SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 1999
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number: 000-25439
TROY FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 16-1559508
- --------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
32 Second Street, Troy, New York 12180
----------------------------------------------------
(Address of principal executive offices)(Zip Code)
(518)270-3313
----------------------------------------------------
(Registrant's telephone number, including area code)
not applicable
----------------------------------------------------
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: [x] No: [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: AS OF AUGUST 10,
1999: 12,139,021 SHARES OF COMMON STOCK, PAR VALUE $.0001 PER SHARE.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
PAGE
Item 1: Financial Statements
Consolidated Statements of Condition,
June 30, 1999 and September 30, 1999...................... 1
Consolidated Statements of Income, Three and Nine
Months Ended June 30, 1999 and June 30, 1998.............. 2
Consolidated Statements of Cash Flows, Nine Months
Ended June 30, 1999 and June 30, 1998..................... 3
Consolidated Statements of Changes in Shareholder Equity,
Nine Months Ended June 30, 1999 and June 30, 1998......... 4
Notes to Unaudited Consolidated Interim
Financial Statements...................................... 5
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations............... 6
Item 3: Quantitative and Qualitative Disclosures About Market Risk...... 7
PART II - OTHER INFORMATION
Items 1-6................................................ II-1
Signature page........................................... II-2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
UNAUDITED
<TABLE>
<CAPTION>
JUNE 30, 1999 SEPTEMBER 30, 1998
------------- ------------------
<S> <C> <C>
ASSETS (IN THOUSANDS, EXCEPT SHARE DATA)
Cash & due from banks $20,936 $12,330
Federal funds sold 7,050 5,585
-------- --------
Total cash and cash equivalents 27,986 17,915
Loans held for sale 4,242 11,096
Securities available for sale at fair value 262,471 197,758
Investment securities held to maturity, at amortized cost 2,619 3,483
Net loans receivable 518,536 457,321
Accrued interest receivable 4,318 4,287
Other real estate owned 1,374 1,872
Premises & equipment, net 15,219 14,096
Other assets 12,581 8,821
-------- --------
Total assets $849,346 $716,649
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Due to depositors:
Savings accounts 192,903 198,509
Money market accounts 20,012 15,708
Demand accounts 119,939 107,311
Time deposit accounts 236,909 256,674
-------- --------
Total deposits 569,763 578,202
Mortgagors' escrow accounts 4,600 1,900
Securities sold under agreement to repurchase 2,367 2,524
Federal Home Loan Bank advances 75,310 44,940
Accrued interest payable 504 360
Official bank checks 4,322 8,841
Contributions payable 3,576 3,453
Other liabilities and accrued expenses 9,937 5,400
-------- --------
Total liabilities 670,379 645,620
Shareholders' Equity:
Preferred Stock, $.0001 par value; 15,000,000 shares authorized,
none issued -- --
Common Stock, $.0001 par value; 60,000,000 shares authorized,
12,139,021 issued at June 30, 1999 1 --
Additional paid in capital 117,759 --
Unallocated common stock held by ESOP (9,620) --
Retained earnings, substantially restricted 70,936 70,622
Accumulated other comprehensive income ( loss ) (109) 407
-------- --------
Total shareholders' equity 178,967 71,029
-------- --------
Total liabilities and shareholders' equity $849,346 $716,649
======== ========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest & dividend income:
Interest and fees on loans $10,063 $9,608 $29,225 $29,366
Securities available for sale:
Taxable 1,343 824 4,811 3,295
Tax exempt 609 675 1,653 1,392
------- ------ ------- -------
1,952 1,499 6,464 4,687
Investment securities held to maturity 54 74 172 228
Federal funds sold 1,277 581 1,947 1,509
------- ------ ------- -------
Total interest and dividend income 13,346 11,762 37,808 35,790
------- ------ ------- -------
Interest expense:
Deposits and escrows 4,837 5,804 15,661 17,558
Short-term borrowings 22 8 83 20
Long-term borrowings 721 81 2,144 206
------- ------ ------- -------
Total interest expense 5,580 5,893 17,888 17,784
------- ------ ------- -------
Net interest income 7,766 5,869 19,920 18,006
Provision for loan losses 812 1,011 2,437 3,033
------- ------ ------- -------
Net interest income after provision for
loan losses 6,954 4,858 17,483 14,973
------- ------ ------- -------
Non-interest income:
Loan servicing fees 166 102 398 305
Service charges on deposit accounts 224 209 666 622
Net gains from securities sales 5 0 14 1
Net gains from mortgage loan sales 48 26 233 125
Trust income 176 108 481 319
Other income 161 174 457 562
------- ------ ------- -------
Total non-interest income 780 619 2,249 1,934
------- ------ ------- -------
Non-interest expense:
Compensation & employee benefits 2,740 2,620 8,009 7,812
Net occupancy 521 516 1,548 1,574
Furniture, fixtures, & equipment 174 196 552 651
Computer charges 352 350 1,092 1,014
Professional, legal, & other 316 177 972 559
Printing, postage, & telephone 171 169 491 464
Other real estate owned 63 24 748 412
Contributions expense 20 34 4,389 114
Other 543 800 2,358 2,313
------- ------ ------- -------
Total non-interest expense 4,900 4,886 20,159 14,913
------- ------ ------- -------
Income (loss) before income tax expense ( benefit ) 2,834 591 (427) 1,994
Income tax expense ( benefit ) 874 138 (741) 506
------- ------ ------- -------
Net income $1,960 $453 $314 $1,488
======= ====== ======= =======
Earnings per share:
Basic $0.16 n/a $0.16 n/a
Diluted $0.16 n/a $0.16 n/a
</TABLE>
Earnings per share calculations do not include earnings prior to the initial
public offering on March 31, 1999.
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
June 30, 1999 June 30, 1998
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income 314 1,488
Adjustments to reconcile net income to net cash provided by (used in )
operating activities:
Depreciation 985 1,039
Charitable foundation contribution 4,084 --
Net (accretion) amortization of discount/premium on securities (2,366) 63
Deferred income tax expense 845 499
Net gain on sale of securities available for sale (6) 0
Net gain on call of investment securities (8) 0
Provision for loan losses 2,437 3,033
Net gain on sale of loans (233) (125)
Net loss/(gain) on sale of other real estate owned 39 (12)
Net write down of other real estate owned 221 17
Proceeds from sale of loans held for sale 50,963 43,973
Net loans made to customers and held for sale (45,721) (46,811)
Increase in accrued interest receivable (31) (48)
Increase in other assets (3,795) (940)
Increase in accrued interest payable 144 18
Increase/(decrease) in official bank checks, contributions payable, and
accrued expenses and other liabilities 142 (3,416)
------- -------
Total adjustments 7,700 (2,710)
------- -------
Net cash provided by (used in) operating activities 8,014 (1,222)
------- -------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 8,611 10,883
Proceeds from maturity and paydown of securities AFS 464,222 84,014
Purchases of securities available for sale (536,032) (99,631)
Proceeds from maturity of investment securities 869 371
Proceeds from sale of other real estate owned 607 550
Net loans (made to) repaid from customers (62,642) 21,077
Capital expenditures (2,108) (1,652)
------- -------
Net cash (used in) provided by investing activities (126,473) 15,612
------- -------
Cash flows from financing activities:
Net (decrease) increase in deposits (8,439) 3,976
(Decrease) increase in securities sold under agreements to
repurchase (157) 810
Issuance of long term debt 30,700 25,001
Payments on long term debt (330) (311)
Increase in mortgagors' escrow accounts 2,700 2,984
Net proceeds from stock offering 113,676 0
Acquisition of common stock by employee stock ownership plan (9,620) --
------- -------
Net cash provided by financing activities 128,530 32,460
------- -------
Net increase in cash and cash equivalents 10,071 46,850
Cash and cash equivalents at beginning of period 17,915 42,451
------- -------
Cash and cash equivalents at end of period 27,986 89,301
======= =======
Supplemental information
Cash paid for:
Interest on deposits and borrowings 17,744 17,766
Taxes paid 699 1,165
Supplemental schedule of noncash investing activities:
Net reduction in loans resulting from the transfer to other real
estate owned 369 646
Increase (decrease) in equity from changes in net unrealized gain (loss) on
securities available for sale, net of tax (516) 96
</TABLE>
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL UNALLOCATED ACCUMULATED
COMMON PAID IN COMMON STOCK RETAINED OTHER COMPREHENSIVE COMPREHENSIVE TOTAL
STOCK CAPITAL HELD BY ESOP EARNINGS INCOME (LOSS) INCOME EQUITY
----- ------- ------------ -------- ------------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1998 $0 $0 $0 $70,622 $407 $0 $71,029
Common Stock
Issuance of 11,730,575
shares of $.0001 par value
common stock in initial public offering 1
Issuance of 408,446
shares of $.0001 par value
common stock to The Troy Savings Bank
Community Foundation 1
Additional paid-in capital
Issuance of 11,730,575
shares of common stock in
initial public offering, net
of $3,628 offering costs 113,675
Issuance of 408,446
shares of common stock
to The Troy Savings Bank
Community Fooundation 4,084 117,759
Unallocated common stock held by ESOP
Acquisition of 971,121
shares of common stock
by ESOP (9,620) (9,620)
Retained earnings
Net income 314 314 314
Accumulated other comprehensive
income ( loss ):
Unrealized net losses
arising during the period on
securities available for sale,
pre-tax ($846) (508)
Reclassification adjustments for gains
realized in net income, pre-tax ($14) (8)
Other comprehensive income (loss) (516) (516) (516)
------------
Comprehensive income $(202)
============
--------- --------- ----------- --------- --------------- ------------ --------
Balance at June 30, 1999 1 117,759 (9,620) 70,936 (109) $178,967
========= ========= =========== ========= =============== ========
Balance at September 30, 1997 $0 $0 $0 $71,500 $42 $0 $ 71,542
Comprehensive income:
Net Income: 1,488 1,488 1,488
Other comprehensive income,
net of tax unrealized net
gains arising during the
period on AFS securities
(pre-tax $160) 96 96 96
--
Comprehensive income $1,584
--------- --------- ----------- --------- --------------- ========= --------
Balance at June 30, 1998 $0 $0 $0 $72,988 $138 $73,126
========= ========= =========== ========= =============== ========
</TABLE>
<PAGE>
Notes to Unaudited Consolidated
Interim Financial Statements
Note 1. Basis of Presentation
The unaudited consolidated interim financial statements include the accounts of
Troy Financial Corporation (the "Company") and its wholly owned subsidiary, The
Troy Savings Bank (the "Bank"), and the Bank's subsidiaries. The Company became
the bank holding company of the Bank on March 31, 1999. Accordingly, all
financial data as of and for periods prior to such date are the consolidated
data of the Bank and its subsidiaries. The September 30, 1998 data in the
Consolidated Statements of Condition is derived from the Company's audited
consolidated financial statements. All intercompany accounts and transactions
have been eliminated in consolidation. The unaudited consolidated interim
financial statements reflect all adjustments of a normal recurring nature which
are necessary for a fair presentation of the results for the interim periods
presented and should be read in conjunction with the consolidated financial
statements and related notes included in the Company's Registration Statement on
Form S-1, filed with the Securities and Exchange Commission on December 11,
1998, as amended. The results of operations for the interim periods are not
necessarily indicative of the results of operations to be expected for the full
fiscal year ended September 30, 1999. Reclasses are made whenever necessary to
conform to the current year presentation.
Note 2. Earnings Per Share
Basic earnings per share is calculated by dividing net income by the weighted
average number of common shares outstanding during the period. The
weighted-average number of shares is the same for the basic and diluted earnings
per share calculation for this reporting period as the Company did not have an
approved plan in place for stock options or unrestricted stock. Unallocated
common shares held by the ESOP are not included in the weighted-average number
of common shares outstanding for either the basic or diluted earnings per share
calculations.
The following table sets forth certain information regarding the calculation of
basic and diluted earnings per share for the three month and nine month periods
ended June 30, 1999:
( in thousands, except share and per share data )
Three Months Ended Nine Months Ended
June 30, June 30,
1999 1999
------------------ -----------------
Net income $1,960 $1,960
------------------ -----------------
Weighted-average common shares 11,888,314 11,888,314
------------------ -----------------
Basic and diluted earnings per share $0.16 $0.16
------------------ -----------------
Earnings per share calculations do not include earnings prior to the initial
public offering on March 31, 1999.
<PAGE>
Note 3. Comprehensive Income
On October 1, 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
Statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income includes the reported net income
of the 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. At
the Company, comprehensive income represents net income plus other comprehensive
income, which consists of the net change in unrealized gains or losses on
securities available for sale for the period. Accumulated other comprehensive
income represents the net unrealized gains or losses on securities available for
sale, net of tax, as of the balance sheet dates. Comprehensive income ( loss )
for the nine months ended June 30, 1999 and 1998 was ($202,000) and $1.6
million, respectively.
Note 4. Impact of New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). 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. This Statement imposes
disclosure requirements only and is not expected to have a material effect on
the financial condition or results of operations of the Company.
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 disclosure requirements of SFAS No. 87 and No. 106 to the
extent practicable and recommends a parallel format for presenting information
about pensions and
<PAGE>
other postretirements benefits. 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
Statements in the annual consolidated financial statements. This Statement
imposes disclosure requirements only and is not expected to have a material
effect on the financial condition or results of operations of the Company.
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, as
recently amended, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Management is currently evaluating the impact of this
statement on the Company's consolidated financial statements.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
Troy Financial Corporation (the "Company" ) was formed in December 1998
to acquire all of the capital stock of The Troy Savings Bank (the "Bank") upon
the Bank's conversion from a New York-chartered mutual savings bank to a New
York-chartered stock savings bank. Upon the Bank's conversion on March 31, 1999,
the Company completed its initial public offering of stock, issuing 12,139,021
shares of common stock, par value $.0001 per share ("Common Stock"), including
408,446 shares contributed to The Troy Savings Bank Community Foundation ( the
"Foundation"). The Company sold 11,730,575 shares of Common Stock at a price of
$10 per share through a subscription offering to certain depositors of the Bank.
Net proceeds to the Company from the offering were $113.7 million after
conversion costs and offering costs. The Company invested approximately $57
million of the net proceeds to acquire the Bank, and the Company used $9.6
million of the net proceeds from the conversion to fund a loan to the Bank's
employee stock ownership plan (the "ESOP" ) which allowed the ESOP to purchase
971,121 shares of Common Stock in the open market. As of June 30, 1999, the ESOP
had purchased all 971,121 shares of Common Stock. The Company's Common Stock is
traded on the NASDAQ Stock Market National Market Tier under the symbol "TRYF."
The consolidated financial condition and operating results of the
Company are primarily dependent upon its wholly owned subsidiary, the Bank, and
the Bank's subsidiaries, and all references to the Company prior to March 31,
1999, except where otherwise indicated, are to the Bank.
The Bank is a community based, full service financial institution
offering a wide variety of business and retail banking products. The Bank and
its subsidiaries also offer a full range of trust, insurance, and investment
services. The Bank's primary sources of funds are deposits and borrowings, which
it uses to originate real estate mortgages, both residential and commercial,
commercial business loans, and consumer loans throughout its primary market area
which
<PAGE>
consists of the six New York counties of Albany, Saratoga, Schenectady, Warren,
Washington, and Rensselaer (Troy).
The Company's profitability, like many financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between the interest it receives on interest earning assets, such as
loans and investments, and the interest it pays on interest bearing liabilities,
principally deposits and borrowings.
Results of operations are also affected by the Bank's provision for
loan losses, non-interest expenses such as salaries and employee benefits,
occupancy and other operating expenses and to a lesser extent, non-interest
income such as mortgage servicing fees and service charges on deposit accounts.
Financial institutions in general, including the Company, are significantly
affected by economic conditions, competition and the monetary and fiscal
policies of the federal government. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, interest rate
conditions and funds availability. Deposit balances and cost of funds are
influenced by prevailing market rates on competing investments, customer
preferences and levels of personal income and savings in the Bank's primary
market area.
FINANCIAL CONDITION
The Company's total assets were $849.3 million at June 30, 1999, an
increase of $132.7 million, or 18.5% from the $716.6 million at September 30,
1998. The $132.7 million increase was principally due to net proceeds from the
Company's initial stock offering of $113.7 million and a $30.4 million increase
in borrowings from the Federal Home Loan Bank of New York ( "FHLB"), which was
partially offset by an $8.4 million decrease in deposits, primarily attributable
to authorized withdrawals from deposit accounts to pay for subscription orders.
The funds were principally invested in loans and securities available for sale,
primarily commercial real estate, commercial business loans, and U. S.
Government agency discount bonds.
Cash and cash equivalents were $28.0 million at June 30, 1999, an increase of
$10.1 million from the $17.9 million at September 30, 1998. The increase was
principally due to the cash proceeds received from the initial public stock
offering.
Total securities, which include securities held to maturity and securities
available for sale, were $265.1 million at June 30, 1999, an increase of $63.9
million, or 31.7% over the $201.2 million as of September 30, 1998. The increase
in securities was principally a $64.7 million increase in AFS securities,
primarily due to the purchase of short-term U.S. Government agency discount
bonds.
<PAGE>
Total loans receivable were $528.8 million as of June 30, 1999, an increase of
$63.2 million or 13.6% over the $465.6 million as of September 30, 1998. The
following table shows the loan portfolio composition as of the respective
balance sheet dates:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
-------------------------- ------------------------------
% OF LOANS % OF LOANS
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate loans:
Residential mortgage $215,247 40.7% $202,511 43.5%
Commercial 194,157 36.7% 166,186 35.7%
Construction 8,110 1.5% 10,052 2.2%
-------- ----- -------- -----
Total real estate loans 417,514 79.0% 378,749 81.4%
-------- ----- -------- -----
Commercial business loans 66,251 12.5% 45,156 9.6%
-------- ----- -------- -----
Consumer loans:
Home equtiy lines of credit 6,720 1.3% 8,575 1.8%
Other consumer 38,571 7.3% 33,445 7.2%
-------- ----- -------- -----
Total consumer loans 45,291 8.6% 42,020 9.0%
----- -----
Gross loans 529,056 100.0% 465,925 100.0%
===== =====
Net deferred loan fees and unearned discount (270) (344)
-------- --------
Total loans $528,786 $465,581
======== ========
</TABLE>
Residential mortgage loans increased $12.7 million, or 6.3%, as the Company
elected to hold 15 year fixed rate residential mortgages in its portfolio
instead of selling them in the secondary mortgage market. Commercial mortgage
loans increased $27.9 million, or 16.8%. Commercial business loans increased
$21.1 million, or 46.7%.
<PAGE>
Non-performing assets at June 30, 1999 were $9.8 million, or 1.16% of total
assets, compared to $13.5 million, or 1.89% of total assets at September 30,
1998. The table below sets forth the amounts and categories of the Company's
non-performing assets.
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1999 1998
-------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans:
Real estate loans:
Residential mortgage $2,472 $2,900
Commercial mortgage 4,857 6,327
Construction -- --
------- -------
Total real estate loans. 7,329 9,227
Commercial business loans 6 31
Home equity lines of credit 159 259
Other consumer loans 64 50
------- -------
Total non-accrual loans 7,558 9,567
Troubled debt restructurings 891 2,081
------- -------
Total non-performing loans 8,449 11,648
Other real estate owned :
Residential real estate 97 345
Commercial real estate 1,277 1,527
------- -------
Total other real estate owned 1,374 1,872
------- -------
Total non-performing assets $9,823 $13,520
------- -------
Allowance for loan losses $10,250 $8,260
======= =======
Allowance for loan losses as a percentage of
non-performing loans 121.32% 70.91%
Allowance for loan losses as a percentage of
total loans 1.94% 1.77%
Non-performing loans as a percentage of total
loans 1.60% 2.50%
Non-performing assets as a percentage of total
assets 1.16% 1.89%
</TABLE>
The $3.2 million decrease in non-performing loans at June 30, 1999 as compared
to September 30, 1998 was attributable primarily to the repayment of three
commercial mortgages. Other real estate owned decreased by $498,000, principally
from the write-down of two properties secured by commercial real estate as
determined by the assessment of their fair market values. The following table
summarizes the activity in other real estate for the periods presented:
NINE MONTHS ENDED JUNE 30,
1999 1998
---- ----
(IN THOUSANDS)
Balance at the beginning of the period $1,872 $2,690
Loans transferred to Other Real Estate 369 646
Sale of Other Real Estate (646) (538)
Write down of Other Real Estate (221) (17)
------ ------
Balance at the end of the period $1,374 $2,781
====== ======
<PAGE>
The allowance for loan losses was $10.3 million, or 1.94% of period end loans at
June 30, 1999, and provided coverage of non-performing loans of 121.3%, compared
to coverage of 70.9% as of September 30, 1998. There are no loans past due 90
days and still accruing at periods end June 30, 1999 and September 30, 1998. The
following table summarizes the activity in the allowance for loan losses:
NINE MONTHS ENDED JUNE 30,
1999 1998
---- ----
(IN THOUSANDS)
Allowance at the beginning of the period $8,260 $6,429
Charge-offs (651) (1,043)
Recoveries 204 216
------- ------
Net charge-offs (447) (827)
Provision for loan losses 2,437 3,033
------- ------
Allowance at end of the period $10,250 $8,635
======= ======
Total deposits were $569.8 million at June 30, 1999, a decrease of $8.4 million,
or 1.5% from the $578.2 million at September 30, 1998. The following table shows
the deposit composition as of the respective balance sheet dates:
<TABLE>
<CAPTION>
JUNE 30, 1999 SEPTEMBER 30, 1998
------------- ------------------
(In Thousands) % of Deposits (In Thousands) % of Deposits
<S> <C> <C> <C> <C>
Savings accounts $192,903 33.9% $198,509 34.3%
Time accounts 236,909 41.6% 256,674 44.4%
Money Market accounts 20,012 3.5% 15,708 2.7%
NOW & Super NOW accounts 84,525 14.8% 76,195 13.2%
Demand accounts 35,414 6.2% 31,116 5.4%
-------- ----- -------- -----
$569,763 100.0% $578,202 100.0%
======== ===== ======== =====
</TABLE>
The $8.4 million decrease in deposits from September 30, 1998 is primarily
attributable to approximately $26 million in authorized withdrawals from deposit
accounts to pay for stock subscription orders, which was partially offset by
deposit growth.
The Company increased its borrowings with the FHLB, to $75.3 million at June 30,
1999, an increase of $30.4 million from the $44.9 million at September 30, 1998.
The increased borrowings were used to fund the growth in loans and securities
noted above.
Shareholders' equity at June 30, 1999 was $179.0 million, an increase of $108.0
million or 152.0% from the $71.0 million at September 30, 1998. The increase was
principally attributable to the sale of 11,730,575 shares of common stock for
$10.00 per share, net of $3.6 million in conversion costs, and the contribution
of 408,446 shares to The Troy Savings Bank Community Foundation. Shareholders'
equity was increased by the Company's year-to-date net income of $314,000 and
decreased by the $516,000 decline in accumulated other comprehensive income.
Shareholders' equity was decreased by the purchase of 971,121 shares of Common
Stock in the open market by the Bank's ESOP which was funded by a loan from the
Company.
<PAGE>
Shareholders' equity as a percentage of total assets was 21.1% at June 30, 1999
compared to 9.9% at September 30, 1998.
TABLE No.1
AVERAGE BALANCE, INTEREST, YIELD AND RATE
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. Tax equivalent adjustments reflected
principally on municipal securities totaled $329,000 in the three month period
ended June 30, 1999, and $323,000 for the comparable three month period. All
average balances are daily average balances. Non-accruing loans have been
included in the table as loans receivable with interest earned recognized on a
cash basis only. Securities include both the securities available for sale
portfolio and the held to maturity portfolio. Securities available for sale are
shown at amortized cost.
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30,
-------------------------------------------------------------------
1999 1998
----------------------------------- -----------------------------
Average Interest Yield/ Average Interest Yield/
Balance Earned Rate Balance Earned Rate
----------------------------------- -----------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans:
Residential mortgage $209,675 $3,879 7.40% $200,481 $3,902 7.78%
Commercial mortgage 179,464 3,745 8.35% 159,284 3,502 8.79%
Construction 7,958 122 6.15% 20,934 330 6.30%
-------- ------ -------- -------
Total real estate loans 397,097 7,746 7.80% 380,699 7,734 8.13%
Commercial business 76,567 1,472 7.69% 51,391 1,099 8.55%
Consumer loans:
Home Equity 6,882 134 7.76% 8,914 191 8.58%
Other 30,176 679 9.00% 17,853 372 8.34%
-------- ------ -------- -------
Total consumer loans 37,058 813 8.77% 26,767 563 8.42%
-------- ------ -------- -------
Total Loans 510,722 10,031 7.86% 458,857 9,396 8.19%
Loans held for sale 4,212 71 6.75% 12,676 212 6.70%
Securities held for investment 2,675 54 8.03% 3,705 74 8.02%
Securities available for sale (at amortized cost)
Taxable 100,389 1,343 5.35% 55,292 824 5.96%
Tax-exempt 62,306 899 5.77% 67,503 998 5.91%
-------- ------ -------- -------
Total securities available for sale (at 162,695 2,242 5.51% 122,795 1,822 5.93%
amortized cost)
Federal funds sold and other short term
investments 106,718 1,277 4.79% 41,882 581 5.55%
-------- ------ -------- -------
Total earning assets 787,022 13,675 6.95% 639,915 12,085 7.55%
INTEREST BEARING LIABILITIES:
Deposits:
NOW and Super NOW accounts 80,748 438 2.17% 76,780 423 2.21%
Money market deposit accounts 18,571 136 2.94% 14,511 111 3.06%
Savings accounts 192,109 1,309 2.72% 195,113 1,607 3.30%
Time deposits accounts 239,353 2,893 4.83% 262,649 3,646 5.55%
Conversion funds in escrow 6,130 43 2.79% -- -- --
Escrow accounts 3,693 18 1.96% 4,155 17 1.65%
-------- ------ -------- -------
Total interest-bearing deposits 540,604 4,837 3.58% 553,208 5,804 4.20%
Borrowings:
Securities sold under agreement to repurchase 2,780 22 3.12% 1,119 8 2.96%
Short-term borrowings 5,785 72 4.98% 0 0 0.00%
Long term-debt 44,863 649 5.79% 5,478 81 5.90%
-------- ------ -------- -------
Total borrowings 53,428 743 5.56% 6,597 89 5.41%
-------- ------ -------- -------
Total interest-bearing liabilities 594,032 5,580 3.76% 559,805 5,893 4.21%
Net interest spread 3.19% 3.34%
Net interest income / net interest margin 8,095 4.11% 6,192 3.87%
====== =======
Ratio of interest earning assets to
interest bearing liabilities 132.49% 114.31%
Tax equivalent adjustment 329 323
====== =======
Net interest income as per consolidated financial statements $7,766 $5,869
====== =======
</TABLE>
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED JUNE 30,
1999 AND 1998
GENERAL
For the three months ended June 30, 1999, the Company recorded net income of
$2.0 million, an increase of $1.5 million as compared to net income of $453,000
for the three month period ended June 30, 1998. The increase was principally the
result of higher net interest income, lower provision for loan losses, and
higher noninterest income, which was partially offset by higher income tax
expense. The Company earned $0.16 per share for the three months ended June 30,
1999 and its annualized return on average assets was 0.95% as compared to 0.27%
for the three months ended June 30, 1998. The Company's annualized return on
average equity was 4.32% for the three months ended June 30, 1999.
NET INTEREST INCOME
Net interest income on a tax equivalent basis for the three months ended June
30, 1999, was $8.1 million, an increase of $1.9 million, or 30.7%, when compared
to the three months ended June 30, 1998. The increase was primarily attributable
to a $147.1 million increase in average interest earning assets which more than
offset the increase in average interest bearing liabilities. The increase in
interest earning assets was principally funded by the net proceeds received from
the initial public offering. The increase was also a result of a $46.8 million
increase in average borrowings, which more than offset a $5.5 million decrease
in average deposits. Net interest income was also positively affected by the 45
basis point decrease in average cost of funds, which partially offset the
decrease in yield on average earning assets. The Company has utilized longer
term borrowings with the FHLB to provide some stability in its funding costs and
to match some of its longer term commercial real estate mortgages.
Interest income for the three months ended June 30, 1999 was $13.7 million on a
tax equivalent basis, an increase of $1.6 million, or 13.2%, over the comparable
period last year. The increase in the volume of earning assets substantially
offset the 60 basis point decrease in the average yield on interest earning
assets.
The average balance of taxable available for sale securities increased by $45.1
million for the three months ended June 30, 1999, compared to the same period in
1998, which offset the 61 basis points decrease in average yield. The Bank
anticipates that its current loan commitments will require the availability of
short-term funds. Therefore, the funds have been invested primarily in
short-term government agency discount bonds providing liquidity comparable to
federal funds while still offering a yield greater than the 4.79% average yield
for federal funds sold. The average loan yield for the three months ended June
30, 1999 was 7.86%, down 33 basis points from the same period in the previous
year, but was 235 basis points more than the 5.51% average yield on available
for sale securities. The Company has also invested in tax-exempt municipal
securities, primarily maturing within one year. The average tax equivalent yield
on these securities is 5.77%, similar to the yield in 1998 and 98 basis points
higher than the average yield on federal funds for the three months ended June
30, 1999.
<PAGE>
Interest expense for the three months ended June 30, 1999, was $5.6 million, a
decrease of $313,000, or 5.3% over the three month period ended June 30, 1999.
The change was principally due to a 45 basis point decrease in the average cost
of funds which more than offset the increase in average volume of interest
bearing liabilities. The average balance of interest bearing liabilities was
$594.0 million for the three months ended June 30, 1999, an increase of $34.2
million, or 6.1%, primarily attributable to an increase in borrowings of $46.8
million which offset a $5.5 million decrease in deposits primarily the result of
approximately $26 million in authorized withdrawals from deposit accounts to pay
for stock subscription orders, net of deposit growth. The average balance of
FHLB borrowings was $50.6 million for the three months ended June 30, 1999, as
compared to $5.5 million in the comparable three month period. The increase in
long-term FHLB advances offset the $23.3 million decline in time deposit
accounts, which the Company experienced as a result of the decrease in time
deposits rates. The time deposit rates were comparable to those offered by other
financial institutions operating in the Company's primary market area.
The Company's net interest margin was 4.11% for the three months ended June 30,
1999, compared to 3.87% for the comparable three month period. The primary cause
was a $147.1 million increase in average earning assets, due primarily to the
Company's initial public offering, which offset the 60 basis point decline in
average yield on earning assets and the 45 basis point decrease in cost of funds
which more than offset the increase in average interest bearing liabilities. The
decline in cost of funds was principally caused by the decrease in rates paid on
savings accounts and time deposits which was partially offset by the increase in
the average rates paid on FHLB borrowings. The decrease in the yield on interest
earning assets was caused by the investment of a substantial portion of the
offering proceeds in short-term government agency bonds and federal funds, with
lower yields than long-term securities, but which provide the liquidity required
to fund higher yielding loan growth.
For more information on average balances, interest, yield and rate, please refer
to Table No. 1, included in this report.
PROVISION FOR LOAN LOSSES
The Company establishes an allowance for loan losses through a provision for
loan losses charged to operations. The adequacy of the amount of the allowance
is determined by management's evaluation of various risk factors inherent in the
loan portfolio. This analysis 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.
The provision for loan losses was $812,000 for the three months ended June 30,
1999, a decrease of $199,000, or 19.7% from the comparable period of the prior
year. The decrease in the provision was primarily attributable to a reduction in
non-performing loans of $3.2 million from $11.6 million at September 30, 1998 to
$8.4 million at June 30, 1999. The allowance for loan losses provides coverage
of 121.3% of non-performing loans at June 30, 1999, as compared to 70.9% as of
September 30, 1998. However, offsetting the decrease in non-performing loans was
an increase of $141,000, or 100.0% in net charge-offs to $282,000 for the three
months ended
<PAGE>
June 30, 1999 compared to the same period of the prior year.
Although the provision for loan losses has reduced from the same period in 1998,
the Company anticipates its provision for loan losses to remain at approximately
its current levels through fiscal year end 1999 as the mix of the Company's loan
portfolio includes an increasing percentage of higher credit risk loan types,
such as commercial real estate loans and commercial business loans. Commercial
real estate loans and commercial business loans represent 49.2% of the total
loan portfolio at June 30, 1999 compared to 45.3% at September 30, 1998.
NON-INTEREST INCOME
Non-interest income was $780,000 for the three months ended June 30, 1999, an
increase of $161,000, or 26.0% from the three months ended June 30, 1998. The
increase was principally from increases in net gains on sales of mortgage loans,
trust commissions, loan servicing fees, and service charges on deposits. The net
gains from sales of mortgage loans was up $22,000, or 84.6%, during the three
months ended June 30, 1999, as compared to the same period in 1998. Trust
commissions were up $68,000, or 63.0%, as a result of a higher balance of assets
managed than in the comparable period of the prior year. Loan servicing fees
were up $64,000, or 62.7% as a result of a higher balance of loans serviced for
the quarter ended June 30, 1999, as compared to the three months ended June 30,
1998. Service charges on deposit accounts were up $15,000, or 7.2%, compared to
the same period of the prior year.
NON-INTEREST EXPENSE
Non-interest expense for the three months ended June 30, 1999 was $4.9 million,
an increase of $14,000, or 0.3%, over the comparable period last year. Personnel
expense increased by $120,000 during the three months ended June 30, 1999, as
compared to the prior year, as the Company began to record expenses for its ESOP
and supplemental retirement plan for certain executive officers. The increase in
expense was partially offset by a reduction in staffing levels over the
comparable period last year. Professional fees increased by $139,000, or 78.5%
for the three months ended June 30, 1999, over the comparable period of the
prior year, primarily caused by increased fees associated with operating a stock
form organization as compared to a mutual savings bank. Other real estate owned
expense was up $39,000, or 162.5%, for the three months ended June 30, 1999, as
compared to the same period in 1998. The increase in expense was principally
caused by the sale of two residential real estate properties at a loss. Other
expense decreased by $257,000, or 32.13%, for the three months ended June 30,
1999, as compared to the three months ended June 30, 1998. This decrease was
primarily attributable to a $235,000 operating expense incurred by one of the
Bank's subsidiaries in the three months ended June 30, 1998. No such expenses
were recorded in the three months ended June 30, 1999.
INCOME TAX EXPENSE
Income tax expense for the three months ended June 30, 1999, was $874,000, as
compared to $138,000 for the comparable period in 1998. The increase was
primarily caused by the $2.2 million increase in income before taxes for the
three months ended June 30, 1999, as compared to the same period in the prior
year.
<PAGE>
TABLE No.2
AVERAGE BALANCE, INTEREST, YIELD AND RATE
The following table presents, for the periods indicated, the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. Tax equivalent adjustments reflected
principally on municipal securities totaled $868,000 in the nine month period
ended June 30, 1999, and $732,000 for the comparable nine month period. All
average balances are daily average balances. Non-accruing loans have been
included in the table as loans receivable with interest earned recognized on a
cash basis only. Securities include both the securities available for sale
portfolio and the held to maturity portfolio. Securities available for sale are
shown at amortized cost.
<PAGE>
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED JUNE 30,
--------------------------------------------------------------------------
1999 1998
----------------------------------- ----------------------------------
Average Interest Yield/ Average Interest Yield/
Balance Earned Rate Balance Earned Rate
----------------------------------- ----------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Loans:
Residential mortgage $207,936 $11,480 7.36% $205,677 $12,081 7.83%
Commercial mortgage 176,574 10,481 7.91% 168,309 11,004 8.72%
Construction 6,648 415 8.33% 18,329 916 6.67%
-------- ------- -------- -------
Total real estate loans 391,158 22,376 7.63% 392,315 24,001 8.16%
Commercial business 62,783 4,115 8.74% 50,031 3,252 8.67%
Consumer loans:
Home Equity 7,581 448 7.89% 9,338 604 8.63%
Other 31,065 2,024 8.69% 19,094 1,165 8.13%
-------- ------- -------- -------
Total consumer loans 38,646 2,472 8.53% 28,432 1,769 8.30%
-------- ------- -------- -------
Total Loans 492,587 28,963 7.84% 470,778 29,022 8.22%
Loans held for sale 5,914 341 7.68% 6,750 344 6.80%
Securities held for investment 2,909 172 7.87% 3,813 228 7.99%
Securities available for sale (at amortized cost)
Taxable 121,543 4,811 5.28% 73,670 3,295 5.96%
Tax-exempt 56,248 2,442 5.79% 47,006 2,124 6.03%
-------- ------- -------- -------
Total securities available for sale (at 177,791 7,253 5.44% 120,676 5,419 5.99%
amortized cost)
Federal funds sold and other short term
investments 53,315 1,947 4.87% 36,130 1,509 5.57%
-------- ------- -------- -------
Total earning assets 732,516 38,676 7.04% 638,147 36,522 7.63%
INTEREST BEARING LIABILITIES:
Deposits:
NOW and Super NOW accounts 79,684 1,308 2.19% 76,943 1,268 2.20%
Money market deposit accounts 18,141 407 2.99% 13,566 312 3.07%
Savings accounts 196,847 4,215 2.85% 194,578 4,808 3.29%
Time deposits accounts 248,010 9,440 5.07% 266,673 11,135 5.57%
Conversion funds in escrow 12,090 253 2.79% 0 0 0.00%
Escrow accounts 2,883 38 1.76% 3,309 35 1.42%
-------- ------- -------- -------
Total interest-bearing deposits 557,655 15,661 3.74% 555,069 17,558 4.22%
Borrowings:
Securities sold under agreement to repurchase 3,518 83 3.14% 978 20 2.76%
Short-term borrowings 10,785 200 4.86% 0 0 0.00%
Long term-debt 39,421 1,944 5.82% 4,660 206 5.89%
-------- ------- -------- -------
Total borrowings 53,724 2,227 5.54% 5,638 226 5.34%
-------- ------- -------- -------
Total interest-bearing liabilities 611,379 17,888 3.90% 560,707 17,784 4.23%
Net interest spread 3.14% 3.40%
Net interest income / net interest margin 20,788 3.78% 18,738 3.92%
======= =======
Ratio of interest earning assets to
interest bearing liabilities 119.81% 113.81%
Tax equivalent adjustment 868 732
------- -------
Net interest income as per consolidated financial statements $19,920 $18,006
======= =======
</TABLE>
<PAGE>
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED JUNE 30, 1999 AND 1998
GENERAL
For the nine months ended June 30, 1999, the Company recorded net income of
$314,000 as compared to net income of $1.5 million for the nine months ended
June 30, 1998. The net decrease was primarily the result of the $2.5 million
after tax nonrecurring charge for the contribution of stock to the Foundation.
The Company's annualized return on average assets for the nine months ended June
30, 1999 was 0.05%, as compared to 0.30% for the nine months ended June 30,
1998. The annualized return on average equity was 0.38% for the nine months
ended June 30, 1999, as compared to 2.74% for the nine months ended June 30,
1998.
NET INTEREST INCOME
Net interest income on a tax equivalent basis for the nine months ended June 30,
1999, was $20.8 million, an increase of $2.1 million, or 10.9%, when compared to
the nine months ended June 30, 1998. The increase was principally the result of
a $94.4 million increase in average interest earning assets, which was funded
primarily by the net proceeds received from the Company's initial public
offering, as well as an increase in average borrowings.
Interest income on a tax equivalent basis for the nine months ended June 30,
1999, was $38.7 million, an increase of $2.2 million, or 5.9%, over the
comparable nine month period in 1998. The increase was primarily attributable to
the $94.4 million increase in average interest earning assets, which more than
offset the 59 basis point decline in average yield on interest earning assets.
The increase in interest earning assets was primarily the result of a $12.8
million increase in average commercial business loans, a $10.2 million increase
in average consumer loans as a result of a direct-mail marketing campaign, and a
$60.2 million increase in average securities available for sale, primarily in
short-term government agency discount bonds and tax-exempt municipals, maturing
in one year or less. The average yield on available for sale securities was down
55 basis points over the comparable period in 1998, however it was higher than
the 4.87% average yield on federal funds sold while still offering the liquidity
to fund higher yielding loans.
The Company increased its average investment in available for sale tax-exempt
municipal securities by $9.2 million over the comparable period in 1998. The
average tax equivalent yield on tax-exempt municipal securities was 5.79%, down
from 6.03% over the nine month period ended June 30, 1998 and 92 basis points
higher than the 4.87% average yield on federal funds sold.
Interest expense for the nine months ended June 30, 1999 was $17.9 million, an
increase of $104,000, or .58%. The increase was principally related to a $50.7
million increase in average interest bearing liabilities, up from the $560.7
million for the comparable period in 1998. The average rate paid on interest
bearing liabilities was 3.90%, down 33 basis points from the 4.23% average rate
paid in 1998. The decrease in cost of funds was primarily attributable to the
<PAGE>
decreases for savings accounts and time accounts of 44 and 50 basis points,
respectively.
The Company's average borrowings were up $48.1 million from the $5.6 million in
average borrowings for the nine months ended June 30, 1998. The increase is
principally the result of additional borrowings with the FHLB, of which $30.0
million were long term fixed rate advances, $11.0 million were convertible
advances, and $5.7 million were short term fixed rate borrowings. The borrowings
were used primarily to fund the growth in interest earning assets.
There were no new advances in the comparable nine month period.
The Company's net interest margin was 3.78% for the nine months ended June 30,
1999, down 14 basis points compared to 3.92% for the comparable period of the
prior year. The decrease was principally the result of a 59 basis point decline
in the average yield on interest earning assets. This was primarily caused by a
38 basis point decline in the average yield on loans as competition for market
share remained strong, interest rates were at historical lows, and borrowers
refinanced into longer term fixed-rate loans. The Company also experienced a 55
basis point decline in the average yield on available for sale securities,
principally the result of an increase in available for sale government agency
securities, with short term maturities and lower yields than other long-term
investment securities. The Company expects to use the proceeds of these maturing
securities to fund its loan originations.
For more information on average balances, interest, yield and rate, please refer
to Table No.2 included in this quarterly report.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $2.4 million for the nine months ended June
30, 1999 , a decrease of $596,000, or 19.7% from the comparable nine month
period. The decrease in provision was primarily attributable to a reduction in
non-performing loans of $3.2 million, from $11.6 million at September 30, 1998
to $8.4 million at June 30, 1999. The allowance for loan losses provides
coverage of 121.3% of non-performing loans at June 30, 1999, as compared to
70.9% as of September 30, 1998. Offsetting the decrease in non-performing loans
was an increase of $380,000, or 45.9%, in net charge-offs to $447,000 for the
nine months ended June 30, 1999 compared to the same period in 1998.
In addition, as noted above the credit risk profile of the Company's loan
portfolio continues to change as an increasing percentage of the total loan
portfolio is comprised of higher credit risk loan types, such as commercial real
estate and commercial business loans.
NON-INTEREST INCOME
Non-interest income was $2.2 million for the nine months ended June 30, 1999, an
increase of $315,000, or 16.3% from the comparable nine month period. The
increase was principally due to a $108,000 increase in net gains from mortgage
loan sales, a related $93,000 increase in loan servicing fees, and a $162,000
increase in trust income. Offsetting the increase was a $105,000 decrease in
other income, which consisted primarily of $25,600 in Nationar recoveries and
$50,000 related to a settlement of a commercial real estate loan in the nine
month period ended
<PAGE>
June 30, 1998. No such income was recognized in 1999. The increase in net gains
on mortgage loan sales is a result of the sale of $51.0 million in fixed rate
residential loans in the secondary mortgage market for the nine months ended
June 30, 1999, up from $44.0 million for the comparable nine month period.
NON-INTEREST EXPENSE
Non-interest expense for the nine months ended June 30, 1999, was $20.2 million,
an increase of $5.2 million, or 35.2%, over the comparable nine month period.
The increase was primarily attributable to compensation and employee benefits
expense, the cost of the stock contribution to the Foundation, Year 2000
remediation expenses, and other real estate owned expense.
Compensation and employee benefits expense increased by $197,000, to $8.0
million for the nine months ended June 30, 1999. The increase was primarily from
recording expenses for its ESOP and the supplemental retirement plan which
benefits certain executive officers.
Contribution expenses increased to $4.4 million for the nine months ended June
30, 1999 compared to $114,000 for the comparable nine month period. The increase
was principally the $4.1 million cost of the stock contribution to the
Foundation.
Other expense increased to $2.4 million for the nine months ended June 30, 1999,
from the $2.3 million for the comparable nine month period. The increase was
principally the result of $382,000 for Year 2000 remediation expenses which
occurred in the three months ended March 31, 1999. The increase was partially
offset by a $235,000 reduction in expense by one of the Bank's subsidiaries for
operating costs incurred in the nine months ended June 30, 1998 and not incurred
in the nine months ended June 30, 1999.
Other real estate owned expenses increased $336,000, primarily the result of a
write-down in the three months ended March 31, 1999 of two properties secured by
commercial real estate as determined by management's assessment of their fair
market values.
INCOME TAX EXPENSE
Income tax benefit for the nine months ended June 30, 1999, was $741,000,
compared to income tax expense of $506,000 from the comparable nine month period
in 1998. The difference is principally the result of the tax benefit derived
from the stock contribution to the Foundation, and the Company's investment in
tax-exempt obligations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability to generate cash flows to meet present and future
financial obligations and commitments. Management monitors its liquidity
position on a daily basis to determine that the Company has adequate liquidity
to fund loan commitments, meet daily withdrawal requirements
<PAGE>
of depositors, and meet all other daily obligations of the Company.
The primary sources of funds are loan repayments, borrowings and proceeds from
the redemption and maturity of federal funds sold and other short-term
securities.
Net cash provided by operating activities was $8.0 million for the nine months
ended June 30, 1999, resulting primarily from $5.2 million in net proceeds
received from loan sales in excess of loans originated for sale and the increase
in other assets as a result of the $1.6 million deferred tax asset related to
the stock contribution to the Foundation.
Investing activities used $126.5 million in the nine months ended June 30, 1999
as the Company increased its interest earning assets through the purchase of
$63.2 million, net of proceeds on redemptions, maturities and sales of available
for sale securities and $62.6 million in loan originations. Financing activities
provided $128.5 million, as the Company experienced increases in deposits,
short-term borrowings, and the cash proceeds received from the Company's initial
public offering. For more details concerning the Company's cash flows, see
"Unaudited Interim Consolidated Statements of Cash Flows."
An important source of the Company's funds is the Bank's core deposits. The
Bank's core deposits are defined as demand deposit accounts, money market
accounts, and savings accounts, which totaled $332.9 million, or 58.4% of total
deposits at June 30, 1999. The Company had $99.5 million in deposits with
balances in excess of $100,000 at June 30, 1999.
The Company believes that it will have sufficient funds to meet its current
commitments. At June 30, 1999, the Company had commitments to originate loans of
$52.9 million. In addition, the Company had undrawn commitments of $8.1 million
on home equity lines and other lines, as well as $73.7 million on undrawn
commitments to funds commercial business loans. Time deposit accounts scheduled
to mature within one year or less at June 30, 1999, totaled $187.1 million, and
management believes that a significant portion of such deposits will remain with
the Company.
The Company and the Bank are required to maintain minimum regulatory capital
ratios. The following is a summary of the Bank's actual capital amounts and
ratios at June 30, 1999, compared to the FDIC minimum capital requirements:
<TABLE>
<CAPTION>
ACTUAL MINIMUM
------------------------------- ------------------------------
AMOUNT PERCENT AMOUNT PERCENT
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Leverage (Tier I) Capital $119,875 15.42% $31,092 4.00%
Risk-based capital
Tier I 119,875 20.51% 23,377 4.00%
Total 127,180 21.76% 46,753 8.00%
</TABLE>
At June 30, 1999, the Company's Tier 1 leverage ratio, as defined in regulatory
guidelines, was 21.67%. At June 30, 1999, the Company's Tier 1
capital-to-risk-weighted assets ratio was 30.44%, and the total
capital-to-risk-weighted assets ratio was 31.69%.
<PAGE>
YEAR 2000
The Company's progress on its Year 2000 issue is continuing. The Company's
primary service provider completed its Year 2000 readiness testing during 1998
and the Company conducted its testing during the quarter ended March 31, 1999
incurring a $120,000 "validation" fee. During the quarter, the Company tested
all of its mission critical systems, and processed transactions with dates up
through and including March 31, 2000. The results of the Company's tests showed
no significant exceptions. The Company incurred $24,000 in costs during the
quarter ended March 31, 1999 to contract with an independent technology
consultant to provide verification and validation of the Company's risk and cost
estimates, systems testing and contingency plans. The results of the study
showed no significant exceptions, as well. During the three months ended March
31, 1999 the Company also incurred Y2K remediation expenses of $158,000 for
system upgrades, $40,000 for contingency planning, and $40,000 for customer
awareness programs.
The Company's investment subsidiary changed its primary service provider during
the quarter ended June 30, 1999. The Company is monitoring the year 2000
readiness of this provider and anticipates that there will be no significant
exceptions.
The Company's mission critical systems have been tested and are certified as
year 2000 compliant at June 30, 1999, and the Company expects all others to be
tested and compliant by September 30, 1999. The Company is also monitoring the
year 2000 readiness of major vendors for which the Company is reliant upon for
bank operations.
The Company expects that when the century changes, any disruption in service
will come not from a failure of its systems or the systems of the providers with
whom it interfaces, but rather from outside agencies ( i.e., electric and
telephone companies ) beyond its control. Therefore, contingency planning and
business resumption planning will be based on the Company's formal Disaster
Recovery Program, which includes using such things as emergency power generation
or reverting to manual systems until problems can be corrected.
The Company has written a Disaster Recovery Program and Year 2000 Contingency
Plan, and management expects to test the plan before September 30, 1999. The
Company is also undertaking various customer awareness programs, such as posted
statements, mailing of FDIC brochures, and anticipates providing information
through its website.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-Q or other filings by the Company with the Securities
and Exchange Commission, in the Company's press releases or other public or
shareholder communications, or in oral statements made with the approval of an
authorized executive officer, the words or
<PAGE>
phrases "will likely result", "are expected to", "will continue", "is
anticipated", "estimate", "project","believe", or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. In addition, certain
disclosures and information customarily provided by financial institutions, such
as analysis of the adequacy of the allowance for loan losses or an analysis of
the interest rate sensitivity of the Company's assets and liabilities, are
inherently based upon predictions of future events and circumstances.
Furthermore, from time to time, the Company may publish other forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
Some of the risks and uncertainties that may affect the operations, performance,
development and results of the Company's business, the interest rate sensitivity
of its assets and liabilities, and the adequacy of its allowance for loan
losses, include but are not limited to the following:
o Deterioration in local, regional, national or global economic conditions
which could result, among other things, in an increase in loan
delinquencies, a decrease in property values, or a change in the housing
turnover rate;
o the effect of certain customers and vendors of critical systems or
services failing to adequately address issues relating becoming Year 2000
compliant;
o changes in market interest rates or changes in the speed at which market
interest rates change;
o changes in laws and regulations affecting the financial service industry;
o changes in competition; and
o changes in consumer preferences.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release any revisions to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
<PAGE>
ITEM 3: Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign exchange rate risk and commodity
price risk, do not arise in the normal course of the Company's business
activities.
Interest rate risk can be defined as exposure to movement in interest rates that
could have an adverse effect on the Company's net interest income. Interest rate
risk arises naturally from the imbalance in repricing, maturity and/or cash flow
characteristics of assets and liabilities. When interest bearing liabilities
mature or reprice on a different basis than interest earning assets in a given
period, a significant increase in market rates of interest could adversely
effect net interest income. Similarly, when interest earning assets mature or
reprice more quickly than interest bearing liabilities, a significant decline in
market rates of interest could decrease net interest income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Management's asset liability
management committee ("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. ALCO reports the interest rate
risk position to the Board of Directors on a quarterly basis. ALCO also
evaluates the overall risk profile and determines actions to maintain and
achieve a posture consistent with policy guidelines. The Company cannot predict
the future movement of interest rates, and such movement could have an adverse
impact on the Company's consolidated financial condition and results of
operations.
The Company manages its exposure to interest rate risk in the following ways:
* emphasizing the origination of adjustable rate mortgage loans, and to a
lesser extent commercial real estate, commercial business and consumer
loans;
* selling substantially all of its fixed rate residential mortgage loans in
the secondary market;
* utilizing FHLB advances to better structure the maturities of interest
rate sensitive liabilities;
* investing in short-term securities which better position the Company for
increases in interest rates.
In order to reduce the interest rate risk associated with the portfolio of
conventional mortgage loans held for sale, as well as outstanding loan
commitments and uncommitted loan applications with rate lock agreements which
are intended to be held for sale, the Company enters into agreements to sell
loans in the secondary market to unrelated investors on a loan-by-loan basis,
and may also enter into option agreements.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Not applicable
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5 - OTHER INFORMATION
Not applicable
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter ending June 30, 1999.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TROY FINANCIAL CORPORATION
(Registrant)
Date: August 13, 1999 /s/ Daniel J. Hogarty, Jr.
------------------------------------------
Daniel J. Hogarty, Jr.
Chairman of the Board, President and
Chief Executive Officer
/s/ Edward M. Maziejka, Jr.
------------------------------------------
Edward M. Maziejka, Jr.
Vice President and Chief Financial Officer
II-2
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S QUARTERLY UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0001075046
<NAME> Troy Financial Corp.
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