMENT PROTECTION AGREEMENTS AND EMPLOYEE
SEVERANCE COMPENSATION PLANS. We intend to enter into employment agreements with
three executive officers and employment protection agreements with additional
officers of the Bank that will provide for, among other things, certain cash
payments to be made, and certain benefits to be continued, upon their
termination of employment in certain circumstances and upon a change of control
situation. Based on compensation and benefit costs as of September 30, 1998,
cash payments to be made as a result of a change of control and subsequent
termination of employment would be approximately $7.1 million under the
employment agreements and employment protection agreements. The actual amounts
to be paid under such circumstances cannot be estimated at this time because the
actual amount is based on the compensation and benefit costs applicable to
individual officers and employees and other factors existing at the time of the
change of control, which cannot be estimated at this time. Such figures do not
include any estimate as to amounts that may be payable on account of the Equity
Compensation Plan because no options or shares have been
ix
<PAGE> 13
allocated under such plan. These agreements may increase the cost of acquiring
us, thereby discouraging future takeover attempts. The Company also intends to
establish an employee compensation severance plan which will provide eligible
employees with severance pay benefits in the event of termination of employment
after a change of control.
OTHER CHANGE OF CONTROL PROVISIONS. Certain provisions of the ESOP, the
Supplemental Plan and the Equity Compensation Plan may provide for cash payments
and/or accelerated vesting upon a change of control and subsequent termination
of employment. These provisions may increase the cost of, or discourage, an
acquisition of us and may reduce the amount that stockholders might otherwise
receive for their shares.
VOTING CONTROL OF EXECUTIVE OFFICERS AND TRUSTEES
The Bank's executive officers and trustees and their affiliates propose
to purchase Common Stock in the Conversion in an aggregate amount equal to
$4,060,000 or 4.45% (based on the maximum of the Estimated Price Range)
of the shares to be sold in the Conversion. These proposed purchases and the
potential acquisitions of Common Stock through the ESOP and the Equity
Compensation Plan could result in management having voting control of
approximately ___% of the Common Stock on a diluted basis at the maximum plus
15% of the Estimated Price Range, including the shares contributed to the
Community Foundation (or __% if the FDIC and New York Superintendent were to
waive the Community Foundation's voting restrictions). Please see page __.
USE OF THE PROCEEDS RAISED FROM THE SALE OF COMMON STOCK
We estimate the net proceeds (after deduction of expenses) from the sale
of Common Stock to be between $65.6 million and $89.2 million depending upon the
number of shares sold. If the Estimated Price Range is increased by 15%, then we
estimate the net proceeds (after deduction of expenses) to be $102.7 million. We
will use approximately 50% of the net proceeds to purchase all of the capital
stock of the Bank as part of the Conversion. We intend to use a portion of the
remainder of those net proceeds to fund a loan to the ESOP to enable it to
purchase 8% of the Common Stock issued in the Conversion, including the shares
contributed to the Community Foundation. We will invest the remaining net
proceeds in short-term securities and deposit accounts, and otherwise use the
net proceeds for general corporate purposes. In that regard, we plan to
establish or acquire a commercial bank and trust company that can accept
municipal deposits to complement the Bank's municipal investment activities. We
also may consider acquisitions of other financial services firms and/or branch
offices, although at this time, we do not have any current arrangements,
understandings or agreements regarding any such transactions.
The Bank will use the funds it receives from us in exchange for all of
its capital stock for the operation of its business, such as making loans and
purchasing securities. The additional funds in the Bank will also count as
regulatory capital and therefore will support future growth of the Bank's total
assets. Please see pages _____.
DIVIDENDS
Following the Conversion, our Board of Directors will have the authority
to declare dividends on the Common Stock, although such authority is subject to
both certain legal requirements and the availability of funds. At this time, we
have not made a decision as to the payment of dividends. Such decision will
depend upon many factors, including earnings and capital. Please see pages ____.
MARKET FOR THE COMMON STOCK
We are a new company, having been formed in December 1998, and therefore
have never issued capital stock. Consequently, there is no existing market for
the Common Stock. We, however, anticipate having the Common Stock quoted on
the Nasdaq Stock Market National Market under the symbol "TROY." Please see
pages ____.
x
<PAGE> 14
IMPORTANT RISKS IN PURCHASING AND OWNING THE COMMON STOCK
Before you decide to purchase any Common Stock, you should read the
entire prospectus, including the Risk Factors on pages 1 through ___. OUR COMMON
STOCK IS NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
xi
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary financial and other information about the Bank is
derived from the Bank's audited consolidated financial statements for each of
the five fiscal years ending September 30, 1998, 1997, 1996, 1995 and 1994.
Because this information is only a summary, you should read it in conjunction
with the Bank's consolidated financial statements and related notes beginning on
page F-1, and with the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" section beginning on page ___.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
- -----------------------
Total assets ......................................... $ 716,649 $ 662,448 $ 657,524 $ 629,652 $ 607,259
Loans receivable, net ................................ 457,321 468,160 451,822 408,615 381,828
Securities available for sale (fair value):
U.S. Government Securities and
Agency obligations ............................. 117,220 57,620 81,053 32,575 64,115
Obligations of states and political
subdivisions ................................... 51,681 20,833 1,548 862 220
Mortgage-backed securities ........................ 3,744 4,653 5,374 4,727 4,842
Corporate debt securities ......................... 16,984 27,168 53,959 -- --
Mutual funds and marketable
equity securities .............................. 4,822 3,971 3,704 3,496 3,251
Non-marketable equity securities .................. 3,307 3,307 3,279 3,065 2,907
Securities held to maturity
(amortized cost) .................................. 3,483 4,000 4,515 102,096 93,519
Deposits ............................................. 578,202 572,397 564,606 552,462 535,903
Borrowings ........................................... 47,464 4,728 9,899 842 1,581
Total equity ......................................... 71,029 71,542 67,408 62,782 55,426
</TABLE>
xii
<PAGE> 16
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
- ---------------------
Interest and dividend income ......................... $ 48,030 $ 48,287 $ 46,862 $ 44,578 $ 39,129
Interest expense ..................................... 24,193 23,351 23,017 20,883 17,591
-------- -------- -------- -------- --------
Net interest income ............................... 23,837 24,936 23,845 23,695 21,538
Provision for loan losses ............................ 4,050 3,900 928 965 1,930
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses ................................ 19,787 21,036 22,917 22,730 19,608
Operating income:
Service charges on deposits ....................... 858 822 802 809 787
Loan servicing fees ............................... 432 460 443 430 441
Trust income ...................................... 459 362 293 234 106
Net gains from securities
sales or calls ................................. 8 4 1 34 136
Net gains (losses) from mortgage
loan sales ..................................... 76 14 (14) 18 172
Other income ...................................... 719 1,075 1,340 784 998
-------- -------- -------- -------- --------
Total other operating income ................... 2,552 2,737 2,865 2,309 2,640
Other operating expenses:
Compensation and employee
benefits ....................................... 10,218 9,573 9,009 7,596 6,984
Occupancy ......................................... 2,101 2,089 1,956 1,519 1,317
Furniture, fixtures, and equipment ................ 1,080 901 961 884 523
Computer charges .................................. 1,424 1,322 1,248 1,221 1,208
Professional, legal, and other fees ............... 924 726 658 670 605
OREO expense (income) ............................. 1,087 380 499 (1,343) 528
Printing, postage and telephone ................... 614 559 543 521 438
Contribution expense .............................. 4,759 102 479 90 89
Other expenses .................................... 2,884 2,887 2,845 3,918 3,122
-------- -------- -------- -------- --------
Total other operating expenses ................. 25,091 18,539 18,198 15,076 14,814
Income (loss) before income tax
(benefit) expense .............................. (2,752) 5,234 7,584 9,963 7,434
Income tax (benefit) expense ......................... (1,874) 1,576 2,506 2,895 3,335
-------- -------- -------- -------- --------
Net income (loss) .................................... $ (878)(1) $ 3,658 $ 5,078 $ 7,068 $ 4,099
======== ======== ======== ======== ========
</TABLE>
xiii
<PAGE> 17
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDING SEPTEMBER 30,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND
- -----------------------------
OTHER DATA
----------
PERFORMANCE RATIOS:
Return (loss) on average assets ................... (0.13)%(2) 0.55% 0.79% 1.15% 0.69%
Return (loss) on average equity ................... (1.20) (2) 5.22 7.84 11.97 7.63
Average equity to average
total assets ................................... 10.80 10.57 10.05 9.56 9.02
Equity to total assets ............................ 9.91 10.80 10.25 9.97 9.13
Average interest earning assets
to average interest bearing
liabilities .................................... 113.96 112.29 110.80 110.12 109.24
Net interest rate spread (3) ...................... 3.32 3.50 3.49 3.65 3.47
Net interest rate margin (4) ...................... 3.84 3.96 3.90 4.01 3.75
Efficiency ratio (5) .............................. 87.44 (2) 65.48 66.27 63.22 59.42
Operating expenses to average
assets ratio ................................... 3.54 (2) 2.74 2.75 2.66 2.40
ASSET QUALITY RATIOS:
Nonperforming loans to total
loans .......................................... 2.50 1.84 2.74 2.85 3.18
Nonperforming assets to total
assets ......................................... 1.89 1.72 2.28 2.22 2.80
Allowance for loan losses to total
loans .......................................... 1.77 1.35 0.94 1.04 1.09
Allowance for loan losses to
non-performing loans ........................... 70.91 73.77 34.49 36.54 34.16
REGULATORY CAPITAL RATIOS:
Leverage capital .................................. 9.89 10.64 10.20 9.83 9.04
Tier I risk-based capital ......................... 14.02 15.01 14.48 15.21 15.15
Risk-based capital ................................ 15.27 16.37 15.41 16.27 16.30
OTHER DATA:
Full-service banking offices ...................... 14 13 13 13 11
Number of deposit accounts ........................ 70,057 70,185 71,458 72,531 68,649
</TABLE>
- -----------------------
(1) In fiscal 1998, the Bank recorded a pre-tax contribution expense of $4.5
million ($2.7 million on an after-tax basis) based upon a $1.0 million
cash contribution and $4.0 million binding, irrevocable commitment to the
Charitable Foundation. If this expense had not been incurred, the Bank's
net income would have been approximately $1.8 million, instead of a net
loss of $878,000.
(2) During fiscal 1998, the Bank contributed to the Charitable Foundation
$1.0 million in cash and entered into a binding, irrevocable commitment
to make a total of $4.0 million in scheduled payments to the Charitable
Foundation. The scheduled payments will occur in each of fiscal years
1999, 2000 and 2001. In connection with the cash contribution and
binding, irrevocable commitment, the Bank incurred a contribution expense
of $4.5 million ($2.7 million on an after tax basis). See "Summary-- The
Troy Savings Bank Community Foundation." Excluding the $4.5 million
contribution expense, the Bank would have had the following performance
ratios for the fiscal year ended September 30, 1998:
Return on average assets........................ .27%
Return on average equity........................ 2.49
Efficiency ratio................................ 71.22
Operating expenses to
average assets ratio.......................... 2.88
(3) Net interest rate spread represents the difference between the tax
effected yield on average interest earning assets and the rate on average
interest bearing liabilities.
(4) Net interest rate margin represents the tax effected net interest income
as a percentage of average interest earning assets.
(5) The efficiency ratio represents operating expenses less OREO expense,
divided by recurring revenues, such as net interest income (on a tax
effected basis) and non-interest income, excluding gains and losses on
securities.
xiv
<PAGE> 18
RISK FACTORS
An investment in our Common Stock involves certain risks. To understand
these risks and to evaluate an investment in our Common Stock, you should read
this entire prospectus, including the following risk factors.
EARNINGS
As a new company without any significant business to date, we have not
yet had any earnings. The Bank, however, had an $878,000 net loss for fiscal
1998. For fiscal years 1997 and 1996, the Bank had net income of $3.7 million
and $5.1 million, respectively. The Bank's earnings in fiscal 1998 were
adversely affected by a contribution expense of $4.5 million related to the
Charitable Foundation. In fiscal 1999, we intend also to have additional
contribution expenses related to the contributions of Common Stock and the Music
Hall to the Community Foundation and Music Hall Foundation, respectively.
The Bank's earnings in 1998 and 1997 also were adversely affected by an
increase in its provisions for loan losses. The Bank's provisions for loan
losses in fiscal years 1998 and 1997 were $4.1 million and $3.9 million,
respectively, as compared to $928,000 for fiscal 1996. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations --
Results of Operations" beginning on page ____. As a result of the trends in the
Bank's loan portfolio, including the current level of nonperforming loans and
net charge-offs, as well as consideration of the general economic trends in the
Bank's market area, we anticipate that the provision for loan losses will
continue in the current range through at least fiscal 1999, although there can
be no assurance that the Bank's loan losses will not exceed its allowance for
loan losses or that its provisions will not increase in future periods.
The Bank's earnings are dependent largely on its net interest income,
which is the difference between the amount that the Bank receives from its
interest earning assets and the amount the Bank pays out on its interest bearing
liabilities. For fiscal years 1998, 1997 and 1996, the Bank had net interest
income (on a tax effected basis) of $24.9 million, $25.0 million and $23.8
million, respectively. This reflects an interest rate margin (on a tax effected
basis) of 3.84%, 3.96% and 3.90% for fiscal years 1998, 1997 and 1996,
respectively. There can be no assurance, however, that the Bank will be able to
maintain similar positive interest rate margins or that its interest rate
margins will not decrease in the future.
The Bank's earnings are also affected by its non-interest income and
non-interest expenses. For fiscal years 1998, 1997 and 1996, the Bank's
non-interest income was at $2.6 million, $2.7 million and $2.9 million,
respectively. In the future, the Bank expects to focus on increasing its
non-interest income through the generation of fee, trust and other non-interest
income, but there can be no assurance that the Bank will be able to do so or
that its non-interest income will not decrease in the future. The Bank's
non-interest expenses increased from $18.5 million in fiscal 1997 to $25.1
million in fiscal 1998. This increase was attributable primarily to an increase
of $4.7 million in contribution expense ($4.5 million of which was related to
the Bank's cash contribution and binding, irrevocable commitment to the
Charitable Foundation), an increase of $707,000 in other real estate owned
expense and an increase of $645,000 in compensation and employee benefits
expense.
Although the Bank intends to increase its asset size by leveraging its
capital through deposit growth and borrowings, and investing in additional
interest earning assets, there can be no assurances that the Bank will be able
to increase its source of funds significantly through deposits and borrowings at
favorable rates, or to increase its interest earning assets through loan
originations, purchases of securities or otherwise at a yield which represents a
positive spread over its cost of funds. Furthermore, there can be no assurance
that the Bank's operating expenses will not increase at a rate corresponding to
the Bank's growth in interest earning assets. In addition to customary annual
costs such as compensation and benefits, we anticipate additional expenses
related to our status as a public stock company. See "-- Potential Increased
Compensation Expense After the Conversion," "Management's Discussion and
Analysis of Financial Condition and Results of
1
<PAGE> 19
Operations," beginning on page __, and the Bank's Consolidated Financial
Statements beginning on page F-1.
POTENTIAL LOW RETURN ON EQUITY FOLLOWING THE CONVERSION; UNCERTAINTY AS TO
FUTURE GROWTH OPPORTUNITIES
At September 30, 1998, the Bank's ratio of equity to assets was 9.91%.
Our equity position will be significantly increased as a result of the
Conversion. On a pro forma basis as of September 30, 1998, assuming the net
proceeds from the sale of Common Stock at the maximum, and maximum plus 15%, of
the Estimated Price Range, our ratio of equity to assets would be 13.85% and
14.42%, respectively. Our ability to leverage this capital will be significantly
affected by industry competition for loans and deposits. We currently anticipate
that it will take time to deploy such capital prudently. As a result, our return
on equity is expected to be below the industry average after the Conversion and
until we can so deploy our capital.
POTENTIAL INCREASED COMPENSATION EXPENSE AFTER THE CONVERSION
All employers are required to record compensation expense in an amount
equal to the average fair value of shares committed to be released to employees
from an employee stock ownership plan. Therefore, if the shares of Common Stock
appreciate in value over time, then our compensation expense with respect to the
ESOP will increase over the cost of shares of Common Stock acquired by the ESOP.
At this time, it is impossible to determine the extent of such impact on future
earnings. See "Pro Forma Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Impact of Accounting
Pronouncements." In addition, after consummation of the Conversion, we intend to
implement, subject to stockholder approval (which approval cannot be obtained
earlier than six months subsequent to the Conversion), the MRP. Upon
implementation of the MRP, the award of shares of Common Stock from the MRP will
result in significant additional compensation expense. See "Pro Forma Data" and
"Management -- Benefits -- Management Recognition Plan."
INTEREST RATE SENSITIVITY
In the future, our earnings will depend, to a large extent, on the level
of our net interest income, which is the difference between interest income from
interest earning assets (such as loans, securities available for sale and
securities held to maturity) and interest expense on interest bearing
liabilities (such as deposits and borrowings). If interest rate changes cause
the Bank's cost of funds to increase faster than the yield of the Bank's
interest earning assets, then our net interest income would be reduced.
Generally, during extended periods when short term and long term interest rates
are relatively close (i.e. a flat yield curve), net interest margins could
become smaller, thereby reducing net interest income. At September 30, 1998, the
Bank's one-year interest rate sensitivity "gap" (the amount by which its
interest sensitive assets in a given period exceed its interest sensitive
liabilities for the same period, stated as a percentage of total assets) was
5.26%. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Management of Interest Rate Risk."
The Bank's interest rate risk management program (i) evaluates the
interest rate risk of balance sheet accounts, (ii) determines the level of risk
appropriate given the Bank's business strategy, operating environment, capital
and liquidity requirements and performance objectives and (iii) seeks to manage
the risk consistent with the Bank's guidelines which have been approved by its
Board of Directors. In recent years, the Bank has primarily utilized the
following strategies to manage interest rate risk: (i) emphasizing the
origination of adjustable rate loans, primarily commercial real estate loans, as
well as commercial business loans and consumer loans; (ii) selling substantially
all of its fixed rate residential mortgage loans in the secondary market; (iii)
utilizing Federal Home Loan Bank ("FHLB") advances to better structure the
maturities of its interest rate sensitive liabilities; and (iv) investing in
short-term securities which generally bear lower yields, compared to longer-term
investments, but which better position the Bank for increases in interest rates.
The Bank's Asset/Liability Management Committee ("ALCO") is responsible for
reviewing the
2
<PAGE> 20
Bank's asset/liability policies and interest rate risk position. The Bank's
ALCO, which is chaired by the Bank's chief financial officer, and includes the
Bank's President, Trust and Investment Officer and other members of the Bank's
senior management team, meets at least monthly and reports trends and interest
rate risk position to the Bank's Board of Directors on a quarterly basis. The
Bank, of course, cannot predict the future movement of interest rates, and such
movement could have an adverse impact on the Bank's consolidated financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Management of Interest Rate
Risk" beginning on page ____.
LENDING RISKS
The Bank's loan originations include primarily residential and commercial
real estate, commercial business and consumer loans. All loans involve some risk
that the borrower will fail to repay the balance or that the value of the
collateral securing the loan will not be sufficient to cover the loan balance
and related collection expenses. Moreover, each loan type involves certain risks
inherent in the nature of the specific loan type. For example, residential real
estate and consumer loans involve risk because changes in borrowers' incomes and
employment status' after funding of the loans may impact their abilities to
repay the loans. Likewise, commercial real estate loans involve risk because
repayment of such loans is dependent, in large part, on sufficient income from
the properties securing the loans to cover operating expenses and debt service.
Commercial business loans involve risk because repayment of such loans is
dependent in substantial part on the success of the commercial business.
General economic conditions, monetary policies of the federal government,
legislative tax policies, governmental budget matters and other events,
including environmental factors, beyond the Bank's or borrowers' control may
affect interest rates and market conditions which in turn may affect prepayment
and default rates, the demand for new loans and the underlying values and cash
flows of any collateral, especially real estate, securing the Bank's loans. In
addition, our net interest income may be affected by our increased interest rate
sensitivity that is caused by the Bank's loans being tied to the prime rate.
Furthermore, an economic recession over a prolonged period of time in the Bank's
market area would likely cause significant increases in non-performing assets,
thereby causing operating losses, impairing liquidity and eroding capital. See
"Business of The Troy Savings Bank --Lending Activities" beginning on page ___.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The "Year 2000" issue is the result of computer programs and equipment
which depend on "embedded chip" technology and software using two digits rather
than four digits to define the applicable year. For dates on or after January 1,
2000, software and hardware, including embedded processors may not be able to
recognize or process dates correctly. This could result in system failures or
miscalculations causing disruption of operations, including, among other things,
system or equipment shutdowns, malfunctions or a temporary inability to process
transactions or engage in normal business activities. In order to address the
Bank's particular Year 2000 issues, the Bank commenced a Year 2000 remediation
and compliance program (the "Y2K Project") which is managed by a project group
consisting of representatives from all business units and functional departments
within the Bank.
The Bank's Y2K Project is focused on testing and certifying Year 2000
compliant systems, and on obtaining Year 2000 readiness assurances from key
servicers, vendors, and significant credit customers. In the event that either
the Bank or its key servicers, vendors or significant credit customers are not
Year 2000 ready, then the Bank is prepared to utilize its contingency plans
which will include, among other things, operating certain core banking systems
off-site, all of which have already been tested and certified to be Year 2000
compliant. Failure of any of the Bank's critical systems, significant credit
customers, key servicers, or the public infrastructure may cause the Bank to
suffer serious consequences including, but not limited to, the inability of the
Bank to do normal business and service its customers. Despite the Bank's efforts
with respect to Year 2000 readiness, including its Y2K Project, there can be no
assurance that partial or total systems or business
3
<PAGE> 21
interruptions or the associated costs would not have a material adverse effect
upon the Bank's business, consolidated financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Year 2000 Compliance," beginning on page ____.
CONTRIBUTION TO THE COMMUNITY FOUNDATION
An important feature of the Conversion involves the contribution of newly
issued shares of Common Stock to the Community Foundation. In connection with
the Conversion, we intend to incorporate the Community Foundation under Delaware
law as a non-stock corporation. The Community Foundation will be operated by the
Bank's directors and will be dedicated to charitable purposes within our local
communities. The contribution of Common Stock to the Community Foundation as
part of the Conversion is intended to allow our local communities to share in
our potential growth and any profitability over the long-term. The contribution,
which is expected to occur immediately following the Conversion, will be newly
issued shares of Common Stock in an amount equal to 8% of the number of shares
of Common Stock sold in the Conversion (539,240, 634,400, 729,560 or 838,994
shares at the minimum, midpoint, maximum and maximum plus 15%, respectively, of
the Estimated Price Range). Such contribution, once made, will not be
recoverable by us or the Bank.
DILUTION OF STOCKHOLDERS' INTERESTS. Assuming the sale of shares at the
midpoint of the Estimated Price Range and the contribution of 634,400 shares to
the Community Foundation, we will have 8,564,400 shares issued and outstanding,
of which the Community Foundation will own 634,400 shares, or 7.4% of our Common
Stock. Due to the issuance of shares of Common Stock to the Community Foundation
immediately following the Conversion, purchasers of Common Stock in the
Conversion will have their ownership and voting interests diluted by 7.4%.
COMPARISON OF VALUATION ASSUMING THE COMMUNITY FOUNDATION IS NOT
ESTABLISHED. Based on the estimated pro forma market value of our Common Stock
(including the establishment of, and contribution of Common Stock to, the
Community Foundation) provided by FinPro, Inc., the amount of Common Stock we
are offering for sale in the Conversion, at the maximum plus 15% of the
Estimated Price Range, is approximately $17.5 million less than the estimated
amount of Common Stock that we would have offered in the Conversion without the
Community Foundation. Accordingly, in the event of an oversubscription, certain
account holders of the Bank who subscribe for Common Stock in the Subscription
Offering will receive fewer shares depending on the size of the account holder's
order, the amount of the account holder's qualifying deposits at the Bank and
the overall level of subscriptions than they would have received had the Company
not established and contributed Common Stock to the Community Foundation.
FinPro, Inc.'s estimate was prepared solely for purposes of providing Eligible
Account Holders, Supplemental Eligible Account Holders and other subscribers
with information with which to make an informed decision on the Conversion. The
decrease in the amount of Common Stock that we are offering as a result of the
contribution of Common Stock to the Community Foundation will not have a
significant effect on the Bank's or our capital position.
POTENTIAL ANTI-TAKEOVER EFFECT. Upon completion of the Conversion, the
Community Foundation will own 7.4% of the total number of shares of our
outstanding Common Stock. In connection with our intended establishment of the
Community Foundation in fiscal 1999, the FDIC and the New York Superintendent
have imposed the condition, which will be agreed to by the Community Foundation,
that the shares of Common Stock held by the Community Foundation must be voted
in the same proportion as all other shares of Common Stock on all proposals
considered by our stockholders. This voting requirement will be waived if it
would jeopardize the Community Foundation's tax-exempt status or result in a
prohibited transaction. If this condition is waived in the future, the Community
Foundation's Board of Directors, which is comprised of individuals who are
directors of the Bank, would exercise sole voting power over such shares. As a
result, if the Community Foundation's Board of Directors determines to vote the
shares of Common Stock held by the Community Foundation in favor of proposals
supported by our Board of Directors, it may
4
<PAGE> 22
increase the control of management. However, if the Community Foundation sells
its shares of Common Stock in the future, its ownership interest and voting
power in us may decrease.
IMPACT ON EARNINGS AND TAX CONSIDERATIONS. Our contribution of Common
Stock to the Community Foundation will also adversely impact our reported
earnings in the quarter and fiscal year in which the contribution is made, which
we expect to be the second quarter of fiscal 1999. This contribution expense is
expected to be partially reduced by a tax benefit related to the contribution.
Under the IRC, there is an annual charitable deduction limitation of 10% of our
annual (pre-contribution) taxable income. The non-deductible part of our
contribution expense, however, may be carried forward for five years, subject to
the annual 10% limitation. To the extent that our charitable deductions exceed
this 10% deduction limitation, based on estimated future taxable income, we
would not be able to recognize the full tax benefit associated with our
contributions. Given the levels of past and anticipated contributions (including
the contribution of Music Hall to the Music Hall Foundation) and estimates of
our future taxable income, we do not expect to recognize the entire tax benefit
associated with our contribution of Common Stock to the Community Foundation.
In fiscal 1998, the Bank established and contributed to the Charitable
Foundation $1.0 million in cash and entered into a binding, irrevocable
commitment to make a total of $4.0 million in scheduled payments to the
Charitable Foundation. The scheduled payments will occur in each of fiscal years
1999, 2000 and 2001. In connection with the Bank's cash contribution and future
binding commitment, the Bank recorded a contribution expense of $4.5 million,
which represents the $1.0 million cash contributed and the present value of the
$4.0 million in future scheduled contributions. In fiscal 1998, the Bank
recognized the entire tax benefit associated with this contribution expense.
Notwithstanding the tax benefit, the contribution expense contributed
significantly to the Bank's fiscal 1998 net loss of $878,000. If this
contribution expense had not been incurred in fiscal 1998, the Bank's net income
would have been approximately $1.8 million.
At this time, we estimate the tax benefit of the contributions of Common
Stock to the Community Foundation and the Music Hall to the Music Hall
Foundation to be between approximately $1.2 million (assuming contribution of
634,400 shares at the midpoint of the Estimate Price Range, a $10.00 per share
price and a combined tax rate of 35%) and $1.3 million (assuming contribution of
838,994 shares at the maximum plus 15% of the Estimated Price Range, a $10.00
per share price and a combined tax rate of 35%). If we were able to realize the
entire tax benefit on these contributions, then, under the same assumptions,
such tax benefit would range between $2.2 million and $2.5 million. In addition,
there can be no assurance that the Internal Revenue Service ("IRS") will
determine that the Charitable Foundation, the Community Foundation and the Music
Hall Foundation are tax-exempt charities under Section 501(c)(3) of the IRC. If
one or more of the foundations fails to qualify, we may not be able to deduct
some or all of our contributions, and our results of operations will be
adversely impacted.
COMPETITION
We face significant competition in the Bank's primary market area both in
attracting deposits and in originating loans. The Bank's six county market area
is a highly competitive market. The Bank's deposits represent 3.74% of the total
deposits in its market area. We also face direct competition from a significant
number of financial institutions operating in the market area, many of which
have a state-wide or regional presence, and, in some cases, a national presence.
This competition arises from commercial banks, savings banks, mortgage banking
companies, credit unions and other financial services providers, many of which
are significantly larger than us and, therefore, have greater financial and
marketing resources than we have. See "Business of The Troy Savings Bank --
Market Area."
ANTI-TAKEOVER PROVISIONS RESTRICTING THE ACQUISITION OF TROY FINANCIAL
CORPORATION
Provisions in Delaware and federal law and in our certificate of
incorporation may make it difficult and expensive for someone to pursue an
unwanted tender offer, change of control or takeover attempt. As a result,
stockholders who might desire to participate in such a transaction
5
<PAGE> 23
may not have the opportunity to do so. Such provisions will also make it
difficult to remove our current board of directors or management team or to
appoint new directors. Additional restrictions include: restrictions on the
acquisition of our equity securities and limitations on voting rights; the
classification of the terms of the members of the board of directors; certain
provisions relating to stockholder meetings; denial of cumulative voting in the
election of directors; the lack of preemptive rights; the issuance of serial
preferred stock without stockholder approval; and supermajority provisions for
the approval of certain business combinations. These provisions may reduce the
trading price of our stock.
In addition, the expected purchase of 406,000 shares of Common Stock by
the Bank's trustees and executive officers at the maximum of the Estimated Price
Range, and the potential acquisition of Common Stock through the Long-Term
Equity Compensation Plan could result in the Bank's current trustees and
executive officers having voting control of approximately 16.4% of our Common
Stock on a fully diluted basis, including the shares of Common Stock contributed
to the Community Foundation (or 23.1% if the FDIC and New York Superintendent
were to waive the Community Foundation's voting restrictions). Such control
could enable the trustees and executive officers to prevent or impede the
approval of certain transactions, including takeover attempts, that certain
stockholders may deem to be in their best interest.
The foregoing does not take into consideration additional shares of
Common Stock held by the ESOP. To the extent such shares are allocated to
employees, they may be voted by the employees. The ESOP trustee will vote
unallocated shares, and allocated shares as to which no instructions are
received in the same manner, on a proportionate basis, as the allocated shares
for which it receives instructions, subject to the requirements of its fiduciary
duties under ERISA.
Certain provisions in the proposed employment and employment protection
agreements and certain benefit programs that provide for cash payments or the
vesting of benefits upon a change of control may have an anti-takeover effect
and could result in stockholders receiving less for their shares of Common Stock
than otherwise might be available in the event of an acquisition of us. See
"Restrictions on Acquisition of Troy Financial Corporation --Restrictions in the
Company's Certificate of Incorporation and Bylaws -- Stockholder Vote Required
to Approve Business Combination with Interested Stockholders" and "Management of
the Bank -- Benefit Plans."
ABSENCE OF MARKET FOR COMMON STOCK
We are a new company, and therefore have never issued capital stock.
Consequently, there is not an existing market for our Common Stock. Although we
expect to have our Common Stock quoted on the Nasdaq Stock Market National
Market under the symbol "TROY" upon completion of the Conversion and compliance
with certain other criteria, there can be no assurance that an active and
liquid trading market for the Common Stock will develop or that, if developed,
will continue, nor can there be any assurance that stockholders will be able to
sell their shares at or above the price they paid for their shares. See "Market
for Common Stock" on page ___.
POSSIBLE ADVERSE INCOME TAX CONSEQUENCES OF THE DISTRIBUTION OF SUBSCRIPTION
RIGHTS
FinPro, Inc. has issued an opinion to us that subscription rights granted
to eligible depositors have no value. This opinion, however, is not binding on
the IRS. If the subscription rights are later deemed to have an ascertainable
value, then such recipients could be taxed upon receipt or exercise of such
subscription rights. Additionally, we may have to recognize a gain for tax
purposes on the distribution of the subscription rights. See "The Conversion --
Effects of Conversion" and "-- Tax Aspects."
POSSIBLE INCREASE IN NUMBER OF SHARES ISSUED
Prior to completion of the Conversion, if the appraised market value of
the Common Stock changes due to market or financial conditions, then, without
notice to you, we may be required to offer up to an additional 15% above the
maximum number of shares or 10,487,425 shares. If the
6
<PAGE> 24
number of shares is increased, then a subscriber's pro forma net income per
share and stockholders' equity per share will decrease and our pro forma
consolidated stockholders' equity and net income will increase.
TROY FINANCIAL CORPORATION
Troy Financial Corporation is a newly formed Delaware corporation that
will register with the Board of Governors of the Federal Reserve System
("Federal Reserve") as a bank holding company for the Bank. We have not engaged
in any significant business to date, and, in the future, our primary business
will be the business of the Bank. We are subject to regulation by the Federal
Reserve. Our executive offices are located at 32 Second Street, Troy, New York
12180, and our telephone number is (518) 270-3313.
THE TROY SAVINGS BANK
The Bank is a community oriented mutual savings bank headquartered in
Troy, New York. Originally chartered in 1823, the Bank offers full service
business and retail banking, and trust and investment services throughout the
six New York State Counties of Albany, Rensselaer (Troy), Saratoga, Schenectady,
Warren and Washington. The Bank's goal is to be the primary source of financial
products and services for its business and retail customers. The Bank's business
strategy is to serve as a community based, full service financial services firm
by offering a wide variety of business and retail banking products, as well as
trust, insurance, investment management and brokerage services to its potential
and existing customers throughout its market area. At September 30, 1998, the
Bank had total assets of $716.6 million, including $465.6 million of total
loans, total deposits of $578.2 million and equity of $71.0 million. The Bank is
subject to regulation, examination and supervision by the FDIC and the New York
Superintendent, and is a member of the Federal Home Loan Bank System. The Bank's
deposits are insured by the FDIC to the maximum extent provided by law. The
Bank's executive offices are located at 32 Second Street, Troy, New York 12180,
and its telephone number is (518) 270-3313.
USE OF PROCEEDS
Troy Financial Corporation estimates the net proceeds (after deduction of
expenses) from the sale of Common Stock in the Conversion to be between $65.6
million and $89.2 million depending upon the number of shares sold. If the
Estimated Price Range is increased by 15%, then the Company estimates the net
proceeds (after deduction of expenses) to be $102.7 million. The Company will
not be able to utilize any of the net proceeds until consummation of the
Conversion. The Company will use approximately 50% of the net proceeds to
purchase all of the capital stock of the Bank as part of the Conversion, and
based on anticipated net proceeds of $65.6 million to $89.2 million, the Company
expects to utilize between $32.8 million and $44.6 million for that purpose.
The Company intends to use a portion of the remainder of those net
proceeds to fund a loan directly to the ESOP to enable the ESOP to purchase in
the Conversion, or in the open market to the extent Common Stock is not
available to fill the ESOP's subscription, 8% of the Common Stock issued in
connection with the Conversion, including shares contributed to the Community
Foundation. Based upon the sale of 6,740,500 or 9,119,500 shares at the minimum
and maximum of the Estimated Price Range, respectively, and the contribution of
shares to the Community Foundation, the amount of the loan to the ESOP would be
$5.8 million or $7.9 million, respectively (or $9.1 million if the Estimated
Price Range is increased by 15%), with a term of 10-15 years at an interest rate
of ___%. If the MRP is established, the Company also may choose to fund the MRP
with cash to purchase shares of stock, although no determination has been made
in that regard. The Company will invest the remaining net proceeds in short-term
securities and deposit accounts, and otherwise use the net proceeds for general
corporate purposes. In that regard, the Company plans to establish or acquire a
commercial bank and trust company that can accept municipal deposits to
complement the Bank's municipal investment activities. The Company may also
consider acquisitions of other financial services firms and/or branch offices,
although at this time, the Company does not have any current arrangements,
understandings or agreements regarding any such transactions.
7
<PAGE> 25
The Bank will use the funds it receives from the Company in exchange for
all of its capital stock for the operation of its business, such as making loans
and purchasing securities. The additional funds in the Bank will also count as
regulatory capital and therefore will support future growth of the Bank's total
assets.
DIVIDEND POLICY
Upon completion of the Conversion, the Company's Board of Directors will
have the authority to declare dividends on the Common Stock, subject to certain
statutory and regulatory requirements. Following consummation of the Conversion,
the Board of Directors may consider a policy of paying cash dividends on the
Common Stock. However, no decision has been made as to the amount or timing of
such dividends. Declarations of dividends by the Board of Directors will depend
upon a number of factors, including the amount of net proceeds from the
Conversion retained by the Company, investment opportunities available to the
Company or the Bank, capital requirements, regulatory limitations, the Company's
and Bank's financial condition and results of operations, tax considerations and
general economic conditions. Consequently, there can be no assurance that
dividends will in fact be paid on the Common Stock or that, if paid, such
dividends will not be reduced or eliminated in future periods. Special cash
dividends, stock dividends or returns of capital may be paid in addition to, or
in lieu of, regular cash dividends.
Dividends from the Company will depend, in part, upon receipt of
dividends from the Bank because, initially, the Company will have no source of
funds other than dividends from the Bank and the net proceeds of the Conversion
retained by the Company and earnings thereon. Any payment of dividends by the
Bank to the Company, which would be deemed to be a distribution from the Bank's
bad debt reserves for federal income tax purposes, would require a payment of
taxes at the then-current tax rate by the Bank on the amount of earnings deemed
to be removed from the reserves for such distribution. The Bank has no current
intention of making any distribution that would create such a federal tax
liability either before or after the Conversion. See "Taxation."
Under the New York Banking Law, dividends may be declared and paid only
out of the net profits of the Bank. Under New York Banking Law, the term "net
profits" includes the remainder of all earnings from current operations plus
actual recoveries on loans and investments and other assets, after deducting
from the total thereof all current operating expenses, actual losses, accrued
dividends on preferred stock, if any, and all federal and state taxes. The
approval of the New York Superintendent is required if the total of all
dividends declared in any calendar year will exceed net profits for that year
plus the retained net profits of the preceding two years, less any required
transfer to surplus or a fund for the retirement of any preferred stock. In
addition, no dividends may be declared, credited or paid if the effect thereof
would cause the Bank's capital to be reduced below the amount required by the
New York Superintendent or the FDIC. For the two years ended September 30, 1998,
the Bank had net profits, less required transfers to surplus, of $2.8 million.
Subsequent to the Conversion, the availability of the Bank's funds for the
payment of dividends also may be limited by the liquidation account. See "The
Conversion -- Liquidation Rights."
Unlike the Bank, the Company is not subject to the New York Banking Law
restrictions on the payment of dividends to its stockholders, although the
source of such dividends will be, in part, dependent upon dividends from the
Bank in addition to the net proceeds retained by the Company and earnings
thereon. The Company is subject, however, to the requirements of Delaware law
which generally limit dividends to an amount equal to the excess of net assets
(the amount by which total assets exceed total liabilities) over statutory
capital, or if there is no such excess, to net profits for the current and/or
immediately preceding fiscal year. Likewise, the Company's ability to pay
dividends may also be restricted by minimum capital requirements imposed by the
Federal Reserve Capital guidelines. See "Regulation and Supervision."
8
<PAGE> 26
MARKET FOR THE COMMON STOCK
Troy Financial Corporation is a new company, having been formed in
December 1998, and therefore has never issued capital stock. Consequently, there
is not an existing market for the Common Stock. The Company, however,
anticipates having its Common Stock quoted on the Nasdaq Stock Market National
Market under the symbol "TROY" upon completion of the Conversion and compliance
with certain other criteria, including, among other things, the presence of at
least three registered market makers for the Common Stock. Sandler O'Neill has
agreed to act as a market maker for the Company's Common Stock following the
Conversion, and to assist in securing additional market makers to do the same.
A public trading market having the desirable characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of both
willing buyers and sellers of the Common Stock at any given time. Accordingly,
there can be no assurance that an active and liquid market for the Common Stock
will develop or be maintained or that resales of the Common Stock can be made
at or above the purchase price. See "The Conversion -- Number of Shares to be
Issued."
9
<PAGE> 27
REGULATORY CAPITAL COMPLIANCE
At September 30, 1998, the Bank exceeded all regulatory capital
requirements. See "Regulation and Supervision -- Federal Regulation of the Bank
- -- Capital Requirements." Set forth below is a summary of the Bank's compliance
with regulatory capital standards as of September 30, 1998, on a historical and
pro forma basis, assuming that the indicated number of shares were sold as of
such date at $10.00 per share, and using the assumptions contained under the
caption "Pro Forma Data," including receipt by the Bank of 50% of the net
proceeds from the Conversion.
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1998
---------------------------------------
MINIMUM MIDPOINT
HISTORICAL 6,740,500 SHARES 7,930,000 SHARES
------------------- ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
GAAP capital (1)............................... $ 71,029 9.91% $ 95,098 12.84% $ 99,444 13.35%
Leverage (Tier I) capital (2):
Leverage capital (3)......................... 70,114 9.89 94,183 12.85 98,529 13.36
Leverage capital requirement (4)............. 28,357 4.00 29,320 4.00 29,494 4.00
--------- ------ --------- ------ --------- ------
Excess....................................... 41,757 5.89 64,863 8.85 69,035 9.36
Tier I risk-based capital (3)................ 70,114 14.02 94,183 18.38 98,529 19.15
Tier I risk-based capital requirement (4).... 20,011 4.00 20,492 4.00 20,579 4.00
--------- ------ --------- ------ --------- ------
Excess....................................... 50,103 10.02 73,691 14.38 77,950 15.15
Risk-based capital (2):
Total risk-based capital (3)(5).............. 76,368 15.27 100,437 19.60 104,783 20.37
Total risk-based capital requirement......... 40,022 8.00 40,985 8.00 41,159 8.00
--------- ------ --------- ------ --------- ------
Excess....................................... 36,346 7.27 59,452 11.60 63,624 12.37
Total assets................................... 716,649 740,718 745,064
Adjusted assets (6)............................ 708,935 733,004 737,350
Risk-weighted assets........................... 500,274 512,309 514,482
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1998
----------------------------------------
ADJUSTED
MAXIMUM MAXIMUM
9,119,500 SHARES 10,487,425 SHARES
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C>
GAAP capital (1)............................... $ 103,791 13.85% $ 108,789 14.42%
Leverage (Tier I) capital (2):
Leverage capital (3)......................... 102,876 13.87 107,874 14.45
Leverage capital requirement (4)............. 29,668 4.00 29,868 4.00
---------- ------ ---------- ------
Excess....................................... 73,208 9.87 78,006 10.45
Tier I risk-based capital (3)................ 102,876 19.91 107,874 20.78
Tier I risk-based capital requirement (4).... 20,666 4.00 20,766 4.00
---------- ------ ---------- ------
Excess....................................... 82,210 15.91 87,108 16.78
Risk-based capital (2):
Total risk-based capital (3)(5).............. 109,130 21.12 114,128 21.98
Total risk-based capital requirement......... 41,332 8.00 41,532 8.00
---------- ------ ---------- ------
Excess....................................... 67,798 13.12 72,596 13.98
Total assets................................... 749,411 754,409
Adjusted assets (6)............................ 741,697 746,695
Risk-weighted assets........................... 516,655 519,154
</TABLE>
- -------------------
(1) Total equity as calculated under generally accepted accounting principles
("GAAP"), expressed as a percent of total assets.
(2) Leverage (Tier I) capital levels are shown as a percentage of total
adjusted quarterly average assets, and risk-based capital levels are
calculated on the basis of a percentage of risk-weighted assets, each as
defined in the FDIC regulations. See "Regulation and Supervision --
Federal Regulation of the Bank -- Capital Requirements."
(3) Pro forma capital levels assume receipt by the Bank of 50% of the net
proceeds from the shares of Common Stock sold at the minimum, midpoint,
maximum and maximum plus 15% of the Estimated Price Range. These levels
assume funding by the Bank of the MRP equal to 4% of the Common Stock
issued, including shares contributed to the Community Foundation, and
funding of the ESOP to enable the ESOP to purchase 8% of the Common Stock
issued, including the shares contributed to the Community Foundation,
valued at the minimum, midpoint, maximum and maximum plus 15% of the
Estimated Price Range.
(4) The current leverage capital requirement is 3% of total adjusted assets
for savings banks that receive the highest supervisory ratings for safety
and soundness and that are not experiencing or anticipating significant
growth. The current leverage capital ratio applicable to all other savings
bank is 4% to 5%. See "Regulation and Supervision -- Federal Regulation of
the Bank -- Capital Requirements."
(5) Assumes the net proceeds are invested in assets that carry a risk-
weighting of 50%.
(6) Adjusted assets is the Bank's fourth quarter of fiscal 1998 average assets
less its goodwill at September 30, 1998.
10
<PAGE> 28
CAPITALIZATION
The following table presents the historical capitalization of the
Bank at September 30, 1998, and the pro forma consolidated capitalization of the
Company at the minimum, the midpoint, the maximum and the maximum plus 15% of
the Estimated Price Range, after giving effect to the Conversion, including the
shares contributed to the Community Foundation, based upon the sale of the
number of shares indicated in the table at $10.00 per share and the other
assumptions set forth under "Pro Forma Data."
<TABLE>
<CAPTION>
10,487,425
6,740,500 7,930,000 9,119,500 SHARES
BANK SHARES SHARES SHARES (MAXIMUM,
HISTORICAL (MINIMUM) (MIDPOINT) (MAXIMUM) PLUS 15%)
---------- --------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits (1)................................... $ 578,202 $ 578,202 $ 578,202 $ 578,202 $ 578,202
=========== =========== =========== =========== ==========
Total deposits and borrowed funds.............. $ 625,666 $ 625,666 $ 625,666 $ 625,666 $ 625,666
=========== =========== =========== =========== ==========
Stockholders' equity:
Preferred Stock ($.0001 par value)
15,000,000 shares authorized;
none to be issued..................... $ -- $ -- $ -- $ -- $ --
Common Stock ($.0001 par value)
60,000,000 shares authorized;
shares to be issued as reflected(2)... -- 1 1 1 1
Additional paid-in-capital............... -- 71,001 83,729 96,456 111,092
Retained earnings (3).................... 70,622 70,622 70,622 70,622 70,622
Net unrealized gain on securities
available for sale, net of taxes...... 407 407 407 407 407
Less:
Expense of contribution
to Community Foundation (4)........... -- (5,392) (6,344) (7,296) (8,390)
Plus:
Estimated tax benefit of contribution
to Community Foundation (5)........... -- 1,000 1,100 1,150 1,225
Less:
Common Stock acquired by
the ESOP (6).......................... -- (5,824) (6,852) (7,879) (9,061)
Common Stock acquired
by the MRP (6)........................ -- (2,912) (3,426) (3,940) (4,531)
--------- ------------ ------------ ------------ -----------
Total Stockholders' Equity..................... $ 71,029 $ 128,903 $ 139,237 $ 149,521 $ 161,365
========= ============ ============ ============ ===========
</TABLE>
- ---------------
(1) No effect has been given to withdrawals from deposit accounts for the
purpose of purchasing Common Stock in the Conversion. Any such withdrawals
will reduce pro forma deposits by the amount of such withdrawals.
(2) Does not reflect the shares of Common Stock that may be reserved for
issuance pursuant to the Equity Compensation Plan and includes shares
contributed to the Community Foundation.
(3) See "Dividend Policy" and "Regulation and Supervision -- Federal
Regulation of the Bank -- Dividend Restrictions" regarding restrictions on
future dividend payments and "The Conversion -- Liquidation Rights"
regarding the liquidation account to be established upon Conversion.
(4) The amount of the contribution of Common Stock to the Community Foundation
will be recognized as an expense in the fiscal quarter in which the
contribution is made, which is expected to be the second quarter of fiscal
1999. No effect has been given to the Company's intended contribution of
the Music Hall to the Music Hall Foundation (the cost of such contribution
is estimated at $300,000) in fiscal 1999. See "The Conversion -- The Troy
Savings Bank Community Foundation."
(5) Represents the estimated tax benefit of the contribution of Common Stock
to the Community Foundation based on an assumed 35% tax rate and a $10.00
per share price. The recognition of the tax benefit is limited to 10% of
the Company's estimated taxable income in fiscal 1999 and during the
five-year carry forward period. See "Summary -- The Troy Savings Bank
Community Foundation" and "Risk Factors -- Contribution to the Community
Foundation -- Impact on Earnings and Tax Consideration."
(6) Assumes that 8% of the number of shares of Common Stock sold in the
Conversion, including the shares contributed to the Community Foundation,
will be purchased by the ESOP. The funds used to acquire the ESOP shares
will be borrowed from the Company. The Bank intends to make contributions
to the ESOP sufficient to service and ultimately retire the ESOP's debt
over a 10-15 year period. Also assumes that an amount of shares equal to
4% of the number of shares of Common Stock sold in the Conversion,
including the shares contributed to the Community Foundation, will be
acquired by the MRP following stockholder ratification of such plan after
completion of the Conversion. In the event that the MRP is funded by the
issuance of authorized but unissued shares in an amount equal to 4% of the
number of shares sold in the Conversion, the interest of existing
stockholders would be diluted by approximately 3.85%. At this time, no
decision has been made concerning the ultimate funding of the MRP. The
amount to be borrowed by the ESOP and the Common Stock acquired by the MRP
is reflected as a reduction of stockholders' equity. See "Management of
the Bank."
11
<PAGE> 29
PRO FORMA DATA
The actual net proceeds available for reinvestment from the sale of
the Common Stock cannot be determined until the Conversion is completed.
However, net proceeds available for investment are currently estimated to be
between $56.9 million and $77.3 million (or $89.1 million if the Estimated Price
Range is increased by 15%) based upon the following assumptions: (i) 100% of the
shares of Common Stock will be sold at the beginning of the period in the
Subscription Offering to Eligible Account Holders, Supplemental Eligible Account
Holders and the ESOP; (ii) Sandler O'Neill will receive a fee equal to 1.10% of
the aggregate purchase price of the shares sold in the Subscription Offering,
except that no fee will be paid with respect to an estimated 750,000 shares
purchased by the trustees, officers and other employees of the Bank and Company
and members of their immediate families, as well as the shares purchased by the
ESOP; (iii) Conversion expenses, excluding the marketing fees paid to Sandler
O'Neill, will be approximately $1.2 million; (iv) the Company will contribute to
the Community Foundation an amount of Common Stock equal to 8% of the number of
shares of Common Stock sold in the Conversion from authorized but unissued
shares; and (v) 50% of such net proceeds will be used by the Company to purchase
all of the capital stock of the Bank, and the remaining net proceeds were
retained by the Company. Pro forma consolidated net income of the Company for
the year ended September 30, 1998 has been calculated as if the Common Stock has
been sold at the beginning of the period and the net proceeds, less the proceeds
used to fund the ESOP loan and purchase the MRP shares, were invested by the
Bank and the Company at the beginning of the period. The assumed return is based
upon the market yield rate of one-year U.S. Government Treasury Securities as of
the end of the period indicated. Historical and pro forma per share amounts have
been calculated by dividing historical and pro forma amounts by the indicated
number of shares of Common Stock, as adjusted to give effect to the purchase of
shares by the ESOP and the MRP and the effect of the contribution of shares to
the Community Foundation. Pro forma stockholders' equity amounts have been
calculated as if the Common Stock had been sold at the beginning of the period,
and no effect has been given in the pro forma stockholders' equity calculations
for the assumed earnings on the net proceeds. The pro forma data does not
reflect the anticipated contribution of the Music Hall to the Music Hall
Foundation in fiscal 1999. The pro forma data also do not reflect the effect of
withdrawals from deposit accounts for the purchase of Common Stock by the Bank's
depositors.
The assumptions of net proceeds represent management's estimate as
to the distribution of stock orders in the Conversion. Although fixed expenses
are estimated to be $1.2 million, actual Conversion expenses may be more or less
than those estimated, and the total fees paid to Sandler O'Neill and other
brokers will vary depending upon the categories of purchasers, market conditions
and other factors.
The following pro forma data summarize historical data of the Bank
and pro forma data of the Company at or for the year ended September 30, 1998,
based on the assumptions set forth above and in the pro forma data and should
not be used as a basis for projections of market value of the Common Stock
following the Conversion. The pro forma data below give effect to the MRP under
the Equity Compensation Plan, which is expected to be adopted by the Company
following the Conversion and presented to stockholders for approval at a meeting
of stockholders to be held no earlier than six months after completion of the
Conversion. See Footnote 6 to the tables and "Management of the Bank -- Benefit
Plans." No effect has been given in the tables to the possible issuance of
additional shares under options pursuant to the Equity Compensation Plan, nor
does stockholders' equity as presented give any effect to the liquidation
account to be established for the benefit of Eligible Account Holders and
Supplemental Eligible Account Holders or, in the event of liquidation of the
Bank, to the possible recapture of the base year tax bad debt reserve and other
factors. See Footnote 9 to the tables below and "The Conversion -- Liquidation
Rights" and "Management of the Bank -- Benefit Plans." The total number of
shares to be issued in the Conversion may be increased or decreased
significantly, or the price per share decreased, to reflect changes in market or
financial conditions prior to completion of the Conversion. However, if the
gross proceeds of the Common Stock sold in the Conversion is below $67.4 million
(the minimum of the Estimated Price Range) or more than $104.9 million (the
maximum plus 15% of the Estimated Price Range), subscribers will be offered the
opportunity to modify or cancel their subscriptions. See "The Conversion --
Number of Shares to be Issued."
12
<PAGE> 30
<TABLE>
<CAPTION>
At and For the Year Ended September 30, 1998
-------------------------------------------------------------------
Maximum
Minimum Midpoint Maximum Plus 15%
6,740,500 7,930,000 9,119,500 10,487,425
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 per $10.00 per $10.00 per $10.00 per
Share Share Share Share
-------------------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Gross proceeds............................................... $ 67,405 $ 79,300 $ 91,195 $ 104,874
Plus: Shares contributed to Community Foundation (1)...... 5,392 6,344 7,296 8,390
------------ ----------- --------------- -------------
Pro forma market capitalization.............................. $ 72,797 $ 85,644 $ 98,491 $ 113,264
============ ============ =============== =============
Gross proceeds............................................... $ 67,405 $ 79,300 $ 91,195 $ 104,874
Less: Estimated expenses.................................. (1,795) (1,914) (2,034) (2,171)
------------ ------------ --------------- -------------
Estimated net conversion proceeds............................ 65,610 77,386 89,161 102,703
Less: ESOP shares (5)..................................... (5,824) (6,852) (7,879) (9,061)
Less: MRP shares (6)...................................... (2,912) (3,426) (3,940) (4,531)
------------ ------------ --------------- -------------
Estimated proceeds available for investment (2).............. $ 56,874 $ 67,108 $ 77,342 $ 89,111
============ ============ =============== =============
Net income:
Historical................................................. $ (878) $ (878) $ (878) $ (878)
Historical, as adjusted (3)................................ 1,822 1,822 1,822 1,822
Pro forma adjustments:
Net earnings from proceeds (4)............................. 1,587 1,872 2,158 2,486
ESOP, after taxes (5)...................................... (379) (445) (512) (589)
MRP, after taxes (6)....................................... (379) (445) (512) (589)
------------ ------------ --------------- -------------
Pro forma net income (1)(6).............................. $ (49) $ 104 $ 256 $ 430
============ ============ =============== =============
Pro forma net income, as adjusted (3).................... $ 2,651 $ 2,804 $ 2,956 $ 3,130
============ ============ =============== =============
Per share net income (7):
Historical ................................................ $ (0.13) $ (0.11) $ (0.10) $ (0.08)
Historical, as adjusted (3)................................ 0.27 0.23 0.20 0.17
Pro forma adjustments:
Net earnings from proceeds(4).............................. 0.24 0.24 0.24 0.24
ESOP, after taxes (5)...................................... (0.06) (0.06) (0.06) (0.06)
MRP, after taxes (6)....................................... (0.06) (0.06) (0.06) (0.06)
------------ ------------ --------------- -------------
Pro forma net income per share (5)(6)(8)................. $ (0.01) $ 0.01 $ 0.02 $ 0.04
============ ============ =============== =============
Pro forma net income per share, as adjusted (3)(5)(6)(8). $ 0.39 $ 0.35 $ 0.32 $ 0.29
============ ============ =============== =============
Stockholders' equity (9):
Historical............................................. $ 71,029 $ 71,029 $ 71,029 $ 71,029
Pro forma adjustments:
Estimated net conversion proceeds...................... 65,610 77,386 89,161 102,703
Plus: Shares issued to Community Foundation............ 5,392 6,344 7,296 8,390
Less: Cost of contribution to Community
Foundation, net of estimated tax benefit (10)....... (4,392) (5,244) (6,146) (7,165)
Less common stock acquired by:
ESOP (5)............................................... (5,824) (6,852) (7,879) (9,061)
MRP (6)................................................ (2,912) (3,426) (3,940) (4,531)
------------ ------------ --------------- -------------
Pro forma stockholders' equity (8)........................ $ 128,903 $ 139,237 $ 149,521 $ 161,365
============ ============ =============== =============
Per share stockholders' equity (7)(9):
Historical............................................. $ 9.76 $ 8.29 $ 7.21 $ 6.27
Pro forma adjustments:
Estimated net conversion proceeds................... 9.01 9.04 9.05 9.07
Plus: Shares issued to Community Foundation......... 0.74 0.74 0.74 0.74
Less: Cost of contribution to Community
Foundation, net of estimated tax benefit (10).... (0.60) (0.61) (0.62) (0.63)
ESOP (5)............................................ (0.80) (0.80) (0.80) (0.80)
MRP (6)............................................. (0.40) (0.40) (0.40) (0.40)
------------ ------------ --------------- -------------
Pro forma stockholders' equity per share (6)(8)............ $ 17.71 $ 16.26 $ 15.18 $ 14.25
=========== =========== ============== ============
Offering price to pro forma net income per share
(historical base)......................................... NM NM NM NM
Offering price to pro forma net income per share,
as adjusted............................................... 25.64 28.63 31.31 34.09
Pro forma offering price per share
to stockholders' equity per share (6)(8).................. 56.47% 61.50% 65.88% 70.18%
</TABLE>
- --------------------
NM -- Not meaningful (See footnotes on next page)
13
<PAGE> 31
(1) The Company intends to contribute an additional 8% of the number of
shares of Common Stock sold in the Conversion to the Community
Foundation following completion of the Conversion. See "The Conversion
--Establishment of the Community Foundation." The contributed shares
will not add to gross proceeds because nominal consideration will be
received by the Company for those shares. However, since such shares
are issued and outstanding, they are included in the Company's market
capitalization. The amount of the contribution will be recognized as
an expense in the quarter in which the contribution is made to the
Community Foundation, which is expected to be the second quarter of
fiscal 1999. The pro forma net income data does not reflect such
non-recurring expense.
(2) Reflects a reduction to net proceeds for the cost of the ESOP and the
MRP (assuming stockholder ratification of the MRP is received) which
it is assumed will be funded from the net proceeds retained by the
Company.
(3) Historical net income, as adjusted, historical net income per share,
as adjusted, pro forma net income, as adjusted, and pro forma net
income per share, as adjusted, eliminate the impact of the Company's
one-time recognition of the $2.7 million contribution expense, net of
taxes, in fiscal 1998. See "Summary -- The Troy Savings Bank Community
Foundation." After adjustment to eliminate this $2.7 million
contribution expense, the Bank had adjusted historical net income of
$1.8 million. The per share amounts vary according to the amount of
Common Stock sold by the Company in the Conversion.
(4) The pro forma after-tax yield on the net proceeds for the Company and
the Bank is assumed to be 2.789%, assuming a combined federal and
state income tax rate of 35%.
(5) It is assumed that: (i) 8% of the number of shares of Common Stock
sold in Conversion, including shares contributed to the Community
Foundation, will be purchased by the ESOP; (ii) the funds used to
acquire such shares will be borrowed by the ESOP from the net
Conversion proceeds retained by the Company; (iii) the Bank intends to
make contributions to the ESOP in amounts at least equal to the
principal and interest requirement of the debt; and (iv) payment of
the ESOP debt is based upon equal installments of principal and
interest over a 10 year period. Assuming the Company makes the ESOP
loan, however, interest income earned by the Company on the ESOP debt
will offset the interest expense for ESOP contributions paid by the
Bank. Accordingly, the compensation expense to the Company on a
consolidated basis will be related to the allocations of earned ESOP
shares which will be based on the number of shares committed to be
released to participants for the year at the average market value of
the shares during the year, net of the related tax effects. The amount
of ESOP debt is reflected as a reduction of stockholders' equity. In
the event that the ESOP were to receive a loan from an independent
third party, both ESOP expense and earnings on the net Conversion
proceeds retained by the Company would be expected to increase. The
ESOP expense has been calculated assuming no appreciation in the fair
market value of the stock.
(6) Adjustments to both stockholders' equity and net income have been made
to give effect to an open market purchase (based upon an assumed
purchase price of $10.00 per share) following Conversion by the trust
under the MRP (assuming stockholders ratify the Equity Compensation
Plan and the MRP is funded with cash to purchase shares of Common
Stock) of an amount of shares equal to 4% of the number of shares of
Common Stock sold in the Conversion, including the shares contributed
to the Community Foundation, for the benefit of certain directors,
officers and employees. It is assumed that the sale of the shares to
the trust under the MRP occurred at the beginning of the period. If
funds are used by the trust under the MRP to purchase the shares, such
funds will be contributed by the Company if stockholders ratify the
Equity Compensation Plan following the Conversion. Therefore, this
funding is assumed to reduce the proceeds available for reinvestment.
For financial accounting purposes, the fair value of the MRP shares at
the grant date will be recorded as a compensation expense over the
period of the vesting. Grants of shares under the MRP are assumed to
vest in equal annual installments over the five years following
stockholder ratification. However, recipients who fail to maintain
continuous service with the Company or its subsidiaries will forfeit
unvested shares. Alternatively, the MRP may issue authorized but
unissued shares of Common Stock from the Company. No determination has
been made at this time concerning how the Company will fund the MRP.
Such funding may be from
14
<PAGE> 32
unauthorized, but unissued shares of Common Stock. In the event that
MRP grants are made from authorized but unissued shares in an amount
equal to 4% of the number of shares of Common Stock sold in the
Conversion, including the shares contributed to the Community
Foundation, the interests of existing stockholders would be diluted
by approximately 3.85%. In that case and assuming all MRP shares are
outstanding, for the year ended September 30, 1998, pro forma net
income per share would be $0.00, $0.02, $0.04 and $0.05 and pro forma
stockholders' equity per share would be $17.03, $15.63, $14.60 and
$13.70 in each case at the minimum, midpoint, maximum and maximum
plus 15% of the Estimated Price Range, respectively.
(7) Per share amounts have been computed as if the shares of Common Stock
indicated had been outstanding at the beginning of the period shown.
All per share data also assumes that the shares of Common Stock
contributed to the Community Foundation and the MRP shares are
outstanding. Pursuant to SOP 93-6, only the ESOP shares committed to
be released are considered outstanding for the purposes of the net
income per share calculations. However, all ESOP shares have been
considered outstanding for purposes of computing stockholders' equity
per share.
(8) No effect has been given to the shares to be reserved for issuance
pursuant to options under the proposed Equity Compensation Plan which
is expected to be adopted by the Company following the Conversion,
subject to stockholder approval. In the event authorized but unissued
shares in an amount equal to 10% of the number of shares of Common
Stock sold in the Conversion, including the shares contributed to the
Community Foundation, are covered by options granted under the Equity
Compensation Plan, at $10.00 per share, the interests of existing
stockholders would be diluted as follows: pro forma net income per
share for the year ended September 30, 1998, would be ($0.01), $0.01,
$0.03 and $0.04, and pro forma stockholders' equity per share would be
$17.01, $15.69, $14.71 and $13.86 in each case at the minimum,
midpoint, maximum and maximum plus 15% of the Estimated Price Range,
respectively. The Company may purchase shares in the open market for
the Equity Compensation Plan following stockholder approval of such
plan. To the extent the entire 10% of the shares to be reserved for
issuance under the Equity Compensation Plan are obtained through open
market purchases at a price of $10.00 per share, proceeds available
for reinvestment in the above calculations would be reduced by $7.3
million, $8.6 million, $9.8 million and $11.3 million at the minimum,
midpoint, maximum and maximum plus 15% of the Estimated Price Range,
respectively. No determination has been made at this time concerning
how the Company will supply shares for issuance under the Equity
Compensation Plan. See "Management of the Bank -- Benefit Plans."
(9) Stockholders equity represents the difference between the stated
amounts of the Bank's assets (generally based on historical cost) and
liabilities computed in accordance with generally accepted accounting
principles. The amounts shown do not reflect the effect of the
Liquidation Account which will be established for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in
the Conversion, or the federal income tax consequences of the
recapture of the Bank's bad debt reserves for income tax purposes
which would be required in the unlikely event of liquidation. See "The
Conversion -- Liquidation Rights" and "Regulation and Supervision" and
"Taxation." The amounts shown for stockholders' equity do not
represent fair market values or amounts, if any, distributable to
stockholders in the unlikely event of liquidation.
(10) The Company will recognize as an expense the amount of its
contribution of Common Stock to the Community Foundation in the fiscal
quarter in which such contribution is made, which is expected to be
the second quarter of fiscal 1999. To the extent that the value of
such contribution exceeds 10% of the Company's estimated taxable
income in fiscal 1999 and during the five-year carry forward period,
the Company would not be entitled to recognize a tax benefit. The
figures shown reflect the estimated tax benefit that is anticipated to
be realized by the Company because of such contribution, based upon
anticipated future taxable income, and assuming a 35% tax rate and a
$10.00 per share price.
15
<PAGE> 33
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH NO CONTRIBUTION TO THE COMMUNITY FOUNDATION
If the Company does not contribute Common Stock to the Community
Foundation, FinPro, Inc. has estimated that the amount of Common Stock offered
for sale in the Conversion would increase by approximately 1.32 million shares
at the midpoint of the Estimated Price Range. Under such circumstances, pro
forma stockholders' equity of the Company would be approximately $150.4 million,
at the midpoint, which is approximately $11.1 million greater than what the pro
forma stockholders' equity of the Company would be if the contribution to the
Community Foundation is made. In preparing this estimate, it has been assumed
that the pro forma offering price to pro forma stockholders' equity ratio and
pro forma offering price to pro forma net income per share ratio, as adjusted,
would be approximately the same under both the current appraisal and the
estimate of the value of the Company without the contribution at the midpoint of
the Estimated Price Range. Further, assuming the midpoint of the Estimated Price
Range, pro forma stockholders' equity and pro forma net income per share, as
adjusted, at and for the period ended September 30, 1998, would be $16.26 and
$0.36, respectively, at the midpoint of the Estimated Price Range, assuming no
contribution to the Community Foundation, and $16.26 and $0.35, respectively,
with the contribution to the Community Foundation. The pro forma offering price
to pro forma stockholders' equity ratio and the pro forma offering price to pro
forma net income per share ratio, as adjusted, at and for the period ended
September 30, 1998 are 62% and 28x, respectively, at the midpoint of the
Estimated Price Range, assuming no contribution and are 62% and 29x,
respectively, with the contribution. The adjusted figures eliminate the impact
of the Company's one-time recognition of the $2.7 million contribution expense,
net of taxes, in fiscal 1998. There is no assurance that in the event the
contribution to the Community Foundation is not made that the appraisal prepared
at that time would conclude that the pro forma market value of the Company would
be the same as that estimated herein.
16
<PAGE> 34
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum plus 15% of the Estimated Price Range, respectively, based on the
assumptions set forth in "Pro Forma Data".
<TABLE>
<CAPTION>
At the Minimum At the Midpoint
--------------------------- --------------------------
With the Without the With the Without the
Community Community Community Community
Foundation Foundation Foundation Foundation
(6,740,500 (7,862,500 (7,930,000 (9,250,000
Shares) Shares) Shares) Shares)
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Estimated offering amount......................... $ 67,405 $ 78,625 $ 79,300 $ 92,500
Pro forma market capitalization................... 72,797 78,625 85,644 92,500
Total assets...................................... 774,523 783,926 784,857 795,995
Total liabilities................................. 645,620 645,620 645,620 645,620
Pro forma stockholders' equity.................... 128,903 138,306 139,237 150,375
Pro forma consolidated net income................. (49) 181 104 374
Pro forma consolidated net income, as adjusted.... 2,651 2,881 2,804 3,074
Pro forma stockholders' equity per share.......... 17.71 17.59 16.26 16.26
Pro forma consolidated net income per share....... (0.01) 0.02 0.01 0.04
Pro forma consolidated net income per share,
as adjusted.................................... 0.39 0.39 0.35 0.36
Pro Forma Pricing Ratios:
Offering price as a percent of pro forma
stockholders' equity per share................ 56.47% 56.85% 61.50% 61.50%
Offering price to pro forma
net income per share.......................... NM NM NM NM
Offering price to pro forma
net income per share, as adjusted............. 26.34 25.33 28.63 27.92
Pro forma market capitalization to assets....... 9.40% 10.03% 10.91% 11.62%
Pro Forma Financial Ratios:
Return (loss) on assets......................... (0.01)% 0.02% 0.01% 0.05%
Return (loss) on assets, as adjusted............ 0.34% 0.37% 0.36% 0.39%
Return (loss) on stockholders' equity........... (0.04)% 0.13% 0.07% 0.25%
Return on stockholders' equity, as adjusted..... 2.06% 2.08% 2.01% 2.04%
Stockholders' equity to assets.................. 16.64% 17.64% 17.74% 18.89%
</TABLE>
<TABLE>
<CAPTION>
At the Maximum At the Maximum Plus 15%
--------------------------- ---------------------------
With the Without the With the Without the
Community Community Community Community
Foundation Foundation Foundation Foundation
(9,119,500 (10,637,500 (10,487,425 (12,233,125
Shares) Shares) Shares) Shares)
---------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Estimated offering amount......................... $ 91,195 $ 106,375 $ 104,874 $ 122,331
Pro forma market capitalization................... 98,491 106,375 113,264 122,331
Total assets...................................... 795,141 808,065 806,985 821,946
Total liabilities................................. 645,620 645,620 645,620 645,620
Pro forma stockholders' equity.................... 149,521 162,445 161,365 176,326
Pro forma consolidated net income................. 256 567 430 788
Pro forma consolidated net income, as adjusted.... 2,956 3,267 3,130 3,488
Pro forma stockholders' equity per share.......... 15.18 15.27 14.25 14.42
Pro forma consolidated net income per share....... 0.02 0.05 0.04 0.06
Pro forma consolidated net income per share
as adjusted.................................... 0.32 0.33 0.29 0.31
Pro Forma Pricing Ratios:
Offering price as a percent of pro forma
stockholders' equity per share................ 65.88% 65.49% 70.18% 69.35%
Offering price to pro forma
net income per share.......................... NM NM NM NM
Offering price to pro forma
net income per share, as adjusted............. 31.31x 30.22x 34.09x 32.55x
Pro forma market capitalization to assets....... 12.39% 13.16% 14.04% 14.88%
Pro Forma Financial Ratios:
Return on assets................................ 0.03% 0.07% 0.05% 0.10%
Return on assets, as adjusted................... 0.37% 0.40% 0.39% 0.42%
Return on stockholders' equity.................. 0.17% 0.35% 0.27% 0.45%
Return on stockholders' equity, as adjusted..... 1.98% 2.01% 1.94% 1.98%
Stockholders' equity to assets.................. 18.80% 20.10% 20.00% 21.45%
</TABLE>
- --------------
NM -- Not Meaningful
17
<PAGE> 35
THE TROY SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of the Bank for each
of the years in the three-year period ended September 30, 1998 have been audited
by KPMG Peat Marwick LLP, independent public accountants, whose report thereon
appears on page F-2 of this Prospectus. These statements should be read in
conjunction with the other financial statements and notes thereto beginning on
page F-1 of this Prospectus.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 38,842 39,050 36,413
Securities available for sale:
Taxable 4,121 7,262 8,521
Tax exempt 2,214 119 -
------------ --------------- -----------
6,335 7,381 8,521
Investment securities 300 353 410
Federal funds sold 2,553 1,503 1,518
------------ --------------- ------------
Total interest and dividend income 48,030 48,287 46,862
------------ --------------- ------------
Interest expense:
Deposits and escrows 23,339 22,812 22,557
Short-term borrowings 33 271 230
Long-term debt 821 268 230
------------ --------------- ------------
Total interest expense 24,193 23,351 23,017
------------ --------------- ------------
Net interest income 23,837 24,936 23,845
Provision for loan losses 4,050 3,900 928
------------ --------------- ------------
Net interest income after provision for loan losses 19,787 21,036 22,917
------------ --------------- ------------
Non-interest income:
Service charges on deposits 858 822 802
Loan servicing fees 432 460 443
Trust income 459 362 293
Net gains from securities sales or calls 8 4 1
Net gains (losses) from mortgage loan sales 76 14 (14)
Other income 719 1,075 1,340
------------ --------------- ------------
Total non-interest income 2,552 2,737 2,865
------------ --------------- ------------
Non-interest expense:
Compensation and employee benefits 10,218 9,573 9,009
Occupancy 2,101 2,089 1,956
Furniture, fixtures and equipment 1,080 901 961
Computer charges 1,424 1,322 1,248
Professional, legal and other fees 924 726 658
Printing, postage and telephone 614 559 543
Other real estate owned 1,087 380 499
Contribution expense 4,759 102 479
Other 2,884 2,887 2,845
------------ --------------- ------------
Total non-interest expense 25,091 18,539 18,198
------------ --------------- ------------
Income (loss) before income tax expense (benefit) (2,752) 5,234 7,584
Income tax expense (benefit) (1,874) 1,576 2,506
------------ --------------- ------------
Net income (loss) $ (878) 3,658 5,078
============ =============== ============
</TABLE>
18
<PAGE> 36
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Troy Financial Corporation has not engaged in any significant
business to date. The Company was established in December 1998 as a Delaware
corporation to be the bank holding company for The Troy Savings Bank upon the
Conversion. In the future, the Company's primary business will be the business
of the Bank. The following discussion focuses on the factors affecting the
consolidated financial condition and results of operations of the Bank as of
September 30, 1998 and for the years ended September 30, 1998 and 1997. Net
interest income and net interest margin are presented on a fully taxable
equivalent basis. The consolidated financial statements and related notes should
be read in conjunction with this discussion.
MANAGEMENT STRATEGY
The Bank's business strategy is to serve as a community based, full
service financial services firm by offering a wide variety of business and
retail banking products, and trust, insurance and investment services to its
potential and existing customers throughout its six county market area. In the
future, the Company intends to establish or acquire a commercial bank and trust
company that can accept municipal deposits to complement the Bank's municipal
investment activities. In addition, the Bank may also open new branches to
better serve its existing customers and to increase its market share, especially
in those areas in which the Bank originates residential mortgage loans. The Bank
believes that its relationships to its communities and its operation as a full
service community bank distinguish it from its competitors and provide it with a
competitive advantage.
Historically, the Bank has operated as a traditional thrift by
making residential mortgage loans and taking customers' deposits. In recent
years, the Bank has emphasized more commercial banking strategies including the
origination of commercial real estate loans and, to a lesser but increasing
extent, commercial business and consumer loans in its market area. In addition
to its lending program, the Bank also purchases securities, including U.S.
government securities and agency obligations. The Bank's primary sources of
funds are deposits and borrowings. The Bank seeks to continue to manage its
growth strategy, emphasizing asset quality and maintenance of favorable interest
rate margins. See "Business of The Troy Savings Bank."
MANAGEMENT OF INTEREST RATE RISK
Interest rate risk is the most significant market risk affecting the
Bank. 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 Bank'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 Bank's net
interest income. Interest rate risk arises naturally from the imbalance in the
repricing, maturity and/or cash flow characteristics of assets and liabilities.
A significant portion of the Bank's loans are adjustable or variable
rate which could result in reduced levels of interest income during periods of
falling rates. For example, in periods of falling interest rates, prepayments of
loans typically increase, which would lead to reduced net interest income if
such proceeds could not be reinvested at a comparable spread. Also in a falling
rate environment, certain categories of deposits may reach a point where market
forces prevent further reduction in the interest rate paid on those instruments.
Generally, during extended periods when short term and long term interest rates
are relatively close (i.e. a flat yield curve), net interest margins could
become smaller, thereby reducing net interest income. The net effect of these
circumstances is reduced interest income, offset only by a nominal decrease in
interest expense, thereby narrowing the net interest margin.
19
<PAGE> 37
The principal objectives of the Bank's interest rate risk management
program are to (i) measure, monitor, evaluate and develop strategies in response
to the interest rate risk profile inherent in the Bank's consolidated balance
sheet accounts, (ii) determine the appropriate level of risk given the Bank's
business strategy, operating environment, capital and liquidity requirements,
and performance objectives and (iii) manage the risk consistent with the Bank's
guidelines. Through such management, the Bank seeks to reduce the vulnerability
of its operations to changes in interest rates by matching the maturities of the
Bank's assets with those of the Bank's liabilities and off-balance sheet
financial instruments.
The responsibility for balance sheet risk management oversight is
the function of the Bank's ALCO. The Bank's ALCO reviews the Bank's
asset/liability policies and interest rate risk position. The Bank's ALCO is
chaired by the Bank's chief financial officer, and includes the Bank's
President, Trust and Investment Officer and other members of the Bank's senior
management team. The ALCO meets at least monthly to review consolidated balance
sheet structure, formulate strategy in light of expected economic conditions and
review performance against guidelines established to control exposure to the
various types of inherent risk, and reports the Bank's interest rate risk
position to the Bank's Board of Directors on a quarterly basis. The Bank's Asset
Liability Management Policy, which is approved annually by the Bank's Board of
Directors, establishes interest rate risk limits in terms of variability of net
interest income under rising, flat and decreasing rate scenarios. The ALCO
evaluates the overall risk profile and determines actions to maintain and
achieve a posture consistent with policy guidelines. The Bank, of course, cannot
predict the future movement of interest rates, and such movement could have an
adverse impact on the Bank's consolidated financial condition and results of
operations.
In recent years, the Bank has primarily utilized the following
strategies to manage interest rate risk: (i) emphasizing the origination of
adjustable rate residential mortgage loans, and to a lesser extent commercial
real estate, commercial business and consumer loans; (ii) selling substantially
all of its fixed rate residential mortgage loans in the secondary market; (iii)
utilizing FHLB advances to better structure the maturities of its interest rate
sensitive liabilities; and (iv) investing in short-term securities which
generally bear lower yields, compared to longer-term investments, but which
better position the Bank for increases in interest rates. In addition, although
the Bank has generally sold all of its 15- and 30-year conforming fixed rate
mortgage loans into the secondary mortgage market, beginning in late fiscal
1998, the Bank determined to hold in its loan portfolio substantially all of its
15-year fixed rate mortgage loans.
GAP ANALYSIS. The matching of assets and liabilities may be analyzed
by examining the extent to which such assets and liabilities are interest rate
sensitive and by monitoring an institution's interest rate sensitivity "gap." An
asset or liability is said to be interest rate sensitive within a specific time
period if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest
earning assets maturing or repricing within a specific time period and the
amount of interest bearing liabilities maturing or repricing within that same
time period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Accordingly,
during a period of rising interest rates, a negative gap would tend to affect
net interest income adversely. Conversely, during a period of falling interest
rates, a negative gap position would tend to result in an increase in net
interest income.
The following table ("Gap table") sets forth the amounts of interest
earning assets and interest bearing liabilities, which are outstanding as of
September 30, 1998, and which are anticipated by the Bank, based on certain
assumptions, to reprice or mature in each of the future time periods shown.
Except as stated below, the amount of assets and liabilities shown which reprice
or mature during a particular period were determined based on the earlier of
term to repricing or the term to repayment of the asset or liability. The Gap
table is intended to provide an approximation of the projected repricing of
assets and liabilities at September 30, 1998 on the basis of contractual
maturities, anticipated prepayments of loans and scheduled rate adjustments
within a three-month
20
<PAGE> 38
period and subsequent selected time intervals. The loan amounts in the Gap
table reflect principal balances expected to be reinvested and/or repriced as a
result of contractual amortization and anticipated early payoffs of adjustable
rate loans and fixed rate loans, and as a result of contractual rate
adjustments on adjustable rate loans. For residential mortgage loans, projected
prepayment rates were assumed to range from 6% to 15% annually. NOW and Super
NOW accounts are assumed to decay 60% in the three months or less category and
40% in the more than one year to three years category. Money market accounts
are all included in the three months or less category. Savings accounts are
assumed to decay at 6.25%, 6.25%, 12.5%, 50% and 25% for the periods of three
months or less, three months to six months, six to twelve months, one to three
years, and three to five years, respectively. Prepayment and deposit decay
rates can have a significant impact on the Bank's estimated gap. While
management believes such assumptions to be reasonable, there can be no
assurance that assumed prepayment rates and decay rates will approximate actual
future loan repayment and deposit withdrawal activity. See "Business of The
Troy Savings Bank -- Lending Activities," "Business of The Troy Savings Bank --
Securities" and "Business of The Troy Savings Bank -- Sources of Funds."
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
------------------------------------------------------------------------------------------------
MORE MORE MORE
MORE MORE THAN THAN THAN
THAN THREE THAN SIX ONE THREE FIVE
THREE MONTHS MONTHS YEAR YEARS YEARS MORE
MONTHS TO SIX TO ONE TO THREE TO FIVE TO 10 THAN 10
OR LESS MONTHS YEAR YEARS YEARS YEARS YEARS TOTAL
------- ------ ---- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Real estate loans:
Residential mortgage.......... $ 23,372 $ 15,999 $ 35,151 $ 16,778 $ 15,111 $ 24,902 $ 71,198 $ 202,511
Commercial mortgage........... 16,545 14,932 11,862 33,572 41,608 39,618 8,049 166,186
Construction.................. 10,052 -- -- -- -- -- -- 10,052
Total real estate loans..... 49,969 30,931 47,013 50,350 56,719 64,520 79,247 378,749
Commercial business............ 22,348 1,618 2,917 13,134 5,139 -- -- 45,156
Home equity lines of credit.... 8,575 -- -- -- -- -- -- 8,575
Other consumer loans........... 2,686 1,737 5,685 14,203 9,134 -- -- 33,445
---------- ---------- ---------- ---------- -------- --------- --------- ----------
Total loans................. 83,578 34,286 55,615 77,687 70,992 64,520 79,247 465,928
Loans held for sale............ 11,096 -- -- -- -- -- -- 11,096
Federal funds sold............. 5,585 -- -- -- -- -- -- 5,585
Debt and equity securities
(at amortized cost)........... 60,574 78,190 18,825 22,032 12,939 318 2,087 194,965
Mortgage-backed securities..... 153 153 306 1,183 840 1,561 1,400 5,596
---------- ---------- ---------- ---------- -------- --------- --------- ----------
Total interest earning assets. $ 160,985 $ 112,629 $ 74,746 $ 100,902 $ 84,771 $ 66,399 $ 82,734 $ 683,167
========== ========== ========== ========== ======== ========= ========= ==========
Interest bearing Liabilities:
Deposits:
NOW and Super NOW
accounts.................... 45,717 -- -- 30,478 -- -- -- 76,195
Money market accounts......... 15,708 -- -- -- -- -- -- 15,708
Savings accounts.............. 12,407 12,407 24,814 99,255 49,626 -- -- 198,509
Time deposit accounts......... 56,241 71,777 66,737 55,527 3,637 2,755 -- 256,674
Escrow accounts................ 1,900 -- -- -- -- -- -- 1,900
FHLB advances.................. 108 110 225 3,497 10,000 31,000 -- 44,940
Securities sold under agree-
ments to repurchase........... 2,524 -- -- -- -- -- -- 2,524
---------- ---------- ---------- ---------- -------- --------- --------- ----------
Total interest bearing
liabilities................ $ 134,605 $ 84,294 $ 91,776 $ 188,757 $ 63,263 $ 33,755 $ -- $ 596,450
========== ========== ========== ========== ======== ========= ========= ==========
Interest rate sensitivity gap.... $ 26,380 $ 28,335 $ (17,030) $ (87,855) $ 21,508 $ 32,644 $ 82,734 $ 86,716
========== ========== =========== ========== ========= ========= ========= ==========
Cumulative interest rate
sensitivity gap................ $ 26,380 $ 54,715 $ 37,685 $ (50,170) $(28,662) $ 3,982 $ 86,716 $ 86,716
========== ========== ========== =========== ========= ========= ========= ==========
Cumulative interest rate
sensitivity gap as a
percentage of total assets..... 3.68% 7.63% 5.26% (7.00)% (4.00)% 0.56% 12.10% 12.10%
Cumulative interest rate
sensitivity gap as a
percentage of total interest
earning assets................. 3.86% 8.01% 5.52% (7.34)% (4.20)% 0.58% 12.69% 12.69%
Cumulative interest earning
assets as a percentage of
cumulative interest bearing
liabilities.................... 119.60% 125.00% 112.13% 89.95% 94.91% 100.67% 114.54% 114.54%
</TABLE>
Certain shortcomings are inherent in the method of analysis
presented in the Gap table. For example, although certain assets and liabilities
may have similar maturities or periods to repricing,
21
<PAGE> 39
they may react in different degrees to changes in market interest rates. Also,
the interest rates on certain types of assets and liabilities may fluctuate in
advance of changes in market interest rates, while interest rates on other
types of assets may lag behind changes in market rates. Additionally, certain
assets such as adjustable rate loans, have features which restrict changes in
interest rates both on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, prepayment and early
withdrawal levels may deviate significantly from those assumed in calculating
the table. Finally, the ability of many borrowers to make scheduled payments on
their adjustable rate loans may decrease in the event of an interest rate
increase.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
Total assets at September 30, 1998 were $716.6 million, up $54.2
million, or 8.2%, from $662.4 million at September 30, 1997. This increase was
primarily in the securities available for sale portfolio which increased by
$80.2 million, or 68.2%, from $117.6 million at September 30, 1997 to $197.8
million at September 30, 1998. This increase was partially offset by a $10.8
million reduction in loans receivable, net. The growth in securities available
for sale was primarily funded by a $40.6 million increase in borrowings, and
proceeds from the redemption and maturity of federal funds sold and other
short-term securities.
The Bank's cash and cash equivalents, which consists of federal
funds sold and cash and due from banks, decreased $24.6 million from $42.5
million at September 30, 1997 to $17.9 million at September 30, 1998. This
decrease was due to the Bank's investment of these funds into higher yielding
securities available for sale.
The Bank's $10.8 million decrease in loans receivable, net, was
primarily due to a 5.6%, or $12.1 million, decrease in residential real estate
loans and a 10.0%, or $18.4 million, decrease in commercial real estate loans.
The reduction in the Bank's residential real estate portfolio was primarily
caused by a change in market demand for the Bank's mortgage loan products. In
recent years until fiscal 1998, the Bank's mortgage customers generally sought
adjustable rate loans because such loans tended to offer lower interest rates
relative to fixed rate loans. The Bank generally retains adjustable rate
mortgage loans in its portfolio. In fiscal 1998, however, as long-term interest
rates declined to levels approaching short-term rates, the Bank's mortgage
customers generally sought fixed rate loans. Because it had been the Bank's
policy generally to sell all of its 15- and 30-year conforming fixed rate
mortgage loans in the secondary market, the Bank's residential loan portfolio
decreased during fiscal 1998. The Bank's origination of commercial real estate
loans remained relatively stable in fiscal 1998 as compared to fiscal 1997
($27.4 million in fiscal 1998, compared to $30.6 million in fiscal 1997), and
the decline in the portfolio can be attributed primarily to the payoff of five
loans, totaling $17.4 million. In contrast to the decline in real estate loans,
from fiscal year end 1997 to fiscal year end 1998, the Bank's commercial
business loan portfolio increased 50.7%, or $15.2 million, and the Bank's
consumer loan portfolio increased 38.1%, or $11.6 million. The increase in
commercial business loans, which generally are secured by non-real estate
business assets, was a result of the Bank's effort to increase the origination
of such loans as part of the Bank's emphasis on commercial banking activities,
and because such loans generally have higher interest rates than the Bank's
other loan products. The increase in consumer loans was primarily the result of
a direct marketing loan campaign initiated during the latter half of fiscal
1998, as well as an increased demand for consumer loans due to aggressive
marketing by the Bank and an overall decrease in the interest rates for such
loans resulting from a general decline in market interest rates. In the future,
the Bank expects to continue emphasizing the origination of commercial real
estate loans, commercial business loans and consumer loans, although there can
be no assurance that the Bank will succeed in increasing the level of such loan
originations.
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on the Bank's evaluation of risks inherent
in its entire loan portfolio. Such evaluation, which includes a review of all
loans for which full collectibility may not be reasonably assured, considers the
market value of the underlying collateral, growth and composition of the loan
portfolio, delinquency trends, adverse situations that may affect borrowers'
abilities to repay,
22
<PAGE> 40
prevailing economic conditions and trends and other factors that warrant
recognition in providing for an adequate allowance for loan losses. See
"Business of The Troy Savings Bank -- Lending Activities -- Allowance for Loan
Losses."
While the Bank believes it uses the best information available to
determine the allowance for loan losses, unforeseen economic and market
conditions could result in adjustments to the allowance for loan losses, and net
earnings could be significantly affected, if circumstances differ substantially
from the assumptions used in making the final determination. Management believes
its allowance for loan losses is adequate at September 30, 1998, however, future
adjustments could be necessary and the Bank's results of operations could be
adversely affected if circumstances differ substantially from the assumptions
used in the determination of the allowance for loan losses. The allowance for
loan losses increased from $6.4 million at September 30, 1997 to $8.3 million at
September 30, 1998. This increase is the result of a $4.1 million provision for
loan losses in fiscal 1998, offset by $2.2 million in net charge-offs for the
same period. At September 30, 1998 the allowance for loan losses equaled 70.9%
of total non-performing loans, down slightly from 73.8% at September 30, 1997.
The balance of the allowance is maintained at a level which is, in management's
judgment, representative of the amount of risk inherent in the Bank's loan
portfolio. See "Business of The Troy Savings Bank -- Lending Activity --
Allowance for Loan Losses."
The Bank's securities available for sale portfolio increased from
$117.6 million at September 30, 1997 to $197.8 million at September 30, 1998.
This increase was primarily attributable to a $59.6 million increase in U.S.
government securities and agency obligations and a $30.8 million increase in
obligations of state and political subdivisions. The Bank used its FHLB
borrowings to fund approximately half of the increase in its securities
available for sale portfolio in order to leverage itself and take advantage of
higher yielding securities, while maintaining liquidity as part of its
asset/liability management program.
The Bank's total liabilities increased 9.3% from $590.9 million at
September 30, 1997 to $645.6 million at September 30, 1998. Most of this
increase was attributable to a $40.6 million increase in FHLB borrowings.
Deposits remained relatively stable at $578.2 million at September 30, 1998,
compared to $572.4 million at September 30, 1997. During fiscal 1998, the Bank
entered into a binding, irrevocable commitment to make a total of $4.0 million
in scheduled payments to the Charitable Foundation. The scheduled payments will
occur in each of fiscal years 1999, 2000 and 2001. The present value of the $4.0
million commitment results in a $3.5 million contribution payable liability. In
addition, the Bank's securities sold under agreement to repurchase increased by
$2.2 million, and the Bank's other liabilities and accrued expenses increased by
$1.6 million during fiscal 1998, primarily due to increases in accruals for
post-retirement benefits, trade accounts payable, deferred compensation and
mortgage servicing related liabilities.
ANALYSIS OF NET INTEREST INCOME
The Bank's earnings are dependent largely on its net interest
income, which is the difference between the amount that the Bank receives
from its interest earning assets and the amount that the Bank pays out on its
interest bearing liabilities.
AVERAGE BALANCE SHEET. The following table sets forth certain
information relating to the Bank's interest earning assets and interest bearing
liabilities for the periods indicated. The yields and rates were derived by
dividing tax effected interest income or interest expense by the average balance
of assets or liabilities, respectively, for the periods shown. Average balances
were computed based on average monthly balances. Management believes that the
use of average monthly balances instead of daily balances does not have a
material effect on the information presented. The yields on loans include
deferred fees and discounts which are considered yield adjustments. Non-accruing
loans have been included in loan balances.
23
<PAGE> 41
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------------
1998 1997
--------------------------------------- --------------------------
AVERAGE
AVERAGE YIELD/ AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST
------- -------- ---- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Real estate loans:
Residential mortgage....... $208,520 $16,240 7.79% $210,501 $16,389
Commercial mortgage......... 177,144 15,480 8.74 189,953 16,695
Construction................ 14,823 898 6.06 16,869 1,172
-------- ------- -------- -------
Total real estate loans.. 400,487 32,618 8.14 417,323 34,256
Commercial business......... 37,234 3,211 8.62 25,964 2,287
Consumer loans:
Home equity
lines of credit........ 9,160 792 8.65 9,572 824
Other consumer........... 20,525 1,694 8.25 18,920 1,484
------ ------- ------ -----
Total consumer loans 29,685 2,486 8.37 28,492 2,308
------ ------- ------ -----
Total loans.......... 467,406 38,315 8.20 471,779 38,851
Loans held for sale........... 6,829 527 7.72 2,743 199
Securities held to
maturity.................... 3,753 300 7.99 4,266 353
Securities available for sale
(amortized cost)
Taxable.................. 69,171 4,121 5.96 121,483 7,262
Tax-exempt............... 55,996 3,286 5.87 3,195 184
------ ----- ---- ----- ---
Total securities available for
sale (amortized cost)....... 125,167 7,407 5.92 124,678 7,446
Federal funds sold and
other short-term
investments................. 45,631 2,553 5.59 27,560 1,503
------ ----- ------ -----
Total interest earning
assets.................. 648,786 49,102 7.57 631,026 48,352
------- ------ ------- ------
INTEREST BEARING LIABILITIES:
Deposits:
NOW and Super NOW
accounts................. $77,010 $1,696 2.20% $ 71,581 $1,590
Money market accounts....... 13,995 431 3.08 14,168 433
Savings accounts............ 195,177 6,451 3.31 201,612 6,647
Time deposit accounts....... 264,538 14,701 5.56 261,032 14,087
Escrow accounts............... 3,704 60 1.62 3,941 55
------- ------ -------- ------
Total interest bearing
deposits................. 554,424 23,339 4.21 552,334 22,812
------- ------ ------- ------
Borrowings:
Securities sold under
agreement to repurchase 1,222 33 2.70 704 29
Short-term borrowings....... -- -- -- 4,403 242
Long-term debt.............. 13,681 821 6.00 4,540 268
------- ------ ------- ---
Total borrowings........... 14,903 854 5.73 9,647 539
------- ------ ------- ---
Total interest bearing
liabilities............. 569,327 24,193 4.25 561,981 23,351
------- ------ ------- ------
Net interest spread.............. 3.32%
Net interest income/net interest
margin........................ 24,909 3.84% 25,001
Ratio of interest earning
assets to interest bearing
liabilities 113.96%
Tax equivalent adjustment........ 1,072 65
----- --
Net interest income as per
consolidated financial
statements.................... $23,837 $24,936
======= =======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1997 1996
---------- -------------------------------------
AVERAGE AVERAGE
YIELD/ AVERAGE YIELD/
RATE BALANCE INTEREST RATE
---- ------- -------- ----
<S> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Real estate loans:
Residential mortgage....... 7.79% $199,367 $15,455 7.75%
Commercial mortgage......... 8.79 180,202 15,938 8.84
Construction................ 6.95 12,234 1,047 8.56
-------- -------
Total real estate loans.. 8.21 391,803 32,440 8.28
Commercial business......... 8.81 21,242 1,932 9.10
Consumer loans:
Home equity
lines of credit........ 8.61 9,014 798 8.85
Other consumer........... 7.84 10,510 983 9.35
-------- ------
Total consumer loans 8.10 19,524 1,781 9.12
-------- ------
Total loans.......... 8.23 432,569 36,153 8.36
Loans held for sale........... 7.25 3,509 260 7.41
Securities held to
maturity.................... 8.27 4,988 410 8.22
Securities available for sale
(amortized cost)
Taxable.................. 5.98 142,758 8,521 5.97
Tax-exempt............... 5.76 -- -- --
---- -- -- --
Total securities available for
sale (amortized cost)....... 5.97 142,758 8,521 5.97
Federal funds sold and
other short-term
investments................. 5.45 27,984 1,518 5.42
------ -----
Total interest earning
assets.................. 7.66 611,808 46,862 7.66
------- ------
INTEREST BEARING LIABILITIES:
Deposits:
NOW and Super NOW
accounts................. 2.22% $ 69,908 $ 1,547 2.21%
Money market accounts....... 3.06 12,600 379 3.01
Savings accounts............ 3.30 206,719 6,798 3.29
Time deposit accounts....... 5.40 251,005 13,758 5.48
Escrow accounts............... 1.40 3,602 75 2.08
-------- -------
Total interest bearing
deposits................. 4.13 543,834 22,557 4.15
------- ------
Borrowings:
Securities sold under
agreement to repurchase 4.12 386 13 3.37
Short-term borrowings....... 5.50 4,220 217 5.14
Long-term debt.............. 5.90 3,711 230 6.20
------- ---
Total borrowings........... 5.59 8,317 460 5.53
------- ---
Total interest bearing
liabilities............. 4.16 552,151 23,017 4.17
------- ------
Net interest spread.............. 3.50% 3.49%
Net interest income/net interest
margin 3.96% 23,845 3.90%
Ratio of interest earning
assets to interest bearing liabilities 112.29% 110.80%
Tax equivalent adjustment........ --
-------
Net interest income as per
consolidated financial
statements.................... $23,845
=======
</TABLE>
24
<PAGE> 42
RATE/VOLUME ANALYSIS. The following table presents the extent to
which changes in interest rates and changes in the volume of interest earning
assets and interest bearing liabilities have affected the Bank's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior year rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) changes
in rate/volume (change in rate times the change in 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.
Interest yields on loans include deferred fees and discounts, and all yields are
tax effected.
<TABLE>
<CAPTION>
Year Ended September 30, 1998 Year Ended September 30, 1997
Compared to Compared to
Year Ended September 30, 1997 Year Ended September 30, 1996
----------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due To Due To
----------------------- -------------------------
Volume Rate Net Volume Rate Net
--------- ---------- ---------- ---------- --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans:
Residential mortgage................................... $ (149) $ -- $ (149) $ 854 $ 80 $ 934
Commercial mortgage.................................... (1,120) (95) (1,215) 847 (90) 757
Construction ......................................... (142) (132) (274) 247 (122) 125
--------- ---------- ---------- ---------- --------- -------
Total real estate loans.............................. (1,411) (227) (1,638) 1,948 (132) 1,816
Commercial business.................................... 973 (49) 924 417 (62) 355
Consumer loans:
Home equity lines of credit.......................... (36) 4 (32) 47 (21) 26
Other consumer....................................... 132 78 210 660 (159) 501
--------- ---------- ---------- ---------- --------- -------
Total consumer loans................................ 96 82 178 707 (180) 527
--------- ---------- ---------- ---------- --------- -------
Total loans............................................ (342) (194) (536) 3,072 (374) 2,698
Loans held for sale..................................... 315 13 328 (55) (6) (61)
Securities held to maturity............................. (41) (12) (53) (59) 2 (57)
Securities available for sale (amortized cost)
Taxable .............................................. (3,117) (24) (3,141) (1,273) 14 (1,259)
Tax exempt............................................. 3,098 4 3,102 92 92 184
--------- ---------- ---------- ---------- --------- -------
Total securities available for sale (amortized cost). 19 (20) (39) (1,181) 106 (1,075)
Federal funds sold and other
short-term investments................................. 1,011 39 1,050 (23) 8 (15)
--------- ---------- ---------- ---------- --------- -------
Interest earning assets............................. 924 (174) 750 1,754 (264) 1,490
Interest bearing liabilities:
Deposits:
NOW and Super NOW accounts............................. 120 (14) 106 36 7 43
Money market accounts.................................. (5) 3 (2) 48 6 54
Savings accounts....................................... (216) 20 (196) (172) 21 (151)
Time deposit accounts.................................. 189 425 614 511 (182) 329
Escrow accounts......................................... (2) 7 5 7 (27) (20)
--------- ---------- ---------- ---------- --------- -------
Total interest bearing deposits...................... 86 441 527 430 (175) 255
Borrowings:
Securities sold under
agreement to repurchase.............................. 7 (3) 4 13 3 16
Short-term borrowings.................................. (121) (121) (242) 9 16 25
Long-term debt......................................... 548 5 553 49 (11) 38
--------- ---------- ---------- ---------- --------- -------
Total borrowings..................................... 434 (119) 315 71 8 79
--------- ---------- ---------- ---------- --------- -------
Total interest bearing liabilities............ 520 322 842 501 (167) 334
--------- ---------- ---------- ---------- --------- -------
Net Interest Income.................................... $ 404 $ (496) $ (92) $ 1,253 $ (97) $ 1,156
========= ========== ========== ========== ========= =======
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
GENERAL. The Bank had a net loss of $878,000 for the year ended
September 30, 1998, compared to net income of $3.7 million for the year ended
September 30, 1997. The 1998 net loss was primarily the result of a $4.8 million
contribution expense, $4.5 million of which was related to the Bank's cash
contribution and commitment to the Charitable Foundation. Also contributing to
the loss were increases in the Bank's other real estate owned expense and
compensation and employee benefits expense of $707,000 and $645,000,
respectively, for the year ended September 30, 1998. These increased expenses
were partially offset by a $3.5 million decrease in income tax expense in fiscal
1998 as compared to fiscal 1997 primarily associated with the tax benefit
recorded
25
<PAGE> 43
in connection with the Bank's contribution and binding, irrevocable commitment
to the Charitable Foundation and otherwise reduced income before taxes.
NET INTEREST INCOME. The Bank's tax equivalent net interest income
for the year ended September 30, 1998 was $24.9 million, down $92,000, compared
to the year ended September 30, 1997. This decrease was primarily the result of
a nine basis point decrease in yield on average interest earning assets and a
nine basis point increase in the rate paid on average interest bearing
liabilities. A $17.8 million increase in average interest earning assets, which
exceeded the $7.3 million increase in average interest bearing liabilities by
$10.5 million, partially offset the impact of the decline in yields on the
Bank's interest earning assets. The Bank's net interest margin for the year
ended September 30, 1998 was 3.84%, down 12 basis points from 3.96% for the year
ended September 30, 1997. The yield on average interest earning assets decreased
from 7.66% to 7.57%, while the rate paid on average interest bearing liabilities
increased from 4.16% to 4.25%.
INTEREST INCOME. The Bank's interest income for the year ended
September 30, 1998 was $49.1 million, down from $48.4 million for the year ended
September 30, 1997. Interest on loans decreased $536,000 from $38.9 million for
the year ended September 30, 1997 to $38.3 million for the year ended September
30, 1998. The average balance of loans decreased $4.4 million to $467.4 million,
and the average yield on loans also decreased three basis points from 8.23% to
8.20% for the year ended September 30, 1998. Tax equivalent interest income on
securities available for sale decreased by $39,000 and interest income on
investment securities held to maturity declined by $53,000 for the year ended
September 30, 1998. The average balance of securities available for sale
increased only slightly from $124.7 million for the year ended September 30,
1997 to $125.2 million for the year ended September 30, 1998. At the same time,
the tax effected average yield on securities available for sale decreased five
basis points from 5.97% to 5.92%. The interest income on federal funds sold
increased $1.0 million to $2.5 million, and the average balance of federal funds
sold and other short-term investments increased from $27.6 million to $45.6
million. The Bank continued to invest in short term federal funds due to the
favorable short term interest rates offered by these instruments compared to
other comparable investment alternatives. The average yield on federal funds
sold and other short-term investments increased from 5.45% to 5.59%.
INTEREST EXPENSE. The Bank's interest expense increased by $842,000
to $24.2 million for the year ended September 30, 1998. The increase is
attributable to increased average balances and rates paid on deposits and
borrowings. The two largest categories of interest bearing deposits are savings
accounts and time deposits. Interest expense on savings accounts decreased by
$196,000 to $6.5 million for the year ended September 30, 1998, primarily due to
a $6.4 million decrease in the average balance of savings accounts. Interest on
time deposits for the year ended September 30, 1998 was $14.7 million, up
$614,000 from the year ended September 30, 1997. This increase was the result
primarily of a 16 basis point increase in the rates paid on these deposits and a
$3.5 million increase in the average balance of time deposits for the year ended
September 30, 1998. Interest expense on the Bank's NOW and money market accounts
was relatively flat, increasing only $104,000 from fiscal year end 1997 to
fiscal year end 1998. The slight increase was attributable to a $5.3 million
increase in the average balances of these deposits accounts. Interest expense on
the Bank's borrowings increased $315,000 in fiscal 1998 compared to fiscal 1997.
The increase is attributable to a $5.3 million increase in the average balance
of borrowings, coupled with a 14 basis point increase in the average rate paid
on borrowings. The increase in borrowings reflects the Bank's use of alternative
funding sources in lieu of relatively higher cost time deposit accounts.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $4.1
million for fiscal 1998, compared to $3.9 million for fiscal 1997. Many of the
adverse credit quality trends noted in fiscal 1997 have continued into fiscal
1998, and it is expected that these trends may continue through at least fiscal
1999. During fiscal 1998, net loan charge-offs were $2.2 million, representing a
25.0% increase from fiscal 1997, when net loan charge-offs were $1.8 million. In
addition, nonperforming loans increased from $8.7 million at September 30, 1997
to $11.6 million at September 30, 1998. This increase is consistent with the
trends noted at September 30, 1997 when significant increases in classified
loans and loans 60 to 89 days delinquent were noted. In determining the
appropriate
26
<PAGE> 44
provision for loan losses, management also considers general economic
conditions and real estate trends in the Bank's market area, both of which can
impact the inherent risk of loss in the Bank's current loan portfolio.
Management believes that there has been a general decline in the real estate
values in the Bank's market area, resulting in a decrease in the values of the
collateral securing much of the Bank's loan portfolio. Management believes that
this trend is reflected in the increased level of net loan charge-offs
experienced in fiscal years 1998 and 1997 compared to fiscal years 1996, 1995
and 1994. In fiscal years 1998 and 1997, net loan charge-offs as a percentage
of average loans were .48% and .38%, respectively, as compared to .21%, .22%,
and .15% in fiscal years 1996, 1995, and 1994, respectively. Accordingly,
management anticipates that the current net charge-off levels may continue
through fiscal 1999. Based upon the reduction in classified and special mention
loans from $25.2 million at September 30, 1997 to $18.7 million at September
30, 1998, and the reduction in loans 60-89 days past due, the Bank has set its
provision for loan losses in anticipation that this rate of increase in
nonperforming loans will not continue at its current pace. The increased
provision in recent years also reflects the change in the mix of assets in the
Bank's loan portfolio as commercial business loans and consumer loans have
increased as a percentage of total loans from 6.31% and 6.41%, respectively, at
September 30, 1997 to 9.70% and 9.02%, respectively, at September 30, 1998.
NON-INTEREST INCOME. The Bank's non-interest income decreased by
$185,000 to $2.6 million for the year ended September 30, 1998. A $356,000
decrease in the Bank's other income and a $28,000 decrease in the Bank's loan
servicing fees contributed to the Bank's decline in non-interest income,
although such declines were partially offset by the Bank's trust income, gains
on the sale of mortgage loans and deposit service charges, which increased by
$97,000, $62,000 and $36,000, respectively, from fiscal 1997 to fiscal 1998. The
Bank's non-interest income in 1997 also includes a one-time $389,000 federal
affordable housing award.
NON-INTEREST EXPENSE. The Bank's non-interest expense increased
35.3% from $18.5 million for the year ended September 30, 1997 to $25.1 million
for the year ended September 30, 1998. The primary cause of this increase was a
$4.8 million contribution expense, all but $306,000 of which was related to the
Bank's cash contribution and binding, irrevocable commitment to the Charitable
Foundation. Immediately after completion of the Conversion, in fiscal 1999, the
Company intends to establish and contribute to the Community Foundation newly
issued shares of Common Stock in an amount equal to 8% of the Common Stock sold
in the Conversion. In addition, the Company intends to contribute the Music Hall
located in the Bank's headquarters to the Music Hall Foundation. These
contributions will result in a significant contribution expense in fiscal 1999,
and because the value of the contributions will exceed the IRC's annual 10%
deduction limitation in fiscal 1999 and during the five-year carry forward
period, the Company does not anticipate being able to recognize the full tax
benefit associated with those contributions. See "Summary -- The Troy Savings
Bank Community Foundation" and "Risk Factors -- Contribution to the Community
Foundation." The Company's future contribution expense, subject to the funding
of these foundations, will decline as a result of these foundations. Beginning
in fiscal 1999, expenses associated with the Music Hall will be paid by the
Music Hall Foundation and not by the Company or the Bank. In fiscal years 1998
and 1997, the direct costs paid by the Bank, excluding any allocated cost,
associated with operating the Music Hall were $78,000 and $88,000, respectively.
Also contributing to the Bank's increased non-interest expense for
the year ended September 30, 1998 was a $707,000 increase in other real estate
owned expense, a $645,000 increase in compensation and employee benefits
expense, and a $198,000 increase in professional, legal and other fees expense.
The increase in other real estate owned expense is attributable to losses on the
disposals of, and additional writedowns taken on, the Bank's foreclosed assets
(other real estate owned). The increase compensation expense was primarily
related to general merit increases for the Bank's employees during the year
ended September 30, 1998, and, to a lesser extent, increased staffing levels and
health insurance costs. The increase in professional, legal and other fees is a
result of additional services relating to establishment of the Charitable
Foundation, general business counseling and consulting costs, and costs
associated with Year 2000 issues and system conversions.
27
<PAGE> 45
INCOME TAXES. For fiscal 1998, the Bank received a $1.9 million
income tax benefit, as compared to a $1.6 million income expense for the year
ended September 30, 1997. The reduction in income tax expense is primarily the
result of the fiscal 1998 pre-tax loss of $2.8 million as compared to the fiscal
1997 pre-tax income of $5.2 million. Also contributing to the change in income
tax expense was an increase in the level of investments in tax exempt securities
from an average investment of $3.2 million during fiscal 1997 to an average
investment of $56.0 million during fiscal 1998, the result of which was a
significant increase in tax exempt income.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996
GENERAL. The Bank's net income for the year ended September 30, 1997
was $3.7 million, a 28.0% decrease from net income of $5.1 million in fiscal
1996. The reduction in the Bank's net income was primarily the result of a $3.0
million increase in the provision for loan losses in fiscal 1997, although this
increase was partially offset by a $1.1 million increase in the Bank's net
interest income.
NET INTEREST INCOME. The Bank's net interest income increased by
$1.1 million from $23.8 million to $25.0 million for fiscal years 1996 and 1997,
respectively. The increase was primarily the result of a $19.2 million increase
in average interest earning assets from $611.8 million for the year ended
September 30, 1996 to $631.0 million for the year ended September 30, 1997.
Average interest bearing liabilities also increased by $9.8 million during this
same period. The Bank's net interest margin for the year ended September 30,
1997 was 3.96%, compared to 3.90% for the year ended September 30, 1996. During
fiscal 1997, the yield on average interest earning assets and the rate paid on
average interest bearing liabilities remained relatively constant.
INTEREST INCOME. The Bank's interest income for fiscal 1997 was
$48.4 million, as compared to $46.9 million for fiscal 1996. The primary cause
of this increase was a $2.7 million increase on interest and fees from the
Bank's loans. During fiscal 1997, the average balance of loans increased $39.2
million to $471.8 million, while the average yield on loans decreased from 8.36%
to 8.23%. The Bank's interest income on securities available for sale decreased
by $1.1 million to $7.4 million for the year ended September 30, 1997. The
majority of the decrease in interest income on securities available for sale was
attributed to a $18.1 million decrease in the average balance of securities
available for sale, which decreased from $142.8 million for the year ended
September 30, 1996 to $124.7 million for the year ended September 30, 1997. The
Bank used proceeds from its maturing securities available for sale to fund its
loan growth.
INTEREST EXPENSE. The Bank's interest expense increased slightly by
$334,000 during the year ended September 30, 1997 to $23.4 million. Most of this
increase was related to interest paid on the Bank's interest bearing depository
accounts. The two largest categories of interest bearing deposits are savings
accounts and time deposits. Although the Bank's interest expense on savings
accounts decreased by $151,000 for the year ended September 30, 1997, primarily
due to a decrease in the average balance of the Bank's savings accounts, the
Bank's interest expense on its time deposits for the year ended September 30,
1997 increased by $329,000 to $14.1 million. This increase is the result of an
increase in the average balance of time deposits from $251.0 million in fiscal
1996 to $261.0 million in fiscal 1997, offset by an eight basis point reduction
in the rates paid on these deposits from 5.48% in fiscal 1996 to 5.40% in fiscal
1997.
PROVISION FOR LOAN LOSSES. In fiscal 1997, there was evidence of
increases in the level of inherent risk in the Bank's loan portfolio. As a
result of this increased inherent risk, management increased the Bank's
provision for loan losses from $928,000 in fiscal 1996 to $3.9 million in fiscal
1997. The increased inherent risk was manifested in a number of developments,
ratios and trends considered by management. Net loan charge-offs increased from
$921,000 in fiscal 1996, or .21% of average loans, to $1.8 million, or .38% of
average loans, in fiscal 1997. This increase in the level of net loan
charge-offs also represented a significant increase from the Bank's historical
net loan charge-off experience which was .22% and .15% of average loans in
fiscal years 1995 and 1994,
28
<PAGE> 46
respectively. Similarly, loans 60 to 89 days past due increased from $1.2
million at September 30, 1996 to $3.5 million at September 30, 1997, and the
Bank's classified and special mention loans increased from $18.9 million at
September 30, 1996 to $25.2 million at September 30, 1997. The Bank also began
to change the mix of assets in the Bank's loan portfolio, the result of which
was an overall increase in the amount of loans with greater credit risk. For
example, commercial business loans increased from $24.8 million at September
30, 1996 to $30.0 million at September 30, 1997, and consumer loans increased
from $22.5 million at September 30, 1996 to $30.4 million at September 30,
1997.
NON-INTEREST INCOME. The Bank's non-interest income decreased by
$128,000 to $2.7 million for the year ended September 30, 1997. This decrease
was primarily caused by a $265,000 decrease in the Bank's other income, although
this decrease was partially offset by a $69,000 increase in the Bank's trust
income resulting from an increase in trust assets under the Bank's management.
In fiscal 1996, the Bank received $435,000 in nonrecurring recoveries of
previously charged-off investments. The Bank did not have a similar recovery in
fiscal 1997.
NON-INTEREST EXPENSE. The Bank's non-interest expense increased
$341,000 to $18.5 million for the year ended September 30, 1997. A $564,000
increase in compensation and employee benefits expense, primarily related to
general merit increases for the Bank's employees, and, to a lesser extent,
increases in pension, 401(k) and post-retirement benefits, was the primary cause
for the increase in non-interest expense, although this increase was offset by
$377,000 and $119,000 decreases in the Bank's contribution expense and other
real estate owned expense, respectively. Additional increases in non-interest
expense are attributable to increases in occupancy and computer charges.
INCOME TAXES. For fiscal 1997, the Bank incurred a $1.6 million
income tax expense, as compared to a $2.5 million income tax expense for fiscal
1996. The reduction in income tax expense is primarily the result of a decrease
in pre-tax income from $7.6 million to $5.2 million for fiscal years 1996 and
1997, respectively, as well as the recognition of a tax benefit associated with
certain changes in the tax laws of New York State.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability to generate cash flow to meet
present and future financial obligations and commitments. The Bank's liquid
assets include cash and cash equivalents, securities held to maturity,
securities that mature within one year and securities available for sale. At
September 30, 1998, the Bank's liquid assets as a percentage of deposits which
have no withdrawal restrictions, time deposits which mature within one year, and
short-term borrowings was 42%.
The Bank's primary sources of funds are borrowings and proceeds from
the redemption and maturity of federal funds sold and other short-term
securities. The Bank's primary cash outflows are new loan originations,
purchases of securities, and deposit withdrawals. Management monitors its
liquidity position on a daily basis. Although maturities and scheduled
amortization of loans are a predictable source of funds, deposit outflows,
mortgage prepayments and mortgage loan sales are greatly influenced by changes
in interest rates, economic conditions, and competitors.
The Bank 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 Bank'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 Bank's depositors, and
meet all other daily obligations of the Bank.
Consistent with its goals to operate a sound and profitable
financial organization, the Bank actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. As of September 30, 1998
and 1997, total equity was $71.0 million and $71.5 million, respectively, or
29
<PAGE> 47
9.9% and 10.8% of total assets at those respective dates. As of September 30,
1998, the Bank exceeded all of the capital requirements of the FDIC. The Bank's
regulatory capital ratios at September 30, 1998 were as follows: Tier I
(leverage) capital: 9.89%; Tier I risk-based capital: 14.02%; and total risk
based capital: 15.27%. The regulatory capital minimum requirements to be
considered "well capitalized" are 5.0%, 6.0%, and 10.0%, respectively.
YEAR 2000 READINESS DISCLOSURE STATEMENT
The "Year 2000" issue is the result of computer programs and
equipment which depend on "embedded chip" technology and software using two
digits rather than four digits to define the applicable year. For dates on or
after January 1, 2000, software and hardware as well as embedded processors may
not be able to recognize or process dates correctly. This could result in system
failures or miscalculations causing disruption of operations, including, among
other things, system or equipment shutdowns, malfunctions or a temporary
inability to process transactions or engage in normal business activities.
Companies have been advised to determine whether and to what extent
their information technology and/or physical resources may be affected by Year
2000; to replace, repair or retire the affected systems or assets; and to test
the new systems or assets to assure that they will not be adversely affected by
Year 2000 (otherwise referred to as "Year 2000 compliant"), Further, any
changes, revisions or new components of systems or equipment configurations may
prove to be incompatible with those existing or upgraded. As a result, the
testing of changed components and of systems and subsystems as a whole, is
critical, but also time and resource consuming.
In order to protect the integrity of the banking system, the federal
banking regulatory authorities (collectively known as the Federal Financial
Institutions Examination Council, or "FFIEC") have (i) issued guidelines to
financial institutions for addressing the Year 2000 issues; (ii) set milestones
that financial institutions are expected to meet in becoming Year 2000
compliant; and (iii) established testing recommendations to assure timely
compliance. The Bank started its Year 2000 compliance plans in 1996, and has
followed the guidelines and recommendations of the FFIEC throughout its planning
and implementation process.
In order to address the Bank's particular Year 2000 issues, the Bank
commenced the Y2K Project, which is a Year 2000 remediation and compliance
program managed by a project group consisting of representatives from all
business units and functional departments within the Bank. The Y2K Project is
directed by a vice president who directly reports on the Y2K Project to the
President/Chief Executive Officer of the Bank. The Y2K Project is overseen by
the Board of Directors which receives quarterly reports from the project group.
The Bank's inventory and assessment of all technologies, equipment
and third party providers began in 1996. Substantially all of the Bank's core
banking systems are outsourced or are purchased software packages. As a result,
much of the remediation and testing process is dependent upon the accuracy of
the work performed by vendors in certifying their systems. Further assessments
were performed to evaluate other systems, equipment, databases and third-party
interfaces which could be affected by Year 2000, or which could be incompatible
with Year 2000 upgrades of the Bank's core banking systems. Finally, the Bank
assessed its machinery, vaults, security systems, elevators, HVAC systems,
telephone, communications and any vendor supplied goods or services in order to
complete plans for remediation, repair or replacement where necessary, and has
monitored vendors' compliance programs against required standards.
In 1996, the Bank negotiated the renewal of its data processing
contract for core banking systems with its third party service provider. In
October 1998, the Bank converted to that service provider's new platform of
software, hardware and operating systems which have been certified by the vendor
as Year 2000 compliant. Where other subsidiary systems are concerned, the Bank
has attempted to obtain all applicable warranties from the vendors or service
providers, and where appropriate, the Bank is arranging alternate service or
software providers in the way of contingency
30
<PAGE> 48
planning should the primary vendor not provide timely and adequate solutions.
The Bank, however, does not have any control over the effectiveness of a
vendor's systems, and there can be no assurances that significant third party
interfaces upon which the Bank's systems rely will be Year 2000 compliant.
The Bank began testing certain in-house systems in October 1998, and
expects to perform all necessary testing of critical core banking systems by the
end of the first quarter of fiscal 1999. The economic cost of the Y2K Project
includes not only direct incremental amounts expended by the Bank for upgrading
or replacing software, systems and equipment, but also the use of internal
resources devoted to the Y2K Project that would have otherwise been devoted to
other business opportunities. It is difficult to quantify the economic costs of
internal resources so re-directed.
The Bank estimates that it will make direct expenditures for the Y2K
Project of approximately $2.5 million over the five year period 1996 to 2000.
Although many of the hardware and equipment expenditures would have been made as
part of normal operations even without Year 2000, they are included in the above
estimate as the timing of those purchases and upgrades was accelerated due to
the Y2K Project. A substantial portion of the upgrades relate to a new branch
automation system which, although not considered by the Bank as mission
critical, has been accelerated. While these are estimates, the Bank does not
expect the costs of the Y2K Project to have a significant impact on its
consolidated financial condition and results of operations. As of September 30,
1998, the Bank has spent approximately $173,000 on Year 2000-related matters.
The potential impact of Year 2000 on the Bank's customers (borrowers
and depositors) has been examined. The Bank is aware that if significant
commercial borrowers suffer losses or illiquidity because of their own Year 2000
problems (including those of others with whom they do business or on whom they
are dependent) the Bank may suffer losses from or experience illiquidity. The
Bank's standard loan documentation programs were revised to take into account
customers' Year 2000 compliance in evaluating and rating credit risk. Loan
documentation generally includes representations from borrowers about Year 2000
readiness and provides the right to examine the borrowers' systems and
procedures in order to determine Year 2000 compliance.
The Bank believes that its Y2K Project will result in its core
banking systems' hardware, software, and firmware being tested and certified as
Year 2000 compliant by the end of the second quarter of fiscal 1999 so as to
ensure continuation of all aspects of its core business processes. For
non-mission critical systems, the Bank and its subsidiaries have developed
contingency plans for non-compliant systems. The contingency plans vary with the
affected systems. The Bank is obtaining assurances that its primary vendors, key
service providers, and, as noted above, significant credit customers will also
be Year 2000 compliant. Contingency plans and alternative arrangements have been
made, or will be made in advance, wherever possible.
Failure of the Bank's mission critical systems could impair the
ability of the Bank to do business and service its customers; failure of large
or numerous borrowers to repay their loans could impair the Bank's capital;
failure of utilities and the public infrastructure could adversely affect the
Bank's operations. Despite the Bank's efforts with respect to Year 2000
readiness, including its Y2K Project, there can be no assurance that partial or
total systems interruptions or business interruptions or the associated costs
would not have an adverse effect upon the Bank's business, consolidated
financial condition, results of operations and business prospects.
IMPACT ON INFLATION AND CHANGING PRICES
The Bank's consolidated financial statements are prepared in
accordance with generally accepted accounting principles which require the
measurement of financial condition and operating results in terms of 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 Bank's operations. Unlike those of most industrial
companies, the Bank's assets and liabilities are nearly all monetary. As a
result, interest rates have a greater impact on the Bank's performance
31
<PAGE> 49
than do the effects of general levels of inflation. In addition, interest rates
do not necessarily move in the direction, or to the same extent, as the price
of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In November 1993, the AICPA issued Statement of Position 93-6 ("SOP
93-6"), "Employers' Accounting for Employee Stock Ownership Plans," which is
effective for years beginning after December 15, 1993. SOP 93-6 requires the
measure of compensation expense recorded by employers for leveraged ESOPs to be
the average fair value of the ESOP shares. In connection with the Conversion,
the Bank has established an ESOP which is expected to purchase 8% of the number
of shares of Common Stock sold in the Conversion, including shares contributed
to the Charitable Foundation. Under SOP 93-6, the Company will recognize a
compensation cost equal to the average fair value of the ESOP shares during the
periods in which they become committed to be released. Employers with internally
leveraged ESOPs, such as the Company, will not report the loan receivable from
the ESOP as an asset and will not report the ESOP debt from the employer as a
liability. The effects of SOP 93-6 on the Company's future results of operations
and financial condition cannot be determined at this time.
In November 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock Based Compensation" ("SFAS No. 123"). This statement establishes
financial accounting standards for stock-based employee compensation plans. SFAS
No. 123 permits the Company to choose either a new fair value based method or
the Accounting Principles Board ("APB") Opinion 25 intrinsic value based method
of accounting for its stock-based compensation arrangements. SFAS No. 123
requires pro forma disclosures of net income and earnings per share computed as
if the fair value based method had been applied in financial statements of
companies that follow accounting for such arrangements under APB Opinion 25.
SFAS No. 123 applies to all stock-based employee compensation plans in which an
employer grants shares of its stock or other equity instruments to employees
except for employee stock ownership plans. SFAS No. 123 also applies to plans in
which the employer incurs liabilities to employees in amounts based on the price
of the employer's stock (e.g., stock option plans, stock purchase plans,
restricted stock plans and stock appreciation rights). This statement also
specifies the accounting for transactions in which a company issues stock
options or other equity for services provided by nonemployees or to acquire
goods or services from outside suppliers or vendors. The Company expects to
utilize the intrinsic value based method prescribed by APB Opinion No. 25.
Accordingly, the impact of adopting this statement will not be material to the
Company's consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per
Share." SFAS No. 128 establishes standards for computing and presenting earnings
per share ("EPS"). This statement supersedes APB Opinion No. 15, "Earnings per
Share" and related interpretations. SFAS No. 128 replaces the presentation of
primary EPS with the presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted average number of common shares outstanding for the period.
Unvested restricted stock awards are considered outstanding common shares and
included in the computation of basic EPS as of the date that they are fully
vested. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. The Company will adopt this statement for all financial statements
after the Conversion.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure," which establishes standards for disclosure
about an entity's capital structure. In accordance with SFAS No. 129, companies
will be required to provide in the financial statements a
32
<PAGE> 50
complete description of all aspects of their capital structure, including call
and put features, redemption requirements and conversion options. The
disclosures required by SFAS No. 129 are for financial statements for periods
ending after December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income. SFAS No. 130 states that comprehensive income includes the
reported net income of an enterprise adjusted for items that are currently
accounted for as direct entries to equity, such as the mark-to-market adjustment
on securities available for sale, foreign currency items and minimum pension
liability adjustments. This statement is effective for fiscal years beginning
after December 15, 1997. The Company anticipates developing the required
information in accordance with this new statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting by public companies about operating segments of their
business. SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. This statement is
effective for periods beginning after December 15, 1997. At this time, the
Company does not anticipate that the adoption of this statement will
significantly impact its financial reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Post Retirement Benefits," which
amends the disclosure requirements of SFAS No. 87, "Employers' Accounting
for Pensions," SFAS No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
and SFAS No. 106, "Employers' Accounting for Post Retirement Benefits Other
Than Pensions." SFAS No. 132 standardizes the disclosure requirements of SFAS
No. 87 and SFAS No. 106 to the extent practicable and recommends a parallel
format for presenting information about pensions and other post retirement
benefits. SFAS No. 132 is applicable to all entities and addresses disclosure
only. The statement does not change any of the measurement or recognition
provisions provided for in SFAS No. 87, SFAS No. 88 or SFAS No. 106. SFAS No.
132 is effective for fiscal years beginning after December 15, 1997. The
Company anticipates providing the required disclosures in its September 30,
1999 consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement established
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
This statement is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. The Company is currently evaluating the impact of this
statement on its consolidated financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Enterprise." This statement establishes criteria for
classification of securitized and retained mortgage-backed securities. The
Company is currently evaluating the impact of this statement, which is effective
for fiscal quarters beginning after December 15, 1998, on its consolidated
financial statements.
33
<PAGE> 51
BUSINESS OF TROY FINANCIAL CORPORATION
Troy Financial Corporation is a newly formed Delaware
corporation that will register with the Federal Reserve as the bank holding
company for the Bank. The Company has not engaged in any significant business
to date, and, in the future, its primary business will be the business of the
Bank.
Presently, the Company has no plans to own or lease any property,
but will instead use the premises and equipment of the Bank. The Company does
not intend to employ any persons other than certain officers of the Bank who
will not be separately compensated by the Company. The Company may utilize the
support staff of the Bank from time to time, if needed, and additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
The Company will be subject to regulation and supervision by the
Federal Reserve. See "Business of Troy Financial Corporation" and "Regulation
and Supervision-- Regulation of the Company."
BUSINESS OF THE TROY SAVINGS BANK
GENERAL
The Troy Savings Bank is a community oriented savings bank
headquartered in Troy, New York and was originally chartered in 1823. As a full
service financial institution, the Bank places a particular emphasis on
residential and commercial real estate loan products, as well as retail and
business banking products and services. The Bank and its subsidiaries also offer
a complete range of trust, insurance and investments services, including
securities brokerage, annuity and mutual funds sales, money management and
retirement plan services, and other traditional investment/brokerage activities
to individuals, families and businesses throughout the six New York State
Counties of Albany, Rensselaer (Troy), Saratoga, Schenectady, Warren and
Washington.
The Bank's goal is to be the primary source of financial products
and services for its business and retail customers. The Bank's business strategy
is to serve as a community based, full-service financial services firm by
offering a wide variety of business and retail banking products, and trust,
insurance, investment management and brokerage services to its potential and
existing customers throughout its market area. In addition, the Company intends
to establish or acquire a commercial bank and trust company that can accept
municipal deposits to complement the Bank's municipal investment activities. In
the future, the Bank may open new branches to better serve its existing
customers and to increase its market share, especially in those areas in which
the Bank, through Family Mortgage Banking Co., Inc. ("FMB"), its wholly owned
subsidiary, originates residential mortgage loans. Whereas the Bank's strategy
since the mid-1980s has been to provide a wide variety of financial products and
services to attract an equally wide variety of customers, the Bank also is now
focusing on expanding each customer's relationship by cross-selling multiple
products and services.
The Bank delivers its products and services and interacts with its
customers primarily through its 14 branches and 15 proprietary automated teller
machines ("ATMs") and its 24-hour telephone banking service ("Time$aver"). The
Bank's branches are staffed by managers, branch operations supervisors and
customer sales and service representatives ("CSSRs") who are trained and
encouraged to market and service the Bank's products and services, including
those of the Bank's subsidiaries. See "-- Subsidiaries." Currently, the Bank is
processing, on average, approximately 25,000 transactions per month at its ATMs
and is handling approximately 2,500 calls monthly through Time$aver. The typical
retail banking customer of the Bank is 54 years of age, lives within the Bank's
six county market area, and has 1.7 accounts with an aggregate deposit balance
of approximately $13,800.
34
<PAGE> 52
The Bank believes that its relationships to the communities it
serves distinguishes it from competitors, many of which are out-of-market
financial institutions with branches in the Bank's market area or local
institutions that have recently been acquired by larger out-of-market
institutions. The Bank has served individuals, families and businesses in its
six county market area for over 175 years, and the Bank maintains a highly
visible role in its communities by participating in and sponsoring charities and
charitable events. Many of the Bank's employees, including its senior officers
and department managers, serve on civic and community boards. The Troy Savings
Bank Music Hall, located in the Bank's headquarters building, hosts many
concerts and other events each year. The Bank's four most senior officers,
including the President and Chief Executive Officer, have been with the Bank for
a combined 55 years, and have worked in the Bank's market area for over 90
years. Many of the Bank's officers have come to work for the Bank after working
for its competitors which were acquired by or merged with out-of-market
financial institutions.
The Bank is subject to regulation, examination and supervision by
the FDIC and the New York Superintendent, and is a member of the FHLB System.
The Bank's deposits are insured by the FDIC to the maximum extent provided by
law.
MARKET AREA
The Bank currently operates 14 full service banking offices,
including one branch in a local supermarket, in a six county market. The Bank's
market area has a combined population of approximately 900,000 and a median
income of approximately $32,000 according to the 1990 United States Census.
Since 1990, the population has increased by 2.05% and new home construction has
increased at an average annual rate of 14%, although prices of existing homes
have generally been declining in recent years. Albany, the state capital of New
York, and Saratoga, a major tourist area, are located within the Bank's market
area. The New York state government employs approximately 53,000 people in the
Bank's market area, and the 10 largest employers in Albany and Rensselaer
Counties employ almost 37,000 workers. The Bank's market area is located on many
major highway networks offering easy access to the east coast, New England, the
midwest and Canada, and is home to 19 colleges and universities. Since 1994, the
unemployment rate in the Bank's market area has decreased from 6.95% to a
current rate of 3.65%.
LENDING ACTIVITIES
The Bank focuses its lending activities primarily on the origination
of residential and commercial real estate loans, commercial business loans and
consumer loans. The types of loans that the Bank may originate are subject to
federal and state law and regulations. Interest rates charged by the Bank on
loans are affected principally by the demand for such loans, the supply of money
available for lending purposes and the rates offered by its competitors. These
factors are, in turn, affected by general and economic conditions, monetary
policies of the federal government, including the Federal Reserve, legislative
tax policies and governmental budget matters. All loan approval decisions are
made locally, by individual loan officers or loan committees, depending upon the
size of the loan, and the Bank responds to all loan requests in a prompt and
timely manner.
LOAN PORTFOLIO COMPOSITION. At September 30, 1998, the Bank's
loan portfolio, totaled $465.6 million, or 65.0% of total assets, and
consisted primarily of single family residential mortgage loans and commercial
real estate loans, as well as construction loans, commercial business loans and
consumer loans.
The Bank's portfolio of single family residential mortgage loans
totaled $202.5 million, or 43.5% of loans, and 28.3% of total assets, at
September 30, 1998, and consisted primarily of fixed rate and adjustable rate
loans secured by detached, single family homes located in the Bank's market
area, as well as secured home equity and home improvement loans. As of September
30, 1998, the Bank's largest single family residential mortgage loan had an
outstanding balance of $796,000. The typical residential mortgage loan held by
the Bank in its portfolio has an average principal balance of
35
<PAGE> 53
approximately $80,000 and a loan-to-value ("LTV") ratio of 80%, secured by a
detached, single family home.
The Bank's commercial real estate loan portfolio totaled $166.2
million, or 35.7% and 23.2% of the Bank's loans, and total assets, respectively,
at September 30, 1998. Approximately 72.3% of the loans are secured by
properties located in the Bank's six county market area, and an additional 15.9%
are secured by properties located in the New York City area. Approximately 35.7%
of the properties securing the loans are apartment buildings and cooperatives,
32.9% are office buildings and warehouses and 16.0% are retail buildings. The
Bank's commercial real estate loans range in size from $1,000 to $4.5 million,
and the median outstanding principal balance at September 30, 1998 was $207,374.
The 20 largest commercial real estate loans range in size from $2.3 million to
$4.5 million, and the Bank had 47 loans with outstanding balances of more than
$1.0 million at September 30, 1998. The Bank's largest commercial real estate
exposure at September 30, 1998 involving a single entity was $15.1 million
(excluding a $2.5 million personal line of credit) to a local real estate
developer and related real estate interests with whom the Bank has had a seven
year relationship.
The Bank's commercial business loan portfolio totaled $45.2 million,
or 9.7% of the Bank's loans, and 6.3% of total assets, at September 30, 1998,
and includes fixed rate loans and adjustable rate lines of credit to a diverse
customer base which includes manufacturers, wholesalers, retailers, service
providers, educational institutions and government funded entities. The Bank's
commercial business loans range in size from $1,000 to $2.5 million, with a
median principal balance outstanding of $25,000 as of September 30, 1998. The
Bank's 20 largest commercial business loans at that date range in terms of total
exposure (outstanding balances and unfunded commitments) from $1.2 million to
$8.0 million.
The Bank's consumer loan portfolio totaled $42.0 million, or 9.0% of
the Bank's loans, and 5.9% of total assets, at September 30, 1998. The Bank's
consumer loan portfolio includes home equity lines of credit, fixed rate
consumer loans, overdraft protection and Creative Loans, which start with a
modest below market interest rate that increases each year. The Bank's home
equity lines of credit and Creative Loans represented 20.4% and 31% of the
Bank's consumer loan portfolio, respectively, at September 30, 1998.
The following table sets forth the composition of the Bank's loan
portfolio, excluding loans held for sale, in dollar amounts and percentages of
the respective portfolios at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------------------------
1998 1997 1996
--------------------------- --------------------------- ----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential mortgage....................... $ 202,511 43.50% $ 214,638 45.23% $ 204,879 44.92%
Commercial................................. 166,186 35.69 184,561 38.89 191,624 42.01
Construction............................... 10,052 2.16 15,508 3.27 12,999 2.85
------------ ------ ------------ ------ ------------ ------
Total real estate loans................. 378,749 81.35 414,707 87.39 409,502 89.78
Commercial business loans..................... 45,156 9.70 29,961 6.31 24,762 5.43
Consumer loans:
Home equity lines of credit................ 8,575 1.84 9,883 2.08 9,387 2.06
Other consumer............................. 33,445 7.18 20,539 4.33 13,159 2.88
------------ ------ ------------ ------ ------------ ------
Total consumer loans.................... 42,020 9.02 30,422 6.41 22,546 4.94
Net deferred loan fees and unearned discount.. (344) (0.07) (501) (0.11) (684) (0.15)
------------ ------ ------------ ------ ------------ ------
Total loans................................... 465,581 100.00% 474,589 100.00% 456,126 100.00%
====== ====== ======
Less:
Allowance for loan losses.................. (8,260) (6,429) (4,304)
------------ ------------ ------------
Total loans receivable, net................... $ 457,321 $ 468,160 $ 451,822
============ ============ ============
</TABLE>
36
<PAGE> 54
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------------------
1995 1994
--------------------------- -----------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Residential mortgage........................................... $ 193,720 46.92% $ 175,769 45.53%
Commercial..................................................... 171,830 41.61 170,744 44.23
Construction................................................... 9,354 2.27 5,949 1.54
------------ ------ ------------ ------
Total real estate loans..................................... 374,904 90.80 352,462 91.30
Commercial business loans......................................... 19,038 4.61 16,046 4.16
Consumer loans:
Home equity lines of credit.................................... 8,620 2.09 10,144 2.63
Other consumer................................................. 11,140 2.69 8,133 2.11
------------ ------ ------------ ------
Total consumer loans........................................ 19,760 4.78 18,277 4.74
Net deferred loan fees and unearned discount...................... (790) (0.19) (767) (0.20)
------------ ------ ------------ ------
Total loans.................................................. 412,912 100.00% 386,018 100.00%
====== ======
Less:
Allowance for loan losses...................................... (4,297) (4,190)
------------ ------------
Total loans receivable, net....................................... $ 408,615 $ 381,828
============ ============
</TABLE>
The following table sets forth, at September 30, 1998, the dollar
amount of all loans in the Bank's portfolio (excluding loans held for sale)
and contractually due after September 30, 1999, and whether such loans have
fixed or adjustable interest rates.
<TABLE>
<CAPTION>
DUE AFTER
SEPTEMBER 30, 1999
--------------------------------
AMOUNT PERCENT
------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Fixed:
Residential mortgage............................................................. $ 126,805 31.57%
Commercial mortgage.............................................................. 82,320 20.50
Construction..................................................................... 3,643 .91
----------- ------
Total real estate loans....................................................... 212,768 52.98
Commercial business.............................................................. 15,804 3.94
Consumer:
Home equity lines of credit................................................... -- --
Other consumer................................................................ 20,009 4.98
----------- ------
Total consumer............................................................. 20,009 4.98
----------- ------
Total fixed rate loans.............................................................. 248,581 61.90
Adjustable:
Residential mortgage............................................................. 74,949 18.67
Commercial mortgage.............................................................. 44,613 11.11
Construction..................................................................... -- --
----------- ------
Total real estate loans....................................................... 119,562 29.78
Commercial business.............................................................. 12,452 3.10
Consumer:
Home equity lines of credit................................................... 8,575 2.14
Other consumer................................................................ 12,376 3.08
----------- ------
Total consumer............................................................. 20,951 5.22
Total adjustable rate loans......................................................... 152,965 38.10
----------- ------
Total loans......................................................................... $ 401,546 100.00%
=========== ======
</TABLE>
37
<PAGE> 55
LOAN MATURITY AND REPRICING. The following table shows the
contractual maturities of the Bank's loan portfolio at September 30, 1998. The
table does not include loans held for sale, prepayments or scheduled principal
amortization.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
------------------------------------------------------------------------------------
REAL ESTATE LOANS
------------------------------------
HOME EQUITY
RESIDENTIAL COMMERCIAL LINES OTHER
MORTGAGE COMMERCIAL CONSTRUCTION BUSINESS OF CREDIT CONSUMER TOTAL
-------- ---------- ------------ -------- --------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Amounts due:
Within one year....................... $ 757 $ 39,253 $ 6,409 $ 16,900 $ -- $ 1,060 $ 64,379
After one year:
More than one year to five years...... 4,221 59,451 3,463 15,092 8,575 31,988 122,790
More than five years to ten years..... 18,403 42,697 180 8,587 -- 347 70,214
More than ten years to twenty years... 52,035 24,592 -- 4,527 -- 50 81,204
More than twenty years................ 127,095 193 -- 50 -- -- 127,338
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total due after September 30, 1999... 201,754 126,933 3,643 28,256 8,575 32,385 401,546
---------- ---------- ---------- ---------- ---------- ---------- ---------
Total amount due.................. 202,511 166,186 10,052 45,156 8,575 33,445 465,925
========== ========== ========== ========== ========== ========== ---------
Less:
Net deferred loan fees and unearned
discount.......................... (344)
Allowance for loans losses........... (8,260)
----------
Loans receivable, net............. $ 457,321
=========
</TABLE>
38
<PAGE> 56
LOAN ORIGINATIONS AND SALES. The following table sets forth the
Bank's loan originations, sales and principal repayments for the periods
indicated.
<TABLE>
<CAPTION>
REAL ESTATE
-------------------------------------- HOME EQUITY
COMMERCIAL LINE OF
RESIDENTIAL COMMERCIAL CONSTRUCTION BUSINESS CREDIT
----------- ---------- ------------ -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance as of September 30, 1995...... $ 199,557 $ 171,830 $ 9,354 $ 19,038 $ 8,620
Add: Loan originations, other
advances, and purchases.......... 47,928 25,443 18,692 51,975 1,291
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions............. (41,135) (5,649) (15,047) (46,251) (524)
-------- ------- -------- -------- -----
Balance as of September 30, 1996...... 206,350 191,624 12,999 24,762 9,387
Add: Loan originations, other
advances, and purchases.......... 36,080 30,566 24,407 51,206 997
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions............. (24,089) (37,629) (21,898) (46,007) (501)
-------- -------- -------- -------- -----
Balance at September 30, 1997......... 218,341 184,561 15,508 29,961 9,883
Add: Loan originations, other
advances, and purchases.......... 79,360 27,432 24,662 78,619 507
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions............. (84,094) (45,807) (30,118) (63,424) (1,815)
-------- -------- -------- -------- -------
Balance at September 30, 1998......... $ 213,607 $ 166,186 $ 10,052 $ 45,156 $ 8,575
=========== ========= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
NET
DEFERRED FEES
OTHER AND UNEARNED TOTAL
CONSUMER SUBTOTAL DISCOUNTS LOANS (1)
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Balance as of September 30, 1995...... $ 11,140 $ 419,539 $ (790) $ 418,749
Add: Loan originations, other
advances, and purchases.......... 6,435 151,764 -- 151,764
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions............. (4,416) (113,022) -- (113,022)
------- --------- ----- ---------
Balance as of September 30, 1996...... 13,159 458,281 (684) 457,597
Add: Loan originations, other
advances, and purchases.......... 17,613 160,869 -- 160,869
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions............. (10,233) (140,357) -- (140,357)
------- --------- ----- ---------
Balance at September 30, 1997......... 20,539 478,793 (501) 478,292
Add: Loan originations, other
advances, and purchases.......... 19,987 230,567 -- 230,567
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions............. (7,081) (232,339) -- (232,339)
------- --------- ----- ---------
Balance at September 30, 1998......... $ 33,445 $ 477,021 $ (344) $ 476,677
======== ========= ========= =========
</TABLE>
(1) Total loans include loans held for sale of $11.1 million, $3.7
million, $1.5 million and $5.8 million for fiscal years 1998,
1997, 1996 and 1995, respectively.
39
<PAGE> 57
The Bank generally does not purchase loans from other financial
institutions. The Bank does, however, sell or enter into commitments to sell
certain of its fixed rate mortgage loans to FreddieMac, as well as to other
parties. Historically the Bank has generally sold substantially all of its 15-
and 30-year conforming fixed rate mortgage loans into the secondary mortgage
market. During 1998 and 1997 the Bank sold $44.5 million and $13.4 million of
mortgage loans into the secondary mortgage market. In late fiscal 1998, the Bank
began to hold in its loan portfolio certain 15-year fixed rate mortgage loans.
In order to reduce the interest rate risk associated with mortgage loans held
for sale, as well as outstanding loan commitments and uncommitted loan
applications with rate lock agreements which are intended to be held for sale,
the Bank enters into formal commitments to sell loans in the secondary market,
and may also enter into option and delivery agreements. The Bank typically
retains servicing rights on loans sold in order to generate fee income. As of
September 30, 1998, the Bank was servicing mortgage loans for others, with an
aggregate outstanding principal balance of $195.7 million.
The following is a more detailed discussion of the Bank's current
lending practices.
SINGLE FAMILY RESIDENTIAL LENDING. During the year ending September
30, 1998, the Bank originated $79.4 million of single family residential real
estate loans. Substantially all of the Bank's residential mortgage loans were
originated through FMB, the Bank's mortgage banking subsidiary. FMB currently
employs six loan counselors who are responsible for developing the Bank's
mortgage business by meeting with referrals, networking with representatives of
the local real estate industry and sponsoring home buying seminars. In addition,
the Bank's CSSRs are trained to refer potential mortgage customers to FMB.
Although FMB meets with applicants and assists with the application process, the
Bank handles the processing, underwriting, funding and closing of all
residential mortgage loans. The single family residential mortgage loans not
originated through FMB generally are originated through independent mortgage
brokers or by the Bank.
The Bank currently offers a variety of fixed rate and adjustable
rate ("ARMs") mortgage loans secured by one- to four-family residences located
in the Bank's six county market area. The Bank offers mortgage loans that
conform to FreddieMac guidelines, as well as jumbo loans (presently loans in
amounts over $227,150) and loans with other non-conforming features. The Bank
will underwrite a single family residential mortgage loan with an LTV ratio of
up to 95% with private mortgage insurance, and the Bank's fixed rate mortgages
generally have maturities of 10 to 30 years.
The Bank offers a variety of ARM programs based on market demand.
The Bank generally amortizes an ARM over 30 years. On select ARMs, the Bank
offers a conversion option, whereby the borrower, at his or her option, can
convert the loan to a fixed interest rate after a predetermined period of time,
generally 10 to 57 months. Interest rates are generally adjusted based on a
specified margin over the Constant Treasury Maturity Index. Interest rate
adjustments on such loans are limited to both annual adjustment caps and a
maximum adjustment over the life of the loan. The origination of ARMs, as
opposed to fixed rate loans, helps to reduce the Bank's exposure to increases in
interest rates. During periods of rising interest rates, however, ARMs may
increase credit risks not inherent in fixed rate loans, primarily because, as
interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. The annual and lifetime adjustable caps do
however help to reduce such risks. The volume and type of ARMs originated
through FMB are affected by numerous market factors, including the level of
interest rates, competition, consumer preferences and the availability of funds.
At September 30, 1998, the Bank held $78.6 million of ARMs in its loan
portfolio, most of which were one-year ARMs.
Single family residential loans are generally underwritten according
to FreddieMac guidelines. The Bank requires borrower's who obtain mortgage loans
with an LTV ratio greater than 80% to obtain private mortgage insurance in an
amount sufficient to reduce the Bank's exposure to not more than 80% of the
lower of the purchase price or appraised value. In addition, the Bank requires
escrow accounts for the payment of taxes and insurance if the LTV ratio exceeds
80%, but will permit borrowers to request an escrow account waiver if the LTV
ratio is less than 80%. Substantially all mortgage loans originated by the Bank
include due-on-transfer clauses which
40
<PAGE> 58
provide the Bank with the contractual right to deem the loan immediately due
and payable, in most instances, if the borrower transfers ownership of the
property without the Bank's consent. The Bank's staff underwriters have
authority to approve loans in amounts up to $227,150. Loans between $227,150
and $1.0 million require the approval of the Bank's Commercial Mortgage Credit
Committee, and loans in excess of $1.0 million require the approval of the
Board of Trustee's Loan Committee.
In an effort to help low and moderate income home buyers in the
Bank's communities, the Bank participates in residential mortgage programs and
products sponsored by the State of New York Mortgage Agency ("SONYMA") and the
Federal Housing Authority ("FHA"). SONYMA and FHA mortgage programs provide low
and moderate income households with smaller down payment and below-market loans.
The Bank typically sells the SONYMA loans back to SONYMA for sale in the
secondary market. The Bank is also a charter member of the Capital District
Affordable Housing Partnership, a local lending consortium which makes mortgage
funds available to home buyers who are unable to obtain conventional financing.
The Bank participates in the Capital District Community Loan and the FHLB Home
Buyer's Club. In the past five years, the Bank has also made available to
low-to-moderate income first-time home buyers over $15 million of conventional
no down payment mortgages for its loan portfolio.
To complement the Bank's portfolio of residential mortgage loan
products, the Bank also originates fixed rate home equity mortgage loans,
ranging in size from $7,000 to $100,000. These loans are secured by a first or
second mortgage on the owner-occupied property. During fiscal 1998, the Bank
originated $2.8 million of home equity mortgage loans. As of September 30, 1998,
the average size of the Bank's outstanding home equity mortgage loans in its
residential mortgage loan portfolio was $20,000.
CONSTRUCTION LENDING. The Bank offers residential construction loans
to individuals who are constructing their own homes in the Bank's market area.
Generally, the builders utilized by the Bank's construction loan borrowers are
ones with whom the Bank is familiar and has a long-standing relationship. The
Bank's loan administration group monitors the periodic disbursements of all
construction loans, and before advances are made the Bank's independent
appraisers provide reports comparing the progress of the construction to the
preconstruction schedule. In many cases, the Bank converts construction loans to
traditional residential or commercial mortgage loans, as the case may be,
following completion of construction. As a result, the Bank would report such
loans as residential or commercial mortgage loans, respectively. During the year
ended September 30, 1998, the Bank originated $24.7 million of construction
loans. As of September 30, 1998, the Bank had $10.1 million of commercial
construction loans outstanding, or 2.16% of the Bank's loans, and 1.4% of total
assets.
The Bank's construction loans generally have terms of up to six
months, and require payments of interest only. If construction is not completed
on schedule, the Bank charges the borrower additional fees in connection with an
extension of the loan. The Bank's staff underwriters have approval authority of
up to $227,150. Loans in excess of $227,150 require approval of the Commercial
Mortgage Credit Committee, and loans in excess of $1.5 million require approval
of the Loan Committee of the Board of Trustees. The Bank will not make
construction loans in excess of $1.5 million, or greater than 95% of the
estimated cost of construction.
Construction lending generally involves greater credit risk than
permanent financing on owner-occupied real estate. The risk of loss is dependent
largely upon the accuracy of the initial estimate of the property's value at
completion of construction, compared to the estimated cost (including interest)
of construction, and the ability of the builder to complete the project. If the
estimate of the value proves to be inaccurate, then the Bank may be confronted
with a project that, when completed, has a value which is insufficient to assure
full repayment of the loan.
The Bank also makes construction loans on commercial real estate
projects where the borrowers are well known to the Bank, have the necessary
liquidity and financial capacity to support the projects through to completion,
and where the source of permanent financing (either the Bank or
41
<PAGE> 59
another institution) can be verified. All commercial real estate construction
lending is done on a recourse basis. At September 30, 1998, the Bank had $10.1
million in outstanding commercial real estate construction loans.
COMMERCIAL REAL ESTATE LENDING. The Bank originates commercial real
estate loans primarily in its six county market area, as well as New York City
and upstate New York, and to a lesser extent in other states. Approximately
15.9%, 2.8% and 9.0% of the Bank's commercial real estate loans are secured by
real estate located in New York City (primarily Manhattan, Brooklyn and the
Bronx), upstate New York and states other than New York, respectively. At
September 30, 1998, the Bank's commercial real estate loan portfolio by sector
is as follows: 35.7% in apartment buildings and cooperatives; 32.9% in office
and warehouse buildings; 16.0% in retail buildings; 2.8% in not for profits;
4.7% in the hospitality industry (hotels and motels); and 7.9% in other property
types.
The volume of the Bank's commercial real estate lending has been
relatively consistent over the last three years. The Bank has originated $27.4
million, $30.5 million, and $25.4 million of new loans in fiscal years 1998,
1997 and 1996, respectively. As part of the Bank's commercial real estate
lending marketing effort, the Bank's commercial real estate loan officers call
on prospective borrowers, follow-up on branch walk-ins and referrals and
interact with representatives of the local real estate industry.
In addition to developing business, the Bank's commercial real
estate loan officers are responsible for the underwriting of commercial real
estate loans. The Bank's underwriting standards focus on a review of the
potential borrower's cash flow, LTV ratios and rent-rolls, as well as the
borrower's leverage and working capital ratios, the real estate securing the
loan, personal guarantees and the borrowers' other on-going projects. In
general, the Bank seeks to underwrite loans with an LTV ratio of 75% or less,
although under certain circumstances it will accept an LTV ratio of up to 90%.
The Bank assigns each commercial real estate loan a risk rating
which focuses on the loan's risk of loss. Following the loan officer's initial
underwriting and preparation of a credit memorandum, the loan file is reviewed
by the Vice President and Director of Commercial Real Estate Lending who then
has authority to approve the loan if the loan amount is less than $100,000, in
the case of unsecured loans, and less than $227,150, in the case of loans
secured by commercial real estate. Unsecured loans between $100,000 and $1.5
million and secured loans between $227,000 and $1.5 million require approval of
the Bank's Commercial Mortgage Credit Committee. All loans in excess of $1.5
million require approval of the Loan Committee of the Board of Trustees.
The commercial real estate loan officers are also responsible for
monitoring the Bank's portfolio of commercial real estate loans on an on-going
basis, which includes reviewing annual financial statements, verification that
loan covenants have not been violated and property inspections. In addition, the
Bank employs an annual review process in which an outside consultant, who was
previously the director of commercial lending for a large New York commercial
bank, reviews 75% to 80% of the Bank's commercial real estate portfolio to
confirm the Bank's assigned risk rating and to review the Bank's overall
monitoring of the loan portfolio.
COMMERCIAL BUSINESS LENDING. Since 1993, the Bank has actively
sought to originate commercial business loans in its market area. During the
year-ended September 30, 1998, the Bank originated $50.9 million commercial
business loans. The Bank's commercial loans generally range in size up to $2.5
million, and all of the borrowers are located within the Bank's market area. The
Bank offers both fixed rate loans, with terms ranging from three to seven years,
and adjustable rate lines of credit. As of September 30, 1998, 44% of the Bank's
outstanding commercial loan portfolio consisted of variable rate loan products.
As a general rule, the Bank sets the interest rates on its loans based on the
Bank's prime rate or other index rates, plus a premium, and its variable-rate
loans reprice at least every 90 days. The Bank's commercial loans includes loans
used for equipment
42
<PAGE> 60
financing, working capital and accounts receivable, and some of the Bank's
outstanding loans are to a diverse customer base which includes manufacturers,
wholesalers, retailers, service providers, educational institutions and
government funded entities.
The Bank solicits commercial loan business through its commercial
loan officers who call on potential borrowers and follow-up on referrals from
other Bank employees. The commercial loan officers market the Bank's commercial
loan products by focusing on the Bank's competitive pricing, the Bank's
reputation for service and the Bank's ties to the local business communities. In
many cases, the Bank's senior management, including the President, will meet
with prospective borrowers.
The Bank also has a small business lending program whereby the Bank
lends money to small, locally owned and operated businesses. During the
year-ending September 30, 1998, the Bank originated 146 new small business loans
of up to $50,000, and as of September 30, 1998, the Bank had over $2.3 million
of such loans outstanding. Many of the Bank's small business loans are secured
by cash collateral or marketable securities or are guaranteed by the Small
Business Administration.
In addition to developing business, the Bank's commercial loan
officers are responsible for the underwriting of the commercial loans and the
monitoring of the ongoing relationship between the borrower and the Bank.
Following the loan officer's initial underwriting and preparation of a credit
memorandum, the potential loan is reviewed by the Vice President and Director of
Commercial Lending who then has authority to approve the loan if the loan amount
is less than $100,000. Loans between $100,000 and $1.0 million require approval
of the Bank's Commercial Loan Credit Committee, and loans in excess of $1.0
million require approval of the Loan Committee of the Board of Trustees. The
Bank'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 Bank 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 Bank's commercial loans, the Bank employs the same risk rating system as is
used by the Bank'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 Bank assigns a risk rating.
The Bank monitors its commercial loan portfolio by closely watching
all loans with a risk rating which indicates certain adverse factors, such as
debt ratios or cash flow issues. In addition, the Bank receives delinquency
reports beginning on the 10th of every month. If a loan payment is more than 20
days late, then the commercial loan officer begins active loan management, which
initially will include calling the borrower or sending a written notice.
Moreover, because the Bank's lines of credit expire every 12 months (five months
after the borrower's end of fiscal year) and the borrower is required to renew
the line of credit at such time, the Bank, in effect, re-underwrites the loan
annually. Because a term loan often includes a line of credit, the status of the
borrower and loan is reviewed annually because of the line of credit review. In
all reviews, the Bank analyzes the borrower's most current financial statements,
and in some cases will visit the borrower or inspect the borrower's business and
properties.
OTHER CONSUMER LENDING. In addition to the Bank's residential
mortgage and construction loans, the Bank offers a variety of other consumer
credit products, including home equity lines of credit, variable rate or
Creative Loans, fixed rate consumer loans and overdraft protection. The
objective of the Bank's consumer lending program is to maintain a profitable
loan portfolio and to serve the credit needs of the Bank's customers and the
communities in which it does business, while providing for adequate liquidity,
diversification and safe and sound banking practices.
The Bank offers home equity lines of credit in amounts up to
$100,000. The home equity lines of credit have fixed interest rates and are
available only if the LTV ratio is less than 80%. The Bank's Creative Loans
begin with a modest below market interest rate which increases each year,
43
<PAGE> 61
and are generally secured by personal property and do not carry prepayment
penalties. The average balance on the Bank's Creative Loans for fiscal 1998 was
$13.8 million.
The Bank's fixed rate consumer loans are typically made to finance
the purchase of new or used automobiles. In such cases, the Bank offers 100%
financing on new automobiles with terms available up to 60 months and 80%
financing on used automobiles with loan terms dependent upon the year of
vehicles. The Bank also offers unsecured lines of credit (overdraft protection)
to credit qualified depositors who maintain checking accounts with the Bank. In
addition to covering overdrafts on checking accounts, these unsecured lines of
credit are accessible to borrowers from ATMs throughout the world.
The Bank markets its consumer credit products through its branches,
local advertisements and direct mailings. Applications can be completed at any
branch of the Bank, and in most cases, the Bank will respond to a customer's
completed credit application within 24 hours, including the funding of the loan
if the borrower is approved. Individual authority to approve consumer loans
varies by the amount of the loan and whether it is real estate related. Consumer
loans are underwritten according to the Bank's Consumer Loans Underwriting
practices, and loan approval is based primarily on review of the borrower's
employment status, credit report and credit score.
LOAN REVIEW. As part of the portfolio monitoring process, all
commercial business loans, regardless of size, and all commercial real estate
loans over $750,000 are subjected to an annual detailed loan review process. All
classified loans (see below) in both portfolios are subjected to this process
quarterly. Current financial information is analyzed and the loan rating is
evaluated to determine if it still accurately represents the level of risk posed
by the credit. These reviews are then reviewed by an outside consultant who
opines on the reasonability of the loan officers' conclusions with respect to
the loan's risk rating and the related allowance for loan loss, if any. For the
classified loans, these quarterly reviews and review by the consultant are
complemented by a quarterly loan officers' meeting with the consultant and the
Bank's Chief Credit Officer. The conclusions reached at these meetings become an
integral part of the quarterly analysis of loan loss reserve adequacy.
DELINQUENT LOANS. It is the policy of the management of the Bank to
monitor the Bank's loan portfolio to anticipate and address potential and actual
delinquencies. The procedures taken by the Bank vary depending on the type of
loan.
With respect to single family residential mortgage loans and
consumer loans, when a borrower fails to make a payment on the loan, the Bank
takes immediate steps to have the delinquency cured and the loan restored to
current status. On the 15th of every month, the Credit Administration Department
runs delinquency reports. The Bank's collection manager and her staff then
contact the borrower by telephone to ascertain the reason for the delinquency
and the prospects of repayment. Written notices are also sent at that time. The
borrower is again contacted by telephone on the 20th and 26th of the month if
payment has not been received. After 30 days another notice is sent and the
borrower is reported as delinquent. The Credit Administration Department
continues to call the borrower, and if payment has not been received by the 60th
day, then another notice is sent informing the borrower that the loan must be
brought current within the next 30 days or foreclosure proceedings will be
commenced. Generally, the Bank does not accrue interest on loans more than 90
days past due. The Bank's procedures for single family residential loans which
have previously been sold by the Bank but which the Bank currently services are
identical during the first 60 days. After 60 days, the Bank follows the
FreddieMac or applicable investor guidelines and timeframes regarding delinquent
loan accounts.
With respect to commercial real estate and commercial business
loans, the Credit Administration Department delivers delinquency reports to the
respective departments beginning on the 10th of every month. If a loan payment
is more than 20 days late, then the loan officer begins active loan management.
44
<PAGE> 62
The following table sets forth the Bank's delinquent loans at the
dates indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
---------------------------------------------------------
60-89 90 DAYS OR MORE
------------------------- -------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Residential mortgage ........ 10 $ 710 42 $ 2,811
Commercial mortgage ......... 2 342 8 6,194
Construction ................ -- -- -- --
-------- -------- -------- --------
Total real estate loans... 12 1,052 50 9,005
-------- -------- -------- --------
Commercial business ............ 3 11 5 215
Consumer loans:
Home equity lines of credit.. -- -- 7 245
Other consumer .............. 3 9 14 50
-------- -------- -------- --------
Total consumer loans ..... 3 9 21 295
-------- -------- -------- --------
Total loans ........... 18 1,072 76 9,515
======== ======== ======== ========
Total delinquent loans to
total loans .............. 2.27%
========
Total loans .................... $465,581
========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------------------------------------
60-89 90 DAYS OR MORE
------------------------ ---------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Residential mortgage ........ 20 $ 1,500 36 $ 1,850
Commercial mortgage ......... 2 2,027 9 4,004
Construction ................ -- -- -- --
-------- -------- -------- --------
Total real estate loans... 22 3,527 45 5,854
-------- -------- -------- --------
Commercial business ............ -- -- 7 1,017
Consumer loans:
Home equity lines of credit.. -- -- 4 180
Other consumer .............. -- -- 9 41
-------- -------- -------- --------
Total consumer loans ..... -- -- 13 221
-------- -------- -------- --------
Total loans ........... 22 3,527 65 7,092
======== ======== ======== ========
Total delinquent loans to
total loans............... 2.24%
========
Total loans .................... $474,589
========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------------------
60-89 90 DAYS OR MORE
------------------------ ------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Residential mortgage ........ 12 $ 657 41 $ 2,544
Commercial mortgage ......... 3 448 19 7,627
Construction ................ -- -- -- --
-------- -------- -------- --------
Total real estate loans... 15 1,105 60 10,171
-------- -------- -------- --------
Commercial business ............ 1 20 10 287
Consumer loans:
Home equity lines of credit.. 3 58 2 98
Other consumer .............. 2 5. 3 14
-------- -------- -------- --------
Total consumer loans ..... 5 63 5 112
-------- -------- -------- --------
Total loans ........... 21 1,188 75 10,570
======== ======== ======== ========
Total delinquent loans to
total loans............... 2.58%
========
Total loans .................... $456,126
========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
---------------------------------------------------------
60-89 90 DAYS OR MORE
------------------------ ------------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Residential mortgage ........ 22 $ 1,316 35 $ 2,699
Commercial mortgage ......... 1 37 14 4,854
Construction ................ 1 1,200 1 116
-------- -------- -------- --------
Total real estate loans... 24 2,553 50 7,669
-------- -------- -------- --------
Commercial business ............ 3 80 10 548
Consumer loans:
Home equity lines of credit.. 2 106 -- --
Other consumer .............. 5 26 3 35
-------- -------- -------- --------
Total consumer loans ..... 7 132 3 35
-------- -------- -------- --------
Total loans ........... 34 2,765 63 8,252
======== ======== ======== ========
Total delinquent loans to
total loans............... 2.67%
========
Total loans .................... $412,912
========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994
--------------------------------------------------------
60-89 90 DAYS OR MORE
--------------------------- -----------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Residential mortgage ........ 18 $ 780 27 $ 2,125
Commercial mortgage ......... 7 2,454 12 5,097
Construction ................ 1 1,200 -- --
-------- -------- -------- --------
Total real estate loans... 26 4,434 39 7,222
-------- -------- -------- --------
Commercial business ............ 2 424 17 1,240
Consumer loans:
Home equity lines of credit.. 3 191 -- --
Other consumer .............. 2 2 1 --
-------- -------- -------- --------
Total consumer loans ..... 5 193 1 --
-------- -------- -------- --------
Total loans ........... 33 5,051 57 8,462
======== ======== ======== ========
Total delinquent loans to
total loans............... 3.50%
========
Total loans ....................
$386,018
========
</TABLE>
45
<PAGE> 63
CLASSIFIED ASSETS. The Bank's classification policies require the
classification of loans and other assets such as debt and equity securities,
considered to be of lesser quality, as "substandard," "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the borrower or of the collateral
pledged, if any. Substandard assets include those characterized by the distinct
possibility that the insured institution will sustain some loss if the
deficiencies are not corrected. Assets classified as "doubtful" have all of the
weaknesses inherent in those classified as substandard, with the added
characteristic that the weaknesses present make collection or liquidation in
full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as "loss" are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. At September 30,
1998, the Bank had classified $15.5 million and $811,000 of assets as
"substandard" and "doubtful," respectively. At such date, the Bank did not have
any assets classified as "loss."
At September 30, 1998, the Bank had five lending relationships each
with an outstanding principal balance in excess of $1.0 million which had an
internal adverse classification. Each of the classified loans was a commercial
real estate loan and classified as "substandard." A brief description of the
loans follows:
- Two commercial real estate loans to related borrowers.
The outstanding principal balance of these loans is $3.2
million, and the loans are secured by warehouse
industrial property and vacant land located outside of
New York State. The loans are also personally
guaranteed.
- A $1.9 million commercial real estate loan secured by a
multi-family residential property located outside of New
York State. The property which secures the loan, prior
to the borrower's purchase, was the subject of the
Bank's foreclosure proceedings. As of the date of this
prospectus, the loan is current and the borrower is
seeking to refinance with other financial institutions.
- A $2.0 million commercial real estate loan secured by a
multi-building warehouse park in the Bank's market area.
Monthly payments on this loan are received late. As of
the date of this prospectus, the borrower is seeking to
renegotiate the loan.
- A $1.3 million commercial real estate loan secured by
improved land located in the Bank's market area and
subdivided into lots intended for office use. The loan
is also personally guaranteed.
- A $1.4 million commercial real estate loan secured by a
multi-family residential apartment project located in
upstate New York outside of the Bank's market area. The
loan has been delinquent at various times.
In addition to classified assets, the Bank also has certain "special
mention" or watch list assets which have characteristics, features or other
potential weaknesses that warrant special attention. At September 30, 1998,
special mention assets totaled $2.4 million, or .33% of total assets.
NON-PERFORMING ASSETS. It is the policy of the Bank to place a loan
on non-accrual status when the loan is contractually past due 90 days or more,
or when, in the opinion of management, the collection of principal and/or
interest is in doubt. At such time, all accrued but unpaid interest is
reversed against current period income and, as long as the loan remains on
non-accrual status, interest is recognized only when received, if considered
appropriate by management. In certain cases, the Bank will not classify a loan
which is contractually past due 90 days or more as non-accruing if management
determines that the particular loan is well secured and in the process of
collection. In such cases, the loan is simply reported as "past due." Loans
are removed from non-accrual status when such loans become current as to
principal and interest or when, in the
46
<PAGE> 64
opinion of management, the loans are expected to be fully collectible as to
principal and interest. The Bank did not have any loans classified as 90 days
past due and still accruing interest at September 30, 1998. In certain cases,
the Bank will classify non-performing loans, which do not fall into the
categories of non-accrual or past-due, as troubled debt restructuring ("TDRs").
TDRs are loans whose repayment criteria have been renegotiated to below market
terms due to the borrowers' inability to repay the loans in accordance with the
loans' original terms. At September 30, 1998, the Bank classified $2.1 million,
or .29% of total assets, as TDRs.
The Bank classifies property that it acquires as a result of
foreclosure on a loan or settlement in lieu thereof as other real estate owned
("OREO"). The Bank records OREO at the lower of the unpaid principal balance or
fair value at the date of acquisition and subsequently carries it at the lower
of cost or net realizable value. At September 30, 1998, the Bank had $345,000 of
OREO resulting from single family residential mortgage loans, and $1.5 million
of OREO resulting from commercial real estate loans.
The following table sets forth the amounts and categories of
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Real estate loans:
Residential mortgage .......... $ 2,900 $ 2,598 $ 3,418 $ 3,676 $ 2,664
Commercial mortgage ........... 6,327 3,438 6,613 4,241 4,430
Construction .................. -- 350 516 -- --
------- ------- ------- ------- -------
Total real estate loans ..... 9,227 6,386 10,547 7,917 7,094
Commercial business loans ...... 31 33 105 236 810
Home equity lines of credit .... 259 -- -- -- 136
Other consumer loans ........... 50 40 17 2 --
------- ------- ------- ------- -------
Total non-accrual loans ..... 9,567 6,459 10,669 8,155 8,040
Loans contractually past due
90 days or more other than
non-accruing ................... -- -- -- 4 89
Troubled debt restructurings.... 2,081 2,256 1,810 3,602 4,136
------- ------- ------- ------- -------
Total non-performing loans... 11,648 8,715 12,479 11,761 12,265
Other real estate owned assets:
Residential real estate ........ 345 589 622 67 84
Commercial real estate ......... 1,527 2,101 1,903 2,122 4,649
------- ------- ------- ------- -------
Total other real estate owned.. 1,872 2,690 2,525 2,189 4,733
Total non-performing assets.. $13,520 $11,405 $15,004 $13,950 $16,998
======= ======= ======= ======= =======
Allowance for loan losses ........ $ 8,260 $ 6,429 $ 4,304 $ 4,297 $ 4,190
======= ======= ======= ======= =======
Allowance for loan losses as a
percentage of non-performing
loans .......................... 70.91% 73.77% 34.49% 36.54% 34.16%
======= ======= ======= ======= =======
Non-performing loans as a
percentage of total loans ...... 2.50% 1.84% 2.74% 2.85% 3.18%
======= ======= ======= ======= =======
Non-performing assets as a
percentage of total assets ..... 1.89% 1.72% 2.28% 2.22% 2.80%
======= ======= ======= ======= =======
</TABLE>
ALLOWANCE FOR LOAN LOSSES. In originating loans, there is a
substantial likelihood that loan losses will be experienced. The risk of loss
varies with, among other things, general economic conditions, the type of loan,
the creditworthiness of the borrower over the term of the loan and, in the case
of a collateralized loan, the quality of the collateral securing the loan. In an
effort to minimize loan losses, the Bank monitors its loan portfolio by
reviewing delinquent loans and taking appropriate measures. In addition, with
respect to the Bank's commercial real estate and
47
<PAGE> 65
commercial business loans, the Bank closely watches all loans with a risk rating
that indicates potential adverse factors. Moreover, on an annual basis, the Bank
reviews borrowers' financial statements, including rent-rolls if appropriate,
and in some cases inspects borrowers' properties, in connection with the annual
renewal of lines of credit. The Bank's outside consultant periodically reviews
the credit quality of the loans in the Bank's commercial real estate and
commercial business loan portfolios, and, together with the Bank's Commercial
Loan Credit Committee, reviews on a quarterly basis all loans over $100,000 with
a risk rating that indicates the loan has certain weaknesses.
Based on management's on-going review of the Bank's loan portfolio,
including the risks inherent in the portfolio, historical loan loss experience,
general economic conditions and trends and other factors, the Bank maintains an
allowance for loan losses to cover potential loan losses. The allowance for loan
losses is established 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
losses on existing loans that may become uncollectible based on evaluation of
the collectibility of loans and prior loan loss experience. Based on information
currently known to management, management considers the current level of
reserves adequate to cover potential loan losses, although there can be no
assurance that such reserves will in fact be sufficient to cover actual losses.
At September 30, 1998, the Bank's allowance for loan losses was $8.3 million, or
1.77% of total loans, and 70.91% of non-performing loans at that date. Net
charge-offs during the year ending September 30, 1998 were $2.2 million. As a
result of the current level of nonperforming loans and net charge-offs, as well
as consideration of the general economic trends in the Bank's market area, the
Bank anticipates that the provision for loan losses will continue in the current
range through at least fiscal 1999. There can be no assurance, however, that
such loan losses will not exceed estimated amounts or that the provision for
loan losses will not increase in future periods. The Bank will continue to
monitor and modify its allowance for loan losses as conditions dictate.
48
<PAGE> 66
The following table is a summary of the activity in the Bank's
allowance for loan losses for the last five years:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans outstanding
(at end of period) ................... $ 465,581 $ 474,589 $ 456,126 $ 412,912 $ 386,018
========= ========= ========= ========= =========
Average total loans outstanding
(period to date) ..................... $ 467,406 $ 471,779 $ 432,569 $ 398,793 $ 369,669
========= ========= ========= ========= =========
Allowance for loan losses at
beginning of period .................. $ 6,429 $ 4,304 $ 4,297 $ 4,190 $ 2,826
Loan charge-offs:
Residential real estate .............. (521) (320) (578) (199) (99)
Commercial real estate ............... (1,612) (1,286) (165) (392) (197)
Construction real estate ............. (130) (140) (401) (82) --
Commercial business .................. (51) (110) (17) (286) (382)
Home equity lines of credit .......... -- -- -- (3) --
Other consumer loans ................. (132) (34) (8) (72) (41)
--------- --------- --------- --------- ---------
Total charge-offs .............. (2,446) (1,890) (1,169) (1,034) (719)
Loan recoveries:
Residential real estate .............. 147 80 92 34 55
Commercial real estate ............... 57 13 83 94 59
Construction real estate ............. -- -- 58 -- --
Commercial business .................. 4 12 9 9 12
Home equity lines of credit .......... -- -- 1 4 --
Other consumer loans ................. 19 10 5 35 27
--------- --------- --------- --------- ---------
Total recoveries ..................... 227 115 248 176 153
Loan charge-offs
(net of recoveries) .................. (2,219) (1,775) (921) (858) (566)
Provision charged to
operations ........................... 4,050 3,900 928 965 1,930
--------- --------- --------- --------- ---------
Allowance for loan losses
(at end of period) ................... $ 8,260 $ 6,429 $ 4,304 $ 4,297 $ 4,190
========= ========= ========= ========= =========
Ratio of net charge-offs
during the period to
average loans outstanding
during the period .................... .48% .38% .21% .22% .15%
========= ========= ========= ========= =========
Allowance as a percentage
of non-performing loans .............. 70.91% 73.77% 34.49% 36.54% 34.16%
========= ========= ========= ========= =========
Allowance as a percentage
of total loans (end of period) ....... 1.77% 1.35% .94% 1.04% 1.09%
========= ========= ========= ========= =========
</TABLE>
49
<PAGE> 67
The following table sets forth the Bank's percent of allowance for
loan losses to total allowance and the percent of loans to total loans in each
of the categories listed at the dates indicated. This allocation is based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is neither indicative of the specific amounts or the loan categories
in which future charge-offs may be taken nor is it an indicator of future loss
trends. The allocation of the allowance to each category does not restrict the
use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
SEPTEMBER 30,
-----------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------ --------- -------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES:
Real estate loans:
Residential mortgage...................... $ 1,316 15.93% 43.50% $ 878 13.66% 45.23%
Commercial mortgage....................... 3,964 47.99 35.69 3,240 50.39 38.89
Construction.............................. 131 1.59 2.16 127 1.98 3.27
Commercial business loans.................... 1,503 18.20 9.70 1,275 19.84 6.31
Home equity lines of credit.................. 31 .37 1.84 31 .48 2.08
Other consumer loans......................... 488 5.91 7.18 278 4.32 4.33
Net deferred loan costs and
unearned discount......................... -- -- (.07) -- -- (.11)
Unallocated.................................. 827 10.01 -- 600 9.33 --
-------- --------- --------- --------- --------- -------
Total .................................... $ 8,260 100% 100% $ 6,429 100% 100%
======== ========= ========= ========= ========= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------------
1996
--------------------------------
Percent
of Loans
Percent of in each
Allowance Category
to Total to Total
Amount Allowance Loans
-------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES:
Real estate loans:
Residential mortgage...................... $ 372 8.64% 44.92%
Commercial mortgage....................... 2,624 60.97 42.01
Construction.............................. 149 3.46 2.85
Commercial business loans.................... 801 18.61 5.43
Home equity lines of credit.................. 31 .72 2.06
Other consumer loans......................... 96 2.23 2.88
Net deferred loan costs and
unearned discount......................... -- -- (.15)
Unallocated.................................. 231 5.37 --
-------- ------- ---------
Total .................................... $ 4,304 100% 100%
========= ======= ==========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------------------------------------------
1995 1994
-------------------------------- -------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Category Allowance Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
------ --------- -------- ------ ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES:
Real estate loans:
Residential mortgage...................... $ 308 7.17% 46.92% $ 147 3.50% 45.53%
Commercial mortgage....................... 2,549 59.32 41.60 2,720 64.92 44.23
Construction.............................. 458 10.66 2.27 682 16.28 1.54
Commercial business loans.................... 814 18.94 4.61 530 12.65 4.16
Home equity lines of credit.................. 27 .63 2.09 7 .17 2.63
Consumer and other loans..................... 83 1.93 2.69 67 1.60 2.11
Net deferred loan costs and
unearned discount......................... -- -- (.19) -- -- (.20)
Unallocated.................................. 58 1.35 -- 37 .88 --
-------- -------- ------ -------- --------- ------
Total .................................... $ 4,297 100% 100% $ 4,190 100% 100%
======== ======== ====== ======== ========= ======
</TABLE>
SECURITIES
The Bank separates its securities portfolio into securities
available for sale and investment securities held to maturity. At September 30,
1998, the Bank had $197.8 million, or 27.6% of total assets in securities
available for sale and $3.5 million, or .5% of total assets, in investment
securities held to maturity. These portfolios consist primarily of U.S.
government securities and agency obligations, corporate debt securities,
municipal securities, mortgage-backed securities, mutual funds and equity
securities. The Company's management determines the appropriate classification
of securities at the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity, then they are classified as
investment securities held to maturity and are carried at amortized cost.
Securities that are identified as trading account assets for resale over a short
period are stated at fair value with unrealized gains and losses reflected in
current earnings. All other debt and equity securities are classified as
securities available for sale and are reported at fair value, with net
unrealized gains or losses reported, net of income taxes, as a separate
component
50
<PAGE> 68
of equity. At September 30, 1998, the Bank did not hold any securities
considered to be trading securities. As a member of the FHLB of New York, the
Bank is required to hold FHLB stock which is carried at cost because the FHLB
stock is not marketable and may only be resold to the FHLB of New York.
The Bank's investment policy focuses investment decisions on
maintaining a balance of high quality, diversified investments. In making its
investments, the Bank also considers liquidity, the potential need for
collateral to be used for pledging purposes, and earnings. Investment decisions
are made by the Bank's Trust and Investment Officer who has authority to
purchase, sell or trade securities qualifying as eligible investments under
applicable law and in conformance with the Bank's investment policy. In
addition, the Bank's director of municipal finance is authorized to purchase
municipal securities for the Bank's portfolio.
Under the Bank's investment policy, securities eligible for the Bank
to purchase include: U.S. Treasury Obligations, securitized loans from the
Bank's loan portfolio, municipal securities, certain corporate obligations,
equity mutual funds, common stock, preferred stock, convertible preferred,
convertible notes and bonds, U.S. governmental agency or agency sponsored
obligations, collateralized mortgage obligations and REMICs, banker's
acceptances and commercial paper, certificates of deposit and federal funds.
The following table sets forth the composition of the Bank's
securities available for sale and investment securities held to maturity in
dollar amounts and percentages at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------
1998 1997
---------------------------- ---------------------------
CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available for sale (fair value):
U.S. Government securities and agency obligations ........ $117,220 59.27% $ 57,620 49.02%
Obligations of states and political subdivisions ......... 51,681 26.13 20,833 17.72
Mortgage-backed securities ............................... 3,744 1.89 4,653 3.96
Corporate debt securities ................................ 16,984 8.59 27,168 23.11
Mutual funds and marketable equity securities ............ 4,822 2.44 3,971 3.38
Non-marketable equity securities ......................... 3,307 1.68 3,307 2.81
-------- -------- -------- ---------
Total securities available for sale ................... 197,758 100.00% 117,552 100.00%
-------- -------- -------- ---------
Investment securities held to maturity (amortized cost):
U.S. Government securities and agency obligations ........ -- -- -- --
Mortgage-backed securities ............................... 1,980 56.85% 2,497 62.42%
Corporate and other debt securities ...................... 1,503 43.15 1,503 37.58
-------- -------- -------- ---------
Total investment securities held to maturity .......... 3,483 100.00% 4,000 100.00%
-------- -------- -------- ---------
Total securities portfolio ................................. $201,241 $121,552
======== ========
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
--------------------------
1996
---------------------------
CARRYING PERCENT
VALUE OF TOTAL
<S> <C> <C>
Securities available for sale (fair value):
U.S. Government securities and agency obligations ........ $ 81,053 54.43%
Obligations of states and political subdivisions ......... 1,548 1.04
Mortgage-backed securities ............................... 5,374 3.61
Corporate debt securities ................................ 53,959 36.23
Mutual funds and marketable equity securities ............ 3,704 2.49
Non-marketable equity securities ......................... 3,279 2.20
-------- ---------
Total securities available for sale ................... 148,917 100.00%
-------- ---------
Investment securities held to maturity (amortized cost):
U.S. Government securities and agency obligations ........ -- --
Mortgage-backed securities ............................... 3,012 66.71%
Corporate and other debt securities ...................... 1,503 33.29
-------- ---------
Total investment securities held to maturity .......... 4,515 100.00%
-------- ---------
Total securities portfolio ................................. $153,432
========
</TABLE>
51
<PAGE> 69
The following table sets forth certain information regarding the
carrying value, weighted average yields and contractual maturities of the
Bank's debt securities available for sale and investment securities held to
maturity portfolios as of September 30, 1998.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
MORE THAN ONE YEAR MORE THAN FIVE
ONE YEAR OR LESS TO FIVE YEARS YEARS TO TEN YEARS
------------------------ --------------------------- --------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING
VALUE YIELD VALUE YIELD VALUE
----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Securities available for sale (fair value):
U.S. Government securities
and agency obligations .......... $115,172 5.05% $ 2,000 5.90% $ 48
Obligations of states and
political subdivisions (1) ...... 27,656 5.79 23,160 6.22 273
Mortgage-backed securities ......... -- -- 365 6.67 1,410
Corporate debt securities .......... 3,024 5.61 13,960 5.55 --
-------- -------- --------
Total due .................... $145,852 5.21% $ 39,485 5.92% $ 1,731
======== ======== ========
Investment securities held to maturity (amortized cost):
Mortgage-backed securities ......... -- -- -- -- 560
Corporate debt securities .......... -- -- -- -- --
-------- -------- --------
Total due .................... -- -- -- -- $ 560
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
MORE THAN FIVE MORE THAN
YEARS TO TEN YEARS TEN YEARS TOTAL
--------------------- ------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE CARRYING AVERAGE CARRYING AVERAGE
YIELD VALUE YIELD VALUE YIELD
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Securities available for sale
(fair value):
U.S. Government securities
and agency obligations .......... 7.95% $ -- --% $117,220 5.07%
Obligations of states and
political subdivisions (1) ...... 6.34 592 6.39 51,681 5.99
Mortgage-backed securities ......... 7.10 1,969 7.37 3,744 7.19
Corporate debt securities .......... -- -- -- 16,984 5.56
-------- --------
Total due .................... 7.01% $ 2,561 7.24% $189,629 5.40%
======== ========
Investment securities held to maturity
(amortized cost):
Mortgage-backed securities ......... 8.20 1,420 8.60 1,980 8.49
Corporate debt securities .......... -- 1,503 7.14 1,503 7.19
-------- --------
Total due .................... 8.20% $ 2,923 7.82% $ 3,483 7.92%
======== ========
- -----------
</TABLE>
(1) Weighted average yields are presented on a tax equivalent basis, using an
assumed tax rate of 35%.
52
<PAGE> 70
The following is a more detailed discussion of the Bank's available
for sale and investment securities held to maturity portfolios.
U.S. GOVERNMENT SECURITIES AND AGENCY OBLIGATIONS. The Bank invests
in U.S. Treasury securities and debt securities issued by government agencies
and government-sponsored agencies such as FannieMae, the FHLBs, GinnieMae and
FreddieMac. At September 30, 1998, the Bank's investment in U.S. Treasury
securities totaled $45.2 million, comprised of $10.2 million of U.S. Treasury
Bills with an average yield of 4.59% and $35.0 million of U.S. Treasury Notes
with an average coupon rate of 5.56% and an average yield of 4.84%. At September
30, 1998, all such securities were classified as available for sale. At the same
date, the Bank also held, as available for sale, $71.9 million of non-government
guaranteed bonds issued by the FHLB, FreddieMac and FannieMae. These securities
had an average coupon rate and an average yield of 5.55% and 5.24%,
respectively, and of these securities which were rated, all had ratings of `AAA'
or higher. The Bank's investment policy limits the amount of U.S. government and
agency obligations to 17% of the Bank's total assets or approximately $121.8
million.
CORPORATE DEBT SECURITIES. The Bank's corporate debt securities
portfolio, which at September 30, 1998, totaled $18.5 million, and consisted of
general corporate obligations, public utility and telephone bonds. All of the
Bank's corporate debt securities were rated `BBB' or higher, and $17.0 million
and $1.5 million were classified as available for sale and held to maturity,
respectively. The Bank's investment policy limits the amount of corporate debt
securities to 25% of the Bank's Investment Securities portfolio or approximately
$179.2 million.
MUNICIPAL SECURITIES. At September 30, 1998, $51.7 million, carrying
value, of the Bank's securities consisted of tax exempt municipal bonds and
notes, all of which were classified as available for sale. Of that $51.7
million, $33.2 million were invested in general obligation securities of
jurisdictions in the State of New York, of which $27.8 million represented
relationship investments in 54 separate municipalities, including counties,
cities, school districts, towns, villages and fire districts. In addition, the
Bank held $18.5 million in bonds of various municipalities throughout the United
States. The Bank's municipal securities have an average maturity of 17 months
and a taxable equivalent yield of 5.99% at September 30, 1998. Interest earned
on municipal bonds is exempt from federal and state income taxes, and the
average yield on municipal securities is 50 to 90 basis points higher than that
of U.S. Treasury securities. The Bank's investment policy limits the amount of
municipal securities to 15% of the Bank's total assets or approximately $107.5
million. Following the Conversion, the Bank expects to invest in additional
municipal securities.
EQUITY SECURITIES. At September 30, 1998, the Bank's equity
securities portfolio totaled $8.1 million, all of which was classified as
available for sale. The single largest investment in one issuer was $3.2 million
of FHLB of New York common stock (which the Bank is required to hold as a member
institution). At September 30, 1998, the Bank also had a $4.7 million investment
in Federated mutual funds, consisting of $3.8 million in a Federated ARMs Fund,
which invests primarily in adjustable and floating rate mortgage securities, and
$885,000 in various other Federated mutual funds, which invest primarily in the
common stock of nationally recognized corporations. The Bank's investment policy
limits the Bank's investments in common and preferred stock and mutual funds to
3% of the Bank's total assets, or $21.5 million. The investment policy presently
limits the Bank's investment in the securities of any single issuer to $500,000
and limits an investment in any stock mutual fund to .75% of total assets ($5.4
million at September 30, 1998).
SOURCES OF FUNDS
The Bank's lending and investment activities are primarily funded by
deposits, repayments and prepayments of loans and securities, proceeds from the
sale of loans and securities, proceeds from maturing securities and cash flows
from operations. In addition, the Bank borrows from the FHLB of New York to fund
its operations.
53
<PAGE> 71
DEPOSITS. The Bank offers a variety of deposit accounts with a range
of interest rates and terms. The Bank's deposit accounts consist of interest
bearing checking, non-interest bearing checking, business checking, regular
savings, money market savings and time deposit accounts. The Bank's time deposit
accounts range from three months to five years. In addition, the Bank offers
IRAs and Keogh accounts. To enhance its deposit products and increase its market
share, the Bank offers overdraft protection and direct deposit for its retail
banking customers and cash management services for its business customers. In
addition, the Bank offers a low-cost interest bearing checking account service
to its customers over 55 years of age. Rates on deposit products are set by the
Bank's ALCO Committee.
At September 30, 1998, the Bank's deposits totaled $578.2 million or
92.1% of interest bearing liabilities. For the year ended September 30, 1998,
the average balance of core deposits (defined to include NOW accounts, money
market accounts, savings accounts and non-interest bearing checking accounts)
totaled $321.4 million, or 54.5% of total average deposits. At September 30,
1998, the Bank had a total of $256.7 million in time deposit accounts, or 44.4%
of total deposits, and $194.8 million had maturities of one year or less. See
"Risk Factors -- Interest Rate Sensitivity."
The flow of deposits is influenced significantly by general economic
conditions, changes in interest rates and competition. The Bank's deposits are
obtained primarily from the six counties in which the Bank's branches are
located. The Bank relies primarily on the competitive pricing of its deposit
products and customer service and long-standing relationships to attract and
retain these deposits, although market interest rates and rates offered by
competing financial institutions affect the Bank's ability to attract and retain
deposits. The Bank uses traditional means of advertising its deposit products,
including local radio and print media, and does not solicit deposits from
outside its market area. In addition, the Bank does not use brokers to obtain
deposits, and at September 30, 1998, the Bank had no brokered deposits.
The following table sets forth the Bank's deposit flow schedule for
the periods indicated.
<TABLE>
<CAPTION>
Money NOW/ Time
Savings Markets Super NOW Deposits
------------ ------------ --------- -------------
(In thousands)
<S> <C> <C> <C> <C>
BALANCE AS OF SEPTEMBER 30, 1995 ....... $ 209,920 $ 11,280 $ 66,498 $ 249,491
Net deposits (withdrawals) (8,647) 2,078 1,967 (10,130)
Interest credited .......... 6,798 379 1,547 13,833
--------- --------- --------- ---------
BALANCE AS OF SEPTEMBER 30, 1996 ....... 208,071 13,737 70,012 253,194
Net deposits (withdrawals) . (15,790) (1,049) (161) (48)
Interest credited .......... 6,648 433 1,591 14,199
--------- --------- --------- ---------
BALANCE AS OF SEPTEMBER 30, 1997 ....... 198,929 13,121 71,442 267,345
Net deposits (withdrawals) . (6,871) (2,156) 3,057 (25,432)
Interest credited .......... 6,451 431 1,696 14,761
--------- --------- --------- ---------
BALANCE AS OF SEPTEMBER 30, 1998 ....... $ 198,509 $ 15,708 $ 76,195 $ 256,674
========= ========= ========= =========
Total No.
Demand Total of Accounts
----------- ---------- -----------
<C> <C> <C>
BALANCE AS OF SEPTEMBER 30, 1995 ....... $ 15,273 $ 552,462 72,531
Net deposits (withdrawals) 4,319 (10,413)
Interest credited .......... -- 22,557
--------- ---------
BALANCE AS OF SEPTEMBER 30, 1996 ....... 19,592 564,606 71,458
Net deposits (withdrawals) . 1,968 15,080
Interest credited .......... -- 22,871
--------- ---------
BALANCE AS OF SEPTEMBER 30, 1997 ....... 21,560 572,397 70,185
Net deposits (withdrawals) . 9,556 (17,534)
Interest credited .......... -- 23,339
--------- --------- ---------
BALANCE AS OF SEPTEMBER 30, 1998 ....... $ 31,116 $ 578,202 70,057
========= ========= =========
</TABLE>
54
<PAGE> 72
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank as of the dates indicated.
<TABLE>
<CAPTION>
BALANCE AS OF SEPTEMBER 30,
--------------------------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- ----------------------
(DOLLARS IN THOUSANDS)
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
-------- -------- -------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Savings accounts...................... $198,509 34.33% $198,929 34.75% $208,071 36.85%
Time deposit accounts:
2.00 - 2.99%....................... 624 .11 257 0.04 252 0.05
3.00 - 3.99%....................... 58 .01 9 -- 3,736 0.66
4.00 - 4.99%....................... 10,174 1.76 5,893 1.03 57,153 10.12
5.00 - 5.99%....................... 236,312 40.87 246,686 43.10 171,279 30.34
6.00 - 6.99%....................... 6,679 1.15 11,762 2.06 18,118 3.21
7.00 - 7.99%....................... 2,698 .47 2,578 0.45 2,500 0.44
8.00 - 8.99%....................... 12 -- 53 0.01 65 0.01
Over 9.00% ........................ 117 .02 107 0.02 91 0.02
-------- ------ -------- ------- -------- ------
Total ............................. 256,674 44.39 267,345 46.71 253,194 44.85
Money market accounts................. 15,708 2.72 13,121 2.29 13,737 2.43
NOW and Super NOW accounts ........... 76,195 13.18 71,442 12.48 70,012 12.40
-------- ------ -------- ------- -------- ------
Total interest bearing accounts.... 547,086 94.62 550,838 96.23 545,014 96.53
Demand accounts....................... 31,116 5.38 21,560 3.77 19,592 3.47
-------- ------- -------- ------- -------- ------
Total deposits................... $578,202 100% $572,397 100% $564,606 100%
======== ======= ======== ======= ======== ======
</TABLE>
The following table sets forth, by various rate categories, the
amount of the Bank's certificate of deposit accounts outstanding at the dates
indicated.
<TABLE>
<CAPTION>
AMOUNT DUE AT SEPTEMBER 30, 1998
-----------------------------------------------------------------------
ONE YEAR ONE TO TWO TO THREE TO FIVE YEARS
OR LESS TWO YEARS THREE YEARS FIVE YEARS OR MORE TOTAL
------- --------- ----------- ---------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Time deposits accounts:
2.00 - 2.99%..................... $ 624 $ -- $ -- $ -- $ -- $ 624
3.00 - 3.99%..................... 49 9 -- -- -- 58
4.00 - 4.99%..................... 8,376 1,699 99 -- -- 10,174
5.00 - 5.99%..................... 183,730 31,437 14,753 6,281 111 236,312
6.00 - 6.99%..................... 1,847 4,832 -- -- -- 6,679
7.00 - 7.99%..................... -- 2,698 -- -- -- 2,698
8.00 - 8.99%..................... 12 -- -- -- -- 12
Over 9.00%....................... 117 -- -- -- -- 117
--------- -------- -------- ------- ----- ---------
Total......................... $ 194,755 $ 40,675 $ 14,852 $ 6,281 $ 111 $ 256,674
========= ======== ======== ======= ===== =========
</TABLE>
At September 30, 1998, the Bank had outstanding $256.7 million in
certificates of deposit accounts, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NON-JUMBO CDS (LESS THAN $100,000):
Three months or less.............................. $ 46,731 5.33%
Over three months through six months.............. 59,597 5.22
Over six months through 12 months................. 59,357 5.39
Over 12 months.................................... 57,540 5.71
-----------
Total non-jumbo certificates of deposit........ $ 223,225 5.41%
===========
JUMBO CDS ($100,000 OR MORE):
Three months or less.............................. $9,510 5.19%
Over three months through six months.............. 12,136 5.30
Over six months through 12 months................. 7,424 5.45
Over 12 months.................................... 4,379 5.97
-----------
Total jumbo certificates of deposit............ $ 33,449 5.39%
===========
</TABLE>
55
<PAGE> 73
BORROWINGS. The principal source of the Bank's borrowing is through
FHLB advances and repurchase agreements. The FHLB system functions in a reserve
credit capacity for member savings associations and certain other home financing
institutions. Members of a FHLB are required to own capital stock in the FHLB,
and, at September 30, 1998, the Bank owned approximately $3.2 million of FHLB
capital stock. The Bank uses FHLB advances as an alternative funding source to
fund its lending activities when it determines that it can profitably invest the
borrowed funds over their term. As of September 30, 1998, the Bank had
outstanding FHLB advances of approximately $44.9 million. Such borrowings had a
weighted average interest rate of 5.8% and a weighted average term of eight
years.
At September 30, 1998, the Bank also had $2.5 million of borrowed
funds in the form of securities sold under agreements to repurchase at an agreed
upon price and date. The Bank generally enters into these agreements only as an
accommodation to its business customers but may utilize this funding source more
often in the future.
TRUST SERVICES
The Trust Department of the Bank offers a full range of services,
including living trusts, executor services, testamentary trusts, employee
benefit plan management, custody services and investment management, primarily
to corporations, unions and other institutions. The Trust Department has
retained the services of two independent financial services firms to provide
investment advice and to ratify the decisions of the Trust Department. Operation
of the Trust Department is overseen by a Trust Committee which consists of two
trust officers and four members of the Bank's board of trustees who rotate on a
semi-annual basis. The Trust Department markets its services through its trust
officers who call on the Bank's existing customers, the Bank's CSSRs and branch
managers who cross-sell the Trust Department's services, and free seminars open
to the public. As of September 30, 1998, the Trust Department managed over
$294.4 million of assets, which includes $78.3 million over which the Trust
Department has discretionary investment authority. The Trust Department's fee
income, which totaled $459,000 for the year ended September 30, 1998,
supplements the Bank's rate-sensitive interest income.
SAVINGS BANK LIFE INSURANCE
Since 1939, the Bank, through its Savings Bank Life Insurance
Department ("SBLI"), has been offering a wide variety of low-cost insurance
policies, including whole life, single premium life, senior life and children's
term, to its customers who live or work in the State of New York. New York law
mandates that SBLI activities be segregated from those of the Bank and, while
the SBLI does not directly affect the Bank's earnings, management believes that
offering SBLI is beneficial to the Bank's relationship with its customers. The
SBLI pays its own expenses and reimburses the Bank for expenses incurred on its
behalf.
SUBSIDIARY ACTIVITIES
The following are descriptions of the Bank's wholly owned
subsidiaries, which, following the Conversion, will be indirectly owned by the
Company.
56
<PAGE> 74
THE FAMILY INVESTMENT SERVICES CO., INC. The Family Investment
Services Co. ("FISC"), which was incorporated in May 1980, is the Bank's wholly
owed full-service brokerage firm, offering a complete range of investment
products, including mutual funds and debt, equity and government securities, on
a fee-per-transaction basis. FISC's goal is to market its products and services
to the Bank's existing customers who seek alternatives to traditional financial
institution savings products. As a complement to the Bank's municipal investment
activities, FISC intends to begin underwriting general obligation securities of
state and political subdivisions. FISC has two full time employees who interface
with the Bank's branches to facilitate referrals from the CSSRs and branch
managers, as well as one officer who assist customers with investment decisions
and trading. As of September 1, 1998, FISC held approximately $61.3 million of
customer assets. FISC is a member of the National Association of Securities
Dealers and is insured by the Securities Insurance Protection Corporation.
FAMILY MORTGAGE BANKING CO. FMB, which was incorporated in April
1987, is the Bank's wholly owned mortgage banking subsidiary. The Bank
originates the majority of its residential real estate and residential
construction loans through FMB.
OTHER SUBSIDIARIES. The Bank has nine other wholly owned
subsidiaries: The Family Advertising Co. is an advertising agency; T.S. Capital
has applied to the Small Business Administration to become a licensed Small
Business Investment Corporation in order to offer small business loans and make
investments in small businesses; The Family Insurance Agency, Inc. is an
insurance agency that offers a full range of life and health insurance products,
as well as taxed-deferred annuities; and T.S. Real Property Inc., Troy SB Real
Estate Co., 32 Second Street, Camel Hill Corporation, 507 Heights Corp. and
Realty Umbrella, Ltd.are all related to the management of, or investment in, the
Bank's foreclosed or purchased real estate.
COMPETITION
The Bank faces significant competition for both deposits and loans.
The deregulation of the financial services industry and the commoditization of
savings and lending products has led to increased competition among savings
banks and other financial institutions for a significant portion of the deposit
and lending activity that had traditionally been the arena of savings banks and
savings and loan associations. The Bank competes for deposits with other savings
banks, savings and loan associations, commercial banks, credit unions, money
market 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 Bank.
The Bank's competition for loans comes principally from savings
banks, savings and loan associations, commercial banks, mortgage banks, credit
unions, finance companies and other institutional lenders, many of whom maintain
offices in the Bank's market area. The Bank's principal methods of competition
include providing competitive loan and deposit pricing, personalized customer
service, access to senior management of the Bank and continuity of banking
relationships.
Although the Bank is subject to competition from other financial
institutions, some of which have much greater financial and marketing resources,
the Bank believes it benefits by its position as a community oriented savings
bank with a long history of serving its market area. See "Risk Factors --
Competition." Management believes that the variety, depth and stability of the
communities which the Bank services support the service and lending activities
conducted by the Bank.
57
<PAGE> 75
PROPERTIES
The Bank currently conducts its business through 14 full-service
banking offices. The following table sets forth the Bank's offices as of
September 30, 1998.
<TABLE>
<CAPTION> NET BOOK VALUE
ORIGINAL OF PROPERTY OR
YEAR DATE OF LEASEHOLD
LEASED OR LEASED OR LEASE IMPROVEMENTS AT
LOCATION OWNED ACQUIRED EXPIRATION SEPTEMBER 30, 1998
- -------- ----- --------- ---------- ------------------
<S> <C> <C> <C> <C>
HEADQUARTERS:
Troy Office................................ Owned 1871 N/A $ 4,505,971(1)
32 Second Street
Troy, NY 12180
BRANCH OFFICES:
Hudson Valley Plaza Office................. Leased 1983 12/31/05 26,150
75 Vandenburgh Avenue
Troy, NY 12180
East Greenbush Office...................... Owned 1969 N/A 113,004
615 Columbia Pike
East Greenbush, NY 12061
Albany Office.............................. Owned 1995 N/A 1,743,465
120 State Street
Albany, NY 12207
Watervliet Office.......................... Leased 1983 3/1/03 31,856
1601 Broadway
Watervliet, NY 12189
Latham Office.............................. Leased 1989 6/30/99 407,433
545 Troy-Schenectady Rd.
Schenectady, NY 12309
Colonie Office............................. Leased 1994 3/31/07 32,943
103 Wolf Road
Colonie, NY 12205
Guilderland Office......................... Leased 1997 6/9/07 324,790
1704 Western Avenue
Guilderland, NY 12203
Schenectady Office......................... Owned 1987 N/A 233,496
1626 Union Street
Schenectady, NY 12309
Clifton Park Office........................ Owned 1972 N/A 199,842
Routes 9 and 146
Clifton Park, NY 12065
Clifton Park-Hannaford Office.............. Leased 1995 8/14/00 115,537
9 Clifton Country Road
Clifton Park, NY 12065
Quaker Road Office......................... Owned 1995 N/A 1,713,275
44 Quaker Road
Queensbury, NY 12804
Queensbury Office.......................... Leased 1979 9/30/04 171,449
739 Upper Glen Street
Queensbury, NY 12804
Whitehall Office.......................... Owned 1971 N/A 246,247
184 Broadway
Whitehall, NY 12887
</TABLE>
- ------------------------------
(1) The net book value of the headquarters will be reduced by an estimated
$300,000 upon contribution of the Music Hall to the Music Hall Foundation.
LEGAL PROCEEDINGS
The Bank is not a party to, nor is its property the subject of, any
material pending legal proceeding, other than ordinary routine litigation
incidental to the business of the Bank.
58
<PAGE> 76
PERSONNEL
As of September 30, 1998, the Bank had 215 full-time employees and 36
part-time employees. The employees are not represented by a collective
bargaining unit, and the Bank believes that its relations with its employees is
satisfactory. The Bank offers various employee benefits, including medical,
dental and life insurance, and a pension and 401(k) savings plan.
REGULATION AND SUPERVISION
GENERAL
The Bank is a New York-chartered mutual savings bank, and its deposit
accounts are insured up to applicable limits by the FDIC under the Bank
Insurance Fund ("BIF"). The Bank is subject to extensive regulation by the New
York State Banking Department ("NYSBD") as its chartering agency, and by the
FDIC as the deposit insurer. After the Conversion, the Bank will be a New
York-chartered stock savings bank with deposits insured under the BIF, and will
continue to be subject to extensive regulation by the New York Banking
Department and the FDIC. Except as otherwise indicated below, the discussion
that follows of the regulations that currently apply to the Bank will apply to
the same extent to the Bank after the Conversion.
The Bank must file reports with the NYSBD and the FDIC concerning its
activities and financial condition, and it must obtain regulatory approval prior
to entering into certain transactions, such as mergers with, or acquisitions of,
other depository institutions and opening or acquiring branch offices. The NYSBD
and the FDIC conduct periodic examinations to assess the Bank's compliance with
various regulatory requirements. This regulation and supervision is intended
primarily for the protection of the deposit insurance funds and depositors. The
regulatory authorities have extensive discretion in connection with the exercise
of their supervisory and enforcement activities, including the setting of
policies with respect to the classification of assets and the establishment of
adequate loan loss reserves for regulatory purposes. The Company, as a bank
holding company, also is required to file certain reports with, and otherwise
comply with, the rules and regulations of the Federal Reserve and the NYSBD and
with the rules and regulations of the Securities and Exchange Commission ("SEC")
under the federal securities laws. Any change in the regulations governing the
Bank or the Company, whether by a bank regulatory agency or through legislation,
could have a material adverse impact on the Bank and the Company and their
operations and shareholders.
The following is a summary of the laws and regulations that are
applicable to the Bank and the Company. This summary does not purport to be a
complete description of such laws and regulations or of all such laws and
regulations. The operations of the Bank and the Company may be affected by
legislative and regulatory changes as well as by changes in the policies of
various regulatory authorities.
NEW YORK REGULATION OF THE BANK
POWERS. The Bank derives its lending, investment and other powers
primarily from the applicable provisions of the New York Banking Law and the
regulations adopted thereunder. Under these laws and regulations, savings banks,
including the Bank, may invest in real estate mortgages, consumer and commercial
loans, certain types of debt securities, including certain corporate debt
securities and obligations of federal, state and local governments and agencies,
certain types of corporate equity securities and certain other assets. A savings
bank may also exercise trust powers upon approval of the NYSBD. The exercise of
these lending, investment and other powers are limited by federal law and the
regulations thereunder. See "-- Federal Regulation of the Bank" and "-- Activity
Restrictions on State-Chartered Banks."
LOANS-TO-ONE-BORROWER LIMITATIONS. With certain limited exceptions, a
New York-chartered savings bank may not make loans or extend credit for
commercial, corporate or business
59
<PAGE> 77
purposes (including lease financing) to a single borrower and to certain
entities related to the borrower, in an aggregate amount which would exceed 15%
of a bank's net worth, plus an additional 10% of a bank's net worth if secured
by the requisite collateral. The Bank currently complies with all applicable
loans-to-one-borrower limitations.
LOANS TO INSIDERS. The Bank currently is prohibited from extending
credit to trustees or officers of the Bank except for certain mortgage loans.
After the Conversion, the Bank will be subject to New York law that imposes
conditions and limitations on a stock savings bank's loans to its directors and
executive officers that are comparable in most respects to the conditions and
limitations imposed under federal law, as discussed below. The New York Banking
Law does not, however, limit loans to shareholders owning 10% or more of the
savings bank's stock. In addition, loans to an executive officer, other than
loans for the education of the officer's children and certain loans secured by
the officer's residence, may not exceed the lesser of (a) $100,000 or (b) the
greater of $25,000 or 2.5% of a bank's capital stock, surplus fund and undivided
profits. Furthermore, a stock savings bank may not make a loan secured by real
property to a director or executive officer if the amount of the loan,
aggregated with all such other loans to the director or executive officer,
exceeds fifteen percent of a bank's net worth.
COMMUNITY REINVESTMENT ACT. The Bank is also subject to provisions of
the New York Banking Law that, like the provisions of the federal Community
Reinvestment Act ("CRA") discussed below, impose continuing and affirmative
obligations upon a banking institution organized in the State of New York to
serve the credit needs of its local community ("NY CRA"). Pursuant to the NY
CRA, a bank must file with the NYSBD an annual NY CRA report and copies of all
federal CRA reports. The New York regulations on community reinvestment parallel
the regulations issued under the federal CRA discussed below. Under the
regulations, the NYSBD is required to make biennial community reinvestment
evaluations of each banking institution and assess each institution's compliance
with the NY CRA utilizing a 4-tiered rating system. The Bank's latest NY CRA
rating, received by letter dated January 27, 1998 from the NYSBD, was
"Outstanding."
The NY CRA also requires the New York Superintendent to consider a
bank's NY CRA rating when reviewing a bank's application to engage in certain
transactions, including mergers, asset purchases and the establishment of branch
offices or automated teller machines, and provides that such assessment may
serve as a basis for the denial of any such application.
DIVIDENDS. Under the New York Banking Law, the Bank, as a stock
savings bank, will not be able to declare, credit or pay any dividends if
capital stock is impaired or would be impaired as a result of the dividend. In
addition, the New York Banking Law provides that the Bank cannot declare and pay
dividends in any calendar year in excess of its "net profits" for such year
combined with its "retained net profits" of the two preceding years, less any
required transfer to surplus or a fund for the retirement of preferred stock,
without prior regulatory approval.
ENFORCEMENT. Under the New York Banking Law, the New York
Superintendent may issue an order to a New York-chartered banking institution to
appear and explain an apparent violation of law, to discontinue unauthorized or
unsafe practices and to keep prescribed books and accounts. Upon a finding by
the Banking Board of New York State ("NYBB") that any director, trustee or
officer of any banking organization has violated any law or regulation, or has
continued unauthorized or unsafe practices in conducting the business of the
banking organization after having been notified by the New York Superintendent
to discontinue such practices, the NYBB may remove such director, trustee or
officer from office after notice and an opportunity to be heard. The New York
Superintendent also has authority to take possession of a New York banking
organization under certain circumstances, including when it appears that the
banking organization is conducting its business in an unauthorized or unsafe
manner, is in an unsound or unsafe condition to transact its business or has an
impairment of its capital. The Bank does not know of any past or current
practice, condition or violation that might lead to any proceeding by the New
York Superintendent or the NYSBD against the Bank or any of its trustees or
officers.
60
<PAGE> 78
FEDERAL REGULATION OF THE BANK
CAPITAL REQUIREMENTS. The FDIC has adopted risk-based minimum capital
regulations for insured state nonmember banks, such as the Bank. The regulations
establish a systematic analytical framework that makes regulatory capital
requirements more sensitive to differences in risk profiles among insured
depository institutions. Risk-based capital ratios are determined by allocating
assets and specified off-balance sheet commitments to four risk-weighted
categories ranging from 0% to 100%, with higher levels of capital required for
the categories perceived as representing greater risk. State nonmember banks
must 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%. Tier 1 capital includes common equity, certain noncumulative perpetual
preferred stock and minority interests in equity accounts of consolidated
subsidiaries, less goodwill and certain other intangible assets (except mortgage
servicing rights and purchased credit card relationships, subject to certain
limitations). Total capital consists of Tier 1 capital plus supplementary (Tier
2) capital which includes, among other items, cumulative perpetual and
long-term, limited-life, preferred stock, mandatory convertible securities,
certain hybrid capital instruments, term-subordinated debt and the allowance for
loan and lease losses, subject to certain limitations, less required deductions.
In addition, under the minimum leverage-based capital requirement adopted by the
FDIC, insured state nonmember banks must maintain a ratio of Tier 1 capital to
average total assets (leverage ratio) of at least 3% to 5%, depending on the
Bank's CAMELS rating.
Capital requirements higher than the generally applicable minimum
requirements may be established for a particular bank if the FDIC determines
that a bank's capital is, or may become, inadequate in view of its particular
circumstances. Individual minimum capital requirements may be appropriate if a
bank is receiving special supervisory attention, has a high degree of exposure
to interest rate risk or poses other safety and soundness concerns. The Bank
currently is not subject to any individually imposed minimum capital
requirements.
Failure to meet capital guidelines could subject a bank to a variety
of enforcement actions, including issuance of a capital directive, the
termination of deposit insurance, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business. As described below,
substantial additional restrictions can be imposed upon banks that fail to meet
applicable capital requirements under the FDIC's prompt corrective action
regulations.
The federal banking agencies, including the FDIC, are required to
assess an institution's exposure to declines in the economic value of a bank's
capital due to changes in interest rates when assessing a bank's capital
adequacy. Under such a risk assessment, examiners will evaluate a bank's capital
for interest rate risk on a case-by-case basis, with consideration of both
quantitative and qualitative factors. Applicable considerations include the
quality of a bank's interest rate risk management process, the overall financial
condition of a bank and the level of other risks at a bank for which capital is
needed. Institutions with significant interest rate risk may be required to hold
additional capital. The agencies issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
61
<PAGE> 79
The following table shows the Bank's leverage ratio, its Tier 1
risk-based capital ratio, and its total risk-based capital ratio, at September
30, 1998, on a historical basis and a pro forma basis assuming the sale of
shares at the maximum of the Estimated Price Range.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA REQUIRED
---------------------- ------------------------------ ------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
REGULATORY TIER 1
LEVERAGE CAPITAL $ 70,114 9.89% $ 102,876 13.87% $ 29,668 4.0%
TIER 1 RISK-BASED
CAPITAL 70,114 14.02 102,876 19.91 20,666 4.0
TOTAL RISK-BASE CAPITAL 76,368 15.27 109,130 21.12 41,332 8.0
</TABLE>
As the preceding table shows, the Bank exceeded the minimum capital
adequacy requirements at the date indicated.
ACTIVITY RESTRICTIONS ON STATE-CHARTERED BANKS. Section 24 of the
Federal Deposit Insurance Act, as amended, which was added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), generally
limits the activities and investments of state-chartered FDIC insured banks and
their subsidiaries to those permissible for federally chartered national banks
and their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or the FDIC determines that such activity or investment
would pose no significant risk to the BIF. Any bank that held, at the time of
passage of FDICIA, an impermissible investment or engaged in an impermissible
activity and that did not receive FDIC approval to retain such investment or to
continue such activity was required to submit to the FDIC a plan for divesting
of such investment or activity as quickly and prudently as possible. In
connection with the passage of FDICIA, the Bank received approval from the FDIC
to retain certain real estate investments until December 31, 1999.
Before making a new investment or engaging in a new activity not
permissible for a national bank or otherwise permissible under Section 24 or the
FDIC regulations thereunder, an insured bank must file a notice or application
with the FDIC to make such investment or engage in such activity. The FDIC will
not approve the activity unless such bank meets its minimum capital requirements
and the FDIC determines that the activity does not present a significant risk to
the FDIC insurance funds. The FDIC has by regulation determined that certain
real estate investment and securities underwriting activities do not present a
significant risk to the FDIC insurance fund provided they are conducted in
accordance with the regulations. The FDIC recently adopted a streamlined notice
process for use by well run, well capitalized institutions seeking permission to
engage in such activities, and simplified existing limitations applicable to the
activities.
ENFORCEMENT. The FDIC has extensive enforcement authority over insured
savings banks, including the Bank. This enforcement authority includes, among
other things, the ability to assess civil money penalties, to issue cease and
desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The FDIC is required, with certain exceptions, to appoint a receiver
or conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible equity to total assets that is equal to or less than 2%. See
"-- Prompt Corrective Action." The FDIC may also appoint a conservator or
receiver for a state bank on the basis of the institution's financial condition
or upon the occurrence of certain events, including: (i) insolvency (whereby the
assets of a bank are less than its liabilities to depositors and others); (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business;
62
<PAGE> 80
(iv) likelihood that a bank will be unable to meet the demands of its depositors
or to pay its obligations in the normal course of business; and (v) insufficient
capital, or the incurring or likely incurring of losses that will deplete all or
substantially all of the institution's capital with no reasonable prospect of
replenishment of capital without federal assistance.
DEPOSIT INSURANCE. The Bank is subject to quarterly payments on
semiannual insurance premium assessments for its FDIC deposit insurance. The
FDIC implements a risk-based deposit insurance assessment system. Deposit
insurance assessment rates currently are within a range of $0.00 to $0.27 per
$100 of insured deposits, depending on the assessment risk classification
assigned to each institution. The FDIC places each institution into one of nine
assessment risk classifications based on an institution's capital and
supervisory classification. Assessment rates are periodically reviewed by the
FDIC and set at a level sufficient to maintain the BIF's and Savings Association
Insurance Fund's ("SAIF") reserve ratio of 1.25% of insured deposits. The FDIC
considers BIF and SAIF fund revenue and expense levels and each fund's reserve
ratios and borrowings in establishing assessment rates. Under current FDIC
assessment guidelines, the Bank expects that it will not incur any FDIC deposit
insurance assessments for 1998. However, the deposit insurance assessments
imposed by the FDIC are subject to change.
Under the Deposit Insurance Funds Act of 1996 ("Funds Act"), the
assessment base for the payments on the bonds ("FICO bonds") issued in the late
1980's by the Financing Corporation to recapitalize the former Federal Savings
and Loan Insurance Corporation was expanded to include, beginning on January 1,
1997, the deposits of BIF-insured institutions, such as the Bank. Until December
31, 1999, or such earlier date on which the last savings association ceases to
exist, the rate of assessment for BIF-assessable deposits shall be one-fifth of
the rate imposed on deposits insured by the SAIF. The annual rate of assessments
for the payments on the FICO bonds for the semi-annual period beginning on July
1, 1998 was 1.22 basis points for BIF-assessable deposits and 6.1 basis points
for SAIF-assessable deposits.
The Funds Act specifies that the SAIF and BIF will be merged on
January 1, 1999, provided no insured depository institution is a savings
association on that date. See "-- Recent Developments." The Bank expects a FICO
assessment expense of approximately $72,000 for 1998, based on the FICO
assessment rates in effect for 1998.
FDIC insurance on deposits may be terminated by the FDIC, after notice
and hearing, upon a finding by the FDIC that the insured bank has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound condition
to continue operations as an insured bank, or has violated any applicable law,
regulation, rule or order of, or condition imposed by or written agreement
entered into with the FDIC. Additionally, if insurance termination proceedings
are initiated against a bank, the FDIC may temporarily suspend insurance on new
deposits received by the institution under certain circumstances. If insurance
of accounts is terminated, the accounts at the institution at the time of the
termination, less subsequent withdrawals, continue to be insured for a period of
six months to two years, as determined by the FDIC.
TRANSACTIONS WITH AFFILIATES OF THE BANK. Transactions between the
Bank and any of its affiliates are governed by Sections 23A and 23B of the
Federal Reserve Act. An affiliate of a bank is any company or entity that
controls, is controlled by or is under common control with the bank. Currently,
a subsidiary of a bank that is not also a depository institution is not treated
as an affiliate of a bank for purposes of Sections 23A and 23B, but the Federal
Reserve has proposed treating any subsidiary of a bank that is engaged in
activities not permissible for the Bank itself as an affiliate for purposes of
Sections 23A and 23B. Generally, Sections 23A and 23B (i) limit the extent to
which a bank or its subsidiaries may engage in "covered transactions" with any
one affiliate to an amount equal to 10% of such institution's capital stock and
surplus, and limit such transactions with all affiliates to an amount equal to
20% of such capital stock and surplus, and (ii) require that all such
transactions be on terms that are consistent with safe and sound banking
practices. The term "covered transaction" includes the making of loans, purchase
of or investment in securities issued by the affiliate, purchase of assets,
issuance of guarantees and other similar types of transactions. Most
63
<PAGE> 81
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.
LOANS TO INSIDERS. A bank's loans to its executive officers,
directors, any owner of 10% or more of its stock (each, an "insider") and to
certain entities affiliated with any such person (an "insider's related
interests") are subject to the conditions and limitations imposed by Sections
22(g) and 22(h) of the Federal Reserve Act and the Federal Reserve's Regulation
O promulgated thereunder. Under these restrictions, the aggregate amount of the
loans to any insider and the insider's related interests may not exceed the
loans-to-one-borrower limit applicable to national banks, which is comparable to
the loans-to-one-borrower limit applicable to the Bank's loans for commercial,
corporate or business purposes under New York law. See "-- New York Regulation
of Troy -- Loans-to-One Borrower Limitations." All loans by a bank to all
insiders and insider's related interests in the aggregate may not exceed a
bank's unimpaired capital and unimpaired surplus. Regulation O also requires
that any proposed loan to an insider or an insider's related interest be
approved in advance by a majority of the board of directors of a bank, with any
interested director not participating in the voting, if such loan, when
aggregated with any existing loans to that insider and the insider's related
interests, would exceed either (a) $500,000 or (b) the greater of $25,000 or 5%
of a bank's unimpaired capital and surplus. Such loans must be made on
substantially the same terms as, and follow credit underwriting procedures that
are not less stringent than, those that are prevailing at the time for
comparable transactions with other persons, except to the extent that the
extension of credit is made pursuant to a benefit or compensation program that
is widely available to employees of the Bank and does not give preference to
insiders. In addition, loans to an executive officer, other than loans for the
education of the officer's children, certain loans secured by the officer's
residence, and other loans secured by certain types of collateral, may not
exceed the lesser of (a) $100,000 or (b) the greater of $25,000 or 2.5% of a
bank's unimpaired capital and surplus.
In addition, Regulation O prohibits extensions of credit to a bank's
insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
UNIFORM REAL ESTATE LENDING STANDARDS. Pursuant to FDICIA, the federal
banking agencies require that all financial institutions adopt and maintain
written policies that establish appropriate limits and standards for extensions
of credit that are secured by liens on or interests in real estate or are made
for the purpose of financing permanent improvements to real estate. These
policies must establish loan portfolio diversification standards, prudent
underwriting standards (including loan-to-value limits) that are clear and
measurable, loan administration procedures, and documentation, approval and
reporting requirements. The real estate lending policies must reflect
consideration of the Interagency Guidelines for Real Estate Lending Policies
("Interagency Guidelines") that have been adopted by the federal bank
regulators.
The Interagency Guidelines, among other things, require a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits: (i) 65% for loans
secured by raw land; (ii) 75% for land development loans; (iii) 80% for loans
for the construction of commercial, multi-family or other non-residential
property; (iv) 85% for loans for the construction of one- to four-family
properties; and (v) 85% for loans secured by other improved property (e.g.,
farmland, completed commercial property and other income-producing property
including non-owner occupied, one- to four-family property). Although no
supervisory loan-to-value limit has been established for owner-occupied, one- to
four-family and home equity loans, the Interagency Guidelines state that for any
such loan with a loan-to-value ratio that equals or exceeds 90% at origination,
an institution should require appropriate credit enhancement in the form of
either mortgage insurance or readily marketable collateral.
64
<PAGE> 82
COMMUNITY REINVESTMENT ACT. Under the CRA, as implemented by FDIC
regulations, a savings bank has a continuing and affirmative obligation
consistent with its safe and sound operation to help meet the credit needs of
its entire community, including low- and moderate-income neighborhoods. The CRA
does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community. The CRA requires the FDIC, in connection with its examination of a
savings institution, to assess the institution's record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications by the institution.
In April 1995, the FDIC and the other federal banking agencies amended
their CRA regulations to replace the prior process-based assessment factors for
CRA evaluations with a new evaluation system that rates an institution based on
its actual performance in meeting community needs. In particular, the proposed
system focuses on three tests: (a) a lending test, to evaluate the institution's
record of making loans in its service areas; (b) an investment test, to evaluate
the institution's record of investing in community development projects,
affordable housing, and programs benefiting low- or moderate-income individuals
and businesses; and (c) a service test, to evaluate the institution's delivery
of services through its branches, ATMs, and other offices. Small banks (less
than $250 million in assets) are assessed under a streamlined approach focusing
on specific limited information and performance standards.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance and assign one of four ratings, with the
performance evaluation and rating made available to the public. In its most
recent examination for CRA performance, the Bank received an "Outstanding"
rating from the FDIC as of November 25, 1996.
SAFETY AND SOUNDNESS STANDARDS. The Bank is subject to certain FDIC
standards designed to maintain the safety and soundness of individual banks and
the banking system. The FDIC has prescribed safety and soundness guidelines
relating to (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
exposure; (v) asset growth and quality; (vi) earnings; and (vii) compensation
and benefit standards for officers, directors, employees and principal
stockholders. The guidelines are intended to set out standards that the FDIC
will use to identify and address problems at institutions before capital becomes
impaired. Institutions are required to, among other things, establish and
maintain a system to identify problem assets and prevent deterioration of those
assets in a manner commensurate with their size and the nature and scope of
their operations. Furthermore, institutions must establish and maintain a system
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves in a manner commensurate with their size
and the nature and scope of their operation.
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. In
the event that an institution, such as the Bank, were to fail to submit an
acceptable compliance plan or fail in any material respect to implement an
accepted compliance plan within the time allowed by the FDIC, the institution
would be required to correct the deficiency and the FDIC would also be
authorized to: (i) restrict asset growth; (ii) require the institution to
increase its ratio of tangible equity to assets; (iii) restrict the rates of
interest that the institution may pay; or (iv) take any other action that would
better carry out the purpose of the corrective action. The Bank believes it was
in compliance with all such safety and soundness guidelines as of the date of
this prospectus.
The FDIC periodically conducts examinations of insured institutions
and, based upon evaluations, may require a revaluation of assets of an insured
institution and may require the establishment of specific reserves in amounts
equal to the difference between such revaluation and the book value of the
assets.
65
<PAGE> 83
PROMPT CORRECTIVE ACTION. Under the FDIC's prompt corrective action
regulations, insured institutions will be considered (i) "well capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater
(provided that the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specified capital level for any capital measure), (ii) "adequately capitalized"
if the institution has a total risk-based capital ratio of 8% or greater, a Tier
1 risk based capital ratio of 4% or greater and a leverage ratio of 4% or
greater (3% or greater if the institution is rated composite CAMELS 1 in its
most recent report of examination and is not experiencing or anticipating
significant growth), (iii) "undercapitalized" if the institution has a total
risk-based capital ratio that is less than 8%, or a Tier 1 risk-based ratio of
less than 4% and a leverage ratio that is less than 4% (3% if the institution is
rated composite CAMELS 1 in its most recent report of examination and is not
experiencing or anticipating significant growth), (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, Tier 1 risk-based capital ratio of less than 3% or a leverage
ratio that is less than 3%, and (v) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%. Under certain circumstances, the FDIC can reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At September 30, 1998, the Bank was classified as
a "well capitalized" institution.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency,
which would be the FDIC for the Bank. An undercapitalized institution also is
generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital restoration plan or with
the approval of the FDIC. In addition, the FDIC may take any other action that
it determines will better carry out the purpose of prompt corrective action
initiatives. Furthermore, the FDIC could appoint a conservator or receiver for
the insured institution, if, among other things, (i) the insured institution's
assets are less than its obligations to its creditors and others, (ii) the
insured institution is likely to be unable to pay its obligations or meet its
depositor's demands in the normal course of business, (iii) the insured
institution is deemed in an unsafe or unsound condition to transact business,
including having insufficient capital, (iv) the insured institution has incurred
or is likely to incur losses that will deplete all or substantially all of its
capital, with no reasonable prospect for becoming adequately capitalized without
federal assistance, or (v) the insured institution becomes undercapitalized and
either has no reasonable prospect of becoming adequately capitalized, fails to
become adequately capitalized when required to do so under federal law, fails to
submit a capital restoration plan acceptable to the FDIC within the time
prescribed by law, or materially fails to implement a capital restoration plan
submitted and accepted by the FDIC. In the event of any such appointment, it is
likely that stockholders of the institution would not receive anything for their
interests in the institution and such interest ultimately would be extinguished.
DIVIDEND RESTRICTIONS. The Bank is not permitted to pay dividends if,
as the result of the payment, it would become undercapitalized, as defined in
the prompt corrective action regulations of the FDIC. In addition, if the Bank
becomes "undercapitalized" under the "prompt corrective action" initiatives of
the FDIC, payment of dividends would be prohibited without the prior approval of
the FDIC. The Bank also could be subject to these dividend restrictions if the
FDIC determines that the Bank is in an unsafe or unsound condition or engaging
in an unsafe or unsound practice.
REQUIRED RESERVES. Under Federal Reserve regulations, the Bank is
required to maintain non-interest-earning reserves against its transaction
accounts (primarily NOW and regular checking accounts). The Federal Reserve
regulations generally require that reserves of 3% must be maintained against
aggregate transaction accounts of $46.5 million or less (subject to adjustment
by the Federal Reserve) and an initial reserve of $1,395,000 plus 10% (subject
to adjustment by the
66
<PAGE> 84
Federal Reserve between 8% and 14%) against that portion of total transaction
accounts in excess of $46.5 million. The first $4.9 million of otherwise
reservable balances (subject to adjustments by the Federal Reserve) are exempted
from the reserve requirements. The Bank is in compliance with the foregoing
requirements. Because required reserves must be maintained in the form of either
vault cash, a non-interest-bearing account at a Federal Reserve Bank or a
pass-through account as defined by the Federal Reserve, the effect of this
reserve requirement is to reduce the Bank's interest-earning assets.
Various proposals were before Congress in 1998 to permit the payment
of interest on required reserve balances. While this legislation appears to have
strong support from many constituencies, the Bank is unable to predict whether
such legislation will be enacted by the next Congress.
RECENT DEVELOPMENTS
The Funds Act contemplates the merger of the BIF with the SAIF. The
combined deposit insurance fund, which will be formed no earlier than January 1,
1999, will insure deposits at all FDIC-insured depository institutions. As a
condition to the combined insurance fund, however, no insured depository
institution can be chartered as a savings association. Several proposals for
combining the BIF and the SAIF were introduced in Congress during 1997 in bills
addressing financial services modernization, including a proposal from the
Treasury Department developed pursuant to requirements of the Funds Act.
Although no legislation was passed in 1997, a financial services modernization
bill was passed by the House of Representatives on May 13, 1998. The bill passed
by the House of Representatives preserves the savings association charter, but
would require the FDIC to review and study issues relating to the planned merger
of the BIF and the SAIF, including the cost of merging the funds and the manner
in which the costs would be distributed among the members of the respective
funds. Within nine months of the bill being enacted into law, the FDIC would be
required to prepare a report on the study, which would include a description of
the plan developed by the FDIC for the merger of the funds. The bill was not
passed by the Senate before the Congress adjourned, but a financial services
modernization bill is likely to be reintroduced and considered by the next
Congress.
REGULATION OF COMPANY
NEW YORK REGULATION. Under the New York Banking Law, certain companies
owning or controlling banks are regulated as a bank holding company. For the
purposes of the New York Banking Law, the term "bank holding company," is
defined generally to include any "company" that, directly or indirectly, either
controls the election of a majority of the directors of, or owns, controls or
holds with power to vote more than 10% of the voting stock of (i) a bank holding
company or, (ii) if the company is a banking institution, another banking
institution, or (iii) each of two or more banking institutions. The term
"company" is defined to include corporations, partnerships and other types of
business entities, chartered or doing business in New York, and the term
"banking institution" is defined to include commercial banks, stock savings
banks and stock savings and loan associations with a principal office in New
York. An entity like the Company controlling, directly or indirectly, only one
banking institution will not be deemed to be a bank holding company for the
purposes of the New York Banking Law. If the Company, however, establishes or
acquires a New York-chartered commercial bank and trust company, the Company
will be a "bank holding company" for purposes of New York Banking Law.
Under the New York Banking Law, the prior approval of the NYBB is
required before: (1) any action is taken that causes any company to become a
bank holding company; (2) any action is taken that causes any banking
institution to become or to be merged or consolidated with a subsidiary of a
bank holding company; (3) any bank holding company acquires direct or indirect
ownership or control of more than 5% of the voting stock of a banking
institution; (4) any bank holding company or subsidiary thereof acquires all or
substantially all of the assets of a banking institution; or (5) any action is
taken that causes any bank holding company to merge or consolidate
67
<PAGE> 85
with another bank holding company. Additionally, certain restrictions apply to
bank holding companies regarding the acquisition of banking institutions that
have been chartered for five years or less and are located in smaller
communities in New York. Directors, officers and employees of a New York State
bank holding company are subject to limitations regarding their affiliation with
firms engaged in securities underwriting and public sale or distribution
activities and with other bank holding companies, and directors and executive
officers are subject to limitations on loans obtained from the holding company's
banking subsidiaries. See "-- New York Regulation of the Bank" and "-- Loans to
Insiders."
Although the Company initially will not be a bank holding company for
purposes of the New York Banking Law upon the effective date of the Conversion,
any future acquisition of ownership, control, or the power to vote 10% or more
of the voting stock of another banking institution or bank holding company would
cause it to become a bank holding company under New York law.
FEDERAL REGULATION. Following the consummation of the Conversion, the
Company will be subject to examination, regulation and periodic reporting under
the Bank Holding Company Act of 1956, as amended ("BHC Act"), as administered by
the Federal Reserve.
The Federal Reserve has adopted capital adequacy guidelines for bank
holding companies on a consolidated basis substantially similar to those of the
FDIC for the Bank. See "-- Federal Regulation of the Bank -- Capital
Requirements." On a pro forma basis after the Conversion, the Company's
risk-based and leverage ratios will exceed these minimum capital requirements. A
bank holding company's ability to pay dividends to its shareholders and expand
its line of business through the acquisition of new banking subsidiaries can be
restricted if its capital falls below levels established by the Federal Reserve
guidelines. In addition, any bank holding company whose capital falls below
levels specified in the guidelines can be required to implement a plan to
increase capital.
Prior Federal Reserve approval will be required for the Company to
acquire direct or indirect ownership or control of any voting securities of any
bank or bank holding company if, after giving effect to such acquisition, it
would, directly or indirectly, own or control more than 5% of any class of
voting shares of such bank or bank holding company. The Company also will be
required to obtain the prior approval of the Federal Reserve to acquire all, or
substantially all, of the assets of any bank or bank holding company.
In addition, a bank holding company is generally prohibited from
engaging in, or acquiring direct or indirect control of any company engaged in,
non-banking activities unless such activities have been found by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. Some of the principal activities that the
Federal Reserve has determined by regulation to be so closely related to banking
as to be a proper incident thereto are: (i) making or servicing loans; (ii)
performing certain data processing services; (iii) providing discount and full
service brokerage services; (iv) acting as fiduciary, investment or financial
advisor, (v) leasing personal or real property; (vi) making investments in
corporations or projects designed primarily to promote community welfare; and
(vii) acquiring a savings and loan association. The financial services
modernization bill passed by the House of Representatives would expand the
permissible activities of bank holding companies by allowing full affiliation
among banks, securities firms, insurance companies and other financial service
providers. Although the bill did not get passed by the Senate before the last
Congress adjourned, it is anticipated that a similar bill will be reintroduced
and considered in the next Congress. The Company and the Bank, however, are
unable to predict whether any such bill will be passed or what form any final
legislation will take.
The Company will be required to give the Federal Reserve prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the Company's consolidated net worth.
The Federal Reserve may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe and unsound practice, or
would violate any
68
<PAGE> 86
law, regulation, Federal Reserve order or directive, or any condition imposed
by, or written agreement with, the Federal Reserve. Such notice and approval is
not required for a bank holding company that would be treated as "well
capitalized" under applicable regulations of the Federal Reserve, that has
received a composite "1" or "2" rating at its most recent bank holding company
inspection by the Federal Reserve, and that is not the subject of any unresolved
supervisory issues.
The Federal Reserve is empowered to initiate cease and desist
proceedings and other supervisory actions for violations of the BHC Act, or the
Federal Reserve regulations, orders or notices issued thereunder.
The status of the Company as a registered bank holding company under
the BHC Act does not exempt it from certain federal and state laws and
regulations applicable to corporations generally, including, without limitation,
certain provisions of the federal securities laws.
ACQUISITION OF THE COMPANY
NEW YORK CHANGE IN BANK CONTROL RESTRICTIONS. The New York Banking Law
generally requires prior approval of the NYBB 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. For this purpose, the
term "company" is defined to include corporations, partnerships and other types
of business entities, chartered or doing-business in New York, and an individual
or combination of individuals acting in concert and residing or doing business
in New York, and 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.
FEDERAL RESTRICTIONS. Under the federal Change in Bank Control Act
("CBCA"), a notice must be submitted to the Federal Reserve if any person
(including a company), or group acting in concert, seeks to acquire 10% or more
of the Company's shares of Common Stock. Under the CBCA, the Federal Reserve has
60 days within which to act on such notices, taking into consideration certain
factors, including the financial and managerial resources of the acquirer, the
convenience and needs of the communities served by the Company and the Bank, and
the competitive effects of the acquisition.
Under the BHC Act, any company would be required to obtain prior
approval from the Federal Reserve before it could acquire "control" of the
Company within the meaning of the BHC Act. Control generally is defined for
these purposes to mean the ownership, control or power to vote 25% or more of
any class of voting securities of the Company, the ability to control in any
manner the election of a majority of the Company's directors, or to otherwise
have the power to exercise a controlling influence over the management or
policies of the Company.
INTERSTATE BANKING AND BRANCHING
Bank holding companies such as the Company are permitted to acquire
banking subsidiaries in any state irrespective of any state law restrictions on
such acquisitions other than minimum age laws and deposit concentration limits.
The Federal Reserve, however, may not approve an acquisition of a bank by a bank
holding company that would result in the acquiring holding company controlling
more than 10% of the deposits in the United States, or more than 30% of the
deposits in any particular state unless the applicable state allows a higher or
lower deposit concentration limit.
In the past, branching across state lines was not generally available
to a state bank such as the Bank. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "Interstate Banking Act"), however,
permitted the responsible federal banking agencies to approve merger
transactions between banks located in different states, regardless of whether
the merger would be prohibited under the law of either state (however state
minimum age laws and deposit concentration limits must be complied with), unless
a state has elected to "opt out" of the provisions of the
69
<PAGE> 87
Interstate Banking Act. Accordingly, a bank, such as the Bank, may acquire
branches in a state other than New York through merger with another bank unless
the other state has opted out of the Interstate Banking Act. Only Texas and
Montana have elected to "opt out" of interstate banking. The Interstate Banking
Act also authorizes de novo branching into another state if the host state
enacts a law expressly permitting out of state banks to establish such branches
within its borders.
FEDERAL HOME LOAN BANK SYSTEM
The Company is a member of the FHLB System. The FHLB System consists
of 12 regional Federal Home Loan Banks, with each subject to supervision and
regulation by the Federal Home Loan Financing Board. The FHLB provides a central
credit facility primarily for member institutions. The Company, as a member of
FHLB of New York, is required to acquire and hold shares of capital stock in
that FHLB in an amount equal to the greater of 1.0% of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, 5% of its FHLB advances
outstanding, or one per cent of thirty per cent of total assets. At September
30, 1998, the Company owned $3.2 million of FHLB common stock.
Advances from the FHLB of New York are secured by a member's shares of
stock in the FHLB of New York, 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, 1998, the Company had $44.9
million of outstanding advances from the FHLB of New York.
TAXATION
FEDERAL TAXATION
General. The Company and the Bank will report their income on a
consolidated basis, using a fiscal year ending September 30 and the accrual
method of accounting and will be subject to federal income taxation in the same
manner as other corporations with certain exceptions, including recapture of
portions of the Bank's tax reserve for bad debts, discussed below. The following
discussion of tax matters is intended only as a summary and does not purport to
be a comprehensive description of the tax rules applicable to the Bank or the
Company. Based on the IRS and New York State statutes of limitations for tax
examinations, the Bank cannot be examined for fiscal 1994 or earlier. No IRS or
New York State tax examinations have been completed for any years subsequent to
fiscal 1994.
Bad Debt Reserves. The Small Business Job Protection Act of 1996 (the
"1996 Act") made significant changes to the federal income tax rules concerning
a savings institution's deduction for additions to its bad debt reserves and the
recapture (i.e., inclusion in taxable income) of certain portions of the
reserve. The effect of the 1996 Act on the Bank is discussed below. Before
enactment of the 1996 Act on August 20, 1996, the Bank could take a federal
income tax deduction for annual additions to its reserve for bad debts, within
specified formula limits. The Bank's deduction with respect to "qualifying
loans," which generally were loans secured by certain interests in real
property, could be computed using an amount based on a six-year moving average
of the Bank's actual loss experience (the "Experience Method"), or a percentage
equal to 8% of the Bank's taxable income (the "PTI Method"), computed without
regard to this deduction, with certain additional modifications and reduced by
the amount of any permitted addition to the non-qualifying reserve. The Bank's
deduction with respect to non-qualifying loans was required to be computed under
the Experience Method. Each year, the Bank adopted the most favorable method to
calculate the deduction.
The 1996 Act. Under the 1996 Act, for its taxable year beginning
October 1, 1996 and thereafter, the Bank is not permitted to make additions to
its bad debt reserves for tax purposes. Instead, the Bank is required to utilize
the specific charge-off method for bad debts. In addition, the Bank is required
to recapture (i.e., take into income) over a six-year period the excess of the
balance
70
<PAGE> 88
of its tax bad debt reserves as of September 30, 1996 over the balance of such
reserves as of September 30, 1988. As of September 30, 1996, the Bank's tax bad
debt reserve exceeded the balance of the reserve as of September 30, 1988 by
$1.4 million and the Bank will be required to include such excess in its taxable
income, ratably over the six taxable year period beginning October 1, 1998.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of September 30, 1988) to the extent thereof, and an
amount based on the amount distributed (but not in excess of such reserves) will
be included in the Bank's taxable income. Non-dividend distributions is defined
as distributions in excess of the Bank's current and accumulated earnings and
profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's taxable income. The amount of additional
taxable income created from a non-dividend distribution is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the
distribution. Thus, if, after Conversion, the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. See "Regulation and Supervision" and "Dividend
Policy" for limits on the payment of dividends by the Bank. The Bank does not
intend to pay dividends that would result in a recapture of any portion of its
tax bad debt reserves.
Corporate Alternative Minimum Tax. The IRC imposes a tax on a
corporation's alternative minimum taxable income ("AMTI") at a rate of 20%. The
excess of the bad debt reserve deduction using the percentage of taxable income
method over the deduction that would have been allowable under the experience
method is treated as a preference item for purposes of computing the AMTI. Only
90% of AMTI can be offset by net operating loss carryforwards. The adjustment to
AMTI based on book income will be an amount equal to 75% of the amount by which
a corporation's adjusted current earnings exceeds its AMTI (determined without
regard to this adjustment and prior to reduction for net operating losses). In
addition, for taxable years beginning after December 31, 1986 and before January
1, 1996, an environmental tax of .12% of the excess of AMTI (with certain
modifications) over $2 million, was imposed on corporations, including the Bank,
whether or not an Alternative Minimum Tax ("AMT") is paid. The Bank does not
expect to be subject to the AMT.
Dividends Received Deduction and Other Matters. The Company may
exclude from its income 100% of dividends received from the Bank as a member of
the same affiliated group of corporations. The corporate dividends received
deduction is generally 70% in the case of dividends received from unaffiliated
corporations with which the Company and the Bank do not file a consolidated tax
return, except that if the Company and the Bank own more than 20% of the stock
of a corporation distributing a dividend, then 80% of any dividends received may
be excluded.
71
<PAGE> 89
MANAGEMENT OF THE COMPANY
DIRECTORS OF THE COMPANY
The Board of Directors of the Company is divided into three classes,
as nearly equal in number as possible, and consists of nine directors. Each
director serves until such director's successor is duly elected and qualified or
until such director's earlier death, resignation or removal. At each annual
meeting of stockholders, the successors to the class of directors whose term
expires at that meeting will be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election and until their successors have been duly elected and qualified
or until any such director's earlier death, resignation or removal. The
following table sets forth certain information regarding the directors of the
Company, each of whom will be an initial director upon completion of the
Conversion.
<TABLE>
<CAPTION>
POSITIONS HELD TERM
NAME AGE(1) WITH THE COMPANY EXPIRES
---- ------ ---------------- -------
<S> <C> <C> <C>
Daniel J. Hogarty, Jr........................ 59 Chairman of the Board; 2000
President; Chief
Executive Officer
George H. Arakelian.......................... 64 Director 2001
Richard B. Devane............................ 64 Director 2001
Michael E. Fleming........................... 68 Director 2002
Willie Anderson Hammett...................... 54 Director 2000
Thomas B. Healy.............................. 52 Director 2000
Keith D. Millsop............................. 72 Director 2002
Edward G. O'Haire............................ 67 Director 2001
Marvin L. Wulf............................... 73 Director 2002
</TABLE>
- -----------
(1) As of December 31, 1998.
The biographical information of each director is set forth below under
"-- Biographical Information." Initially the directors of the Company will not
receive additional fees for their services as directors of the Company. See "--
Compensation of Trustees" for a discussion of fees paid to trustees of the Bank.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company are the same as the executive
officers of the Bank. They are appointed annually and hold office until their
respective successors are chosen and qualified or until their death, earlier
resignation or removal from office. The following table sets forth certain
information regarding the executive officers of the Company and Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME AGE(1) WITH THE COMPANY AND BANK
---- ------ -------------------------
<S> <C> <C>
Daniel J. Hogarty, Jr.......................... 59 Chairman of the Board of the Company; Trustee of the Bank; President
and Chief Executive Officer of the Company and the Bank
Kevin M. O'Bryan............................... 49 Senior Vice President; Secretary
Michael C. Mahar............................... 51 Senior Vice President
Edward M. Maziejka, Jr......................... 39 Vice President and Chief Financial Officer
</TABLE>
- -----------
(1) As of December 31, 1998.
The biographical information for each executive officer is set forth
below under "-- Biographical Information."
Since the formation of the Company, none of the executive officers,
directors or other personnel has received remuneration from the Company.
Executive officers of the Company will be compensated as described below under
"Management of the Bank."
72
<PAGE> 90
MANAGEMENT OF THE BANK
TRUSTEES OF THE TROY SAVINGS BANK
The direction and control of the Bank has been vested in its Board
of Trustees. Upon consummation of the Conversion, each of the current trustees
of the Bank will become directors of the stock-chartered Bank for terms that
expire in the same year as their respective terms on the Board of the Company.
The directors will be divided into three classes, as nearly in number as
possible, with the terms of office of one class expiring each year. Members of
each class shall be elected for the term of three years and until their
successors are elected and qualified. The following table sets forth certain
information regarding the Board of Trustees of the Bank.
<TABLE>
<CAPTION>
POSITIONS HELD TRUSTEE
NAME WITH THE BANK SINCE
---- ------------- -----
<S> <C> <C>
Daniel J. Hogarty, Jr.................................... President; Chief Executive 1985
Officer; Trustee
George H. Arakelian...................................... Trustee 1988
Richard B. Devane........................................ Trustee 1970
Michael E. Fleming....................................... Trustee 1981
Willie Anderson Hammett.................................. Trustee 1990
Thomas B. Healy.......................................... Trustee 1995
Keith D. Millsop......................................... Trustee 1979
Edward G. O'Haire........................................ Trustee 1979
Marvin L. Wulf........................................... Trustee 1973
</TABLE>
- -----------
(1) As of December 31, 1998.
BIOGRAPHICAL INFORMATION
TRUSTEES OF THE BANK
Daniel J. Hogarty, Jr. joined the Bank in 1985 and has been the
Bank's President, Chief Executive Officer and trustee since that time. Mr.
Hogarty also serves as President and/or Director of nine of the Bank's
subsidiaries.
George H. Arakelian has served as a trustee of the Bank since 1988.
Mr. Arakelian is President and Chairman of the Board of Standard Manufacturer
Co., Inc., a manufacturer of outerwear and sportswear located in Troy, New York.
Richard B. Devane has served as a trustee of the Bank since 1970.
Mr. Devane is President of Devane, Inc., a floor contractor, and is a real
estate broker with Devane Realty, both of which are located in Troy, New York.
Michael E. Fleming, DDS has served as a trustee of the Bank since
1980. Dr. Fleming is an orthodontist practicing in Troy, New York.
Willie A. Hammett has served as a trustee of the Bank since 1990.
Mr. Hammett is Vice President of Student Services at Hudson Valley Community
College located in Troy, New York.
Thomas B. Healy has served as a trustee of the Bank since 1995. Mr.
Healy is Senior Vice President of Investments at Prudential Securities, Inc.
located in Albany, New York.
Keith D. Millsop has served as a trustee of the Bank since 1979. Mr.
Millsop is a retired Manager of Industrial Relations at Ford Motor Company's
Plant in Green Island, New York.
Edward G. O'Haire has served as a trustee of the Bank since 1979.
Mr. O'Haire is President of Ryan & O'Haire Insurance Agency located in Troy, New
York.
73
<PAGE> 91
Marvin L. Wulf has served as a trustee of the Bank since 1973. Mr.
Wulf is an Economic Development Specialist for the City of Troy, New York.
EXECUTIVE OFFICERS OF THE BANK WHO ARE NOT TRUSTEES
Kevin M. O'Bryan joined the Bank in 1976 and is a Senior Vice
President and the Bank's Chief Credit Officer and Secretary. Mr. O'Bryan's
primary responsibilities include oversight of all of the Bank's lending
departments. Prior to his appointment as Senior Vice President and Chief
Credit Officer in 1992, Mr. O'Bryan has held numerous positions in the Bank's
commercial mortgage department. Mr. O'Bryan is also Secretary and Director
of FMB, Troy S.B. Real Estate Co., Inc., The Family Advertising Co., T.S. Real
Property, Inc., Realty Umbrella, Ltd., and 32 Second Street, Inc., all of
which are subsidiaries of the Bank. Mr. O'Bryan is also President and Director
of Camel Hill Corporation, 507 Height, and T.S. Capital Corp., which are also
subsidiaries of the Bank.
Michael C. Mahar joined the Bank in 1988 and is a Senior Vice
President of the Bank. Mr. Mahar's primary responsibilities include oversight
of the Bank's retail banking, deposit services, sales and marketing, and
operations. Prior to that appointment in 1992, Mr. Mahar was the director of
the Bank's commercial lending program.
Edward M. Maziejka, Jr. joined the Bank in 1988 and is the Bank's
Chief Financial Officer. Prior to that appointment in 1993, Mr. Maziejka was
Vice President of Financial Administration of the Bank. Mr. Maziejka is also
Treasurer and Director of FMB, Troy S.B. Real Estate Co., Inc., The Family
Advertising Co., T.S. Real Property, Inc., Realty Umbrella, Ltd., and 32
Second Street, Inc., all of which are subsidiaries of the Bank. Mr. Maziejka
also serves as Assistant Treasurer of The Family Insurance Agency, Inc., as
Treasurer and Secretary of T.S. Capital Corp., and as Secretary, Treasurer
and Director of Camel Hill Corporation, which are also subsidiaries of the
Bank.
MEETINGS AND COMMITTEES OF THE BOARDS OF THE BANK AND THE COMPANY
The Board of Trustees of the Bank meets at least monthly and may
have additional special meetings as may be called by the President or one-third
of the trustees. During the fiscal year ended September 30, 1998, the Board of
Trustees held 16 meetings. No trustee attended fewer than 98% in the aggregate
of the total number of meetings of the Board or committees on which such
trustee served for the year ended September 30, 1998. There are currently five
committees of the Board of Trustees consisting of the Audit and Examining
Committee, the Compensation Committee, the Loan Committee, the Executive
Committee and the Trust Committee. Subsequent to the Conversion, the Board of
Trustees may consider and make revisions to the current structure of its
committees.
COMPENSATION OF TRUSTEES
Trustees of the Bank receive fees of $1,375 per board meeting
attended and fees ranging from $250 to $850 per committee meeting attended,
depending on the type of committee. Subsequent to the Conversion, the Company
and the Bank intend to engage a compensation consultant to study the level and
structure of compensation paid to the directors and trustees, as compared to
similarly situated publicly traded financial institutions and, upon review of
such study, may revise the amount of fees paid to such director and trustees.
TRUSTEES EMERITUS
The Bank's Bylaws require that a trustee retire at the end of the
calendar year in which the trustee reaches the age of 75. The Bank's Bylaws
also permit the Board of Trustees, upon a majority vote, to elect as a Trustee
Emeritus a trustee, who so requests, and who has served the Bank for at least
20 years and who is at least 70 years old. Trustees Emeritus may attend all
regular meetings of the Board and may take part in the Board's discussions, but
shall not be eligible to vote. In addition, Trustees Emeritus are not counted
for the purpose of determining a quorum, and Trustees Emeritus may be removed
by
74
<PAGE> 92
a majority vote of the Board of Trustees. Upon Conversion, Trustees Emeritus
will receive the same meeting fees as trustees of the Bank.
HONORARY TRUSTEES
The Bank's Bylaws also permit the Board of Trustees to elect
Honorary Trustees by a majority vote. Honorary Trustees are elected for three
year terms, and may attend all regular meetings of the Board and may take part
in the Board's discussions. Honorary Trustees may not vote, receive any
compensation or be counted for the purpose of determining any quorum.
EXECUTIVE COMPENSATION
The following table sets forth the cash and certain other
compensation paid by the Bank for services rendered in all capacities during
the year ended September 30, 1998, to the President and Chief Executive Officer
and all executive officers who received compensation in excess of $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (2) LONG TERM COMPENSATION AWARDS
--------------------------------------- -----------------------------
RESTRICTED
NAME AND STOCK ALL OTHER
PRINCIPAL POSITIONS YEAR(1) SALARY($) BONUS($) AWARDS($)(4) OPTIONS(#)(4) COMPENSATION(5)
- ---------------------- ------- ------------ -------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Hogarty, Jr. 1998 $ 577,967(3) -- -- -- $ 10,000
President and Chief
Executive Officer
Kevin M. O'Bryan 1998 $ 154,048 -- -- -- $ 8,789
Senior Vice President,
Chief Credit Officer
and Secretary
</TABLE>
- -----------
(1) All data for fiscal years ended September 30, 1998.
(2) For fiscal year ended September 30, 1998, there were no perquisites with
an aggregate value for any named individual in excess of the lesser of
$50,000 or 10% of the individual's salary and bonus or other annual
compensation not categorized as salary or bonus. (3) Includes deferred
compensation of $98,000.
(4) As a mutual institution, the Bank does not have any stock based plans. The
Company does, however, intend to adopt such plans following the Conversion.
(5) Reflects matching contributions made by the Bank under a 401(k) plan.
REPORT OF INDEPENDENT COMPENSATION CONSULTANT
Pursuant to the NYBD regulations governing the Conversion, the Bank
must obtain the opinion of an independent compensation consultant as to whether
or not the total compensation for the executive officers, directors or trustees
of the Bank, viewed as a whole and on an individual basis, is reasonable and
proper in comparison to the compensation provided to executive officers,
directors or trustees of similar publicly traded financial institutions. The
Bank has obtained an opinion from ________________________, which provides
that, based upon published professional survey data of similarly situated
publicly traded financial institutions operating in the relevant markets as of
_________________, with respect to the total cash compensation (base salary and
annual incentive) for executive officers and total compensation for trustees
of the Bank, such compensation, viewed as a whole and on an individual basis,
is reasonable and proper in comparison to the compensation provided to
similarly situated publicly-traded financial institutions, and that, with
respect to the amount of shares of Common Stock to be reserved under the ESOP
and Equity Compensation Plan that such amounts reserved for granting are
reasonable in comparison to similar publicly traded financial institutions.
BENEFIT PLANS
EMPLOYMENT AND EMPLOYMENT PROTECTION AGREEMENTS
75
<PAGE> 93
Upon the Conversion, the Company and the Bank intend to enter into
employment agreements with three executive officers, including Messrs. Hogarty
and O'Bryan (the "Employment Agreements") and employment protection agreements
with four other officers (the "Employment Protection Agreements").
The Employment Agreements will provide for initial terms of three
years from the date of the Conversion. The Employment Agreements will
automatically renew for one additional year on the first and each subsequent
anniversary of the Conversion, unless at least three months before any renewal
date the Company and the Bank give written notice to the executive officer or
the executive officer gives written notice to the Company and the Bank that the
Employment Agreement will not be renewed. Upon a change of control (as defined
below) the term of each Employment Agreement will be extended so that the
Employment Agreement will not expire before three years after the change of
control. Under the Employment Agreements, each executive officer is entitled to
receive an annual salary and may receive annual cost of living and merit
increases as determined by the Company and the Bank. The Company and the Bank
will review the base salary at least annually, but cannot reduce it from the
amount previously in effect.
Each executive officer is eligible to receive discretionary bonuses
from the Company and the Bank and will be eligible to participate in any
incentive, bonus, equity compensation, retirement, deferred compensation or
welfare benefit plan that the Company or the Bank maintains, including any plan
that the Company or the Bank has that provides for stock options, employee
stock purchases, pension or retirement income, retirement savings, employee
stock ownership, deferred compensation and medical, prescription, dental,
disability, employee life, group life, accidental death and travel accident
insurance or benefits. In addition, under the Employment Agreements, the
Company and the Bank provide each executive officer with an automobile or an
automobile allowance for business use. As of September 30, 1998, the base
salaries for Messrs. Hogarty and O'Bryan are $600,000 and $160,000,
respectively.
The Company and the Bank 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), the
Company and the Bank will be required to pay to the executive officer a lump
sum cash payment equal to three times the sum of the executive officer's annual
base salary in effect before the termination, plus the amount of any bonuses
payable to the executive officer during the preceding 12 months, including
bonuses that were earned but deferred until a later year. The Company and the
Bank will also be required to pay the executive officer an amount that is equal
to the value of the additional retirement benefits that the executive officer
would have been entitled to receive under the Bank's qualified defined benefit
pension plan, 401(k) Plan, ESOP and Supplemental Plan if the executive officer
had continued to be employed for three years after the termination and had been
paid the same annual base salary and bonus amounts that are used to compute the
lump sum cash payment. The Company and the Bank will also continue to provide
employee welfare benefits (such as medical, disability and life insurance) to
the executive officer (and, if applicable, his dependents) for three years,
except that, if the executive officer becomes entitled to comparable employee
benefits, the benefits will be secondary to those provided by the new employer.
The Company and the Bank will provide the executive officer with outplacement
services and will continue to cover the affected officer under the Company's
and the Bank's existing indemnification provisions and insurance relating to
director and officer liability.
In addition, following a termination without cause, the executive
officer will be fully vested (except to the extent limited by applicable
regulations) in stock options, Restricted Stock and other equity compensation
arrangements, the Supplemental Plan and any other deferred compensation plan
and all other employee benefits that would otherwise be forfeited upon
termination of employment. If the executive officer's options and Restricted
Stock cannot be vested because of regulatory constraints, the Company and the
Bank will pay the executive officer an amount of cash equal to the value of the
unvested options and Restricted Stock. The Company and the Bank will pay or
reimburse the executive officer for any expenses (including attorneys fees)
reasonably
76
<PAGE> 94
incurred by the executive officer in connection with any dispute, including
litigation, concerning the interpretation or enforcement of the officer's
Employment Agreement.
If an executive officer terminates his employment with "good
reason" (as defined in the Employment Agreements), the above provisions will
also apply (as if the Company and the Bank had terminated his employment
without cause).
If the executive officer would be subject to the excise tax imposed
by Section 4999 of the IRC (relating to excess parachute payments) on any
payment or distribution the Company or the Bank makes to or for the benefit of
the executive officer under the Employment Agreement, the Company and the Bank
will pay to the executive officer a gross-up amount sufficient (after all
taxes) to pay the excise tax (including interest and penalties with respect to
any such taxes). However, if the gross-up payment would not produce a net
after-tax benefit to the executive officer of at least $50,000 more than the
net after-tax amount the executive officer could receive without incurring any
excise tax, the amounts payable to the executive officer will be reduced to the
maximum amount that can be paid without triggering the excise tax.
During the term of the Employment Agreement, if the executive
officer terminates his employment without the consent of the Company and the
Bank and without good reason or if the Company and the Bank terminate the
officer's employment for cause, then the Employment Agreement, among other
things, would restrict the executive officer from having any other employment
for one year or the remaining term of the agreement plus six months, whichever
is less, with a commercial bank, savings bank, savings and loan association, or
mortgage banking company, or a holding company affiliate of any of the
foregoing, which has an office out of which the executive officer would be
primarily based, located within 35 miles of the Bank's home office.
The executive officer will agree not to make any unauthorized
disclosure of confidential information belonging to the Company and the Bank,
either during or after employment. The executive officer will also agree to
return written materials to the Company and the Bank when upon termination of
employment.
The Employment Protection Agreements provide for initial terms of
three years ending on the third anniversary of the Conversion, with renewals
for one additional year annually, unless, before any renewal date, the Company
and the Bank give written notice to the officer or the officer gives written
notice to the Company and the Bank that the Employment Protection Agreement
will not renew. An officer is not entitled to severance or other compensation
following termination of employment under an Employment Protection Agreement
except in the context of a "change of control" (as defined below). Upon a
change of control, the term of each Employment Protection Agreement will be
extended so that such Agreement will not expire before two years after the
change of control.
If a change of control occurs during the term of an Employment
Protection Agreement and, either before and in connection with the change of
control, or within two years after the change of control, the Company and the
Bank terminate the officer's employment without cause (as defined in the
Employment Protection Agreement) or the officer terminates employment with
"good reason" (as defined in the Employment Protection Agreement), the Company
will be required to make a severance payment to the officer. The amount of the
payment will be two times the officer's current annual salary in effect before
the change of control or at the time of termination, whichever is more. The
Company will also continue the officer's employee welfare benefits for a period
of two years after the termination and the officer will be fully vested (except
to the extent limited by applicable regulations) in stock options, Restricted
Stock and other equity compensation arrangements, deferred compensation and
other employee benefits that would otherwise be forfeited upon termination of
employment. If the officer's options and Restricted Stock cannot be vested
because of regulatory constraints, the Company and the Bank will pay the
officer an amount of cash equal to the value of the unvested options and
Restricted
77
<PAGE> 95
Stock. However, severance and other benefits, including accelerated vesting and
any cash payment with respect to unvested options and Restricted Stock, payable
under an Employment Protection Agreement will be limited to the maximum amount
that can be paid to the officer without constituting an "excess parachute
payment" under the IRC. The Company will pay or reimburse the officer for any
expenses including attorneys fees reasonably incurred in connection with any
dispute, including litigation, concerning the interpretation or enforcement of
his Employment Protection Agreement.
For purposes of the Employment and Employment Protection
Agreements, a "change of control" means any of the following:
(1) the acquisition by any individual, entity or group (a
"Person") of beneficial ownership of 20% or more of
either (i) the outstanding shares of the Company's
Common Stock or (ii) the combined voting power of the
Company's outstanding voting securities that are
entitled to vote generally in the election of directors
("Voting Securities"), except that any acquisition (a)
directly from the Company, (b) by the Company, (c) by
any employee benefit plan or trust of the Company or
the Bank, or (d) pursuant to a transaction that
complies with clauses (3)(i), (ii) and (iii) below will
not constitute a change of control;
(2) individuals who, as of the Conversion, constituted the
Company's Board of Directors (the "Incumbent Board")
cease for any reason to constitute at least a majority
of the Board of Directors, except that any individual
who becomes a director after the Conversion whose
election, or nomination for election by the
shareholders, was approved by a vote of at least a
majority of the directors who comprise the Incumbent
Board at that time shall be considered a member of the
Incumbent Board, but excluding anyone whose initial
assumption of office occurs as a result of an actual or
threatened election contest with respect to the
election or removal of directors or other actual or
threatened solicitation of proxies or consents by or on
behalf of any Person other than the Board of Directors;
(3) consummation of a reorganization, merger or
consolidation or sale or other disposition of all or
substantially all of the Company's assets or the
Company's acquisition of the stock or assets of another
entity (a "Business Combination"), unless, immediately
after the Business Combination (i) the beneficial
owners of the Company's outstanding Common Stock and
Voting Securities, respectively, beneficially own,
directly or indirectly, more than 50% of, respectively,
the outstanding shares of common stock (the "Resulting
Common Stock") and the combined voting power of the
outstanding voting securities entitled to vote
generally in the election of directors (the "Resulting
Voting Securities"), as the case may be, of the
corporation resulting from the Business Combination
(including a corporation that as a result of the
Business Combination owns the Company or all or
substantially all of the Company's assets either
directly or through one or more subsidiaries) (the
"Resulting Corporation") in substantially the same
proportions as their ownership, immediately before the
Business Combination, of the outstanding Common Stock
and Voting Securities, as the case may be, (ii) no
Person (excluding any employee benefit plan or trust of
the Company or the Bank or of the Resulting
Corporation) beneficially owns, directly or indirectly,
20% or more of, respectively, the then outstanding
Resulting Common Stock or the combined voting power of
the Resulting Voting Securities, except to the extent
that such ownership existed before the Business
Combination and (iii) at least a majority of the
members of the board of directors of the Resulting
Corporation were members of the Incumbent Board at the
time of the execution of the initial agreement, or of
the action of the Board of Directors, providing for
such Business Combination; or
(4) approval by the Company's stockholders of a complete
liquidation or dissolution of the Company.
78
<PAGE> 96
EMPLOYEE SEVERANCE COMPENSATION PLAN
Upon Conversion, the Bank intends to establish an Employee
Severance Compensation Plan (the "Severance Plan") which will provide eligible
employees with severance pay benefits in the event of termination of employment
after a change of control (as defined above). Management personnel with
Employment Agreements or Employment Protection Agreements will not eligible to
participate in the Severance Plan. Generally, full-time employees will be
covered under the Severance Plan if they have completed at least one year of
service with the Company, the Bank or both. During the first year after a
change of control, each eligible employee whose employment is terminated
without cause (as defined in the Severance Plan) or who terminates his
employment for good reason (as specified in the Severance Plan), will be
entitled to receive a severance payment. The amount of the severance payment
will be equal to 1/26th of such employee's annual base compensation for each
year of service up to a maximum of 26 years. Severance payments may tend to
discourage takeover attempts by increasing costs to be incurred by the Company
and the Bank in the event of a takeover.
OTHER BENEFIT PLANS
General. The Bank currently provides health care benefits to its
employees, including hospitalization, major medical and prescription drug
benefits, on a self-funded basis (up to applicable stop loss insurance
amounts), subject to certain deductibles and co-payments by employees. The Bank
also provides life and disability insurance to employees and certain health
care and life insurance benefits to retired employees.
Defined Benefit Pension Plan. The Bank maintains a non-contributory
defined benefit pension plan covering substantially all of its full-time
salaried employees (the "Pension Plan"). Employees are eligible to participate
in the Pension Plan following the completion of one year of service (1,000
hours worked during a continuous 12-month period) and attainment of 21 years of
age. A participant must complete five years of service before attaining a
vested interest in his retirement benefits, after which such participant is
100% vested. A participant will also be fully vested upon attaining normal
retirement age or upon a change of control (as defined above).
The benefit provided to a participant at normal retirement age
(generally age 65) is based on the participant's highest three-year average
annual base earnings during the participant's final 10-years of participation
("average annual earnings") subject to a limitation on the amount of
compensation that can be taken into account under the IRC. The annual benefit
provided to a participant at normal retirement age is equal to 2% of his
average annual earnings for each year of credited service up to 32.5 years,
plus .4% of his average annual earnings that exceed 50% of the Social Security
wage base for each year of credited services up to 30 years.
An unreduced annual retirement benefit, calculated in the same
manner as described above, will be provided to a participant who:
- 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;
- 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
- postpones annual benefits beyond normal retirement age.
If a participant who is eligible for early retirement benefits elects to
begin receiving benefits before satisfying the foregoing age and service
requirements, such participant's benefits will be reduced in accordance with
actuarial factors set out in the Pension Plan.
79
<PAGE> 97
The Pension Plan also provides a preretirement surviving spouse
benefit if the participant dies before retirement or other termination of
employment and after having satisfied the requirements for a vested retirement
benefit.
The following table sets forth, as of September 30, 1998, estimated
annual pension benefits for individuals at age 65 payable in the form of a life
annuity under the most advantageous plan provisions for various levels of
compensation and years of service. The figures in this table are based upon the
assumption that the Pension Plan continues in its present form and do not
reflect Social Security benefits and benefits payable under the ESOP. At
September 30, 1998, the estimated years of credited service of Messrs. Hogarty
and O'Bryan were 13 and 22 years, respectively.
[INSERT PENSION PLAN TABLE]
401(k) Savings Plan. The Bank has a qualified, tax-exempt savings
plan with a cash or deferred feature qualifying under Section 401(k) of the IRC
(the "401(k) Plan"). All salaried or commissioned employees who have attained
age 21 and completed one year of employment are eligible to participate.
Participants may contribute from 2% to 15% of their base compensation to the
401(k) Plan on a pre-tax basis. At present, the Bank makes a matching
contribution equal to 50% of the participant's pre-tax contributions (up to a
maximum of 3% of the participant's compensation).
All participants' pre-tax contributions (and earnings on the
pre-tax contributions) are fully and immediately vested. Matching contributions
become vested at a rate of 20% per year of service, beginning when the employee
has completed two years of service. However, upon the normal retirement age of
65, disability (as defined for purposes of the Bank's long-term disability
plan), death or a change of control (as defined below above), a participant
will automatically be 100% vested.
Participants may direct the investment of amounts contributed to
their 401(k) Plan accounts in one or more investment options available under
the 401(k) Plan. Changes in investment directions among the funds are permitted
on a quarterly basis pursuant to procedures established by the Plan
Administrator. Each participant receives a quarterly statement which provides
information regarding, among other things, the market value of his investments
and contributions made to the 401(k) Plan on his behalf. In connection with the
Conversion, the Bank intends to amend the 401(k) Plan to permit participants to
invest in the Company's Common Stock as one of the investment options. The
401(k) Plan will be able to purchase Common Stock from the Company or in open
market transactions. The trustee of the 401(k) Plan will follow the voting
directions of 401(k) Plan participants with respect to Common Stock held by the
401(k) Plan, so long as those directions are consistent with the terms of the
401(k) Plan and applicable law. The trustee will vote shares of Common Stock as
to which no instructions are received from participants in accordance with its
fiduciary duties. The trustee will also follow the instructions of participants
in determining whether to tender shares of Common Stock in response to any
tender offer and will not tender shares for which no instructions are received.
Participants are permitted to borrow against their account balances in the
401(k) Plan and are eligible to receive hardship distributions from their
pre-tax contributions. For the year ended September 30, 1998, the Bank's
contributions to the 401(k) Plan on behalf of Messrs. Hogarty and O'Bryan were
$10,000 and $8,789, respectively.
Employee Stock Ownership Plan. In connection with the Conversion,
the Bank intends to implement the ESOP. The ESOP will be a noncontributory,
tax-qualified stock purchase plan that invests primarily in Common Stock of the
Company. The ESOP will be 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 will be permitted to borrow in order to finance purchases of
Common Stock.
The Company anticipates that it will loan money to the ESOP to
enable the ESOP to purchase 8% of the Common Stock issued in the Conversion,
including shares contributed to the Community Foundation. The loan will be
secured by the Common Stock purchased by the ESOP.
80
<PAGE> 98
Under a pledge agreement between the ESOP and the Company, the Common Stock
will be held in a suspense account under the ESOP and will be released for
allocation to participants' accounts as payments of principal and interest are
made on the loan. The term of the loan will be 10-15 years. After shares of
Common Stock are released from the pledge and suspense account, the ESOP
trustee will allocate those shares to participants' accounts on an annual
basis, generally in proportion to their compensation for the year. The ESOP
will repay the loan from contributions the Bank will make to the ESOP (and
dividends paid on the purchased shares that have not been allocated to
participants' accounts, if any). The interest rate for the loan will be based
on prevailing market rates. Subject to limitations imposed by the IRC, the Bank
will be entitled to a federal income tax deduction for the amounts it
contributes to the ESOP.
All employees of the Bank will be eligible to participate in the
ESOP after they attain age 21 and complete one year of service during which
they work at least 1,000 hours. Employees will receive credit for years of
service with the Bank before the adoption of the ESOP for participation and
vesting purposes. Each participant's account will be credited with shares of
Common Stock based upon his or her compensation (up to a specified dollar
limitation in effect under the IRC) for each plan year in which the Bank makes
a contribution to the ESOP. A participant will become vested in his ESOP
account at a rate of 20% per year commencing upon completion of two years of
service and, after completing six years of service, a participant will be 100%
vested in his or her ESOP account. ESOP participants will be fully vested in
the event of disability, death, attainment of the normal retirement age of 65,
disability or a change of control (as defined above).
ESOP participants generally will be entitled to receive
distributions from their ESOP accounts only upon termination of service, except
for certain diversification distributions provided for under the IRC.
Distributions may be made in cash or in whole shares of the Common Stock, but
fractional shares of Common Stock will not be distributed. Participants will
not incur federal income taxes until a distribution is made.
Participating employees will be entitled to instruct the trustee of
the ESOP as to how to vote the shares held in their accounts. The ESOP trustee
will vote unallocated shares, and allocated shares as to which no instructions
are received in the same manner, on a proportionate basis, as the allocated
shares for which it receives instructions, subject to the requirements of its
fiduciary duties under ERISA. The trustee will similarly follow the
instructions of participants with respect to allocated shares in determining
how to respond to a tender offer with respect to the Company's Common Stock and
will not tender allocated shares for which it does not receive instructions.
The trustee will decide whether to tender unallocated shares consistently with
its fiduciary duties under ERISA. The trustee will not be affiliated with the
Company.
The ESOP may be amended by the Board of Directors of the Bank,
except that no amendment may be made which would reduce the vested interest of
any participant in the ESOP trust fund or divert any of the assets of the ESOP
trust fund to purposes other than the exclusive benefit of participants or
their beneficiaries.
From time to time, the ESOP may purchase additional shares of
Common Stock from the Company or in the market. Future purchases by the ESOP,
which are not currently contemplated, would be subject to applicable laws,
regulations and market conditions.
Long-Term Equity Compensation Plan. The Company and the Bank
believe that the Conversion will enhance their ability to attract and retain
directors and key personnel because it will be able to offer stock options and
other stock-related incentive programs after the Conversion. The Company
intends to adopt a Long-Term Equity Compensation Plan (the "Equity Compensation
Plan") and to submit it to its stockholders for their approval (at a meeting to
be held no earlier than six months following the Conversion). The objective of
the Equity Compensation Plan will be to provide directors, officers, employees
and independent contractors with a proprietary interest in the Company as an
incentive to contribute to its success.
81
<PAGE> 99
The Equity Compensation Plan will consist of a stock option plan
and the MRP. The Company anticipates that the Equity Compensation Plan will
permit the Company to grant:
- stock options intended to qualify as incentive options
under Section 422 of the IRC ("Incentive Options") to
officers and other employees,
- stock options that do not qualify as Incentive Options
("Non-Statutory Options") to directors, officers,
employees and independent contractors; and
- shares of Common Stock, which may be made subject to
vesting restrictions ("Restricted Stock"), to
directors, officers, employees and independent
contractors (including Trustees Emeritus).
The Company plans to reserve a number of shares equal to 10% of the
shares of Common Stock issued in the Conversion, including shares contributed
to the Community Foundation (or 984,906 shares based upon the issuance of
9,119,500 shares), for options issued under the Equity Compensation Plan. The
Company plans to establish and contribute cash to a trust to enable the trust
to purchase 4.0% of the shares of Common Stock issued in the Conversion,
including shares contributed to the Community Foundation (or 393,962 shares
based upon the issuance of 9,119,500 shares), that will be used for grants of
Restricted Stock under the MRP. Alternatively, the Company may reserve an
equivalent number of its authorized but unissued shares for grants of
Restricted Stock. Unless sooner terminated, the Company expects that the Equity
Compensation Plan will remain in effect for 10 years after approval by the
Company's stockholders.
If the Company implements the Equity Compensation Plan within one
year following the Conversion, applicable regulations provide that no
individual officer or employee of the Bank may receive more than 25% of the
options or shares of Restricted Stock granted under the plan. Non-employee
directors may not receive more than 5% individually, or 30% in the aggregate,
of the options or shares of Restricted Stock granted under the plan. The
regulations also provide that the exercise price of any options granted under
any option plan implemented within one year after the Conversion must equal or
exceed the market price of the Common Stock as of the date of grant.
Additionally, with respect to any equity compensation plan adopted within one
year after conversion, the vesting of Restricted Stock or the vesting or
exercisability of any options granted under such a plan may not be accelerated
except upon death or disability.
A committee of not less than two of the Company's directors (the
"Compensation Committee") will administer the Equity Compensation Plan. Each
member of the Compensation Committee will be a "non-employee director," as
defined in regulations issued by the SEC, and an "outside director," as defined
under Section 162(m) of the IRC. The Compensation Committee will have the
authority to grant options and Restricted Stock to eligible individuals and to
determine which options will be Incentive Options. When the Compensation
Committee grants an option, it will specify the number of shares subject to the
option, the exercise price, the manner of exercise and any vesting or other
restrictions on the recipient's ability to exercise the option.
The option exercise price of an Incentive Option may not be less
than 100% of the fair market value of the Common Stock on the date of grant (or
110% in the case of an Incentive Option granted to anyone who beneficially owns
more than 10% of the outstanding Common Stock). The maximum option term is 10
years (or five years in the case of an Incentive Option granted to anyone who
beneficially owns more than 10% of the outstanding Common Stock). The Equity
Compensation Plan will specify the maximum number of shares that may be covered
by options granted to any employee in any calendar year, in accordance with
regulations issued under Section 162(m) of the IRC. There is a $100,000 limit
on the value of stock (determined at the time of grant) covered by Incentive
Options that first become exercisable by an employee in any calendar year. The
Compensation Committee will have the authority to specify the number of shares
of Restricted Stock that will be granted to an eligible individual and the
nature of the vesting and other restrictions that apply to each grant.
82
<PAGE> 100
The Company expects that options granted pursuant to the Equity
Compensation Plan generally will be exercisable for at least three months after
a participant ceases to perform services for the Company, unless the
Compensation Committee determines otherwise. The Company anticipates that
Restricted Stock will vest ratably over five years and that unvested shares
will be forfeited upon a voluntary termination of employment without "good
reason" or involuntary termination of employment for "cause." However, in the
event of death, disability or a change of control, options and Restricted Stock
will be vested and exercisable for up to one year, or such other period as
determined by the Compensation Committee, subject to applicable regulatory
requirements and, unless otherwise determined by the Company, to limitations to
prevent such accelerated vesting from constituting an excess parachute payment
under the IRC. Under the IRC, any Incentive Option exercised more than three
months after termination of an employee's employment, other than because of
death or disability, will be treated as a Nonqualified Option for tax purposes.
Incentive Options and Restricted Stock awards will be non-transferable and
non-assignable (except at death). In its discretion, the Compensation Committee
may allow an optionee to transfer nonqualified options for estate planning
purposes.
If the amount of outstanding shares of Common Stock is increased or
decreased or changed into or exchanged for a different number or kind of
securities, by reason of merger, consolidation, reorganization,
recapitalization, reclassification, stock split-up, combination of shares,
exchange of shares, stock dividend or other distribution payable in capital
stock, or other increase or decrease in the Company's Common Stock without
receipt of consideration by the Company, an appropriate and proportionate
adjustment will be made in the number and kinds of shares subject to the Equity
Compensation Plan, and in the number, kinds and per share exercise price of
shares subject to the unexercised portion of options granted before the change.
Any adjustment in an outstanding option, however, will be made without a change
in the total price applicable to the unexercised portion of the option, but
with a corresponding adjustment in the per share option price.
Upon a reorganization, merger or consolidation in which the Company
is not the surviving corporation, or upon the sale of all or substantially all
of the Company's assets to another corporation, or upon a transaction that
results in the Company becoming a subsidiary, appropriate adjustments will be
made to outstanding options. Upon a dissolution or liquidation of the Company,
all options will terminate.
The Equity Compensation Plan will provide that the Company's Board
of Directors may amend it prospectively. However, approval of the Company's
stockholders will be required if the amendment would (i) change the
requirements as to eligibility to receive Incentive Options; (ii) increase the
maximum number of shares in the aggregate for which Incentive Options may be
granted (except for adjustments upon changes in capitalization); or (iii)
otherwise cause options granted under the Plan to fail to satisfy the
requirements of Section 162(m) of IRC.
The grant of an option under the Equity Compensation Plan will not
be a taxable event. When a participant in the Equity Compensation Plan
exercises a Non-Statutory Option, he generally will recognize ordinary income
in an amount equal to the difference between the exercise price and the fair
market value of the Common Stock on the date of exercise and the Company
generally will be entitled to a business expense deduction in the same amount.
Different rules may apply if the Common Stock is subject to restrictions. If a
participant surrenders shares of Common Stock in payment of the exercise price
for Non-Statutory Options, generally the participant will not recognize gain or
loss on the exchange of shares.
An employee will not recognize taxable income upon exercise of an
Incentive Option, except that alternative minimum tax may apply. Gain realized
upon a sale of shares received pursuant to the exercise of an Incentive Option
will be taxed as long-term capital gain if the employee has held the shares for
at least two years after the date of grant and for one year after the date of
exercise of the option. The Company will not be entitled to any business
expense deduction with respect to the grant or exercise of an Incentive Option,
except as discussed below.
83
<PAGE> 101
If all of the requirements for Incentive Option treatment are met
except for the special one- or two-year holding period set forth above, the
employee will recognize ordinary income upon the disposition of the shares
generally in an amount equal to the excess of the fair market value of the
shares at the time the option was exercised over the option exercise price (or,
if less, the amount of gain recognized on the disposition). Any remaining gain
will be taxed as long- or short-term capital gain, depending upon how long the
shares were held. If the Company complies with applicable reporting
requirements, then it will be allowed a business expense deduction to the
extent the employee recognizes ordinary income. If an employee exercises an
incentive option by tendering shares of Common Stock, the exchange of shares
generally will be treated as a nontaxable exchange (unless the employee had
acquired the shares pursuant to the exercise of an Incentive Option and had not
satisfied the special holding period requirements).
The grant of shares of Restricted Stock will not be a taxable event
if the shares are subject to a substantial risk of forfeiture, unless the
recipient makes a special tax election under Section 83(b) of the IRC within 30
days after the grant (a "Section 83(b) Election"). Upon the vesting of shares
of Restricted Stock (assuming that no Section 83(b) Election was made), the
grantee will realize ordinary income equal to the value of the shares that
become vested and the Company will generally be entitled to a deduction for tax
purposes in the same amount (except as limited by Section 162(m) of the IRC,
with respect to annual compensation in excess of $1 million). If the grantee
makes a Section 83(b) Election, he will realize ordinary income as of the grant
date in an amount equal to the value of the shares at that time (without regard
to any restriction, other than a restriction that will never lapse) and the
Company generally will be entitled to a deduction in a like amount. If the
grantee subsequently forfeits shares as to which a Section 83(b) Election was
made, he will not be entitled to any tax deduction.
If an employee becomes vested in an option or in shares of
Restricted Stock because of a change of control, the employee may be subject to
an additional 20% excise tax if the amounts received by the employee (including
accelerated vesting) constitute an "excess parachute payment" under the IRC. In
that case, the Company would not be allowed to claim a deduction for the amount
that constituted an excess parachute payment.
SUPPLEMENTAL RETIREMENT AND BENEFIT RESTORATION PLAN
The Bank intends to implement a non-tax qualified Supplemental
Retirement and Benefit Restoration Plan (the "Supplemental Plan") to provide
additional benefits to a select group of management or highly compensated
employees after the Conversion. The Bank anticipates that three executive
officers, including Messrs. Hogarty and O'Bryan, will participate in the
Supplemental Plan. The Supplemental Plan will provide participants with
additional retirement benefits that cannot be provided under the Bank's
qualified retirement plans because of limitations in effect under the IRC. In
addition, the Supplemental Plan will make up for benefits lost under the ESOP
allocation procedures if participants retire or otherwise terminate employment
before the ESOP has repaid the funds it will borrow to purchase Common Stock.
Each participant in the Supplemental Plan will be entitled to an
annual defined benefit pension amount at age 65 or retirement (if later) equal
to 65% of his average annual earnings (as defined above), without regard to any
limitations imposed by the IRC (the "Pension Amount"), reduced by any amounts
actually payable under the Pension Plan and, in Mr. Hogarty's case, by $26,000
per year. 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 Mr. Hogarty's case, the maximum amount of annual compensation that
will be taken into account for this purpose will be $500,000. In the event of
the participant's death, the Pension Amount (reduced by the death benefit
payable under the Pension Plan) will be payable to his surviving spouse for
life, beginning when the participant would have reached the age of 65. The
Pension Amount will be actuarially reduced (based on the same factors as are
applied under the Pension Plan) if the participant or surviving spouse elects
to commence receiving benefits before age 65 (except in cases where the
participant has met the age and service
84
<PAGE> 102
requirements for an unreduced current 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 will also be entitled to
an annual defined contribution amount, based on the amount of the matching
contribution that would have been made to the 401(k) Plan (assuming the
participant had made the maximum allowable pre-tax contribution and determined
as if the IRC did not impose nondiscrimination limitations on employer matching
contributions), reduced by the maximum matching contribution that could
actually be made for the participant under the 401(k) Plan applying existing
IRC provisions and assuming that the participant makes the maximum contribution
that he can make in accordance with the IRC rules . The defined contribution
amounts will be reflected in a bookkeeping account on the Bank's books and will
be credited with earnings based on the performance of investments selected by
the participant. The defined contribution amounts will be fully vested and will
be paid in a lump sum upon the participant's retirement or other termination of
employment.
Each participant in the Supplemental Plan will also be entitled, at
retirement or other termination of employment, or upon a change of control (as
defined above) to an additional benefit if shares have not been allocated under
the ESOP because the ESOP has not repaid its loan (the "ESOP Replacement
Benefit"). The ESOP Replacement Benefit will be based on (i) 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 (ii) the number of years remaining in the term
of the ESOP loan. The benefit will be paid in cash, based on the average fair
market value of a share of the Common Stock as of the participant's retirement
or other termination of employment or the change of control, if applicable. The
vesting provisions of the ESOP will apply to the ESOP Replacement Benefit.
Participants' rights to benefits under the Supplemental Plan will
be limited to those of general unsecured creditors of the Bank. The Bank 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 the Bank's creditors
in the event of insolvency and, if the trust invests in the Company's Common
Stock, the Bank will have the right to substitute other assets for the Common
Stock.
TRANSACTIONS WITH CERTAIN RELATED PERSONS
Certain executive officers of the Bank were customers of, and had
other transactions with, the Bank in the ordinary course of business. Loans to
these parties were made on the Bank's normal credit terms, including interest
rates and collateralization. The aggregate of such loans totaled less than 5%
of the Bank's total equity at September 30, 1998. The Company intends that all
transactions between the Company and its executive officers, directors, holders
of 10% or more of the Company's Common Stock and affiliates thereof, will
contain terms no less favorable to the Company than could have been obtained by
it in arms-length negotiations with unaffiliated persons and will be approved
by a majority of the Company's independent directors who do not have any
interest in the transaction.
85
<PAGE> 103
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND TRUSTEES
The following table sets forth the number of shares of Common Stock
the Bank's executive officers and trustees and their associates, propose to
purchase, assuming shares of Common Stock are issued at the minimum and maximum
of the Estimated Price Range and that sufficient shares will be available to
satisfy their subscriptions. The table also sets forth the total expected
beneficial ownership of Common Stock as to all trustees and executive officers
as a group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED PRICE OF THE ESTIMATED PRICE
RANGE(1) RANGE(1)
-------------------------- --------------------------
AS A % AS A %
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
- ---- ------ --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Daniel J. Hogarty, Jr.................. $1,000,000 100,000 1.48% 100,000 1.10%
George H. Arakelian.................... 1,000,000 100,000 1.48 100,000 1.10
Richard B. Devane...................... 20,000 2,000 -- 2,000 --
Michael E. Fleming..................... 260,000 26,000 .39 26,000 .29
Willie Anderson Hammett................ 200,000 20,000 .30 20,000 .22
Thomas B. Healy .................. 500,000 50,000 .74 50,000 .55
Keith D. Millsop .................. 250,000 25,000 .37 25,000 .27
Edward G. O'Haire .................. 400,000 40,000 .60 40,000 .44
Marvin L. Wulf .................. 200,000 20,000 .30 20,000 .22
Michael C. Mahar .................. 60,000 6,000 .09 6,000 .07
Edward M. Maziejka, Jr................. 70,000 7,000 .10 7,000 .08
Kevin M. O'Bryan .................. 100,000 10,000 .15 10,000 .11
All Trustees and Executive
Officers as a group (12 persons) $4,108,742 406,000 6.02% 406,000 4.45%
</TABLE>
- --------------------------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the Conversion, including
shares contributed to the Community Foundation. Also does not include
shares to be contributed to the Community Foundation equal to 8% of the
Common Stock sold, Common Stock which may be awarded under the MRP to be
adopted equal to 4% of the Common Stock issued in the Conversion,
including shares contributed to the Community Foundation and Common Stock
which may be purchased pursuant to options which may be granted under the
Equity Compensation Plan equal to 10% of the number of shares of Common
Stock issued in the Conversion, including shares contributed to the
Community Foundation.
86
<PAGE> 104
THE CONVERSION
THE BOARD OF TRUSTEES OF THE BANK AND THE NEW YORK SUPERINTENDENT
HAVE APPROVED THE PLAN OF CONVERSION SUBJECT TO THE APPROVAL OF THE BANK'S
DEPOSITORS AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH APPROVAL BY
THE NEW YORK SUPERINTENDENT, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR
ENDORSEMENT OF THE PLAN OF CONVERSION BY THE NEW YORK SUPERINTENDENT.
GENERAL
On July 15, 1998, the Board of Trustees of the Bank adopted a plan
of conversion, as amended on December 10, 1998 (the "Plan of Conversion"),
pursuant to which the Bank will convert from a New York State-chartered mutual
savings bank to a New York State-chartered capital stock savings bank under the
same name. The Plan of Conversion also contemplates that, upon the conversion
of the Bank to the stock form of organization, all of the stock of the Bank
will be owned by a bank holding company organized as a Delaware corporation
that will issue its own common stock to certain depositors and members of the
general public. The Plan of Conversion has been approved by the New York
Superintendent and the Bank has received a notice of intent not to object to
the Plan of Conversion from the FDIC, subject to, among other things, approval
of the Plan of Conversion by the Bank's eligible depositors. A special meeting
of eligible depositors has been called for this purpose to be held on ____,
1999.
In the Conversion, the Company will acquire all of the issued and
outstanding shares of the Bank's capital stock. The Company will offer the
Common Stock to Eligible Account Holders, the ESOP and the Supplemental
Eligible Account Holders in the respective priorities and upon the terms and
conditions set forth in the Plan of Conversion. Any shares of Common Stock not
subscribed for by the foregoing classes of persons will then be offered for
sale to certain members of the public directly through a Community Offering
and/or a Syndicated Community Offering, through an underwritten firm commitment
public offering or through a combination thereof. If a holding company is not
utilized and thus the Company is not utilized, then the Common Stock of the
Bank will be sold in the manner described above pursuant to the priorities set
forth in the Plan of Conversion.
The Plan of Conversion also provides that, immediately following
the Conversion, the Company intends to contribute to the Community Foundation a
number of shares of its authorized but unissued Common Stock in an amount equal
to 8% of the Common Stock issued in the Conversion (approximately 7.4% of the
Common Stock outstanding after such issuance). The Community Foundation, along
with the established Charitable Foundation, will provide for charitable
activities in the Bank's community. The Community Foundation will allow the
Bank's local communities to share in the potential growth and any profitability
of the Company and the Bank over the long-term.
Although the Plan of Conversion has been unanimously approved by
the Board of Trustees of the Bank present at a meeting duly called under the
Bank's Bylaws, and pursuant to the notice requirements of the New York Banking
Law, the Plan of Conversion must also be approved by eligible depositors of the
Bank by the affirmative vote of at least a majority of the amount of votes
eligible to be cast at the Special Meeting. The Board of Trustees will appoint
an independent custodian and tabulator to receive and hold proxies to be voted
at the Special Meeting and count the votes cast in favor of and in opposition
to the Plan of Conversion.
The aggregate price of the shares of Common Stock to be sold in the
Conversion will be determined based upon an independent appraisal prepared by
FinPro, Inc. of the estimated pro forma market value of the Common Stock giving
effect to the Conversion. All shares of Common Stock to be issued and sold in
the Conversion will be sold at the same price. FinPro, Inc.'s independent
appraisal will be updated and the final price of the shares of Common Stock
will be
87
<PAGE> 105
determined at the completion of the Subscription Offering, if all shares are
subscribed for, or at the completion of the Community and/or Syndicated
Offering. FinPro, Inc. is a consulting firm experienced in the valuation and
appraisal of savings institutions. See "-- Stock Pricing" for additional
information as to the determination of the estimated pro forma market value of
the Common Stock.
The following is a brief summary of pertinent aspects of the Plan
of Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan of Conversion. A copy of the Plan of Conversion is
available from the Bank upon written request directed to ______ and is
available for inspection at the offices of the Bank and at the office of the
New York Superintendent. The Plan of Conversion is also filed as an Exhibit to
the Registration Statement of which this Prospectus is a part, copies of which
may be obtained from the SEC. See "Additional Information."
ESTABLISHMENT OF THE COMMUNITY FOUNDATION
As part of the Conversion, the Company intends to establish and
transfer to the Community Foundation, for a nominal consideration, from its
authorized, but unissued, Common Stock an amount up to 8% of the number of
shares of Common Stock sold in the Conversion. The funding of the Community
Foundation with Common Stock of the Company furthers the stated goals of the
Community Foundation, and enables the community to share in the potential
growth and any profitability of the Company and the Bank over the long-term.
The Community Foundation will be dedicated to the promotion of
charitable purposes within the Bank's communities, including, but not limited
to, providing grants to the Music Hall Foundation and other qualifying
charitable organizations. In order to serve the purposes for which it was
formed and maintain its Section 501(c)(3) qualification, the Community
Foundation may sell the Common Stock contributed to it by the Company.
The Bank will be the sole voting member of the Community Foundation
and will have the power to elects its board of directors. The board of
directors of the Community Foundation will be selected from the individuals
who, from time to time, are serving as directors of the Bank. The board of
directors of the Community Foundation will be responsible for establishing the
polices of the Community Foundation with respect to grants or donations,
consistent with the stated purposes of the Community Foundation.
The funding of the Community Foundation as part of the Conversion
is subject to the approval of the New York Superintendent and, if applicable,
the FDIC.
STRUCTURE OF THE COMMUNITY FOUNDATION. The Community Foundation
will be incorporated under Delaware law as a non-stock corporation. The
certificate of incorporation of the Community Foundation will provide that the
Community Foundation is organized exclusively for charitable purposes,
including community development, as set forth in Section 501(c)(3) of the IRC.
The Community Foundation's certificate of incorporation will further provide
that no part of the net earnings of the Community Foundation will inure to the
benefit of, or be distributable to its directors, officers or members of the
Company or Bank.
The board of directors of the Community Foundation will have
authority over the affairs of the Community Foundation. The directors of the
Community Foundation will establish the policies with respect to grants or
donations by the Community Foundation, consistent with the purposes for which
the Community Foundation was established. The directors of the Community
Foundation will at all times be bound by their fiduciary duties to advance the
Community Foundation's charitable goals, to protect the assets of the Community
Foundation and to act in a manner consistent with its charitable purposes. The
directors of the Community Foundation will also be responsible for directing
the activities of the Community Foundation, including the management of the
Common Stock of the Company held by the Community Foundation. However, as a
condition to receiving the nonobjection of the FDIC to the Bank's Conversion,
the Community Foundation has agreed that all
88
<PAGE> 106
shares of Common Stock held by the Community Foundation will be voted in the
same ratio as all other shares of the Company's Common Stock on all proposals
considered by stockholders of the Company; provided, however, that the FDIC
shall waive this voting restriction under certain circumstances if compliance
with the voting restriction would: (i) cause a violation of the law of the
State of Delaware; (ii) would cause the Community Foundation to lose its
tax-exempt status, or cause the IRS to deny the Community Foundation's request
for a determination that it is an exempt organization or otherwise have a
material and adverse tax consequence on the Community Foundation; or (iii)
would cause the Community Foundation to be subject to an excise tax under
Section 4941 of the IRC. In order for the FDIC to waive such voting
restriction, the Company's or the Community Foundation's legal counsel must
render an opinion satisfactory to the FDIC that compliance with the voting
restriction would have the effect described in clauses (i), (ii) or (iii)
above. Under those circumstances, the FDIC will grant a waiver of the voting
requirement upon submission of such legal opinion(s) by the Company or the
Community Foundation that are satisfactory to the FDIC. In the event that the
FDIC were to waive the voting requirement, the directors would direct the
voting of the Common Stock held by the Community Foundation.
The Company intends to contribute to the Community Foundation
Common Stock of the Company in an amount equal to 8.0% of the number of shares
of Common Stock sold in the Conversion. At the minimum, midpoint, maximum and
maximum plus 15% of the Estimated Price Range, the contribution to the
Community Foundation would equal 539,240, 634,400, 729,560 and 838,994 shares,
which would have a market value of $5,392,400, $6,344,000, $7,295,600 and
$8,349,940, respectively, assuming a $10.00 per share price. The Company and
the Bank determined to fund the Community Foundation with Common Stock rather
than cash because it desired to form a bond with its community in a manner that
would allow the community to share in any potential growth and success of the
Company and the Bank over the long-term.
The Community Foundation would receive working capital from any
dividends that may be paid on the Company's Common Stock in the future, and
subject to applicable federal and state laws, loans collateralized by the
Common Stock or from the proceeds of the sale of any of the Common Stock in the
open market from time to time as may be permitted to provide the Community
Foundation with additional liquidity. As a private foundation under Section
501(c)(3) of the IRC, the Community Foundation will be required to distribute
annually in grants or donations, a minimum of 5% of the average fair market
value of its net investment assets. One of the conditions imposed on the gift
of Common Stock by the Company is that the amount of Common Stock that may be
sold by the Community Foundation in any one year shall not exceed 5% of the
average market value of the assets held by the Community Foundation, except
where the board of directors of the Community Foundation determines that the
failure to sell an amount of Common Stock greater than such amount would result
in a long-term reduction of the value of the Community Foundation's assets and
as such would jeopardize the Community Foundation's capacity to carry out its
charitable purposes. Upon completion of the Conversion and the contribution of
shares to the Community Foundation immediately following the Conversion, the
Company would have 7.3 million, 8.6 million, 9.9 million and 11.3 million
shares issued and outstanding at the minimum, midpoint, maximum and maximum
plus 15% of the Estimated Price Range. Because the Company will have an
increased number of shares outstanding, the voting and ownership interests of
stockholders in the Company's Common Stock would be diluted by 7.4%, as
compared to their interests in the Company if the Community Foundation was not
funded with Common Stock. For additional discussion of the dilutive effect, see
"Risk Factors -- Contribution to the Community Foundation" and "Pro Forma
Data."
TAX CONSIDERATIONS. The Company and the Bank have been advised by
Hogan & Hartson L.L.P., their tax advisor, that an organization created for the
above purposes would qualify as a Section 501(c)(3) exempt organization under
the IRC, and would likely be classified as a private foundation. The Community
Foundation will submit a request to the IRS to be recognized as an exempt
organization. As long as the Community Foundation files its application for
tax-exempt status within 15 months from the date of its organization, and
provided the IRS approves the application, the effective date of the Community
Foundation's status as a Section 501(c)(3) organization will be the date of its
organization. The Company's tax advisors, however, have not
89
<PAGE> 107
rendered any advice on the condition to the contribution to be agreed to by the
Community Foundation which requires that all shares of Common Stock of the
Company held by the Community Foundation be voted in the same ratio as all
other outstanding shares of Common Stock of the Company on all proposals
considered by stockholders of the Company. The FDIC would waive this voting
restriction if it would cause the Community Foundation to lose its tax-exempt
status or subject the Community Foundation to an excise tax, upon submission of
a legal opinion satisfactory to the FDIC. See "-- Regulatory Conditions Imposed
on the Community Foundation."
Under Delaware law, the Company is authorized by statute to make
charitable contributions and case law has recognized the benefits of such
contributions to a Delaware corporation. In this regard, Delaware case law
provides that a charitable gift must be within reasonable limits as to amount
and purpose to be valid. The Company and the Bank believe that the Conversion
presents a unique opportunity to fund a charitable foundation given the
substantial amount of additional capital being raised in the Conversion. In
making such a determination, the Company and the Bank considered the dilutive
impact of the contribution of Common Stock to the Community Foundation on the
amount of Common Stock available to be offered for sale in the Conversion.
Based on such consideration, the Company and Bank believe that the contribution
to the Community Foundation in excess of the 10% annual limitation is justified
given the Bank's capital position and its earnings, the substantial additional
capital being raised in the Conversion and the potential benefits of the
Community Foundation to the Bank's community. In this regard, assuming the sale
of the Common Stock at the maximum plus 15% of the Estimated Price Range, the
Company would have pro forma consolidated stockholders' equity of $161.4
million or 20.0% of pro forma consolidated assets and the Bank's pro forma
leverage and Tier I risk-based capital ratios would be 14.45% and 20.78%
respectively. See "Regulatory Capital Compliance," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No contribution to the
Community Foundation." Thus, the amount of the contribution will not adversely
impact the consolidated financial condition of the Company and the Bank, and
the Company and the Bank therefore believe that the amount of the charitable
contribution is reasonable given the Company's and the Bank's pro forma capital
positions. As such, the Company and the Bank believe that the contribution does
not raise safety and soundness concerns.
The Company and the Bank have received an opinion of Hogan & Hartson
L.L.P., their tax advisor, that the Company's transfer of its own stock to the
Community Foundation for a nominal consideration would not constitute an act of
self-dealing, and that the Company will be entitled to a deduction in the
amount of the fair market value of the stock at the time of the contribution,
subject to the limitation based on 10% of the Company's annual taxable income.
In fiscal 1998, the Bank established and contributed to the
Charitable Foundation $1.0 million in cash and entered into a binding,
irrevocable commitment to make a total of $4.0 million in scheduled payments to
the Charitable Foundation. The scheduled payments will occur in each of fiscal
years 1999, 2000 and 2001. In connection with the Bank's cash contribution and
future binding commitment, the Bank recorded a contribution expense of $4.5
million, which represents the $1.0 million cash contributed and the present
value of the $4.0 million in future scheduled contributions. In fiscal 1998,
the Bank recognized the entire tax benefit associated with this contribution
expense. In fiscal 1999, the Company also intends to contribute the Music Hall
to the Music Hall Foundation (the pre-tax cost of this contribution is
estimated at $300,000). The combined value of these contributions is expected
to exceed the 10% deduction limitation on the Company's estimated taxable
income in fiscal 1999 and during the five-year carry forward period, and
accordingly, the Company will not be able to recognize the full tax benefit of
these contributions.
At this time, the Company estimates the tax benefit of the
contribution of Common Stock to the Community Foundation to be between
approximately $1.1 million (assuming contribution of 634,400 shares at the
midpoint of the Estimate Price Range, a $10.00 per share price and a combined
tax rate of 35%) and $1.2 million (assuming contribution of 838,994 shares at
the maximum plus 15% of the Estimated Price Range, a $10.00 per share price and
a combined tax rate of 35%). If the Company were able to realize the entire tax
benefit on this contribution, then, under the same
90
<PAGE> 108
assumptions, such tax benefit would range between $2.2 million and $2.5
million. There can be no assurances that the IRS will determine that the
Charitable Foundation, the Community Foundation and the Music Hall Foundation
are not tax-exempt charities under Section 501(c)(3) of the IRC. If one or more
of the foundations do not qualify, the IRS may disallow the Company's
deductions for its contributions, in whole or in part. If the Company is not
permitted to deduct part or all of the contribution expense, its results of
operations will be adversely impacted. See "Risk Factors -- Contribution to the
Community Foundation."
As a private foundation, earnings and gains, if any, from the sale
of Common Stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The foundations will
each be required to make an annual filing with the IRS within four and one-half
months after the close of their fiscal year to maintain their tax-exempt
status. The foundations will each be required to publish a notice that the
annual information return will be available for public inspection for a period
of 180 days after the date of such public notice. The information return for a
private foundation must include, among other things, an itemized list of all
grants made or approved, showing the amount of each grant, the recipient, any
relationship between a grant recipient and the foundation's managers and a
concise statement of the purpose of each grant. The foundations will also be
required to file annual reports with the Charities Bureau of the Office of the
Attorney General of the State of New York
REGULATORY CONDITIONS IMPOSED ON THE COMMUNITY FOUNDATION.
Establishment of the Community Foundation is subject to the following
conditions to be agreed to by the Community Foundation in writing as a
condition to receiving the FDIC's non-objection of the Bank's Conversion: (i)
the Community Foundation will be subject to examination by the FDIC; (ii) the
Community Foundation must comply with supervisory directives imposed by the
FDIC; (iii) the Community Foundation will operate in accordance with written
policies adopted by the board of directors, including a conflict of interest
policy; and (iv) any shares of Common Stock of the Company held by the
Community Foundation must be voted in the same ratio as all other outstanding
shares of Common Stock of the Company on all proposals considered by
stockholders of the Company; provided, however, that, consistent with the
condition, the FDIC shall waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (a) cause a
violation of the law of the State of Delaware; (b) would cause the Community
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Community Foundation; or (c) would cause the
Community Foundation to be subject to an excise tax under Section 4941 of the
IRC. In order for the FDIC to waive such voting restriction. the Company's or
the Community Foundation's legal counsel must render an opinion satisfactory to
FDIC that compliance with the voting restriction would have the effect
described in clauses (a), (b) or (c) above. There can be no assurances that a
legal opinion addressing these issues will be rendered, or if rendered, that
the FDIC will grant an unconditional waiver of the voting restriction. In no
event will the voting restriction survive the sale of shares of the Common
Stock held by the Community Foundation.
PURPOSES OF THE CONVERSION
The Board of Trustees has carefully considered the corporate
structures and charter alternatives available to the Bank, including
maintaining the Bank's current form. Based on this evaluation, the Board of
Trustees has determined that the mutual to stock conversion, and concurrent
holding company formation, is in the best interests of the Bank, its depositors
and the communities served by the Bank. If the concurrent holding company
formation cannot be accomplished, the Board of Trustees still believes that the
mutual to stock conversion is in the best interests of the Bank, its depositors
and the communities served by the Bank.
The Bank, as a New York State-chartered mutual savings bank, does
not have stockholders and has no authority to issue capital stock. By
converting to the capital stock form of organization, the Bank will be
structured in the form used by most financial service providers, including
savings banks, and therefore will enable the Company and Bank to compete more
effectively with such
91
<PAGE> 109
institutions. The Conversion will also allow the Company to access the capital
markets in order to raise additional capital as needed, and will facilitate the
Company's establishment or acquisition of a commercial bank and trust company
that can accept municipal deposits to complement the Bank's municipal
investment activities. The newly raised capital may also be used to increase
the Bank's presence in its communities and to attract new customers through
expanded operations, acquisitions of other financial institutions or branches
and diversification of operations. Although there are no current arrangements,
understandings or agreements regarding any such opportunities, the Company will
be in a position after the Conversion, subject to regulatory limitations and
the Company's financial position, to take advantage of any such opportunities
that may arise. While there are benefits associated with the holding company
form of organization, such form of organization may involve additional costs
associated with its maintenance and regulation as a bank holding company to be
registered with the Federal Reserve, such as additional administrative
expenses, taxes and regulatory filings or examination fees.
The potential impact of the Conversion upon the Bank's capital base
is significant. At September 30, 1998, the Bank had Tier I Leverage capital of
$70.1 million, or 9.89% of total adjusted quarterly average assets. Assuming
that $102.7 million (using the maximum plus 15% of the Estimated Price Range)
of net proceeds are realized from the sale of Common Stock (see "Pro Forma
Data" for the basis of this assumption) and assuming that 50% of the net
proceeds are used by the Company to purchase the capital stock of the Bank, the
Bank's Tier I Leverage capital would increase to $107.9 million, resulting in a
pro forma leverage capital ratio of 14.45% giving effect to the Conversion.
After completion of the Conversion, the unissued Common Stock and
preferred stock authorized by the Company's certificate of incorporation will
permit the Company, subject to market conditions and applicable regulatory
approvals, to raise additional equity capital through further sales of
securities, and to issue securities in connection with possible acquisitions.
At the present time, the Company has no plans with respect to additional
offerings of securities, other than the issuance of additional shares to the
Community Foundation and issuance of shares upon exercise of stock options
under the Equity Compensation Plan, ESOP and MRPs. Following the Conversion,
the Company will also be able to use stock-based benefit plans to attract and
retain executive and other personnel for itself and its subsidiaries. See
"Management of the Bank -- Executive Compensation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the net worth
of the institution based upon the balance in his or her account, which interest
may only be realized in the event of a liquidation of the institution. However,
this ownership interest is tied to the depositor's account and has no tangible
market value separate from such deposit account. Any depositor who opens a
deposit account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the account
is reduced.
Consequently, mutual savings bank depositors normally have no way
to realize the value of their ownership interest, which may have realizable
value only in the unlikely event that the mutual savings bank is liquidated. In
such event, the depositors of record at that time, as owners, would have a
claim to share pro rata in any residual surplus and reserves after other
claims, including claims of depositors to the amounts of their deposits, are
paid.
When a mutual savings bank converts to stock form, depositors lose
all rights to the net worth of the mutual savings bank, except to the extent
depositors have rights to claim a pro rata share of funds representing the
liquidation account established in connection with the Conversion.
Additionally, permanent nonwithdrawable capital stock is created and offered to
depositors which represents the ownership of the institution's net worth,
subject to certain claims of Eligible Account
92
<PAGE> 110
Holders and Supplemental Eligible Account Holders with respect to amounts
representing the liquidation account. THE COMMON STOCK IS SEPARATE AND APART
FROM DEPOSIT ACCOUNTS AND CANNOT BE AND IS NOT INSURED BY THE FDIC OR ANY OTHER
GOVERNMENTAL AGENCY. Certificates are issued to evidence ownership of the
permanent stock. The stock certificates are transferable, and therefore the
stock may be sold or traded if a purchaser is available with no effect on any
deposit account the seller may hold in the institution.
CONTINUITY. While the Conversion is being accomplished, the normal
business of the Bank of accepting deposits and making loans will continue
without interruption. The Bank will continue to be subject to regulation by the
New York Superintendent and the FDIC. After Conversion, the Bank will continue
to provide services for depositors and borrowers under current policies by its
present management and staff.
The trustees of the Bank at the time of Conversion will serve as
directors of the Bank after the Conversion. The directors of the Company will
consist of the same individuals who will serve on the Board of Directors of the
Bank. All officers of the Bank at the time of Conversion will retain their
positions after the Conversion.
EFFECT ON DEPOSIT ACCOUNTS. Under the Plan, each depositor in the
Bank at the time of Conversion will automatically continue as a depositor after
the Conversion, and each such deposit account will remain the same with respect
to deposit balance, interest rate and other terms. Each such account will be
insured by the FDIC to the same extent as before the Conversion. Depositors
will continue to hold their existing passbooks and other evidences of their
accounts.
EFFECT ON LOANS. No loan outstanding from the Bank will be affected
by the Conversion, and the amount, interest rate, maturity and security for
each loan will remain as it was contractually fixed prior to the Conversion.
EFFECT ON VOTING RIGHTS OF DEPOSITORS. In its current mutual form,
voting rights and control of the Bank are vested exclusively in the Board of
Trustees. After the Conversion, direction of the Bank will be under the control
of the Board of Directors of the Bank. The Company, as the holder of all of the
outstanding common stock of the Bank, will have exclusive voting rights with
respect to any matters concerning the Bank requiring stockholder approval,
including the election of directors of the Bank.
After the Conversion, subject to the rights of the holders of
preferred stock that may be issued in the future, the holders of the Common
Stock will have exclusive voting rights with respect to any matters concerning
the Company. Each holder of Common Stock will, subject to the restrictions and
limitations set forth in the Company's Certificate Incorporation discussed
below, be entitled to vote on any matters to be considered by the Company's
stockholders, including the election of directors of the Company.
TAX EFFECTS. The Bank has received an opinion of counsel with
regard to federal income taxation which indicates that the adoption and
implementation of the Plan of Conversion set forth herein will not be taxable
for federal income tax purposes. The Bank has also received an opinion from
KPMG Peat Marwick LLP with respect to New York State franchise and income taxes
that the Plan of Conversion will not be taxable for New York State tax purposes
to the Bank or its Eligible Account Holders and Supplemental Eligible Account
Holders or the Company, subject to the limitations and qualifications in such
opinion. See "-- Tax Aspects."
EFFECT ON LIQUIDATION RIGHTS. If a mutual savings bank were to
liquidate, all claims of creditors (including those of depositors, to the
extent of deposit balances) would be paid first. Thereafter, if there were any
assets remaining, depositors would have a claim to receive such remaining
assets, pro rata, based upon the deposit balances in their deposit accounts
immediately prior to liquidation. In the unlikely event that the Bank were to
liquidate after Conversion, all claims of creditors (including those of
depositors, to the extent of their deposit balances) would also
93
<PAGE> 111
be paid first, followed by distribution of the "liquidation account," if any,
to certain depositors (as described in "-- Liquidation Rights," below), with
any assets remaining thereafter distributed to the Company as the holder of the
Bank's capital stock.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the
Common Stock must be based on the appraised pro forma market value of the
Common Stock, as determined on the basis of an independent appraisal. The Bank
and the Company have retained FinPro, Inc. to make such appraisal. For its
services in making such appraisal, FinPro, Inc. will receive a fee of $_____,
including fees related to the preparation of a business plan for the Company
and Bank, and will be reimbursed for certain of its expenses. The Bank and the
Company have agreed to indemnify FinPro, Inc. and its employees and affiliates
against certain losses (including any losses in connection with claims under
the federal securities laws) arising out of its services as the independent
appraiser, except where FinPro, Inc.'s liability results from its negligence or
willful misconduct.
An appraisal has been made by FinPro, Inc. in reliance upon the
information contained in this Prospectus, including the Consolidated Financial
Statements. FinPro, Inc. also considered the following factors, among others:
the present and projected operating results and financial condition of the
Company and the Bank, including liquidity, capitalization, asset composition,
funding mix, amount of intangible assets owned, and level of interest rate
risk; the economic, demographic and competitive aspects of the Bank's existing
marketing area; the quality and depth of the Bank's management; certain
historical, financial and other information relating to the Bank; a comparative
evaluation of the operating and financial statistics of the Bank with those of
other savings institutions; the aggregate size of the offering of the Common
Stock; the impact of Conversion on the Bank's net worth and earnings potential;
the proposed dividend policy of the Company and the Bank; the trading market
for securities of comparable institutions and general conditions in the market
for such securities; and recent regulatory matters. In particular, the
appraisal considered the Bank's financial condition and projected and
historical operating results, including income and expense trends, asset size,
loan portfolio composition, non-performing loans and assets, interest rate
sensitivity position, capital position, and yields on assets and costs of
liabilities in comparison to other publicly-traded thrifts with assets greater
than or equal to $650 million and less than or equal to $1.1. billion located
in the Mid-Atlantic, New England and/or Midwest regions. The Board of Trustees
of the Bank and Board of Directors of the Company have reviewed the appraisal
of FinPro, Inc. in determining the reasonableness and adequacy of such
appraisal consistent with NYBB and FDIC regulations and have reviewed the
methodology and reasonableness of assumptions utilized by FinPro, Inc. in the
preparation of such appraisal and established the Estimated Price Range in a
manner consistent with this appraisal.
On the basis of the foregoing, FinPro, Inc. has advised the Company
and the Bank that, in its opinion dated as of December 10, 1998, the estimated
pro forma market value of the Common Stock being sold in connection with the
Conversion ranged from a minimum of $67,405,000 to a maximum of $91,195,000
(the "Estimated Price Range") with a midpoint of $79,300,000. This establishes
the number of shares to be offered (6,740,500 to 9,119,500), based on an
offering price of $10.00 per share. If the appraised market value of the Common
Stock changes due to market or financial conditions, then, without notice, the
Company may be required to offer up to an additional 15% above the maximum
number of shares or 10,487,425 shares. The Estimated Price Range may be amended
with the approval of' the New York Superintendent and FDIC, if required, if
necessitated by subsequent developments in the financial condition of the
Company or the Bank or market conditions generally.
SUCH APPRAISAL, HOWEVER, IS NOT INTENDED, AND MUST NOT BE
CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING
SUCH SHARES OF COMMON STOCK. FINPRO, INC. DID NOT INDEPENDENTLY VERIFY THE
CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION PROVIDED BY THE BANK,
NOR DID FINPRO, INC. VALUE INDEPENDENTLY THE ASSETS OR LIABILITIES OF THE BANK.
THE APPRAISAL CONSIDERS THE BANK AS A GOING CONCERN AND
94
<PAGE> 112
SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF THE BANK.
MOREOVER, BECAUSE SUCH APPRAISAL IS NECESSARILY BASED UPON ESTIMATES AND
PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH ARE SUBJECT TO CHANGE FROM
TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING SUCH SHARES IN
THE CONVERSION WILL THEREAFTER BE ABLE TO SELL SUCH SHARES AT PRICES AT OR
ABOVE THE PURCHASE PRICE OR IN THE RANGE OF THE FOREGOING VALUATION OF THE PRO
FORMA MARKET VALUE THEREOF.
No sale of shares of Common Stock may be consummated unless, prior
to such consummation, FinPro, Inc. confirms to the Bank, Company, New York
Superintendent and FDIC that, to the best of its knowledge, nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause FinPro, Inc. to conclude that the value of the Common Stock at the
price so determined is incompatible with its estimate of the pro forma market
value of the Common Stock at the conclusion of the Subscription and Community
Offerings.
If the pro forma market value of the Common Stock is either more
than 15% above the maximum of the Estimated Price Range ($104,874,250) or less
than the minimum of the Estimated Price Range ($67,405,000), the Bank and the
Company, after consulting with the New York Superintendent and FDIC, may
terminate the Conversion and return all funds promptly with interest, extend or
hold a new Subscription Offering, Community Offering and/or Syndicated
Community Offering, establish a new Estimated Price Range, commence a
resolicitation of subscribers or take such other actions as permitted by the
New York Superintendent and FDIC in order to complete the Conversion. In the
event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period of time, all funds will be promptly
returned to investors as described above. A resolicitation following the
conclusion of the Subscription Offering and Community Offering would not exceed
45 days or, if following the Syndicated Community Offering, would not exceed 60
days, unless such resolicitation period is further extended by the New York
Superintendent or FDIC for periods of up to 60 days not to extend beyond ___,
1999.
If all shares of Common Stock are not sold through the Subscription
Offering and Community Offering, then the Bank and the Company expect to offer
the remaining shares in a Syndicated Community Offering which would occur as
soon as practicable following the close of the Subscription Offering and
Community Offering but may commence the Syndicated Community Offering during
the Subscription Offering and Community Offering subject to prior rights of
subscribers. All shares of Common Stock will be sold at the same price per
share in the Syndicated Community Offering as in the Subscription Offering and
Community Offering. See "-- Syndicated Community Offering."
No sale of shares of Common Stock may be consummated unless, prior
to such consummation, FinPro, Inc. confirms to the Bank, Company, New York
Superintendent and FDIC that, to the best of its knowledge, nothing of a
material nature has occurred which, taking into account all relevant factors,
including those which would be involved in a cancellation of the Syndicated
Community Offering, would cause FinPro, Inc. to conclude that the aggregate
market value of the Common Stock is incompatible with its estimate of the pro
forma market value of the Common Stock of the Company at the time of the
Syndicated Community Offering. Any change which would result in an aggregate
purchase price which is below or more than 15% above the Estimated Price Range
would be subject to New York Superintendent and FDIC approval. If such
confirmation is not received, the Bank may extend the Conversion, extend,
reopen or commence a new Subscription Offering and Community Offering and/or
Syndicated Community Offering, establish a new Estimated Price Range and
commence a resolicitation of all subscribers with the approval of the New York
Superintendent and FDIC or take such other actions as permitted by the New York
Superintendent and FDIC in order to complete the Conversion, or terminate the
Plan of Conversion and cancel the Subscription Offering and Community Offering
and/or the Syndicated Community Offering. In the event market or financial
conditions change so as to cause the aggregate purchase price of the shares to
be below the minimum of the Estimated Price Range ($67,405,000) or more than
15% above the maximum of the Estimated Price Range ($104,874,250),
95
<PAGE> 113
and the Company and the Bank determine to continue the Conversion, subscribers
will be resolicited (i.e., be permitted to continue their orders. in which case
they will need to affirmatively reconfirm their subscriptions prior to the
expiration of the resolicitation offering or their subscription funds will be
promptly refunded with interest, or be permitted to decrease or cancel their
subscriptions). Any change in the Estimated Price Range must be approved by the
New York Superintendent and FDIC. A resolicitation, if any, following the
conclusion of the Subscription and Community Offerings would not exceed 45
days, or if following the Syndicated Community Offering, 60 days, unless
further extended by the New York Superintendent or FDIC for periods up to 60
days not to extend beyond _________, 1999. If such resolicitation is not
effected, the Bank will return all funds promptly with interest.
Copies of the appraisal report of FinPro, Inc. including any
amendments thereto, and the detailed memorandum of the appraiser setting forth
the method and assumptions for such appraisal are available for inspection by
any Eligible Account Holder or Supplemental Eligible Account Holder at the
Bank's main office located at 32 Second Street, Troy, New York 12180, during
regular business hours of the Bank. Copies of the appraisal may also be
requested by Eligible Account Holders or Supplemental Eligible Account Holders;
provided, however, that such Eligible Account Holders or Supplemental Eligible
Account Holders shall be responsible for all costs associated with the copying
and transmittal of such appraisal. See "Additional Information."
NUMBER OF SHARES TO BE ISSUED
Depending upon market or financial conditions following the
commencement of the Subscription Offering and Community Offerings, the total
number of shares to be sold in the Conversion may be increased or decreased
without a resolicitation of subscribers, provided that the product of the total
number of shares times the price per share is not below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated Price
Range. Based on a fixed purchase price of $10.00 per share and FinPro, Inc.'s
estimate of the pro rata market value of the Common Stock ranging from a
minimum of $67,405,000 to a maximum plus 15% of $104,874,250, the number of
shares of Common Stock expected to be issued is between a minimum of 6,740,500
shares and a maximum plus 15% of 10,487,425 shares. The actual number of shares
issued between this range will depend on a number of factors and shall be
determined by the Bank and Company subject to New York Superintendent and FDIC
approval, if necessary.
In the event market or financial conditions change so as to cause
the aggregate purchase price of the shares to be below the minimum of the
Estimated Price Range or more than 15% above the maximum of the Estimated Price
Range, if the Plan is not terminated by the Company and the Bank after
consultation with the New York Superintendent and FDIC, purchasers will be
resolicited (i.e., permitted to continue their orders, in which case they will
need to affirmatively reconfirm their subscriptions prior to the expiration of
the resolicitation offering or their subscription funds will be promptly
refunded, or be permitted to modify or rescind their subscriptions. Any change
in the Estimated Price Range must be approved by the New York Superintendent
and FDIC. If the number of shares issued in the Conversion is increased due to
an increase of up to 15% in the Estimated Price Range to reflect changes in
market or financial conditions, persons who subscribed for the maximum number
of shares will not be given the opportunity to subscribe for an adjusted
maximum number of shares. See "-- Limitations on Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion
as a result of an increase in the estimated pro forma market value would
decrease both a subscriber's ownership interest and the Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease
in the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Company's pro forma net earnings and
stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholder's equity on an aggregate basis. For a presentation of
the effects of such changes, see "Pro Forma Data."
96
<PAGE> 114
The number of shares to be issued and outstanding as a result of the
sale of Common Stock in the Conversion will be increased by a number of shares
equal to 8.0% of the Common Stock sold in the Conversion to fund the Community
Foundation. Assuming the sale of shares in the Offerings at the midpoint of the
Estimated Price Range, the Company intends to contribute 634,400 shares of its
Common Stock from authorized but unissued shares to the Community Foundation
immediately following the completion of the Conversion. In that event, the
Company will have total shares of Common Stock outstanding of 8,564,400 shares.
Of that amount, the Community Foundation will own 7.4%. Funding the Community
Foundation with authorized but unissued shares will have the effect of diluting
the ownership and voting interests of persons purchasing shares in the
Conversion by 7.4% since a greater number of shares will be outstanding upon
completion of the Conversion than would be if the Community Foundation were not
funded. See "Pro Forma Data."
SUBSCRIPTION OFFERING AND SUBSCRIPTION RIGHTS
In accordance with the Plan of Conversion, rights to subscribe for
the purchase of Common Stock have been granted under the Plan of Conversion to
the following persons in the following order of descending priority:
1. ELIGIBLE ACCOUNT HOLDERS-- those persons who held deposit
accounts (containing balances of at least $100) at the Bank on
June 30, 1997.
2. ESOP.
3. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS-- those persons (other than
Eligible Account Holders) who held deposit accounts (containing
balances of at least $100) with the Bank on [December 31, 1998].
All subscriptions received will be subject to the availability of Common Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion and as described below under "-- Limitations
on Common Stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder
will receive, without payment, as a first priority, nontransferable subscription
rights to subscribe for shares of Common Stock in the Subscription Rights
Offering up to the amount permitted to be purchased in the Community Offering,
currently $500,000 of Common Stock, subject to the overall maximum purchase
limitation. See "-- Limitations on Common Stock Purchases." Subscription rights
as Eligible Account Holders received by trustees and Officers of the Bank and
their associates based on increased deposits in the Bank during the one-year
period preceding June 30, 1997 will be subordinated to all other subscription
rights of Eligible Account Holders.
In the event that Eligible Account Holders exercise subscription
rights for a number of shares of Common Stock in excess of the total number of
such shares eligible for subscription, the shares of Common Stock will be
allocated be allocated among the subscribing Eligible Account Holders so as to
permit each subscribing Eligible Account Holder, to the extent possible, to
purchase a number of shares sufficient to make his or her total allocation of
Conversion Stock equal to the lesser of 100 shares or the number of shares
subscribed for by the Eligible Account Holder. Thereafter, any shares remaining
after that allocation will be allocated among the subscribing Eligible Account
Holders whose subscriptions remain unsatisfied in the proportion that the amount
of the qualifying deposit of each remaining Eligible Account Holder whose
subscription remains unsatisfied bears to the total amount of the qualifying
deposits of all subscribing Eligible Account Holders whose subscriptions remain
unsatisfied. If any shares remain after the above allocations, such shares shall
then be allocated among those remaining Eligible Account Holders whose
subscriptions remain unfilled, on the same principle until all available shares
have been allocated or all subscriptions satisfied.
97
<PAGE> 115
To ensure proper allocation of stock, each Eligible Account Holder
must list on his or her stock order form all accounts in which such Eligible
Account Holder has an ownership interest. Failure to list an account could
result in less shares being allocated than if all accounts had been disclosed.
PRIORITY 2: ESOP. To the extent that there are sufficient shares
remaining after satisfaction of the subscriptions by Eligible Account Holders,
the ESOP will receive, without payment, as a second priority, nontransferable
subscription rights to purchase in the Subscription Rights Offering the number
of shares of Common Stock requested by any such plan, up to 10% of the Common
Stock issued in the Conversion. If, after the filling of subscriptions of
Eligible Account Holders, a sufficient number of shares of Common Stock is not
available to fill the subscriptions by any such plan, then subscription by such
plan shall be filled to the maximum extent possible. The ESOP intends to
purchase 8% of the shares to be issued in connection with the Conversion,
including shares contributed to the Community Foundation, or 582,379 shares and
906,114 shares, based on the issuance of 6,740,500 shares (minimum) and
10,487,425 shares (maximum plus 15%), respectively.
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent
there are sufficient shares of Common Stock remaining after the satisfaction of
subscriptions by Eligible Account Holders and the ESOP, each Supplemental
Eligible Account Holder will receive, without payment, as a third priority,
nontransferable subscription rights to subscribe for shares of Common Stock
equal to the amount permitted to be subscribed for in the Community Offering
which amount is currently $500,000, subject to the overall maximum purchase
limitation. See "-- Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Common Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the remaining
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
remaining Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the qualifying deposits of all
remaining Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied. If any shares remain after the above allocations, such shares shall
then be allocated among those remaining Supplemental Eligible Account Holders
whose subscriptions remain unfilled on the same principle until all available
shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible
Account Holder must list on his or her stock order form all accounts in which
such Supplemental Eligible Account Holder has an ownership interest. Failure to
list an account could result in less shares being allocated than if all accounts
had been disclosed. Subscription rights received by an Eligible Account Holder
shall be applied in partial satisfaction of the subscription rights to be
received as a Supplemental Eligible Account Holder.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription
Offering will expire on ________, 1999 at 12:00 noon, New York time ("Expiration
Date"), unless extended for up to ____ days by the Bank and Company or such
additional periods with the approval of the New York Superintendent and FDIC, if
required. Subscription rights which have not been exercised prior to the
Expiration Date will become void. The Bank will not execute orders until all
shares of Common Stock have been subscribed for or otherwise sold. If all shares
have not been subscribed for or sold within ___ days after the Expiration Date,
unless such period is extended with the consent of the New York Superintendent
and FDIC, all funds delivered to the Bank pursuant to the
98
<PAGE> 116
Subscription Offering will be returned promptly to the subscribers with interest
and all withdrawal authorizations will be canceled. If an extension beyond the
____ day period following the Expiration Date is granted, the Bank will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions and have their funds returned promptly with
interest, and of the time period within which subscribers must affirmatively
notify the Bank of their intention to confirm, modify, or rescind their
subscription. If an affirmative response to any resolicitation is not received
by the Company from a subscriber, such order will be rescinded and all
subscription funds will be promptly returned with interest. Such extensions may
not go beyond __________, 1999.
COMMUNITY OFFERING
If shares of Common Stock remain available following the
Subscription Offering, then those remaining shares will be sold, as a fourth
priority, in a Community Offering to certain members of the general public.
Participants in the Community Offering may, together with any associate or group
of persons acting in concert, subscribe for up to $500,000 of Common Stock
subject to the minimum and maximum purchase limitations set forth in the Plan of
Conversion See "--Limitations on Common Stock Purchases." The shares may be made
available in the Community Offering through a direct community marketing program
which may provide for utilization of a broker, dealer, consultant or investment
banking firm. In offering the unsubscribed for shares to the public in the
Community Offering, the Company and the Bank may establish the relative
preferences, priorities, purchase limitations and allocation of shares among
persons, including Bank investors, subscribing for shares. The Bank may
establish all other terms and conditions of such offer. The Bank shall make
distribution of the Common Stock to be sold in the Community Offering in such a
manner as to promote a wide distribution of Common Stock. The Bank reserves the
right to reject any or all orders, in whole or in part, which are received in
the Community Offering.
It is expected that the Community Offering will commence
concurrently with the Subscription Offering. The Community Offering must be
completed within 45 days after the completion of the Subscription Offering
unless otherwise extended with the approval of the New York Superintendent and
FDIC, if necessary.
The Company and the Bank will make reasonable efforts to comply with
the securities laws of all states in the United States in which persons entitled
to subscribe for Common Stock pursuant to the Plan of Conversion reside. The
Plan of Conversion does not permit the issuance of subscription rights to, or
the purchase of Common Stock in the Subscription Offering by, a person residing
in a foreign country.
MARKETING AND UNDERWRITING ARRANGEMENTS
The Bank and the Company have engaged Sandler O'Neill as a
consultant and financial advisor in connection with the offering of the Common
Stock, and Sandler O'Neill has agreed to assist the Bank and the Company in its
solicitation of subscriptions and purchase orders for shares of Common Stock in
the Offerings. Sandler O'Neill will receive a fee equal to 1.1% of the aggregate
purchase price of all shares sold in the Conversion, excluding shares purchased
by trustees, directors, officers and employees of the Bank or Company and any
immediate family member thereof and the ESOP for which Sandler O'Neill will not
receive a fee. In the event that a selected dealers agreement is entered into in
connection with a Syndicated Community Offering, the Company and Bank will pay a
fee (to be negotiated at such time under such agreement) to such selected
dealers, any sponsoring dealers fees, and a management fee to Sandler O'Neill of
1.10% for shares sold by a NASD member firm pursuant to a selected dealers
agreement; provided, however, that the aggregate fees payable to Sandler O'Neill
for Common Stock sold by them pursuant to such a selected dealers agreement
shall not exceed 1.10% of the aggregate purchase price and provided, further,
however, that the aggregate fees payable to Sandler O'Neill and the selected
dealers will not exceed 1.10% of the aggregate purchase price of the Common
Stock sold by selected dealers. Fees to Sandler O'Neill and to any other
broker-dealer may be deemed to be underwriting fees, and Sandler O'Neill and
such
99
<PAGE> 117
broker-dealers may be deemed to be underwriters. Sandler O'Neill will also be
reimbursed for its reasonable out-of-pocket expenses, including legal fees.
Notwithstanding the foregoing, in the event the Offerings are not consummated or
Sandler O'Neill ceases, under certain circumstances after the subscription
solicitation activities are commenced, to provide assistance to the Company,
Sandler O'Neill will be entitled to a fee for its management advisory services
in an amount to be agreed upon by the Bank and Sandler O'Neill, and based upon
the amount of services performed by Sandler O'Neill and will also be reimbursed
for its reasonable out-of-pocket expenses as described above. The Company and
the Bank have agreed to indemnify Sandler O'Neill for reasonable costs and
expenses in connection with certain claims or liabilities, including certain
liabilities under the Securities Act of 1933, as amended ("Securities Act").
Sandler O'Neill has received advances towards its marketing and financial
advisory service fees totaling $50,000. Total marketing fees to Sandler O'Neill
are expected to be $595,000 and $834,000 at the minimum and the maximum of the
Estimated Price Range, respectively. See "Pro Forma Data" for the assumptions
used to arrive at these estimates.
Sandler O'Neill, in its role as conversion agent, will also perform
proxy solicitation services, conversion agent services and records management
services for the Bank in the Conversion and will receive a fee for these
services of $30,000, plus reimbursement of reasonable out-of-pocket expenses.
Directors, trustees and executive officers of the Company and Bank
may participate in the solicitation of offers to purchase Common Stock.
Questions of prospective purchasers will be directed to executive officers or
registered representatives. Other employees of the Bank may participate in the
Offering in ministerial capacities or providing clerical work in effecting a
sales transaction. Such other employees have been instructed not to solicit
offers to purchase Common Stock or provide advice regarding the purchase of
Common Stock. The Company will rely on Rule 3a4-1 under the Securities Exchange
Act of 1934, as amended ("Exchange Act"), and sales of Common Stock will be
conducted within the requirements of Rule 3a4-l, so as to permit officers,
trustees, directors and employees to participate in the sale of Common Stock. No
officer, trustee, director or employee of the Company or the Bank will be
compensated in connection with his participation by the payment of commissions
or other remuneration based either directly or indirectly on the transactions in
the Common Stock.
PROCEDURE FOR PURCHASING SHARES IN SUBSCRIPTION AND COMMUNITY OFFERINGS
To ensure that each purchaser receives a prospectus at least 48
hours before the Expiration Date in accordance with Rule 15c2-8 of the Exchange
Act, no prospectus will be mailed any later than five days prior to such date or
hand delivered any later than two days prior to such date. Execution of the
stock order form and certification form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order and certification forms will only be
distributed with a prospectus.
To purchase shares in the Subscription and Community Offerings, an
executed stock order form and certification form with the required payment for
each share subscribed for, or with appropriate authorization for withdrawal from
the Bank's deposit account (which may be given by completing the appropriate
blanks in the stock order form), must be received by the Bank at any of its
offices by ___ p.m., New York time, on _______, 1999. Stock order forms which
are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Bank and Company are not obligated to accept
orders submitted on photocopied or facsimilied stock order forms and will not
accept stock order forms unaccompanied by an executed certification form.
Notwithstanding the foregoing, the Company and Bank shall have the right, each
in their sole discretion, to permit institutional investors to submit
irrevocable orders together with a legally binding commitment for payment and to
thereafter pay for the shares of Common Stock for which they subscribe in the
Community Offering at any time prior to 48 hours before the completion of the
Conversion. The Company and the Bank have the right to waive or permit the
correction of incomplete or improperly executed forms, but do not represent that
they will do so. Once received, an executed stock order form may not be
modified, amended or rescinded without the consent of the Bank unless the
100
<PAGE> 118
Conversion has not been completed within 45 days after the end of the
Subscription and Community Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders and Supplemental
Eligible Account Holders are properly identified as to their stock purchase
priorities, depositors of the Bank as of the eligibility record date (June 30,
1997) and/or the supplemental eligibility record date ([December 31, 1998]) must
list all accounts on the stock order form giving all names in each account and
the account number.
Payment for subscriptions may be made (i) in cash if delivered in
person at any branch office of the Bank, (ii) by check or money order, or (iii)
by authorization of withdrawal from deposit accounts maintained with the Bank.
No wire transfers will be accepted. Interest will be paid on payments made by
cash, check or money order at the Bank's passbook rate of interest from the date
payment is received until the completion or termination of the Conversion. If
payment is made by authorization of withdrawal from deposit accounts, the funds
authorized to be withdrawn from a deposit account will continue to accrue
interest at the contractual rates until completion or termination of the
Conversion, but a hold will be placed on such funds, thereby making them
unavailable to the depositor until completion or termination of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from his deposit account, the Bank will do so as of the effective
date of the Conversion. The Bank will waive any applicable penalties for early
withdrawal from certificate accounts. If the remaining balance in a certificate
account is reduced below the applicable minimum balance requirement at the time
that the funds actually are transferred under the authorization, the certificate
will be canceled at the time of the withdrawal, without penalty, and the
remaining balance will earn interest at the Bank's passbook rate. If a
certificate account or other time account matures prior to the Conversion's
completion or termination, such funds will earn interest at the Bank's regular
passbook rate from the time of maturity until completion or termination of the
Conversion.
If the ESOP subscribes for shares during the Subscription Offering,
the ESOP will not be required to pay for the shares subscribed for at the time
it subscribes, but rather, may pay for such shares of Common Stock subscribed
for at the purchase price upon consummation of the Subscription and Community
Offering, if all shares are sold, or upon consummation of the Syndicated
Community Offering if shares remain to be sold in such offering; provided, that
there is in force from the time of its subscription until such time, a loan
commitment from the Company or an unrelated financial institution to lend to the
ESOP, at such time, the aggregate purchase price of the shares for which it
subscribed.
Owners of self-directed IRAs and other qualified plan accounts, such
as Keogh and 401(k) Plan accounts, may use the assets of such IRAs and other
qualified plan accounts to purchase shares of Common Stock in the Subscription
and Community Offerings, provided that such IRAs or other qualified plan
accounts (other than the Bank's 401(k) Plan) are not maintained at the Bank or
any subsidiary of the Bank and that the terms of the IRA or qualified plan
permit the purchase. Persons with self-directed IRAs or qualified plan accounts
maintained at the Bank or any subsidiary of the Bank must have their accounts
transferred to an unaffiliated institution or broker to purchase shares of
Common Stock in the Subscription and Community Offerings. In addition, the
provisions of ERISA and IRS regulations require that officers, directors and ten
percent shareholders who use self-directed IRA or qualified plan account funds
to purchase shares of Common Stock in the Subscription and Community Offerings
make such purchases for the exclusive benefit of the IRAs or qualified plan
accounts.
Certificates representing shares of Common Stock purchased will be
mailed to purchasers at the address specified in properly completed stock order
forms, as soon as practicable following consummation of the sale of all shares
of Common Stock. Any certificates returned as undeliverable will be disposed of
in accordance with applicable law.
101
<PAGE> 119
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the NYBB regulations
prohibit any person with subscription rights, including the Eligible Account
Holders, the ESOP and Supplemental Eligible Account Holders, from transferring
or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the Plan or the
shares of Common Stock to be issued upon their exercise. Such rights may be
exercised only by the person to whom they are granted and only for his or her
account. Each person exercising such subscription rights will be required to
certify that he or she is purchasing shares solely for his or her own account
and that he or she has no agreement or understanding regarding the sale or
transfer of such shares. The regulations also prohibit any person from offering
or making an announcement of an offer or intent to make an offer to purchase
such subscription rights or shares of Common Stock prior to the completion of
the Conversion.
THE BANK AND THE COMPANY WILL PURSUE ANY AND ALL LEGAL AND EQUITABLE
REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE TRANSFER
OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO INVOLVE THE
TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if
feasible, all shares of Common Stock not purchased in the Subscription and
Community Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of the Company to
assist the Company and the Bank in the sale of the Common Stock. THE COMPANY AND
THE BANK HAVE THE RIGHT TO REJECT ORDERS IN WHOLE OR IN PART IN THEIR SOLE
DISCRETION IN THE SYNDICATED COMMUNITY OFFERING. Neither Sandler O'Neill nor any
registered broker-dealer shall have any obligation to take or purchase any
shares of the Common Stock in the Syndicated Community Offering, however,
Sandler O'Neill has agreed to use its best efforts in the sale of shares in the
Syndicated Community Offering.
The price at which Common Stock is sold in the Syndicated Community
Offering will be determined as described above under "-- Stock Pricing." Subject
to the overall maximum purchase limitation, no person, together with any
associate or group of persons acting in concert, will be permitted to subscribe
in the Syndicated Community Offering for more than $500,000 of Common Stock;
provided, however, that shares of Common Stock purchased in the Community
Offering by any persons, together with associates of or persons acting in
concert with such persons, will be aggregated with purchases in the Syndicated
Community Offering and be subject to an overall maximum purchase limitation of
$1.0 million (100,000 shares).
Payments made in the form of a check, money order or in cash will
earn interest at the Bank's passbook rate of interest from the date such
payment is actually received by the Bank until completion or termination of the
Conversion.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his shares with funds held by or deposited with a selected
dealer. If an order form is executed and forwarded to the selected dealer or if
the selected dealer is authorized to execute the order form on behalf of a
purchaser, the selected dealer is required to forward the order form and funds
to the Bank for deposit in a segregated account on or before noon of the
business day following receipt of the order form or execution of the order form
by the selected dealer. Alternatively, selected dealers may solicit indications
of interest from their customers to place orders for shares. Such selected
dealers shall subsequently contact their customers who indicated an interest and
seek their confirmation as to their intent to purchase Those indicating an
intent to purchase shall execute order forms and forward them to their selected
102
<PAGE> 120
dealer or authorize the selected dealer to execute such forms. The selected
dealer will acknowledge receipt of the order to its customer in writing on the
following business day and will debit such customer's account on the third
business day after the customer has confirmed his intent to purchase (the "debit
date") and on or before noon of the next business day following the debit date
will send order forms and funds to the Bank for deposit in a segregated account.
Although purchasers' funds are not required to be in their accounts with
selected dealers until the debit date in the event that such alternative
procedure is employed once a confirmation of an intent to purchase has been
received by the selected dealer, the purchaser has no right to rescind his
order.
Certificates representing shares of Common Stock purchased, together
with any refund due, will be mailed to purchasers at the address specified in
the order form, as soon as practicable following consummation of the sale of the
Common Stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
The Syndicated Community Offering will terminate no more than ___
days following the Subscription Expiration Date, unless extended by the Company
with the approval of the New York Superintendent and FDIC. Such extensions may
not be beyond ______, 1999. See "-- Stock Pricing" above for a discussion of
rights of subscribers, if any, in the event an extension is granted.
LIMITATIONS ON PURCHASES
The Plan includes the following limitations on the number of shares
of Common Stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the amount permitted to be purchased in
the Community Offering, currently $500,000 of Common Stock, subject
to the overall maximum purchase limitation described in (7) below;
(3) The ESOP is permitted to purchase, in the aggregate, up to 10% of
the shares of Common Stock issued in the Conversion, including
shares issued in the event of an increase in the Estimated Price
Range of 15%, and the ESOP intends to purchase 8% of the shares of
Common Stock issued in connection with the Conversion, including
shares contributed to the Community Foundation (787,925 shares using
the maximum of the Estimated Price Range);
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase in the Subscription Offering up to the amount permitted to
be purchased in the Community Offering, currently $500,000 of
Common Stock, subject to the overall maximum purchase limitation
described in (7) below;
(5) Persons purchasing shares of Common Stock in the Community
Offering, together with associates of and groups of persons acting
in concert with such persons, may purchase in the Community
Offering up to $500,000 of Common Stock, subject to the overall
maximum purchase limitation described in (7) below;
(6) Persons purchasing shares of Common Stock in the Syndicated
Community Offering, together with associates of and persons acting
in concert with such persons, may purchase in the Syndicated
Offering up to $500,000 of Common Stock subject to the overall
maximum purchase limitation described in (7) below and, provided
further, that shares of Common Stock purchased in the Community
Offering by any persons, together with associates of and persons
acting in concert with such persons, will be aggregated with
purchases in the Syndicated Community Offering in applying the
$500,000 purchase limitation;
(7) Eligible Account Holders and Supplemental Eligible Account Holders
may purchase stock in the Community Offering and Syndicated
Community Offering, subject to the purchase
103
<PAGE> 121
limitations described in (5) and (6) above, provided that, except
for the ESOP, the overall maximum number of shares of Common Stock
subscribed for or purchased in all categories of the Conversion by
any person, together with associates of and groups of persons
acting in concert with such persons, shall not exceed 100,000; and
(8) No more than 25% of the total number of shares issued in the
Conversion may be purchased by trustees, directors and officers of
the Bank or Company and their associates in the aggregate, excluding
purchases by the ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of depositors of
the Bank or subscribers for Common Stock, both the individual amount permitted
to be subscribed for and the overall maximum purchase limitation may be
increased to up to a maximum of 5% of the Common Stock to be issued at the sole
discretion of the Company and the Bank. If such amount is increased, subscribers
for the maximum amount will be, and certain other large subscribers in the sole
discretion of the Bank may be, given the opportunity to increase their
subscriptions up to the then applicable limit.
The overall maximum purchase limitation may not be reduced to less
than 100,000 shares or $1.0 million and the individual amount permitted to be
subscribed for may not be reduced by the Bank to less than 0.10% without the
further approval of eligible depositors or resolicitation of subscribers. An
Eligible Account Holder or Supplemental Eligible Holder may not purchase
individually in the Subscription Offering the overall maximum purchase limit of
100,000 shares or $1.0 million, but may make such purchase, together with
associates of and persons acting in concert with such person, by also
purchasing in other available categories of the Conversion, subject to
availability of shares and the maximum overall purchase limit for purchases in
the Conversion.
The term "associate" of a person is defined to mean: (i) any
corporation or organization (other than the Company, the Bank or a
majority-owned subsidiary of the Bank) of which such person is an officer,
partner or 10% stockholder; (ii) any trust or other estate in which such person
has a substantial beneficial interest or serves as a trustee or in a similar
fiduciary capacity; provided, however, such term shall not include any employee
stock benefit plan of the Bank in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; and (iii)
any relative or spouse of such person, or any relative of such spouse, who
either has the same home as such person or who is a trustee or officer of the
Bank. Trustees are not treated as associates of each other solely because of
their Board membership. For a further discussion of limitations on purchases of
a converting institution's stock at the time of Conversion and subsequent to
Conversion, see "Management of the Bank -- Subscriptions by Executive Officers,
Directors and Trustees," "-- Certain Restrictions on Purchase or Transfer of
Shares After Conversion" and "Restrictions on Acquisition of Troy Financial
Corporation."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor would have a claim to receive their pro rata
share of any assets of the Bank remaining after payment of claims of all
creditors (including the claims of all depositors to the withdrawal value of
their accounts). To the extent there are remaining assets, a depositor would
have a claim to receive a pro rata share of any such remaining assets in the
same proportion as the value of such depositor's deposit accounts to the total
value of all deposit accounts in the Bank at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation, would have a
claim as a creditor of the same general priority as the claims of all other
general creditors of the Bank. However, except as described below, his claim
would be solely in the amount of the balance in their deposit account plus
accrued interest. Such depositor would not have an interest in the value or
assets of the Bank above that amount.
104
<PAGE> 122
The Plan provides for the establishment, at the time of the
Conversion, of a liquidation account' for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders in an amount equal to the
Bank's net worth (determined in accordance with generally accepted accounting
principles) as set forth in the latest statement of financial condition
contained in the Proxy Statement. The liquidation account will be maintained by
the Bank for the benefit of the Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their deposit accounts at the
Bank in the event of a complete liquidation of the Bank following the
Conversion. Each Eligible Account Holder and Supplemental Eligible Account
Holder shall, with respect to each deposit account, hold a related inchoate
interest in a portion of the liquidation account balance, in relation to each
deposit account balance at June 30, 1997 or _____, 1999, as the case may be, or
to such balance as it may be subsequently reduced, as hereinafter provided. The
initial liquidation account balance shall not be increased, and shall be subject
to downward adjustment to the extent of any downward adjustment of any
subaccount balance of any Eligible Account Holder or Supplemental Eligible
Account Holder in accordance with the Conversion Regulations.
In the unlikely event of a complete liquidation of the Bank (and
only in such event), following all liquidation payments to creditors (including
those to Account Holders to the extent of their Accounts) each Eligible Account
Holder and Supplemental Eligible Account Holder shall be entitled to receive a
liquidating distribution from the liquidation account, in the amount of the then
adjusted subaccount balance for his deposit account then held, before any
liquidation distribution may be made to any holders of the Bank's capital stock.
No merger, consolidation, purchase of bulk assets with assumption of deposit
accounts and other liabilities, or similar transactions with an FDIC-insured
savings bank, in which the Bank is not the surviving institution, shall be
deemed to be a complete liquidation for this purpose. In such transactions, the
liquidation account shall be assumed by the surviving institution.
The initial subaccount balance for a deposit account held by an
Eligible Account Holder and Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the liquidation account by a
fraction, the numerator of which is the amount of such Eligible Account Holder's
or Supplemental Eligible Account Holder's qualifying deposit and the denominator
of which is the total amount of all qualifying deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Bank. Such initial
subaccount balance shall not be increased, but shall be subject to downward
adjustment as described below.
If, at the close of business on the last day of any period for which
the Bank or the Company, as the case may be, has prepared audited financial
statements subsequent to the effective date of Conversion, the deposit balance
in the deposit account of an Eligible Account Holder or Supplemental Eligible
Account Holder is less than the lesser of (i) the balance in the deposit account
at the close of business on the last day of any period for which the Bank or the
Company, as the case may be, has prepared audited financial statements
subsequent to June 30, 1997 or _____, 1999, as the case may be, or (ii) the
amount in such deposit account as of June 30, 1997 or ____, 1999, as the case
may be, the subaccount balance for such deposit account shall be adjusted by
reducing such subaccount balance in an amount proportionate to the reduction in
such deposit balance. In the event of such downward adjustment, the subaccount
balance shall not be subsequently increased, notwithstanding any subsequent
increase in the deposit balance of the related deposit account. If any such
deposit account is closed, the related subaccount shall be reduced to zero. A
time account shall be deemed to be closed upon its maturity date regardless of
any renewal. A distribution of each subaccount balance may be made only in the
event of a complete liquidation of the Bank subsequent to the Conversion and
only out of funds available for such purpose after payment of all creditors.
The Bank is not required to set aside funds for the purpose of
establishing the liquidation account, and the creation and maintenance of the
liquidation account does not operate to restrict the use or application of any
of the net worth accounts of the Bank, except that the Bank may not declare or
pay a cash dividend on, or repurchase any of, its capital stock if the effect
thereof would cause its net worth to be reduced below the amount required for
the liquidation account.
105
<PAGE> 123
TAX ASPECTS
Consummation of the Conversion is expressly conditioned upon the
receipt by the Bank of either a favorable ruling from the IRS or an opinion of
counsel with respect to federal income taxation, and an opinion of KPMG Peat
Marwick LLP with respect to certain New York state taxation, to the effect that
the Conversion will not be a taxable transaction to the Company, the Bank,
Eligible Account Holders or Supplemental Eligible Account Holders, except as
noted below. The federal and New York tax consequences will remain unchanged in
the event that a holding company form of organization is not utilized.
No private ruling has been requested from the IRS with respect to
the proposed Conversion. Instead, the Bank has received an opinion of its
counsel, Hogan & Hartson L.L.P., which has been filed with the SEC as an exhibit
to the Company's Registration Statement to the effect that for federal income
tax purposes, among other matters: (i) the Bank's change in form from mutual to
stock ownership will constitute a reorganization under section 368(a)(1)(F) of
the IRC and neither the Bank nor the Company will recognize any gain or loss as
a result of the Conversion; (ii) no gain or loss will be recognized to the Bank
or the Company upon the purchase of the Bank's capital stock by the Company or
to the Company upon the purchase of its Common Stock in the Conversion; (iii) no
gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the issuance to them of deposit accounts in the
Bank in its stock form plus their interests in the liquidation account in
exchange for their deposit accounts in the Bank; (iv) the tax basis of the
depositors' deposit accounts in the Bank immediately after the Conversion will
be the same as the basis of their deposit accounts immediately prior to the
Conversion; (v) the tax basis of each Eligible Account Holder's or Supplemental
Eligible Account Holder's interest in the liquidation account will be zero; (vi)
no gain or loss will be recognized by Eligible Account Holders or Supplemental
Eligible Account Holders upon the distribution to them of nontransferable
subscription rights to purchase shares of the Common Stock, provided that the
amount to be paid for the Common Stock is equal to the fair market value of such
stock; and (vii) the tax basis to the stockholders of the Common Stock of the
Company purchased in the Conversion will be the amount paid therefor and the
holding period for the shares of Common Stock purchased by such persons will
begin on the date on which their subscription rights are exercised. The Bank has
also received an opinion from KPMG Peat Marwick LLP with respect to New York
State franchise and income taxes that the Plan of Conversion will not be taxable
for New York State tax purposes to the Bank or its Eligible Account Holders and
Supplemental Eligible Account Holders or the Company, subject to the limitations
and qualifications in such opinion.
In the opinion of FinPro, Inc., which opinion is not binding on the
IRS, the subscription rights do not have any value, based on the fact that such
rights are acquired by the recipients without cost, are nontransferable and of
short duration, and afford the recipients the right only to purchase the Common
Stock at a price equal to its estimated fair market value, which will be the
same price as the purchase price for the unsubscribed shares of Common Stock. If
the subscription rights granted to Eligible Account Holders or Supplemental
Eligible Account Holders are deemed to have an ascertainable value, such
recipients could be taxed either on the receipt or exercise of such subscription
rights and the Bank may have taxable income when it distributes the subscription
rights.
Unlike private rulings, an opinion of counsel is not binding on the
IRS and the IRS could disagree with conclusions reached therein. In the event of
such disagreement, there can be no assurance that the IRS would not prevail in a
judicial or administrative proceeding.
CERTAIN RESTRICTIONS ON PURCHASE OR TRANSFER OF SHARES AFTER CONVERSION
All shares of Common stock purchased or acquired (either directly or
indirectly) in connection with the Conversion by a director, trustee or an
executive officer of the Bank or Company will be subject to a restriction that
the shares not be sold for a period of one year following the date of purchase
or acquisition, except in the event of the death or judicial declaration of
incompetency of
106
<PAGE> 124
such director, trustee or executive officer or any exchange of such shares in
connection with a merger or acquisition involving the Bank or the Company, as
the case may be, which has been approved by the New York Superintendent. Each
certificate for such restricted shares will bear a legend giving notice of this
restriction on transfer, and instructions will be issued to the stock transfer
agent for the Company to the effect that any transfer within such time period of
any certificate or record ownership of such shares other than as provided above
is a violation of such restriction. Any shares of Common Stock issued at a later
date as a stock dividend, stock split, or otherwise, with respect to such
restricted stock will be subject to the restriction that they may not be sold
until the restrictions respecting such originally restricted stock are
terminated, and will bear a legend advising of such restrictions. The directors,
trustees and executive officers of the Bank or Company will also be subject to
the insider trading rules promulgated pursuant to the Exchange Act.
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the Plan of Conversion and application of its
provisions to particular circumstances by a majority of the Board of Trustees of
the Bank will be final, subject to the authority of the New York Superintendent
and FDIC. The Plan of Conversion provides that, if deemed necessary or desirable
by the Board of Trustees of the Bank, the Plan of Conversion may be
substantively amended at any time prior to solicitation of proxies from Voting
Depositors, and at any time thereafter, by a vote of the Board of Trustees with
the concurrence of the New York Superintendent and FDIC. The Conversion must be
completed within 24 months of the approval of the Plan of Conversion by the New
York Superintendent, unless a longer time period is permitted by governing laws
and regulations, or the Plan of Conversion will terminate. The Plan of
Conversion may be terminated by majority vote of the Board of Trustees of the
Bank at any time prior to the Special Meeting, and at any time thereafter, with
the concurrence of the New York Superintendent and FDIC.
RESTRICTIONS ON ACQUISITION OF TROY FINANCIAL CORPORATION
The Bank's Plan of Conversion provides for the Conversion of the
Bank from the mutual to the stock form of organization and in connection
therewith, adoption of a Restated Organization Certificate and Bylaws. The Plan
of Conversion also provides for the concurrent formation of a bank holding
company to be registered with the Federal Reserve. See "The Conversion --
General." Certain provisions in the Company's Certificate of Incorporation and
Bylaws and in its management remuneration plan provided for in the Conversion,
together with provisions of Delaware corporate law, may have anti-takeover
effects. In addition, the Bank's Restated Organization Certificate and Bylaws
and management remuneration plan provided for in the Conversion may have
anti-takeover effects as described below. Finally, regulatory restrictions may
make it difficult for persons or companies to acquire control of either the
Company or the Bank.
RESTRICTIONS IN THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
A number of provisions of the Company's Certificate of Incorporation
and Bylaws deal with matters of corporate governance and certain rights of
stockholders. The following discussion is a general summary of certain
provisions of the Company's Certificate of Incorporation and Bylaws and certain
other statutory and regulatory provisions relating to stock ownership and
transfers, the Board of Directors and business combinations, which might be
deemed to have a potential "anti-takeover" effect. These provisions may have the
effect of discouraging a future takeover attempt which is not approved by the
Board of Directors but which individual Company stockholders may deem to be in
their best interests or in which stockholders may receive a substantial premium
for their shares over then current market prices. As a result, stockholders who
might desire to participate in such a transaction may not have an opportunity to
do so. Such provisions will also render the removal of the current Board of
Directors or management of the Company more difficult. The following description
is necessarily general and reference should be made the Company's Certificate of
Incorporation and Bylaws, which are incorporated herein by reference. See
"Additional Information" as to how to obtain a copy of these documents.
107
<PAGE> 125
Limitation on Voting Rights. The Certificate of Incorporation of the
Company provides that in no event shall any record owner of any outstanding
Common Stock which is beneficially owned, directly or indirectly, by a person
who beneficially owns in excess of 10% of the then outstanding shares of Common
Stock (the "Limit") be entitled or permitted to any vote in respect of the
shares held in excess of the Limit. Beneficial ownership is determined pursuant
to Rule 13d-3 under the Exchange Act, and includes shares beneficially owned by
such person or any of his affiliates (as defined in Rule 12b-2 under the
Exchange Act), shares which such person or his affiliates have the right to
acquire pursuant to any agreement, arrangement or understanding or upon the
exercise of conversion rights, exchange rights, warrants or options or otherwise
and shares as to which such person and his affiliates have sole or shared voting
or investment power, but shall not include shares that are subject to a publicly
solicited revocable proxy and that are not otherwise deemed to be beneficially
owned by such person and his affiliates. No director or officer (or any
affiliate thereof) of the Company shall, solely by reason of any or all of such
directors or officers acting in their capacities as such, be deemed to
beneficially own any shares beneficially owned by any other director or officer
(or affiliate thereof) nor will the ESOP or any similar plan of the Company or
the Bank or any trustee with respect thereto (solely by reason of such trustee's
capacity) be deemed to beneficially own any shares held under any such plan. The
Certificate of Incorporation of the Company further provides that the provisions
limiting voting rights may only be amended upon the vote of the holders of at
least a majority of the voting power of all then outstanding shares of capital
stock entitled to vote thereon (after giving effect to the provision limiting
voting rights).
Board of Directors. The Board of Directors of the Company is divided
into three classes, each of which shall contain approximately one-third of the
whole number of the members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The Company's Certificate of Incorporation and Bylaws provide
that the size of the Board shall be determined by resolution of the Board of
Directors. The Certificate of Incorporation and the Bylaws provide that any
vacancy occurring in the Board, including a vacancy created by an increase in
the number of directors or resulting from death, resignation, retirement,
disqualification, removal from office or other cause, shall be filled, for the
remainder of the unexpired term, exclusively by a majority vote of the directors
then in office. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of the
Company. Directors may be removed by the stockholders only for cause by the
affirmative vote, at a special meeting of stockholders called for such a
purpose, of the holders of at least 66-2/3% of the voting power of all then
outstanding shares of capital stock entitled to vote thereon.
In the absence of these provisions, the vote of the holders of a
majority of the shares could remove the entire Board, with or without cause, and
replace it with persons of such holders choice.
Cumulative Voting, Special Meetings and Action by Written Consent.
The Certificate of Incorporation does not provide for cumulative voting in the
election of directors. Special meetings of stockholders of the Company may be
called at any time by a majority of the Board of Directors of the Company or by
the holders of at least 66-2/3% of the voting power of all then outstanding
shares of capital stock of the Company entitled to vote generally in the
election of directors. The Certificate of Incorporation also provides that any
action required or permitted to be taken by the stockholders of the Company may
be taken only at an annual or special meeting and prohibits stockholder action
by written consent in lieu of a meeting unless such consent is unanimous.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of 60 million shares of Common Stock and 15 million shares of serial
preferred stock. The shares of Common Stock and serial preferred stock were
authorized in an amount greater than that to be issued in the Conversion to
provide the Company's Board of Directors with as much flexibility as possible to
effect, among other transactions, financings, acquisitions, stock dividends,
stock splits and employee stock options. However, these additional authorized
shares may also be used by the Board of Directors, consistent with its fiduciary
duty, to deter future attempts to gain control of the Company. The
108
<PAGE> 126
Board of Directors also has sole authority to determine the terms of any one or
more series of serial preferred stock, including voting rights, conversion
rates, and liquidation preferences. As a result of the ability to fix voting
rights for a series of serial preferred stock, the Board has the power, to the
extent consistent with its fiduciary duty, to issue a series of serial preferred
stock to persons friendly to management in order to attempt to block a
post-tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. The Company's
Board currently has no plans for the issuance of additional shares, other than
the issuance of additional shares upon exercise of stock options.
Stockholder Vote Required to Approve Business Combinations with
Interested Stockholders. In order to approve certain "Business Combinations"
with "Interested Stockholders" (each as defined in the Company's Certificate of
Incorporation) and related transactions, the Certificate of Incorporation
requires the approval of (i) the holders of at least 80% of the total number of
outstanding shares of voting stock and (ii) the holders of 66-2/3% of the voting
power of the outstanding shares of voting stock, excluding for purposes of
calculating the affirmative vote and the total number of outstanding shares of
voting stock under this clause (ii) above, all shares of voting stock of which
the beneficial owner is the Interested Stockholder involved in the Business
Combination or any affiliate or associate of such Interested Stockholder. Under
Delaware law, absent this provision, business combinations, including mergers,
consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of common stock of the
company and any other affected class of stock.
Under the Certificate of Incorporation, the 80% approval is not
required if (i) the Business Combination has been approved by at least 66-2/3%
of the Company's directors, who are not affiliated with the Interested
Stockholder(s) and were members of the Board of Directors prior to the time that
the Interested Stockholder (including any affiliate or associate of such
Interested Stockholder) became an Interested Stockholder, then in office at a
duly constituted meeting of the Board of Directors called for such purpose or
(ii) if the proposed transaction meets certain price and procedure conditions in
the Certificate of Incorporation designed to afford stockholders a fair price in
consideration for their shares. In each such case, where stockholder approval is
required, the approval of only a majority of the outstanding shares of voting
stock is sufficient. The term "Interested Stockholder" is defined to include,
among others, any person (than the Company, its subsidiaries or their employee
benefit plans that (a) is the beneficial owner, directly or indirectly, of five
percent or more of the voting power of the then outstanding voting stock, (b) is
an affiliate of the Company and at any time within the two-year period
immediately prior to the date in question was the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the then outstanding voting
stock; or (c) which is an assignee of or has otherwise succeeded to the
beneficial ownership of any shares of voting stock that were at any time within
the two-year period immediately prior to any such date beneficially owned by an
Interested Stockholder, if such assignment or succession shall have occurred in
the course of a transaction or series of transactions not utilizing the
facilities of a national securities exchange, occurring on The Nasdaq Stock
Market, Inc., or involving a public distribution.
The term "Business Combination" is defined to include: (i) any
merger or consolidation of the Company or any subsidiary with any Interested
Stockholder or any other corporation (whether or not itself an Interested
Stockholder) which is, or after the merger or consolidation would be, an
affiliate or associate of such Interested Stockholder prior to the transaction;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition
other than in the usual and regular course of business (in one transaction or a
series of transactions in any 12-month period) to any Interested Stockholder or
any affiliate or associate of such Interested Stockholder, other than the
Company or any of its subsidiaries, of any assets of the Company or any
subsidiary that have an aggregate book value as of the end of the Company's most
recent fiscal quarter of 10% or more of the total market value of the
outstanding shares of the Company or of its net worth as of the end of its most
recent fiscal quarter, measured at the time the transaction(s) is approved by
the Board of Directors of the Company; (iii) any issuance or transfer by the
Company or any subsidiary of any equity securities of the Company
109
<PAGE> 127
or any subsidiary having an aggregate market value of five percent or more of
the total market value of the outstanding shares of the Company or such
subsidiary to any Interested Stockholder or any affiliate or associate of any
Interested Stockholder, other than the Company or any of its subsidiaries,
except pursuant to the exercise of warrants, rights or options to subscribe for
or purchase securities offered, issued or granted pro rata to all holders of the
voting stock of the Company or any other method affording substantially
proportionate treatment to the holders of voting stock; (iv) any adoption of any
plan or proposal for the liquidation or dissolution of the Company or any
subsidiary proposed by or on behalf of an Interested Stockholder or any
affiliate or associate of such Interested Stockholder, other than the Company or
any of its subsidiaries; and (v) any reclassification of securities (including
any reverse stock split), or recapitalization of the Company, or any merger or
consolidation of the Company with any of its subsidiaries or any other
transaction (whether or not with or into or otherwise involving an Interested
Stockholder) which has the effect, directly or indirectly, in one transaction or
a series of transactions, of increasing the proportionate amount of the
outstanding shares of any class of equity or convertible securities of the
Company or any subsidiary which is directly or indirectly owned by any
Interested Stockholder or any affiliate or associate of any Interested
Stockholder, other than the Company or any of its subsidiaries.
The trustees and executive officers of the Bank are purchasing in
the aggregate approximately 4.45% of the shares of the Common Stock offered
based on the maximum of the Estimated Price Range. Additionally, if at a meeting
of stockholders following the Conversion stockholder approval of the proposed
Equity Compensation Plan is received, the Company expects to provide funds to
enable a trust to acquire 4.0% of the Common Stock issued in connection with the
Conversion, including shares contributed to the Community Foundation, on behalf
of the MRP under the Equity Compensation Plan and expects to grant options to
issue an amount equal to 10% of the Common Stock issued in connection with the
Conversion, including shares contributed to the Community Foundation, under the
Equity Compensation Plan to directors and executive officers. As a result,
assuming the Equity Compensation Plan is approved by stockholders, directors,
and executive officers have the potential to control the voting of approximately
16.4% of the Company's Common Stock on a fully diluted basis at the maximum of
the Estimated Price Range.
The foregoing does not take into consideration additional shares of
Common Stock held by the ESOP. To the extent such shares are allocated to
employees, they may be voted by the employees. The ESOP trustee will vote
unallocated shares, and allocated shares as to which no instructions are
received in the same manner, on a proportionate basis, as the allocated shares
for which it receives instructions, subject to the requirements of its fiduciary
duties under ERISA.
Evaluation of Offers. The Certificate of Incorporation of the
Company further provides that the Board of Directors of the Company, when
evaluating any offer of another party to (a) make a tender or exchange offer for
any equity security of the Company, (b) merge or consolidate the Company with
another institution, or (c) purchase or otherwise acquire all or substantially
all of the properties and assets of the Company, shall, in connection with the
exercise of its judgment in determining what is in the best interests of the
Company and its stockholders, be authorized to give due consideration to any
such factors as the Board of Directors determines to be relevant, including,
without limitation, the economic effects of acceptance of such offer on
depositors, borrowers and employees of the insured institution subsidiary or
subsidiaries of the Company, and on the communities in which such subsidiary or
subsidiaries operate or are located and the ability of such subsidiary or
subsidiaries to fulfill the objectives of an insured institution under
applicable Federal and state statutes and regulations. By having these standards
in the Certificate of Incorporation of the Company, the Board of Directors may
be in a stronger position to oppose such a transaction if the Board of Directors
concludes that the transaction would not be in the best interest of the Company,
even if the price offered is significantly greater than the then market price of
any equity security of the Company.
Amendment of Certificate of Incorporation and Bylaws. Amendments to
the Company's Certificate of Incorporation must be approved by 66-2/3% of the
Board of Directors and by a majority
110
<PAGE> 128
of the outstanding shares of its voting stock, provided, however, that an
affirmative vote of the holders of at least 66-2/3% of the outstanding voting
stock entitled to vote (after giving effect to the provision limiting voting
rights) is required to amend or repeal certain provisions of the Certificate of
Incorporation relating to the Board of Directors, actions by stockholders,
special stockholder meetings, acquisition or control of the Company, evaluation
of certain business transactions by the Board of Directors, indemnification and
amendment of the Certificate of Incorporation. The affirmative vote of the
holders of at least 80% of the outstanding voting stock entitled to vote (after
giving effect to the provision limiting voting rights) is required to amend or
repeal Article 11 of the Company's Certificate of Incorporation which governs
Business Combinations. The Company's Bylaws may be amended or repealed by a
majority vote of the Board of Directors of the Company then in office. The
stockholders may also amend or repeal the Bylaws of the Company upon the
affirmative vote of the holders of at least 80% of the voting power of all of
the then-outstanding shares of the capital stock of the Company entitled to vote
generally in the election of directors (after giving effect to the provision
limiting voting rights), voting together as a single class.
Certain Bylaw Provisions. The Bylaws of the Company also require a
stockholder who intends to nominate a candidate for election to the Board of
Directors, or to raise new business at an annual stockholder meeting to give at
least 60 days' advance notice to the Secretary of the Company. The notice
provision requires a stockholder who desires to raise new business to provide
certain information to the Company concerning the nature of the new business,
the stockholder and the stockholder's interest in the business matter.
Similarly, a stockholder wishing to nominate any person for election as a
director must provide the Company with certain information concerning the
nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
AND BENEFIT PLANS ADOPTED IN CONVERSION
The provisions described above are intended to reduce the Company's
vulnerability to takeover attempts and certain other transactions which have not
been negotiated with and approved by members of its Board of Directors. Certain
provisions of the Equity Compensation Plan provide for accelerated benefits to
participants in the event of a change of control of the Company or the Bank or a
tender or exchange offer for their stock. See "Management of the Bank -- Benefit
Plans." The Company and the Bank have entered or intend to enter into agreements
with key officers and employees and the Bank intends to establish the [Severance
Plan] which will provide such officers and eligible employees with additional
payments and benefits on the officer's termination in connection with a change
of control of the Company or the Bank. See "Management of the Bank -- Benefit
Plans." The foregoing provisions and limitations may make it more difficult for
companies or persons to acquire control of the Company and the Bank.
Additionally, the provisions could deter offers to acquire the outstanding
shares of the Company which might be viewed by stockholders to be in their best
interests.
The Company's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws and the Company's benefit plans are in
the best interest of the Company and its stockholders. An unsolicited
non-negotiated takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Company and its
stockholders to encourage potential acquirers to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts.
DELAWARE CORPORATE LAW
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the Delaware General Corporate Law
("Section 203"), is intended to discourage certain takeover practices by
impeding the ability of a hostile acquirer to engage in certain transactions
with the target company.
111
<PAGE> 129
In general, Section 203 provides that a "Person" (as defined
therein) who owns 15% or more of the outstanding voting stock of a Delaware
corporation (an "Interested Stockholder") may not consummate a merger or other
business combination transaction with such corporation at any time during the
three-year period following the date such "Person" became an Interested
Stockholder. The term "business combination" is defined broadly to cover a wide
range of corporate transactions including mergers, sales of assets, issuances of
stock, transactions with subsidiaries and the receipt of disproportionate
financial benefits.
The statute exempts the following transactions from the requirements
of Section 203: (i) any business combination if, prior to the date a person
became an Interested Stockholder, the board of directors approved either the
business combination or the transaction which resulted in the stockholder
becoming an Interested Stockholder; (ii) any business combination involving a
person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became an Interested Stockholder, excluding, for
purposes of determining the number of shares outstanding, shares owned by the
corporation's directors who are also officers and certain employee stock plans;
(iii) any business combination with an Interested Stockholder that is approved
by the board of directors and by a 66-2/3% vote of the outstanding voting stock
not owned by the Interested Stockholder; and (iv) certain business combinations
that are proposed after the corporation had received other acquisition proposals
and which are approved or not opposed by a majority of certain continuing
members of the board of directors. A corporation may exempt itself from the
requirements of the statute by adopting an amendment to its certificate of
incorporation or bylaws electing not to be governed by Section 203. At the
present time, the Board of Directors does not intend to propose any such
amendment.
RESTRICTIONS IN THE BANK'S RESTATED ORGANIZATION CERTIFICATE AND BYLAWS
Although the Board of Trustees of the Bank is not aware of any
effort that might be made to obtain control of the Bank after Conversion, the
Board of Trustees believes that it is appropriate to adopt certain provisions
permitted by the General Regulations of the Banking Board of the State of New
York to protect the interests of the converted Bank and its sole stockholder
from any hostile takeover. Such provisions may, indirectly, inhibit a change of
control of the Company, as the Bank's sole stockholder. See "Risk Factors --
Certain Anti-Takeover Provisions."
The Bank's Restated Organization Certificate contains a provision
whereby the acquisition of beneficial ownership of more than 10% of the issued
and outstanding shares of any class of equity securities of the Bank by any
person (i.e., any individual, corporation, group acting in concert, trust,
partnership, joint stock company or similar organization), either directly or
indirectly, without the prior written approval of the New York Superintendent,
is prohibited for a period of three years following the both the consummation of
the conversion of the Bank from a mutual to a stock savings bank and the
concurrent acquisition by the Company of all of the outstanding capital stock of
the Bank. Any stock in excess of 10% acquired in violation of the charter
provision will not be entitled to vote and shall not be voted by any person or
counted as voting stock in connection with any matter submitted to stockholders
for a vote. In addition, the Bank's Restated Organization Certificate prohibits
the cumulation of votes for the election of directors, and provides for the
election of three classes of directors to staggered terms. The staggered terms
of the Board of Directors could have an anti-takeover effect by making it more
difficult for a majority of shares to force an immediate change in the Board of
Directors because only one-third of the Board of Directors is elected each year.
The purpose of these provisions is to assure stability and continuity of
management of the Bank in the years immediately following the Conversion.
DESCRIPTION OF CAPITAL STOCK OF TROY FINANCIAL CORPORATION
GENERAL
The Company is authorized to issue 75,000,000 shares of capital
stock, of which 60,000,000 shares will be Common Stock having a par value of
$.0001 per share and 15,000,000 shares of serial
112
<PAGE> 130
preferred stock having a par value of $.0001 per share (the "Preferred Stock").
In connection with the Conversion, the Company currently expects to issue up to
9,119,500 shares of Common Stock (or up to 10,487,425 shares in the event of an
increase of 15% in the Estimated Price Range). Giving effect to the contribution
of Common Stock to the Community Foundation, the Company currently expects to
issue up to 9,849,060 shares of Common Stock at the maximum of the Estimated
Price Range (or 11,326,419 shares at the maximum plus 15% of the Estimated Price
Range). The Company does not expect to issue any shares of Preferred Stock. The
Board of Directors of the Company is expressly authorized to issue, without
stockholder approval, any unissued shares of authorized Common Stock as
nonvoting Common Stock. Except as discussed above in "Restrictions on
Acquisition of Troy Financial Corporation," each share of the Company's Common
Stock will have the same relative rights as, and will be identical in all
respects to, all the other shares of the Company's Common Stock. Upon receipt by
the Company of the full specified purchase price therefor, the Common Stock will
be fully paid and non-assessable.
THE COMMON STOCK OF THE COMPANY WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY
THE FDIC.
COMMON STOCK
Dividends. The Board of Directors of the Company may declare and pay
dividends upon the shares of the Company's Common Stock out of the Company's
statutory surplus or out of certain net profits of the Company, and the holders
of record of the Common Stock will be entitled to receive such dividends out of
any assets legally available therefor. The payment of dividends by the Company
is subject to limitations which are imposed by law and applicable regulation.
See "Dividend Policy" and "Regulation and Supervision."
Voting Rights. Upon Conversion, the holders of Common Stock of the
Company will possess exclusive voting rights in the Company. Each holder of
shares of Common Stock will be entitled to attend all special and annual
meetings of the stockholders of the Company and to vote upon any matter or thing
(including, without limitation, the election of one or more directors) properly
considered and acted upon by the stockholders, except as otherwise provided in
the Company's Certificate of Incorporation or by applicable law. There will be
no cumulative voting rights in the election of directors.
As a New York-chartered mutual savings bank, the Bank's corporate
powers and control are vested in its Board of Trustees, who elect the officers
of the Bank and who fill any vacancies on the Board of Trustees as it exists
upon Conversion. Subsequent to Conversion, voting rights of the Bank will vest
exclusively with the Company which will be the owner of the Bank's outstanding
capital stock. The Board of Directors of the Company will vote the Bank's
capital stock, and, consequently, the holders of the Common Stock of the Company
will not have direct control of the Bank.
Liquidation. In the event of any dissolution, liquidation or winding
up of the Company, whether voluntary or involuntary, the holders of record of
the Common Stock then outstanding, and all holders of the outstanding shares of
any class or series of stock entitled to participate therewith, as to
distribution of assets, will be entitled to participate in the distribution of
any assets of the Company remaining after the Company has paid, or set aside for
payment, to the holders of outstanding shares of any class of capital stock
having preference over the Common Stock, with respect to dissolution,
liquidation or winding up, the full preferential amounts (if any) to which such
holders are entitled.
Preemptive Rights. Holders of the Common Stock of the Company will
not be entitled to preemptive rights with respect to any shares or other
securities of the Company which may be issued.
113
<PAGE> 131
PREFERRED STOCK
None of the shares of the Company's authorized Preferred Stock will
be issued in the Conversion. The Board of Directors of the Company expressly is
authorized, subject to limitations prescribed by the Delaware General
Corporation Law and the provisions of the Company's Certificate of
Incorporation, to provide for the issuance from time to time of Preferred Stock
in one or more series, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences
and other rights of the shares of each such series and to fix the
qualifications, limitations and restrictions thereon.
DESCRIPTION OF CAPITAL STOCK OF THE TROY SAVINGS BANK
GENERAL
In the event that the holding company form of organization is not
utilized in connection with the Conversion, the Bank may offer shares of its
common stock in connection with the Conversion. The following is a discussion of
the capital stock of the Bank.
The Restated Organization Certificate of the Bank, to be effective
upon the Conversion, authorizes the issuance of capital stock consisting of
1,000 shares of common stock, par value $1.00 per share. Except as discussed
above in "Restrictions on Acquisition of Troy Financial Corporation," each share
of common stock of the Bank will have the same relative rights as, and will be
identical in all respects with, each other share of common stock. After the
Conversion, the Board of Directors will be authorized to approve the issuance of
Common Stock up to the amount authorized by the Restated Organization
Certificate without the approval of the Bank's shareholders, except to the
extent that such approval is required by governing law. All of the issued and
outstanding common stock of the Bank will be held by the Company as the Bank's
sole shareholder.
THE CAPITAL STOCK OF THE BANK WILL REPRESENT NON-WITHDRAWABLE
CAPITAL, WILL NOT BE AN ACCOUNT OF AN INSURABLE TYPE, AND WILL NOT BE INSURED BY
THE FDIC.
Dividends. The holders of the Bank's common stock will be entitled
to receive and to share equally in such dividends as may be declared by the
Board of Directors of the Bank out of funds legally available therefor. See
"Dividend Policy" for certain restrictions on the payment of dividends and
"Taxation -- Federal Taxation" for a discussion of the consequences of the
payment of cash dividends from income appropriated to bad debt reserves.
Voting. The holders of the Bank's common stock will possess
exclusive voting power. Each holder of shares of common stock will be entitled
to one vote for each share held by such holder. Cumulation of votes for election
of directors will not be permitted. See "Restrictions on Acquisition of Troy
Financial Corporation -- Anti-Takeover Effects of the Company's Certificate of
Incorporation and Bylaws and Benefit Plans Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or
winding up of the Bank, the holders of its common stock will be entitled to
receive, after payment of all debts and liabilities of the Bank (including all
deposit accounts and accrued interest thereon), and distribution of the balance
in the special liquidation account, which is a memorandum account only, to
Eligible Account Holders and Supplemental Eligible Account Holders (see "The
Conversion -- Effects of Conversion -- Liquidation Rights"), all assets of the
Bank available for distribution in cash or in kind.
Preemptive Rights. Holders of the common stock of the Bank will not
be entitled to preemptive rights with respect to any shares of the Bank which
may be issued. Upon receipt by the Bank of the full specified purchase price
therefor, the common stock of the Bank will be fully paid and non-assessable.
114
<PAGE> 132
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is _______.
EXPERTS
The consolidated financial statements of the Bank and its
subsidiaries as of September 30, 1998 and 1997 and for each of the years in the
three-year period ended September 30, 1998, included in this Prospectus have
been audited by KPMG Peat Marwick LLP, independent certified public accountants,
as indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said report.
FinPro, Inc. has consented to the publication herein of the summary
of its report to the Bank and Company setting forth its opinion as to the
estimated pro forma market value of the Common Stock upon Conversion and its
opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Common Stock and the federal income tax
consequences of the Conversion will be passed upon for the Bank and Company by
Hogan & Hartson L.L.P., Washington, D.C., special counsel to the Bank and
Company. The New York State income tax consequences of the Conversion will be
passed upon for the Bank and Company by KPMG Peat Marwick LLP. Certain legal
matters will be passed upon for Sandler O'Neill by Muldoon, Murphy & Faucette,
Washington, D.C.
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under
the Securities Act with respect to the Common Stock offered hereby. As permitted
by the rules and regulations of the SEC, this Prospectus does not contain all
the information set forth in the registration statement. Such information,
including the conversion valuation appraisal report, which is an exhibit to the
registration statement, can be examined without charge at the public reference
facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of such material can be obtained from the SEC at prescribed rates. In
addition, the SEC maintains a web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC, including the Company. The
conversion valuation appraisal report may also be inspected by Eligible Account
Holders and Supplemental Eligible Account Holders at the offices of the Bank
during normal business hours. This Prospectus contains a description of the
material terms and features of all material contracts, reports or exhibits to
the registration statement required to be described herein. Such statements are,
of necessity, brief descriptions thereof and are not necessarily complete; each
such statement is qualified by reference to such contract or document.
The Bank has filed an application for approval of conversion with
the New York Superintendent and the FDIC. Pursuant to the rules and regulations
of the New York Superintendent, this Prospectus omits certain information
contained in that application. The application may be examined at the principal
office of the New York Superintendent, Two Rector Street, New York, New York,
10006.
The Company has filed with the Federal Reserve an application to
become a bank holding company. This prospectus omits certain information
contained in such application. Such application may be inspected at the offices
of the Federal Reserve Bank of New York, 59 Maiden Lane, New York, New York
10045.
In connection with the Conversion, the Company will register its
Common Stock with the SEC under Section 12(g) of the Exchange Act, and, upon
such registration, the Company and the
115
<PAGE> 133
holders of its Common Stock will become subject to the proxy solicitation rules,
reporting requirements and restrictions on stock purchases and sales by
directors, officers and greater than 10% stockholders, the annual and periodic
reporting and certain other requirements of the Exchange Act. Under the Plan of
Conversion, the Company has undertaken that it will not terminate such
registration for a period of at least three years following the Conversion. In
the event that the Bank amends the Plan of Conversion to eliminate the
concurrent formation of the Company as part of the Conversion, the Bank will
register its stock with the FDIC under Section 12(g) of the Exchange Act and,
upon such registration, the Bank and the holders of its stock will become
subject to the same obligations and restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the
Company and the Restated Organization Certificate and Bylaws of the Bank are
available without charge from the Bank. The Bank's principal office is located
at 32 Second Street, Troy, New York 12180 and its telephone number is (518)
270-3313.
116
<PAGE> 134
THE TROY SAVINGS BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report............................................................................................. F-2
Consolidated Statements of Condition at September 30, 1998 and 1997...................................................... F-3
Consolidated Statements of Income for the Years Ended September 30, 1998, 1997 and 1996.................................. F-4
Consolidated Statements of Changes in Equity for the Years Ended September 30, 1998,
1997 and 1996...................................................................................................... F-5
Consolidated Statements of Cash Flows for Years Ended September 30, 1998,
1997 and 1996...................................................................................................... F-6
Notes to Consolidated Financial Statements............................................................................... F-8
</TABLE>
All schedules are omitted because the required information is not applicable or
is included in the Consolidated Financial Statements and related Notes.
The financial statements of the Holding Company have been omitted because the
Holding Company has not yet issued any stock, has no assets, no liabilities and
has not conducted any business other than that of an organizational nature.
F-1
<PAGE> 135
INDEPENDENT AUDITORS' REPORT
The Examining and Audit Committee
of the Board of Trustees
The Troy Savings Bank:
We have audited the accompanying consolidated statements of condition of The
Troy Savings Bank and subsidiaries (the Bank) as of September 30, 1998 and 1997,
and the related consolidated statements of income, changes in equity, and cash
flows for each of the years in the three-year period ended September 30, 1998.
These consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Troy Savings
Bank and subsidiaries as of September 30, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
October 30, 1998
Albany, New York
F-2
<PAGE> 136
F-7
THE TROY SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Condition
September 30, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
Cash and due from banks $ 12,330 13,903
Federal funds sold 5,585 28,548
-------- --------
Total cash and cash equivalents 17,915 42,451
Loans held for sale 11,096 3,703
Securities available for sale, at fair value 197,758 117,552
Investment securities held to maturity (fair value of $3,621 and
$4,162, at September 30, 1998 and 1997, respectively) 3,483 4,000
Net loans receivable 457,321 468,160
Accrued interest receivable 4,287 4,334
Other real estate owned 1,872 2,690
Premises and equipment, net 14,096 13,734
Other assets 8,821 5,824
-------- --------
Total assets $716,649 662,448
======== ========
LIABILITIES AND EQUITY
Liabilities:
Due to depositors:
Savings accounts 198,509 198,929
Money Market accounts 15,708 13,121
N.O.W. and demand accounts 107,311 93,002
Time accounts 256,674 267,345
-------- --------
Total deposits 578,202 572,397
Mortgagors' escrow accounts 1,900 1,916
Securities sold under agreement to repurchase 2,524 372
Federal Home Loan Bank of New York long-term debt 44,940 4,356
Accrued interest payable 360 60
Official bank checks 8,841 7,988
Contribution payable 3,453 -
Other liabilities and accrued expenses 5,400 3,817
-------- --------
Total liabilities 645,620 590,906
-------- --------
Commitments and contingent liabilities (note 14)
Equity:
Surplus 18,306 18,306
Undivided profits 52,316 53,194
Net unrealized gain on securities available for sale, net of tax 407 42
-------- --------
Total equity 71,029 71,542
-------- --------
Total liabilities and equity $716,649 662,448
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE> 137
THE TROY SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Income
Years ended September 30, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 38,842 39,050 36,413
Securities available for sale:
Taxable 4,121 7,262 8,521
Tax exempt 2,214 119 -
-------- -------- --------
6,335 7,381 8,521
Investment securities 300 353 410
Federal funds sold 2,553 1,503 1,518
-------- -------- --------
Total interest and dividend income 48,030 48,287 46,862
-------- -------- --------
Interest expense:
Deposits and escrows 23,339 22,812 22,557
Short-term borrowings 33 271 230
Long-term debt 821 268 230
-------- -------- --------
Total interest expense 24,193 23,351 23,017
-------- -------- --------
Net interest income 23,837 24,936 23,845
Provision for loan losses 4,050 3,900 928
-------- -------- --------
Net interest income after provision for loan losses 19,787 21,036 22,917
-------- -------- --------
Non-interest income:
Service charges on deposits 858 822 802
Loan servicing fees 432 460 443
Trust income 459 362 293
Net gains from securities sales or calls 8 4 1
Net gains (losses) from mortgage loan sales 76 14 (14)
Other income 719 1,075 1,340
-------- -------- --------
Total non-interest income 2,552 2,737 2,865
-------- -------- --------
Non-interest expense:
Compensation and employee benefits 10,218 9,573 9,009
Occupancy 2,101 2,089 1,956
Furniture, fixtures and equipment 1,080 901 961
Computer charges 1,424 1,322 1,248
Professional, legal and other fees 924 726 658
Printing, postage and telephone 614 559 543
Other real estate owned 1,087 380 499
Contribution expense 4,759 102 479
Other 2,884 2,887 2,845
-------- -------- --------
Total non-interest expense 25,091 18,539 18,198
-------- -------- --------
Income (loss) before income tax expense (benefit) (2,752) 5,234 7,584
Income tax expense (benefit) (1,874) 1,576 2,506
-------- -------- --------
Net income (loss) $ (878) 3,658 5,078
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 138
THE TROY SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
Years ended September 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
Net
unrealized
gain (loss) on
securities
available
Undivided for sale, Total
Surplus profits net of tax equity
------- ------- ----------- -------
<S> <C> <C> <C> <C>
Balance, September 30, 1995 $18,306 44,458 18 62,782
Net income for year ended September 30, 1996 - 5,078 - 5,078
Change in net unrealized gain/loss
on securities available for sale,
net of tax - - (452) (452)
------- ------- ------- -------
Balance, September 30, 1996 18,306 49,536 (434) 67,408
Net income for year ended
September 30, 1997 - 3,658 - 3,658
Change in net unrealized gain/loss
on securities available for sale,
net of tax - - 476 476
------- ------- ------- -------
Balance, September 30, 1997 18,306 53,194 42 71,542
Net loss for year ended September 30, 1998 - (878) - (878)
Change in net unrealized gain/loss
on securities available for sale,
net of tax - - 365 365
------- ------- ------- -------
Balance, September 30, 1998 $18,306 52,316 407 71,029
======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 139
THE TROY SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Net cash flows from operating activities:
Net income (loss) $ (878) 3,658 5,078
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation 1,615 1,426 1,442
Net amortization (accretion) of premium/discount
on securities 65 85 (358)
Deferred tax benefit (3,027) (1,442) (333)
Net gains from securities sales or calls (8) (4) (1)
Provision for loan losses 4,050 3,900 928
Net (gains) losses from mortgage loan sales (76) (14) 14
Net loss on sale of other real estate owned 106 12 54
Net write-down of other real estate owned 326 - 359
Proceeds from sale of loans held for sale 44,496 13,443 30,025
Net loans made to customers and held for sale (51,813) (15,660) (25,664)
Decrease (increase) in accrued interest receivable 47 439 (497)
Decrease (increase) in other assets (215) 93 1,774
Increase (decrease) in accrued interest payable 300 (59) (52)
Decrease in mortgagors' escrow accounts (16) (473) (1,419)
Increase (decrease) in other liabilities,
accrued expenses, and official bank checks 5,889 (2,015) 3,515
--------- --------- ---------
Net cash provided by operating
activities 861 3,389 14,865
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 54,782 - 61
Proceeds from maturity and redemption of securities
available for sale 110,223 78,199 97,393
Purchase of securities available for sale (244,657) (46,125) (103,592)
Proceeds from maturity and redemption of
investment securities 517 519 14,609
Purchase of investment securities - - (15,479)
Proceeds from sale of other real estate owned 963 2,629 353
Net loans repaid from (made to) customers 6,212 (22,701) (44,987)
Capital expenditures (1,977) (930) (1,702)
--------- --------- ---------
Net cash (used in) provided by
investing activities (73,937) 11,591 (53,344)
--------- --------- ---------
(Continued)
</TABLE>
F-6
<PAGE> 140
THE TROY SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended September 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 5,805 7,790 12,145
Net increase (decrease) in securities sold under
agreement to repurchase 2,152 222 (693)
Increase (decrease) in FHLB of New York
short-term borrowings - (5,000) 5,000
Issuance of long-term debt 41,000 - 5,000
Payments on long-term debt (417) (393) (250)
--------- --------- ---------
Net cash provided by financing
activities 48,540 2,619 21,202
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents (24,536) 17,599 (17,277)
Cash and cash equivalents at beginning of year 42,451 24,852 42,129
--------- --------- ---------
Cash and cash equivalents at end of year $ 17,915 42,451 24,852
========= ========= =========
Supplemental information:
Cash paid for:
Interest on deposits and borrowings $ 23,893 23,410 23,068
Income taxes $ 1,569 3,826 2,209
Supplemental schedule of noncash investing
activities:
Net reduction in loans resulting from the
transfer to other real estate owned $ 577 2,462 853
Investment securities transferred to securities
available for sale in accordance with the FASB
"Special Report," fair value of securities
transferred $98,700 $ - - 98,384
Increase (decrease) in equity from change in net
unrealized gain/loss on securities available for
sale, net of tax $ 365 476 (452)
Increase in deferred gain on sale of other real
estate $ - 344 -
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 141
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of The
Troy Savings Bank and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation.
(b) BASIS OF PRESENTATION
The accompanying consolidated financial statements of The Troy
Savings Bank and subsidiaries (the Bank) conform, in all material
respects, to generally accepted accounting principles and to
general practice within the savings bank industry. The Bank
utilizes the accrual method of accounting for financial reporting
purposes.
(c) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of
the allowance for loan losses 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 or
write downs 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 Bank's allowance for loan losses and other
real estate owned. Such agencies may require the Bank to recognize
additions to the allowance or write downs 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.
F-8
<PAGE> 142
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
A substantial portion of the Bank's loans are secured by real
estate located throughout the six New York State Counties of
Albany, Rensselaer, Saratoga, Schenectady, Warren and Washington.
In addition, a substantial portion of the other real estate owned
is located in those same markets. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan
portfolio and the recovery of a substantial portion of the
carrying amount of other real estate owned is dependent upon
market conditions in these market areas.
(d) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash
and cash equivalents consists of cash on hand, due from banks, and
federal funds sold.
(e) LOANS HELD FOR SALE
Loans held for sale are recorded at the lower of cost or fair
value, determined on an aggregate basis. Gains and losses on the
disposition of loans held for sale are determined on the specific
identification method. It is the intention of management to sell
these loans in the near future.
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 reserve for
changes in interest rates is recorded.
(f) MORTGAGE SERVICING RIGHTS
As of October 1, 1996, the Bank adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights", (SFAS No. 122) as amended by SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS No. 125) which require entities to recognize as
separate assets, the rights to service mortgage loans for others,
regardless of how those servicing rights were acquired.
Additionally, these Statements require that the capitalized
mortgage servicing rights be assessed for impairment based on the
fair value of those rights, and that impairment, if any, be
recognized through a valuation allowance. The adoption of SFAS
No.'s 122 and 125, did not have a material effect on the Bank's
consolidated financial statements.
F-9
<PAGE> 143
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(g) SECURITIES AVAILABLE FOR SALE, AND INVESTMENT SECURITIES HELD TO
MATURITY
Management determines the appropriate classification of securities
at the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity, they are classified
as investment securities held to maturity and are carried at
amortized cost. Securities that are identified as trading account
assets for resale over a short period are stated at fair value
with unrealized gains and losses reflected in current earnings.
All other debt and equity securities are classified as securities
available for sale and are reported at fair value, with net
unrealized gains or losses reported, net of income taxes, as a
separate component of equity. At September 30, 1998 and 1997, the
Bank did not hold any securities considered to be trading
securities. As a member of the Federal Home Loan Bank of New York
(FHLB), the Bank is required to hold stock which is carried at
cost since there is no readily available market value.
Unrealized losses on securities which reflect a decline in value
which is other than temporary, if any, are charged to income.
Gains or losses on disposition of securities are based on the net
proceeds and the amortized cost of the securities sold, using the
specific identification method. The amortized cost of securities
is adjusted for amortization of premium and accretion of discount,
which is calculated on an effective interest method.
In November 1995, the staff of the Financial Accounting Standards
Board released its Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities." The Special Report contained, among other
things, a provision that allowed entities to, concurrent with the
initial adoption of the Special Report (November 15, 1995), but no
later than December 31, 1995, reassess the appropriateness of the
classifications of all securities held at that time. In
conjunction with the provisions of this Special Report, in
December 1995, the Bank transferred certain securities with an
amortized cost totaling $98.4 million and a fair value totaling
$98.7 million from investment securities held to maturity to
securities available for sale.
(h) NET LOANS RECEIVABLE
Loans receivable are reported at the principal amount outstanding,
net of unearned discount, net deferred loan fees, and the
allowance for loan losses. Discounts and net loan fees on loans
are accreted to income to provide a level-yield of interest on the
underlying loans.
F-10
<PAGE> 144
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
Loans considered doubtful of collection by management are placed
on a nonaccrual status for the recording of interest. Generally
loans past due 90 days or more as to principal or interest are
placed on nonaccrual status except for those loans which, in
management's judgment, are adequately secured and in the process
of collection and certain consumer and open-end credit loans which
are usually charged off at 120 days past due. When a loan is
placed on nonaccrual status, all previously accrued income that
has not been collected is reversed from current year interest
income, and subsequent cash receipts are generally applied to
reduce the unpaid principal balance. Amortization of related
unearned discount and net deferred fees is suspended when a loan
is placed on nonaccrual status. Loans are removed from nonaccrual
status when they become current as to principal and interest or
when in the opinion of management, the loans are expected to be
fully collectible as to principal and interest.
(i) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established 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 losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans
and prior loan loss experience. Management's evaluation of the
adequacy of the allowance for loan losses is performed on a
periodic basis and takes into consideration such factors as the
historical loan loss experience, changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may
affect borrowers' ability to pay.
As of October 1, 1995 the Bank adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan" (SFAS No. 114) as amended
by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," (SFAS No. 118). These
Statements prescribe recognition criteria for loan impairment and
measurement methods for certain impaired loans and all loans whose
terms are modified in troubled debt restructurings subsequent to
the adoption of these Statements. Under these Statements, a loan
is considered impaired when it is probable that the borrower will
not repay the loan according to the original contractual terms of
the loan agreement, or when a loan (of any loan type) is
restructured in a troubled debt restructuring subsequent to
October 1, 1995. The allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for
certain loans where repayment of the loan is expected to be
provided solely by the underlying collateral (collateral dependent
loans). The Bank's impaired loans are generally collateral
dependent. These Statements are principally related to commercial
type loans, however, certain provisions related to restructured
loans are applicable to all loan types. The adoption of these
Statements did not have a material effect on the Bank's
consolidated financial statements.
F-11
<PAGE> 145
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(j) OTHER REAL ESTATE OWNED
Other real estate owned includes real estate acquired in
settlement of loans. Other real estate owned is recorded on an
individual asset basis at the lower of cost (defined as the fair
value at initial investment), 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 loan value
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 other operating expenses. Properties are
regularly reappraised and written down to the fair value less the
estimated cost to sell the property, if necessary.
The recognition of gains and losses from the sale of other real
estate owned is dependent on a number of factors relating to the
nature of the property sold, terms of the sale, and the future
involvement of the Bank and subsidiaries in the property sold. If
a real estate transaction does not meet certain down payment and
loan amortization requirements, income recognition is deferred and
recognized under an alternative method.
(k) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated
depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the terms of the
related leases or the useful lives of the assets.
(l) INCOME TAXES
The Bank accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" (SFAS No. 109). Under the asset
and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. 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.
F-12
<PAGE> 146
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(m) STATUTORY TRANSFER TO SURPLUS
A quarterly transfer of 10% of net income (before dividends paid
to depositors and losses on sale of assets) is generally required
to be made to surplus under New York State Banking Law. No
transfer is required, however, if the net worth of the bank
exceeds 10% of deposits.
(n) FINANCIAL INSTRUMENTS
In the normal course of business, the Bank 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 Bank's policy is to record such instruments
when funded.
(o) OFFICIAL BANK CHECKS
The Bank's official checks (including tellers' checks, loan
disbursement checks, interest checks, expense checks, money
orders, and payroll checks) are drawn on deposit accounts at the
Bank and are ultimately paid through the Bank's Federal Reserve
correspondent account.
(p) RECLASSIFICATIONS
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform with the current year's
presentation.
(q) TRUST ASSETS AND SERVICE FEES
Assets held by the Bank in a fiduciary or agency capacity for its
customers are not included in the consolidated statements of
condition since these assets are not assets of the Bank. Trust
service fees are reported on the accrual basis.
(r) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 130",
"Reporting Comprehensive Income". SFAS No. 130 states that
comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct
entries to equity, such as the mark to market adjustment on
securities available for sale, foreign currency items and minimum
pension liability adjustments. This statement is effective for
fiscal years beginning after December 15, 1997. Management does
not believe that the impact of adopting this Statement will be
material to the Company's consolidated financial statements.
F-13
<PAGE> 147
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for reporting by public companies of
operating segments within the company, disclosures about products
and services, geographic areas and major customers. This statement
is effective for periods beginning after December 15, 1997.
Management does not believe that the adoption of SFAS No. 131 will
have a material impact on the Company's consolidated financial
statements.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits,"
which amends the disclosure requirements of SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132 standardizes the disclosures of SFAS No.
87 and No. 106 to the extent practical and recommends a parallel
format for presenting information about pensions and other
postretirement benefits. This Statement is applicable to all
entities and addresses disclosure only. The Statement does not
change any of the measurement or recognition provisions provided
for in SFAS No. 87, No. 88 or No. 106. The Statement is effective
for fiscal years beginning after December 15, 1997. Management
anticipates providing the required disclosures in the September
30, 1999 consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other
contracts, and for hedging activities. This Statement is effective
for all fiscal quarters of fiscal years beginning after June 15,
1999. Management is currently evaluating the impact of this
Statement on the Company's consolidated financial statements.
(2) LOANS HELD FOR SALE
At September 30, 1998 and 1997, loans held for sale consisted of
conventional mortgages originated for subsequent sale. At
September 30, 1998 and 1997, there was no valuation reserve
related to loans held for sale.
F-14
<PAGE> 148
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) SECURITIES AVAILABLE FOR SALE
The amortized cost and approximate fair value of securities available for
sale at September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities and agencies obligations $ 117,174 46 - 117,220
Obligations of states and political subdivisions 51,324 357 - 51,681
Mortgage-backed securities 3,616 128 - 3,744
Corporate debt securities 16,826 160 (2) 16,984
--------- -------- -------- --------
Total debt securities available for sale 188,940 691 (2) 189,629
Mutual funds and marketable equity securities 4,831 74 (83) 4,822
Non-marketable equity securities 3,307 - - 3,307
--------- -------- -------- --------
Total securities available for sale $ 197,078 765 (85) 197,758
========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities and agencies obligations $ 57,658 52 (90) 57,620
Obligations of states and political subdivisions 20,829 6 (2) 20,833
Mortgage-backed securities 4,561 92 - 4,653
Corporate debt securities 27,145 87 (64) 27,168
-------- -------- -------- --------
Total debt securities available for sale 110,193 237 (156) 110,274
Mutual funds and marketable equity securities 3,983 53 (65) 3,971
Non-marketable equity securities 3,307 - - 3,307
-------- -------- -------- --------
Total securities available for sale $117,483 290 (221) 117,552
======== ======== ======== ========
</TABLE>
F-15
<PAGE> 149
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3), CONTINUED
During 1998, proceeds from sales of securities available for sale totaled
$54.8 million, with gross gains of $9 thousand and gross losses of $1
thousand. During 1997 there were no sales of securities available for
sale. During 1996 proceeds from the sale of securities available for sale
totaled $61 thousand with gross gains of $1 thousand.
As of September 30, 1998, the contractual maturity schedule
(mortgaged-backed securities are shown separately) of debt securities
available for sale at amortized cost and approximate fair value is as
follows.
<TABLE>
<CAPTION>
Approximate
Amortized fair
Maturity ranges cost value
--------------- --------- ------------
(in thousands)
<S> <C> <C>
Within one year $ 145,761 145,852
From one year to five years 38,661 39,120
From five years to ten years 318 321
Over ten years 584 592
Mortgage-backed securities 3,616 3,744
---------------- ---------------
$ 188,940 189,629
================ ===============
</TABLE>
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.
Mortgaged-backed securities consist entirely of direct pass through
Government National Mortgage Association (GNMA) and Freddie Mac
securities.
Other than U.S. Government Securities there are no securities of a single
issuer that exceed 10% of equity at September 30, 1998 and 1997.
(4) INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and approximate fair value of investment securities as
of September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 1,980 118 - 2,098
Corporate and other debt securities 1,503 20 - 1,523
---------- --------- --------- ------------
Total investment securities $ 3,483 138 - 3,621
========== ========= ========= ============
</TABLE>
F-16
<PAGE> 150
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4), CONTINUED
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 2,497 160 (1) 2,656
Corporate and other debt securities 1,503 7 (4) 1,506
---------- --------- --------- ------------
Total investment securities $ 4,000 167 (5) 4,162
========== ========= ========= ============
</TABLE>
The amortized cost and approximate fair value of investment securities
held to maturity at September 30, 1998, by contractual maturity
(mortgage-backed securities are shown separately), are as follows:
<TABLE>
<CAPTION>
Amortized Approximate
Maturity ranges cost fair value
--------------- ------------ ----------
(in thousands)
<S> <C> <C>
Over ten years $ 1,503 1,523
Mortgage-backed securities 1,980 2,098
------------ ------------
Total $ 3,483 3,621
============ ============
</TABLE>
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.
No provision has been made for losses on investment securities held to
maturity in which the current market prices are less than the carrying
values since the Bank has the positive intent and ability to hold all
investment securities to maturity, and the Bank does not anticipate that
the unrealized loss, if any, is other than temporary.
F-17
<PAGE> 151
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) NET LOANS RECEIVABLE
A summary of loans receivable at September 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Loans secured by real estate:
Residential $ 202,511 214,638
Commercial 166,186 184,561
Construction 10,052 15,508
--------- ---------
Total real estate loans 378,749 414,707
Commercial business 45,156 29,961
Home equity lines 8,575 9,883
Other consumer loans 33,445 20,539
--------- ---------
Total consumer loans 42,020 30,422
Less: Net unearned discount and deferred fees (344) (501)
Allowance for loan losses (8,260) (6,429)
--------- ---------
Loans receivable, net $ 457,321 468,160
========= =========
</TABLE>
Non performing loans receivable at September 30, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Non-accrual loans $ 9,567 6,459 10,669
Restructured loans 2,081 2,256 1,810
--------- --------- ---------
Total $ 11,648 8,715 12,479
========= ========= =========
</TABLE>
All restructured loans are performing according to their modified terms
at September 30, 1998 and 1997.
Had the above non-accrual loans been on an accrual basis or had the
interest rate not been reduced with respect to the loans restructured
in trouble debt restructurings, the additional interest that would have
been earned was $180 thousand, $429 thousand, and $489 thousand for
1998, 1997 and 1996, respectively. There are no commitments to extend
further credit on the restructured loans.
F-18
<PAGE> 152
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), CONTINUED
Changes in the allowance for loan losses for the years ended September
30, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 6,429 4,304 4,297
Provision charged to operations 4,050 3,900 928
Loans charged off (2,446) (1,890) (1,169)
Recoveries on loans charged-off 227 115 248
------- ------- -------
Balance, end of year $ 8,260 6,429 4,304
======= ======= =======
</TABLE>
At September 30, 1998 and 1997, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 totaled $8.4 million and
$6.1 million, respectively, for which the related allowance for loan
losses was approximately $1.2 million and $1.0 million, respectively. As
of September 30, 1998 and 1997, 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, 1998 and 1997 was
approximately $5.9 million and $7.0 million, respectively. The total
interest income recognized on impaired loans, during the period of
impairment, was $0, $99 thousand, and $336 thousand for 1998, 1997 and
1996, respectively. The interest income recognized on impaired loans,
during the period of impairment, using the cash basis of income
recognition was $0, $98 thousand and $315 thousand for 1998, 1997, and
1996, respectively.
Certain executive officers of the Bank were customers of and had other
transactions with the Bank in the ordinary course of business. Loans to
these parties were made in the ordinary course of business at the Bank's
normal credit terms, including interest rate and collateralization. The
aggregate of such loans totaled less than 5% of total equity at September
30, 1998 and 1997.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at September 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Loans $2,770 2,925
Securities available for sale 1,494 1,386
Investment securities 23 23
------ ------
$4,287 4,334
====== ======
</TABLE>
F-19
<PAGE> 153
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) OTHER REAL ESTATE OWNED
Other real estate owned at September 30, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Other real estate owned:
Residential (1-4 family) $ 345 589
Commercial properties 1,527 2,101
------ ------
$1,872 2,690
====== ======
</TABLE>
(8) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at September 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Land $ 1,423 1,423
Buildings 12,621 12,520
Furniture, fixtures and equipment 8,002 7,516
Leasehold improvements 3,450 3,075
Construction in progress 1,225 210
-------- --------
26,721 24,744
Less accumulated depreciation (12,625) (11,010)
-------- --------
Premises and equipment, net $ 14,096 13,734
======== ========
</TABLE>
Depreciation expense was approximately $1.6 million for the year ended
September 30, 1998 and $1.4 million in each of the years ended September
30, 1997 and 1996.
F-20
<PAGE> 154
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) DEPOSITS
A summary of depositors' balances at September 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Savings accounts (2.75% to 5.5%) $198,509 198,929
-------- --------
Time accounts:
2.00% to 2.99% 624 257
3.00% to 3.99% 58 9
4.00% to 4.99% 10,174 5,893
5.00% to 5.99% 236,312 246,686
6.00% to 6.99% 6,679 11,762
7.00% to 7.99% 2,698 2,578
8.00% to 8.99% 12 53
9.00% to 9.99% 117 107
-------- --------
Total time accounts 256,674 267,345
-------- --------
Money market accounts (2.00% to 3.00%) 15,708 13,121
N.O.W. and Super N.O.W. accounts (2.00% to 2.35%) 76,195 71,442
Demand accounts (0%) 31,116 21,560
-------- --------
Total money market, N.O.W. and demand deposit
accounts 123,019 106,123
-------- --------
Total deposits $578,202 572,397
======== ========
</TABLE>
The contractual maturities of time accounts for the years subsequent to
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Years ending September 30,
(in thousands)
<S> <C>
1999 $ 194,755
2000 40,675
2001 14,852
2002 6,281
Thereafter 111
--------
$256,674
========
</TABLE>
F-21
<PAGE> 155
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9), CONTINUED
Interest expense on deposits and escrows for the years ended September
30, 1998, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Time accounts $14,701 14,087 13,758
Savings accounts 6,451 6,647 6,798
Money market accounts 431 433 379
N.O.W. and Super N.O.W. accounts 1,696 1,590 1,547
Escrow accounts 60 55 75
------- ------- -------
$23,339 22,812 22,557
======= ======= =======
</TABLE>
Individual time accounts in excess of $100 thousand totaled $33.4 million
and $28.7 million at September 30, 1998 and 1997, respectively.
(10) EMPLOYEE BENEFIT PLANS
The Bank maintains a non-contributory pension plan with the Retirement
System Group, Inc., covering substantially all its full-time employees.
The benefits are generally computed as two percent of the highest three
year "average annual earnings" multiplied by years of credited service,
subject to various caps and adjustments as provided for in the plan. The
amounts contributed to the plan are determined annually on the basis of
(a) the maximum amount that can be deducted for federal income tax
purposes or (b) the amount certified by an actuary as necessary to avoid
an accumulated funding deficiency as defined by the Employee Retirement
Income Security Act of 1974. Contributions are intended to provide not
only for benefits attributed to service to date but also those expected
to be earned in the future. Assets of the plan are primarily invested in
pooled equity and fixed income funds.
F-22
<PAGE> 156
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), CONTINUED
The following table sets forth the plan's funded status and amounts
recognized in the banks consolidated financial statements as of September
30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$9.8 million and, $8.3 million at September 30, 1998 and
1997, respectively $(10,182) (8,467)
======== ========
Projected benefit obligation for service rendered to date (12,458) (10,388)
Plan assets at fair value 12,805 13,160
-------- --------
Plan assets in excess of projected benefit obligation 347 2,772
Unrecognized net gain from past experience different from
that assumed and effects and changes in assumptions (241) (2,513)
Unrecognized net transition asset at January 1, 1987 being
recognized over 11.2 years - (14)
Unrecognized past service asset 339 387
-------- --------
Prepaid pension cost included in other assets $ 445 632
======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net periodic pension cost included the following components:
Service cost $ 580 482 361
Interest cost 752 699 559
Expected return on plan assets (1,038) (868) (488)
Net amortization (68) (51) (211)
-------- -------- --------
Net periodic pension cost $ 226 262 221
======== ======== ========
</TABLE>
The actuarial assumptions used in determining the actuarial present value
of the projected benefit obligation as of September 30, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Discount Rate 6.50% 7.25% 7.75%
Long-term rate of return 8.00% 8.00% 8.00%
Salary increase rate 4.50% 5.00% 5.50%
</TABLE>
F-23
<PAGE> 157
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), CONTINUED
The Bank 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 a year of service. Participants may
contribute from 2% to 15% of their compensation. The Bank made matching
contributions equal to 50% of the participants' contributions (up to a
limit of 3% of the participants' compensation) in fiscal 1998, 1997 and
1996. Employer matching contributions vest 20% per year beginning after
one year of participation in the plan. Employer matching contributions
were approximately $146 thousand, $125 thousand and $120 thousand for
each of the years ended September 30, 1998, 1997 and 1996, respectively.
The Bank has established a self-funded employee welfare benefit plan to
provide health care coverage (hospital medical, major medical, and
prescription drug) for eligible employees and their dependents who enroll
in the plan. This self insurance program is administered by an unrelated
company. Under the terms of the self insurance program, the Bank could
incur costs up to a maximum of approximately $828 thousand for the cost
of covered claims for the plan year ended December 31, 1998. The Bank has
purchased a $1.0 million insurance policy to cover claims in excess of
the maximum costs under the plan. In addition, there are lower maximum
cost limitations for individual claims.
The Bank provides certain health care and life insurance benefits for
retired employees. Substantially all of the Bank's employees will become
eligible for those benefits if they reach normal retirement age while
working for the Bank. As of October 1, 1995, the Bank adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (SFAS No. 106).
The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements at September 30, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retired employees $(1,769) (2,072)
Active employees fully eligible for benefits (533) (255)
Other active plan participants (1,135) (1,126)
------- -------
Unfunded postretirement benefit obligation (3,437) (3,453)
Unrecognized net loss 15 253
Unrecognized transition obligation 2,304 2,440
------- -------
Accrued postretirement benefit cost included in
other liabilities $(1,118) (760)
======= =======
</TABLE>
F-24
<PAGE> 158
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), CONTINUED
Net periodic post retirement benefit cost recognized in the consolidated
statements of income for the years ended September 30, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Service cost $170 124 115
Interest cost 204 237 217
Amortization of transition obligation at
October 1, 1995 being amortized over
20 years 136 136 136
---- ---- ----
Net periodic postretirement benefit cost $510 497 468
==== ==== ====
</TABLE>
The weighted-average discount rate used in determining the accumulated
post retirement benefit obligation was 6.5%, 7.25% and 8.0% as of
September 30, 1998, 1997, and 1996 respectively.
For measurement purposes, 5% and 3% annual rates of increase in the per
capita cost of covered medical and dental costs, respectively, was
assumed for fiscal 1998 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
postretirement benefit obligation as of September 30, 1998 by
approximately $332 thousand (10%) and increase the aggregate of the
service and interest cost components of the net periodic postretirement
benefit cost for fiscal 1998 by approximately $56 thousand (15%).
(11) INCOME TAXES
The components of income tax (benefit) expense for the years ended
September 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ 850 2,694 2,444
State 303 324 395
Deferred tax benefit (3,027) (1,442) (333)
------- ------- -------
Income tax (benefit) expense $(1,874) 1,576 2,506
======= ======= =======
</TABLE>
F-25
<PAGE> 159
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
The following is a reconciliation of the expected income tax (benefit)
expense and the actual income tax (benefit) expense. The expected income
tax (benefit) expense has been computed by applying the statutory federal
tax rate to income before income tax (benefit) expense:
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------
1998 1997 1996
------ ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Income tax (benefit) expense at applicable federal statutory rate $ (936) 1,780 2,578
Increase (decrease) in income tax (benefit) expense resulting from:
Tax exempt securities income (637) (46) (10)
State income tax (benefit) expense, net of Federal impact (276) 214 261
Reduction in the valuation allowance for deferred tax assets - - (245)
Reduction in New York State bad debt reserve resulting from tax law changes
- (349) -
Rehabilitation credits - - (42)
Other (25) (23) (36)
------- ------- -------
Income tax (benefit) expense $(1,874) 1,576 2,506
======= ======= =======
Effective tax rate (68.1)% 30.1% 33.0%
======= ======= =======
</TABLE>
F-26
<PAGE> 160
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Differences in reporting the provision for loan losses $2,815 2,084
Differences in reporting expenses related to other real estate owned 248 182
Differences in reporting certain accrued expenses 2,689 667
Differences in reporting depreciation 603 397
Deferred compensation 386 335
------ ------
Total gross deferred tax assets 6,741 3,665
Deferred tax liabilities:
Differences in reporting pension costs 178 253
Differences in reporting prepaid expenses 259 252
Deferred net loan origination fees 157 133
Mortgage servicing rights 127 34
------ ------
Total gross deferred tax liabilities 721 672
------ ------
Net deferred tax asset at end of year 6,020 2,993
Net deferred tax asset at beginning of year 2,993 1,551
------ ------
Deferred tax benefit for the year $3,027 1,442
====== ======
</TABLE>
In addition to the deferred tax assets and liabilities described above,
the Bank also has a deferred tax liability of approximately $273 thousand
and $28 thousand at September 30, 1998 and 1997, respectively, related to
the net unrealized gain on securities available for sale.
Deferred tax assets are recognized subject to management's judgement that
realization is more likely than not. Based on the sufficiency of
temporary taxable items, historical taxable income, as well as estimates
of future taxable income, the Bank believes it is more likely than not
that the entire net deferred tax asset at September 30, 1998 and 1997
will be realized. During the year ended September 30, 1996 the valuation
allowance of $245 thousand was reduced to zero.
F-27
<PAGE> 161
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions
historically have been determined using methods based on loss experience
or a percentage of taxable income. Tax bad debt reserves are maintained
equal to the excess of allowable deductions over actual bad debt losses
and other reserve reductions. These reserves consist of a defined
base-year amount, plus additional amounts ("excess reserves") accumulated
after the base year. SFAS No. 109 requires recognition of deferred tax
liabilities with respect to such excess reserves, as well as any portion
of the base-year amount which is expected to become taxable (or
"recaptured") in the foreseeable future.
Certain amendments to the Federal and New York State tax laws regarding
bad debt deductions were enacted in July and August 1996, respectively.
The Federal amendments include elimination of the percentage of taxable
income method for tax years beginning after December 31, 1995, and
imposition of a requirement to recapture into taxable income (over a
period of approximately six years) the bad debt reserves in excess of the
base-year amounts. The Bank previously established, and will continue to
maintain, a deferred tax liability with respect to such excess Federal
reserves. The New York State amendments redesignate the Bank's state bad
debt reserves at December 31, 1995 as the base-year amount and also
provide for future additions to the base-year reserve using the
percentage of taxable income method. As a result of the redesignation of
the New York State base-year reserve, the Bank reduced its deferred tax
liabilities related to the previous excess New York State reserve
resulting in a deferred tax benefit in fiscal 1997 of approximately $349
thousand.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal base-year reserve of $7.9 million
and "supplemental" reserve (as defined) of $1.0 million at September 30,
1998, and the state base-year reserve of $18.9 million at September 30,
1998, since the Bank does not expect that these amounts will become
taxable in the foreseeable future. Under New York State tax law, as
amended, events that would result in taxation of these reserves include
the failure of the Bank to maintain a specified qualifying assets ratio
or meet other thrift definition tests for tax purposes. The unrecognized
deferred tax liability at September 30, 1998 with respect to the Federal
base-year reserve and supplemental reserve was $2.7 million and $340
thousand, respectively. The unrecognized deferred tax liability at
September 30, 1998 with respect to the state base-year reserve was
approximately $1.7 million.
F-28
<PAGE> 162
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) SHORT-TERM BORROWINGS
A summary of short-term borrowings is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Securities Sold Under Agreements to Repurchase:
Balance at September 30 $ 2,524 372 149
Maximum month-end balance 2,544 2,352 761
Average during the year 1,222 704 386
Average rate during the year 2.70% 4.12% 3.37%
Rate at September 30 3.45% 5.10% 4.31%
Federal Home Loan Bank of New York Short-Term Borrowings:
Balance at September 30 - - 5,000
Maximum month-end balance - 10,000 10,000
Average during the year - 4,403 4,220
Average rate during the year - 5.50% 5.14%
Rate at September 30 - - 5.45%
Average aggregate borrowing rates 2.70% 5.30% 5.27%
</TABLE>
Securities sold under agreements to repurchase generally mature within
ninety days. The Company maintains control over the securities
underlying the agreements.
The Company has established overnight and term lines of credit with the
Federal Home Loan Bank of New York (FHLB). If advanced, such lines of
credit will be collateralized by qualifying loans, securities,
mortgage-backed securities, and FHLB stock loans. Total availability
under these lines was approximately $67.1 million and $67.0 million at
September 30, 1998 and 1997, respectively. Participation in the FHLB
program requires an investment in FHLB stock. Investment in FHLB stock,
included in securities available for sale on the consolidated balance
sheets, amounted to $3.3 million at September 30, 1998 and 1997.
F-29
<PAGE> 163
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) FEDERAL HOME LOAN BANK OF NEW YORK LONG-TERM DEBT
At September 30, 1998, long term debt included a $3.9 million 5.89%
fixed rate amortizing loan and other long term borrowings of $41.0
million bearing interest of 5.8%. The following table sets forth
maturities of the long-term borrowings of September 30, 1998.
<TABLE>
<CAPTION>
Years ended September 30,
(in thousands)
<S> <C>
1999 $ 443
2000 469
2001 3,028
2002 -
2003 10,000
2004 and thereafter 31,000
----------
$ 44,940
==========
</TABLE>
Collateral for borrowings include a blanket lien on general assets of
the Bank and approximately $11.0 million of pledged securities.
(14) COMMITMENTS AND CONTINGENT LIABILITIES
(a) LEASE OBLIGATIONS
The Bank leases several banking office facilities under
various noncancellable operating leases. These leases expire
(excluding renewal options) in periods ranging from 1 to 10
years. Minimum rental commitments under lease contracts are as
follows:
<TABLE>
<CAPTION>
Years ending September 30, Office facilities
-----------------
(in thousands)
<S> <C>
1999 $ 448
2000 502
2001 540
2002 542
2003 547
2004 and thereafter 1,065
----------
$ 3,644
==========
</TABLE>
F-30
<PAGE> 164
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), CONTINUED
(b) DATA PROCESSING
During the year ended September 30, 1997, the Bank renewed its
data processing agreement for a five year period beginning
February 1, 1997. At September 30, 1998, commitments under
this agreement were approximately $3.8 million.
(c) OFF-BALANCE-SHEET FINANCING AND CONCENTRATIONS OF CREDIT
The Bank is a party to certain financial instruments with
off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial
instruments include commitments to extend credit, unused lines
of credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the consolidated financial
statements. The contract amounts of these instruments reflect
the extent of involvement the Bank has in particular classes
of financial instruments.
The Bank'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 Bank
uses the same credit policies in making commitments as it does
for on-balance-sheet instruments.
Contract amounts of financial instruments that represent the
future extension of credit as of September 30, 1998 and 1997
at fixed and variable interest rates are as follows:
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------
(in thousands)
Fixed Variable Total
----- -------- -----
<S> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments outstanding:
Conventional mortgages $ 10,212 13,487 23,699
Construction loans - 14,575 14,575
------------ ----------- --------
10,212 28,062 38,274
------------ ----------- --------
Unused lines of credit:
Home equity lines of credit - 6,242 6,242
Commercial lines of credit 25,846 25,077 50,923
Overdraft lines of credit - 1,572 1,572
------------ ----------- --------
25,846 32,891 58,737
------------ ----------- --------
Standby letters of credit - 2,721 2,721
------------ ----------- --------
$ 36,058 63,674 99,732
============ =========== ========
</TABLE>
F-31
<PAGE> 165
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), CONTINUED
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------
(in thousands)
Fixed Variable Total
----- -------- -----
<S> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments outstanding:
Conventional mortgages $ 5,801 2,019 7,820
Construction loans - 5,570 5,570
------------ ----------- ---------
5,801 7,589 13,390
------------ ----------- ---------
Unused lines of credit:
Home equity lines of credit - 6,192 6,192
Commercial lines of credit 3,124 24,460 27,584
Overdraft lines of credit - 1,446 1,446
------------ ----------- ---------
3,124 32,098 35,222
------------ ----------- ---------
Standby letters of credit - 1,935 1,935
------------ ----------- ---------
$ 8,925 39,687 48,612
============ =========== =========
</TABLE>
Commitments to extend credit are agreements to lend to a
customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed
expiration dates or other termination clauses and may require
payment of a fee. Since not all of the commitments are
expected to be funded, the total commitment amounts do not
necessarily represent future cash requirements. The Bank
evaluates each customer's creditworthiness on a case-by-case
basis. The amount of collateral, if any, required by the Bank
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 Bank to interest rate risk given the
possibility that market rates may change between commitment
and actual extension of credit.
Standby letters of credit are conditional commitments issued
by the Bank to guarantee payment on behalf of a customer and
guarantee the performance of a customer to a third party. The
credit risk involved in issuing these instruments is
essentially the same as that involved in extending loans to
customers. Since a portion of these instruments will expire
unused, the total amounts do not necessarily represent future
cash requirements. Each customer is evaluated individually for
creditworthiness under the same underwriting standards used
for commitments to extend credit and on-balance sheet
instruments. Bank policies governing loan collateral apply to
standby letters of credit at the time of credit extension.
F-32
<PAGE> 166
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), CONTINUED
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 Bank to
interest rate risk should market rates increase above these
limits. At September 30, 1998 and 1997 approximately $75.6
million and $104.6 million of adjustable rate residential
loans had interest rate caps.
The Bank 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 Bank 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 Bank
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, 1998 and 1997, the Bank 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 $20.3
million and $8.6 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 Bank enters into agreements to sell
loans in the secondary market to unrelated investors on a loan
by loan basis, and may also enter into option agreements. At
September 30, 1998 and 1997, the Bank had mandatory
commitments and cancelable options to sell conventional fixed
rate mortgage loans at set prices amounting to approximately
$25.0 million and $11.0 million, respectively. The Bank
believes that it will be able to meet these commitments
without incurring any material losses.
(d) SERVICED LOANS
The total loans serviced by the Bank for unrelated third
parties were approximately $195.7 million at September 30,
1998 and $146.1 million at September 30, 1997.
F-33
<PAGE> 167
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), CONTINUED
(e) CONTINGENT LIABILITIES
In the ordinary course of business there are various legal
proceedings pending against the Bank. Based on consultation
with outside counsel, management considers that the aggregate
exposure, if any, arising from such litigation would not have
a material adverse effect on the Bank's consolidated financial
statements.
(f) CHARITABLE FOUNDATION CONTRIBUTION COMMITMENT
In 1998, the Bank contributed $1.0 million to the Troy Savings
Bank Charitable Foundation (the Foundation) and entered into a
binding unconditional commitment to contribute an additional
$4.0 million to the Foundation over the next 3 years as
follows:
<TABLE>
<CAPTION>
Years ending September 30,
(in thousands)
<S> <C>
1999 $ 1,000
2000 1,500
2001 1,500
-------
$ 4,000
=======
</TABLE>
The present value of the above commitment of $3.5 million has
been recorded as a liability on the Bank's September 30, 1998
consolidated statement of condition. A related contribution
expense of $3.5 million, in addition to the $1.0 million paid
to the Foundation, has been recorded on the Bank's 1998
consolidated statement of income.
(g) CONCENTRATIONS OF CREDIT
The Bank grants commercial, consumer and residential loans to
customers throughout the six New York State counties of
Albany, Rensselaer, Saratoga, Schenectady, Warren and
Washington. Although the Bank 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.
(h) RESERVE REQUIREMENT
The Bank 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 $46 thousand.
F-34
<PAGE> 168
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
(SFAS No. 107) requires that the Bank disclose estimated fair values
for its financial instruments. Fair value estimates are made at a
specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for
sale at one time the Bank's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the
Bank's financial instruments, fair value estimates are based on
judgments regarding future expected net cash flows, current economic
conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax assets and bank premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates of fair value
under SFAS No. 107.
In addition there are significant intangible assets that SFAS No. 107
does not recognize, such as the value of core deposits, the Bank's
branch network, and other items generally referred to as goodwill.
Short-Term Financial Instruments
The fair values of certain financial instruments are estimated to
approximate their carrying values because the remaining term to
maturity of the financial instrument is less than 90 days or the
financial instrument reprices in 90 days or less. Such financial
instruments include cash and due from banks, Federal funds sold,
accrued interest receivable, accrued interest payable, and securities
sold under agreements to repurchase.
Loans Held for Sale
The estimated fair value of loans held for sale, is calculated by
either using quoted market rates or in the case where a firm commitment
has been made to sell the loan, the firm committed price.
Securities Available for Sale and Investment Securities Held to
Maturity
Securities available for sale and investment securities held to
maturity are financial instruments which are usually traded in broad
markets. Fair values are based upon market prices. If a quoted market
price is not available for a particular security, the fair value is
determined by reference to quoted market prices for securities with
similar characteristics.
F-35
<PAGE> 169
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15), CONTINUED
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 other
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. 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, NOW and money market
accounts and mortgagors' escrow deposits, is regarded to be the amount
payable on demand as of September 30, 1998 and 1997. The estimated fair
value of time accounts 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.
Long-Term Debt
The estimated fair value of long-term debt is based on the discounted
value of contractual cash flows. The discount rate is estimated using
the rates currently offered for similar long-term debt issues.
Commitments to Extend Credit, Unused Lines of Credit, and Standby
Letters of Credit
The fair value of commitments to extend credit, unused lines of credit
and standby-letters of credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of
the counterparties. For fixed rate commitments to extend credit and
unused lines of credit, fair value also considers the difference
between current levels of interest rates and the committed rates. Based
upon the estimated fair value of commitments to extend credit, unused
lines of credit, and standby letters of credit, there are no
significant unrealized gains or losses associated with these financial
instruments.
F-36
<PAGE> 170
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15), CONTINUED
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments
as of September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 17,915 17,915 42,451 42,451
Loans held for sale 11,096 11,096 3,703 3,703
Securities available for sale 197,758 197,758 117,552 117,552
Investment securities held to maturity 3,483 3,621 4,000 4,162
Loans 465,581 469,713 474,589 473,253
Less: Allowance for loan losses 8,260 - 6,429 -
----------- ----------- ----------- ------------
Net loans 457,321 469,713 468,160 473,253
Accrued interest receivable 4,287 4,287 4,334 4,334
Financial liabilities:
Deposits:
Demand, savings, money market,
and NOW accounts 321,528 321,528 305,052 305,052
Time accounts 256,674 258,254 267,345 267,712
Securities sold under agreements to repurchase 2,524 2,524 372 372
Accrued interest payable 360 360 60 60
Mortgagors' escrow accounts 1,900 1,900 1,916 1,916
Contribution payable 3,453 3,453 - -
Long-term debt 44,940 44,940 4,356 4,356
</TABLE>
Note: Loans held for sale represent the only trading financial
instruments; all other financial instruments are considered
to be held for purposes other than trading.
F-37
<PAGE> 171
] THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) REGULATORY CAPITAL REQUIREMENTS
Federal Deposit Insurance Corporation regulations require banks to
maintain a minimum level of regulatory capital. Under the regulations
in effect at September 30, 1998 and 1997, the Bank was required to
maintain a minimum leverage ratio of Tier I (core) capital to average
adjusted quarterly assets of 4.00%; and minimum ratios of Tier I (core)
capital and total capital to risk weighted assets of 4.00% and 8.00%,
respectively.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the
classification of savings institutions into five categories: well
capitalized, adequately capitalized, under capitalized, significantly
under capitalized, and critically under capitalized. Generally an
institution is considered well capitalized if it has a Tier I (core)
capital ratio of at least 5.0% (based on total adjusted quarterly
average assets); a Tier I risk-based capital ratio of at least 6.0%;
and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC
about capital components, risk weighting and other factors.
Management believes that, as of September 30, 1998 and 1997, the Bank
met all capital adequacy requirements to which it is subject. Further,
the most recent FDIC notification categorized the Bank as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and
ratios as of September 30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30, 1998 Amount Ratio
------------------ ------ -----
(dollars in thousands)
<S> <C> <C>
Leverage (Tier I) Capital $ 70,114 9.89%
Risk-based Capital:
Tier I $ 70,114 14.02%
Total $ 76,368 15.27%
September 30, 1997 Amount Ratio
------------------ ------ -----
Leverage (Tier I) Capital $ 70,943 10.64%
Risk-based Capital:
Tier I $ 70,943 15.01%
Total $ 77,372 16.37%
</TABLE>
F-38
<PAGE> 172
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17) ADOPTION OF PLAN OF CONVERSION
On July 15, 1998 the Board of Trustees of the Bank, subject to
regulatory approval and approval by members of the Bank, unanimously
adopted a Plan of Conversion (as amended and restated, the Plan), to
convert from a New York State-chartered mutual savings bank to a New
York State-chartered stock savings bank with the concurrent formation
of a holding company. The conversion is expected to be accomplished
through amendment of the Bank's Organization Certificate and
the sale of the holding company's common stock in an amount equal to
the proforma market value of the Bank after giving effect to the
conversion. A subscription offering of the sale of the holding
company's common stock will be offered with priority rights to certain
of the Bank's depositors, and the employee stock ownership plan
expected to be set up as part of the Plan. Any shares of the holding
company's common stock not sold in the subscription offering will be
offered for sale to the general public.
At the time of conversion, the Bank will establish a liquidation
account in an amount equal to its total equity as of the date of the
latest consolidated balance sheet appearing in the final prospectus.
The liquidation account will be maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank after
the conversion. The liquidation account will be reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will 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
Bank may not pay dividends that would reduce stockholders' equity below
the required liquidation account balance.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all
costs will be charged to expense. As of September 30, 1998,
approximately $120.8 thousand of conversion costs had been deferred.
Pursuant to the Plan, the holding company intends to contribute holding
company common stock in an amount equal to 8.0% of the total amount of
common stock to be sold in the conversion, to the Troy Savings Bank
Community Foundation (the Community Foundation). The Community
Foundation is being formed as a complement to the Bank's existing
community activities and will be dedicated to community activities and
the promotion of charitable causes.
F-39
<PAGE> 173
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17), CONTINUED
The Community Foundation will submit a request to the Internal Revenue
Service to be recognized as a tax-exempt organization and will likely
be classified as a private foundation. A contribution of common stock
to the Community Foundation by the holding company may be tax
deductible, subject to an annual limitation of all contributions based
on 10% of the holding company's annual taxable income (before
contributions). To the extent that the Bank determines that such annual
taxable income will, more likely than not, be sufficient to allow for
the deduction, the holding company would be able to carry forward any
unused portion of the deduction for five years following the
contribution. Upon funding the Community Foundation, the holding
company will recognize an expense in the full amount of the
contribution, offset in part by any corresponding tax benefit, during
the quarter in which the contribution is made.
F-40
<PAGE> 174
GLOSSARY
ALCO. The Asset/Liability Management Committee of The Troy Savings Bank.
ARMS. Adjustable rate mortgages.
ATMS. Automated teller machines.
BIF. The Bank Insurance Fund.
BANK. The Troy Savings Bank.
BHC ACT. The Bank Holding Company Act of 1956, as amended.
CHARITABLE FOUNDATION. The Troy Savings Bank Charitable Foundation.
COMMUNITY FOUNDATION. The Troy Savings Bank Community Foundation.
COMMUNITY OFFERING. The offering for sale to certain members of the general
public of Common Stock not subscribed for in the Subscription Offering pursuant
to the Plan of Conversion.
COMMON STOCK. The common stock, par value $.0001, of Troy Financial Corporation.
COMPANY. Troy Financial Corporation.
CONVERSION. The simultaneous conversion of The Troy Savings Bank from mutual to
stock form of organization, the issuance of The Troy Savings Bank's capital
stock to Troy Financial Corporation and the offer and sale of Troy Financial
Corporation's common stock to certain depositors and members of the public in
accordance with a plan of conversion.
CRA. The Community Reinvestment Act.
CSSRS. Customer sales and service representatives of The Troy Savings Bank.
ELIGIBLE ACCOUNT HOLDERS. Those persons who held deposit accounts (containing
balances of at least $100) at The Troy Savings Bank on June 30, 1997.
EMPLOYMENT AGREEMENTS. Employment agreements that Troy Financial Corporation and
The Troy Savings Bank intend to enter into after the Conversion with three
executive officers.
EMPLOYMENT PROTECTION AGREEMENTS. Employment protection agreements that Troy
Financial Corporation and The Troy Savings Bank intend to enter into after the
Conversion with four officers.
ERISA. The Employee Retirement Income Security Act of 1974, as amended.
ESOP. A tax-qualified employee stock ownership plan established by The Troy
Savings Bank to purchase Common Stock in the Conversion.
ESTIMATED PRICE RANGE. The estimated pro forma market value of the Common Stock
being sold in connection with the Conversion, based on FinPro, Inc.'s appraisal
dated as of December 10, 1998. The range of the market value of the Common Stock
is from a minimum of $67,405,000 to a maximum of $91,195,000, with a midpoint of
$79,300,000. This establishes the number of shares to be offered (6,740,500 to
9,119,500), based on an offering price of $10.00 per share.
EQUITY COMPENSATION PLAN. A long-term equity compensation plan that Troy
Financial Corporation intends to adopt after the Conversion in order to provide
directors, officers, employees
G-1
<PAGE> 175
and independent contractors with stock options and restricted stock. The portion
of the plan that provides for restricted stock is referred to as the management
recognition plan ("MRP").
EXCHANGE ACT. The Securities Exchange Act of 1934, as amended.
EXPIRATION DATE. ____, 1999 at 12:00 p.m. New York time, which is the date and
time when the Subscription Offering expires, unless otherwise extended.
FEDERAL RESERVE. The Board of Governors of the Federal Reserve System.
FHLB. The Federal Home Loan Bank.
FMB. The Family Mortgage Banking Co., Inc.
FINPRO, INC.. The independent appraiser hired by The Troy Savings Bank.
FDIC. The Federal Deposit Insurance Corporation.
FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991.
IRC. The Internal Revenue Code.
IRS. The Internal Revenue Service.
LTV. Loan to value ratio.
MUSIC HALL. The Troy Savings Bank Music Hall located in the headquarters of The
Troy Savings Bank.
MUSIC HALL FOUNDATION. The Troy Savings Bank Music Hall Foundation.
MRP. The part of the Equity Compensation Plan that will provide for grants of
shares of restricted stock (management recognition plan).
NYBB. The Banking Board of the State of New York.
NY CRA. The New York Community Reinvestment Act.
NYSBD. The New York State Banking Department.
NEW YORK SUPERINTENDENT. The Superintendent of Banks of the State of New York.
OREO. Other real estate owned by The Troy Savings Bank.
PLAN OF CONVERSION. The legal document that governs the Conversion and
establishes who is eligible to purchase common stock. A summary of the
Conversion as set forth in the Plan of Conversion is contained in this
prospectus.
PUBLIC OFFERING. Any Community Offering and/or Syndicated Community Offering of
the Common Stock.
SAIF. The Savings Association Insurance Fund.
SANDLER O'NEILL. Sandler O'Neill & Partners, L.P. serves as the conversion agent
which will assist with the Conversion, as well as the underwriter which will use
its best efforts to help Troy Financial Corporation sell its Common Stock.
G-2
<PAGE> 176
SBLI. The Savings Bank Life Insurance Department of The Troy Savings Bank.
SEC. The United States Securities and Exchange Commission.
SECURITIES ACT. Securities Act of 1933, as amended.
SEVERANCE PLAN. An employee severance compensation plan that The Troy Savings
Bank intends to establish upon Conversion in order to provide eligible employees
with severance pay benefits in the event of termination of employment after a
change of control of The Troy Savings Bank or Troy Financial Corporation.
SUBSCRIPTION OFFERING. The process whereby Troy Financial Corporation issues
non-transferable subscription rights to purchase our Common Stock to Eligible
Account Holders, the ESOP and Supplemental Eligible Account Holders.
SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. Those persons (other than Eligible
Account Holders) holding deposit accounts (containing balances of at least $100)
with The Troy Savings Bank on ______, 1999.
SUPPLEMENTAL PLAN. A non-tax qualified supplemental retirement and benefit
restoration plan that the Bank intends to establish after the Conversion in
order to provide additional benefits to a select group of management or highly
compensated employees.
SYNDICATED COMMUNITY OFFERING. The offering of Common Stock following the
Subscription Offering and Community Offering through a syndicate of
broker-dealers.
Y2K PROJECT. The Year 2000 remediation and compliance program of The Troy
Savings Bank.
401(K) PLAN. The qualified, tax-exempt savings plan of The Troy Savings Bank
qualifying under Section 401(k) of the IRC.
G-3
<PAGE> 177
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY TROY FINANCIAL CORPORATION, THE TROY SAVINGS BANK OR SANDLER O'NEILL &
PARTNERS, L.P. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY JURISDICTION WHERE, OR
TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN
THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF TROY FINANCIAL
CORPORATION OR THE TROY SAVINGS BANK SINCE ANY OF THE DATES AS OF WHICH SUCH
INFORMATION IS FURNISHED OR SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Questions and Answers............................................. i
Summary...........................................................
Selected Consolidated Financial and Other Data....................
Risk Factors...................................................... 1
Troy Financial Corporation........................................
The Troy Savings Bank.............................................
Use of Proceeds...................................................
Dividend Policy...................................................
Market for the Common Stock.......................................
Regulatory Capital Compliance.....................................
Capitalization....................................................
Pro Forma Data....................................................
Comparison of Valuation and Pro Forma
Information with No Contribution to
the Community Foundation.......................................
The Troy Savings Bank and Subsidiaries
Consolidated Statements of Income..............................
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................
Business of Troy Financial Corporation............................
Business of The Troy Savings Bank.................................
Regulation and Supervision........................................
Taxation..........................................................
Management of the Company.........................................
Management of the Bank............................................
The Conversion....................................................
Restrictions on Acquisition of
Troy Financial Corporation.....................................
Description of Capital Stock of Troy Financial Corporation........
Description of Capital Stock of The Troy Savings Bank.............
Transfer Agent and Registrar......................................
Experts...........................................................
Legal and Tax Opinions............................................
Additional Information............................................
Index to Consolidated Financial Statements........................ F-1
Glossary.......................................................... G-1
</TABLE>
UNTIL ______, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
================================================================================
9,119,500 SHARES
TROY FINANCIAL
CORPORATION
[LOGO]
(PROPOSED BANK HOLDING COMPANY
FOR THE TROY SAVINGS BANK)
COMMON STOCK
(PAR VALUE $0.0001 PER SHARE)
--------------------------
PROSPECTUS
--------------------------
, 1999
SANDLER O'NEILL & PARTNERS, L.P.
================================================================================
<PAGE> 178
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts except the
Securities and Exchange Commission registration fee are estimated.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ------
<S> <C>
SEC Registration fee . . . . . . . . . . . . . . . . . . . . . . . . $ 29,155
Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . . .
Nasdaq registration fee . . . . . . . . . . . . . . . . . . . . . . .
New York State Banking Department filing fee . . . . . . . . . . . .
Counsel fees and expenses . . . . . . . . . . . . . . . . . . . . . .
Appraisal and business plan fees and expenses . . . . . . . . . . . .
Conversion agent fees and expenses . . . . . . . . . . . . . . . . .
Marketing agent's fees and expenses . . . . . . . . . . . . . . . . .
Printing and engraving expenses . . . . . . . . . . . . . . . . . . .
Postage and mailing . . . . . . . . . . . . . . . . . . . . . . . . .
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . . . .
Accounting fees and expenses . . . . . . . . . . . . . . . . . . . .
Conversion and Transfer Agent fees . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
--------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ *
========
</TABLE>
- ---------------
* To be provided by amendment.
All expenses of registration incurred in connection with this
Registration Statement are being borne by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to the provisions of the General Corporation Law
of the State of Delaware (the "DGCL") and Section 12 of the Company's
Certificate of Incorporation.
The Registrant is a Delaware corporation subject to the applicable
indemnification provisions of the DGCL. Section 145 of the DGCL provides for
the indemnification, under certain circumstances, of persons who are or were
directors, officers, employees or agents of a corporation, or are or were
serving at the request of a corporation in such a capacity with another
business organization or entity, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in actions, suits or
proceedings, whether civil, criminal, administrative, or investigative, brought
or threatened against or involving such persons because of such person's
service in any such capacity. In the case of actions brought by or in the
right of a corporation, Section 145 provides for indemnification of expenses
(including attorneys' fees) if the person seeking indemnification acted in good
faith and in a manner that such person reasonably believed to be in or not
opposed to the best interests of the corporation, and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall been adjudged liable to the corporation unless and only
upon a determination by the Court of Chancery or the court in which such action
or suit was brought that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is reasonably and fairly
entitled to indemnity for such expenses.
II-1
<PAGE> 179
The Company's Certificate of Incorporation provides that, to the
extent permitted by law, the Company shall fully indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative
or investigative) by reason of the fact that such person is or was a director
or officer of the Company, or is or was serving at the request of the Company
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Moreover, to the extent permitted by law, the Company will fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was an employee or agent of the Company, or is or was serving
at the request of the Company as an employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding. The Company will also advance expenses
upon receipt of an undertaking by or on behalf of the director or officer to
repay such amount if it shall ultimately be determined that such director or
officer is not entitled to indemnification. Section 8 of the Company's Bylaws
provides for similar indemnification of such persons.
ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES
ITEM 701. During the past three years, the Registrant has not sold
any unregistered securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following Exhibits are filed herewith or incorporated herein by
reference:
1.1 Engagement Letter, dated as of July 15, 1998, between The Troy Savings
Bank and Sandler O'Neill & Partners, L.P.
1.2 Form of Agency Agreement between Troy Financial Corporation, The Troy
Savings Bank and Sandler O'Neill & Partners, L.P.*
2 Amended and Restated Plan of Conversion of The Troy Savings Bank, dated
July 15, 1998, and amended on December 10, 1998.
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1
hereto).
4.2 Bylaws of the Company (filed as Exhibit 3.2 hereto).
4.3 Form of stock certificate of Troy Financial Corporation.
5.1 Opinion of Hogan & Hartson L.L.P.*
8.1 Opinion of Hogan & Hartson L.L.P. as to certain federal income tax
matters. *
II-2
<PAGE> 180
8.2 Opinion of KPMG Peat Marwick LLP as to certain New York State tax
matters. *
8.3 Opinion of FinPro, Inc. as to value of subscription rights.
10.1 The Troy Savings Bank 401(k) Savings Plan. *
10.2 Form of Executive Officer Employment Agreement.*
10.3 Form of Employment Protection Agreement. *
10.4 Form of Severance Compensation Plan. *
10.5 Form of Supplemental Retirement and Benefits Restoration Plan. *
10.6 Engagement Letter, dated as of September 16, 1998, between The Troy
Savings Bank and FinPro, Inc., for conversion appraisal services and
services related to the preparation of the business plan of The Troy
Savings Bank.
10.7 Engagement Letter, dated as of July 15, 1998, between The Troy Savings
Bank and Sandler O'Neill & Partners, L.P., for conversion agent services.
21 Subsidiaries of The Troy Savings Bank.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of FinPro, Inc.
23.3 Consents of Hogan & Hartson L.L.P. (contained in Exhibit 5.1 and
Exhibit 8.1).*
23.4 Consent of William M. Mercer, Inc. *
27 Financial Data Schedule.
99.1 Appraisal Report of FinPro, Inc. *
99.2 Form of marketing materials to be used in connection with the offerings.*
- ------------
* To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement;
II-3
<PAGE> 181
(iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) To provide to the underwriter at the closing
specified in the underwriting agreements, certificates in such denominations
and registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE> 182
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Troy, New York, on
December 11, 1998.
TROY FINANCIAL CORPORATION
(Registrant)
By: /s/ Daniel J. Hogarty, Jr.
-----------------------------------------
Daniel J. Hogarty, Jr.
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose
signature appears below hereby constitutes and appoints Daniel J. Hogarty, Jr.
and Kevin M. O'Bryan, and each and either of them, such individual's true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, to sign this Registration Statement and any and all
amendments thereto, and to file the same with the Securities and Exchange
Commission, with all exhibits thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as such person might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or either of
them or any substitute therefor, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on December 11, 1998.
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
/s/ Daniel J. Hogarty, Jr.
- ----------------------------
Daniel J. Hogarty, Jr. President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Edward M. Maziejka, Jr.
- ----------------------------
Edward M. Maziejka, Jr. Chief Financial Officer
(Principal Financial Officer)
/s/ George H. Arakelian
- ----------------------------
George H. Arakelian Director
/s/ Richard B. Devane
- ----------------------------
Richard B. Devane Director
</TABLE>
II-5
<PAGE> 183
<TABLE>
<S> <C>
/s/ Michael E. Fleming
- ----------------------------
Michael E. Fleming Director
/s/ Willie A. Hammett
- ----------------------------
Willie A. Hammett Director
/s/ Thomas B. Healy
- ----------------------------
Thomas B. Healy Director
/s/ Keith D. Millsop
- ----------------------------
Keith D. Millsop Director
/s/ Edward G. O'Haire
- ----------------------------
Edward G. O'Haire Director
/s/ Marvin L. Wulf
- ----------------------------
Marvin L. Wulf Director
</TABLE>
II-6
<PAGE> 184
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------ -------- ------
<S> <C>
1.1 Engagement Letter, dated as of July 15, 1998, between The Troy Savings Bank and Sandler O'Neill & Partners, L.P.
1.2 Form of Agency Agreement between Troy Financial Corporation, The Troy Savings Bank and Sandler O'Neill & Partners, L.P.*
2 Amended and Restated Plan of Conversion of The Troy Savings Bank, dated July 15, 1998, and amended on December 10, 1998.
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 hereto).
4.2 Bylaws of the Company (filed as Exhibit 3.2 hereto).
4.3 Form of stock certificate of Troy Financial Corporation.
5.1 Opinion of Hogan & Hartson L.L.P.*
8.1 Opinion of Hogan & Hartson L.L.P. as to certain federal income tax matters. *
8.2 Opinion of KPMG Peat Marwick LLP as to certain New York State tax matters. *
8.3 Opinion of FinPro, Inc. as to value of subscription rights.
10.1 The Troy Savings Bank 401(k) Savings Plan. *
10.2 Form of Executive Officer Employment Agreement.*
10.3 Form of Employment Protection Agreement. *
10.4 Form of Severance Compensation Plan. *
10.5 Form of Supplemental Retirement and Benefits Restoration Plan. *
10.6 Engagement Letter, dated as of September 16, 1998, between The Troy Savings Bank and FinPro, Inc., for conversion
appraisal services and services related to the preparation of the business plan of The Troy Savings Bank.
10.7 Engagement Letter, dated as of July 15, 1998, between The Troy Savings Bank and Sandler O'Neill & Partners, L.P., for
conversion agent services.
21 Subsidiaries of The Troy Savings Bank.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of FinPro, Inc.
</TABLE>
II-7
<PAGE> 185
<TABLE>
<S> <C>
23.3 Consents of Hogan & Hartson L.L.P. (contained in Exhibit 5.1 and Exhibit 8.1).*
23.4 Consent of William M. Mercer, Inc. *
27 Financial Data Schedule.
99.1 Appraisal Report of FinPro, Inc. *
99.2 Form of marketing materials to be used in connection with the offerings. *
</TABLE>
- ------------
* To be filed by amendment.
II-8
<PAGE> 1
EXHIBIT 1.1
July 15, 1998
Mr. Daniel J. Hogarty
President and Chief Executive Officer
The Troy Savings Bank
32 2nd Street
Troy, New York 12180
Dear Mr. Hogarty:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill"), is pleased to act as
an independent financial advisor to The Troy Savings Bank (the "Bank") in
connection with the Bank's proposed conversion from mutual to stock form (the
"Conversion"), including the offer and sale of certain shares of the common
stock of the proposed new holding company for the Bank (the "Holding Company")
to the Bank's eligible account holders in a Subscription Offering, to members of
the Bank's community in a Direct Community Offering and, under certain
circumstances, to the general public in a Syndicated Community Offering
(collectively, the "Offerings"). For purposes of this letter, the term "Actual
Purchase Price" shall mean the price at which the shares of the Holding
Company's common stock are sold in the Conversion. This letter is to confirm the
terms and conditions of our engagement.
ADVISORY SERVICES
Sandler O'Neill will act as a consultant and advisor to the Bank and the
Holding Company and will work with the Bank's management, counsel, accountants
and other advisors in connection with the Conversion and the Offerings. We
anticipate that our services will include the following, each as may be
necessary and as the Bank may reasonably request:
1. Consulting as to the securities marketing implications of any aspect
of the Plan of Conversion or related corporate documents;
2. Reviewing with the Board of Directors the independent appraiser's
appraisal of the common stock, particularly with regard to aspects
of the appraisal involving the methodology employed;
3. Reviewing all offering documents, including the Prospectus, stock
order forms and related offering materials (it being understood that
preparation and filing of such documents will be the responsibility
of the Bank and the Holding Company and their counsel);
4. Assisting in the design and implementation of a marketing strategy
for the Offerings;
<PAGE> 2
5. Assisting in obtaining all requisite regulatory approvals;
6. Assisting Bank management in scheduling and preparing for meetings
with potential investors and broker-dealers; and
7. Providing such other general advice and assistance as may be
requested to promote the successful completion of the Conversion.
SYNDICATED COMMUNITY OFFERING
If any shares of the Holding Company's common stock remain available after
the expiration of the Subscription Offering and the Direct Community Offering,
at the request of the Bank and subject to the continued satisfaction of the
conditions set forth in the second paragraph under the caption "Definitive
Agreement" below, Sandler O'Neill will seek to form a syndicate of registered
dealers to assist in the sale of such common stock in a Syndicated Community
Offering on a best efforts basis, subject to the terms and conditions set forth
in a selected dealers agreement. Sandler O'Neill will endeavor to limit the
aggregate fees to be paid by the Bank under any such selected dealers agreement
to an amount competitive with gross underwriting discounts charged at such time
for underwritings of comparable amounts of stock sold at a comparable price per
share in a similar market environment, which shall not exceed 5% of the
aggregate Actual Purchase Price of the shares sold under such agreements.
Sandler O'Neill will endeavor to distribute the common stock among dealers in a
fashion which best meets the distribution objectives of the Bank and the
requirements of the Plan of Conversion, which may result in limiting the
allocation of stock to certain selected dealers. It is understood that in no
event shall Sandler O'Neill be obligated to act as a selected dealer or to take
or purchase any shares of the Holding Company's common stock.
FEES
If the Conversion is consummated, the Bank agrees to pay Sandler O'Neill
for its services hereunder the fees set forth below:
1. a fee of one and one-tenth percent (1.10%) of the aggregate Actual
Purchase Price of the shares of common stock sold in the
Subscription Offering and in the Direct Community Offering,
excluding in each case shares purchased by (i) any employee benefit
plan of the Holding Company or the Bank established for the benefit
of their respective directors, officers and employees, and (ii) any
trustee, director, officer or employee of the Holding Company, the
Bank or any of the Bank's subsidiaries or members of their immediate
families, and the Bank's general counsel, Lambert L. Ginsberg; and
2. with respect to any shares of the Holding Company's common stock
sold by an NASD member firm (other than Sandler O'Neill) under any
selected dealers agreement in the Syndicated Community Offering, (a)
the sales commission payable to the selected dealer under such
agreement, (b) any sponsoring dealer's
2
<PAGE> 3
fees, and (c) a management fee to Sandler O'Neill of one and
one-tenth percent (1.10%). Any fees payable to Sandler O'Neill for
common stock sold by Sandler O'Neill under any such agreement shall
be limited to an aggregate of one and one-tenth percent (1.10%) of
the Actual Purchase Price of such shares.
If (i) Sandler O'Neill's engagement hereunder is terminated for any of the
reasons provided for under the second paragraph of the section of this letter
captioned "Definitive Agreement," or (ii) the Conversion is terminated by the
Bank, no fees shall be payable by the Bank to Sandler O'Neill hereunder;
however, the Bank shall reimburse Sandler O'Neill for its reasonable
out-of-pocket expenses incurred in connection with its engagement hereunder.
All fees payable to Sandler O'Neill hereunder shall be payable in cash by
wire transfer at the time of the closing of the Conversion. In recognition of
the long lead times involved in the conversion process, the Bank agrees to make
advance payments to Sandler O'Neill in the aggregate amount of $50,000, $25,000
of which shall be payable upon execution of this letter and the remaining
$25,000 of which shall be payable upon commencement of the Subscription
Offering, which shall be credited against any fees or reimbursement of expenses
payable hereunder.
COSTS AND EXPENSES
In addition to any fees that may be payable to Sandler O'Neill hereunder
and the expenses to be borne by the Bank pursuant to the following paragraph,
the Bank agrees to reimburse Sandler O'Neill, upon request made from time to
time, after giving effect to the credit referred to in the last paragraph on the
preceding page hereof, for its reasonable out-of-pocket expenses incurred in
connection with its engagement hereunder, regardless of whether the Conversion
is consummated, including, without limitation, legal fees and expenses (not to
exceed $150,000), advertising, promotional, syndication, and travel expenses;
provided, however, that Sandler O'Neill shall document such expenses to the
reasonable satisfaction of the Bank. The provisions of this paragraph are not
intended to apply to or in any way impair the indemnification provisions of this
letter.
As is customary, the Bank will bear all other expenses incurred in
connection with the Conversion and the Offerings, including, without limitation,
(i) the cost of obtaining all securities and bank regulatory approvals,
including any required NASD filing fees; (ii) the cost of printing and
distributing the offering materials; (iii) the costs of blue sky qualification
(including fees and expenses of blue sky counsel) of the shares in the various
states; (iv) listing fees; and (v) all fees and disbursements of the Bank's and
the Holding Company's counsel, accountants, conversion agent and other advisors.
In the event Sandler O'Neill incurs any such fees and expenses on behalf of the
Bank or the Holding Company, the Bank will reimburse Sandler O'Neill for such
fees and expenses whether or not the Conversion is consummated, after giving
effect to the credit referred to in the last paragraph on the preceding page
hereof; provided, however, that Sandler O'Neill shall not incur any substantial
expenses on behalf of the Bank or the Holding Company pursuant to this paragraph
without the prior approval of the Bank.
3
<PAGE> 4
DUE DILIGENCE REVIEW
Sandler O'Neill's obligation to perform the services contemplated by this
letter shall be subject to the satisfactory completion of such investigation and
inquiries relating to the Bank and the Holding Company, and their respective
directors, officers, agents and employees, as Sandler O'Neill and its counsel in
their sole discretion may deem appropriate under the circumstances. In this
regard, the Bank agrees that, at its expense, it will make available to Sandler
O'Neill all information which Sandler O'Neill requests, and will allow Sandler
O'Neill the opportunity to discuss with the Bank's and the Holding Company's
management the financial condition, business and operations of the Bank and the
Holding Company. The Bank and the Holding Company acknowledge that Sandler
O'Neill will rely upon the accuracy and completeness of all information received
from the Bank and the Holding Company and their directors, trustees and
authorized officers, employees, agents, independent accountants and counsel.
BLUE SKY MATTERS
The Bank agrees that if Sandler O'Neill's counsel does not serve as
counsel with respect to blue sky matters in connection with the Offerings, the
Bank will cause the counsel performing such services to prepare a Blue Sky
Memorandum related to the Offerings including Sandler O'Neill's participation
therein and shall furnish Sandler O'Neill a copy thereof addressed to Sandler
O'Neill or upon which such counsel shall state Sandler O'Neill may rely.
CONFIDENTIALITY
Other than disclosure to other firms made part of any syndicate of
selected dealers or as required by law or regulation, Sandler O'Neill agrees
that it will not disclose any Confidential Information relating to the Bank
obtained in connection with its engagement hereunder (whether or not the
Conversion is consummated). As used in this paragraph, the term "Confidential
Information" shall not include information which (i) is or becomes generally
available to the public other than as a result of a disclosure by Sandler
O'Neill, (ii) was available to Sandler O'Neill on a non-confidential basis prior
to its disclosure to Sandler O'Neill by the Bank, or (iii) becomes available to
Sandler O'Neill on a non-confidential basis from a person other than the Bank
who is not otherwise known to Sandler O'Neill to be bound not to disclose such
information pursuant to a contractual, legal or fiduciary obligation.
INDEMNIFICATION
Since Sandler O'Neill will be acting on behalf of the Bank and the Holding
Company in connection with the Conversion, the Holding Company and the Bank
agree to indemnify and hold Sandler O'Neill and its affiliates and their
respective partners, directors, officers, employees, agents and controlling
persons within the meaning of Section 15 of the Securities Act of 1933 or
Section 20 of the Securities Exchange Act (Sandler O'Neill and each such person
being an "Indemnified Party") harmless from and against any and all losses,
claims, damages and liabilities, joint or several, to which such Indemnified
Party may become subject under applicable federal or state law, or otherwise,
related to or arising out of the Conversion or the
4
<PAGE> 5
engagement of Sandler O'Neill pursuant to, or the performance by Sandler O'Neill
of the services contemplated by, this letter, and will reimburse any Indemnified
Party for all expenses (including reasonable legal fees and expenses) as they
are incurred, including expenses incurred in connection with the investigation
of, preparation for or defense of any pending or threatened claim or any action
or proceeding arising therefrom, whether or not such Indemnified Party is a
party; provided, however, that the Bank and the Holding Company will not be
liable in any such case to the extent that any such loss, claim, damage,
liability or expense (i) arises out of or is based upon any untrue statement of
a material fact or the omission of a material fact required to be stated therein
or necessary to make not misleading any statements contained in any proxy
statement or prospectus (preliminary or final), or any amendment or supplement
thereto, or any of the applications, notices, filings or documents related
thereto made in reliance on and in conformity with written information furnished
to the Bank by Sandler O'Neill expressly for use therein, or (ii) is primarily
attributable to the gross negligence, willful misconduct or bad faith of Sandler
O'Neill. If the foregoing indemnification is unavailable for any reason, the
Bank and the Holding Company agree to contribute to such losses, claims,
damages, liabilities and expenses in the proportion that its financial interest
in the Conversion bears to that of Sandler O'Neill.
DEFINITIVE AGREEMENT
Sandler O'Neill and the Bank agree that (a) except as set forth in clause
(b), the foregoing represents the general intention of the Bank and Sandler
O'Neill with respect to the services to be provided by Sandler O'Neill in
connection with the Offerings, which will serve as a basis for Sandler O'Neill
commencing activities, and (b) the only legal and binding obligations of the
Bank, the Holding Company and Sandler O'Neill with respect to the subject matter
hereof shall be (1) the Bank's obligation to reimburse costs and expenses
pursuant to the section captioned "Costs and Expenses," (2) those set forth
under the captions "Confidentiality" and "Indemnification," and (3) as set
forth in a duly negotiated and executed definitive Agency Agreement to be
entered into prior to the commencement of the Subscription Offering relating to
the services of Sandler O'Neill in connection with the Offerings. Such Agency
Agreement shall be in form and content satisfactory to Sandler O'Neill, the Bank
and the Holding Company and their respective counsel and shall contain standard
indemnification provisions consistent herewith.
Sandler O'Neill's execution of such Agency Agreement shall also be subject
to (i) Sandler O'Neill's satisfaction with its investigation of the Bank's
business, financial condition and results of operations, (ii) preparation of
offering materials that are reasonably satisfactory to Sandler O'Neill and its
counsel, (iii) compliance with all relevant legal and regulatory requirements to
the reasonable satisfaction of Sandler O'Neill's counsel, (iv) agreement that
the price established by the independent appraiser is reasonable and (v) market
conditions at the time of the proposed offering. Sandler O'Neill may terminate
this agreement if such Agency Agreement is not entered into prior to December
31, 1999.
ELIMINATION OF HOLDING COMPANY
5
<PAGE> 6
If the Board of Directors of the Bank, for any reason, elects not to proceed
with the formation of the Holding Company but determines to proceed with the
Conversion and substitute the common stock of the Bank for the common stock of
the Holding Company, all of the provisions of this letter relating to the common
stock of the Holding Company will be deemed to pertain to the common stock of
the Bank on the same terms and conditions that such provisions pertain to the
common stock of the Holding Company and all of the references in this letter to
the Holding Company shall be deemed to refer to the Bank or shall have no
effect, as the context of the reference requires.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sandler O'Neill the duplicate copy of this letter
enclosed herewith.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Mark B. Cohen
-------------------------
Mark B. Cohen
Vice President
Accepted and agreed to as of
the date first above written:
The Troy Savings Bank
By: /s/ Daniel J. Hogarty
-------------------------------------
Mr. Daniel J. Hogarty
President and Chief Executive Officer
cc: Mr. Stuart G. Stein
Hogan & Hartson
6
<PAGE> 1
EXHIBIT 2
AMENDED AND RESTATED
PLAN OF CONVERSION
THE TROY SAVINGS BANK
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Introduction.................................................................................1
2. Definitions..................................................................................2
3. Procedure For Conversion.....................................................................5
4. Holding Company Applications And Approvals...................................................7
5. Sale Of Conversion Stock.....................................................................7
6. Number Of Shares And Purchase Price Of Conversion Stock......................................7
7. Purchase By The Holding Company Of The Stock Of The Savings Bank.............................9
8. Subscription Rights Of Eligible Account Holders (First Priority).............................9
9. Subscription Rights Of The Employee Plans (Second Priority).................................10
10. Subscription Rights Of Supplemental Eligible Account Holders (Third Priority)...............10
11. Community Offering (Fourth Priority)........................................................11
12. Syndicated Community Offering Or Public Offering............................................11
13. Limitation On Purchases.....................................................................12
14. Payment For Conversion Stock................................................................14
15. Manner Of Exercising Subscription Rights Through Order Forms................................15
16. Undelivered, Defective Or Late Order Form: Insufficient Payment.............................16
17. Restrictions On Resale Or Subsequent Disposition............................................16
18. Voting Rights Of Stockholders...............................................................17
19. Establishment Of Liquidation Account........................................................17
20. Transfer Of Deposit Accounts And Continuity Of The Savings Bank.............................18
21. Restrictions On Acquisition Of The Savings Bank And Holding Company.........................18
22. Payment Of Dividends And Repurchase Of Stock................................................19
23. Amendment Of Plan...........................................................................19
24. Organization Certificate And Bylaws.........................................................20
25. Consummation Of Conversion..................................................................20
26. Registration And Marketing..................................................................20
27. Residents Of Foreign Countries And Certain States...........................................20
28. Establishment And Funding Of The Troy Savings Bank Community Foundation.....................20
29. Expenses Of Conversion......................................................................21
30. Conditions To Conversion....................................................................21
31. Interpretation..............................................................................21
</TABLE>
- i -
<PAGE> 3
AMENDED AND RESTATED
PLAN OF CONVERSION
THE TROY SAVINGS BANK
1. INTRODUCTION
This Plan of Conversion ("Plan") provides for the conversion of The
Troy Savings Bank, Troy, New York (the "Savings Bank"), from the mutual to stock
form as a New York-chartered capital stock savings bank under the name "The Troy
Savings Bank." In adopting this Plan, the Board of Trustees of the Savings Bank
also has determined that upon the conversion of the Savings Bank to the stock
form of organization, all of the stock of the Savings Bank should be owned by a
financial institution holding company organized as a Delaware corporation (the
"Holding Company").
The Board of Trustees has carefully considered the corporate
structures and charter alternatives available to the Savings Bank, including
maintaining the Savings Bank's current form. Based on this evaluation, the Board
has determined that the mutual to stock conversion, and concurrent holding
company formation described in this Plan, is in the best interests of the
Savings Bank, its depositors and the community served by the Savings Bank. If
the concurrent holding company formation cannot be accomplished, the Board of
Trustees still believes that the mutual to stock conversion described in this
Plan is in the best interests of the Savings Bank, its depositors and the
community served by the Savings Bank.
The conversion of the Savings Bank into the capital stock form of
organization will provide additional capital for the Savings Bank to invest in
the improvement and expansion of its franchise, and to compete more effectively
with other financial institutions and financial service providers. The
conversion also will provide the Savings Bank greater flexibility to access the
capital markets. The Holding Company also provides greater organizational and
operating flexibility.
In the conversion, the Holding Company will acquire all of the issued
and outstanding shares of the Savings Bank's equity capital stock. The Holding
Company will offer the Conversion Stock (such term, and other capitalized terms
used herein and not otherwise defined, are as defined in Section 2 below) upon
the terms and conditions set forth herein to the Eligible Account Holders, the
Employee Plans established by the Savings Bank or Holding Company and the
Supplemental Eligible Account Holders in the respective priorities set forth in
this Plan. Any shares of Conversion Stock not subscribed for by the foregoing
classes of persons will be offered for sale to certain members of the public
directly through a Community Offering or a Syndicated Community Offering,
through an underwritten firm commitment public offering or through a combination
thereof. In the event that the Holding Company is not utilized, Conversion Stock
of the Savings Bank will be sold in the manner described above pursuant to the
priorities set forth in this Plan.
In addition to the foregoing, the Savings Bank and the Holding Company
intend to enter into employment or severance agreements with certain employees
and to provide certain other benefits to the trustees, officers and employees of
the Savings Bank as described in the Prospectus for the Conversion Stock.
This Plan provides that, immediately following the Conversion, the
Holding Company (or the Savings Bank, as the case may be) intends to establish
and donate to The Troy Savings Bank Community Foundation a number of shares of
its authorized but unissued common stock in an amount equal to 8% of the common
stock issued in the Conversion (approximately 7.4% of the common stock
outstanding after such issuance). It is the desire of the Board of Trustees that
the Foundation be operated in a manner consistent with the purposes described
herein, and so as to
1
<PAGE> 4
allow the Savings Bank's local community to share in the growth and
profitability of the Holding Company and the Savings Bank over the long term.
This Plan has been unanimously approved by the Board of Trustees of
the Savings Bank present at a meeting duly called under the Savings Bank's
Bylaws, and pursuant to the notice requirements (or waiver thereof) of Part 86
of the General Regulations of the New York Banking Board. The Plan must also be
approved by the affirmative vote of at least a majority of the amount of votes
eligible to be cast at the Special Meeting. The Board of Trustees shall appoint
an independent custodian and tabulator to receive and hold proxies to be voted
at the Special Meeting and count the votes cast in favor of and in opposition to
the Plan. Prior to the submission of this Plan to the Voting Depositors for
consideration, the Plan must be approved by the Superintendent and certain
waivers must be granted by the Superintendent or the Banking Board. The Plan
also must be not objected to by the FDIC.
2. DEFINITIONS
For the purposes of this Plan, the following underlined terms have the
following meanings:
Account Holder: any Person holding a Deposit Account in the Savings
Bank.
Acting in Concert: (i) knowing participation in a joint activity or
interdependent conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or (ii) a combination or pooling of voting or
other interests in the securities of an issuer for a common purpose pursuant to
any contract, understanding, relationship, agreement or other arrangement,
whether written or otherwise. In addition to the foregoing, a person or company
which acts in concert with another person or company ("other party") shall also
be deemed to be acting in concert with any person or company who is also acting
in concert with that other party, except that any Tax-Qualified Employee Stock
Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan will not be deemed
to be acting in concert with any other Tax-Qualified Employee Stock Benefit Plan
or Non-Tax-Qualified Employee Stock Benefit Plan or with its trustee or a person
who serves in a similar capacity solely for the purpose of determining whether
stock held by the trustee and stock held by the plan will be aggregated.
Actual Purchase Price: the per share price at which the Conversion
Stock is ultimately sold in accordance with the terms hereof.
Associate: when used to indicate a relationship with any Person, (i)
any corporation or organization (other than the Holding Company, the Savings
Bank or a majority-owned subsidiary of the Savings Bank or the Foundation) of
which such Person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of equity securities, (ii) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as trustee or in a similar fiduciary capacity,
except that: (a) for the purposes of Sections 8 and 11 hereof, the term
"Associate" does not include any Non-Tax-Qualified Employee Stock Benefit Plan
or any Tax-Qualified Employee Stock Benefit Plan in which a person has a
substantial beneficial interest or serves as a trustee or in a similar fiduciary
capacity; and (b) for purposes of aggregating total shares that may be held by
Officers and Directors, the term "Associate" does not include any Tax-Qualified
or Non-Tax-Qualified Employee Stock Benefit Plan, and (iii) any relative or
spouse of such Person, or any relative of such spouse, who has the same home as
such Person or who is a Trustee, Director or Officer of the Savings Bank or the
Holding Company, if utilized, or any of its parents or subsidiaries.
Banking Law: the Banking Law of the State of New York.
2
<PAGE> 5
Banking Board: the Banking Board of the State of New York.
Community Offering: the offering for sale to certain members of the
general public directly by the Savings Bank or the Holding Company, as the case
may be, of any shares not subscribed for in the Subscription Offering.
Conversion: the (a) restatement of the Savings Bank's Organization
Certificate to authorize the issuance of capital stock in accordance with the
Banking Law and the Conversion Regulations, and to otherwise conform to the
requirements of a New York stock savings bank, and (b) the issuance of the
capital stock of the Savings Bank in accordance with this Plan.
Conversion Regulations: Part 86 of the General Regulations of the New
York Banking Board and the applicable conversion regulations of the FDIC.
Conversion Stock: the common stock, par value $.0001 per share,
offered and issued by the Holding Company, or the common stock, par value $.01
per share, offered and issued by the Savings Bank if the Holding Company form of
organization is not utilized, upon Conversion.
Deposit Account: all deposits of the Savings Bank as defined in
Section 9019 of the Banking Law of New York, and includes without limitation,
savings, time, demand, negotiable orders of withdrawal ("NOW"), money market and
passbook accounts maintained by the Savings Bank.
Effective Date: the effective date of the Conversion, which shall be
the date set forth in Section 25.
Eligible Account Holder: any person holding a Qualifying Deposit at
the Savings Bank on the Eligibility Record Date.
Eligibility Record Date: the date for determining Eligible Account
Holders in the Savings Bank, which date is June 30, 1997.
Employees: The term Employees means all Persons who are employed by
the Savings Bank.
Employee Plans: the Tax-Qualified Employee Stock Benefit Plans,
including the Employee Stock Ownership Plan ("ESOP"), approved or ratified by
the Board of Trustees of the Savings Bank or the Board of Directors of the
Holding Company, as the case may be.
Estimated Price Range: the range of minimum and maximum aggregate
values determined by the Board of Trustees of the Savings Bank within which the
aggregate amount of common stock sold in the Conversion will fall. The Estimated
Price Range will be within the estimated pro forma market value of the
Conversion Stock as determined by the Independent Appraiser prior to the
Subscription Offering and as it may be amended from time to time thereafter.
FDIC: the Federal Deposit Insurance Corporation.
Foundation: The Troy Savings Bank Community Foundation, a charitable
foundation that is intended to qualify as an exempt organization under Section
501(c)(3) of the Internal Revenue Code, and is being established to provide for
charitable activities.
Holding Company: the Delaware-chartered corporation formed for the
purpose of acquiring all of the shares of capital stock of the Savings Bank to
be issued upon its conversion to stock form, unless the Holding Company
structure is not utilized. Shares of common stock of the
3
<PAGE> 6
Holding Company will be issued in the Conversion to Participants and others in a
Subscription, Community, Syndicated Community, or Public Offering, or through a
combination thereof.
Independent Appraiser: an appraiser retained by the Savings Bank to
prepare an appraisal of the pro forma market value of the Conversion Stock.
Internal Revenue Code: the Internal Revenue Code of 1986, as amended.
Savings Bank: The Troy Savings Bank, Troy, New York.
Maximum Subscription Price: the amount per share of Conversion Stock
to be paid initially by Participants in the Subscription Offering and persons in
the Community Offering.
Non-Tax-Qualified Employee Stock Benefit Plan: any defined benefit
plan or defined contribution plan which is not a Tax-Qualified Employee Stock
Benefit Plan.
Officer: an executive officer of the Savings Bank, which includes the
Chief Executive Officer, President, any Executive Vice President, Senior Vice
President, or Vice President in charge of principal business functions,
Secretary, Treasurer and Controller, and any Person participating in major
policy making functions of the Savings Bank.
Order Form: any form together with attached cover letter, sent by the
Savings Bank to any Participant or Person containing among other things a
description of the alternatives available to such Person under the Plan and by
which any such Person may make elections regarding subscriptions for Conversion
Stock in the Subscription and Community Offerings.
Participants: the Employee Plans, Eligible Account Holders and
Supplemental Eligible Account Holders.
Person: an individual, a corporation, a partnership, an association, a
joint-stock company, a trust (including Individual Retirement Accounts and KEOGH
Accounts), any unincorporated organization, a government or political
subdivision thereof or any other entity.
Plan: this Plan of Conversion of the Savings Bank as it exists on the
date hereof and as it may hereafter be amended in accordance with its terms.
Prospectus: the offering circular or offering prospectus utilized to
offer for sale the Conversion Stock in accordance with the Plan of Conversion.
Public Offering: the underwritten, firm commitment offering to the
public through one or more underwriters.
Qualifying Deposit: the aggregate of one or more Deposit Accounts in
the Savings Bank with an aggregate balance of $100 or more at the close of
business on the Eligibility Record Date. Deposit Accounts with aggregate total
deposit balances of less than $100 shall not constitute a Qualifying Deposit.
SEC: the Securities and Exchange Commission.
Special Meeting: the special meeting of Voting Depositors, and any
adjournments thereof, held to consider and vote upon this Plan.
Subscription Offering: the offering of Conversion Stock for purchase
through Order Forms to Participants.
4
<PAGE> 7
Subscription Price Range: the per share price range established by the
Savings Bank prior to commencement of the Subscription and Community Offerings,
and based on the valuation of the Independent Appraiser.
Superintendent: the Superintendent of Banks of the State of New York,
including his or her designees.
Supplemental Eligibility Record Date: the supplemental record date for
determining Supplemental Eligible Account Holders of the Savings Bank, which
date shall be the last day of the calendar quarter preceding the
Superintendent's approval of the application for conversion.
Supplemental Eligible Account Holder: any person (other than an
Eligible Account Holder) holding a Qualifying Deposit, except Officers, Trustees
and their Associates, as of the Supplemental Eligibility Record Date.
Syndicated Community Offering: the offering of Conversion Stock
following the Subscription and Community Offerings through a syndicate of
broker-dealers.
Syndicated Community Offering Price: the per share price submitted
with orders for shares of Conversion Stock in the Syndicated Community Offering.
Tax-Qualified Employee Stock Benefit Plan: any defined benefit plan or
defined contribution plan, such as an employee stock ownership plan, stock bonus
plan, profit-sharing plan or other plan, which, with its related trust, meets
the requirements to be "qualified" under Internal Revenue Code Section 401. For
purposes of Section 9 of this Plan, the Savings Bank's profit sharing and/or
401(k) plan shall be considered a Tax-Qualified Employee Stock Benefit Plan only
to the extent of the unallocated funds, if any, over which investment authority
is vested solely with the trustee(s) of those plans. The Savings Bank or Holding
Company may make scheduled discretionary contributions to a Tax-Qualified
Employee Stock Benefit Plan provided such contributions do not cause the Savings
Bank to fail to meet its regulatory capital requirement.
Trustee: a member of the Board of Trustees of the Savings Bank.
Voting Depositors: those persons holding one or more Deposit Accounts
in the Savings Bank with an aggregate balance of $100 or more as of the Voting
Record Date.
Voting Record Date: the date fixed by the Trustees for determining
eligibility to vote at the Special Meeting, which date shall be (i) not more
than 60 nor less than 20 days prior to the date of such meeting, or (ii) with
approval of the Superintendent or the Banking Board and the FDIC, the
Supplemental Eligibility Record Date.
3. PROCEDURE FOR CONVERSION
The Plan has been duly approved by the Board of Trustees of the
Savings Bank. The Plan shall be submitted together with all other requisite
material to the Superintendent for approval or waiver by the Superintendent or
the Banking Board, if necessary, and shall be submitted to the FDIC with all
other requisite material for non-objection. Promptly after adoption of the Plan
by the Board of Trustees, the Savings Bank will cause notice of the adoption of
the Plan by the Board of Trustees of the Savings Bank to be conspicuously posted
at its principal office and at each of its branch offices and will also cause
notice of the adoption of the Plan to be published in a newspaper having general
circulation in each community in which an office of the Savings Bank is located
and will issue a press release containing the material terms of Conversion.
Following approval by the Superintendent and non-objection by the FDIC and
receipt of all necessary waivers by the
5
<PAGE> 8
Superintendent or the Banking Board, if necessary, the Plan will be submitted to
a vote of the Voting Depositors at the Special Meeting called for that purpose.
Voting Depositors will also be given the opportunity to request a copy of the
Plan and the proposed Restated Organization Certificate and proposed Bylaws. The
Special Meeting shall be held upon written notice given no less than 20 days nor
more than 45 days from the last date on which such Notice is mailed to Voting
Depositors. The notice of the Special Meeting, proxy card and proxy statement or
short-form proxy statement shall be sent to each Voting Depositor and shall be
accompanied by a Prospectus and Order Form. Separate and readily distinguishable
postage-paid envelopes shall be provided for the return of proxy cards and Order
Forms. At the Special Meeting, each Voting Depositor shall be entitled to cast
one vote in person or by proxy for every $100 such Voting Depositor had on
deposit with the Savings Bank as of the Voting Record Date; provided, however,
that no Voting Depositor shall be eligible to cast more than one thousand votes.
The Superintendent shall be notified of the results of the Special
Meeting within five days after the conclusion of the Special Meeting by a
certificate signed by the Chief Executive Officer and Secretary of the Savings
Bank. The Plan must be approved by the affirmative vote of at least a majority
of the amount of votes entitled to be cast at such Special Meeting. In such
event, the Savings Bank will take all other necessary steps to effect the
Conversion subject to the terms and conditions of this Plan. If the Plan is not
so approved at the Special Meeting and any adjournments thereof, the Plan shall
terminate, the Savings Bank will remain in mutual form and all funds submitted
in the Subscription Offering and Community Offering and Syndicated Community
Offering will be returned to subscribers, with interest as provided herein, and
all withdrawal authorizations will be canceled. The Conversion must be completed
within 24 months of the approval of the Plan by the Superintendent, unless a
longer time period is permitted by governing laws and regulations.
The Board of Trustees of the Savings Bank intends to take all
necessary steps to form the Holding Company, including the filing of an
application with the Superintendent and the appropriate regulatory authority
which will govern the activities of the Holding Company. In the event that the
Holding Company is utilized, upon conversion the Savings Bank will issue its
capital stock to the Holding Company and the Holding Company will issue and sell
the Conversion Stock in accordance with this Plan.
The Board of Trustees of the Savings Bank may determine for any reason
at any time prior to the issuance of the Conversion Stock not to utilize a
holding company form of organization in the Conversion, in which case the
Savings Bank will take all steps necessary to complete the conversion from the
mutual to the stock form of organization, including filing any necessary
documents with the Superintendent, FDIC and the appropriate regulatory authority
which otherwise would have governed the activities of the Holding Company, and
will issue and sell the Conversion Stock in accordance with this Plan. In such
event, any subscriptions or orders received for Conversion Stock of the Holding
Company shall be deemed to be subscriptions or orders for Conversion Stock of
the Savings Bank and the Savings Bank shall take such steps as permitted or
required by the Superintendent, FDIC or the SEC, as applicable. Unless the
context means otherwise, any references to the Holding Company in this Plan
shall mean the Savings Bank if the Holding Company structure is not used in the
Conversion.
The Conversion Stock will not be insured by the FDIC. The Savings Bank
will not knowingly lend funds or otherwise extend credit to any Person to
purchase shares of the Conversion Stock.
6
<PAGE> 9
4. HOLDING COMPANY APPLICATIONS AND APPROVALS
The Holding Company shall make timely applications for any requisite
regulatory approvals, including an application with the Superintendent and the
appropriate regulatory authority which will govern the activities of the Holding
Company, and shall file with the SEC a registration statement for the Conversion
Stock.
5. SALE OF CONVERSION STOCK
The Conversion Stock will be offered simultaneously in the
Subscription Offering to the Eligible Account Holders, Employee Plans and
Supplemental Eligible Account Holders in the respective priorities set forth in
Sections 8 through 10 of this Plan. The Subscription Offering may be commenced
as early as the mailing of the Proxy Statement for the Special Meeting and must
be commenced in time to complete the Conversion within the time period specified
in Section 3.
Any shares of Conversion Stock not subscribed for in the Subscription
Offering will be offered for sale in the Community Offering as provided in
Section 11 of this Plan. The Subscription Offering may be commenced prior to the
Special Meeting and, in that event, the Community Offering may also be commenced
prior to the Special Meeting and may commence concurrently with the Subscription
Offering. The offer and sale of Conversion Stock prior to the Special Meeting
shall, however, be conditioned upon approval of the Plan by the Voting
Depositors.
If feasible, any shares of Conversion Stock remaining after the
Subscription and Community Offerings will be sold in a Syndicated Community
Offering, or, alternatively, in a Public Offering, as determined by the Holding
Company and the Savings Bank, and as provided in Section 12 of this Plan. The
sale of all Conversion Stock subscribed for in the Subscription and Community
Offerings will be consummated simultaneously on the date the sale of Conversion
Stock in the Syndicated Community Offering or Public Offering is consummated and
only if all unsubscribed for Conversion Stock is sold.
The Savings Bank may elect to offer to pay fees on a per share basis
to qualifying brokers, as determined by the Savings Bank in its sole discretion,
who assist Persons in determining to purchase shares in the Subscription and
Community Offerings.
6. NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK
The total number of shares (or a range thereof) of Conversion Stock to
be offered and issued for sale will be determined jointly by the Board of
Trustees of the Savings Bank and Board of Directors of the Holding Company, if
the holding company form of organization is utilized, immediately prior to the
commencement of the Subscription and Community Offerings, subject to adjustment
thereafter if necessitated by market or financial conditions, with the approval
of the Superintendent and FDIC, if necessary. In particular, the total number of
shares may be increased by up to 15% of the number of shares initially offered
in the Subscription and Community Offering if the Estimated Price Range is
increased subsequent to the commencement of the Subscription and Community
Offering to reflect changes in market and financial conditions and the Actual
Purchase Price in the aggregate is not more than 15% above the maximum of the
Estimated Price Range.
All shares sold in the Conversion will be sold at a uniform price per
share referred to in this Plan as the Actual Purchase Price in accordance with
the Conversion Regulations. The aggregate purchase price for all shares of
Conversion Stock shall equal the estimated consolidated pro forma market value
of the Holding Company as of the Effective Date. The estimated consolidated pro
forma market value of the Savings Bank or the Holding Company, if utilized, will
be determined for such purpose by the Independent Appraiser in accordance with
the Conversion
7
<PAGE> 10
Regulations. Prior to the commencement of the Subscription and Community
Offerings, an Estimated Price Range will be established, which range will vary
within 15% above to 15% below the average of the minimum and maximum of such
price range. The number of shares of Conversion Stock to be issued and the
purchase price per share may be increased or decreased by the Savings Bank prior
to the Effective Date. In the event that the aggregate purchase price of the
Conversion Stock is below the minimum of the Estimated Price Range, or
materially above the maximum of the Estimated Price Range, resolicitation of
purchasers may be required, provided that up to a 15% increase above the maximum
of the Estimated Price Range will not be deemed material so as to require a
resolicitation. Any such resolicitation shall be effected in such manner and
within such time as the Savings Bank shall establish, with the approval of the
Superintendent and FDIC, if required. Up to a 15% increase in the number of
shares to be issued which is supported by an appropriate change in the estimated
pro forma market value of the Holding Company will not be deemed to be material
so as to require a solicitation of subscriptions.
Based upon the independent valuation as updated prior to the
commencement of the Subscription and Community Offerings, the Board of Directors
of the Holding Company, (if a holding company form of organization is utilized)
and the Board of Trustees of the Savings Bank will fix the Maximum Subscription
Price and the Subscription Price Range. If upon completion of the Subscription
and Community Offerings all of the Conversion Stock is subscribed for, or if
because of a limited number of unsubscribed shares or otherwise a Syndicated
Community Offering or Public Offering cannot be effected, the Actual Purchase
Price for each share of Conversion Stock will be jointly determined by the
Savings Bank and Holding Company (if a holding company form of organization is
utilized) as follows: (a) the estimated aggregate pro forma market value of the
Savings Bank or the Holding Company, as the case may be, immediately after
conversion as determined by the Independent Appraiser, expressed in terms of a
specific aggregate dollar amount rather than as a range, upon completion of the
Subscription and Community Offerings or other sale of all of the Conversion
Stock shall be divided by (b) the total number of shares of Conversion Stock to
be issued and sold.
If there is a Syndicated Community Offering or Public Offering of
shares of Conversion Stock not subscribed for in the Subscription and Community
Offerings, the price per share at which the Conversion Stock is sold in such
Syndicated Community Offering or Public Offering shall be not greater than the
maximum nor less than the minimum of the Subscription Price Range on a per share
basis as the Savings Bank may determine subject to approval by the
Superintendent and FDIC, if required. Upon consummation of the sale in the
Syndicated Community Offering or Public Offering of the shares of Conversion
Stock unsubscribed for in the Subscription and Community Offerings, the
Syndicated Community Offering or Public Offering Price will become the Actual
Purchase Price paid for all shares of Conversion Stock in the Subscription,
Community and Syndicated Community or Public Offerings.
Notwithstanding the foregoing, no sale of Conversion Stock may be
consummated unless, prior to such consummation, the Independent Appraiser
confirms to the Savings Bank and Holding Company, if utilized, and to the
Superintendent and FDIC, if required, that, to the best knowledge of the
Independent Appraiser, nothing of a material nature has occurred which, taking
into account all relevant factors, would cause the Independent Appraiser to
conclude that the aggregate value of the Conversion Stock at the Actual Purchase
Price is incompatible with its estimate of the aggregate consolidated pro forma
market value of the Holding Company or the Savings Bank if no Holding Company is
utilized. If such confirmation is not received, the Savings Bank may cancel the
Subscription and Community Offerings and/or the Syndicated Community Offering,
and/or the Public Offering, extend the Conversion, establish a new Subscription
Price Range and/or Estimated Price Range, extend, reopen or hold new
Subscription and Community Offerings and/or Syndicated Community Offering and/or
Public Offering or take such other action as the Superintendent and FDIC may
permit.
8
<PAGE> 11
The per share difference, if any, between the Actual Purchase Price
and the Maximum Subscription Price or amount submitted in the Syndicated
Community Offering or Public Offering, together with interest at the rate paid
by the Savings Bank on passbook accounts, will be refunded to all Persons who
shall have paid the Maximum Subscription Price or amount submitted in the
Syndicated Community Offering or the Public Offering for such shares, unless
such difference is applied to the purchase of additional whole shares in
accordance with the instructions of such Persons.
The Conversion Stock to be issued in the Conversion shall be fully
paid and nonassessable.
7. PURCHASE BY THE HOLDING COMPANY OF THE STOCK OF THE SAVINGS BANK
Upon the consummation of the sale of all of the Conversion Stock, and
in the event that a holding company form of organization is utilized, the
Holding Company will purchase from the Savings Bank all of the capital stock of
the Savings Bank to be issued by the Savings Bank in the conversion in exchange
for the Conversion proceeds that are not to be retained by the Holding Company.
The Holding Company will retain 50% of the proceeds of the Conversion.
Assuming the Holding Company is not eliminated, a lesser percentage may be
acceptable in the judgment of the Board of Trustees. The Savings Bank believes
that the Conversion proceeds will provide economic strength to the Holding
Company and the Savings Bank for the future in a highly competitive and
regulated environment and would facilitate the possible expansion through
acquisitions of financial service organizations, possible diversification into
other related businesses and for other business and investment purposes,
including the possible payment of dividends and possible future repurchases of
the Conversion Stock as permitted by the Superintendent. If during the
conversion process the Board of Trustees of the Savings Bank determines not to
complete the conversion utilizing a holding company form of organization,
capital stock of the Savings Bank will be issued and sold in accordance with the
Plan.
8. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
(i) Each Eligible Account Holder shall receive, without payment, as a
first priority, nontransferable subscription rights to subscribe for shares of
Conversion Stock equal to the amount permitted to be subscribed for in the
Community Offering, which amount, pursuant to Section 11, currently is $500,000
of the Conversion Stock, but which may be increased to 5.0% of the Conversion
Stock offered or decreased to 0.10% of the Conversion Stock offered without the
further approval of Voting Depositors or resolicitation of subscribers, subject
to the maximum purchase limitation specified in Section 13(i) and the minimum
purchase limitation in Section 13(iii).
(ii) In the event that Eligible Account Holders exercise Subscription
Rights for a number of shares of Conversion Stock in excess of the total number
of such shares eligible for subscription, the shares of Conversion Stock shall
be allocated among the subscribing Eligible Account Holders so as to permit each
subscribing Eligible Account Holder, to the extent possible, to purchase a
number of shares sufficient to make his or her total allocation of Conversion
Stock equal to the lesser of 100 shares or the number of shares subscribed for
by the Eligible Account Holder. Any shares remaining after that allocation will
be allocated among the subscribing Eligible Account Holders whose subscriptions
remain unsatisfied in the proportion that the amount of the Qualifying Deposit
of each remaining Eligible Account Holder whose subscription remains unsatisfied
bears to the total amount of the Qualifying Deposits of all subscribing Eligible
Account Holders whose subscriptions remain unsatisfied, provided, however, that
no fractional shares shall be issued. If any
9
<PAGE> 12
shares remain after the above allocations, such shares shall then be allocated
among those remaining Eligible Account Holders whose subscriptions remain
unfilled, on the same principle until all available shares have been allocated
or all subscriptions satisfied.
(iii) Subscription rights as Eligible Account Holders received by
Trustees and Officers and their Associates which are based on their increased
deposits in the Savings Bank during the one year period preceding the
Eligibility Record Date shall be subordinated to the Subscription Rights of all
other Eligible Account Holders.
9. SUBSCRIPTION RIGHTS OF THE EMPLOYEE PLANS (SECOND PRIORITY)
Each Tax Qualified Employee Stock Benefit Plan purchasing stock shall
receive, as second priority after the filling of subscriptions of Eligible
Account Holders, nontransferable subscription rights to purchase in the
Subscription Offering the number of shares of Conversion Stock requested by any
such plan, subject to the purchase limitations set forth in Section 13. If,
after the filling of subscriptions of Eligible Account Holders, a sufficient
number of shares of Conversion Stock is not available to fill the subscriptions
by any such plan, the subscription by such plan shall be filled to the maximum
extent possible.
The Tax Qualified Employee Stock Benefit Plans shall not be deemed to
be associates or affiliates of or Persons Acting in Concert with any Director,
Trustee or Officer of the Holding Company or the Savings Bank.
10. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD
PRIORITY)
(i) Each Supplemental Eligible Account Holder shall receive, as third
priority, after the filling of subscriptions of the Eligible Account Holders and
Employee Plans, nontransferable subscription rights to subscribe for shares of
Conversion Stock equal to the amount permitted to be subscribed for in the
Community Offering which amount, pursuant to Section 11, currently is $500,000
of the Conversion Stock, but which may be increased to 5.0% of the Conversion
Stock offered or decreased to less than 0.10% of the Conversion Stock offered
without the further approval of Voting Depositors or resolicitation of
subscribers, subject to the maximum purchase limitation specified in Section
13(i) and the minimum purchase limitation specified in Section 13(iii).
(ii) In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of Conversion Stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the remaining
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
remaining Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the Qualifying Deposits of all
remaining Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied provided, however, that no fractional shares shall be issued. If any
shares remain after the above allocations, such shares shall then be allocated
among those remaining Supplemental Eligible Account Holders whose subscriptions
remain unfilled on the same principle until all available shares have been
allocated or all subscriptions satisfied.
10
<PAGE> 13
(iii) Subscription rights received by an Eligible Account Holder
pursuant to Section 8 shall be applied in partial satisfaction of the
subscription rights to be received as a Supplemental Eligible Account Holder
pursuant to this Section 10.
11. COMMUNITY OFFERING (FOURTH PRIORITY)
If less than the total number of shares of Conversion Stock to be
subscribed for in the Conversion are sold in the Subscription Offering, it is
expected that shares remaining unsubscribed for will be made available for
purchase in the Community Offering as a fourth priority to certain members of
the general public, which may subscribe together with any Associate or group of
persons Acting in Concert for up to $500,000 of Conversion Stock subject to the
maximum purchase limitation specified in Section 13(i) and the minimum purchase
limitation specified in Section 13(iii); provided, however, that the amount
permitted to be purchased in the Community Offering may be increased to 5% or
decreased to 0.10% of the Conversion Stock offered without the further approval
of depositors. The shares may be made available in the Community Offering
through a direct community marketing program which may provide for utilization
of a broker, dealer, consultant or investment banking firm, experienced and
expert in the sale of savings banks securities. Such entities may be compensated
on a fixed fee basis or on a commission basis, or a combination thereof. In
offering the unsubscribed for shares to the public in the Community Offering,
the Holding Company and the Savings Bank may establish the relative preferences,
priorities, purchase limitations and allocation of shares among persons,
including Savings Bank investors, subscribing for shares. The Savings Bank may
establish all other terms and conditions of such offer. The Savings Bank shall
make distribution of the Conversion Stock to be sold in the Community Offering
in such a manner as to promote a wide distribution of Conversion Stock. The
Savings Bank reserves the right to reject any or all orders, in whole or in
part, which are received in the Community Offering.
It is expected that the Community Offering will commence concurrently
with the Subscription Offering. The Community Offering must be completed within
45 days after the completion of the Subscription Offering unless otherwise
extended with the approval of the Superintendent and FDIC, if necessary.
12. SYNDICATED COMMUNITY OFFERING OR PUBLIC OFFERING
If feasible, all shares of Conversion Stock not subscribed for in the
Subscription and Community Offerings will be sold in a Syndicated Community
Offering, subject to such terms, conditions and procedures as may be determined
by the Savings Bank, in a manner that will achieve the widest distribution of
the Conversion Stock subject to the right of the Savings Bank to accept or
reject in whole or in part all subscriptions in the Syndicated Community
Offering. In the Syndicated Community Offering, any person, together with any
Associate or group of persons Acting in Concert, may purchase up to $500,000 of
Conversion Stock subject to the maximum purchase limitation specified in Section
13(i) and the minimum purchase limitation specified in Section 13(iii);
provided, however, that this amount may be increased to 5% or decreased to 0.10%
of the Conversion Stock offered without the further approval of depositors. The
shares purchased by any Person together with any Associate or group of persons
Acting in Concert pursuant to Section 11 shall be counted toward meeting the
maximum purchase limitation found in this Section and Section 13. Provided that
the Subscription Offering has commenced, the Savings Bank may commence the
Syndicated Community Offering at any time after the mailing to the depositors of
the Proxy Statement to be used in connection with the Special Meeting, provided
that the completion of the offer and sale of the Conversion Stock shall be
conditioned upon the approval of this Plan by the Voting Depositors. If the
Syndicated Community Offering is not sooner commenced pursuant to the provisions
of the preceding sentence, the Syndicated Community Offering will be commenced
as soon as practicable following the date upon which the Subscription and
Community Offerings terminate.
11
<PAGE> 14
Alternatively, if a Syndicated Community Offering is not held, and the
Savings Bank and the Holding Company determine to continue the Conversion, the
Savings Bank shall have the right to sell any shares of Conversion Stock
remaining following the Subscription and Community Offerings in a Public
Offering. The provisions of Section 13 hereof shall not be applicable to sales
to underwriters for purposes of such an offering, but shall be applicable to the
sales by the underwriters to the public. The price to be paid by the
underwriters in such an offering shall be equal to the Actual Purchase Price
less an underwriting discount to be negotiated among such underwriters and the
Savings Bank, which will in no event exceed an amount deemed to be acceptable by
the Superintendent and FDIC, if necessary. The Holding Company and the
underwriters shall use reasonable efforts to assure that the stock to be offered
and sold in the Public Offering shall be offered and sold in a manner that, to
the extent practicable, will achieve a reasonably wide distribution of such
stock.
If for any reason a Syndicated Community Offering or Public Offering
of shares of Conversion Stock not sold in the Subscription and Community
Offerings cannot be effected, or in the event that any residue of shares of
Conversion Stock not exceeding one percent of the aggregate shares issued is not
sold in the Subscription and Community Offerings or in the Syndicated Community
or Public Offering, other arrangements will be made for the disposition of
unsubscribed for shares by the Savings Bank, if possible. Such other purchase
arrangements will be subject to the approval of the Superintendent and FDIC, if
necessary.
13. LIMITATION ON PURCHASES
In addition to the maximum amount of Conversion Stock that may be
subscribed for in Sections 8, 9, 10, 11, and 12, the following limitations shall
apply to all purchases of shares of Conversion Stock:
(i) The maximum number of shares of Conversion Stock which may be
subscribed for or purchased in all categories in the conversion by any Person or
Participant, together with any Associate or group or persons Acting in Concert,
shall not exceed 100,000, except for the Employee Plans which may subscribe
for up to 10% of the Conversion Stock issued; provided, however, that Trustees,
Directors and Officers of the Savings Bank and the Holding Company shall not
be deemed to be associates or acting together or in concert solely as a result
of their board membership or employment; and, provided further, that if the
maximum purchase limitation set forth in this Section 13(i) is increased to
more than 100,000 shares, orders for Conversion Stock in the Community
Offering, the Syndicated Community Offering or the Public Offering, if any,
shall, as determined by the Savings Bank and the Holding Company, first be
filled to a maximum of 100,000 shares and thereafter remaining shares shall be
allocated on an equal number of shares per order basis until all orders have
been filled.
(ii) The maximum number of shares of Conversion Stock which may be
purchased in all categories in the conversion by executive officers, Trustees
and Directors of both the Savings Bank and the Holding Company in the aggregate
shall not exceed 25% of the total number of shares of Conversion Stock issued.
(iii) A minimum of 25 shares of Conversion Stock must be purchased by
each Person purchasing shares in the Conversion to the extent those shares are
available; provided, however, that in the event the minimum number of shares of
Conversion Stock purchased times the price per share exceeds $500, then such
minimum purchase requirement shall be reduced to such number of shares which
when multiplied by the price per share shall not exceed $500, as determined by
the Board.
12
<PAGE> 15
If the number of shares of Conversion Stock otherwise allocable
pursuant to Sections 8 through 12, inclusive, to any Person or that Person's
Associates would be in excess of the maximum number of shares permitted as set
forth above, the number of shares of Conversion Stock allocated to each such
person shall be reduced to the lowest limitation applicable to that Person, and
then the number of shares allocated to each group consisting of a Person and
that Person's Associates shall be reduced so that the aggregate allocation to
that Person and his or her Associates complies with the above maximums, and such
maximum number of shares shall be reallocated among that Person and his or her
Associates as they may agree, or in the absence of an agreement, in proportion
to the shares subscribed by each (after first applying the maximums applicable
to each Person, separately).
Depending upon market or financial conditions, the Board of Trustees
of the Savings Bank and the Board of Directors of the Holding Company, with the
approval of the Superintendent and FDIC, if necessary, and without further
approval of the depositors, may (i) decrease the maximum purchase limitation
applicable to Persons to 0.10% of the Conversion Stock offered, provided,
however, the maximum purchase limitation applicable to all Persons, together
with Associates and Persons Acting in Concert, in the Subscription Offering may
not be decreased below 100,000 shares of Conversion Stock; (ii) decrease the
maximum purchase limitation applicable to Persons together with Associates and
Persons Acting in Concert in the Community or Syndicated Community Offering or
Public Offering to 0.10% of the Conversion Stock offered; or (iii) increase the
purchase limitations in this Plan, provided that no Person, together with
Associates and Persons Acting in Concert, may be permitted to acquire in excess
of 5% of the Conversion Stock offered. If the Savings Bank or the Holding
Company, as the case may be, increases the maximum purchase limitations, the
Savings Bank or the Holding Company, as the case may be, is only required to
resolicit Persons who subscribed for the maximum purchase amount and may, in the
sole discretion of the Savings Bank or the Holding Company, as the case may be,
resolicit certain other large subscribers. Requests to purchase additional
shares of the Conversion Stock in the event that the purchase limitation is so
increased will be determined by the Board of Trustees of the Savings Bank and
the Board of Directors of the Holding Company in their sole discretion.
Prior to the Effective Date of the Conversion, no Person shall offer
to transfer, or enter into any agreement or understanding to transfer, the legal
or beneficial ownership of any Subscription Rights or shares of Conversion
Stock, except pursuant to this Plan of Conversion. Each Person purchasing
Conversion Stock in the conversion shall be deemed to confirm that such purchase
does not conflict with the above purchase limitations contained in this Plan.
For a period of three years following the conversion, no Officer,
Trustee or Director (or any person who was an Officer, Trustee or Director at
any time after the date on which the Board of Trustees adopts this Plan) of the
Savings Bank or the Holding Company or their Associates shall, without the prior
written approval of the Superintendent, purchase or acquire direct or indirect
beneficial ownership of any outstanding shares of common stock of the Savings
Bank or the Holding Company, as the case may be, except from a broker-dealer
registered with the SEC. This provision shall not apply to the exercise of any
options pursuant to a stock option plan or purchases of common stock of the
Savings Bank or the Holding Company, as the case may be, made by or held by any
Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock
Benefit Plan of the Savings Bank or the Holding Company (including the Employee
Plans) which may be attributable to any Officer, Director or Trustee.
The Savings Bank will make reasonable efforts to comply with the
securities laws of all States in the United States in which Persons entitled to
subscribe for shares of Conversion Stock pursuant to the Plan reside. No Person
will be issued subscription rights or be permitted to purchase shares of
Conversion Stock in the Subscription Offering if such Person resides in a
foreign country.
13
<PAGE> 16
14. PAYMENT FOR CONVERSION STOCK
All payments for Conversion Stock subscribed for in the Subscription,
Community and Syndicated Community Offerings must be delivered in full to the
Savings Bank, together with a properly completed and executed Order Form, or
purchase order in the case of the Syndicated Community Offering, on or prior to
the expiration date specified on the Order Form or purchase order, as the case
may be, unless such date is extended by the Savings Bank; provided, however,
that if the Employee Plans subscribe for shares during the Subscription
Offering, such plans will not be required to pay for the shares at the time they
subscribe but rather may pay for such shares of Conversion Stock subscribed for
by such plans at the Actual Purchase Price upon consummation of the Conversion,
provided that, in the case of the ESOP, there is in force from the time of its
subscription until the consummation of the Conversion, a loan commitment from
the Holding Company or from an unrelated financial institution to lend to the
ESOP, at such time, the aggregated Maximum Subscription Price of the shares for
which it subscribed.
Notwithstanding the foregoing, the Savings Bank and the Holding
Company, if utilized, shall have the right, in their sole discretion, to permit
institutional investors to submit contractually irrevocable orders in the
Community Offering and to thereafter submit payment for the Conversion Stock for
which they are subscribing in the Community Offering at any time prior to 48
hours before the completion of the Conversion, unless such 48 hour period is
waived by the Savings Bank and the Holding Company in their sole discretion.
Payment for Conversion Stock subscribed for shall be made either in
cash (if delivered in person), check or money order. Alternatively, subscribers
in the Subscription and Community Offerings may pay for the shares subscribed
for by authorizing the Savings Bank on the Order Form to make a withdrawal from
the subscriber's Deposit Account at the Savings Bank in an amount equal to the
purchase price of such shares. Funds for which a withdrawal is authorized will
remain in the subscriber's Deposit Account but may not be used by the subscriber
until the Conversion Stock has been sold or the 45-day period (or such longer
period as may be approved by the Superintendent) following the Subscription and
Community Offering has expired, whichever occurs first. Thereafter, the
withdrawal will be given effect only to the extent necessary to satisfy the
subscription (to the extent it can be filled) at the Actual Purchase Price per
share. Interest will continue to be earned on any amounts authorized for
withdrawal until such withdrawal is given effect. Such authorized withdrawal
from a certificate account shall be without penalty as to premature withdrawal.
Any remaining balance in a Deposit Account will earn interest after such
withdrawal at the rate and manner applicable to such Deposit Account, provided,
that if the authorized withdrawal is from a certificate account, and the
remaining balance does not meet the applicable minimum balance requirement,
without penalty, the remaining balance will earn interest at the same rate and
manner as a comparable balance in a passbook account. If a certificate account
or other time account matures prior to the date the Conversion is completed or
terminated, funds placed under a hold in the account shall be transferred to a
statement savings account that will earn interest at the regular passbook rate.
Interest will be paid by the Savings Bank at not less than the passbook annual
rate on payments for Conversion Stock received in cash or by check. Such
interest will be paid from the date payment is received by the Savings Bank
until consummation or termination of the conversion. If for any reason the
conversion is not consummated, all payments made by subscribers in the
Subscription, Community and Syndicated Community Offerings will be refunded to
them with interest. In case of amounts authorized for withdrawal from Deposit
Accounts, refunds will be made by canceling the authorization for withdrawal.
The Savings Bank is prohibited by regulation from knowingly making any loans or
granting any lines of credit for the purchase of stock in the conversion, and
therefore, will not do so.
14
<PAGE> 17
15. MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
As soon as practicable after the Prospectus prepared by the Holding
Company and Savings Bank has been declared effective by the Superintendent, FDIC
and the SEC, if the holding company form of organization is utilized, Prospectus
and Order Forms will be distributed to the Employee Plans, all Eligible Account
Holders and Supplemental Eligible Account Holders at their last known addresses
appearing on the records of the Savings Bank for the purpose of subscribing to
shares of Conversion Stock in the Subscription Offering and will be made
available for use by those Persons entitled to purchase in the Community
Offering.
Each Order Form will be preceded or accompanied by a Prospectus
describing the Holding Company, if utilized, the Savings Bank, the Conversion
Stock and the Subscription and Community Offerings. Each Order Form will
contain, among other things, the following:
(i) A specified date by which all Order Forms must be received by the
Savings Bank, which date with respect to Eligible Account Holders and
Supplemental Eligible Account Holders shall be not less than five days following
the Special Meeting, unless a shorter period of time is approved by the
Superintendent and FDIC, if necessary, and which date will constitute the
termination of the Subscription Offering.
(ii) The Maximum Subscription Price per share for shares of Conversion
Stock to be sold in the Subscription and Community Offerings;
(iii) A description of the minimum and maximum number of shares of
Conversion Stock which may be subscribed for pursuant to the exercise of
Subscription Rights or otherwise purchased in the Community Offering;
(iv) Instructions as to how the recipient of the Order Form is to
indicate thereon the number of shares of Conversion Stock for which such person
elects to subscribe and the available alternative methods of payment therefor;
(v) An acknowledgment that the recipient of the Order Form has
received a final copy of the Prospectus prior to execution of the Order Form;
(vi) Specifically designated blank spaces for dating and signing the
Order Form;
(vii) Indicate the consequences of failing to properly complete and
return the Order Form, including a statement to the effect that all subscription
rights are nontransferable, will be void at the end of the Subscription
Offering, and can only be exercised by delivering within the subscription period
such properly completed and executed Order Form, together with cash (if
delivered in person), check or money order in the full amount of the purchase
price as specified in the Order Form for the shares of Conversion Stock for
which the recipient elects to subscribe in the Subscription Offering (or by
authorizing on the Order Form that the Savings Bank withdraw said amount from
the subscriber's Deposit Account at the Savings Bank) to the Savings Bank; and
(viii) A statement to the effect that the executed Order Form, once
received by the Savings Bank, may not be modified or amended by the subscriber
without the consent of the Savings Bank.
Notwithstanding the above, the Savings Bank and the Holding Company
reserve the right in their sole discretion to accept or reject orders received
on photocopied or facsimilied order forms.
15
<PAGE> 18
16. UNDELIVERED, DEFECTIVE OR LATE ORDER FORM: INSUFFICIENT PAYMENT
In the event Order Forms (a) are not delivered and are returned to the
Savings Bank by the United States Postal Service or the Savings Bank is unable
to locate the addressee, (b) are not received back by the Savings Bank or are
received by the Savings Bank after the expiration date specified thereon, (c)
are defectively filled out or executed, (d) are not accompanied by the full
required payment, or, in the case of Savings Bank investors in the Community
Offering, by delivering irrevocable orders together with a legally binding
commitment to pay in cash, check, money order or wire transfer the full amount
of the purchase price prior to 48 hours before the completion of the Conversion,
unless waived by the Savings Bank, for the shares of Conversion Stock subscribed
for (including cases in which deposit accounts from which withdrawals are
authorized are insufficient to cover the amount of the required payment), or (e)
are not mailed pursuant to a "no mail" order placed in effect by the Eligible
Account Holder or Supplemental Eligible Account Holder, the subscription rights
of the person to whom such rights have been granted will lapse as though such
person failed to return the contemplated Order Form within the time period
specified thereon; provided, however, that the Savings Bank may, but will not be
required to, waive any immaterial irregularity on any Order Form or require the
submission of corrected Order Forms or the remittance of full payment for
subscribed shares by such date as the Savings Bank may specify. The
interpretation of the Savings Bank of terms and conditions of the Plan and of
the Order Forms will be final, subject to the authority of the Superintendent
and FDIC.
17. RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
(i) All shares of Conversion Stock purchased or acquired (either
directly or indirectly) by Trustees, Directors or officers (as such term is
defined in Part 70 of the General Regulations of the New York Banking Board) of
the Savings Bank or the Holding Company on original issue (or otherwise
beneficially owned immediately after such original issuance) in the conversion
shall be subject to the restriction that, except as provided in Section 17(ii),
below, or as may be approved by the Superintendent, such shares shall not be
sold for a period of one (l) year following the date of purchase.
(ii) The restriction on disposition of shares of Conversion Stock set
forth in Section 17(i) above shall not apply to the following:
(a) Any exchange of such shares in connection with a merger or
acquisition involving the Savings Bank or the Holding Company, as the case may
be, which has been approved by the Superintendent; and
(b) Any disposition of such shares following the death or
judicial declaration of incompetency of such Trustee, Director or officer.
(iii) With respect to all shares of Conversion Stock subject to
restrictions on resale or subsequent disposition, each of the following
provisions shall apply:
(a) Each certificate representing shares restricted within the
meaning of Section 17(i), above, shall bear a legend prominently stamped on its
face giving notice of the restriction;
(b) Appropriate instructions shall be issued to the stock
transfer agent for the Savings Bank or the Holding Company, as the case may be,
with respect to applicable restrictions on transfer of such restricted stock;
and
16
<PAGE> 19
(c) Any shares of capital stock of the Savings Bank or the
Holding Company, as the case may be, issued as a stock dividend, stock split, or
otherwise with respect to any such restricted stock may not be sold until the
restrictions respecting such originally restricted stock are terminated, and any
certificate for such shares shall bear a legend advising of such restrictions.
18. VOTING RIGHTS OF STOCKHOLDERS
Upon conversion, the holders of the capital stock of the Savings Bank
shall have the exclusive voting rights with respect to the Savings Bank as
specified in its Organization Certificate. The holders of the common stock of
the Holding Company (if a holding company form of organization is utilized)
shall have the exclusive voting rights with respect to the Holding Company.
19. ESTABLISHMENT OF LIQUIDATION ACCOUNT
The Savings Bank shall establish at the time of conversion a
liquidation account in an amount equal to its net worth (determined in
accordance with generally accepted accounting principles) as set forth in the
latest statement of financial condition contained in the proxy statement. The
liquidation account will be maintained by the Savings Bank for the benefit of
the Eligible Account Holders and Supplemental Eligible Account Holders who
continue to maintain their Deposit Accounts at the Savings Bank in the event of
a complete liquidation of the Savings Bank following the Conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder shall, with
respect to each Deposit Account, hold a related inchoate interest in a portion
of the liquidation account balance, in relation to each Deposit Account balance
at the Eligibility Record Date or the Supplemental Eligibility Record Date, as
the case may be, or to such balance as it may be subsequently reduced, as
hereinafter provided. The initial liquidation account balance shall not be
increased, and shall be subject to downward adjustment to the extent of any
downward adjustment of any subaccount balance of any Eligible Account Holder or
Supplemental Eligible Account Holder in accordance with the Conversion
Regulations.
In the unlikely event of a complete liquidation of the Savings Bank
(and only in such event), following all liquidation payments to creditors
(including those to Account Holders to the extent of their Accounts) each
Eligible Account Holder and Supplemental Eligible Account Holder shall be
entitled to receive a liquidating distribution from the liquidation account, in
the amount of the then adjusted subaccount balance for his Deposit Account then
held, before any liquidation distribution may be made to any holders of the
Savings Bank's capital stock. No merger, consolidation, purchase of bulk assets
with assumption of Deposit Accounts and other liabilities, or similar
transactions with an FDIC-insured Savings Bank, in which the Savings Bank is not
the surviving Savings Bank, shall be deemed to be a complete liquidation for
this purpose. In such transactions, the liquidation account shall be assumed by
the surviving Savings Bank.
The initial subaccount balance for a Deposit Account held by an
Eligible Account Holder and Supplemental Eligible Account Holder shall be
determined by multiplying the opening balance in the liquidation account by a
fraction, the numerator of which is the amount of such Eligible Account Holder's
or Supplemental Eligible Account Holder's Qualifying Deposit and the denominator
of which is the total amount of all Qualifying Deposits of all Eligible Account
Holders and Supplemental Eligible Account Holders in the Savings Bank. Such
initial subaccount balance shall not be increased, but shall be subject to
downward adjustment as described below.
If, at the close of business on the last day of any period for which
the Savings Bank or the Holding Company, as the case may be, has prepared
audited financial statements subsequent to the effective date of conversion, the
deposit balance in the Deposit Account of an Eligible Account Holder or
Supplemental Eligible Account Holder is less than the lesser of (i) the balance
in the Deposit Account at the close of business on the last day of any period
for which the Savings Bank or
17
<PAGE> 20
the Holding Company, as the case may be, has prepared audited financial
statements subsequent to the Eligibility Record Date or the Supplemental
Eligibility Record Date, as the case may be, or (ii) the amount in such Deposit
Account as of the Eligibility Record Date or the Supplemental Eligibility Record
Date, as the case may be, the subaccount balance for such Deposit Account shall
be adjusted by reducing such subaccount balance in an amount proportionate to
the reduction in such deposit balance. In the event of such downward adjustment,
the subaccount balance shall not be subsequently increased, notwithstanding any
subsequent increase in the deposit balance of the related Deposit Account. If
any such Deposit Account is closed, the related subaccount shall be reduced to
zero. For purposes of this Section and the Conversion Regulations, a time
account shall be deemed to be closed upon its maturity date regardless of any
renewal thereof. A distribution of each subaccount balance may be made only in
the event of a complete liquidation of the Savings Bank subsequent to the
Conversion and only out of funds available for such purpose after payment of all
creditors.
The Savings Bank shall not be required to set aside funds for the
purpose of establishing the liquidation account, and the creation and
maintenance of the liquidation account shall not operate to restrict the use or
application of any of the net worth accounts of the Savings Bank, except that
the Savings Bank shall not declare or pay a cash dividend on, or repurchase any
of, its capital stock if the effect thereof would cause its net worth to be
reduced below the amount required for the liquidation account.
20. TRANSFER OF DEPOSIT ACCOUNTS AND CONTINUITY OF THE SAVINGS BANK
Upon conversion, each Person having a Deposit Account at the Savings
Bank at the time of conversion will continue to have a Deposit Account, without
payment therefor, in the same amount and subject to the same terms and
conditions (except for voting and liquidation rights) as in effect prior to the
conversion.
After conversion, the Savings Bank shall cease to be a mutual
institution and shall simultaneously become a stock institution and shall
succeed to all the rights, powers, franchises, debts, liabilities, interests,
duties and obligations of the Savings Bank before conversion, including but not
limited to all rights and interests of the Savings Bank in and to its assets and
properties, whether real, personal or mixed. All of the insured deposits of the
Savings Bank will continue to be insured by the FDIC to the extent provided by
applicable law, and the Savings Bank shall continue to be a member of the
Federal Home Loan Bank System.
21. RESTRICTIONS ON ACQUISITION OF THE SAVINGS BANK AND HOLDING COMPANY
(i) In accordance with Conversion Regulations, except with the prior
approval of the Superintendent, no Person or group of Persons Acting in Concert,
other than the Holding Company (if a holding company form of organization is
utilized), for a period of one year following the Effective Date of the
Conversion, shall directly or indirectly offer to acquire or acquire the
beneficial ownership of more than 10% of any class of an equity security of the
Savings Bank.
(ii) (a) The Restated Organization Certificate of the converted
Savings Bank contains a provision stipulating that no Person or group of Persons
Acting in Concert, except the Holding Company (if a holding company form of
organization is utilized), for a period of three years following the Effective
Date of the Conversion shall directly or indirectly offer to acquire or acquire
the beneficial ownership of more than 10% of any class of an equity security of
the Savings Bank, without the prior written approval of the Superintendent. In
addition, such Restated Organization Certificate will also provide that for a
period of three years following the Conversion, shares beneficially owned in
violation of the above-described provision shall not be entitled to vote and
shall
18
<PAGE> 21
not be voted by any person or counted as voting stock in connection with any
matter submitted to stockholders for a vote. In addition, special meetings of
the stockholders relating to changes in control or amendment of the Savings Bank
Organization Certificate may only be called by the Board of Directors, and
shareholders shall not be permitted to cumulate their votes for the election of
directors.
(b) The Certificate of Incorporation of the Holding Company, if
a holding company form of organization is utilized, will contain a provision
stipulating that in no event shall any record owner of any outstanding shares of
the Holding Company's common stock who beneficially owns in excess of 10% of
such outstanding shares be entitled or permitted to any vote in respect to any
shares held in excess of 10%. In addition, the Certificate of Incorporation and
Bylaws of the Holding Company contain provisions which provide for staggered
terms of the directors, noncumulative voting for directors, limitations on the
calling of special meetings, a fair price provision for certain business
combinations and certain notice requirements.
(iii) For the purposes of this Section 21:
(a) The term "person" includes an individual, a group Acting in
Concert, a corporation, a partnership, an association, a joint stock company, a
trust, an unincorporated organization or similar company, a syndicate or any
other group formed for the purpose of acquiring, holding or disposing of
securities of an insured Savings Bank;
(b) The term "offer" includes every offer to buy or acquire,
solicitation of an offer to sell, tender offer for, or request or invitation for
tenders of, a security or interest in a security for value;
(c) The term "acquire" includes every type of acquisition,
whether effected by purchase, exchange, operation of law or otherwise; and
(d) The term "security" includes non-transferable subscription
rights issued pursuant to a plan of conversion as well as a "security" as
defined in 15 U.S.C. Section 78c(a)(10).
22. PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
The Savings Bank shall not declare or pay a cash dividend on, or
repurchase any of, its capital stock if the effect thereof would cause its
regulatory capital to be reduced below the amount required for the Liquidation
Account. Otherwise, the Savings Bank may declare dividends or make capital
distributions in accordance with applicable law and regulations.
23. AMENDMENT OF PLAN
If deemed necessary or desirable, the Plan may be substantively
amended at any time prior to solicitation of proxies from Voting Depositors to
vote on the Plan by the Savings Bank's Board of Trustees, and at any time
thereafter by such vote of such Board of Trustees with the concurrence of the
Superintendent and FDIC. Amendment of the Plan may be necessary as a result of
comments from the Superintendent and FDIC. Any amendment to the Plan made after
approval by the Voting Depositors with the approval of the Superintendent and
FDIC shall not necessitate further approval by the Voting Depositors unless
otherwise required by the Superintendent and FDIC. The Plan may be terminated by
majority vote of the Savings Bank's Board of Trustees at any time prior to the
Special Meeting to vote on this Plan, and at any time thereafter with the
concurrence of the Superintendent and FDIC.
19
<PAGE> 22
By adoption of the Plan, the Voting Depositors of the Savings Bank
authorize the Board of Trustees to amend or terminate the Plan under the
circumstances set forth in this Section.
24. ORGANIZATION CERTIFICATE AND BYLAWS
The Savings Bank shall take all appropriate steps to amend and restate
its Organization Certificate to read in the form of an Organization Certificate
for a New York stock savings bank as specified in the Banking Law and the
regulations of the New York Banking Board and approved by the Board of Trustees
of the Savings Bank. By their approval of the Plan, the Voting Depositors of the
Savings Bank will thereby approve and adopt such Restated Organization
Certificate. The Savings Bank shall also take all appropriate steps to adopt
Bylaws legally sufficient for a New York stock savings bank. The name of the
converted Savings Bank shall be The Troy Savings Bank.
25. CONSUMMATION OF CONVERSION
The conversion of the Savings Bank shall be deemed to take place and
be effective upon the filing of the Restated Organization Certificate by the
Superintendent.
26. REGISTRATION AND MARKETING
Within the time period required by applicable laws and regulations,
the Savings Bank or the Holding Company, as the case may be, will register the
securities issued in connection with the conversion pursuant to the Securities
Exchange Act of 1934 and will not deregister such securities for a period of at
least three years thereafter, except that the maintenance of registration for
three years requirement may be fulfilled by any successor to the Savings Bank or
any holding company of the Savings Bank. In addition, the Savings Bank/Holding
Company will use its best efforts to encourage and assist a market-maker to
establish and maintain a market for the Conversion Stock and to list those
securities on a national or regional securities exchange or the Nasdaq Stock
Market.
27. RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
The Savings Bank will make reasonable efforts to comply with the
securities laws of all States in the United States in which Persons entitled to
subscribe for shares of Conversion Stock pursuant to the Plan reside. No Person
will be issued subscription rights or be permitted to purchase shares of
Conversion Stock in the Subscription Offering if such Person resides in a
foreign country.
28. ESTABLISHMENT AND FUNDING OF THE TROY SAVINGS BANK COMMUNITY FOUNDATION
As part of the Conversion, the Savings Bank is establishing The Troy
Savings Bank Community Foundation, and intends that the Holding Company donate
to it from authorized, but unissued, shares of common stock of the Holding
Company an amount up to 8% of the number of shares of common stock sold in the
Conversion. The funding of The Troy Savings Bank Community Foundation with
common stock of the Holding Company enables the community to share in the growth
and profitability of the Holding Company and the Savings Bank over the
long-term.
The Troy Savings Bank Community Foundation will be dedicated to the
promotion of charitable purposes. In order to serve the purposes for which it
was formed and maintain its Section 501(c)(3) qualification, The Troy Savings
Bank Community Foundation may sell the common stock contributed to it by the
Holding Company.
20
<PAGE> 23
The initial board of directors of The Troy Savings Bank Community
Foundation will be comprised of individuals who are Officers and/or Trustees
(Directors) of the Savings Bank. The board of directors of The Troy Savings Bank
Community Foundation will be responsible for establishing the polices of The
Troy Savings Bank Community Foundation with respect to grants or donations,
consistent with the stated purposes of The Troy Savings Bank Community
Foundation.
The establishment and funding of The Troy Savings Bank Community
Foundation as part of the Conversion is subject to the approval of the
Superintendent and, if applicable, the FDIC.
29. EXPENSES OF CONVERSION
The Savings Bank shall use its best efforts to assure that expenses
incurred by it in connection with the conversion shall be reasonable.
30. CONDITIONS TO CONVERSION
The conversion of the Savings Bank pursuant to this Plan is expressly
conditioned upon the following:
(a) Prior receipt by the Savings Bank of either rulings of the United
States Internal Revenue Service and the New York State taxing authorities, or
opinions of counsel or independent auditors, substantially to the effect that
the conversion will not result in any adverse federal or state tax consequences
to Eligible Account Holders or to the Savings Bank and the Holding Company
before or after the conversion;
(b) The sale of all of the Conversion Stock offered in the conversion;
and
(c) The completion of the conversion within the time period specified
in Section 3 of this Plan.
31. INTERPRETATION
All interpretations of this Plan and application of its provisions to
particular circumstances by a majority of the Board of Trustees of the Savings
Bank shall be final, subject to the authority of the Superintendent and FDIC.
The Savings Bank and the Holding Company shall have the right to take all such
action as they may, in their sole discretion, deem necessary, appropriate, or
advisable in order to monitor and enforce the terms, conditions, limitations and
restrictions contained in this Plan, and the terms, conditions and
representations contained in the Order Forms, including, but not limited to, the
right to require any subscriber or purchaser to provide evidence, in a form
satisfactory to the Savings Bank, of such Person's eligibility to subscribe for
or purchase shares of the Conversion Stock under the terms of this Plan and the
absolute right (subject only to any necessary regulatory approvals or
concurrence) to reject, limit, or revoke acceptance of any subscription or order
and to delay, terminate, or refuse to consummate any sale of Conversion Stock
that they believe might violate, or is designed to or is any part of a plan to,
evade or circumvent such terms, conditions, limitations, restrictions, and
representations. Any such action shall be final, conclusive, and binding on all
Persons.
21
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
TROY FINANCIAL CORPORATION
1. NAME.
The name of the Corporation is Troy Financial Corporation.
2. REGISTERED OFFICE AND AGENT.
The registered office of the Corporation shall be located
at 1013 Centre Road, Wilmington, Delaware 19805 in the County of New Castle.
The registered agent of the Corporation at such address shall be Corporation
Service Company.
3. PURPOSE AND POWERS.
The purpose of the Corporation is to engage in any lawful
act or activity for which corporations may be organized under the Delaware
General Corporation Law. The Corporation shall have all power necessary or
helpful to engage in such acts and activities.
4. CAPITAL STOCK.
4.1. AUTHORIZED SHARES.
The total number of shares of all classes of stock
that the Corporation shall have the authority to issue is 75,000,000 shares, of
which 15,000,000 shares shall be serial preferred stock, having a par value of
$0.0001 per share ("Preferred Stock"), and 60,000,000 shall be classified as
shares of common stock, having a par value of $0.0001 per share ("Common
Stock"). The Board of Directors is expressly authorized to issue, without
stockholder approval, any unissued shares of the Corporation's authorized
Common Stock as nonvoting Common Stock ("Nonvoting Common Stock").
4.2. COMMON STOCK.
(a) RELATIVE RIGHTS.
The Common Stock shall be subject to all of the rights,
privileges, preferences and priorities of the Preferred Stock as set forth in
the certificate of designations filed to establish the respective series of
Preferred Stock. Each share of Common Stock shall have the same relative
rights as and be identical in all respects to all the other shares of Common
Stock.
(b) VOTING RIGHTS.
Each holder of shares of Common Stock shall be entitled
to attend all special and annual meetings of the stockholders of the
Corporation and, share for share and without regard to class, together with the
holders of all other classes of stock entitled to attend such meetings and to
vote (except any class or series of stock having special voting rights), to
cast one vote for each outstanding share of Common Stock so held upon any
matter or thing (including, without limitation, the election of one or more
directors) properly considered and acted upon by the stockholders, except as
otherwise provided in this Certificate of Incorporation or by applicable law.
There shall be no cumulative voting rights in the election of directors.
<PAGE> 2
(c) DIVIDENDS.
Whenever there shall have been paid, or declared and
set aside for payment, to the holders of the outstanding shares of any class of
stock having preference over the Common Stock as to the payment of dividends,
the full amount of dividends and of sinking fund or retirement fund or other
retirement payments, if any, to which such holders are respectively entitled in
preference to the Common Stock, then the holders of record of the Common Stock
and any class or series of stock entitled to participate therewith as to
dividends, shall be entitled to receive dividends, when, as, and if declared by
the Board of Directors, out of any assets legally available for the payment of
dividends thereon.
(d) DISSOLUTION, LIQUIDATION, WINDING UP.
In the event of any dissolution, liquidation or winding
up of the Corporation, whether voluntary or involuntary, the holders of record
of the Common Stock then outstanding, and all holders of the outstanding shares
of any class or series of stock entitled to participate therewith in whole or
in part, as to distribution of assets, shall become entitled to participate in
the distribution of any assets of the Corporation available for distribution,
in cash or in kind, remaining after the Corporation shall have paid, or set
aside for payment, to the holders of outstanding shares of any class of stock
having preference over the Common Stock in the event of dissolution,
liquidation or winding up, the full preferential amounts (if any) to which they
are entitled, and shall have paid or provided for payment of all debts and
liabilities of the Corporation.
4.3. SERIAL PREFERRED STOCK.
(a) ISSUANCE, DESIGNATIONS, POWERS, ETC.
The Board of Directors expressly is authorized, subject
to limitations prescribed by the Delaware General Corporation Law and the
provisions of this Certificate of Incorporation, by resolution or resolutions
from time to time adopted and by filing a certificate of designations pursuant
to the Delaware General Corporation Law, to provide for the issuance from time
to time of the serial Preferred Stock in one or more series, to establish from
time to time the number of shares to be included in each such series, and to
fix the designation, powers, preferences and other rights of the shares of each
such series and to fix the qualifications, limitations and restrictions
thereon, including, but without limiting the generality of the foregoing, the
following:
(i) the number of shares constituting that series
and the distinctive designation of that series;
(ii) the dividend rate on the shares of that series,
whether dividends shall be cumulative, and, if so, from which
date or dates, and the relative rights of priority, if any, of
payment of dividends on shares of that series;
(iii) whether that series shall have voting rights,
in addition to the voting rights provided by law, and, if so,
the terms of such voting rights;
(iv) whether that series shall have conversion
privileges, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the
conversion rate in such events as the Board of Directors shall
determine;
(v) whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such
redemption, including the dates upon or after which they shall
be redeemable, and the amount per share payable in case of
redemption,
2
<PAGE> 3
which amount may vary under different conditions and at
different redemption dates;
(vi) whether that series shall have a sinking fund for
the redemption or purchase of shares of that series, and, if
so, the terms and amount of such sinking fund;
(vii) the rights of the shares of that series in the
event of voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, and the relative rights of
priority, if any, of payment of shares of that series; and
(viii) any other relative powers, preferences, and
rights of that series, and qualifications, limitations or
restrictions on that series.
(b) DISSOLUTION, LIQUIDATION, WINDING UP.
In the event of any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary, the holders of
record of the Preferred Stock of each series shall be entitled to receive only
such amount or amounts as shall have been fixed by the certificate of
designations or by the resolution or resolutions of the Board of Directors
providing for the issuance of such series.
4.4. PREEMPTIVE RIGHTS.
Holders of the capital stock of the Corporation shall
not be entitled to preemptive rights with respect to any shares or other
securities of the Corporation which may be issued.
4.5. CERTAIN LIMITATIONS ON VOTING
The provisions of this Section 4.5 shall become effective
upon both (i) the consummation of the conversion of The Troy Savings Bank, a
New York savings bank (the "Bank"), from a mutual to a stock savings bank, and
(ii) the concurrent acquisition by the Corporation of all of the outstanding
capital stock of the Bank. Notwithstanding any other provision of this
Certificate of Incorporation, in no event shall any record owner of any
outstanding Common Stock which is beneficially owned, directly or indirectly,
by such owner who, as of any record date for the determination of stockholders
entitled to vote on any matter, beneficially owns in excess of 10% of the
then-outstanding shares of Common Stock (the "Limit"), be entitled, or
permitted to any vote in respect of the shares held in excess of the Limit. The
number of votes which may be cast by any record owner by virtue of the
provisions hereof in respect of Common Stock beneficially owned by such person
beneficially owning shares in excess of the Limit shall be a number equal to
the total number of votes which a single record owner of all Common Stock
beneficially owned by such person would be entitled to cast, (subject to the
provisions of this Section 4) multiplied by a fraction, the numerator of which
is the number of shares of such class or series which are both beneficially
owned by such person and owned of record by such record owner and the
denominator of which is the total number of shares of Common Stock beneficially
owned by such person.
The following terms shall have the meanings specified
below for purposes of this Section 4.5:
(a) The term "affiliate" shall have the meaning ascribed to it
in Rule 12b-2 (17 C.F.R. Section 240.12b-2) under the Securities
Exchange Act of 1934, as amended, as in effect on the date of filing
of this Certificate of Incorporation.
3
<PAGE> 4
(b) The term "beneficial ownership," and derivations thereof,
shall refer to ownership as determined pursuant to Rule 13d-3 (17
C.F.R. Section 240.13d-3) under the Securities Exchange Act of
1934, as amended, (or any successor rule or statutory provision), or,
if said Rule 13d-3 shall be rescinded and there shall be no successor
rule or provision thereto, pursuant to said Rule 13d-3 as in effect on
the date of filing of this Certificate of Incorporation; provided,
however, that a person shall, in any event, also be deemed the
"beneficial owner" of any shares Common Stock:
(i) which such person or any of its affiliates
beneficially owns, directly or indirectly; or
(ii) which such person or any of its affiliates
has: (i) the right to acquire (whether such
right is exercisable immediately or only
after the passage of time), pursuant to any
agreement, arrangement or understanding (but
shall not be deemed to be the beneficial
owner of any voting shares solely by reason
of an agreement, contract, or other
arrangement with this Corporation to effect
any transaction which is described in any one
or more of clauses (a) through (e) of Section
11.1 of this Certificate of Incorporation),
or upon the exercise of conversion rights,
exchange rights, warrants, or options or
otherwise, or (ii) sole or shared voting or
investment power with respect thereto
pursuant to any agreement, arrangement,
understanding, relationship or otherwise (but
shall not be deemed to be the beneficial
owner of any voting shares solely by reason
of a revocable proxy granted for a particular
meeting of stockholders, pursuant to a public
solicitation of for such meeting, with
respect to shares of which neither such
person nor any such Affiliate is deemed the
beneficial owner); or
(iii) which are beneficially owned, directly or
indirectly, by any other person with which
such first mentioned person or any of its
affiliates acts as a partnership, limited
partnership, syndicate or other group
pursuant to any agreement, arrangement or
understanding for the purpose of acquiring,
holding, voting or disposing of any shares of
capital stock of this Corporation; and
provided further, however, that: (1) no
director or officer of this Corporation (or
any affiliate of any such director or
officer) shall, solely by reason of any or
all of such directors or officers acting in
their capacities as such, be deemed, for any
purposes hereof, to beneficially own any
Common Stock beneficially owned by any other
such director or officer (or any affiliate
thereof); and (2) neither any employee stock
ownership or similar plan of this Corporation
or any subsidiary of this Corporation, nor
any trustee with respect thereto or any
affiliate of such trustee (solely by reason
of such capacity of such trustee), shall be
deemed, for any purposes hereof, to
beneficially own any Common Stock held under
any such plan. For purposes only of computing
the percentage of beneficial ownership of
Common Stock of a person, the outstanding
Common Stock shall include shares deemed
owned by such person through application of
this subsection, but shall not include any
other Common Stock which may be issuable by
this Corporation pursuant to any agreement,
or upon exercise of conversion rights,
warrants or options, or otherwise. For all
other purposes, the outstanding Common Stock
shall include only Common Stock then
outstanding and shall not include any Common
Stock which may be issuable by this
Corporation pursuant to any agreement, or
upon the exercise of conversion rights,
warrants or options, or otherwise.
4
<PAGE> 5
Notwithstanding the foregoing, for purposes of this paragraph
(b), an investment advisor shall not be deemed to beneficially
own Common Stock of its advisee if the advisor (a) votes the
Common Stock only upon instruction from the beneficial owner, and
(b) does not provide the beneficial owner with advice concerning
the voting of such Common Stock.
(c) A "person" shall include an individual, a firm, a
group acting in concert, a corporation, a partnership, an
association, a joint venture, a pool, a joint stock company, a
trust, an incorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring,
holding or disposing of securities or any other entity.
The Board of Directors shall have the power to
construe and apply the provisions of this Section 4.5 and to make all
determinations necessary or desirable to implement such provisions, including
but not limited to matters with respect to: (i) the number of shares of Common
Stock beneficially owned by any person; (ii) whether a person is an affiliate
of another; (iii) whether a person has an agreement, arrangement, or
understanding with another as to the matters referred to in the definition of
beneficial ownership; (iv) the application of any other definition or operative
provision of the section to the given facts; or (v) any other matter relating
to the applicability or effect of this section.
The Board of Directors shall have the right to
demand that any person who is reasonably believed to beneficially own Common
Stock in excess of the Limit (or holds of record Common Stock beneficially
owned by any person in excess of the Limit) supply the Corporation with
complete information as to: (i) the record owner(s) of all shares beneficially
owned by such person who is reasonably believed to own shares in excess of the
Limit; and (ii) any other factual matter relating to the applicability or
effect of this section as may reasonably be requested of such person.
Except as otherwise provided by law or expressly
provided in this Section 4.5, the presence, in person or by proxy, of the
holders of record of shares of capital stock of the Corporation entitling the
holders thereof to cast a majority of the votes (after giving effect, if
required, to the provisions of this Section 4.5) entitled to be cast by the
holders of shares of capital stock of the Corporation entitled to vote shall
constitute a quorum at all meetings of the stockholders, and every reference in
this Certificate of Incorporation to a majority or other proportion of capital
stock (or the holders thereof) for purposes of determining any quorum
requirement or any requirement for stockholder consent or approval shall be
deemed to refer to such majority or other proportion of the votes (or the
holders thereof) then entitled to be cast in respect of such capital stock.
Any constructions, applications, or determinations
made by the Board of Directors pursuant to this Section 4.5 in good faith and
on the basis of such information and assistance as was then reasonably
available for such purpose shall be conclusive and binding upon the Corporation
and its stockholders.
In the event any provision (or portion thereof) of
this Section 4.5 shall be found to be invalid, prohibited or unenforceable for
any reason, the remaining provisions (or portions thereof) of this Section 4.5
shall remain in full force and effect, and shall be construed as if such
invalid, prohibited or unenforceable provision had been stricken herefrom or
otherwise rendered inapplicable, it being the intent of this Corporation and
its stockholders that each such remaining provision (or portion thereof) of
this Section 4.5 remain, to the fullest extent permitted by law, applicable and
enforceable as to all stockholders, including stockholders owning an amount of
stock over the Limit, notwithstanding any such finding.
5
<PAGE> 6
5. BOARD OF DIRECTORS.
5.1. CLASSIFICATION AND ELECTION.
The Board of Directors shall consist of not less than five
directors nor more than 15 directors. The number of directors of the
Corporation shall be as fixed from time to time by resolution of the Board of
Directors. The directors, other than those who may be elected by the holders
of any series of Preferred Stock voting separately by series, shall be
classified, with respect to the time for which they severally hold office, into
three classes, Class I, Class II and Class III, and the directors in each class
shall be as nearly equal in number as possible. When the number of directors
is changed, the Board of Directors shall determine the class or classes to
which the increased or decreased number of directors shall be apportioned,
provided that no decrease in the number of directors shall shorten the term of
any incumbent director.
The classification shall be such that the term of one class
shall expire each succeeding year. The terms, classifications, qualifications
and election of the Board of Directors and the filling of vacancies thereon
shall be as provided herein and in the Bylaws. Each initial director in Class
I shall hold office for a term expiring at the first annual meeting of
stockholders, each initial director in Class II shall hold office initially for
a term expiring at the second annual meeting of stockholders, and each initial
director in Class III shall hold office for a term expiring at the third annual
meeting of stockholders. Notwithstanding the foregoing provisions of this
Section 5.1, each director shall serve until such director's successor is duly
elected and qualified or until such director's earlier death, resignation or
removal. At each annual meeting of stockholders, the successors to the class
of directors whose term expires at that meeting shall be elected to hold office
for a term expiring at the annual meeting of stockholders held in the third
year following the year of their election and until their successors have been
duly elected and qualified or until any such director's earlier death,
resignation or removal.
Directors need not be elected by written ballot.
5.2. REMOVAL.
Except as otherwise provided pursuant to the provisions of this
Certificate of Incorporation or a certificate of designations relating to the
rights of the holders of any series of Preferred Stock, voting separately by
series, to elect directors under specified circumstances, any director or
directors may be removed from office at any time, but only for cause and only
by the affirmative vote, at a special meeting of the stockholders called for
such a purpose, of not less than 66-2/3 percent of the total number of votes of
the then outstanding shares of stock of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, but
only if notice of such proposal was contained in the notice of such meeting. At
least 30 days prior to such special meeting of stockholders, written notice
shall be sent to the director or directors whose removal will be considered at
such meeting.
For purposes of this Section 5.2, "cause" shall mean (a) conduct
as a director of the Corporation or any subsidiary involving willful material
misconduct, breach of material fiduciary duty involving personal profit, or
gross negligence as to material duties, or (b) conduct, whether or not as a
director of the Corporation or any subsidiary, involving dishonesty or breach
of trust which is punishable by imprisonment for a term exceeding one year
under state or federal law.
Any vacancy in the Board of Directors, including any vacancy
created by reason of an increase in the number of directors, shall be filled
for the unexpired term by the vote of a majority of the directors then in
office, whether or not a quorum, and any director so chosen shall hold office
for the remainder of the full term of the class of directors in which the new
directorship was created
6
<PAGE> 7
or the vacancy occurred and until such director's successor shall be elected
and qualified, or until such director's earlier death, resignation or removal.
5.3. CHANGE OF AUTHORIZED NUMBER.
In the event of any increase or decrease in the authorized
number of directors, the newly created or eliminated directorships resulting
from such increase or decrease shall be apportioned by the Board of Directors
among the three classes of directors so as to maintain such classes as nearly
equal as possible. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
5.4. DIRECTORS ELECTED BY HOLDERS OF PREFERRED STOCK.
Notwithstanding the foregoing, whenever the holders of any one
or more series of Preferred Stock issued by the Corporation shall have the
right, voting separately by series, to elect directors at an annual or special
meeting of stockholders, the election, term of office, filling of vacancies and
other features of such directorships shall be governed by the terms of this
Certificate of Incorporation or a certificate of designations applicable
thereto, and such directors so elected shall not be divided into classes
pursuant to this Article 5 unless expressly provided by the certificate of
designations.
5.5. LIMITATION OF LIABILITY.
No director of the Corporation shall be liable to the
Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, provided that this provision shall not eliminate
or limit the liability of a director (a) for any breach of the director's duty
of loyalty to the Corporation or its stockholders; (b) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law; (c) for the types of liability set forth in Section 174 of
the Delaware General Corporation Law; or (d) for any transaction from which the
director derived an improper personal benefit. Any repeal or modification of
this Section 5.5 by the stockholders of the Corporation shall be prospective
only, and shall not adversely affect limitation on the personal liability of a
director of the Corporation existing at the time of such repeal or modification
with respect to acts or omissions occurring prior to the effective date of such
repeal or modification.
6. ACTIONS BY STOCKHOLDERS.
Any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of stockholders, and may not be effected by any consent in writing by such
stockholders, unless such consent is unanimous.
7. SPECIAL MEETINGS.
Special meetings of the stockholders may be called at any time
but only by (a) a majority of the directors in office, although less than a
quorum; or (b) the holders of not less than 66-2/3 percent of the Voting Stock
(as defined in Section 8.3 of Article 8 hereof).
7
<PAGE> 8
8. APPROVAL FOR ACQUISITIONS OF CONTROL AND OFFERS TO ACQUIRE CONTROL.
8.1. STOCKHOLDER VOTE AND REGULATORY APPROVAL REQUIRED FOR
ACQUISITION OF CONTROL.
No Person shall acquire Control of the Corporation at any
time, unless such acquisition has been approved prior to its consummation by
the affirmative vote of the holders of at least 66-2/3 percent of the Voting
Stock at a duly constituted meeting of stockholders called for such purpose.
(Capitalized terms are defined in Section 8.3 hereof.) In addition, no Person
shall acquire Control of the Corporation at any time without obtaining prior
thereto all federal and state regulatory approvals, including any approvals
required under the Bank Holding Company Act and Federal Deposit Insurance Act,
any applicable state law, or any successor provisions of law, and in the manner
provided by all applicable regulations of the appropriate Federal agency under
such Acts, and any applicable state regulations. In the event that Control is
acquired without obtaining all such regulatory approvals, such acquisition
shall constitute a violation of this Article 8 and the Corporation shall be
entitled to institute a private right of action to enforce such statutory and
regulatory provisions.
8.2. EXCESS SHARES.
In the event that Control of the Corporation is acquired in
violation of this Article 8, all shares of Voting Stock owned by the Person so
acquiring Control in excess of the number of shares the beneficial ownership of
which is deemed under Section 8.3 hereof to confer Control of the Corporation
shall be considered from and after the date of their acquisition by such Person
to be "excess shares" for purposes of this Article 8. Such excess shares shall
thereafter no longer (a) be entitled to vote on any matter, (b) be entitled to
take other stockholder action, (c) be entitled to be counted in determining the
total number of outstanding shares for purposes of any matter involving
stockholder action, or (d) be transferable except with the approval of the
Board of Directors or by an independent trustee appointed by the Board of
Directors for the purpose of having such excess shares sold on the open market
or otherwise. The proceeds from the sale by the trustee of such excess shares
shall be paid (i) first, to the trustee in the amount equal to the trustee's
reasonable fees and expenses, (ii) second, to the "beneficial owner" (as
defined in Section 11.3 of Article 11, hereof) of such excess shares in an
amount up to such owner's federal income tax basis in such excess shares, and
(iii) third, to the Corporation as to any remaining balance.
8.3 CERTAIN DEFINITIONS
For purposes of this Article 8:
"Control" means the sole or shared power to vote or direct
the voting of, or to dispose or to direct the disposition of, 25 percent or
more of the Voting Stock; provided, that the solicitation, holding and voting
of revocable proxies obtained by the Board of Directors of the Corporation (or
the Board's designee) pursuant to a solicitation under Regulation 14A of the
General Rules and Regulations under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") shall not constitute "control;" and provided
further, that an investment advisor shall not be deemed to acquire the Voting
Stock of its advisee if the advisor (a) votes the stock only upon instruction
from the beneficial owner, and (b) does not provide the beneficial owner with
advice concerning the voting of such stock.
"Group Acting in Concert" includes Persons seeking to combine
or pool their voting or other interests in the Voting Stock for a common
purpose, pursuant to any contracts, understanding, relationship, agreement or
other arrangement, whether written or otherwise; provided, that a "Group Acting
in Concert" shall not include the Board of Directors of the
8
<PAGE> 9
Corporation (or the Board's designee) in its solicitation, holding and voting
of revocable proxies obtained by it pursuant to a solicitation under Regulation
14A of the General Rules and Regulations under the Exchange Act.
"Person" means any individual, firm, corporation or other
entity including a Group Acting in Concert.
"Voting Stock" means the then outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors.
8.4. INAPPLICABILITY TO PUBLIC OFFERING OR EMPLOYEE BENEFIT
PLANS.
This Article 8 shall not apply to an acquisition or offer to
acquire securities of the Corporation (a) by underwriters in connection with a
public offering of such securities; or (b) by any employee stock purchase plan,
pension plan, profit sharing plan or other employee benefit plan of the
Corporation or any of its subsidiaries.
9. CONTROL SHARE ACQUISITIONS
9.1. ACQUIRING PERSON STATEMENT.
Any person who proposes to make a Control Share Acquisition
(as defined in Section 9.7 hereof), may at the person's election, and any
person who has made a Control Share Acquisition shall, within 10 days of such
Control Share Acquisition, deliver an acquiring person statement to the
Corporation at the Corporation's principal office. The acquiring person
statement must set forth all of the following:
(a) The identity of the acquiring person and each other member
of any group of which the person is a part for purposes of determining
Control Shares.
(b) A statement that the acquiring person statement is given
pursuant to this Article 9.
(c) The number of shares of the Corporation owned (directly or
indirectly) by the acquiring person and each other member of the
group.
(d) The range of voting power under which the Control Share
Acquisition falls or would, if consummated, fall.
(e) If the Control Share Acquisition has not taken place:
(i) a description in reasonable detail of
the terms of the proposed Control Share Acquisition, including
the names of the acquiring person, the price to be paid and
the approximate date of acquisition; and
(ii) representations of the acquiring person,
together with a statement in reasonable detail of the facts
upon which they are based, that the proposed Control Share
Acquisition, if consummated, will not be contrary to law and
that the acquiring person has the financial capacity to make
the proposed Control Share Acquisition.
9.2. SPECIAL MEETING OF STOCKHOLDERS.
If the acquiring person so requests at the time of delivery of
an acquiring person statement and gives an undertaking to pay the Corporation's
expenses of a special meeting, within
9
<PAGE> 10
ten days thereafter, the directors of the Corporation shall call a special
meeting of the stockholders of the Corporation, to take place not sooner than
thirty days after the receipt by the Corporation of the acquiring person
statement, for the purpose of considering the voting rights to be accorded to
the shares acquired or to be acquired in the Control Share Acquisition. Unless
the acquiring person agrees in writing to another date, the special meeting of
the stockholders shall be held within fifty days after the receipt by the
Corporation of the request. If no request for a special meeting is made, the
voting rights to be accorded the shares acquired in the Control Share
Acquisition shall be presented at the next special or annual meeting of
stockholders.
9.3. NOTICE.
If a special meeting is requested, notice of the special
meeting of stockholders shall be given as promptly as reasonably practicable by
the Corporation to all stockholders of record as of the record date set for the
meeting, whether or not entitled to vote at the meeting. Notice of the special
or annual stockholder meeting at which the voting rights are to be considered
must include or be accompanied by both of the following:
(a) a copy of the acquiring person statement delivered to the
Corporation pursuant to this Article 9.
(b) A statement by the Board of the Directors of the
Corporation, authorized by its directors, of its position or recommendation, or
that it is taking no position or making no recommendation, with respect to the
proposed Control Share Acquisition.
9.4. VOTING RIGHTS.
Control Shares (as defined in Section 9.7 hereof) acquired in
a Control Share Acquisition have the same voting rights as were accorded the
shares before the Control Share Acquisition only to the extent granted by
resolutions approved by a majority of the then outstanding shares of stock of
the Corporation entitled to vote generally in the election of directors other
than Interested Shares (as defined in Section 9.7 hereof). Interested Shares
shall not be entitled to vote on the matter, and in determining whether a
quorum exists, all Interested Shares shall be disregarded. For the purpose of
this Section 9.4, the Interested Shares shall be determined as of the record
date for determining the stockholders entitled to vote at the meeting.
9.5. REDEMPTION.
Control Shares acquired in a Control Share Acquisition with
respect to which no acquiring person statement has been filed with the
Corporation may, at any time during the period ending sixty days after the last
acquisition of Control Shares by the acquiring person, be subject to redemption
by the Corporation at the redemption price equal to the number of such shares
multiplied by the dollar amount (rounded to the nearest cent) equal to the
average per share price, including any brokerage commissions, transfer taxes
and soliciting dealers fees, paid by the acquiring person for such shares.
Control Shares acquired in a Control Share Acquisition are not subject to
redemption after an acquiring person statement has been filed unless the shares
are not accorded full voting rights by the stockholders as provided in Section
9.4 above. In order to determine the redemption price provided for in this
Section 9.5, the Corporation may rely conclusively on public announcements by,
or filings with the Securities and Exchange Commission by, the acquiring person
as to the prices so paid.
9.6. DISSENTERS RIGHTS.
In the event Control Shares acquired in a Control Share
Acquisition are accorded full voting rights and the acquiring person has
acquired Control Shares with a majority or more of all
10
<PAGE> 11
voting power, all stockholders of the Corporation, other than the acquiring
person, have the right to dissent from the granting of voting rights and to
demand payment of the fair value of their shares under Section 262 of the
Delaware General Corporation Law as though such granting of voting rights were
a corporate action described in paragraph (b) of Section 262, except that the
provisions of subsection (1) of paragraph (b) of Section 262 shall not be
applicable. For purposes of this Section 9.6, "fair value" of shares under
Section 262 of the Delaware General Corporation Law shall in no event be less
than the highest price per share paid in the Control Share Acquisition, as
adjusted for any subsequent stock dividends or reverse stock splits or similar
changes.
9.7. CERTAIN DEFINITIONS
For purposes of this Article 9:
"Control Share" means shares of the Corporation that would
have voting power that when added to all the other shares of the Corporation
owned by a person or in respect to which that person may exercise or direct the
exercise of voting power, would entitle that person, immediately after
acquisition of the shares (directly or indirectly, alone or as part of a
group), to exercise or direct the exercise of the voting power of the
Corporation in the election of directors within any of the following ranges of
voting power: (a) one-fifth or more but less than a third of all voting power;
(b) one-third or more but less than a majority of all voting power; or (c) a
majority or more of all voting power.
"Control Share Acquisition" means the acquisition (directly or
indirectly) by any person of ownership of, or the power to direct the exercise
of voting power with respect to, issued and outstanding Control Shares. Shares
acquired within ninety days of a prior acquisition or shares acquired pursuant
to a plan to make a Control Share Acquisition are considered to have been
acquired in the same acquisition. The acquisition of any shares of the
Corporation does not constitute a Control Share Acquisition if the acquisition
is consummated in any of the following circumstances: (a) pursuant to the laws
of descent and distribution; (b) pursuant to the satisfaction of a pledge or
other security interest created in good faith and not for the purpose of
circumventing this Article 9; (c) pursuant to a merger or plan of
consolidation if the Corporation is a party to the agreement of merger or
consolidation; or (d) pursuant to a tender or exchange offer that is made
pursuant to an agreement to which the Corporation is a party, or directly from
the Corporation, or from any of its wholly owned subsidiaries.
The acquisition of any shares of the Corporation in good faith
and not for the purpose of circumventing this Article 9 by or from (i) any
person whose voting rights had previously been authorized by stockholders in
compliance with this Article 9, or (ii) any person whose previous acquisition
of shares of the Corporation would have constituted a Control Share Acquisition
but for the circumstances specified in the paragraph above, does not constitute
a Control Share Acquisition, unless the acquisition entitles the person
(directly or indirectly, alone or as a part of a group) to exercise or direct
the exercise of voting power of the Corporation in the election of directors in
excess of the voting power otherwise authorized.
For purposes of this Article 9, a person who acquires shares
in the ordinary course of business for the benefit of others in good faith and
not for the purpose of circumventing this Article 9 has voting power only of
shares in respect of which that person would be able to exercise or direct the
vote without further instruction from others.
"Interested Shares" mean the shares of the Corporation in
respect of which any of the following persons may exercise or direct the
exercise of the voting power of the Corporation in the election of directors:
(a) an acquiring person or member of a group with respect to a Control Share
Acquisition; (b) any officer of the Corporation; (c) any employee of the
Corporation who is also a director of the Corporation.
11
<PAGE> 12
10. CRITERIA FOR EVALUATING CERTAIN OFFERS.
The Board of Directors, when evaluating any offer of another
party to (a) make a tender or exchange offer for any equity security of the
Corporation, (b) merge or consolidate the Corporation with another institution,
or (c) purchase or otherwise acquire all or substantially all of the properties
and assets of the Corporation, shall, in connection with the exercise of its
judgment in determining what is in the best interests of the Corporation and
its stockholders, be authorized to give due consideration to any such factors
as the Board of Directors determines to be relevant, including, without
limitation, the economic effects of acceptance of such offer on (i) depositors,
borrowers and employees of the insured institution subsidiary or subsidiaries
of the Corporation, and on the communities in which such subsidiary or
subsidiaries operate or are located and (ii) the ability of such subsidiary or
subsidiaries to fulfill the objectives of an insured institution under
applicable Federal statutes and regulations.
11. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS.
11.1. HIGHER VOTE FOR CERTAIN BUSINESS COMBINATIONS.
In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly provided in
Section 11.2 hereof:
(a) any merger or consolidation of the Corporation or any Subsidiary
with (i) any Interested Stockholder or (ii) any other corporation
(whether or not itself an Interested Stockholder) which is, or after the
merger or consolidation would be, an Affiliate or Associate of such
Interested Stockholder prior to the transaction (capitalized terms are
defined in Section 11.3 hereof);
(b) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition other than in the usual and regular course of business (in
one transaction or a series of transactions in any 12-month period) to
any Interested Stockholder or any Affiliate or Associate of such
Interested Stockholder, other than the Corporation or any of its
Subsidiaries, of any assets of the Corporation or any Subsidiary that
have an aggregate book value as of the end of the Corporation's most
recent fiscal quarter of 10 percent or more of the total Market Value of
the outstanding shares of the Corporation or of its net worth as of the
end of its most recent fiscal quarter, measured at the time the
transaction (or transactions) is (are) approved by the Board of
Directors of the Corporation;
(c) any issuance or transfer by the Corporation or any Subsidiary
(in one transaction or a series of transactions) of any equity
securities of the Corporation or any Subsidiary having an aggregate
Market Value of five percent or more of the total Market Value of the
outstanding shares of the Corporation or such Subsidiary to any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder, other than the Corporation or any of its Subsidiaries,
except pursuant to the exercise of warrants, rights or options to
subscribe for or purchase securities offered, issued or granted pro
rata to all holders of the Voting Stock of the Corporation or any
other method affording substantially proportionate treatment to the
holders of Voting Stock;
(d) any adoption of any plan or proposal for the liquidation or
dissolution of the Corporation or any Subsidiary proposed by or on
behalf of an Interested Stockholder or any Affiliate or Associate of
such Interested Stockholder, other than the Corporation or any of its
Subsidiaries; or
12
<PAGE> 13
(e) any reclassification of securities (including any reverse
stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any
other transaction (whether or not with or into or otherwise involving
an Interested Stockholder) which has the effect, directly or
indirectly, in one transaction or a series of transactions, of
increasing the proportionate amount of the outstanding shares of any
class of equity or convertible securities of the Corporation or any
Subsidiary which is directly or indirectly owned by any Interested
Stockholder or any Affiliate or Associate of any Interested
Stockholder, other than the Corporation or any of its subsidiaries;
shall be approved by the affirmative vote of at least (i) the holders of 80
percent of the total number of outstanding shares of Voting Stock and (ii) the
holders of two-thirds of the voting power of the outstanding shares of Voting
Stock, excluding for purposes of calculating the affirmative vote and the total
number of outstanding shares of Voting Stock under this clause (ii), all shares
of Voting Stock of which the beneficial owner is the Interested Shareholder
involved in the Business Combination or any Affiliate or Associate of such
Interested Shareholder. Such affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or this Certificate of Incorporation.
"Business Combination" means any transaction which is referred
to in any one or more of clauses (a) through (e) of this Section 11.1.
11.2. WHEN HIGHER VOTE IS NOT REQUIRED.
The provisions of Section 11.1 hereof shall not be applicable
to any particular Business Combination, and such Business Combination shall
require only such affirmative vote as is required by law and any other
provision of this Certificate of Incorporation, if the condition or conditions
specified in either paragraph (a) or paragraph (b) below are met:
(a) APPROVAL BY CONTINUING DIRECTORS.
The Business Combination shall have been approved by at least
two-thirds of the Continuing Directors then in office at a duly constituted
meeting of the board of directors called for such purpose.
(b) PRICE AND PROCEDURE REQUIREMENTS.
All of the following conditions shall have been met:
(i) The aggregate amount of the cash and of the Market Value
as of the Valuation Date of consideration other than cash to be
received per share by holders of Common Stock in such Business
Combination shall be at least equal to the highest of the following:
(A) the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees)
paid by the Interested Stockholder for any shares of Common
Stock acquired by it (1) within the two-year period
immediately prior to the first public announcement of the
proposal of the Business Combination (the "Announcement Date")
or (2) in the transaction in which it became an Interested
Stockholder, whichever is higher;
(B) the Market Value per share of Common Stock on the
Announcement Date or on the date on which the Interested
Stockholder became an
13
<PAGE> 14
Interested Stockholder (such latter date is referred to in
this Article 11 as the "Determination Date"), whichever is
higher; or
(C) the price per share equal to the Market Value per
share of Common Stock determined pursuant to subdivision
(i)(B) hereof, multiplied by the fraction of (1) the highest
per share price (including brokerage commissions, transfer
taxes and soliciting dealers' fees) paid by the Interested
Stockholder for any shares of common stock of the same class
or series acquired by it within the two-year period
immediately prior to the Announcement Date, over (2) the
Market Value per share of common stock of the same class or
series on the first day in such two-year period on which the
Interested Stockholder acquired shares of Common Stock.
(ii) The aggregate amount of the cash and the Market Value
as of the Valuation Date of consideration other than cash to be
received per share by holders of shares of any class or series of
outstanding Voting Stock, other than Common Stock, shall be at least
equal to the highest of the following (it being intended that the
requirements of this paragraph (b)(ii) shall be required to be met
with respect to every class of outstanding Voting Stock, other than
Common Stock, whether or not the Interested Stockholder has
previously acquired any shares of a particular class of Voting
Stock):
(A) the highest per share price (including any
brokerage commissions, transfer taxes and soliciting dealers'
fees) paid by the Interested Stockholder for any shares of
such class or series of Voting Stock acquired by it: (1)
within the two-year period immediately prior to the
Announcement Date or (2) in the transaction in which it
became an Interested Stockholder, whichever is higher;
(B) the highest preferential amount per share to which
the holders of shares of such class or series of Voting Stock
are entitled in the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, or
in the event of any call of such class or series of Voting
Stock;
(C) the Market Value per share of such class or series
of Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher; or
(D) the price per share equal to the Market Value per
share of such class or series of stock determined pursuant to
subdivision (ii)(C) hereof, multiplied by the fraction of (1)
the highest per share price (including any brokerage
commissions, transfer taxes and soliciting dealers' fees)
paid by the Interested Stockholder for any shares of any
class or series of Voting Stock acquired by it within the
two-year period immediately prior to the Announcement Date
over (2) the Market Value per share of the same class or
series of Voting Stock on the first day in such two-year
period on which the Interested Stockholder acquired any
shares of the same class or series of Voting Stock.
(iii) The consideration to be received by holders of a
particular class or series of outstanding Voting Stock shall be in
cash or in the same form, and on the same terms, as the Interested
Stockholder has previously paid for shares of such class or series of
Voting Stock. If the Interested Stockholder has paid for shares of
any class or series of Voting Stock with varying forms of
consideration, on varying terms, the
14
<PAGE> 15
form and terms of consideration for such class or series of Voting
Stock shall be either cash or the form and terms used to acquire the
largest number of shares of such class or series of Voting Stock
previously acquired by it. If the Interested Stockholder has not
previously acquired shares of such class or series, the form of
consideration for such class or series shall either be cash or the
form of consideration used to acquire the largest number of shares of
Voting Stock previously acquired by the Interested Stockholder.
(iv) After such Interested Stockholder has become an
Interested Stockholder and prior to the consummation of such Business
Combination: (A) there shall have been no failure to declare and pay
at the regular date therefor any full quarterly dividends (whether or
not cumulative) on any outstanding preferred stock of the Corporation
except as approved by a majority of the Continuing Directors; (B)
there shall have been (1) no reduction in the annual rate of
dividends paid on any class or series of the capital stock of the
Corporation, (except as necessary to deflect any subdivision of the
capital stock), except as approved by a majority of the Continuing
Directors, and (2) an increase in such annual rate of dividends as
necessary to reflect any reclassification (including any reverse
stock split), recapitalization, reorganization or any similar
transaction which has the effect of reducing the number of
outstanding shares of common stock, unless the failure to increase
such annual rate is approved by a majority of the Continuing
Directors; and (C) such Interested Stockholder shall not have become
the beneficial owner of any additional shares of capital stock except
as part of the transaction which results in such Interested
Shareholder becoming an Interested Stockholder or by virtue of
proportionate stock splits or stock dividends.
The provisions of subdivisions (iv)(A) and (iv)(B) of this
subsection do not apply if the Interested Stockholder or any
Affiliate or Associate of the Interested Stockholder voted as a
director of the Corporation in a manner consistent with such
subdivisions, and the Interested Stockholder, within 10 days after
any act or failure to act by or on behalf of the Corporation, which
act or failure to act is inconsistent with such subdivisions,
notifies the board of directors of the Corporation in writing that
the Interested Stockholder disapproves thereof and requests in good
faith that the board of directors rectify such act or failure to act.
(v) After such Interested Stockholder has become an
Interested Stockholder, such Interested Stockholder shall not have
received the benefit, directly or indirectly (except proportionately
as a stockholder), of any loans, advances, guarantees, pledges or
other financial assistance or any tax credits or other tax advantages
provided by the Corporation or any of its Subsidiaries (whether in
anticipation of or in connection with such Business Combination or
otherwise).
(vi) A proxy or information statement describing the proposed
Business Combination and complying with the requirements of the
Exchange Act and the rules and regulations thereunder (or any
subsequent provisions replacing the Exchange Act, rules or
regulations) shall be mailed to public stockholders of the
Corporation at least 20 days prior to the consummation of such
Business Combination (whether or not such proxy or information
statement is required to be mailed pursuant to the Exchange Act or
subsequent provisions).
11.3. CERTAIN DEFINITIONS
For the purposes of this Article 11:
15
<PAGE> 16
"Affiliate" means a person that directly or indirectly
through one or more intermediaries controls, or is controlled by, or is under
common control with, a specified person.
"Associate," when used to indicate a relationship with any
person, means: (a) any domestic or foreign corporation or organization, other
than the Corporation or a subsidiary of the Corporation, of which such person
is an officer or director or is, directly or indirectly, the beneficial owner
of 10 percent or more of any class of equity securities; (b) any trust or other
estate, other than an employee stock purchase plan, pension plan, profit
sharing plan or other employee benefit plan of the Corporation or any
Subsidiary, in which such person has a 10 percent or more beneficial interest
or as to which such person serves as a trustee or in a similar fiduciary
capacity; (c) any relative or spouse of such person, or any relative of such
spouse who has the same home as such person or who is a director or officer of
the Corporation or any of its Affiliates; and (d) any other manager, member or
partner in a limited liability company, partnership, limited partnership, joint
venture, syndicate or other entity or group, formal or informal, of which the
specified person is a manager, member or partner and which is acting together
for the purpose of acquiring, holding or disposing of securities of the
Corporation.
"Beneficial owner," when used with respect to any Voting
Stock, means any person that:
(a) individually or with any of its Affiliates or Associates,
beneficially owns Voting Stock directly or indirectly, whether or not
of record;
(b) individually or with any of its Affiliates or Associates,
has (i) the right to acquire Voting Stock (whether such right is
exercisable immediately or only after passage of time), pursuant to
any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise;
(ii) the right to vote or direct the voting of Voting Stock pursuant
to any agreement, arrangement or understanding; or (iii) the right to
dispose of or to direct the disposition of Voting Stock pursuant to
any agreement, arrangement or understanding; or
(c) individually or with any of its Affiliates or Associates,
has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of Voting Stock with any other
person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, such shares of Voting Stock.
"Continuing Director" means any member of the Board of
Directors of the Corporation who is unaffiliated with the Interested
Stockholder and was a member of the Board of Directors of the Corporation prior
to the time that the Interested Stockholder (including any Affiliate or
Associate of such Interested Stockholder) became an Interested Stockholder, and
any successor of a Continuing Director who is unaffiliated with the Interested
Stockholder and is recommended to succeed a Continuing Director by a majority
of Continuing Directors then on the Board of Directors of the Corporation.
"Interested Stockholder" shall mean any person (other than
the Corporation or any Subsidiary or any employee stock purchase plan, pension
plan, profit sharing plan or other employee benefit plan of the Corporation or
any Subsidiary) that (a) is the beneficial owner, directly or indirectly, of
five percent or more of the voting power of the then outstanding Voting Stock;
(b) is an Affiliate of the Corporation and at any time within the two-year
period immediately prior to the date in question was the beneficial owner,
directly or indirectly, of ten percent or more of the voting power of the then
outstanding Voting Stock; or (c) which is an assignee of or has otherwise
succeeded to the beneficial ownership of any shares of Voting Stock that were
at any time within the two-year period immediately prior to any such date
beneficially owned by an Interested Stockholder, if such
16
<PAGE> 17
assignment or succession shall have occurred in the course of a transaction or
series of transactions not utilizing the facilities of a national securities
exchange, occurring on The Nasdaq Stock Market, Inc., or involving a public
distribution. For the purposes of determining whether a person is an
Interested Stockholder, the number of shares of Voting Stock deemed to be
outstanding shall include the shares with respect to which such person is the
beneficial owner, as defined above, except it shall not include any shares of
Voting Stock which may be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants or options, or
otherwise.
"Market Value" means:
(a) In the case of stock, the highest closing sale price during
the 30-day period immediately preceding the date in question of a
share of such stock on the established national or regional stock
exchange on which it is listed, or, if such stock is not listed on any
such exchange, the highest closing sales price or bid quotation with
respect to a share of such stock during the 30-day period preceding
the date in question on the Nasdaq Stock Market of the National
Association of Securities Dealers, Inc. or any system then in use, or
if no such quotations are available, the fair market value on the date
in question of a share of such stock as determined by the Board of
Directors of the Corporation in good faith; and
(b) in the case of property other than cash or stock, the fair
market value of such property on the date in question as determined by
a majority of the Board of Directors of the Corporation in good faith.
"Subsidiary" means any corporation of which Voting Stock
having a majority of the votes entitled to be cast is owned, directly or
indirectly, by the Corporation.
"Valuation Date" means: (a) For a Business Combination voted
on by stockholders, the latter of the day prior to the date of the
stockholders' vote or the date 10 days prior to the consummation of the
Business Combination; and (b) for a Business Combination not voted upon by the
stockholders, the date of the consummation of the Business Combination.
"Voting Stock" means the then outstanding shares of capital
stock of the Corporation of Subsidiary, as the case may be, entitled to vote
generally in the election of directors.
In the event of any Business Combination in which the
Corporation is the surviving corporation, the phrase "consideration other than
cash to be received" as used in paragraphs (b)(i) and (b)(ii) of Section 11.2
hereof shall include the shares of Common Stock and/or the shares of any other
class or series of outstanding Voting Stock retained by the holders of such
shares.
11.4. POWERS OF THE BOARD OF DIRECTORS.
A majority of the Corporation's directors then in office shall have
the power and duty to determine for the purposes of this Article 11, on the
basis of information known to them after reasonable inquiry, (a) whether a
person is an Interested Stockholder, (b) the number of shares of Voting Stock
beneficially owned by any person, (c) whether a person is an Affiliate or
Associate of another, and (d) whether the requirements of paragraph B of
Section 11.2 have been met with respect to any Business Combination; and the
good faith determination of a majority of the Board of Directors on such
matters shall be conclusive and binding for all the purposes of this Article
11.
11.5. NO EFFECT ON FIDUCIARY OBLIGATIONS OF INTERESTED
STOCKHOLDERS.
17
<PAGE> 18
Nothing contained in this Article 11 shall be construed to relieve
any Interested Stockholder from any fiduciary obligation imposed by law.
12. INDEMNIFICATION.
To the extent permitted by law, the Corporation shall fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
To the extent permitted by law, the Corporation will fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was an employee or agent of the Corporation, or is or was
serving at the request of the Corporation as an employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
The Corporation will advance expenses (including attorneys' fees)
incurred by a director or officer in advance of the final disposition of such
action, suit or proceeding upon the receipt of an undertaking by or on behalf
of the director or officer to repay such amount if it shall ultimately be
determined that such director or officer is not entitled to indemnification.
The Corporation may advance expenses (including attorneys' fees) incurred by an
employee or agent in advance of the final disposition of such action, suit or
proceeding upon such terms and conditions, if any, as the Board of Directors
deems appropriate.
13. AMENDMENT OF CERTIFICATE OF INCORPORATION.
Except as set forth in this Article 13 or as otherwise
specifically required by law, no amendment of any provision of this Certificate
of Incorporation shall be made unless such amendment has been first proposed by
the Board of Directors of the Corporation upon the affirmative vote of at least
two-thirds of the directors then in office at a duly constituted meeting of the
Board of Directors called for such purpose, and thereafter approved by the
stockholders of the Corporation by the affirmative vote of the holders of at
least a majority of the shares entitled to vote thereon at a duly called annual
or special meeting; provided, however, that if such amendment is to the
provisions set forth in this Article 13 or in Article 5, 6, 7, 8, 9, 10, or 12
hereof, such amendment must be approved by the affirmative vote of the holders
of at least 66-2/3 percent of the then outstanding shares of stock of the
Corporation entitled to vote thereon rather than a majority; provided, further,
that if such amendment is to the provisions set forth in Article 11 hereof,
such amendment must be approved by the affirmative vote of the holders of at
least 80 percent of the shares entitled to vote thereon rather than a majority.
14. AMENDMENT OF BYLAWS.
The Board of Directors is expressly empowered to adopt, amend or
repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the
Bylaws of the Corporation by the Board of Directors shall require the approval
of a majority of the Board of Directors then in office. The stockholders shall
also have power to adopt, amend or repeal the Bylaws of the Corporation;
provided, however, that, in addition to any vote of the holders of any class or
series of
18
<PAGE> 19
stock of this Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least 80 percent of
the voting power of all of the then-outstanding shares of the capital stock of
the Corporation entitled to vote generally in the election of Directors (after
giving effect to the provisions of Section 4.5, voting together as a single
class, shall be required to adopt, amend or repeal any provisions of the Bylaws
of the Corporation.
19
<PAGE> 20
15. INCORPORATOR.
The name of the sole incorporator is Daniel J. Hogarty, Jr. and the
mailing address of the sole incorporator is The Troy Savings Bank, 32 Second
Street, Troy, New York 12180.
I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a
corporation under the laws of the State of Delaware, do make, file and record
this Certificate of Incorporation and do certify that the facts herein stated
are true, and accordingly, have hereto set my hand this 8th day of December,
1998.
/s/ Daniel J. Hogarty, Jr.
--------------------------------
Daniel J. Hogarty, Jr.
Incorporator
<PAGE> 1
EXHIBIT 3.2
BYLAWS
OF
TROY FINANCIAL CORPORATION
1. OFFICES.
1.1. REGISTERED OFFICE.
The initial registered office of the Corporation shall be in Wilmington,
Delaware, and the initial registered agent in charge thereof shall be
Corporation Service Company.
1.2. OTHER OFFICES.
The Corporation may also have offices at such other places, both within
and without the State of Delaware, as the Board of Directors may from time to
time determine or as may be necessary or useful in connection with the business
of the Corporation.
2. MEETINGS OF STOCKHOLDERS.
2.1. PLACE OF MEETINGS.
All meetings of the stockholders shall be held at such place as may be
fixed from time to time by the Board of Directors, the Chairman of the Board, or
the President and stated in the notice of meeting or in a duly executed waiver
of notice thereof.
2.2. ANNUAL MEETINGS.
The Corporation shall hold annual meetings of stockholders on the third
Thursday in January, at 11 a.m., if not a legal holiday, and if a legal holiday,
then on the next day following which is not a legal holiday, or at such other
date and time as shall be designated from time to time by the Board of
Directors, the Chairman of the Board or the President, but in no event later
than the end of February of any year, at which stockholders shall elect
directors and transact such other business as may properly be brought before the
meeting.
2.3. SPECIAL MEETINGS.
Special meetings of the stockholders for any purpose, unless otherwise
prescribed by statute, may be called only as provided in the Corporation's
Certificate of Incorporation, as amended from time to time (the "Certificate of
Incorporation"). Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
2.4. NOTICE OF MEETINGS.
Notice of any meeting of stockholders, stating the place, date and hour
of the meeting and the purpose or purposes for which the meeting is called,
shall be given to each stockholder entitled to vote at such meeting not less
than 10 days nor more than 60 days before the date of the meeting (except to the
extent that such notice is waived or is not required as provided in the General
Corporation Law of the State of Delaware (the "Delaware General Corporation
Law")). Such notice shall be given in accordance with, and shall be deemed
effective as set forth in, Section 222 (or any successor section) of the
Delaware General Corporation Law.
<PAGE> 2
2.5. WAIVERS OF NOTICE.
Whenever the giving of any notice is required by statute, the Certificate
of Incorporation or these Bylaws, a waiver thereof, in writing and delivered to
the Corporation, signed by the person or persons entitled to said notice,
whether before or after the event as to which such notice is required, shall be
deemed equivalent to notice. Attendance of a stockholder at a meeting shall
constitute a waiver of notice (a) of such meeting, except when the stockholder
at the beginning of the meeting objects to holding the meeting or transacting
business at the meeting, and (b) of consideration of a particular matter at the
meeting that is not within the purpose or purposes described in the meeting
notice, unless the stockholder objects to considering the matter at the
beginning of the meeting.
2.6. BUSINESS AT ANNUAL MEETING.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be (a) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors, (b) otherwise properly brought before the meeting by or at the
direction of the Board of Directors or (c) otherwise properly brought before the
meeting by a stockholder.
For business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary. To be timely, a stockholder's notice must be received at the
principal executive offices of the Corporation no later than the date designated
for receipt of stockholders' proposals in a prior public disclosure made by the
Corporation. If there has been no such prior public disclosure, then to be
timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 60 days nor
more than 90 days prior to the annual meeting; provided, however, that in the
event that less than 70 days' notice of the date of the annual meeting is given
to stockholders or prior public disclosure of the date of the meeting is made,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting (a) a brief description
of the business desired to be brought before the annual meeting and the reasons
for conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books, of the stockholder proposing such
business, (c) the class and number of shares of the Corporation which are
beneficially owned by the stockholder, (d) any material interest of the
stockholder in such business and (e) the same information required by clauses
(b), (c) and (d) above with respect to any other stockholder that, to the
knowledge of the stockholder proposing such business, supports such proposal.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at an annual meeting except in accordance with the procedures set
forth in this Section 2.6. The Chairman of the Board shall, if the facts
warrant, determine and declare to the annual meeting that a matter of business
was not properly brought before the meeting in accordance with the provisions of
this Section 2.6, and if the Chairman of the Board should so determine, the
Chairman of the Board shall so declare to the meeting and any such business not
properly brought before the meeting shall not be transacted.
2.7. LIST OF STOCKHOLDERS.
After the record date for a meeting of stockholders has been fixed, at
least 10 days before such meeting, the officer who has charge of the stock
ledger of the Corporation shall make a list of all stockholders entitled to vote
at the meeting, arranged in alphabetical order and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list
2
<PAGE> 3
shall be open to the examination of any stockholder for any purpose germane to
the meeting, during ordinary business hours, for a period of at least 10 days
prior to the meeting, either at a place in the city where the meeting is to be
held, which place is to be specified in the notice of the meeting, or at the
place where the meeting is to be held. Such list also shall, for the duration
of the meeting, be produced and kept open to the examination of any stockholder
who is present at the time and place of the meeting.
2.8. STOCK LEDGER.
The stock ledger of the Corporation shall be the only evidence as to who
are the stockholders entitled to examine the list required by Section 2.7 above
or to vote in person or by proxy at any meeting of stockholders.
2.9. QUORUM AT MEETINGS.
Stockholders may take action on a matter at a meeting only if a quorum
exists with respect to that matter. Except as otherwise provided by statute or
by the Certificate of Incorporation, the holders of a majority of the stock
issued and outstanding and entitled to vote at the meeting, and who are present
in person or represented by proxy, shall constitute a quorum at all meetings of
the stockholders for the transaction of business. Once a share is represented
for any purpose at a meeting (other than solely to object (a) to holding the
meeting or transacting business at the meeting or (b) to consideration of a
particular matter at the meeting that is not within the purpose or purposes
described in the meeting notice), it is deemed present for quorum purposes for
the remainder of the meeting and for any adjournment of that meeting unless a
new record date is or must be set for the adjourned meeting. The holders of a
majority of the voting shares represented at a meeting, whether or not a quorum
is present, may adjourn such meeting from time to time. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed. If the adjournment is for more than 30 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder entitled to vote at the
meeting.
2.10. VOTING AND PROXIES.
Unless otherwise provided in the Delaware General Corporation Law or in
the Certificate of Incorporation, and subject to the other provisions of these
Bylaws, each stockholder shall be entitled to one vote on each matter, in person
or by proxy, for each share of the Corporation's capital stock that has voting
power and that is held by such stockholder and such number of votes, including
multiple or fractional votes, as may be provided by resolution of the Board of
Directors for each share of serial preferred stock entitled to vote thereat held
by such stockholder. Proxies solicited on behalf of the Board of Directors shall
be voted as directed by the stockholder or, in the absence of such direction, as
determined by a majority of the Board of Directors. No proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period. A duly executed appointment of proxy shall be irrevocable if the
appointment form states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power.
2.11. REQUIRED VOTE.
If a quorum exists, any matter brought before any meeting of
stockholders (other than the election of directors) shall be decided by the
affirmative vote of the majority of the votes cast on the matter, unless the
Certificate of Incorporation or the Delaware General Corporation Law or these
Bylaws requires a greater number of affirmative votes (in which case such
different requirement shall apply). Directors shall be elected by a plurality of
the votes cast by the shares entitled to vote in the election (provided a quorum
exists), and the election of directors need not be by written ballot.
3
<PAGE> 4
The Board of Directors, in its discretion, may require that any votes cast at
such meeting shall be cast by written ballot.
2.12. ACTION WITHOUT A MEETING.
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
stockholders, and may not be effected by any consent in writing by such
stockholders, unless such written consent is unanimous, and the writing or
writings are delivered to the Corporation for inclusion in the Minute Book of
the Corporation.
2.13. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS.
If shares or other securities having voting power stand of record in the
names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or if
two or more persons have the same fiduciary relationship respecting the same
shares, unless the secretary of the Corporation is given written notice to the
contrary and is furnished with a copy of the instrument or order appointing them
or creating the relationship wherein it is so provided, their acts with respect
to voting shall have the following effect: (a) if only one votes, his or her act
binds all; (b) if more than one vote, the act of the majority so voting binds
all; (c) if more than one vote, but the vote is evenly split on any particular
matter, each fraction may vote the securities in question proportionally, or any
person voting the shares, or a beneficiary, if any, may apply to the Court of
Chancery of the State of Delaware or such other court as may have jurisdiction
to appoint an additional person to act with the persons so voting the shares,
which shall then be voted as determined by a majority of such persons and the
person appointed by the Court. If the instrument so filed shows that any such
tenancy is held in unequal interests, a majority or even-split for the purposes
of this Section 2.13 shall be a majority or even-split in interest.
2.14. VOTING OF SHARES BY CERTAIN HOLDERS.
Shares standing in the name of another corporation may be voted by any
officer, agent or proxy as the bylaws of such corporation may prescribe, or in
the absence of such provision, as the board of directors of such corporation may
determine. Shares held by an administrator, executor, guardian or conservator
may be voted by him or her, but no trustee shall be entitled to vote shares held
by such trustee without a transfer of such shares into his or her name. Shares
standing in the name of a receiver may be voted by such receiver, and shares
held by or under the control of a receiver may be voted by such receiver without
the transfer into his or her name if authority so to do is contained in an
appropriate order of the court or other public authority by which such receiver
was appointed.
A stockholder whose shares are pledged shall be entitled to vote such
shares unless in the transfer by the pledgor on the books of the Corporation
such stockholder has expressly empowered the pledgee to vote thereon, in which
case only the pledgee, or his or her proxy, may represent such stock and vote
thereon.
Neither treasury shares of its own stock held by the Corporation, nor
shares held by another corporation, if a majority of the shares entitled to vote
for the election of directors of such other corporation are held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time for purposes of any meeting.
2.15. INSPECTORS OF ELECTION.
In advance of any meeting of stockholders, the Chairman of the Board or
the President shall appoint one or more inspectors of election and any
substitute inspectors to act at the meeting or
4
<PAGE> 5
any adjournment thereof. Each inspector, before entering upon the discharge of
his or her duties, shall take and sign an oath faithfully to execute the duties
of inspector at such meeting with strict impartiality and according to the best
of his or her ability. The inspectors shall determine the number of shares of
stock outstanding and the voting power of each, the shares of stock represented
at the meeting, the existence of a quorum, the validity and effect of proxies
and ballots, and shall receive votes, ballots or consents, hear and determine
all challenges and questions arising in connection with the right to vote, count
and tabulate all votes, ballots or consents, determine the result, determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors, certify their determination of the
number of shares represented at the meeting, and their count of all votes and
ballots, and do such acts as are proper to conduct the election or vote with
fairness to all stockholders. The inspectors may appoint and retain other
persons or entities to assist the inspectors in the performance of the duties of
the inspectors. On request of the person presiding at the meeting, the
inspectors shall make a report in writing of any challenge, question or matter
determined by them and execute a certificate of any fact found by them.
3. DIRECTORS.
3.1. POWERS.
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors, which may exercise all such powers of
the Corporation and do all such lawful acts and things, subject to any
limitation set forth in the Certificate of Incorporation, these Bylaws or
agreements among stockholders which are otherwise lawful.
3.2. NUMBER AND ELECTION.
The number of directors which shall constitute the whole board shall not
be fewer than six nor more than nine. Within the limits above specified, the
number of directors shall be determined by resolution of the Board of Directors.
Directors shall be elected only by stockholders at annual meetings of
stockholders, other than the initial board of directors and except as provided
in Section 3.3 hereof in the case of vacancies and newly created directorships.
Each director elected shall hold office for the term for which such director is
elected and until such director's successor is elected and qualified or until
such director's earlier resignation or removal.
3.3. VACANCIES.
Vacancies and newly created directorships resulting from any increase in
the authorized number of directors shall be filled, for the unexpired term, by
the concurring vote of a majority of the directors then in office, whether or
not a quorum, and any director so chosen shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified or until such director's earlier death, resignation
or removal.
3.4. CLASSES; TERMS OF OFFICE.
Unless otherwise provided in the Certificate of Incorporation, the Board
of Directors shall divide the directors into three classes; and, when the number
of directors is changed, shall determine the class or classes to which the
increased or decreased number of directors shall be apportioned; provided,
however, that no decrease in the number of directors shall affect the term of
any director then in office. At each annual meeting of stockholders, directors
elected to succeed those whose terms are expiring shall be elected for a term of
office expiring at the annual meeting of stockholders held in the third year
following their election and until their respective successors are elected and
qualified, or until such director's earlier death, resignation or removal.
5
<PAGE> 6
3.5. NOMINATION OF DIRECTORS.
Nominations of persons for election to the Board of Directors may be made
by the Board of Directors, or by any stockholder of the Corporation entitled to
vote for the election of directors at the annual meeting who complies with the
notice procedures set forth in this Section 3.5. Nominations by stockholders
shall be made pursuant to timely notice in writing to the Secretary. To be
timely, a stockholder's notice shall be received at the principal executive
offices of the Corporation no later than the date designated for receipt of
stockholders' proposals in a prior public disclosure made by the Corporation. If
there has been no such prior public disclosure, then to be timely, a
stockholder's nomination must be delivered to or mailed and received at the
principal executive offices of the Corporation not less than 60 days nor more
than 90 days prior to the annual meeting; provided, however, that in the event
that less than 70 days' notice of the date of the meeting is given to
stockholders or prior public disclosure of the date of the meeting is made,
notice by the stockholder to be timely must be so received not later than the
close of business on the 10th day following the day on which such notice of the
date of the annual meeting was mailed or such public disclosure was made. Such
stockholder's notice shall set forth (a) as to each person whom the stockholder
proposes to nominate for election or re-election as a director, (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares of
the Corporation which are beneficially owned by such person, and (iv) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including without limitation such person's written consent to being
named in the proxy statement as a nominee and to serving as a director if
elected); and (b) as to the stockholder giving notice (i) the name and address,
as they appear on the Corporation's books, of the stockholder proposing such
nomination, and (ii) the class and number of shares of the Corporation which are
beneficially owned by the stockholder. At the request of the Board of Directors,
any person nominated by the Board of Directors for election as a director shall
furnish to the Secretary that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the procedures set forth in this Section 3.5. The Chairman of
the Board shall, if the facts warrant, determine and declare to the annual
meeting that a nomination was not made in accordance with the provisions of this
Section 3.5, and if the Chairman of the Board should so determine, the Chairman
of the Board shall so declare to the meeting and the defective nomination shall
be disregarded.
3.6. MEETINGS.
(a) REGULAR MEETINGS.
Regular meetings of the Board of Directors may be held without notice at
such time and at such place as shall from time to time be determined by the
Board of Directors.
(b) SPECIAL MEETINGS.
Special meetings of the Board of Directors may be called by the Chairman
of the Board, President or any two directors on one day's notice to each
director, either personally or by telephone, express delivery service (so that
the scheduled delivery date of the notice is at least one day in advance of the
meeting), telegram or facsimile transmission, and on five days' notice by mail
(effective upon deposit of such notice in the mail). The notice need not
describe the purpose of a special meeting.
6
<PAGE> 7
(c) TELEPHONE MEETINGS.
Members of the Board of Directors may participate in a meeting of the
Board of Directors by means of conference telephone or similar communications
equipment by means of which all participating directors can simultaneously hear
each other during the meeting. A director participating in a meeting by this
means is deemed to be present in person at the meeting.
(d) ACTION WITHOUT MEETING.
Any action required or permitted to be taken at any meeting of the Board
of Directors may be taken without a meeting if all members of the Board of
Directors consent thereto in writing, and the writing or writings are delivered
to the Corporation for inclusion in the Minute Book of the Corporation.
(e) WAIVER OF NOTICE OF MEETING; PRESUMPTION OF ASSENT.
A director may waive any notice required by statute, the Certificate of
Incorporation or these Bylaws before or after the date and time stated in the
notice. Except as set forth below, the waiver must be in writing, signed by the
director entitled to the notice, and delivered to the Corporation for inclusion
in the Minute Book of the Corporation. Notwithstanding the foregoing, a
director's attendance at or participation in a meeting waives any required
notice to the director of the meeting unless the director at the beginning of
the meeting objects to holding the meeting or transacting business at the
meeting and does not thereafter vote for or assent to action taken at the
meeting. A director who is present at a meeting is presumed to have assented to
any action taken unless such director enters a dissent or abstention in the
minutes of the meeting or files a written dissent to such action no later than
five days after such director receives a copy of the minutes of the meeting,
provided that the right to dissent shall not apply to a director who votes in
favor of such action.
(f) QUORUM AND VOTE AT MEETINGS.
At all meetings of the Board of Directors, a quorum of the Board of
Directors consists of a majority of the total number of directors prescribed
pursuant to Section 3.2 hereof (or, if no number is prescribed, the number in
office immediately before the meeting begins). The vote of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute or by the Certificate of Incorporation or by these Bylaws. In the
absence of a quorum for any meeting of the Board of Directors, a majority of the
directors present thereat may adjourn such meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
3.7. COMPENSATION OF DIRECTORS.
The Board of Directors shall have the authority to fix the compensation
of directors. The directors may be paid their reasonable expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a
reasonable fixed sum for actual attendance at each meeting of the Board of
Directors. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
3.8. INTERESTED DIRECTORS.
No contract or transaction between the Corporation and one or more of its
directors or officers, or between the Corporation and any other corporation,
partnership, association, or other
7
<PAGE> 8
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or her or their
votes are counted for such purpose if: (a) the material facts as to his or her
or their relationship or interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the committee, and the Board
of Directors or committee in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or (b) the material
facts as to his or her or their relationship or interest and as to the contract
or transaction are disclosed to or are known by the stockholders entitled to
vote thereon, and the contract or transaction is specifically approved in good
faith by vote of the stockholders; or (c) the contract or transaction is fair as
to the Corporation as of the time it is authorized, approved or ratified by the
board of directors, a committee thereof or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
3.9. RESIGNATION.
Any director may resign at any time by sending a written notice of such
resignation to the Chairman of the Board or the President of the Corporation.
Unless otherwise specified therein such resignation shall take effect upon
receipt thereof by the Chairman of the Board or the President. More than three
consecutive absences from regular meetings of the Board of Directors, unless
excused by resolution of the Board of Directors, shall automatically constitute
a resignation, effective when such resignation is accepted by the Board of
Directors.
4. COMMITTEES.
4.1. CREATION OF COMMITTEES.
The Board of Directors may by resolution create one or more committees
and appoint members of the Board of Directors to serve on them. Each committee
may have one or more members, who serve at the pleasure of the Board of
Directors. The Board of Directors shall establish an Audit Committee and a Stock
Option Committee, composed in each case only of directors who are not employees
of the Corporation or any subsidiary thereof. The creation of a committee and
appointment of members to it shall be approved by a majority of all the
directors in office when the action is taken, whether or not a quorum. The
designation of any committee pursuant to this Article 4 and the delegation of
authority thereto shall not operate to relieve the Board of Directors, or any
director, of any responsibility imposed by law or regulation. The same rules
that govern meetings, action without meetings, notice and waiver of notice, and
quorum and voting requirements of the Board of Directors apply to committees and
their members as well.
4.2. EXECUTIVE COMMITTEE.
The Board of Directors may by resolution designate the chief executive
officer and two or more other directors to constitute an Executive Committee.
The chairman of the Executive Committee shall be designated by the Board of
Directors. The Executive Committee may fix its own rules of procedure which
shall not be inconsistent with these Bylaws. It shall keep regular minutes of
its proceedings and report the same to the full Board of Directors for its
information at the meeting thereof held next after the proceedings shall have
taken place. Subject to Section 4.4 below, each member of the Executive
Committee shall hold office until the next annual regular meeting of the Board
of Directors following his or her designation and until his or her successor is
designated as a member of the Executive Committee.
8
<PAGE> 9
4.3. EXECUTIVE COMMITTEE AUTHORITY.
The Executive Committee, when the Board of Directors is not in session,
shall have and may exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Corporation, and
may authorize the seal of the Corporation to be affixed to all papers which may
require it, except to the extent, if any, that such powers and authority shall
be limited by the resolution appointing the Executive Committee; and except also
that the Executive Committee shall not have the power or authority of the Board
of Directors with reference to amending the Certificate of Incorporation;
adopting an agreement of merger or consolidation; recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets; recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution; amending the
Bylaws of the Corporation; filling a vacancy or creating a new directorship; or
approving a transaction in which any member of the such committee, directly or
indirectly, has any material beneficial interest; and unless the resolution or
Bylaws expressly so provide, the Executive Committee shall not have the power or
authority to declare a dividend or to authorize the issuance of stock or
securities convertible into or exercisable for stock.
4.4. RESIGNATION AND REMOVAL.
Any member of the Executive Committee may be removed at any time with or
without cause by resolution adopted by a majority of the full Board of
Directors. Any member of the Executive Committee may resign from the Executive
Committee at any time by giving written notice to the Chairman of the Board or
the President of the Corporation. Unless otherwise specified therein, such
resignation shall take effect upon receipt. The acceptance of such resignation
shall not be necessary to make it effective.
5. OFFICERS.
5.1. POSITIONS.
The officers of the Corporation shall be a Chairman of the Board, a
President, and a Secretary, and such other officers as the Board of Directors
(or an officer authorized by the Board of Directors) from time to time may
appoint, including one or more Vice Chairmen, Executive Vice Presidents, Vice
Presidents, Assistant Secretaries and Assistant Treasurers. Each such officer
shall exercise such powers and perform such duties as shall be set forth below
and such other powers and duties as from time to time may be specified by the
Board of Directors or by any officer(s) authorized by the Board of Directors to
prescribe the duties of such other officers. Any number of offices may be held
by the same person.
5.2. POWERS.
(a) Each officer shall have, in addition to the duties and powers set
forth herein, such duties and powers as are commonly incident to such officer's
office and such additional duties and powers as the Board of Directors may from
time to time authorize.
(b) Powers of attorney, proxies, waivers of notice of meetings, consents
and other instruments relating to securities or partnership interests owned by
the Corporation may be executed in the name of and on behalf of the Corporation
by the Chairman of the Board, the President or any Vice President, and any such
officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities, or at any meeting of any partnership in which the Corporation
owns an interest at any such meeting, shall possess and may exercise any and all
rights and powers incident to the
9
<PAGE> 10
ownership of such securities or partnership interest and which, as the owner
thereof, the Corporation might have possessed and exercised, if present. The
Board of Directors may, by resolution, from time to time confer like powers upon
any other person or persons.
5.3. CHAIRMAN OF THE BOARD.
The Chairman of the Board shall (when present) preside at all meetings of
the Board of Directors and stockholders, and shall ensure that all orders and
resolutions of the Board of Directors and stockholders are carried into effect.
The Chairman of the Board may execute bonds, mortgages and other contracts,
under the seal of the Corporation, if required, except where required or
permitted by law to be otherwise signed and executed and except where the
signing and execution thereof shall be expressly delegated by the Board of
Directors to some other officer or agent of the Corporation.
5.4. PRESIDENT.
The President of the Corporation shall be the chief executive officer,
unless the Board of Directors designates the Chairman of the Board as the chief
executive officer. The President shall have overall responsibility and authority
for management of the operations of the Corporation, subject to the authority of
the Board of Directors and the Chairman of the Board. The President may execute
bonds, mortgages and other contracts, under the seal of the Corporation, if
required, except where required or permitted by law to be otherwise signed and
executed and except where the signing and execution thereof shall be expressly
delegated by the Board of Directors to some other officer or agent of the
Corporation.
5.5. VICE PRESIDENT.
Any Vice President shall have such duties and powers as shall be set
forth in these Bylaws or as shall be designated from time to time by the Board
of Directors or by the Chairman of the Board or President. In the absence of the
President or in the event of the President's inability or refusal to act, the
Vice President (or in the event there be more than one Vice President, the Vice
Presidents in the order designated, or in the absence of any designation, then
in the order of their election) shall perform the duties of the President, and
when so acting shall have all the powers of, and be subject to all the
restrictions upon, the President. Any Vice President may execute bonds,
mortgages and other documents under the seal of the Corporation, except where
required or permitted by law to be otherwise executed and except where the
execution thereof shall be expressly delegated by the Board of Directors to some
other officer or agent of the Corporation.
5.6. SECRETARY.
The Secretary shall have responsibility for preparation of minutes of
meetings of the Board of Directors and of the stockholders and for
authenticating records of the Corporation. The Secretary shall give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors. The Secretary or an Assistant Secretary also may attest all
instruments signed by any other officer of the Corporation.
5.7. ASSISTANT SECRETARY.
The Assistant Secretary, or if there be more than one, the Assistant
Secretaries in the order determined by the Board of Directors (or if there shall
have been no such determination, then in the order of their election), shall, in
the absence of the Secretary or in the event of the Secretary's inability or
refusal to act, perform the duties and exercise the powers of the Secretary.
10
<PAGE> 11
5.8. TREASURER.
The Treasurer shall have responsibility for the custody of the corporate
funds and securities and shall see to it that full and accurate accounts of
receipts and disbursements are kept in books belonging to the Corporation. The
Treasurer shall render to the Chairman of the Board, the President, the Vice
President, and the Board of Directors, upon request, an account of all financial
transactions and of the financial condition of the Corporation.
5.9. ASSISTANT TREASURER.
The Assistant Treasurer, or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors (or if
there shall have been no such determination, then in the order of their
election), shall, in the absence of the Treasurer or in the event of the
Treasurer's inability or refusal to act, perform the duties and exercise the
powers of the Treasurer.
5.10. TERM OF OFFICE.
The officers of the Corporation shall hold office until their successors
are chosen and qualified or until their death, earlier resignation or removal.
Any vacancy occurring in any office of the Corporation shall be filled by the
Board of Directors. Any officer may resign at any time upon written notice to
the Corporation. Any officer elected or appointed by the Board of Directors may
be removed at any time, with or without cause, by the affirmative vote of a
majority of the Board of Directors. Any officer may be removed by the Board of
Directors whenever in its judgment the best interests of the Corporation will be
served thereby, but such removal, other than for cause, shall be without
prejudice to the contract rights, if any, of the person so removed.
6. CAPITAL STOCK.
6.1. CERTIFICATES OF STOCK; UNCERTIFICATED SHARES.
The shares of the Corporation shall be represented by certificates,
provided that the Board of Directors may provide by resolution that some or all
of any or all classes or series of the Corporation's stock shall be
uncertificated shares. Any such resolution shall not apply to shares represented
by a certificate until such certificate is surrendered to the Corporation.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates, and upon request every holder
of uncertificated shares, shall be entitled to have a certificate (representing
the number of shares registered in certificate form) signed in the name of the
Corporation by the Chairman of the Board, the President, or any Vice President,
and by the Treasurer, Secretary or any Assistant Treasurer or Assistant
Secretary. Any or all the signatures on the certificate may be facsimile. In
case any officer, transfer agent or registrar whose signature or facsimile
signature appears on a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if such person were such officer,
transfer agent or registrar at the date of issue.
6.2. LOST CERTIFICATES.
The Chairman of the Board, the President, or any Vice President may
direct a new certificate of stock to be issued in place of any certificate
theretofore issued by the Corporation and alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
that the certificate of stock has been lost, stolen or destroyed. When
authorizing such issuance of a new certificate, such officer may, as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or such owner's legal representative, to
advertise the same in such manner as such officer shall require and/or to give
the Corporation a bond, in such sum as such officer may direct as indemnity
against any claim that may
11
<PAGE> 12
be made against the Corporation on account of the certificate alleged to have
been lost, stolen or destroyed or on account of the issuance of such new
certificate or uncertificated shares.
6.3. RECORD DATE.
(a) ACTIONS BY STOCKHOLDERS.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders (or to take any other
action), the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors and shall not be less than 10 nor more than 60 days
before the meeting or action requiring a determination of stockholders.
In order that the Corporation may determine the stockholders entitled to
consent to corporate action without a meeting, the Board of Directors may fix a
record date, which record date shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors and shall
not be more than 10 days after the date upon which the resolution fixing the
record date is adopted by the Board of Directors.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting,
unless the Board of Directors fixes a new record date.
If no record date is fixed by the Board of Directors, the record date
shall be at the close of business on the day next preceding the day on which
notice is given, or if notice is not required or is waived, at the close of
business on the day next preceding the day on which the meeting is held or such
other action is taken, except that (if no record date is established by the
Board of Directors) the record date for determining stockholders entitled to
consent to corporate action without a meeting is the first date on which a
stockholder delivers a signed written consent to the Corporation for inclusion
in the Minute Book of the Corporation.
(b) PAYMENTS.
In order that the Corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any rights
or the stockholders entitled to exercise any rights in respect of any change,
conversion or exchange of stock, or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted,
and which record date shall be not more than 60 days prior to such action. If no
record date is fixed, the record date for determining stockholders for any such
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto.
(c) STOCKHOLDERS OF RECORD.
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends, to
receive notifications, to vote as such owner, and to exercise all the rights and
powers of an owner. The Corporation shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise may be provided by law.
12
<PAGE> 13
7. INSURANCE.
The Corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the Corporation
(or is or was serving at the request of the Corporation as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise) against liability
asserted against or incurred by such person in such capacity or arising from
such person's status as such (whether or not the Corporation would have the
power to indemnify such person against the same liability).
8. INDEMNIFICATION.
8.1. INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN THOSE
BY OR IN RIGHT OF THE CORPORATION.
(a) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, and any appeal therein, whether civil, criminal,
administrative, arbitrative, or investigative (other than an action by or in
right of the Corporation) by reason of the fact that such person is or was a
director, officer, trustee, employee, or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, trustee,
employee, or agent of another corporation, association, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, and any appeal therein, if such person acted in good faith
and in a manner which such person reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe that such conduct was
unlawful. The termination of any action, suit or proceeding, and any appeal
therein, by judgment, order, settlement, conviction, or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which such person
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that such conduct was unlawful.
8.2. INDEMNIFICATION IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE
RIGHT OF THE CORPORATION.
(a) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that such person is or was a director,
officer, trustee, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, trustee, employee or
agent of another corporation, association, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Corporation. No such indemnification shall
be made against expenses in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the Corporation or against
amounts paid in settlement unless and only to the extent that there is a
determination (as set forth in Section 8.3 hereof) that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses or
amounts paid in settlement.
13
<PAGE> 14
8.3. AUTHORIZATION OF INDEMNIFICATION.
Any indemnification under this Article 8 shall be made by the Corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because such person or persons have met the applicable standard of
conduct set forth in Sections 8.1 and 8.2 hereof and, if applicable, is fairly
and reasonably entitled to indemnity as set forth in Section 8.2, as the case
may be. Such determination shall be made (a) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (b) if such a quorum is not obtainable, or, even
if obtainable a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (c) by a majority of the stockholders
entitled to vote generally in the election of directors. To the extent, however,
that a director, officer, trustee, employee or agent of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
he or she shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection therewith, without
the necessity of authorization in the specific case. No director, officer,
trustee, employee or agent of the Corporation shall be entitled to
indemnification in connection with any action, suit or proceeding voluntarily
initiated by such person unless the action, suit or proceeding was authorized by
a majority of the entire Board of Directors.
8.4. GOOD FAITH DEFINED.
For purposes of any determination under Section 8.3 hereof, a person
shall be deemed to have acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests of the Corporation, or,
with respect to any criminal action or proceeding, to have had no reasonable
cause to believe his or her conduct was unlawful, if his or her action is based
on the records or books of account of the Corporation or another enterprise, or
on information supplied to him or her by the officers of the Corporation or
another enterprise in the course of their duties, or on the advice of legal
counsel for the Corporation or another enterprise or on information or records
given or reports made to the Corporation or another enterprise by an independent
certified public accountant or by an appraiser or other expert selected with
reasonable care by the Corporation or another enterprise. The term "another
enterprise" as used in this Section 8.4 shall mean any other corporation or any
association, partnership, joint venture, trust or other enterprise of which such
person is or was serving at the request of the Corporation as a director,
officer, trustee, employee or agent. The provisions of this Section 8.4 shall
not be deemed to be exclusive or to limit in any way the circumstances in which
a person may be deemed to have met the applicable standards of conduct set forth
in Sections 8.1 or 8.2 hereof, as the case may be.
8.5. INDEMNIFICATION BY A COURT.
Notwithstanding any contrary determination in the specific case under
Section 8.3, and notwithstanding the absence of any determination thereunder,
any director, officer, trustee, employee or agent may apply to any court of
competent jurisdiction in the State of Delaware for indemnification to the
extent otherwise permissible under Sections 8.1 and 8.2 above. The basis of such
indemnification by a court shall be a determination by such court that
indemnification of the director, officer, trustee, employee or agent is proper
in the circumstances because he or she has met the applicable standards of
conduct set forth in Sections 8.1 and 8.2 above, as the case may be. Notice of
any application for indemnification pursuant to this Section 8.5 shall be given
to the Corporation promptly upon the filing of such application. Notwithstanding
any of the foregoing, unless otherwise required by law, no director, officer,
trustee, employee or agent of the Corporation shall be entitled to
indemnification in connection with any action, suit or proceeding voluntarily
initiated by such person unless the action, suit or proceeding was authorized by
a majority of the entire Board of Directors.
14
<PAGE> 15
8.6. ADVANCEMENT OF EXPENSES.
The Corporation may advance expenses (including attorneys' fees) incurred
by a director, officer, employee or agent in advance of the final disposition of
such action, suit or proceeding upon the receipt of an undertaking by or on
behalf of such person to repay such amount if it shall ultimately be determined
that such person is not entitled to indemnification from the Corporation as
authorized in this Article 8.
8.7. CONTRACT, NON-EXCLUSIVITY AND SURVIVAL OF INDEMNIFICATION.
The indemnification provided by this Article 8 shall be deemed to be a
contract between the Corporation and each director, officer, employee and agent
who serves in such capacity at any time while this Article 8 is in effect, and
any repeal or modification thereof shall not affect any rights or obligations
then existing with respect to any state of facts then or theretofore existing or
any action, suit or proceeding theretofore or thereafter brought based in whole
or in part upon any such state of facts. Further, the indemnification and
advancement of expenses provided by this Article 8 shall not be deemed exclusive
of any other rights to which those seeking indemnification and advancement of
expenses may be entitled under any certificate of incorporation, bylaw,
agreement, contract, vote of stockholders or disinterested directors or pursuant
to the direction (howsoever embodied) of any court of competent jurisdiction or
otherwise, both as to action in his or her official capacity and as to action in
another capacity while holding such office, it being the policy of the
Corporation that, subject to the limitation in Section 8.3 hereof concerning
voluntary initiation of actions, suits or proceedings, indemnification of the
persons specified in Sections 8.1 and 8.2 hereof shall be made to the fullest
extent permitted by law. The provisions of this Article 8 shall not be deemed to
preclude the indemnification of any person who is not specified in Sections 8.1
or 8.2 of this Article 8 but whom the Corporation has the power or obligation to
indemnify under the provisions of the law of the State of Delaware. The
indemnification and advancement of expenses provided by, or granted pursuant to,
this Article 8 shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be a director, officer, trustee,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
8.8. MEANING OF "CORPORATION" FOR PURPOSES OF ARTICLE 8.
For purposes of this Article 8, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers and employees or agents, so that
any person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
association, partnership, joint venture, trust or other enterprise, shall stand
in the same position under the provisions of this Article 8 with respect to the
resulting or surviving corporation as he or she would have with respect to such
constituent corporation if its separate existence had continued.
9. NOTICES.
9.1. NOTICES.
Whenever written notice is required by law, the Certificate of
Incorporation or these Bylaws to be given to any director, member of a committee
or stockholder, such notice may be given by mail, addressed to such director,
member of a committee or stockholder, at his or her address as it appears on the
records of the Corporation, with postage thereon prepaid, and such notice shall
be deemed to be given at the time when the same shall be deposited in the United
States mail. Written notice may also be given personally or by telegram, telex
or telecopy.
15
<PAGE> 16
9.2. WAIVERS OF NOTICE.
Whenever any notice is required by law, the Certificate of Incorporation
or these bylaws to be given to any director, member of a committee or
stockholder, a waiver thereof in writing, signed by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting with the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at nor the purpose of any regular or special meeting
of the stockholders, directors, or members of a committee of directors need be
specified in any other waiver of notice unless so required by the Certificate of
Incorporation or these Bylaws.
10. GENERAL PROVISIONS.
10.1. INSPECTION OF BOOKS AND RECORDS.
Any stockholder, in person or by attorney or other agent, shall, upon
written demand under oath stating the purpose thereof, have the right during the
usual hours for business to inspect for any proper purpose the Corporation's
stock ledger, a list of its stockholders, and its other books and records, and
to make copies or extracts therefrom. A proper purpose shall mean a purpose
reasonably related to such person's interest as a stockholder. In every instance
where an attorney or other agent shall be the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing which authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office or at its principal place of business.
10.2. DIVIDENDS.
The Board of Directors may declare dividends upon the capital stock of
the Corporation, subject to the provisions of the Certificate of Incorporation
and the laws of the State of Delaware, and such dividends may be paid in cash,
in property, or in shares of capital stock of the Corporation. Subject to the
Delaware General Corporation Law, such dividends may be paid either out of
surplus, out of the net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year.
10.3. RESERVES.
The Board of Directors may set apart, out of the funds of the Corporation
available for dividends, a reserve or reserves for any proper purpose and may
abolish any such reserve.
10.4. EXECUTION OF INSTRUMENTS.
All checks, drafts or other orders for the payment of money, and
promissory notes of the Corporation shall be signed by such officer or officers
or such other person or persons as the Board of Directors may from time to time
designate.
10.5. FISCAL YEAR.
The fiscal year of the Corporation shall begin on October 1 and end on
September 30.
16
<PAGE> 17
10.6. SEAL.
The corporate seal shall be in such form as the Board of Directors shall
approve. The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or otherwise reproduced.
11. AMENDMENTS TO BYLAWS.
The Board of Directors may from time to time adopt, amend and repeal
these Bylaws. Such action by the Board of Directors shall require the
affirmative vote of at least a majority of the directors then in office. If
stockholders are entitled to vote with respect thereto to amend or repeal Bylaws
adopted by the Board of Directors as may be provided in the Certificate of
Incorporation or by law, then the affirmative vote of 66-2/3% of the total
number of votes of the then outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required for the amendment or repeal of
Bylaws by the stockholders of the Corporation. Any amendments to Sections 3.2,
3.4 and 3.5 of the Corporation's Bylaws shall require the affirmative vote of
the stockholders set forth in the preceding sentence.
* * * * *
17
<PAGE> 18
The foregoing Bylaws were adopted by the Board of Directors on July 15,
1998, and amended on December 10, 1998.
/s/ Daniel J. Hogarty, Jr.
--------------------------------
Daniel J. Hogarty, Jr.
Chairman of the Board
Attested:
/s/ Kevin M. O'Bryan
- -----------------------
Kevin M. O'Bryan
Secretary
<PAGE> 1
EXHIBIT 4.3
FORM OF STOCK CERTIFICATE
[FRONT]
TROY FINANCIAL CORPORATION
(Incorporated under the laws of the State of Delaware)
Number Shares
------ ------
TRYF
COMMON STOCK See reverse for certain definitions
Par Value $.0001
THIS IS TO CERTIFY that CUSIP
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.0001
PER SHARE,
TROY FINANCIAL CORPORATION
The shares represented by this certificate are transferable only on the
stock transfer books of Troy Financial Corporation by the holder of record
thereof, or by his or her duly authorized attorney or legal representative, upon
the surrender of this certificate properly endorsed. This certificate and the
shares represented hereby are issued and shall be subject to all the provisions
of the Certificate of Incorporation of Troy Financial Corporation and any
amendments thereto (copies of which are on file with the Transfer Agent), to all
of which provisions the holder by acceptance hereof, assents.
This certificate is not valid until countersigned and registered by the
Corporation's Transfer Agent and Registrar. The shares represented by this
certificate are not insured by the Federal Deposit Insurance Corporation or by
any other government agency.
IN WITNESS THEREOF, Troy Financial Corporation has caused this
certificate to be executed by the facsimile signatures of its duly authorized
officers and has caused a facsimile of its corporate seal to be hereunto
affixed.
Dated:
<TABLE>
<S> <C> <C>
/s/ Kevin M. O'Bryan [SEAL] /s/ Daniel J. Hogarty, Jr.
Corporate Secretary Chairman of the Board and President
</TABLE>
COUNTERSIGNED AND REGISTERED:
(NEW YORK) TRANSFER AGENT AND REGISTRAR
BY:
<PAGE> 2
[REVERSE]
TROY FINANCIAL CORPORATION
The shares represented by this certificate are issued subject to all the
provisions of the Certificate of Incorporation and Bylaws of Troy Financial
Corporation (the "Corporation") as from time to time may be amended (copies of
which are on file at the principal office of the Corporation), to all of which
the holder by acceptance hereof, assents. The following description constitutes
a summary of certain provisions of, and is qualified in its entirety by
reference to, the Certificate of Incorporation.
The Board of Directors of the Corporation is authorized by resolution(s),
from time to time adopted, to provide for the issuance of serial preferred stock
and to fix the designation, powers, preferences and other rights of the shares
of each such series and to fix the qualifications, limitations and restrictions
thereon. The Certificate of Incorporation limits the voting rights of
stockholders who beneficially own, directly or indirectly, in excess of 10% of
the then outstanding shares of common stock of the Corporation. Stockholders may
only take actions required or permitted to be taken by such stockholders at duly
called annual or special stockholders meetings, and may not do so by written
consent, unless such consent is unanimous. Stockholders may only call a special
stockholders meeting if the holders of at least 66-2/3% of the voting stock of
the Corporation agree to do so.
No person may acquire control (the power to vote or direct the voting of
25% or more of the voting stock of the Corporation) of the Corporation at any
time, unless such acquisition has been previously approved by the affirmative
vote of the holders of at least 66-2/3 percent of the voting stock of the
Corporation at a stockholders meeting called for such purpose. Violation of this
provision will cause such person's excess shares of stock to be considered
"excess shares," and such excess shares will not be entitled to vote on any
matter, take other stockholder action, be counted in determining the total
number of outstanding shares for purposes of any matter involving stockholder
action, or be transferable except with the approval of the Board of Directors.
This provision does not apply to an acquisition or offer to acquire securities
of the Corporation by underwriters in connection with a public offering of such
securities or by any employee stock purchase plan, pension plan, profit sharing
plan or other employee benefit plan of the Corporation or any of its
subsidiaries.
The shares represented by this certificate may not be cumulatively voted
in the election of directors. The affirmative vote of the holders of at least
80% of the voting stock of the Corporation and the holders of at least
two-thirds of the total voting power of the then outstanding voting shares of
voting stock of the Corporation is required to approve certain business
combinations and other transactions with interested stockholders (generally
includes any person who is the beneficial owner, directly or indirectly, of five
percent or more of the voting power of the then outstanding voting stock of the
Corporation). Amendment of certain provisions of the Certificate of
Incorporation requires the affirmative vote of at least 66-2/3% or 80% of the
then outstanding shares of stock of the Corporation entitled to vote thereon.
The Corporation will furnish to any stockholder upon written request
and without charge, a statement of the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation or to its
transfer agent and registrar.
<PAGE> 3
The following abbreviations, when used in the inscription on the face of
this certificate shall be construed as through they were written out in full
according to applicable laws and regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as tenants
in common
UNIF GIFT MIN ACT - ____ (Custodian) ___ (Minor) under Uniform Gifts to
Minors Act ___ (State)
Additional abbreviations may also be used though not in the above list.
For value received, __________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [___]
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE
shares of common stock evidenced by this certificate, and does hereby
irrevocably constitute and appoint ______________, as Attorney, to transfer said
common stock on the books of Troy Financial Corporation with full power of
substitution.
Dated:________
Signature:_____________________________________________________________________
NOTICE: The signature to this assignment must correspond with the
name as written upon the face of the certificate, in every
particular, without alteration or enlargement, or any change
whatsoever.
SIGNATURE GUARANTEED:__________________________________________________________
The signature(s) should be guaranteed by an Eligible
Guarantor Institution (banks, stockbrokers, savings
associations, credit unions and nation securities
exchanges with membership in an approved signature
guarantee medallion program). Pursuant to S.E.C. Rule
17Ad-15.
<PAGE> 1
EXHIBIT 8.3
[LETTERHEAD OF FINPRO, INC.]
December 10, 1998
Board of Trustees
The Troy Savings Bank
32 2nd Street
Troy, NY 12180
Dear Board Members:
All capitalized terms not otherwise defined in this letter have the meanings
given such terms in the Plan of Conversion, as amended (the "Plan") adopted by
the Board of Trustees of The Troy Savings Bank (the "Bank"), whereby the Bank
will convert from a New York State-chartered mutual savings bank to a New York
State-chartered stock savings bank and issue all of the Bank's outstanding
capital stock to Troy Financial Corporation (the "Company"). Simultaneously, the
Company will issue shares of common stock.
We understand that in accordance with the Plan, Subscription Rights to purchase
shares of the Conversion Stock are to be issued to (i) Eligible Account Holders;
(ii) Employee Plans; and (iii) Supplemental Eligible Account Holders, together
collectively referred to as the "Recipients". Based solely on our observation
that the Subscription Rights will be available to such Recipients without cost,
will be legally non-transferable and of short duration, and will afford the
Recipients the right only to purchase shares of Conversion Stock at the same
price as will be paid by members of the general public in the Community
Offering, if any, but without undertaking any independent investigation of state
or federal law or the position of the Internal Revenue Service with respect to
this issue, we are of the belief that:
(1) the Subscription Rights will have no ascertainable market value; and
(2) the price at which the Subscription Rights are excercisable will not
be more or less than the pro forma market value of the shares upon
issuance.
Changes in the local and national economy, the legislative and regulatory
environment, the stock market, interest rates, and other external forces (such
as natural disasters or significant world events) may occur from time to time,
often with great unpredictability and may materially impact the value of thrift
stocks as a whole or the Company's value alone. Accordingly, no assurance can be
given that persons who subscribe to shares of Conversion Stock in the Conversion
will thereafter be able to buy or sell such shares at the same price paid in the
Subscription Offering.
Very Truly Yours,
/s/ FinPro, Inc.
<PAGE> 1
EXHIBIT 10.6
FIN PRO
26 Church Street
POB 323
Liberty Corner, NJ 07938
Troy Savings Bank
Agreement to provide Appraisal and Business Plan Services
SECTION 1: SERVICES TO BE RENDERED
APPRAISAL
As part of the Conversion and Stock Offering services, the following major tasks
will be included:
- - conduct financial due diligence, including on-site interviews of senior
management and reviews of financial and other records;
- - gather an understanding of the Bank's financial condition, profitability,
risk characteristics, operations and external factors that might
influence or impact the Bank;
- - prepare a detailed written valuation report of the Bank and the Company,
that is consistent with applicable regulatory guidelines and standard
valuation practices;
- - prepare and deliver an opinion, in form and substance acceptable to legal
and tax counsel of the Bank, to the effect that the subscription rights
granted to eligible account holders, the applicable stock benefit plans
and others in connection with the mutual holding company reorganization
and minority stock offering, have no value.
The valuation report will:
- - include an in-depth analysis of the operating results and financial
condition of the Bank;
- - assess the interest rate risk, credit risk and liquidity risk;
- - describe the business strategies of the Bank and the Company, the market
area, competition and potential for the future;
- - include a detailed peer analysis of publicly traded savings institutions
for use in determining appropriate valuation adjustments based upon
multiple factors;
- - include a midpoint pro forma valuation along with a range of value around
the midpoint value;
- - comply, in form and substance to all applicable requirements of
regulatory authorities for purposes of its use to establish the estimated
pro forma market value of the common stock of the Company following the
Conversion and Stock Offering.
The valuation report may be periodically updated throughout the Conversion
process and will be updated at the time of the closing of the Stock Offering.
<PAGE> 2
The Savings Bank
July 17, 1998 Page: 2
- --------------------------------------------------------------------------------
FinPro will perform such other services as are necessary or required in
connection with the regulatory review of the appraisal and will respond to the
regulatory comments, if any, regarding the valuation appraisal and any
subsequent updates.
BUSINESS PLAN
In connection with the preparation of the business plan and any other strategy
planning services, the following major tasks will be included:
- - compile a historical trend analysis utilizing the past five year ends of
Regulatory Reports;
- - perform detailed peer analysis;
- - assess competitive situation;
- - analyze the Bank markets and customers from a demographic standpoint;
- - conduct branch market tour and identify competitive positioning,
branching opportunities and market threats;
- - assess the regulatory, social, political and economic environment;
- - document the internal situation assessment;
- - analyze the current ALM position;
- - analyze the CRA position;
- - identify and document strengths and weaknesses;
- - document the Bank's mission statement;
- - document the objectives and goals;
- - document strategies;
- - meet with the Regional Office of the FDIC to review the business plan
prior to filing holding company applications;
- - compile five year projections of performance;
- - prepare assessment of strategic alternatives;
- - conduct one or two planning retreats with the Board and Management to
review strategies;
- - map the Bank's general ledger to FinPro's planning model and to the
Regulatory Reports;
- - assess the Bank from a capital markets perspective including comparison
to national, regional, state and similar size organizations;
- - prepare a written business plan in form and substance satisfactory to all
applicable regulatory authorities for purposes of submission and
dissemination in connection with the application to form a holding
company, offering prospectus and other documents concerning the holding
company formation and stock offering.
NO OTHER APPRAISAL/PLANNING FIRM PROVIDES THE QUANTITY AND QUALITY OF THE
PLANNING SERVICES FINPRO PROVIDES AS PART OF IT STANDARD PROPOSALS. WE URGE YOU
TO TALK TO OUR CLIENTS ABOUT THE EXTRA ADVANTAGE THAT FINPRO HAS AFFORDED THEM.
CONFIDENTIAL
<PAGE> 3
The Savings Bank
July 17, 1998 Page: 3
- --------------------------------------------------------------------------------
SECTION 2: INFORMATION REQUIREMENTS OF THE BANK
To accomplish the tasks set forth in Section 1 of this proposal, the following
information and work effort is expected of the Bank:
- - provide FinPro with all financial and other information, whether or not
publicly available, necessary to familiarize FinPro with the business and
operations of the Bank;
- - allow FinPro the opportunity, from time to time, to discuss the
operations of the Bank with Bank personnel;
- - promptly advise FinPro of any material or contemplated material
transactions that may have an effect on the day-to-day operations of the
Bank;
- - provide FinPro with all support schedules required to compile Regulatory,
Board and Management reports;
- - provide FinPro with offering circular, prospectus and all other materials
relevant to the appraisal function for the Conversion;
- - have system download capability;
- - promptly review all work products of FinPro and provide necessary
sign-offs on each work product so that FinPro can move on to the next
phase;
- - provide FinPro with office space to perform its daily tasks. The office
space requirements consists of a table with at least two chairs along
with access to electrical outlets for FinPro's computers.
SECTION 3: PROJECT DELIVERABLES
The following is a list of deliverables that will result from FinPro's effort:
1. Pro Forma Market Valuation of the Company and the Bank
2. Mapping of the Bank's general ledger to FinPro's five year cash flow
projection model
3. Business Plan
SECTION 4: TERM OF THE AGREEMENT AND STAFFING
It is anticipated that it will take approximately six months of elapsed time to
complete the tasks outlined in this proposal. During this time, FinPro will be
on-site at the Bank's facilities on a regular basis, during normal business
hours.
FinPro will assign Donald J. Musso and Kenneth G. Emerson to this engagement.
Although other FinPro staff may perform some back office analytics, Don and Ken
will be the firm's point men on this engagement and will be active in all
aspects of this engagement.
CONFIDENTIAL
<PAGE> 4
The Savings Bank
July 17, 1998 Page: 4
- --------------------------------------------------------------------------------
SECTION 5: FEES AND EXPENSES
FinPro's fees for providing the services outlined in this Agreement will be:
- $18,000 for the appraisal.
- $15,500 for the business plan.
This fee is payable according to the following schedule:
- prior to starting, a retainer of $4,000; plus
- upon the submission of the business plan to the regulators, a
non-refundable fee of $11,500; plus
- upon submission of the appraisal to the regulators, a
non-refundable fee of $9,000; plus
- upon completion of the Stock Offering, a non-refundable fee equal
to the remainder, unless only the plan is selected in which case
the remainder would be due upon regulatory approval of the
business plan.
In addition to any fees that may be payable to FinPro hereunder, the Bank hereby
agrees to reimburse FinPro for all of FinPro's travel and other out-of-pocket
expenses incurred in connection with FinPro's engagement. Such out-of-pocket
expenses will consist of travel to and from the Bank's facilities from FinPro's
offices, food and lodging when traveling, normal delivery charges such as
Federal Express, and costs associated with the actual Plan and Valuation
documents such as copying. It is FinPro policy to provide you with an itemized
accounting of the out-of-pocket expenditures so that you can control them.
In the event that the Bank shall, for any reason, discontinue the proposed
Conversion prior to delivery of the completed documents set forth above, the
Bank agrees to compensate FinPro according to FinPro's standard billing rates
for consulting services based on accumulated time and expenses, not to exceed
the respective fee caps noted above. FinPro's standard hourly rates are as
follows:
- Director Level and Above $250
- Staff Consultant Level $150
CONFIDENTIAL
<PAGE> 5
The Savings Bank
July 17, 1998 Page: 5
- --------------------------------------------------------------------------------
If during the course of the proposed transaction, unforeseen events occur so as
to materially change the nature or the work content of the services described in
this contract, the terms of said contract shall be subject to renegotiation by
the Bank and FinPro. Such unforeseen events shall include, but not be limited
to, major changes in the conversion regulations, appraisal guidelines or
processing procedures as they relate to conversion appraisals, major changes in
management or procedures, operating policies or philosophies, excessive delays
or suspension of processing of conversion applications by the regulators, and
stale financial numbers such that completion of the conversion transaction
requires the preparation by FinPro of a new or updated appraisal.
FinPro agrees to execute a suitable confidentiality agreement with the Bank. The
Bank acknowledges that all opinions, valuations and advice (written or oral)
given by FinPro to the Bank in connection with FinPro's engagement are intended
solely for the benefit and use of the Bank (and it's directors, management, and
attorneys) in connection with the matters contemplated hereby, and the Bank
agrees that no such opinion, valuation, or advice shall be used for any other
purpose, except with respect to the opinion and valuation which may be used for
the proper corporate purposes of the client, or reproduced, or disseminated,
quoted or referred to at any time, in any manner or for any purpose, nor shall
any public references to FinPro be made by the Bank (or such persons), without
the prior written consent of FinPro, which consent shall not be unreasonably
withheld.
SECTION 6: REPRESENTATIONS AND WARRANTIES
FinPro, the Bank and the Company agree to the following:
1.) The Bank agrees to make available or to supply to FinPro the information set
forth in Section 2 of this Agreement.
2.) The Bank hereby represents and warrants to FinPro that any information
provided to FinPro does not and will not, to the best of the Bank's knowledge,
at the times it is provided to FinPro, contain any untrue statement of a
material fact or fail to state a material fact necessary to make the statements
therein not false or misleading in light of the circumstances under which they
were made.
3.) (a) The Bank agrees that it will indemnify and hold harmless FinPro, its
directors, officers, agents and employees of FinPro (collectively referred to in
this Section 6 as "FinPro") or its successors who act for or on behalf of FinPro
in connection with the services called for under this agreement (hereinafter
referred to as the "Agreement"), from and against any and all losses, claims,
damages and liabilities (including, but not limited to, all losses and expenses
in connection with claims under the federal securities law) arising out of or in
any way related to the services provided by FinPro under this Agreement, except
to the extent arising out of or attributable to the negligence or willful
misconduct of FinPro, its directors, officers, agents or employees.
(b) FinPro shall give written notice to the Bank of such claim for
indemnification or facts within thirty days of the assertion of any claim or
discovery of material facts upon which FinPro intends to base a claim for
indemnification hereunder. In the event the Bank elects,
CONFIDENTIAL
<PAGE> 6
The Savings Bank
July 17, 1998 Page: 6
- --------------------------------------------------------------------------------
within seven days of the receipt of the original notice thereof, to contest such
claim by written notice to FinPro, FinPro will be entitled to be paid any
amounts payable by the Bank hereunder, together with interest on such costs from
the date incurred at the rate of eight percent per annum within five days after
a final determination is made either in writing by the Bank or by a final
judgment of a court of competent jurisdiction that indemnification hereunder
should be made. If the Bank does not elect to challenge the claim for
indemnification, FinPro shall be paid promptly and in any event within thirty
days after receipt by the Bank of the notice of the claim.
(c) The Bank shall pay for or reimburse the reasonable expenses, including
attorneys' fees, incurred by FinPro in connection with the contest of any claim
subject to indemnification hereunder in advance of the final determination of
any proceeding within thirty days of the receipt of such request if FinPro
furnishes the Bank:
1. a written statement of FinPro's good faith belief that it is
entitled to indemnification hereunder; and
2. a written undertaking by FinPro to repay the advance if it is
ultimately determined in a final adjudication of such proceeding
that FinPro is not entitled to such indemnification.
(d) In the event that the Bank elects to contest the claim, (i) FinPro will
cooperate in Good Faith with the contest, (ii) FinPro will provide the Bank with
an irrevocable power-of-attorney permitting the Bank to pursue the claim in the
name of FinPro, and (iii) FinPro will be prohibited from settling or
compromising the claim without written consent of the Bank.
(e) In the event the Bank does not pay any indemnified loss or make advance
reimbursements of expenses in accordance with the terms of this Agreement,
FinPro shall have all remedies available at law or in equity to enforce such
obligation.
This Agreement constitutes the entire understanding of the Bank and FinPro
concerning the subject matter addressed herein, and shall be governed and
construed in accordance with the laws of the State of New York. This Agreement
may not be modified, supplemented or amended except by written agreement
executed by both parties.
The Bank and FinPro are not affiliated, and neither the Bank nor FinPro has an
economic interest in, or is held in common with, the other and has not derived a
significant portion of its gross revenues, receipts or net income for any period
from transactions with the other.
CONFIDENTIAL
<PAGE> 7
The Savings Bank
July 17, 1998 Page: 7
- --------------------------------------------------------------------------------
Please confirm that the foregoing is in accordance with your understanding and
agreement with FinPro by signing and returning to FinPro the duplicate of the
letter enclosed herewith.
Sincerely:
FinPro, Inc.
By:
/s/ Donald J. Musso /s/ Daniel J. Hogarty, Jr.
- --------------------------- ---------------------------------
Donald J. Musso Daniel J. Hogarty, Jr.
President President and CEO
9/9/98 9/16/98
- --------------------------- ---------------------------------
Date Date
CONFIDENTIAL
<PAGE> 1
EXHIBIT 10.7
July 15, 1998
Mr. Daniel J. Hogarty
President and Chief Executive Officer
The Troy Savings Bank
32 2nd Street
Troy, New York 12180
Dear Mr. Hogarty:
Sandler O'Neill & Partners, L.P. ("Sandler O'Neill"), is pleased to act as
conversion agent to The Troy Savings Bank (the "Bank") in connection with the
Bank's proposed conversion from mutual to stock form (the "Conversion"). This
letter is to confirm the terms and conditions of our engagement.
SERVICES AND FEES
In our role as Conversion Agent, we anticipate that our services will
include the services outlined below, each as may be necessary and as the Bank
may reasonably request:
I. Consolidation of Accounts and Development of a Central File
II. Preparation of Proxy, Order and/or Request Forms
III. Organization and Supervision of the Conversion Center
IV. Proxy Solicitation and Special Meeting Services
V. Subscription Services
Each of these services is further described in Appendix A to this agreement.
For its services hereunder, the Bank agrees to pay Sandler O'Neill a fee
of $30,000. This fee is based upon a total number of unconsolidated accounts of
approximately 70,000. No change in fees will occur as long as the variance in
the number of accounts does not exceed 5%. In the event the actual number of
accounts exceeds the number specified above by more than 5%, the fee will be
proportionately increased.
The fee set forth above is based upon the requirements of current
regulations and the Plan of Conversion as currently contemplated. Any unusual or
additional items or duplication of service required as a result of a material
change in the regulations or the Plan of Conversion or a
<PAGE> 2
Mr. Daniel J. Hogarty
July 15, 1998
Page 2
material delay or other similar events may result in extra charges which will be
covered in a separate agreement if and when they occur.
All fees under this agreement shall be payable in cash, as follows: (a)
$5,000 payable upon execution of this agreement by the Bank, which shall be
non-refundable; and (b) the balance upon the completion of the Conversion.
COSTS AND EXPENSES
In addition to any fees that may be payable to Sandler O'Neill hereunder,
the Bank agrees to reimburse Sandler O'Neill, upon request made from time to
time, for its reasonable out-of-pocket expenses incurred in connection with its
engagement hereunder regardless of whether the Conversion is consummated,
including, without limitation, travel, lodging, food, telephone, postage,
listings, forms and other similar expenses; provided, however, that Sandler
O'Neill shall document such expenses to the reasonable satisfaction of the Bank.
The provisions of this paragraph are not intended to apply to or in any way
impair the indemnification provisions of this agreement.
In addition, all taxes however designated, arising from or based upon this
agreement or the payments made to Sandler O'Neill pursuant hereto, including,
but not limited to, any applicable sales, use, excise and similar taxes, shall
be paid by the Bank as the same become due, and the Bank shall, upon request by
Sandler O'Neill, pay the same either to Sandler O'Neill or to the appropriate
taxing authority at any time during, or after the termination of, this
Agreement; provided, however, that the Bank shall not be responsible for the
payment of any state, federal, or local franchise or income taxes based upon the
net income of Sandler O'Neill.
RELIANCE ON INFORMATION PROVIDED
The Bank will provide Sandler O'Neill with such information as Sandler
O'Neill may reasonably require to carry out its duties. The Bank recognizes and
confirms that Sandler O'Neill (a) will use and rely on such information in
performing the services contemplated by this agreement without having
independently verified the same, and (b) does not assume responsibility for the
accuracy or completeness of the information. The Bank will also inform Sandler
O'Neill within a reasonable period of time of any changes in the Plan which
require changes in Sandler O'Neill's services. If a substantial expense results
from any such change, the parties shall negotiate an equitable adjustment in the
fee.
LIMITATIONS
Sandler O'Neill, as Conversion Agent hereunder, (a) shall have no duties
or obligations other than those specifically set forth herein; (b) will be
regarded as making no representations
<PAGE> 3
Mr. Daniel J. Hogarty
July 15, 1998
Page 3
and having no responsibilities as to the validity, sufficiency, value or
genuineness of any order form or any stock certificates or the shares
represented thereby, and will not be required to and will make no
representations as to the validity, value or genuineness of the offer; (c) shall
not be liable to any person, firm or corporation including the Bank by reason of
any error of judgment or for any act done by it in good faith, or for any
mistake of law or fact in connection with agreement and the performance hereof
unless caused by or arising out of its own bad faith or gross negligence; (d)
will not be obliged to take any legal action hereunder which might in its
judgment involve any expense or liability, unless it shall have been furnished
with reasonable indemnity satisfactory to it; and (e) may rely on and shall be
protected in acting in reliance upon any certificate, instrument, opinion,
notice, letter, telex, telegram, or other document or security delivered to it
and in good faith believed by it to be genuine and to have been signed by the
proper party or parties.
Anything in this agreement to the contrary notwithstanding, in no event
shall Sandler O'Neill be liable for special, indirect or consequential loss or
damage of any kind whatsoever (including but not limited to lost profits), even
if Sandler O'Neill has been advised of the likelihood of such loss or damage and
regardless of form of action.
INDEMNIFICATION
The Bank agrees to indemnify and hold Sandler O'Neill and its affiliates
and their respective partners, directors, officers, employees, agents and
controlling persons (Sandler O'Neill and each such person being an "Indemnified
Party") harmless from and against any and all losses, claims, damages and
liabilities, joint or several, to which such Indemnified Party may become
subject under applicable federal or state law, or otherwise, related to or
arising out of the engagement of Sandler O'Neill pursuant to, and the
performance by Sandler O'Neill of the services contemplated by this letter, and
will reimburse any Indemnified Party for all expenses (including reasonable
counsel fees and expenses) as they are incurred, including expenses incurred in
connection with the investigation of, preparation for or defense of any pending
or threatened claim or any action or proceeding arising therefrom, whether or
not such Indemnified Party is a party. The Bank will not be liable under the
foregoing indemnification provision to the extent that any loss, claim, damage,
liability or expense is found in a final judgment by a court of competent
jurisdiction to have resulted primarily from Sandler O'Neill's bad faith,
willful misconduct or gross negligence.
MISCELLANEOUS
The following addresses shall be sufficient for written notices to each
other:
<PAGE> 4
Mr. Daniel J. Hogarty
July 15, 1998
Page 4
If to you: The Troy Savings Bank
32 2nd Street
Troy, New York 12180
Attention: Mr. Daniel J. Hogarty
If to us: Sandler O'Neill & Partners, L.P.
747 Middle Neck Road
Great Neck, New York 11024
Attention: Mr. Mark B. Cohen
The Agreement and appendix hereto constitute the entire Agreement between
the parties with respect to the subject matter hereof and can be altered only by
written consent signed by the parties. This Agreement is governed by the laws of
the State of New York.
Please confirm that the foregoing correctly sets forth our agreement by
signing and returning to Sandler O'Neill the duplicate copy of this letter
enclosed herewith.
Very truly yours,
Sandler O'Neill & Partners, L.P.
By: Sandler O'Neill & Partners Corp.,
the sole general partner
By: /s/ Mark B. Cohen
-----------------
Mark B. Cohen
Vice President
<PAGE> 5
Mr. Daniel J. Hogarty
July 15, 1998
Page 5
Accepted and agreed to as of
the date first above written:
The Troy Savings Bank
By: /s/ Daniel J. Hogarty
-------------------------------------
Mr. Daniel J. Hogarty
President and Chief Executive Officer
cc: Mr. Stuart G. Stein
Hogan & Hartson
<PAGE> 6
APPENDIX A
OUTLINE OF CONVERSION AGENT SERVICES
I. Consolidation of Accounts
1. Consolidate files in accordance with regulatory guidelines.
2. Accounts from various files are all linked together. The resulting
central file can then be maintained on a regular basis.
3. Our EDP format will be provided to your data processing people.
II. Proxy/Order Form/Request Card Preparation
1. Vote calculation.
2. Any combination of proxies, request cards and stock order forms for
voting and ordering stock.
3. Target group identification for subscription offering.
III. Organization and Supervision of Conversion Center
1. Advising on and supervising the physical organization of the
Conversion Center, including materials requirements.
2. Assist in the training of all Bank personnel who will be staffing
the conversion center.
3. Establish reporting procedures.
4. On-site supervision of the Conversion Center during the
solicitation/offering period.
IV. Special Meeting Services *
1. Direct proxy solicitation if independent solicitor not used.
2. Proxy and ballot tabulation.
3. Act as or support inspector of election.
4. Delete voting record date accounts closed prior to special meeting.
5. Produce final report of vote.
* To the extent independent third parties are required by any
regulatory agency to perform such services, it is understood
and agreed that Sandler O'Neill will subcontract for such
services and that the Bank will reimburse Sandler O'Neill for
such reasonable fees and expenses incurred as a result of such
regulatory requirement.
A - 1
<PAGE> 7
V. Subscription Services
1. Produce list of depositors by state (Blue Sky report).
2. Production of subscription rights and research books.
3. Stock order form processing.
4. Acknowledgement letter to confirm receipt of stock order.
5. Daily reports and analysis.
6. Proration calculation and share allocation in the event of an
oversubscription.
7. Produce charter shareholder list.
8. Interface with Transfer Agent for Stock Certificate issuance.
9. Refund and interest calculations.
10. Confirmation letter to confirm purchase of stock.
11. Notification of full/partial rejection of orders.
12. Production of 1099/Debit tape.
A - 2
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
There are currently no subsidiaries of Troy Financial Corporation (the
"Registrant"). Following the conversion of The Troy Savings Bank (the "Bank")
from a New York-chartered mutual savings bank to a New York-chartered stock
savings bank and the concurrent issuance and sale of all of the outstanding
capital stock of the Bank to the Registrant, the Bank will be a wholly owned
subsidiary of the Registrant.
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANT'S CONSENT
The Board of Trustees
The Troy Savings Bank
We consent to the use in this Registration Statement on Form S-1 and in the
Application for Conversion on Form 86-AC and in the Notice and Application for
Conversion of Troy Financial Corporation of our report dated October 30, 1998,
on the Consolidated Financial Statements of The Troy Savings Bank and
subsidiaries as of September 30, 1998 and 1997, and for each of the years in the
three-year period ended September 30, 1998.
We also consent to the reference to our firm under the heading "Experts" in the
related prospectus.
/s/ KPMG Peat Marwick LLP
Albany, New York
December 11, 1998
<PAGE> 1
EXHIBIT 23.2
December 10, 1998
Board of Trustees
The Troy Savings Bank
32 2nd Street
Troy, NY 12180
Dear Board Members:
We hereby consent to the use of our firm's name, FinPro, Inc. ("FinPro") in the
Application for Conversion on Form 86-AC filed by The Troy Savings Bank, and any
amendments thereto, for permission to convert to a stock savings institution and
references to the Conversion Valuation Appraisal Report ("Report") and the
valuation of The Troy Savings Bank provided by FinPro, and our opinion regarding
subscription rights filed as an exhibit to the applications referred to below.
We also consent to the use of our firm's name and the inclusion of, summary of
and references to our Report in the Form S-1 Registration Statement filed by
Troy Financial Corporation, and any amendments thereto, and the Application for
Conversion on Form 86-AC filed by The Troy Savings Bank, and any amendments
thereto.
Very Truly Yours,
/s/ FinPro, Inc.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BANK'S
AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 12,066
<INT-BEARING-DEPOSITS> 264
<FED-FUNDS-SOLD> 5,585
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 197,758
<INVESTMENTS-CARRYING> 3,483
<INVESTMENTS-MARKET> 3,621
<LOANS> 465,581
<ALLOWANCE> 8,260
<TOTAL-ASSETS> 716,649
<DEPOSITS> 578,202
<SHORT-TERM> 2,524
<LIABILITIES-OTHER> 19,954
<LONG-TERM> 44,940
0
0
<COMMON> 0
<OTHER-SE> 71,029
<TOTAL-LIABILITIES-AND-EQUITY> 716,649
<INTEREST-LOAN> 38,842
<INTEREST-INVEST> 6,635
<INTEREST-OTHER> 2,553
<INTEREST-TOTAL> 48,030
<INTEREST-DEPOSIT> 23,339
<INTEREST-EXPENSE> 24,193
<INTEREST-INCOME-NET> 23,837
<LOAN-LOSSES> 4,050
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 25,091
<INCOME-PRETAX> (2,752)
<INCOME-PRE-EXTRAORDINARY> (2,752)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (878)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 7.57
<LOANS-NON> 9,567
<LOANS-PAST> 0
<LOANS-TROUBLED> 2,081
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 6,429
<CHARGE-OFFS> 2,446
<RECOVERIES> 227
<ALLOWANCE-CLOSE> 8,260
<ALLOWANCE-DOMESTIC> 8,260
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 827
</TABLE>
