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Filed pursuant to rule 424(b)(3)
Registration statement number 333-68813
PROSPECTUS SUPPLEMENT
TROY FINANCIAL CORPORATION
[BUILDING LOGO]
THE TROY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
We are giving you this prospectus supplement because you are a participant
in The Troy Savings Bank 401(k) Savings Plan in RSI Retirement Trust.
As a participant in the plan, you may direct the trustee of the plan to
purchase common stock being offered as part of Troy Savings' conversion. The
trustee will use amounts allocated to your accounts under the plan to purchase
the common stock. Since the plan's trustee actually purchases the common stock,
you would acquire only a participation interest in the shares of common stock
and would not own the common stock directly.
The conversion and the offering of common stock are discussed in detail in
the attached prospectus.
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PLEASE READ THE RISK FACTORS BEGINNING ON PAGE 7 OF THE PROSPECTUS BEFORE
INVESTING IN COMMON STOCK OR THE TROY STOCK FUND.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE NEW YORK
SUPERINTENDENT OF BANKS NOR THE NEW YORK STATE BANKING DEPARTMENT HAS APPROVED
OR DISAPPROVED OF THE COMMON STOCK OR THE PARTICIPATION INTERESTS IN THE 401(K)
SAVINGS PLAN OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTUS OR THIS
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE PARTICIPATION INTERESTS IN THE 401(K) SAVINGS PLAN ARE NOT DEPOSITS OR
ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE 401(K) SAVINGS PLAN'S ENTIRE
INVESTMENT IN THE COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE
POSSIBLE LOSS OF THE PRINCIPAL INVESTED.
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THE DATE OF THIS PROSPECTUS SUPPLEMENT IS FEBRUARY 12, 1999.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
You May Now Invest in the Troy Stock Fund................... S-2
The Plan Offering........................................... S-2
Securities Offered........................................ S-2
Election to Purchase Common Stock in the Conversion....... S-2
Priorities................................................ S-2
Value of Participation Interests.......................... S-3
How to Direct a Transfer Between Accounts................. S-3
Deadline for Directing a Transfer Between Accounts........ S-3
Your Decision to Transfer Funds to the Troy Stock Fund is
Irrevocable............................................ S-3
Direction to Purchase Common Stock after the Conversion... S-3
Purchase Price of the Common Stock........................ S-3
The Nature of Your Interest in the Common Stock........... S-4
Voting Rights of Common Stock............................. S-4
Description of the Plan..................................... S-4
Introduction.............................................. S-4
Eligibility and Participation in the Plan................. S-4
Contributions Under the Plan.............................. S-5
Limitations on Contributions.............................. S-5
Investments of Contributions.............................. S-6
Benefits Under the Plan................................... S-8
Distributions from the Plan............................... S-9
Administration of the Plan................................ S-10
Reports to Plan Participants.............................. S-11
Plan Administrator........................................ S-11
Amendment and Termination................................. S-11
Merger, Consolidation or Transfer......................... S-11
Federal Income Tax Consequences........................... S-11
ERISA and Other Qualifications............................ S-14
SEC Reporting and Short-Swing Profit Liability............ S-14
Investment Election Form.................................... Si-1
</TABLE>
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YOU MAY NOW INVEST IN THE TROY STOCK FUND
As a 401(k) Savings Plan participant, you can invest all or a portion of
your account balance in one of seven investment funds. Troy Savings has now
established the Troy Stock Fund as an additional investment option under the
plan. The Troy Stock Fund will invest in our common stock. This prospectus
supplement, and the accompanying prospectus, have been distributed to you so
that you can make an informed decision whether to invest any of your account
balance in the Troy Stock Fund. If the plan trustee is unable to use the full
amount allocated by you to purchase common stock in the conversion, then any
remaining funds will be allocated to the following seven funds according to your
prior investment directions:
(1) Core Equity Fund
(2) Emerging Growth Equity Fund
(3) Value Equity Fund
(4) Intermediate-Term Bond Fund
(5) Actively Managed Bond Fund
(6) International Equity Fund
(7) Short-Term Investment Fund
THE PLAN OFFERING
SECURITIES OFFERED
The securities offered are participation interests in the plan. The common
stock acquired by the plan will be held in the Troy Stock Fund.
Information about the plan is contained in this prospectus supplement and
information about the conversion and the financial condition, results of
operations and business of Troy Financial and Troy Savings is contained in the
attached prospectus. The address of the principal executive office of Troy
Financial and Troy Savings is 32 Second Street, Troy, New York 12180. The
telephone number is (518) 270-3200.
ELECTION TO PURCHASE COMMON STOCK IN THE CONVERSION
Under the plan, you may invest your account balance, in multiples of 5%,
among eight investment alternatives, including the Troy Stock Fund. The trustee
of the Troy Stock Fund will purchase common stock in the conversion according to
your directions. IF THE CONVERSION IS OVERSUBSCRIBED AND THE TRUSTEE IS UNABLE
TO USE YOUR FULL ACCOUNT BALANCE TO PURCHASE COMMON STOCK, THEN ANY REMAINING
FUNDS WILL BE ALLOCATED TO THE OTHER SEVEN FUNDS ACCORDING TO YOUR PRIOR
INVESTMENT DIRECTIONS. If you have never made an investment election, then your
account balance will be invested in the Short-Term Investment Fund.
PRIORITIES
The subscription offering is being made to individuals in the following
order of priority:
- depositors with accounts at Troy Savings with balances of at least $100
at June 30, 1997.
- depositors with accounts at Troy Savings with balances of at least $100
at December 31, 1998, who did not hold deposit accounts at Troy Savings
with balances of at least $100 on June 30, 1997.
If you fall into one of these categories, then you may use funds in your
plan accounts to invest in the Troy Stock Fund. In addition, even if you do not
fall into one of these categories, you may still be able to use your funds to
invest in the Troy Stock Fund in the community offering or through open market
purchases. In that case, our common stock will be placed in your Troy Stock Fund
account within the plan.
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Your funds that are not transferred to the Troy Stock Fund will remain in the
other investment funds as directed by you.
VALUE OF PARTICIPATION INTERESTS
The assets of the plan were valued at approximately $4.9 million as of
January 26, 1999, and you were informed of the value of your beneficial interest
in the plan. The value of the assets of the plan represents the market value, as
of January 26, 1999, of all participant accounts and any earnings or losses on
those accounts, less prior account withdrawals and loans.
HOW TO DIRECT A TRANSFER BETWEEN ACCOUNTS
The last page of this prospectus supplement contains an investment election
form, by which you can direct that any of your funds in the plan be transferred
to the Troy Stock Fund, in multiples of 5%. If you wish to transfer all or part
of your accounts to the Troy Stock Fund, then you should indicate that decision
on the investment election form. The investment election form must be returned
to Evelyn A. Morris, Vice President/Director of Human Resources of Troy Savings
by 5 p.m., March 5, 1999.
DEADLINE FOR DIRECTING A TRANSFER BETWEEN ACCOUNTS
The deadline for submitting the investment election form to Evelyn A.
Morris is 5 p.m., March 5, 1999.
YOUR DECISION TO TRANSFER FUNDS TO THE TROY STOCK FUND IS IRREVOCABLE
Your direction to transfer amounts to the Troy Stock Fund is irrevocable.
DIRECTION TO PURCHASE COMMON STOCK AFTER THE CONVERSION
After the conversion, you will be able to direct that a percentage of your
interest in the plan be transferred to the Troy Stock Fund, as well as to any of
the seven investment funds available under the plan. These transfers must be in
multiples of 5%, from 5% to 100%.
You may also direct that your future contributions to the plan be invested
among any of the eight funds, including the Troy Stock Fund, in multiples of 5%.
You may not change your allocation more than once per quarter, although your
election to invest in the Troy Stock Fund during the conversion will not be
considered to be your quarterly allocation election. If you are one of our
officers, directors, trustees or principal stockholders then special
restrictions may apply to you.
PURCHASE PRICE OF THE COMMON STOCK
The funds transferred to the Troy Stock Fund for the purchase of common
stock in the conversion will be used by the trustee to order common stock. The
price paid for the common stock by the trustee will be $10.00 per share, which
is the same price paid by all other purchasers who purchase common stock in the
conversion.
Common stock purchased by the trustee after the conversion will be acquired
in open market transactions.
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THE NATURE OF YOUR INTEREST IN THE COMMON STOCK
The common stock will be held in the name of the trustee for the Troy Stock
Fund. Common stock acquired at your direction will be allocated to your account
under the plan. Therefore, earnings in your account should not be affected by
the investment designations, including investments in common stock, of other
plan participants.
VOTING RIGHTS OF COMMON STOCK
The trustee for the Troy Stock Fund generally will vote the common stock
held by it as directed by you and the other plan participants with interests in
the Troy Stock Fund. With respect to each matter as to which you have a right to
vote, you will be allocated voting instruction rights reflecting your
proportionate interest in the Troy Stock Fund. The number of shares of common
stock held in the Troy Stock Fund that are voted in the affirmative and negative
on each matter will be proportionate to the number of affirmative and negative
instruction votes of you and the other plan participants.
DESCRIPTION OF THE PLAN
INTRODUCTION
The plan was established on April 1, 1989, and is a cash or deferred
arrangement established under Section 401(a) and Section 401(k) of the Internal
Revenue Code. The Internal Revenue Service has determined that the plan and its
related trust are qualified under the Internal Revenue Code.
Troy Savings intends that the plan, in operation, will comply with the
requirements under the Internal Revenue Code. Troy Savings will adopt any
amendments to the plan necessary to ensure the qualified status of the plan
under the Internal Revenue Code and applicable regulations.
Employee Retirement Income Security Act of 1974 or ERISA. The plan is an
individual account plan, other than a money purchase pension plan, within the
meaning of ERISA. Thus, the plan is subject to all of the provisions of Title I,
Protection of Employee Benefit Rights, and Title II, Amendments to the Internal
Revenue Code Relating to Retirement Plans, of ERISA, except the funding
requirements contained in Part 3 of Title I of ERISA which by their terms do not
apply to an individual account plan, other than a money purchase pension plan.
The plan is not subject to Title IV, Plan Termination Insurance, of ERISA. The
funding requirements contained in Title IV of ERISA are not applicable to
participants or beneficiaries under the plan.
Reference to the Full Text of the Plan. The following statements are
summaries of some of the provisions of the plan. You may obtain a complete copy
of the plan from the plan administrator, Attn: Evelyn A. Morris, Vice
President/Director of Human Resources of Troy Savings, 433 River Street, Troy,
New York 12180. The plan administrator's telephone number is (518) 270-3255. You
are urged to read carefully the full text of the plan.
ELIGIBILITY AND PARTICIPATION IN THE PLAN
Generally, salaried or commissioned employees, of Troy Financial, Troy
Savings and their subsidiaries are eligible to join the plan upon reaching age
21 and completing a 365-day period of employment, beginning on the date of hire.
Employees compensated on an hourly, daily, fee or retainer basis, leased
employees and employees covered by a collective bargaining agreement, which does
not expressly provide for participation in the plan, are not eligible to join
the plan.
As of December 31, 1998, there were approximately 230 employees eligible to
participate in the plan, and 223 employees had elected to participate in the
plan by making salary deferred contributions.
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CONTRIBUTIONS UNDER THE PLAN
Plan Contributions. Under the plan, you are permitted to defer a part of
your base salary, on a pre-tax basis, up to the lesser of 15% of your annual
base salary, expressed in terms of whole percentages, or the applicable limit
under the Internal Revenue Code, which is $10,000 for 1999. Under the Internal
Revenue Code, the pre-tax base could be increased to the lesser of 25% of your
annual base salary or the $10,000 limit. For purposes of the plan, base salary
means your regular base pay, including salary, draw against commissions,
before-tax contributions made to the plan during the year and wages and wage
continuation payments. Base salary excludes overtime, bonuses, expense
allowances, severance pay, fees and any other special or supplemental
compensation. In 1999, the maximum amount of base salary that can be used for
any purpose under the plan is $160,000. The Internal Revenue Service adjusts
this limitation annually for changes in the cost of living.
You may elect to modify the amount contributed to the plan once in any
calendar quarter effective the first payroll period following 10 days after you
submit written notice to the plan administrator or as soon as possible
thereafter. Special restrictions here may also apply to you if you are subject
to Section 16 of the Securities Exchange Act of 1934.
Employer Contributions. For 1998 and prior years, Troy Savings matched 50%
of a participant's pre-tax contributions, up to a maximum of 3% of the
participant's base salary. The matching contributions, including any earnings,
are not taxed so long as the funds remain in the plan. Matching contributions
are also subject to change, as well as vesting requirements. Following the
conversion, we intend to discontinue making matching contributions.
LIMITATIONS ON CONTRIBUTIONS
Limitation on Employee Salary Deferrals. The annual amount of deferred base
salary, when aggregated with any elective deferrals under a simplified employee
pension plan or a tax-deferred annuity, may not exceed the limitation contained
in the Internal Revenue Code, as adjusted. The limitation for 1999 is $10,000.
Contributions in excess of this limitation or excess deferrals will be included
in the participant's gross income for federal income tax purposes in the year
made. In addition, any excess deferral will again be subject to federal income
tax when distributed by the plan to the participant, unless the excess deferral,
together with any income allocable to it, is distributed not later than the
first April 15th following the close of the taxable year in which the excess
deferral is made. Any income on the excess deferral that is distributed not
later than that date will be treated, for federal income tax purposes, as earned
and received by the participant in the taxable year in which the distribution is
made.
Limitations on Annual Additions and Benefits. The plan provides that the
amount of contributions and forfeitures allocated to each participant's account
during any year may not exceed the lesser of $30,000 or 25% of the participant's
base salary for the year. In addition, annual additions are limited to the
extent necessary to prevent contributions on behalf of any employee from
exceeding the employee's combined plan limit. This limit takes into account the
contributions and benefits made on behalf of an employee to all plans of Troy
Savings or Troy Financial. To the extent that these limitations have been
exceeded with respect to a participant, the plan administrator shall use the
excess amounts in the next limitation year, and succeeding limitation years, if
necessary, to reduce participant contributions and employer matching
contributions for that participant if the participant is an eligible employee,
as defined in the plan, during the next limitation year. If the participant is
not an eligible employee, the plan administrator can allocate and reallocate the
excess amounts in the next limitation year, and succeeding limitation years, if
necessary, to all participants then actively participating in the plan.
Limitation on Contributions for Highly Compensated Employees. The Internal
Revenue Code limits the amount of salary deferral contributions and matching
contributions that may be made to the plan in any year on behalf of highly
compensated employees in relation to the amount of salary deferral contributions
made by or on behalf of all other employees eligible to participate in the plan.
Specifically, the actual deferral percentage, which is the average of the actual
deferral ratios, expressed as a percentage, of each
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eligible employee's salary deferral contribution if any, for the year over the
employee's compensation, for the highly compensated employees must meet either
of the following tests:
(1) the actual deferral percentage of the eligible highly compensated
employees is not more than 125% of the actual deferral percentage of
all other eligible employees for the prior year, or
(2) the actual deferral percentage of the eligible highly compensated
employees is not more than 200% of the actual deferral percentage of
all other eligible employees for the prior year, and the excess of the
actual deferral percentage for the eligible highly compensated
employees over the actual deferral percentage of all other eligible
employees for the prior year is not more than two percentage points.
Similarly, the actual contribution percentage, which is the average of the
actual contribution ratios, expressed as a percentage of each eligible
employee's matching contributions, if any, for the year over the employee's
compensation, of the highly compensated employees must meet either of the
following tests:
(1) the actual contribution percentage of the eligible highly compensated
employees is not more than 125% of the actual contribution percentage
of all other eligible employees for the prior year, or
(2) the actual contribution percentage of the eligible highly compensated
employees is not more than 200% of the actual contribution percentage
of all other eligible employees for the prior year, and the excess of
the actual contribution percentage for the eligible highly compensated
employees over the actual contribution percentage of all other
employees for the prior year is not more than two percentage points.
In general, beginning in 1999, a highly compensated employee includes any
employee, who,
(1) during the year or the preceding year, was at any time a 5% owner of
the employer's stock, or
(2) for the preceding year received base salary from an employer in excess
of a specified amount, which is $80,000 in 1999, and, if the employer
elects for a year, was in the group consisting of the top 20% of
employees when ranked on the basis of base salary paid during the year.
The Internal Revenue Service adjusts the dollar amounts set forth above
annually to reflect increases in the cost of living.
To prevent the disqualification of the plan, any amount contributed by
highly compensated employees that exceeds the actual deferral percentage
limitation in any year, together with any allocable income, must be distributed
to such highly compensated employees before the close of the following year.
Moreover, Troy Savings will be subject to a 10% excise tax on any excess
contributions unless the excess contributions, together with any allocable
income, are either re-characterized or distributed before the close of the first
2 1/2 months following the year to which such excess contributions relate. In
addition, to avoid disqualification of the plan, any contributions by highly
compensated employees that exceed the average contribution limitation in any
year, together with any income allocable, must be distributed to such highly
compensated employees before the close of the following year. However, the 10%
excise tax will be imposed on Troy Savings with respect to any excess aggregate
contributions, unless those amounts, plus any income allocable thereto, are
distributed within 2 1/2 months following the close of the year in which they
arose.
INVESTMENTS OF CONTRIBUTIONS
All amounts credited to participants' accounts under the plan are held in a
trust fund which is administered by the trustee appointed by Troy Savings' Board
of Trustees.
Prior to the conversion, participants could direct the investment of their
accounts into the seven funds.
The plan now provides that, in addition to the seven funds, a participant
may direct the trustee to invest all or a portion of his or her account in the
Troy Stock Fund. A participant may elect to have both past contributions and
earnings, as well as future contributions to the participant's accounts invested
in either the Troy Stock Fund or among the other seven funds. Transfers of past
contributions and the earnings do not affect the investment mix of future
contributions. Participants may transfer past contributions from one fund to
another not more than once in any calendar quarter by submitting a request to
the plan administrator at
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least 10 days prior to the date the transfer is to be made. All transfers must
be made in multiples of 5%. Participants may also change the investment of
future contributions not more than once in any calendar quarter by submitting a
request to the plan administrator at least 10 days prior to the date the change
is to take effect. The change in future allocations will become effective as of
the first payroll period following the participant's written notice to the plan
administrator, or as soon as possible thereafter.
The value of a participant's accounts under the plan will reflect the
investment performance of the fund or funds in which the participant is
invested. Each fund is valued daily. For purposes of allocations, all assets of
the trust are valued at fair market value.
A. PREVIOUS FUNDS.
The following table provides performance data for the seven existing funds,
based on information provided to us by RSI Retirement Trust.
NET INVESTMENT PERFORMANCE FOR PERIODS ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
FUND 12 MONTHS 3 YEARS 5 YEARS 10 YEARS
---- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(1) Core Equity Fund......................... 25.85% 24.22% 22.17% 17.49%
(2) Emerging Growth Equity Fund.............. (7.08) 8.53 13.58 15.23
(3) Value Equity Fund........................ 17.90 25.04 20.96 14.66
(4) Intermediate-Term Bond Fund.............. 6.69 5.92 5.71 7.70
(5) Actively Managed Bond Fund............... 8.38 7.04 6.69 8.70
(6) International Equity Fund................ 14.79 8.69 7.79 6.74
(7) Short-Term Investment Fund............... 5.03 4.89 4.69 5.16
</TABLE>
The following is a description of each of the seven existing funds:
Core Equity Fund. This fund seeks capital appreciation and income and
invests in a broadly diversified group of high quality, large capitalization
companies exhibiting sustainable growth in earnings and dividends. It is
expected that the variability of returns, or risk, for this fund will
approximate that of the Standard and Poor's 500 stock index over time.
Emerging Growth Equity Fund. This fund seeks capital appreciation and
income by investing primarily in stocks of smaller companies with
higher-than-average earnings and dividend growth potential. The fund will
generally have a higher degree of risk and price volatility than the portfolios
of the Core Equity Fund and the Value Equity Fund.
Value Equity Fund. This fund seeks capital appreciation and income and
invests heavily in out-of-favor stocks of financially sound companies that are
selling at unjustifiably low market valuations based on price/earnings ratios,
price-to-book ratios and other indicators. The results achieved by this fund may
be more volatile than the results produced by the Standard and Poor's 500 stock
index.
Intermediate-Term Bond Fund. This fund seeks principal appreciation and
income and invests in high quality fixed-income vehicles that mature within 10
years or have expected average lives of 10 years or less. At least 65% of its
assets must be invested in securities issued or backed by the United States
government, or its agencies or instrumentalities. The returns of this fund are
expected to be less volatile than the returns produced by the Lehman Brothers
Government/Corporate Bond Index.
Actively Managed Bond Fund. This fund invests in high quality fixed income
securities and seeks both principal appreciation and income. The maturity
structure of this fund is expected to vary substantially based on the perceived
relative attractiveness of different areas of the fixed income market. At least
65% of its assets must be invested in securities issued or backed by the United
States government, or its agencies or instrumentalities. The returns of this
fund are expected to reflect the variability of returns produced by the Lehman
Brothers Government/Corporate Bond Index.
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International Equity Fund. This fund seeks capital appreciation and income
by investing in stocks of companies headquartered in foreign countries. Each
selection is based on companies whose current prices do not reflect the true
earnings potential and therefore, are selling at undervalued prices, indicated
by unjustifiably low price-to-book ratios, price/earnings ratios, and other
indicators. Investments in foreign markets with unacceptable political or
economic risks are avoided. Holdings are concentrated in the larger markets of
Europe, Australia and the Far East. In addition, the portfolio manager will
invest in emerging markets, as opportunities arise and, in smaller
capitalization issues up to 15% of total portfolio assets. This fund generally
carries a higher degree of risk and price volatility than the Core Equity Fund
and the Value Equity Fund, but less than the Emerging Growth Equity Fund. Total
net return, including adjustments for currency price changes, should exceed the
Lipper International Mutual Funds Average measured over a period of three to
five years.
Short-Term Investment Fund. This fund focuses on preservation of principal
while producing a competitive money market return.
B. THE TROY STOCK FUND.
The Troy Stock Fund will consist of investments in our common stock made
during and after the conversion. After the conversion, the trustee for the Troy
Stock Fund will, to the extent practicable, use all amounts held by it in the
Troy Stock Fund, including cash dividends, if any, paid on our common stock held
in the Troy Stock Fund, to purchase shares of our common stock. The trustee will
make all purchases at prevailing market prices. Under certain circumstances, the
trustee may be required to limit the daily volume of shares purchased. Pending
investment in our common stock, assets held in the Troy Stock Fund may be placed
in Troy Savings deposit accounts and other short-term investments.
The expenses of managing plan funds, including investment management fees,
commissions, and other transaction costs, are charged against the assets of the
total applicable fund. A participant's account will be adjusted to reflect
changes in the value of the shares of common stock resulting from stock
dividends, stock splits and similar changes, if any.
As of the date of this prospectus supplement, no common stock has been
issued or is outstanding and there is no established market for our common
stock. Accordingly, there is no record of the historical performance of the Troy
Stock Fund. Performance depends upon a number of factors, including our
financial condition and profitability and the market conditions for our common
stock generally.
AN INVESTMENT IN THE TROY STOCK FUND INVOLVES RISKS. FOR A DISCUSSION OF
THESE RISKS FACTORS, SEE PAGE 7 OF THE PROSPECTUS. THE PERFORMANCE OF THE TROY
STOCK FUND AND AMOUNTS IN THE TROY STOCK FUND OR ANY OF THE OTHER PLAN FUNDS ARE
NOT GUARANTEED BY TROY SAVINGS, THE PLAN OR US. THE TROY STOCK FUND IS NOT
INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.
BENEFITS UNDER THE PLAN
Vesting. You, at all times, have a fully vested, nonforfeitable right to
your before-tax contributions, after-tax contributions and rollover
contributions and their earnings under the plan. You are vested in any matching
contributions and earnings according to the following schedule:
<TABLE>
<CAPTION>
VESTED
YEARS OF SERVICE PERCENTAGE
---------------- ----------
<S> <C>
less than 2 years........................................... 0%
2 years but less than 3 years............................... 20%
3 years but less than 4 years............................... 40%
4 years but less than 5 years............................... 60%
5 years but less than 6 years............................... 80%
6 or more years............................................. 100%
</TABLE>
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You will also be 100% vested in matching contributions and earnings,
regardless of years of employment, upon your retirement, permanent disability or
death.
DISTRIBUTIONS FROM THE PLAN
FEDERAL LAW REQUIRES THE PLAN TO IMPOSE SUBSTANTIAL RESTRICTIONS ON YOUR
RIGHT TO WITHDRAW AMOUNTS HELD FOR YOUR BENEFIT UNDER THE PLAN PRIOR TO YOUR
TERMINATION OF EMPLOYMENT. A SUBSTANTIAL FEDERAL TAX PENALTY MAY ALSO BE IMPOSED
ON WITHDRAWALS MADE PRIOR TO YOUR ATTAINMENT OF AGE 59 1/2, REGARDLESS OF
WHETHER THE WITHDRAWAL OCCURS DURING OR AFTER TERMINATION OF YOUR EMPLOYMENT.
Circumstances When Distributions Are Made. The plan is designed to provide
you with a source of retirement income. Accordingly, benefits are normally paid
at retirement. The plan, however, has provisions for distributions to commence
at a variety of times depending upon the circumstances.
Retirement. Normal retirement under the plan occurs on the later of the
date that you attain age 65 or the date in which you complete five years of
service beginning on the date you first became eligible to participate in the
plan. If, however, you are eligible for an early retirement benefit under a
defined benefit retirement plan, then you may choose to retire under the plan
earlier than at normal retirement. If you retire before age 55 and do not roll
over your account balance to a rollover individual retirement account or IRA or
a subsequent employer's qualified plan, then you may have to pay a 10% federal
excise tax on the taxable portion of the distribution in addition to other
federal, state and local income taxes applicable to all distributions. If you
work past age 65, then your distributions will generally be deferred at least
until the actual retirement date.
Disability. You can receive a distribution if you become disabled while an
active employee. For purposes of the plan, you are considered disabled if you
become eligible for benefits under a long term disability plan.
Death. The full value of your plan accounts, less any outstanding loans,
will be paid if you die. To receive this payment, your beneficiary must first
provide the plan administrator with proper documentation, such as a death
certificate. If there is no beneficiary or contingent beneficiary on record,
then payment will be made to your estate.
Termination of Employment. If you terminate employment for any reason
before retirement, then your contributions will automatically end. If you
terminate employment and receive a distribution before age 55 and do not roll
over the distribution to a rollover IRA or a subsequent employer's qualified
plan, then you will have to pay a 10% federal excise tax on the taxable portion
of the distribution in addition to other federal, state and local income taxes
applicable to all distributions.
When and How Distributions are Made. Distributions from the plan are
usually made in one cash payment and are generally taxable as ordinary income in
the year in which the payment is made. However, the portion of the distribution
that is a return of your after-tax contributions is not taxable since you
already paid tax on it. The earnings on after-tax contributions are taxable as
ordinary income in the year in which the earnings are paid to you.
If you terminate employment for any reason and the value of your plan
accounts is $5,000 or less, then you will receive a single cash payment as soon
as administratively possible after termination. You may elect to have the
payment transferred directly to an IRA or another qualified plan. If you retire
on or after the normal retirement age and the value of your plan accounts
exceeds $5,000 and you have not elected an optional form of payment, then you
will receive a single cash payment as soon as administratively possible after
termination. If you terminate for any reason before normal retirement age, the
value of your vested plan accounts exceeds $5,000 and you have not elected an
optional form of payment, then you will receive a single cash payment as soon as
administratively possible after attaining normal retirement age.
S-9
<PAGE> 11
Optional Forms of Payment. You have the option to elect to receive the
following optional forms of payment:
(1) Single Cash Payment. This option is available regardless of the
value of your plan accounts. If you terminate employment for reasons other
than death, then you may elect to receive the value of your vested plan
accounts as a single cash payment any date up to 13 months after
termination.
(2) Installment Payments. This option is available if the value of
your plan accounts exceeds $5,000. This option is only available if your
reason for termination of employment is due to retirement or disability.
You may elect to receive the value of your accounts in installments, up to
a maximum payment period of 10 years. The maximum payment period, however,
cannot exceed your life expectancy and the life expectancy of your
beneficiary. You decide when the installments commence, although,
generally, you must begin to receive payments no later than the first day
of April following the year in which you attain age 70 1/2 or terminate
employment, if later. Each installment amount will be based on the number
of payments then remaining and the current value of your accounts.
(3) Direct Transfers to an IRA or Another Qualified Plan. This option
is available regardless of the value of your plan accounts. You may, at
least 10 days prior to the date on which the benefit is scheduled to be
paid, request that the value of your accounts be made payable to the
trustee or custodian of an IRA, or the trustee of another qualified pension
or profit-sharing plan, provided that the other plan permits receipt
thereof.
Distributions Following Your Death. If you die before receiving the entire
value of your plan accounts, then payments will be made to your beneficiary or
contingent beneficiary as follows:
(1) If you had not made a valid election as to how payments are to be
made, then a single cash payment will be made as soon as administratively
possible following death.
(2) If you had made a valid election to receive a deferred single cash
payment, a single cash payment will generally be made as of the date you
had elected to receive the payment. However, there are certain situations
when a single cash payment may be made as of another date:
(a) if your beneficiary is your spouse and death occurs before age
70 1/2, then payment to your spouse will be made no later than the date
you would have attained age 70 1/2;
(b) if your beneficiary is your spouse and you die on or after age
70 1/2, then payment to your spouse will be made as soon as
administratively possible following death; and
(c) if your beneficiary is not your spouse, then payment to your
beneficiary will be made within one year of the date of your death.
(3) If you are receiving installment payments and die before receipt
of all the installments, then your beneficiary or contingent beneficiary
will continue to receive the installments in the same manner as before
death. Payments will continue until all installments paid equal the number
of installment payments that you had elected to receive.
Nonalienation of Benefits. Except with respect to federal income tax
withholding and as provided with respect to a qualified domestic relations
order, benefits payable under the plan shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge, encumbrance,
charge, garnishment, execution, or levy of any kind, either voluntary or
involuntary, and any attempt to anticipate, alienate, sell, transfer, assign,
pledge, encumber, charge or otherwise dispose of any rights to benefits payable
under the plan will be void.
ADMINISTRATION OF THE PLAN
Trustee. The trustee of the plan is the named fiduciary of the plan for
purposes of ERISA.
The trustee is appointed by the Board of Trustees of Troy Savings to serve
at its pleasure. The current trustee of the plan is the RSI Retirement Trust.
However, RSGroup Trust Company is being appointed as
S-10
<PAGE> 12
trustee for the Troy Stock Fund. As used in the prospectus supplement, trustee
refers to both RSI Retirement Trust and RSGroup Trust Company.
The trustee receives, holds and invests the contributions to the plan in
trust and distributes the account balances according to the terms of the plan
and the directions of the plan administrator. The trustee is responsible for
investment of the assets of the trust.
REPORTS TO PLAN PARTICIPANTS
The trustee will furnish to each participant a statement each quarter
showing, as of the statement date, how much each participant has in the plan,
the participant's investment allocations, and the value of the participant's
accounts in the plan.
PLAN ADMINISTRATOR
Pursuant to the terms of the plan, the plan is administered by the plan
administrator. Currently, the plan administrator is Troy Savings. Ms. Evelyn A.
Morris, Vice President/Director of Human Resources of Troy Savings is the
representative for the plan administrator. The address and telephone number of
the plan administrator is c/o The Troy Savings Bank, 433 River Street, Troy, New
York 12180; (518) 270-3255. The plan administrator is responsible for
maintaining the plan's records, determining eligibility to participate,
forwarding all appropriate forms to the trustee, notifying participants
regarding claims for benefits, and generally acting in good faith and in the
plan's interest. The plan administrator is also responsible for interpretation
of the provisions of the plan, prescribing procedures for filing applications
for benefits, preparation and distribution of information explaining the plan,
and preparation and filing of all returns and reports relating to the plan which
are required to be filed with the U.S. Department of Labor and the Internal
Revenue Service, and for all disclosures required to be made to participants,
beneficiaries and others under ERISA.
AMENDMENT AND TERMINATION
Troy Savings intends to continue the plan indefinitely. Nevertheless, Troy
Savings may terminate the plan at any time. If the plan is terminated then
regardless of other provisions in the plan, each employee affected by the
termination will have a fully vested interest in his or her accounts. Troy
Savings reserves the right to make any amendments to the plan which do not cause
any part of the trust to be used for, or diverted to, any purpose other than the
exclusive benefit of participants or their beneficiaries. Troy Savings may,
however, make any amendment it determines necessary or desirable, with or
without retroactive effect, to comply with ERISA.
MERGER, CONSOLIDATION OR TRANSFER
If the plan merges or consolidates with another plan, or the assets are
transferred to another plan, the plan requires that each participant, if either
the plan or an other plan then terminated receives a benefit immediately after
the merger, consolidation or transfer which is equal to or greater than the
benefit he or she would have been entitled to receive immediately before the
merger, consolidation or transfer if the plan had then terminated.
FEDERAL INCOME TAX CONSEQUENCES
The following is a brief summary of the material federal income tax aspects
of the plan which are of general application under the Internal Revenue Code and
is not intended to be a complete description of the federal income tax
consequences of participating in or receiving distributions from the plan.
Statutory provisions are subject to change, as are their interpretations, and
their application may vary in individual circumstances. Finally, the
consequences under applicable state and local income tax laws may not be the
same as under the federal income tax laws. Participants are urged to consult
their tax advisors with respect to any distribution from the plan and
transactions involving the plan.
S-11
<PAGE> 13
The plan is qualified under the Internal Revenue Code and the related trust
is exempt from tax under the Internal Revenue Code. A plan that is qualified
under these sections of the Internal Revenue Code is afforded special tax
treatment which includes the following:
(1) Troy Savings is allowed an immediate tax deduction for the amount
contributed to the plan each year;
(2) Participants pay no current income tax on amounts contributed by Troy
Savings on their behalf; and
(3) Earnings of the plan are not subject to taxes currently, thus
permitting the tax-deferred accumulation of income and gains on investments. The
plan will be administered to comply in operation with the requirements of the
Internal Revenue Code as of the applicable effective date of any change in the
law. Troy Savings expects to adopt any amendments to the plan that may be
necessary to maintain the qualified status of the plan.
Assuming that the plan is administered in accordance with the requirements
of the Internal Revenue Code, participation in the plan under existing federal
income tax laws will have the following effects:
(a) Amounts contributed to a participant's account and any investment
earnings are not includable in a federal taxable income until such
contributions or earnings are actually distributed or withdrawn from the
plan. Special tax treatment may apply to the taxable portion of any
distribution that includes common stock or qualifies as a lump sum
distribution.
(b) Income earned on assets held by the trust will not be taxable to
the trust.
Lump Sum Distribution. A distribution from the plan to a participant or the
beneficiary of a participant will qualify as a lump sum distribution if it is
made:
(1) within one year of the death of a participant or beneficiary,
(2) on account of the participant's death, disability or separation from
service, or after the participant attains age 59 1/2, and
(3) consists of the balance to the credit of the participant under this
plan and all other profit sharing plans, if any, maintained by Troy Savings. The
portion of any lump sum distribution that is required to be included in the
participant's or beneficiary's taxable income for federal income tax purposes
consists of the entire amount of such lump sum distribution less the amount of
after-tax contributions, if any, made by the participant to any other profit
sharing plan maintained by Troy Savings which is included in such distribution.
Averaging Rules. The portion of the total taxable amount of a lump sum
distribution that is attributable to participation after 1973 in the plan or in
any other profit-sharing plan maintained by Troy Savings will be taxable
generally as ordinary income for federal income tax purposes. However, for tax
years beginning before year 2000, a participant who has completed at least five
years of participation in the plan before the taxable year in which the
distribution is made, or a beneficiary who receives a lump sum distribution on
account of the participant's death regardless of the period of the participant's
participation in the plan or any other profit-sharing plan maintained by Troy
Savings, may elect to have the ordinary income portion of such lump sum
distribution taxed according to a special averaging rule. The election of the
special averaging rules may apply only to one lump sum distribution received by
the participant or beneficiary, provided the amount is received on or after the
participant turns age 59 1/2 and the recipient elects to have any other lump sum
distribution from a qualified plan received in the same taxable year taxed under
the special averaging rule. Under a special grandfather rule, individuals who
turned age 50 by 1985 may elect to have their lump sum distribution taxed under
either the five-year averaging rule or under the prior law 10-year averaging
rule. The special five-year average rule was repealed for tax years beginning
after 1999.
Common Stock Included in Lump Sum Distribution. If a lump sum distribution
includes common stock, the distribution generally will be taxed in the manner
described above, except that the total taxable amount will be reduced by the
amount of any net unrealized appreciation with respect to the common stock. The
tax basis of common stock to the participant or beneficiary for purposes of
computing gain or loss on its subsequent sale will be the value of the common
stock at the time of distribution less the amount of net
S-12
<PAGE> 14
unrealized appreciation. Any gain on a subsequent sale or other taxable
disposition of such common stock, to the extent of the amount of net unrealized
appreciation at the time of distribution, will be considered long-term capital
gain regardless of the holding period of such common stock. Any gain on a
subsequent or other taxable disposition of the common stock in excess of the
amount of net unrealized appreciation at the time of distribution will be
considered either short-term capital gain or long-term capital gain depending
upon the length of the holding period of the common stock. The recipient of a
distribution may elect to include the amount of any net unrealized appreciation
in the total taxable amount of the distribution to the extent allowed by law.
Contribution to Another Qualified Plan or to an IRA. A participant may
defer federal income taxation of all or any portion of the total taxable amount
of a lump sum distribution. Including the proceeds from the sale of any common
stock included in the lump sum distribution to the extent that the amount, or a
portion is contributed, within 60 days after the date of its receipt by the
participant, to another qualified plan or to an IRA. If less than the total
taxable amount of a lump sum distribution is contributed to another qualified
plan or to an IRA within the applicable 60-day period, the amount not so
contributed must be included in the participant's income for federal income tax
purposes and will not be eligible for the special averaging rules or for capital
gains treatment. Additionally, a participant may defer the federal income
taxation of any portion of an amount distributed from plan on account of the
participant's disability or separation from service, generally, if the amount is
distributed within one taxable year of the participant, and the amount is
contributed, within 60 days after the date of its receipt by the participant, to
an IRA.
Effective January 1, 1993, participants have the right to elect to have the
trustee transfer all or any portion of an eligible rollover distribution
directly to another plan qualified under the Internal Revenue Code or to an IRA.
If the participant does not elect to have an eligible rollover distribution
transferred directly to another qualified plan or to an IRA, the distribution
will be subject to a mandatory federal withholding tax equal to 20% of the
taxable distribution. An eligible rollover distribution means any amount
distributed from the plan except:
(1) a distribution that is
(a) one of a series of substantially equal periodic payments made, not
less frequently than annually, over the participant's life or the
joint life of the participant and the participant's designated
beneficiary, or
(b) for a specified period of 10 years or more;
(2) any amount that is required to be distributed under the minimum
distribution rules; and
(3) any other distributions excepted under applicable federal law.
The beneficiary of a participant who is the participant's surviving spouse
also may defer federal income taxation of all or any portion of a distribution
from the plan to the extent that such amount, or a portion, is contributed
within 60 days after the date of its receipt by the surviving spouse, to an IRA.
If all or any portion of the total taxable amount of a lump sum distribution is
contributed by the surviving spouse of a participant to an IRA within the
applicable 60-day period, any subsequent distribution from the IRA will not be
eligible for the special averaging rules or for capital gains treatment. Any
amount received by the participant's surviving spouse that is not contributed to
another qualified plan or to an IRA within the applicable 60-day period, and any
amount received by a nonspouse beneficiary will be included in such
beneficiary's income for federal tax purposes in the year in which it is
received.
Additional Tax on Early Distributions. A participant who receives a
distribution from the plan prior to attaining age 59 1/2 will be subject to an
additional income tax equal to 10% of the taxable amount of the distribution.
The 10% additional income tax will not apply, however, to the extent the
distribution is rolled over into an IRA or another qualified plan or the
distribution is
(a) made to a beneficiary, or to the estate or a participant, on or after
the death of the participant,
(b) attributable to the participant's being disabled within the meaning of
the Internal Revenue Code,
S-13
<PAGE> 15
(c) part of a series of substantially equal periodic payments, not less
frequently than annually, made for the life or life expectancy of the
participant or the joint lives or joint life expectancies of the
participant and his beneficiary,
(d) made to the participant after separation from service on account of
early retirement under the plan after attainment of age 55,
(e) made to pay medical expenses to the extent deductible for federal
income tax purposes,
(f) payments made to an alternate payee pursuant to a qualified domestic
relations order, or
(g) made to effect the distribution of excess contributions or excess
deferrals.
ERISA AND OTHER QUALIFICATIONS
As noted above, the plan is subject to certain provisions of ERISA and has
received a favorable determination that it is qualified under the Internal
Revenue Code.
The foregoing is only a brief summary of the federal income tax aspects of
the plan and is not intended to be a complete description of the federal income
tax consequences of participating in or receiving distributions from the plan.
Accordingly, you are urged to consult a tax advisor concerning the federal,
state and local tax consequences of participating in and receiving distributions
from the plan.
SEC REPORTING AND SHORT-SWING PROFIT LIABILITY
Section 16 of the Securities Exchange Act of 1934 imposes reporting and
liability requirements on officers, directors and persons beneficially owning
more than 10% of the equity securities of public companies. Section 16(a)
requires the filing of reports of beneficial ownership of such equity
securities. Within 10 days of becoming a person subject to the reporting
requirements of Section 16(a), a Form 3 reporting initial beneficial ownership
must be filed. Changes in beneficial ownership must be reported on a Form 4
within 10 days after the end of the month in which a change occurs. Annual
statements of beneficial ownership must be filed on a Form 5 within 45 days
after the close of the fiscal year, unless the person has previously reported
such information on Form 4. Certain discretionary transactions in and beneficial
ownership of the common stock through the Troy Stock Fund by officers, directors
and persons beneficially owning more than 10% of the common stock must be
reported by such individuals.
In addition to the reporting requirements described above, Section 16(b)
provides for the recovery by us of profits realized by an officer, director or
any person beneficially owning more than 10% of our common stock, resulting from
certain purchases and sales of our common stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide
exemption from the profit recovery provisions of Section 16(b) for
participant-directed employer security transactions within an employee benefit
plan, such as the plan, if certain requirements are met. These requirements
generally involve restrictions upon the timing of elections to acquire or
dispose of employer securities for the accounts of Section 16(b) persons.
Except for distributions of common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations
order, under the plan, Section 16(b) persons are required to hold shares of
common stock distributed from the plan for six months following distribution and
are prohibited from directing additional purchases of units within the Troy
Stock Fund for six months after receiving such a distribution.
S-14
<PAGE> 16
THE TROY SAVINGS BANK
401(k) SAVINGS PLAN IN RSI RETIREMENT TRUST
INVESTMENT ELECTION FORM
NAME OF PARTICIPANT (Last, First, MI):
-----------------------------------
SOCIAL SECURITY NUMBER:
--------------------------------------------------
OVERVIEW: In connection with the conversion of The Troy Savings Bank to a
stock savings bank, the Troy Savings Bank 401(k) Savings Plan in RSI Retirement
Trust has been amended so that you may direct the trustee of the plan to
purchase common stock of Troy Financial Corporation, the bank holding company
for Troy Savings, with amounts allocated to your accounts under the plan. The
plan would invest in common stock through the Troy Stock Fund. Since the plan
actually purchases the common stock, you would acquire only a participation
interest in the common stock and would not own common stock directly. This
investment election form enables you make an initial election to direct that all
or a portion of your accounts under the plan be invested in the Troy Stock Fund.
INSTRUCTIONS: To transfer all or a portion of your accounts under the plan
to the Troy Stock Fund, you should complete and file this form with Evelyn A.
Morris, Vice President/Director of Human Resources of The Troy Savings Bank, no
later than 5:00 p.m., March 5, 1999. A REPRESENTATIVE FOR THE PLAN ADMINISTRATOR
WILL RETAIN THE ORIGINAL COPY OF THIS FORM AND RETURN A COPY TO YOU. If you need
assistance in completing this form, please contact Evelyn A. Morris at (518)
270-3255. If you do not complete and return this form to Evelyn A. Morris by
5:00 p.m., March 5, 1999, the funds in your accounts under the plan will
continue to be invested according to your prior investment direction, or
according to the terms of the plan if no investment direction has been provided.
INVESTMENT DIRECTIONS.
A. I hereby authorize the plan administrator to direct the trustee to sell
the units currently credited to my accounts under the plan, and to purchase
units in the Troy Stock Fund. Transfers of units from existing investment
accounts must be in multiples of 5%, and cannot exceed 100%. Purchases of units
in the Troy Stock Fund will always be 100%:
<TABLE>
<CAPTION>
SELL UNITS FROM
----------------------------------------------------------------------------
<S> <C> <C>
SELL ---% of (1): Core Equity Fund
SELL ---% of (2): Emerging Growth Equity Fund
SELL ---% of (3): Value Equity Fund
SELL ---% of (4): Intermediate-Term Bond Fund
SELL ---% of (5): Actively Managed Bond Fund
SELL ---% of (6): International Equity Fund
SELL ---% of (7): Short-Term Investment Fund
</TABLE>
B. Did you have deposit accounts with The Troy Savings Bank containing
balances of at least $100 on:
<TABLE>
<S> <C>
June 30, 1997.......................................... [ ] Yes [ ] No
December 31, 1998...................................... [ ] Yes [ ] No
</TABLE>
ACKNOWLEDGMENT OF PARTICIPANT: I understand that this investment election
form is subject to all of the terms and conditions of the 401(k) Savings Plan. I
acknowledge that I have received a copy of the prospectus and the prospectus
supplement, and have read those materials. In addition, I understand that if my
stock order is unable to be filled, either partially or in full, then any
remaining funds will be allocated to the other funds according to my prior
investment directions.
Si-1
<PAGE> 17
Signature of Participant:
------------------------ Date:
--------------
THE PARTICIPATION INTERESTS REPRESENTED BY THE COMMON STOCK OFFERED HEREBY
ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY, AND ARE NOT
GUARANTEED BY TROY FINANCIAL OR TROY SAVINGS. THE COMMON STOCK IS SUBJECT TO
INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF INVESTMENT.
FOR ADMINISTRATOR'S USE ONLY
This change will become effective on:
<TABLE>
<S> <C>
- ----------------------------------------------------------- ------------------------------
Plan Administrator or Representative Date Received
</TABLE>
Si-2
<PAGE> 18
PROSPECTUS
TROY FINANCIAL CORPORATION
(PROPOSED HOLDING COMPANY FOR THE TROY SAVINGS BANK)
[BUILDING LOGO]
10,200,500 SHARES OF COMMON STOCK
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Troy Savings Bank is converting to the stock form of organization. As part
of this conversion, Troy Savings will become a subsidiary of Troy Financial
Corporation. Troy Financial is offering its common stock to depositors with
subscription rights. The offering will terminate at 3:00 p.m., New York time, on
March 15, 1999. There also is a community offering. The common stock of Troy
Financial will be quoted on the Nasdaq National Market under the symbol "TRYF."
Please read this prospectus for additional information on how to purchase stock.
You can call the Troy Conversion Center at (518) 272-4952 for further
assistance.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TERMS OF OFFERING
<TABLE>
<S> <C> <C>
- - Price Per Share $10.00
- - Number of Shares Offered 7,539,500 to 10,200,500
Minimum/Maximum
- - Amount of Common Stock Offered $75,395,000 to $102,005,000
Minimum/Maximum
- - Estimated Underwriting Discounts, Commissions and Other $2,200,000 to $2,468,000
Expenses
Minimum/Maximum
- - Estimated Net Proceeds to Troy Financial Corporation $73,195,000 to $99,537,000
Minimum/Maximum
</TABLE>
------------------------
PLEASE READ THE RISK FACTORS ON PAGE 7 BEFORE SUBSCRIBING FOR ANY COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION,
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE NEW YORK SUPERINTENDENT OF BANKS
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.
THE COMMON STOCK IS NOT A DEPOSIT OR ACCOUNT AND IS NOT INSURED OR GUARANTEED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THE
COMMON STOCK IS SUBJECT TO INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE
PRINCIPAL INVESTED.
Sandler O'Neill & Partners, L.P. will use its best efforts to help us sell at
least 7,539,500 shares of common stock but is not required to sell any specific
amount of common stock.
------------------------
SANDLER O'NEILL & PARTNERS, L.P.
------------------------
THE DATE OF THIS PROSPECTUS IS FEBRUARY 12, 1999.
<PAGE> 19
[MAP/PICTURE OF HEADQUARTERS -- MUSIC HALL]
<PAGE> 20
QUESTIONS AND ANSWERS
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. We are offering up to 10,200,500 shares of common stock at $10.00 per share.
We must sell at least 7,539,500 shares, and we may sell up to 11,730,575
shares.
Q: WILL I BE ABLE TO SELL MY STOCK AFTER I PURCHASE IT?
A: Yes, you can sell your stock unless you are one of our officers, directors or
trustees. However, you cannot be sure that someone will want to buy your
stock.
Q. WILL MY STOCK BE COVERED BY DEPOSIT INSURANCE OR GUARANTEED BY ANY GOVERNMENT
AGENCY?
A. No. Unlike insured deposit accounts at Troy Savings, your stock will not be
insured or guaranteed by the FDIC or any other government agency.
Q: HOW MUCH STOCK MAY I ORDER?
A: There are limits on how much stock you can order. These limits are discussed
in this prospectus and on the stock order form.
Q. WHEN IS THE DEADLINE TO ORDER STOCK?
A. We must receive your signed order form with payment no later than 3:00 p.m.,
New York time, on March 15, 1999.
Q: HOW DO I PURCHASE THE STOCK?
A: First, you should read this prospectus. Then, complete and return the
enclosed stock order and certification form, together with your payment.
Q. CAN I CHANGE MY MIND AFTER I ORDER STOCK?
A. No. After we receive your order form and payment, you may not cancel or
modify your order.
Q: HOW CAN I PAY FOR THE STOCK?
A: You have three options:
(1) pay cash if it is delivered to us in person, but do not send cash in
the mail;
(2) send us a check or money order; or
(3) authorize a withdrawal from your deposit account at Troy Savings,
without any penalty for early withdrawal.
Q: WILL I RECEIVE INTEREST ON MY PAYMENT?
A. Yes. Payments will be placed in an interest bearing account at Troy Savings,
and will earn interest at our passbook rate. Depositors who authorize a
withdrawal from their accounts at Troy Savings will continue to receive
interest on their accounts until the funds are withdrawn.
Q. CAN I PAY FOR STOCK USING FUNDS IN MY INDIVIDUAL RETIREMENT ACCOUNT OR IRA AT
TROY SAVINGS?
A. No. You cannot pay for stock with your IRA at Troy Savings. You may, however,
establish a self-directed IRA with an outside trustee to pay for stock using
your IRA funds. Please call our Conversion Center at (518) 272-4952 to get
more information. Please understand that this process takes time, so please
make arrangements as soon as possible.
1
<PAGE> 21
Q: WHAT HAPPENS IF THERE IS NOT ENOUGH STOCK TO FILL ALL ORDERS?
A: You may not receive any or all of the stock that you ordered.
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS?
A: For answers to your other questions please read this prospectus. You can also
call the Troy Conversion Center at (518) 272-4952, Monday through Friday,
between the hours of 10:00 a.m. and 4:00 p.m. You may also write to:
Troy Conversion Center
Hedley Park Place
433 River Street -- 1st Floor
Troy, New York 12180
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 MARCH 15, 1999, NO PROSPECTUS WILL BE MAILED ANY LATER THAN MARCH 10,
1999 OR HAND DELIVERED ANY LATER THAN MARCH 13, 1999.
2
<PAGE> 22
SUMMARY
This summary highlights information from this prospectus and does not
contain all the information that you need to know before making an informed
investment decision. Therefore, you should read this entire prospectus.
THE COMPANIES
TROY FINANCIAL CORPORATION
32 Second Street
Troy, New York 12180
(518) 270-3200
Troy Financial Corporation was established in December 1998 to be the bank
holding company for The Troy Savings Bank, and has not engaged in any
significant business to date. Please see pages 9 and 43.
THE TROY SAVINGS BANK
32 Second Street
Troy, New York 12180
(518) 270-3200
Troy Savings is a community oriented bank headquartered in Troy, New York.
Troy Savings, which was chartered in 1823, provides full service banking to
individuals, families and businesses throughout the six New York State Counties
of Albany, Saratoga, Schenectady, Warren, Washington and Rensselaer, the county
in which Troy is located. Since the mid-1980s, the strategy of Troy Savings has
been to provide a wide variety of financial products and services to attract
customers. In addition to offering traditional banking products and services,
Troy Savings and its subsidiaries offer trust, insurance, investment management
and brokerage services to meet the financial needs of a diverse customer base.
At September 30, 1998, Troy Savings had total assets of $716.6 million, deposits
of $578.2 million and equity of $71.0 million. Please see pages 9 and 43 to 68.
Troy Savings also is home to the renowned Troy Savings Bank Music Hall, a
1,200 seat facility located on the upper floors of the headquarters of Troy
Savings. The Music Hall has been an integral part of the Troy community since it
opened in 1875. Troy Savings is committed to ensuring that the Music Hall is
available to its patrons and the community, fulfilling the purpose designated by
its founders.
COMMITMENT TO OUR COMMUNITY
In fiscal 1997, Troy Savings made $102,000 in charitable contributions. To
further its commitment to its community, Troy Savings established the Troy
Savings Bank Charitable Foundation in fiscal 1998. At that time, Troy Savings
contributed $1.0 million in cash, and entered into a binding commitment to make
a total of $4.0 million in additional scheduled payments to this foundation in
fiscal years 1999, 2000 and 2001. Also in fiscal 1998, Troy Savings made
additional charitable contributions of $306,000.
In 1998, Troy Savings also established the Troy Savings Bank Music Hall
Foundation. During fiscal 1999, Troy Savings plans to contribute the Troy
Savings Bank Music Hall to this foundation. The cost of this contribution is
estimated at $300,000.
Troy Savings intends to establish the Troy Savings Bank Community
Foundation during 1999, and, immediately following the offering, we plan to
contribute up to $2.9 million of our common stock to this foundation. As a
result of our contribution, persons purchasing shares in the offering will have
their ownership and voting interests diluted by as much as 2.73%. Please see
pages 24 and 25 and 106 through 110.
All three of these foundations are and will be dedicated to charitable and
educational purposes.
3
<PAGE> 23
THE CONVERSION
The Board of Trustees of Troy Savings adopted a plan to convert Troy
Savings to a stock savings bank. As part of that plan, we are offering our
common stock in a subscription offering to depositors and Troy Savings' employee
stock ownership plan. At the same time, we will offer our common stock in a
community offering. We will sell our stock first in the subscription offering,
and we may sell any remaining shares in the community offering. We will use a
portion of the offering proceeds to acquire Troy Savings. Please see pages 15
and 90 through 110.
PERSONS WHO CAN ORDER STOCK IN THE SUBSCRIPTION OFFERING
The following persons and benefit plan, in the order of priority listed,
are eligible to order our stock in the subscription offering:
1. Depositors with accounts at Troy Savings with balances of at least $100
on June 30, 1997.
2. Our employee stock ownership plan which will provide retirement benefits
to our employees.
3. Depositors with accounts at Troy Savings with balances of at least $100
on December 31, 1998, who did not hold deposit accounts at Troy Savings
with balances of at least $100 on June 30, 1997.
YOU MAY NOT SELL OR GIVE AWAY YOUR SUBSCRIPTION RIGHTS
If you order stock, you will be required to state that you are purchasing
the stock for yourself and that you have no agreement or understanding to sell
or give away your rights. We intend to take legal action against anyone who
sells or gives away their subscription rights. We will not accept your order if
we have reason to believe that you sold or gave away your subscription rights.
Please see page 101.
THE OFFERING OF OUR STOCK
We are offering between 7,539,500 and 10,200,500 shares of common stock at
a price of $10.00 per share. This range is based on our market value as
determined by FinPro, Inc., an independent appraisal firm experienced in
appraisals of converting savings banks. Without notice to you, we may be
required to sell up to 11,730,575 shares. Our Board of Trustees determined the
$10.00 price per share. If our market value changes to either below $75,395,000
or above $117,305,750, we will notify you and provide you with the opportunity
to modify or cancel your order. Please see pages 93 through 98.
DETERMINATION OF OUR MARKET VALUE
FinPro has estimated that our market value at January 29, 1999, is between
$75,395,000 and $102,005,000. This results in an offering of between 7,539,500
and 10,200,500 shares of stock at an offering price of $10.00 per share.
FinPro's estimate of our market value was based in part upon our financial
condition and results of operations and the effect of the additional capital
raised in this offering.
Two of the factors that FinPro considered in determining our market value
were the price-to-book ratio and the price/earnings or P/E ratio. The
price-to-book ratio represents the price per share of stock relative to its book
value per share. In our case, based on stockholders' equity per share of $15.15,
our price-to-book ratio would be 66.01% as of September 30, 1998 if we sell
10,200,500 shares at $10 per share.
The price/earnings or P/E ratio represents the price per share of stock
divided by earnings or net income per share. In our case, for the year-ended
September 30, 1998, our P/E ratio, as adjusted to reflect the issuance of our
stock in the offering and the elimination of a one-time recognition by Troy
Savings of a $2.7 million charitable contribution expense, net of taxes, in
fiscal 1998, would be 31.52x, assuming the issuance of 10,200,500 shares of
stock at $10 per share. See "Comparison of Valuation and Pro Forma Information
With or Without Contribution to the Community Foundation" on pages 24 and 25.
4
<PAGE> 24
TERMINATION OF THE OFFERING
The subscription offering will terminate at 3:00 p.m., New York time, on
March 15, 1999. The community offering is expected to terminate at the same
time, but may be extended without notice, until April 29, 1999, unless a later
date is approved by the New York Superintendent of Banks and the FDIC. Please
see page 98.
MARKET FOR OUR COMMON STOCK
We are a new company and have never issued stock. Although there is no
existing market for our stock, our common stock will be quoted on the Nasdaq
National Market under the symbol "TRYF." Please see page 16.
PAYMENT OF DIVIDENDS ON OUR STOCK
Our Board of Directors will have the authority to declare dividends on our
common stock, subject to both legal requirements and the availability of funds.
At this time, no decision has been made whether to pay dividends. That decision
will depend upon many factors, including earnings and capital. Please see pages
15 and 16.
USE OF THE PROCEEDS FROM THE SALE OF OUR STOCK
We will use approximately half of the net proceeds to purchase Troy
Savings. We intend to use the remainder of the net proceeds to fund a loan to
our employee stock ownership plan and for general corporate purposes. We also
plan to establish or acquire a commercial bank. Please see page 15.
IMPORTANT RISKS IN PURCHASING AND OWNING OUR STOCK
Before you decide to purchase any stock, you should read the entire
prospectus, including the Risk Factors on pages 7 through 8. OUR COMMON STOCK IS
NOT INSURED OR GUARANTEED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY, AND IS
SUBJECT TO INVESTMENT RISK, INCLUDING LOSS OF THE PRINCIPAL INVESTED.
OUR OFFICERS AND EMPLOYEES WILL RECEIVE BENEFITS FOLLOWING THE OFFERING
DIFFERENT FROM YOURS
We intend to adopt the following benefit plans:
- Long-term Equity Compensation Plan. This plan, subject to stockholder
approval, will provide for grants of options and shares of restricted
stock to directors, officers, employees and independent contractors. We
anticipate that 1,048,653 shares would be reserved for issuance under
stock options and we intend to make grants of 419,461 shares of restricted
stock. Grants of options and restricted stock will be at no cost to the
recipients. The exercise price of options will be the fair market value of
the stock at the time of grant.
- Employee Stock Ownership Plan. This plan intends to subscribe for up to
838,922 shares of stock in the offering, or purchase shares in the open
market. Stock distributed to employees under this plan will be at no cost
to the employees.
- Supplemental Retirement and Benefit Restoration Plan. This plan will
provide selected executive officers additional retirement benefits that we
cannot provide under tax-qualified retirement plans.
- Employment Agreements, Employment Protection Agreements and Employee
Severance Compensation Plans. We intend to enter into agreements with six
officers that may provide for payments and benefits upon their termination
of employment and upon a change of control. Troy Financial's employee
compensation severance plan may provide eligible employees with severance
pay benefits upon termination of employment after a change of control.
5
<PAGE> 25
The following table presents our estimate of the value of shares to be
issued under the stock benefit plans, assuming shares are allocated to
participants in the plans at $10.00 per share.
<TABLE>
<CAPTION>
ESTIMATED VALUE
OF SHARES
---------------
<S> <C>
Employee stock ownership plan............................... $ 8,389,220
Long-term equity compensation plan:
Management recognition plan............................... $ 4,194,610
Stock option plan......................................... --
-----------
$12,583,830
===========
</TABLE>
VOTING CONTROL OF EXECUTIVE OFFICERS AND TRUSTEES
Executive officers and trustees of Troy Savings and parties related to them
propose to purchase $4,250,000, or 4.05%, of our stock. These proposed purchases
and the potential acquisitions of our stock through our employee stock ownership
plan and the long-term equity compensation plan could result in our management
having voting control of approximately 26.0% of our stock. Please see pages 8
and 90.
6
<PAGE> 26
RISK FACTORS
An investment in our common stock involves 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.
OUR CHARITABLE CONTRIBUTIONS WILL DECREASE EARNINGS AND MAY NEGATIVELY IMPACT
THE VALUE OF YOUR STOCK
Poor earnings likely will have a negative impact on the value of your
stock. In fiscal 1999, we expect to incur contribution expense attributable to
the contribution of common stock and The Troy Savings Bank Music Hall to
charitable foundations. The approximately $3.2 million contribution expense,
assuming the sale of 10,200,500 shares and a cost of $10.00 per share, will be
partially offset by approximately $1.3 million of tax benefits from the
contributions.
PROBLEMS IN OUR MARKET MAY NEGATIVELY IMPACT EARNINGS AND THE VALUE OF YOUR
STOCK
Problems like a decline in real estate values may cause problems in our
loan portfolio, and thus we may need to increase provisions for loan losses. A
future increase in Troy Savings' provision for loan losses would negatively
impact earnings, which likely will have a negative impact on the value of your
stock.
For example, earnings in 1998 and 1997 were adversely affected by an
increase in the provisions for loan losses. Troy Savings' provisions for loan
losses in the years ended September 30, 1998 and 1997 were $4.1 million and $3.9
million, as compared to $928,000 for fiscal 1996. Management believes that
portions of its market area show signs of declining or stagnant real estate
values. As a result since 1997, Troy Savings has experienced increased loan
charge-offs and high delinquency and non-performing loan levels. While we
increased loan loss provisions over the past two years, the level of provisions
may go higher. As discussed in detail under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" below, management
anticipates that the current net charge-off levels may continue through fiscal
1999. There can be no assurances that Troy Savings' loan losses will not exceed
its allowance for loan losses or that its provisions will not increase in future
periods, thereby impacting our earnings. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
IF OUR STOCK PRICE INCREASES THEN THE COST OF OUR STOCK BASED BENEFIT PLANS WILL
INCREASE, WHICH WILL REDUCE OUR EARNINGS
We will record compensation expense equal to the average fair value of
shares committed to be released to employees from our employee stock ownership
plan. Therefore, if our stock price increases, our compensation expense will
increase, and our earnings will be negatively impacted. See "Pro Forma Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of New Accounting Standards."
In addition, granting shares of stock under our stock based plans will
increase our compensation expense because these grants are expensed over the
vesting period, based upon the market value of the stock at the date of the
grant. See "Pro Forma Data" and "Management of Troy Savings Bank -- Benefit
Plans -- Other Benefit Plans."
IF WE DO NOT DEPLOY OUR NEW CAPITAL EFFECTIVELY, OUR RETURN ON EQUITY MAY
NEGATIVELY IMPACT THE VALUE OF YOUR STOCK
We will not be able to deploy the increased capital from this offering
immediately. Our ability to profitably leverage our new capital will be
significantly affected by industry competition for loans and deposits. Until we
can leverage our increased capital to grow interest-earning assets, we expect
our return on equity to be below the industry average, which may negatively
impact the value of your stock.
THE YEAR 2000 PROBLEM COULD NEGATIVELY IMPACT OUR CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WHICH COULD NEGATIVELY IMPACT THE VALUE OF
YOUR STOCK
Failure of any of Troy Savings' critical systems, significant credit
customers' systems, key servicers' systems, or the public infrastructure may
result in Troy Savings not being able to do normal business and
7
<PAGE> 27
service its customers. This could negatively impact our earnings. We may also
receive adverse publicity and customer reaction, all of which could decrease
stockholder value. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Year 2000 Readiness Disclosure
Statement."
VOTING CONTROL AND ANTI-TAKEOVER PROVISIONS MAY PREVENT TRANSACTIONS YOU WANT
The purchases of common stock by board members and by management, the
contribution of stock to the charitable foundation as well as the provisions of
law, our certificate of incorporation and our contracts may increase the ability
of management to control us, and make it difficult and expensive for someone to
pursue a takeover attempt of us. This could reduce the trading price of our
stock, or could result in our stockholders receiving less for their shares than
otherwise might be available in the event of an acquisition of us. Control by
management also could enable the trustees and executive officers to prevent the
approval of matters that stockholders may deem to be in their best interest. See
"Restrictions on Acquisition of Troy Financial Corporation -- Restrictions in
Troy Financial's Certificate of Incorporation and Bylaws -- Stockholder Vote
Required to Approve Business Combinations with Interested Stockholders" and
"Management of Troy Savings Bank -- Benefit Plans."
YOU COULD HAVE DIFFICULTY SELLING YOUR STOCK IF AN ACTIVE TRADING MARKET DOES
NOT DEVELOP
Because we are a new company, there is no market for our stock. Unless an
active and liquid trading market develops, you may not be able to sell your
shares. We have applied to have our stock quoted on the Nasdaq National Market
under the symbol "TRYF." In addition, Sandler O'Neill has agreed to act as a
market maker for our stock, and to assist in securing additional market makers
to do the same. See "Market for Common Stock."
THE SUBSCRIPTION RIGHTS WE ARE GIVING YOU COULD RESULT IN ADVERSE INCOME TAX
CONSEQUENCES TO YOU
If the Internal Revenue Service determines that the subscription rights
have value, then you could be taxed. Additionally, we may have to recognize a
gain for tax purposes on the distribution of the subscription rights. FinPro,
our independent appraiser, has issued an opinion to us stating that the
subscription rights have no value. This opinion, however, is not binding on the
Internal Revenue Service. See "The Conversion -- Effects of Conversion" and
"-- Tax Aspects."
Although we are aware of many conversions similar to ours having been
completed, we do not know if the Internal Revenue Service has ever considered
this issue. Therefore, it is not possible to estimate for you the actual level
of risk.
8
<PAGE> 28
TROY FINANCIAL CORPORATION
Troy Financial Corporation is a newly formed Delaware corporation
registered with the Board of Governors of the Federal Reserve System as a bank
holding company for The Troy Savings Bank. We have not engaged in any
significant business to date, and, in the future, our primary business will be
the business of Troy Savings. As a bank holding company, 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) 270-3200.
THE TROY SAVINGS BANK
The Troy Savings Bank is a community oriented savings bank headquartered in
Troy, New York. Originally chartered in 1823, Troy Savings offers full service
banking to individuals, families and businesses throughout the six New York
State counties of Albany, Saratoga, Schenectady, Warren, Washington and
Rensselaer, the county in which Troy is located.
The goal of Troy Savings is to be the primary source of financial products
and services for its customers. Troy Savings' business strategy is to serve as a
community-based, full service financial services firm offering a wide variety of
banking products and services, as well as trust, insurance, investment
management and brokerage services, to a diverse customer base. At September 30,
1998, Troy Savings 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.
Troy Savings is subject to regulation, examination and supervision by the
FDIC and the New York State Banking Department. Troy Savings is a member of the
Federal Home Loan Bank System, and deposits at Troy Savings are insured by the
FDIC to the maximum extent provided by law. The executive offices of Troy
Savings are located at 32 Second Street, Troy, New York 12180, and its telephone
number is (518) 270-3200.
9
<PAGE> 29
RECENT DEVELOPMENTS
The following table sets forth consolidated financial and other data of
Troy Savings at and for the periods indicated. Data at and for the year ended
September 30, 1998 should be read in conjunction with the audited Consolidated
Financial Statements of Troy Savings and related Notes presented elsewhere in
this prospectus. Data presented for the three months ended December 31, 1998 are
not necessarily indicative of the results of operations for the year ending
September 30, 1999.
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
1998 1998
--------------- ----------------
UNAUDITED
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED SELECTED FINANCIAL CONDITION DATA:
Total assets.............................................. $738,543 $716,649
Loans receivable, net..................................... 479,221 457,321
Securities available for sale (fair value)................ 198,156 197,758
Securities held to maturity (amortized cost).............. 2,856 3,483
Deposits.................................................. 588,493 578,202
Borrowings................................................ 58,384 47,464
Total equity.............................................. 71,717 71,029
ASSET QUALITY RATIOS:
Nonperforming loans to total loans........................ 2.07% 2.50%
Nonperforming assets to total assets...................... 1.62 1.89
Allowance for loan losses to total loans.................. 1.84 1.77
Allowance for loan losses to non-performing loans......... 88.87 70.91
REGULATORY CAPITAL RATIOS:
Leverage capital.......................................... 9.86% 9.89%
Tier I risk-based capital................................. 13.51 14.02
Risk-based capital........................................ 14.76 15.27
OTHER DATA:
Full-service banking offices.............................. 14 14
Number of deposit accounts................................ 74,810 70,057
FOR THE THREE MONTHS
ENDED DECEMBER 31,
----------------------------------
1998 1997
--------------- ----------------
UNAUDITED UNAUDITED
(IN THOUSANDS)
SELECTED OPERATING DATA:
Interest and dividend income.............................. $ 12,167 $ 12,056
Interest expense.......................................... 6,200 5,989
-------- --------
Net interest income before provision for loan losses... 5,967 6,067
Provision for loan losses................................. 812 1,011
-------- --------
Net interest income after provision for loan losses.... 5,155 5,056
Total other operating income.............................. 623 649
Total other operating expense............................. 4,841 5,437
-------- --------
Income before income tax expense.......................... 937 268
Income tax expense........................................ 234 67
-------- --------
Net income............................................. $ 703 $ 201
======== ========
</TABLE>
10
<PAGE> 30
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS
ENDED DECEMBER 31,
-------------------------
1998 1997
--------- ---------
UNAUDITED UNAUDITED
<S> <C> <C>
PERFORMANCE RATIOS:
Return on average assets.................................. .39% .12%
Return on average equity.................................. 3.94 1.12
Average interest earning assets to average interest
bearing liabilities.................................... 114.11 113.72
Net interest rate spread.................................. 3.10 3.39
Net interest rate margin.................................. 3.61 3.90
Efficiency ratio.......................................... 72.01 76.67
Operating expenses to average assets ratio................ 2.64 3.11
</TABLE>
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND SEPTEMBER 30, 1998
Assets at December 31, 1998 increased $22.0 million, or 3.1%, as compared
to September 30, 1998. The increase was primarily attributable to an increase in
the origination of real estate loans and commercial business loans funded by
deposit inflows and Federal Home Loan Bank advances. Real estate loans increased
by $11.2 million, or 3.0%, from $378.7 million at September 30, 1998, to $389.9
million at December 31, 1998, primarily due to a $13.1 million increase in
commercial real estate loans and a $4.9 million increase in residential real
estate loans, which were offset in part by a $6.8 million decline in
construction loans. Commercial business loans increased by $13.5 million to
$58.6 million at December 31, 1998, compared to $45.2 million at September 30,
1998. Consumer loans decreased by $2.1 million, or 4.9%, to $39.9 million at
December 31, 1998, from $42 million at September 30, 1998, primarily due to
principal payments in excess of originations for automobile and unsecured loans.
Deposit balances at December 31, 1998 increased $10.3 million, or 1.8% over
September 30, 1998 amounts. The overall increase in deposits is primarily
attributable to a $6.8 million increase in demand deposits and a $5.6 million
increase in interest-bearing checking, offset in part by a $3.8 million decrease
in time deposits. Borrowed funds increased at December 31, 1998 as management
utilized Federal Home Loan Bank borrowings as a funding source for commercial
real estate loans.
Total equity at December 31, 1998 increased compared to September 30, 1998
due to net income and a reduction in net unrealized gain on securities available
for sale, net of tax, of $15,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND
DECEMBER 31, 1997
Net income for the three months ended December 31, 1998 increased $503,000,
or 251%, as compared to the three months ended December 31, 1997. The increase
was attributable to a $199,000 decrease in provision for loan losses and a
$596,000 decrease in other operating expense, primarily due to a $218,000
decrease in real estate owned expense and a $424,000 decrease in advertising and
marketing expenses as a result of the Bank's decision to utilize a direct mail
marketing strategy. The decreases in expenses were partially offset by a
$100,000 decrease in net interest income, which resulted from an increase in the
average balance of interest-bearing liabilities and a 46 basis point decrease in
the average yield on interest-earning assets, and a $168,000 increase in income
tax expense.
The increase in interest and dividend income was primarily the result of a
$72 million increase in the average balance of securities available for sale
which offset a 37 basis point decline in the average yield on loans.
Interest expense on deposits decreased for the three months ended December
31, 1998 as a result of a 33 basis point decrease in the average rate paid on
savings balances to 2.97% for the three months ended December 31, 1998 from
3.30% for the three months ended December 31, 1997 and a 27 basis point
11
<PAGE> 31
decrease in the average rate paid on time deposits to 5.36% for the three months
ended December 31, 1998 from 5.63% for the three months ended December 31, 1997.
Offsetting these decreases was an increase in interest expense on borrowings for
the three months ended December 31, 1998 compared to the 1997 period, reflecting
higher average balances due to management's decision to utilize borrowings to
fund its asset growth, primarily through the purchase of shorter term government
agency securities available for sale and longer term commercial real estate
loans.
Non-interest income decreased slightly for the three months ended December
31, 1998 from the three months ended December 31, 1997 as a result of a $74,000
decrease in nonrecurring miscellaneous income which was offset in part by a
$47,000 increase in trust fees. Non-interest expense decreased for the three
months ended December 31, 1998 from the three months ended December 31, 1997,
primarily from a $218,000 decrease in real estate owned expense and a $424,000
decrease in advertising and marketing expense. These decreases were partially
offset by a $50,000 increase in computer charges, primarily maintenance costs
and costs related to the migration to a new platform system with our existing
computer service provider.
12
<PAGE> 32
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following summary financial and other information about Troy Savings is
derived from Troy Savings' 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 Troy Savings' Consolidated Financial Statements and related Notes beginning
on page F-1, and with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<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)................... 197,758 117,552 148,917 44,725 75,335
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
YEARS ENDED SEPTEMBER 30,
--------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS)
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
Other real estate owned 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>
(continued on following page)
13
<PAGE> 33
<TABLE>
<CAPTION>
AT OR FOR THE YEARS ENDED 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, Troy Savings recorded a pre-tax contribution expense of $4.5
million or $2.7 million on an after-tax basis. This expense was based upon a
$1.0 million cash contribution and $4.0 million binding, irrevocable
commitment to a charitable foundation. If this expense had not been
incurred, Troy Savings' net income would have been approximately $1.8
million, instead of a net loss of $878,000.
(2) During fiscal 1998, Troy Savings contributed $1.0 million in cash and
entered into a binding, irrevocable commitment to make a total of $4.0
million in scheduled payments to a 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,
Troy Savings incurred a pre-tax contribution expense of $4.5 million or $2.7
million on an after tax basis. Excluding the $4.5 million contribution
expense, Troy Savings would have had the following performance ratios for
the fiscal year ended September 30, 1998:
<TABLE>
<S> <C>
Return on average assets.................................... .27%
Return on average equity.................................... 2.49
Efficiency ratio............................................ 71.22
Operating expenses to average assets ratio.................. 2.88
</TABLE>
(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 other real estate
owned expense, divided by recurring revenues, such as net interest income on
a tax effected basis and non-interest income, excluding gains and losses on
securities.
14
<PAGE> 34
USE OF PROCEEDS
TROY FINANCIAL
After deduction of expenses, we estimate the proceeds from the sale of our
common stock to be between $73.2 million and $99.5 million, depending upon the
number of shares sold. We will use approximately 50% of the net proceeds to
acquire Troy Savings.
We also intend to use a portion of the remainder of those net proceeds to
fund a loan to our employee stock ownership plan to enable the plan to purchase
our stock. The plan will purchase our stock in the subscription offering, or in
the open market to the extent stock is not available due to oversubscription. We
expect the plan to acquire 8% of the sum of the amount of common stock sold in
the stock offering and contributed to the newly formed charitable foundation. We
expect the term of the loan to be between 10 and 15 years.
The following table summarizes our estimate and use of the proceeds from
the sale of our common stock:
<TABLE>
<CAPTION>
NUMBER OF SHARES SOLD
----------------------
7,539,500 10,200,500
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Offering proceeds........................................... $75,395 $102,005
Offering expenses........................................... 2,200 2,468
------- --------
Net offering proceeds.................................. 73,195 99,537
Proceeds used to acquire Troy Savings....................... 36,598 49,769
Proceeds used for loan to employee stock ownership plan..... 6,090 8,389
------- --------
Proceeds remaining for general corporate purposes........... $30,507 $ 41,379
======= ========
</TABLE>
If our appraised market value increases and we are required to sell
11,730,575 shares of stock, then we estimate the net proceeds to be $114.7
million. If our appraised market value is increased and we sell 11,730,575
shares of stock and contribute 408,446 shares to the Troy Savings Bank Community
Foundation, then our loan to the employee stock ownership plan would be $9.7
million.
If we establish a long-term equity compensation plan, we may choose to fund
the plan with cash to enable the plan to purchase shares of our stock. At this
time, we have not made a determination regarding the funding of that benefit
plan. We will invest the remaining net proceeds in short-term securities and
deposit accounts, and otherwise use those proceeds for general corporate
purposes.
We also plan to establish or acquire a commercial bank and trust company
that can accept municipal deposits to complement Troy Savings' municipal
investment activities. If we establish a new bank, we plan to invest at least
approximately $2 million of capital. This capital infusion would still count as
our capital on a consolidated basis. If we acquire a bank, the cost will depend
primarily upon the value of the assets and liabilities of the specific bank to
be acquired. In addition, we may also consider acquisitions of other financial
services firms and branch offices, although at this time, we do not have any
agreements regarding any proposed transactions.
TROY SAVINGS
Troy Savings will use the funds it receives from us to fund the operation
of its business, including making loans and purchasing securities. The
additional funds in Troy Savings will count as regulatory capital and therefore
will support future growth of Troy Savings' total assets.
DIVIDEND POLICY
Following the stock offering, our Board of Directors will have the
authority to declare dividends on our common stock. This authority, however, is
subject to statutory and regulatory requirements. Our Board of Directors may
consider a policy of paying cash dividends on our stock, although no decision
has been made at this time.
15
<PAGE> 35
The determination of whether to declare dividends will depend upon a number
of factors, including the amount of net proceeds from the offering that we
retain, investment opportunities available to us or Troy Savings, capital
requirements, regulatory limitations, our consolidated financial condition and
results of operations, tax considerations and general economic conditions.
Consequently, there can be no assurance that we will pay dividends. In addition,
if we do pay dividends, we may reduce or eliminate them in the future. Special
cash dividends, stock dividends or returns of capital may be paid in addition
to, or in lieu of, regular cash dividends.
Our ability to pay dividends will depend, in part, upon receipt of
dividends from Troy Savings. Initially, we will have no source of funds for
dividends, other than dividends that we receive from Troy Savings and the net
proceeds of the stock offering that we retain and any earnings. In addition, we
are subject to the requirements of Delaware corporate law which generally limits
dividends to an amount equal to the excess of our net assets, or the amount by
which our total assets exceed total liabilities, over statutory capital, or if
there is no such excess, to net profits for the current or immediately preceding
fiscal year. Likewise, our ability to pay dividends may also be restricted by
minimum capital requirements imposed by federal capital guidelines. See
"Regulation and Supervision."
Under the New York Banking Law, dividends may be declared and paid by Troy
Savings only out of its net profits. Under New York Banking Law, net profits
include 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 of Banks 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
Troy Savings' capital to be reduced below the amount required by the New York
Superintendent of Banks or the FDIC. For the two years ended September 30, 1998,
Troy Savings had net profits, less required transfers to surplus, of $2.8
million.
The availability of funds for the payment of dividends by Troy Savings may
also be limited by the establishment of a liquidation account in connection with
Troy Savings' change to a stock savings bank. See "The Conversion -- Liquidation
Rights." Moreover, any payment of dividends by Troy Savings to us, to the extent
it constituted a distribution from Troy Savings' bad debt reserves for federal
income tax purposes, would require a payment of taxes at the then-current tax
rate by Troy Savings on the amount of earnings removed from the reserves for
such distribution. Troy Savings has no current intention of making any
distribution that would create a federal tax liability. See "Taxation."
MARKET FOR THE COMMON STOCK
We are a new company, having been formed in December 1998. Because we have
never issued any stock, there is no existing market for our stock. Our
application for listing on the Nasdaq National Market has been approved, and we
anticipate having our stock quoted under the symbol "TRYF" upon completion of
the stock offering and compliance with Nasdaq's listing requirements, including
the presence of at least three market makers for our stock.
Sandler O'Neill has agreed to act as a market maker for our stock, 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
at any given time. Accordingly, there can be no assurance that an active and
liquid market for our stock will develop or be maintained or that you will be
able to sell your shares at or above your purchase price. See "The
Conversion -- Number of Shares to be Issued."
16
<PAGE> 36
REGULATORY CAPITAL COMPLIANCE
At September 30, 1998, Troy Savings exceeded all regulatory capital
requirements. See "Regulation and Supervision -- Federal Regulation of Troy
Savings -- Capital Requirements." Set forth below is a summary of Troy Savings'
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 Troy Savings
of 50% of the net proceeds from the conversion.
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1998
---------------------------------------
MINIMUM MIDPOINT
HISTORICAL 7,539,500 SHARES 8,870,000 SHARES
------------------ ------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
GAAP capital(1)....................... $ 71,029 9.91% $ 98,492 13.24% $103,353 13.80%
Leverage (Tier I) capital(2):
Leverage capital(3).............. 70,114 9.89 97,577 13.25 102,438 13.82
Leverage capital
requirement(4)................. 28,357 4.00 29,456 4.00 29,650 4.00
-------- ----- -------- ----- -------- -----
Excess........................... 41,757 5.89 68,121 9.25 72,788 9.82
Tier I risk-based capital(3)..... 70,114 14.02 97,577 18.98 102,438 19.84
Tier I risk-based capital
requirement(4)................. 20,011 4.00 20,560 4.00 20,657 4.00
-------- ----- -------- ----- -------- -----
Excess........................... 50,103 10.02 77,017 14.98 81,781 15.84
Risk-based capital(2):
Total risk-based capital(3)(5)... 76,368 15.27 103,831 20.20 108,692 21.05
Total risk-based capital
requirement.................... 40,022 8.00 41,120 8.00 41,315 8.00
-------- ----- -------- ----- -------- -----
Excess........................... 36,346 7.27 62,711 12.20 67,377 13.05
Total assets.......................... 716,649 744,112 748,973
Adjusted assets(6).................... 708,935 736,398 741,259
Risk-weighted assets.................. 500,274 514,005 516,436
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1998
---------------------------------------
ADJUSTED
MAXIMUM MAXIMUM
10,200,500 SHARES 11,730,575 SHARES
------------------ ------------------
AMOUNT PERCENT AMOUNT PERCENT
-------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
GAAP capital(1)....................... $108,214 14.38% $113,804 14.99%
Leverage (Tier I) capital(2):
Leverage capital(3).............. 107,299 14.38 112,889 15.02
Leverage capital
requirement(4)................. 29,845 4.00 30,068 4.00
-------- ----- -------- -----
Excess........................... 77,454 10.38 82,821 11.02
Tier I risk-based capital(3)..... 107,299 20.68 112,889 21.64
Tier I risk-based capital
requirement(4)................. 20,755 4.00 20,866 4.00
-------- ----- -------- -----
Excess........................... 86,544 16.68 92,023 17.64
Risk-based capital(2):
Total risk-based capital(3)(5)... 113,553 21.88 119,143 22.84
Total risk-based capital
requirement.................... 41,509 8.00 41,733 8.00
-------- ----- -------- -----
Excess........................... 72,044 13.88 77,410 14.84
Total assets.......................... 753,834 759,424
Adjusted assets(6).................... 746,120 751,710
Risk-weighted assets.................. 518,866 521,662
</TABLE>
- ---------------
(1) Total equity as calculated under generally accepted accounting principles
("GAAP"), expressed as a percentage 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 FDIC
regulations. See "Regulation and Supervision -- Federal Regulation of Troy
Savings -- Capital Requirements."
(3) Pro forma capital levels assume receipt by Troy Savings 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 Troy Savings of the Management Recognition Plan ("MRP")
equal to 4% of the common stock issued, including shares contributed to the
Troy Savings Bank Community Foundation ("Community Foundation"), and funding
of the Employee Stock Ownership Plan ("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 banks is
4% to 5%. See "Regulation and Supervision -- Federal Regulation of Troy
Savings -- Capital Requirements."
(5) Assumes the net proceeds are invested in assets that carry a risk-weighting
of 50%.
(6) Adjusted assets represent average assets of Troy Savings for the fourth
quarter of fiscal 1998, less its goodwill at September 30, 1998.
17
<PAGE> 37
CAPITALIZATION
The following table presents the historical capitalization of Troy Savings
at September 30, 1998, and the pro forma consolidated capitalization of Troy
Financial 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 Troy Savings Bank Community Foundation ("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>
11,730,575
7,539,500 8,870,000 10,200,500 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(3)........................... -- 73,926 88,157 102,396 118,767
Retained earnings(4).................................... 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(5)...... -- (732) (1,792) (2,860) (4,084)
Plus:
Estimated tax benefit of contribution to Community
Foundation(6)......................................... -- 256 627 1,001 1,429
Less:
Common stock acquired by the ESOP(7).................... -- (6,090) (7,239) (8,389) (9,711)
Common stock acquired by the MRP(8)..................... -- (3,045) (3,620) (4,195) (4,856)
-------- -------- -------- -------- --------
Total Stockholders' Equity.......................... $ 71,029 $135,345 $147,163 $158,983 $172,575
======== ======== ======== ======== ========
</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 long-term equity compensation plan and includes
shares contributed to the Community Foundation.
(3) The additional paid-in capital amounts do not correspond to the estimated
net proceeds of the stock offering because the amounts reflect both the
offering expenses and the additional capital from the shares to be issued to
the Community Foundation.
(4) See "Dividend Policy" and "Regulation and Supervision -- Federal Regulation
of Troy Savings -- Dividend Restrictions" regarding restrictions on future
dividend payments and "The Conversion -- Liquidation Rights" regarding the
liquidation account to be established upon conversion.
(5) 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 Troy Financial's intended contribution of
the Troy Savings Bank Music Hall to the Music Hall Foundation. The cost of
such contribution is estimated at $300,000 in fiscal 1999, which represents
the approximate fair value of the Music Hall. See "The Conversion --
Establishment of the Community Foundation."
(6) 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 Troy
Financial's estimated taxable income in fiscal 1999 and during the five-year
carry forward period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Comparison of Financial Condition at
September 30, 1998 and September 30, 1997" and "-- Comparison of Results of
Operations for the Years Ended September 30, 1998 and September 30,
1997 -- Non-interest Expense."
(7) 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 Troy Financial. Troy Savings 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 a number 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, 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
are reflected as a reduction of stockholders' equity. See "Management of
Troy Savings Bank."
18
<PAGE> 38
PRO FORMA DATA
The actual net proceeds 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 $64.1 million and $87.0
million, or $100.1 million if the estimated price range is increased by 15%,
based upon the following assumptions:
(a) 100% of the shares of common stock will be sold at the beginning of the
period in the subscription offering to Eligible Account Holders (as
defined under "The Conversion -- Subscription Offering and Subscription
Rights"), Supplemental Eligible Account Holders (as defined under "The
Conversion -- Subscription Offering and Subscription Rights") and the
Employee Stock Ownership Plan ("ESOP");
(b) 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 500,000 shares
purchased by the trustees, officers and other employees of Troy Savings
and Troy Financial and members of their immediate families, as well as
the shares purchased by the ESOP;
(c) conversion expenses, excluding the marketing fees paid to Sandler
O'Neill, will be approximately $1.5 million;
(d) Troy Financial will contribute from authorized but unissued shares to
the Community Foundation an amount of common stock valued at $10 per
share equal to the difference between 8.0% of the gross proceeds from
the common stock sold in the conversion and $5.3 million, the amount of
total contribution committed or anticipated to be contributed to the
Charitable Foundation; and
(e) 50% of such net proceeds will be used by Troy Financial to purchase all
of the capital stock of Troy Savings, and the remaining net proceeds
were retained by Troy Financial.
Pro forma consolidated net income of Troy Financial for the year ended
September 30, 1998 has been calculated as if the common stock had been sold at
the beginning of the period and the net proceeds, less the proceeds used to fund
the ESOP loan and purchase the Management Recognition Plan ("MRP") shares, had
been invested by Troy Savings and Troy Financial at the beginning of the period.
The assumed return of 4.29%, or 2.79% after tax, is based upon the yield 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 Troy Savings Bank Music Hall ("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 Troy Savings' 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 $1.5 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 Troy Savings and
pro forma data of Troy Financial 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, which
is expected to be adopted by Troy Financial 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 Troy Savings Bank -- Benefit Plans." No effect has
been given in the tables to
19
<PAGE> 39
the possible issuance of additional shares under options pursuant to the
Long-Term Equity Compensation Plan ("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 Troy Savings, 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 Troy Savings 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 are below $75.4 million, the minimum
of the estimated price range, or more than $117.3 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."
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------------
MAXIMUM
MINIMUM MIDPOINT MAXIMUM PLUS 15%
7,539,500 8,870,000 10,200,500 11,730,575
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 PER SHARE DATA)
<S> <C> <C> <C> <C>
Gross proceeds............................. $ 75,395 $ 88,700 $102,005 $117,306
Plus: Shares contributed to Community
Foundation(1)....................... 732 1,792 2,860 4,084
--------- -------- -------- --------
Pro forma market capitalization............ $ 76,127 $ 90,492 $104,865 $121,390
========= ======== ======== ========
Gross proceeds............................. $ 75,395 $ 88,700 $102,005 $117,306
Less: Estimated expenses.............. (2,200) (2,334) (2,468) (2,622)
--------- -------- -------- --------
Estimated net conversion proceeds.......... 73,195 86,366 99,537 114,684
Less: ESOP shares(5).................. (6,090) (7,239) (8,389) (9,711)
Less: MRP shares(6)................... (3,045) (3,620) (4,195) (4,856)
--------- -------- -------- --------
Estimated proceeds available for
investment(2)............................ $ 64,060 $ 75,507 $ 86,953 $100,117
========= ======== ======== ========
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)......... 1,787 2,107 2,426 2,793
ESOP, after taxes(5).................. (396) (471) (545) (631)
MRP, after taxes(6)................... (396) (471) (545) (631)
--------- -------- -------- --------
Pro forma net income(1)(6)............ $ 117 $ 287 $ 458 $ 653
========= ======== ======== ========
Pro forma net income, as
adjusted(3)......................... $ 2,817 $ 2,987 $ 3,158 $ 3,353
========= ======== ======== ========
Per share net income(7):
Historical............................ $ (0.12) $ (0.10) $ (0.09) $ (0.08)
Historical, as adjusted(3)............ 0.26 0.22 0.19 0.16
Pro forma adjustments:
Net earnings from proceeds(4)......... 0.25 0.25 0.25 0.25
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 $ 0.03 $ 0.04 $ 0.05
========= ======== ======== ========
</TABLE>
(continued on following page)
20
<PAGE> 40
<TABLE>
<CAPTION>
AT AND FOR THE YEAR ENDED SEPTEMBER 30, 1998
-----------------------------------------------------------------
MAXIMUM
MINIMUM MIDPOINT MAXIMUM PLUS 15%
7,539,500 8,870,000 10,200,500 11,730,575
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 PER SHARE DATA)
<S> <C> <C> <C> <C>
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... 73,195 86,366 99,537 114,684
Plus: Shares issued to Community
Foundation.......................... 732 1,792 2,860 4,084
Less: Cost of contribution to
Community Foundation, net of
estimated tax
benefit(10)......................... (476) (1,165) (1,859) (2,655)
Less common stock acquired by:
ESOP(5)............................... (6,090) (7,239) (8,389) (9,711)
MRP(6)................................ (3,045) (3,620) (4,195) (4,856)
--------- -------- -------- --------
Pro forma stockholders' equity(8)..... $ 135,345 $147,163 $158,983 $172,575
========= ======== ======== ========
Per share stockholders' equity(7)(9):
Historical............................ $ 9.33 $ 7.85 $ 6.77 $ 5.85
Pro forma adjustments:
Estimated net conversion proceeds..... 9.61 9.54 9.49 9.45
Plus: Shares issued to Community
Foundation.......................... 0.10 0.20 0.27 0.34
Less: Cost of contribution to
Community Foundation, net of
estimated tax
benefit(10)......................... (0.06) (0.13) (0.18) (0.22)
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)........................... $ 17.78 $ 16.26 $ 15.15 $ 14.22
========= ======== ======== ========
Offering price to pro forma net income per
share (historical base).................. 1,000.00x 333.33x 250.00x 200.00x
Offering price to pro forma net income per
share, as adjusted....................... 25.78x 28.82x 31.52x 34.28x
Pro forma offering price per share to
stockholders' equity per share(6)(8)..... 56.24% 61.50% 66.01% 70.32%
</TABLE>
- ---------------
(1) Troy Financial intends to contribute an additional number of shares of
common stock valued at $10 per share and equal to the difference between 8%
of the gross proceeds from the common stock sold in the conversion and $5.3
million. See "The Conversion -- Establishment of the Community Foundation."
The contributed shares will not add to gross proceeds because nominal
consideration will be received by Troy Financial for those shares. However,
since such shares are issued and outstanding, they are included in Troy
Financial'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.
(continued on following page)
21
<PAGE> 41
(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 conversion proceeds.
(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 Troy Savings' one-time
recognition of the $2.7 million contribution expense, net of taxes, in
fiscal 1998. After adjustment to eliminate this $2.7 million contribution
expense, Troy Savings had adjusted historical net income of $1.8 million.
The per share amounts vary according to the amount of common stock sold by
Troy Financial in the conversion.
(4) The pro forma after-tax yield on the net proceeds for Troy Financial and
Troy Savings is assumed to be 2.789%, assuming a combined federal and state
income tax rate of 35%.
(5) It is assumed that:
(a) 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;
(b) the funds used to acquire such shares will be borrowed by the ESOP from
the net conversion proceeds retained by Troy Financial;
(c) Troy Savings intends to make contributions to the ESOP in amounts at
least equal to the principal and interest requirement of the debt; and
(d) payment of the ESOP debt is based upon equal installments of principal
and interest over a 10 year period.
Assuming Troy Financial makes the ESOP loan, however, interest income earned
by Troy Financial on the ESOP debt will offset the interest expense for ESOP
contributions paid by Troy Savings. Accordingly, the compensation expense to
Troy Financial 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 Troy
Financial 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 Troy Financial 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 Troy
Financial or its subsidiaries will forfeit unvested shares. Alternatively,
the MRP may issue authorized but unissued shares of common stock from Troy
Financial. No determination has been made at this time concerning how Troy
Financial will fund the MRP. Such funding may be from unauthorized, but
unissued shares of common stock. In the event that MRP grants are made from
(continued on following page)
22
<PAGE> 42
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 $0.03, $0.04, $0.06 and $0.07
and pro forma stockholders' equity per share would be $17.10, $15.64,
$14.58 and $13.67 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 Troy Financial 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, $0.03, $0.04 and $0.05, and pro forma stockholders'
equity per share would be $17.07, $15.69, $14.69 and $13.83 in each case at
the minimum, midpoint, maximum and maximum plus 15% of the estimated price
range, respectively. Troy Financial 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 $7.6 million,
$9.0 million, $10.5 million and $12.1 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 Troy Financial will
supply shares for issuance under the Equity Compensation Plan. See
"Management of Troy Savings Bank -- Benefit Plans."
(9) Stockholders' equity represents the difference between the stated amounts
of 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 Troy Savings' bad debt reserves for income
tax purposes which would be required in the unlikely event of liquidation.
See "Regulation and Supervision," "Taxation" and "The Conversion --
Liquidation Rights." 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) Troy Financial 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 Troy Financial's estimated taxable income in fiscal 1999 and during the
five-year carry forward period, Troy Financial would not be entitled to
recognize a tax benefit. The figures shown reflect the estimated tax
benefit that is anticipated to be realized by Troy Financial because of
such contribution, based upon anticipated future taxable income, and
assuming a 35% tax rate and a $10.00 per share price.
23
<PAGE> 43
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH AND WITHOUT CONTRIBUTION TO THE COMMUNITY FOUNDATION
If Troy Financial 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 330,000 shares at the midpoint of
the estimated price range. Under such circumstances, pro forma stockholders'
equity of Troy Financial would be approximately $149.6 million, at the midpoint,
which is approximately $2.5 million greater than what the pro forma
stockholders' equity of Troy Financial 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 Troy Financial 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 Troy Savings' one-time recognition of the $2.7 million contribution expense,
net of taxes, in fiscal 1998. The $1.0 million cash contribution and the present
value of the $4.0 million in future cash commitments to the Troy Savings Bank
Charitable Foundation were expensed in fiscal 1998. Accordingly, the after-tax
impact was reflected in Troy Savings' September 30, 1998 equity. FinPro's
valuations, both with and without the common stock contribution to the Community
Foundation, are based on Troy Savings' equity of $71.0 million at September 30,
1998. No different treatment is accorded the contribution or commitments to the
Troy Savings Bank Charitable Foundation under either valuation. 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 Troy Financial would be the same as that estimated herein.
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
(7,539,500 (7,820,000 (8,870,000 (9,200,000
SHARES) SHARES) SHARES) SHARES)
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Estimated offering amount....................... $ 75,395 $ 78,200 $ 88,700 $ 92,000
Pro forma market capitalization................. 76,127 78,200 90,492 92,000
Total assets.......................... 780,965 783,236 792,783 795,240
Total liabilities..................... 645,620 645,620 645,620 645,620
Pro forma stockholders' equity.................. 135,345 137,616 147,163 149,620
Pro forma consolidated net income............... 117 166 287 359
Pro forma consolidated net income, as
adjusted...................................... 2,817 2,866 2,987 3,059
Pro forma stockholders' equity per share........ 17.78 17.59 16.26 16.26
Pro forma consolidated net income per share..... 0.01 0.02 0.03 0.04
Pro forma consolidated net income per share,
as adjusted................................... 0.39 0.39 0.35 0.36
</TABLE>
(continued on following page)
24
<PAGE> 44
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MIDPOINT
------------------------ ------------------------
WITH THE WITHOUT THE WITH THE WITHOUT THE
COMMUNITY COMMUNITY COMMUNITY COMMUNITY
FOUNDATION FOUNDATION FOUNDATION FOUNDATION
(7,539,500 (7,820,000 (8,870,000 (9,200,000
SHARES) SHARES) SHARES) SHARES)
---------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Pro Forma Pricing Ratios:
Offering price as a percent of pro forma
stockholders' equity per share........... 56.24% 56.85% 61.50% 61.50%
Offering price to pro forma net income per
share.................................... 1,000.00x 500.00x 333.33x 250.00x
Offering price to pro forma net income per
share, as adjusted....................... 25.78x 25.32x 28.82x 27.91x
Pro forma market capitalization to
assets................................... 9.75% 9.98% 11.41% 11.57%
Pro Forma Financial Ratios:
Return on assets........................... 0.01% 0.02% 0.04% 0.05%
Return on assets, as adjusted.............. 0.36 0.37 0.38 0.38
Return on stockholders' equity............. 0.09 0.12 0.20 0.24
Return on stockholders' equity, as
adjusted................................. 2.08 2.08 2.03 2.04
Stockholders' equity to assets............. 17.33 17.57 18.56 18.81
</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
(10,200,500 (10,580,500 (11,730,575 (12,167,000
SHARES) SHARES) SHARES) SHARES)
----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Estimated offering amount....................... $102,005 $105,800 $117,306 $121,670
Pro forma market capitalization................. 104,865 105,800 121,390 121,670
Total assets.......................... 804,603 807,244 818,195 821,049
Total liabilities..................... 645,620 645,620 645,620 645,620
Pro forma stockholders' equity.................. 158,983 161,624 172,575 175,429
Pro forma consolidated net income............... 458 550 653 769
Pro forma consolidated net income, as
adjusted...................................... 3,158 3,250 3,353 3,469
Pro forma stockholders' equity per share........ 15.15 15.27 14.22 14.42
Pro forma consolidated net income per share..... 0.04 0.05 0.05 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........... 66.01% 65.49% 70.32% 69.35%
Offering price to pro forma net income per
share.................................... 250.00x 200.00x 200.00x 166.67x
Offering price to pro forma net income per
share, as adjusted....................... 31.52x 30.21x 34.28x 32.55x
Pro forma market capitalization to
assets................................... 13.03% 13.11% 14.84% 14.82%
Pro Forma Financial Ratios:
Return on assets........................... 0.06% 0.07% 0.08% 0.09%
Return on assets, as adjusted.............. 0.39 0.40 0.41 0.42
Return on stockholders' equity............. 0.29 0.34 0.38 0.44
Return on stockholders' equity, as
adjusted................................. 1.99 2.01 1.94 1.98
Stockholders' equity to assets............. 19.76 20.02 21.09 21.37
</TABLE>
25
<PAGE> 45
THE TROY SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
The following Consolidated Statements of Income of Troy Savings for each of
the years in the three-year period ended September 30, 1998 have been audited by
KPMG LLP, independent public accountants, whose report thereon appears on page
F-2 of this prospectus. These statements should be read in conjunction with the
Consolidated Financial Statements and related Notes 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>
26
<PAGE> 46
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This prospectus contains forward-looking statements and information
relating to Troy Financial and Troy Savings. 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 these statements
reflect the current views of management concerning future events, these
statements involve risks, uncertainties and assumptions. Therefore, actual
future results may differ significantly from the results discussed in the
forward-looking statements. Some of the factors that may cause a different
outcome are discussed in the Risk Factors section.
GENERAL
Troy Financial was established in December 1998 as a Delaware corporation
to be the bank holding company for The Troy Savings Bank upon the conversion,
and has not engaged in any significant business to date. In the future, Troy
Financial's primary business will be the business of Troy Savings. The following
discussion focuses on the factors affecting the consolidated financial condition
of Troy Savings as of September 30, 1998 and 1997 and the results of operations
for each of the years in the three year period ended September 30, 1998. 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
Troy Savings' 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, Troy Financial intends to establish or acquire a commercial bank and
trust company that can accept municipal deposits to complement Troy Savings'
municipal investment activities. In addition, Troy Savings may also open new
branches to better serve its existing customers and to increase its market
share, especially in those areas in which Troy Savings originates residential
mortgage loans. Troy Savings 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, Troy Savings has operated as a traditional thrift by making
residential mortgage loans and taking customers' deposits. In recent years, Troy
Savings 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, Troy Savings also purchases securities, including U.S.
government securities and agency obligations. Troy Savings' primary sources of
funds are deposits and borrowings. Troy Savings 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 Troy
Savings. Other types of market risk, such as movements in foreign currency
exchange rates and commodity prices, do not arise in the normal course of Troy
Savings' business operations. Interest rate risk can be defined as an exposure
to a movement in interest rates that could have an adverse effect on Troy
Savings' net interest income. Interest rate risk arises naturally from the
imbalance in the repricing, maturity and/or cash flow characteristics of assets
and liabilities.
A significant portion of Troy Savings' loans are adjustable or variable
rate which could result in reduced levels of interest income during periods of
falling rates. In addition, in periods of falling interest rates,
27
<PAGE> 47
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, a flat yield curve, net interest
margins could become smaller, thereby reducing net interest income. The net
effect of these circumstances is reduced interest income, offset only by a
nominal decrease in interest expense, thereby narrowing the net interest margin.
The principal objectives of Troy Savings' interest rate risk management
program are to
(a) measure, monitor, evaluate and develop strategies in response to the
interest rate risk profile inherent in Troy Savings' consolidated
balance sheet accounts,
(b) determine the appropriate level of risk given Troy Savings' business
strategy, operating environment, capital and liquidity requirements,
and performance objectives and
(c) manage the risk consistent with Troy Savings' guidelines.
Through such management, Troy Savings seeks to reduce the vulnerability of its
operations to changes in interest rates by matching the maturities of Troy
Savings' assets with those of Troy Savings' liabilities and off-balance sheet
financial instruments.
The responsibility for balance sheet risk management oversight is the
function of Troy Savings' Asset/ Liability Management Committee ("ALCO"). Troy
Savings' ALCO reviews Troy Savings' asset/liability policies and interest rate
risk position. Troy Savings' ALCO is chaired by Troy Savings' chief financial
officer, and includes Troy Savings' President, Trust and Investment Officer and
other members of Troy Savings' 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 Troy Savings' interest rate risk position to Troy Savings' Board of
Directors on a quarterly basis. Troy Savings' ALCO considers variability of net
interest income under various rate scenarios. The ALCO also evaluates the
overall risk profile and determines actions to maintain and achieve a posture
consistent with policy guidelines. Troy Savings, of course, cannot predict the
future movement of interest rates, and such movement could have an adverse
impact on Troy Savings' consolidated financial condition and results of
operations.
In recent years, Troy Savings has primarily utilized the following
strategies to manage interest rate risk:
(a) emphasizing the origination of adjustable rate residential mortgage
loans, and to a lesser extent commercial real estate, commercial
business and consumer loans;
(b) selling substantially all of its fixed rate residential mortgage loans
in the secondary market;
(c) utilizing FHLB advances to better structure the maturities of its
interest rate sensitive liabilities; and
(d) investing in short-term securities which generally bear lower yields,
compared to longer-term investments, but which better position Troy
Savings for increases in interest rates.
In addition, although Troy Savings has generally sold all of its 15- and 30-year
conforming fixed rate mortgage loans into the secondary mortgage market,
beginning in late fiscal 1998, Troy Savings determined to hold in its loan
portfolio substantially all of its 15-year fixed rate mortgage loans.
In order to reduce the interest rate risk associated with the portfolio of
conventional mortgage loans held for sale, as well as outstanding loan
commitments and uncommitted loan applications with rate lock agreements which
are intended to be held for sale, Troy Savings 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, Troy Savings
had mandatory commitments and cancelable options to sell fixed rate mortgage
loans at set prices amounting to approximately $25.0 million.
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
28
<PAGE> 48
"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 sustained period of rising interest rates, a negative gap would tend to
affect net interest income adversely.
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 Troy Savings, 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 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 Troy
Savings' estimated gap.
The fair value of loans is calculated based on discounted cash flows for
performing loans and either recent external appraisals or discounted cash flows
for nonperforming loans. The fair value of debt and equity securities, including
mortgage-backed securities, is based on quoted market prices. If quoted market
prices are not available, the fair value is determined by reference to quoted
market prices for securities with similar characteristics. The fair value of
deposits with no stated maturity is regarded to be the amount payable on demand
at September 30, 1998. The fair value of time deposits is based on the
discounted value of contractual cash flows. the fair value of FHLB advances is
based upon the discounted value of contractual cash flows using the rates
currently offered for similar long-term debt issues. 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 Troy Savings Bank -- Lending
Activities," "-- Securities" and "-- Sources of Funds."
29
<PAGE> 49
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
-----------------------------------------------------------------------------------
MORE MORE MORE
THAN THREE THAN SIX THAN ONE
THREE MONTHS MONTHS YEAR
MONTHS AVERAGE TO SIX AVERAGE TO ONE AVERAGE TO THREE AVERAGE
OR LESS RATE% MONTHS RATE% YEAR RATE% YEARS RATE%
-------- ------- ---------- ------- -------- ------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Real estate loans:
Residential mortgage.................. $ 23,372 7.90 $ 15,999 8.04 $ 35,151 8.10 $ 16,778 7.72
Commercial mortgage................... 16,545 8.43 14,932 8.28 11,862 7.92 33,572 8.90
Construction.......................... 10,052 8.35 -- -- --
Total real estate loans........... 49,969 8.17 30,931 8.16 47,013 8.05 50,350 8.51
Commercial business................... 22,348 8.34 1,618 7.84 2,917 7.70 13,134 7.84
Home equity lines of credit........... 8,575 8.25 -- -- --
Other consumer loans.................. 2,686 9.75 2,546 8.25 5,685 8.25 14,203 8.35
-------- -------- -------- --------
Total loans....................... 83,578 8.27 36,095 8.15 55,615 8.06 77,687 8.37
Loans held for sale................... 11,096 7.27 -- -- --
Federal funds sold.................... 5,585 5.47 -- -- --
Debt and equity securities (at
amortized cost)..................... 60,574 5.46 78,190 5.06 18,825 5.75 22,032 6.26
Mortgage-backed securities............ 153 7.65 153 7.65 306 7.65 1,183 7.65
-------- -------- -------- --------
Total interest earning assets..... $160,986 $113,438 $ 74,746 $100,902
======== ======== ======== ========
Interest bearing Liabilities:
Deposits:
NOW and Super NOW accounts............ 45,717 2.20 -- -- 30,478 2.20
Money market accounts................. 15,708 3.09 -- -- --
Savings accounts...................... 12,407 3.30 12,407 3.30 24,814 3.30 99,255 3.30
Time deposit accounts................. 56,241 5.63 71,777 5.30 66,737 5.40 55,527 5.72
Escrow accounts......................... 1,900 2.11 -- -- --
FHLB advances........................... 108 5.89 110 5.89 225 5.89 3,497 5.89
Securities sold under agreements to
repurchase............................ 2,524 3.21 -- -- --
-------- -------- -------- --------
Total interest bearing
liabilities..................... $134,605 $ 84,294 $ 91,776 $188,757
======== ======== ======== ========
Interest rate sensitivity gap............. $ 26,381 $ 29,144 $(17,030) $(87,855)
======== ======== ======== ========
Cumulative interest rate sensitivity
gap..................................... $ 26,381 $ 55,525 $ 38,495 $(49,360)
======== ======== ======== ========
Cumulative interest rate sensitivity gap
as a percentage of total assets......... 3.68% 7.75% 5.37% (6.89)%
Cumulative interest rate sensitivity gap
as a percentage of total interest
earning assets.......................... 3.86% 8.13% 5.63% (7.23)%
Cumulative interest earning assets as a
percentage of cumulative interest
bearing liabilities..................... 119.60% 125.37% 112.39% 90.12%
<CAPTION>
AT SEPTEMBER 30, 1998
------------------------------------------------------------------------------------
MORE MORE
THAN THREE THAN FIVE
YEARS YEARS MORE
TO FIVE AVERAGE TO 10 AVERAGE THAN 10 AVERAGE FAIR
YEARS RATE% YEARS RATE% YEARS RATE% TOTAL VALUE
---------- ------- --------- ------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Real estate loans:
Residential mortgage.................. $ 15,111 7.59 $24,902 7.69 $71,198 6.65 $202,511 $203,571
Commercial mortgage................... 41,608 8.41 39,618 8.17 8,049 7.99 166,186 169,325
Construction.......................... -- -- -- 10,052 10,052
Total real estate loans........... 56,719 8.19 64,520 7.98 79,247 6.79 378,749 382,948
Commercial business................... 5,139 8.00 -- -- 45,156 45,228
Home equity lines of credit........... -- -- -- 8,575 8,575
Other consumer loans.................. 8,325 8.43 -- -- 33,445 33,306
-------- ------- ------- -------- --------
Total loans....................... 70,183 8.21 64,520 7.98 79,247 6.79 465,925 470,057
Loans held for sale................... -- -- -- 11,096 11,096
Federal funds sold.................... -- -- -- 5,585 5,585
Debt and equity securities (at
amortized cost)..................... 12,939 6.22 318 6.45 2,087 6.92 194,965 195,538
Mortgage-backed securities............ 840 7.65 1,561 7.87 1,400 7.25 5,596 5,841
-------- ------- ------- -------- --------
Total interest earning assets..... $ 83,962 $66,399 $82,734 $683,167 $688,117
======== ======= ======= ======== ========
Interest bearing Liabilities:
Deposits:
NOW and Super NOW accounts............ -- -- -- 76,195 76,195
Money market accounts................. -- -- -- 15,708 15,708
Savings accounts...................... 49,626 3.30 -- -- 198,509 198,509
Time deposit accounts................. 3,637 5.70 2,755 5.60 -- 256,674 258,254
Escrow accounts......................... -- -- -- 1,900 1,900
FHLB advances........................... 10,000 6.03 31,000 5.74 -- 44,940 44,940
Securities sold under agreements to
repurchase............................ -- -- -- 2,524 2,524
-------- ------- ------- -------- --------
Total interest bearing
liabilities..................... $ 63,263 $33,755 $ -- $596,450 $598,030
======== ======= ======= ======== ========
Interest rate sensitivity gap............. $ 20,699 $32,644 $82,734 $ 86,717
======== ======= ======= ========
Cumulative interest rate sensitivity
gap..................................... $(28,661) $ 3,983 $86,717 $ 86,717
======== ======= ======= ========
Cumulative interest rate sensitivity gap
as a percentage of total assets......... (4.00)% 0.56% 12.10% 12.10%
Cumulative interest rate sensitivity gap
as a percentage of total interest
earning assets.......................... (4.20)% 0.58% 12.69% 12.69%
Cumulative interest earning assets as a
percentage of cumulative interest
bearing liabilities..................... 94.91% 100.67% 114.54% 114.54%
</TABLE>
30
<PAGE> 50
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, 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, an increase of
$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.
Troy Savings' 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 Troy Savings' investment of these funds into higher yielding securities
available for sale.
Troy Savings' $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 Troy Savings' residential real estate portfolio was primarily
caused by a change in market demand for Troy Savings' mortgage loan products. In
recent years, until fiscal 1998, Troy Savings' mortgage customers generally
sought adjustable rate loans because such loans tended to offer lower interest
rates relative to fixed rate loans. Troy Savings 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, Troy Savings'
mortgage customers generally sought fixed rate loans. Because it had been Troy
Savings' policy generally to sell all of its 15- and 30-year conforming fixed
rate mortgage loans in the secondary market, Troy Savings' residential loan
portfolio decreased during fiscal 1998. Troy Savings' origination of commercial
real estate loans remained relatively stable in fiscal 1998 as compared to
fiscal 1997. Troy Savings originated $27.4 million of real estate loans 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, Troy Savings' commercial business loan
portfolio increased 50.7%, or $15.2 million, and Troy Savings' 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 Troy Savings' effort to increase the origination of such loans as part
of Troy Savings' emphasis on commercial banking activities, and because such
loans generally have higher interest rates than Troy Savings' 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. There
was also an increased demand for consumer loans due to aggressive marketing by
Troy Savings and an overall decrease in the interest rates for such loans
resulting from a general decline in market interest rates. In the future, Troy
Savings expects to continue emphasizing the origination of commercial real
estate loans, commercial business loans and consumer loans, although there can
be no assurance that Troy Savings 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 Troy Savings' 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,
31
<PAGE> 51
adverse situations that may affect borrowers' ability to repay, prevailing
economic conditions and trends and other factors that warrant recognition in
providing for an adequate allowance for loan losses. See "Business of Troy
Savings Bank -- Lending Activities -- Allowance for Loan Losses."
While Troy Savings 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 Troy Savings' 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 in part by $2.2 million in net charge-offs
for the same year. 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 Troy
Savings' loan portfolio. See "Business of Troy Savings Bank -- Lending
Activity -- Allowance for Loan Losses."
Troy Savings' 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. Troy Savings 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.
Troy Savings' total liabilities increased 9.3% from $590.9 million at
September 30, 1997 to $645.6 million at September 30, 1998. The increase was
primarily 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, Troy Savings 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, Troy Savings' securities sold under agreement to repurchase increased
by $2.2 million, and Troy Savings' 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
Troy Savings' earnings are dependent largely on its net interest income,
which is the difference between the amount that Troy Savings receives from its
interest earning assets and the amount that Troy Savings pays out on its
interest bearing liabilities.
Average Balance Sheet. The following table sets forth certain information
relating to Troy Savings' 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. A federal
incremental tax rate of 34% and a New York State incremental tax rate of 9.0%
were used to calculate tax exempt income on a tax equivalent basis. Average
balances were computed based on average monthly balances. Management believes
that the use of average monthly balances instead of daily balances does not have
a material effect on the information presented. The
32
<PAGE> 52
yields on loans include deferred fees and discounts which are considered yield
adjustments. Non-accruing loans have been included in loan balances.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- -------- ------- -------- -------- ------- -------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Real estate loans:
Residential mortgage........ $208,520 $16,240 7.79% $210,501 $ 16,389 7.79% $199,367 $15,455 7.75%
Commercial mortgage......... 177,144 15,480 8.74 189,953 16,695 8.79 180,202 15,938 8.84
Construction................ 14,823 898 6.06 16,869 1,172 6.95 12,234 1,047 8.56
-------- ------- -------- -------- -------- -------
Total real estate
loans................. 400,487 32,618 8.14 417,323 34,256 8.21 391,803 32,440 8.28
-------- ------- -------- -------- -------- -------
Commercial business......... 37,234 3,211 8.62 25,964 2,287 8.81 21,242 1,932 9.10
-------- ------- -------- -------- -------- -------
Consumer loans:
Home equity lines of
credit.................. 9,160 792 8.65 9,572 824 8.61 9,014 798 8.85
Other consumer............ 20,525 1,694 8.25 18,920 1,484 7.84 10,510 983 9.35
-------- ------- -------- -------- -------- -------
Total consumer loans.... 29,685 2,486 8.37 28,492 2,308 8.10 19,524 1,781 9.12
-------- ------- -------- -------- -------- -------
Total loans............. 467,406 38,315 8.20 471,779 38,851 8.23 432,569 36,153 8.36
-------- -------- --------
Loans held for sale........... 6,829 527 7.72 2,743 199 7.25 3,509 260 7.41
-------- -------- --------
Securities held to maturity... 3,753 300 7.99 4,266 353 8.27 4,988 410 8.22
-------- -------- --------
Securities available for sale
(amortized cost)
Taxable................... 69,171 4,121 5.96 121,483 7,262 5.98 142,758 8,521 5.97
Tax-exempt................ 55,996 3,286 5.87 3,195 184 5.76 -- -- --
-------- ------- -------- -------- -------- -------
Total securities
available for sale
(amortized cost)...... 125,167 7,407 5.92 124,678 7,446 5.97 142,758 8,521 5.97
Federal funds sold and other
short-term investments...... 45,631 2,553 5.59 27,560 1,503 5.45 27,984 1,518 5.42
-------- ------- -------- -------- -------- -------
Total interest earning
assets................ 648,786 49,102 7.57 631,026 48,352 7.66 611,808 46,862 7.66
-------- ------- -------- -------- -------- -------
INTEREST BEARING LIABILITIES:
Deposits:
NOW and Super NOW accounts.. $ 77,010 $ 1,696 2.20% $ 71,581 $ 1,590 2.22% $ 69,908 $ 1,547 2.21%
Money market accounts....... 13,995 431 3.08 14,168 433 3.06 12,600 379 3.01
Savings accounts............ 195,177 6,451 3.31 201,612 6,647 3.30 206,719 6,798 3.29
Time deposit accounts....... 264,538 14,701 5.56 261,032 14,087 5.40 251,005 13,758 5.48
Escrow accounts............... 3,704 60 1.62 3,941 55 1.40 3,602 75 2.08
-------- ------- -------- -------- -------- -------
Total interest bearing
deposits.............. 554,424 23,339 4.21 552,334 22,812 4.13 543,834 22,557 4.15
-------- ------- -------- -------- -------- -------
Borrowings:
Securities sold under
agreement to repurchase... 1,222 33 2.70 704 29 4.12 386 13 3.37
Short-term borrowings....... -- -- -- 4,403 242 5.50 4,220 217 5.14
Long-term debt.............. 13,681 821 6.00 4,540 268 5.90 3,711 230 6.20
-------- ------- -------- -------- -------- -------
Total borrowings........ 14,903 854 5.73 9,647 539 5.59 8,317 460 5.53
-------- ------- -------- -------- -------- -------
Total interest bearing
liabilities........... 569,327 24,193 4.25 561,981 23,351 4.16 552,151 23,017 4.17
-------- ------- -------- -------- -------- -------
Net interest spread............. 3.32% 3.50% 3.49%
Net interest income/net interest
margin........................ 24,909 3.84% 25,001 3.96% 23,845 3.90%
Ratio of interest earning assets
to interest bearing
liabilities................... 113.96% 112.29% 110.80%
Tax equivalent adjustment....... 1,072 65 --
------- -------- -------
Net interest income as per
consolidated financial
statements.................... $23,837 $ 24,936 $23,845
======= ======== =======
</TABLE>
33
<PAGE> 53
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest earning assets
and interest bearing liabilities have affected Troy Savings' interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to:
(1) changes attributable to changes in volume (changes in volume multiplied
by prior year rate);
(2) changes attributable to changes in rate (changes in rate multiplied by
prior volume); and
(3) 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, which are
considered yield adjustments, 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>
34
<PAGE> 54
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
General. Troy Savings 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 Troy Savings' cash
contribution and commitment to the Charitable Foundation. Also contributing to
the loss were increases in Troy Savings' other real estate owned expense and
compensation and employee benefits expense of $707,000 and $645,000,
respectively, for the year ended September 30, 1998. These increased expenses
were partially offset by a $3.5 million decrease in income tax expense in fiscal
1998 as compared to fiscal 1997, primarily associated with the tax benefit
recorded in connection with Troy Savings' contribution and binding, irrevocable
commitment to the Charitable Foundation and otherwise reduced income before
taxes.
Net Interest Income. Troy Savings' 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 Troy Savings' interest
earning assets. Troy Savings' net interest margin for the year ended September
30, 1998 was 3.84%, a decrease of 12 basis points from 3.96% for the year ended
September 30, 1997. The yield on average interest earning assets decreased from
7.66% to 7.57%, while the rate paid on average interest bearing liabilities
increased from 4.16% to 4.25%. The components which contributed to the changes
in net interest income and net interest margin are described below and are set
forth in the tabular presentation under the above heading "Rate/ Volume
Analysis."
Interest Income. Troy Savings' interest income for the year ended
September 30, 1998 was $49.1 million, an increase from $48.4 million for the
year ended September 30, 1997. Interest on loans decreased $536,000 from $38.9
million for the year ended September 30, 1997 to $38.3 million for the year
ended September 30, 1998. The average balance of loans decreased $4.4 million to
$467.4 million, and the average yield on loans decreased three basis points from
8.23% to 8.20% for the year ended September 30, 1998. Tax equivalent interest
income on securities available for sale decreased by $39,000 and interest income
on investment securities held to maturity declined by $53,000 for the year ended
September 30, 1998. The average balance of securities available for sale
increased only slightly from $124.7 million for the year ended September 30,
1997 to $125.2 million for the year ended September 30, 1998. At the same time,
the tax effected average yield on securities available for sale decreased five
basis points from 5.97% to 5.92%. The interest income on federal funds sold
increased $1.0 million to $2.5 million, and the average balance of federal funds
sold and other short-term investments increased from $27.6 million to $45.6
million. Reductions in market interest rates throughout 1998 led to changes in
the mix of Troy Savings, interest earning assets and changes in interest income.
Lower loan rates resulted in increased residential loan refinancings and fixed
rate loans. Because Troy Savings sells most of its fixed rate residential loans,
interest income on loans held for sale increased. The interest rate environment
also resulted in increased refinancings by commercial mortgage customers, some
of which refinanced with other institutions. Troy Savings sought to take
advantage of the interest rate environment by borrowing funds from the FHLB, and
investing in short-term investments, thereby increasing short-term interest
income by $1.1 million. Troy Savings 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. Troy Savings' 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
35
<PAGE> 55
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 Troy
Savings' 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 Troy Savings' 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 Troy Savings' use of alternative funding sources in lieu of
relatively higher cost time deposit accounts.
Provision for Loan Losses. The provision for loan losses was $4.1 million
for fiscal 1998, compared to $3.9 million for fiscal 1997. Many of the adverse
credit quality trends noted in fiscal 1997 continued into fiscal 1998, 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 provision for loan losses, management also considers general
economic conditions and real estate trends in Troy Savings' market area, both of
which can impact the inherent risk of loss in Troy Savings' current loan
portfolio. Management believes that there has been a general decline in the real
estate values in Troy Savings' market area, resulting in a decrease in the
values of the collateral securing much of Troy Savings' 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. The increased provision in recent years also
reflects the change in the mix of assets in Troy Savings' 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. Troy Savings' non-interest income decreased by
$185,000 to $2.6 million for the year ended September 30, 1998. A $356,000
decrease in Troy Savings' other income and a $28,000 decrease in Troy Savings'
loan servicing fees contributed to Troy Savings' decline in non-interest income.
Such declines were partially offset by Troy Savings' 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. Troy
Savings' non-interest income in 1997 also includes a one-time $389,000 federal
affordable housing award. Service charges on deposits increased due to increases
in demand deposit account balances and additional commercial relationships.
Trust income increased due to increases in assets under management. These
increases reflect Troy Savings' strategy of becoming a more full service
relationship institution. Gains on mortgage loan sales increased as a result of
the decline in mortgage rates and a corresponding increase in fixed rate loans
held for sale.
Non-interest Expense. Troy Savings' 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 Troy
Savings' cash contribution and binding, irrevocable commitment to the Charitable
Foundation.
Immediately after completion of the conversion, Troy Financial intends to
establish and contribute to the Community Foundation newly issued shares of
common stock in an amount equal to the difference between 8% of the gross
proceeds from the common stock sold in the conversion and $5.3 million, which
represents the $5.0 million cash contribution and commitment to the Charitable
Foundation and the value of the Music Hall.
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
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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 to be $300,000, which represents the approximate fair
value of the Music Hall. 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. The contribution of common stock to the
Community Foundation is intended to allow our local communities to share in our
potential growth and any profitability over the long term.
Troy Financial's future contribution expense, 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 Troy Financial or Troy Savings. In fiscal years 1998
and 1997, the direct costs paid by Troy Savings, excluding any allocated cost,
associated with operating the Music Hall were $78,000 and $88,000, respectively.
Also contributing to Troy Savings' 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, Troy Savings' foreclosed assets or other
real estate owned. The increase compensation expense was primarily related to
general merit increases for Troy Savings' 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.
Income Taxes. For fiscal 1998, Troy Savings recognized a $1.9 million
income tax benefit, as compared to a $1.6 million income expense for the year
ended September 30, 1997. The reduction in income tax expense is primarily the
result of the fiscal 1998 pre-tax loss of $2.8 million as compared to the fiscal
1997 pre-tax income of $5.2 million. Also contributing to the change in income
tax expense was an increase in the level of investments in tax exempt securities
from an average investment of $3.2 million during fiscal 1997 to an average
investment of $56.0 million during fiscal 1998, the result of which was a
significant increase in tax exempt income.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996
General. Troy Savings' 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 Troy Savings' 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 Troy Savings'
net interest income.
Net Interest Income. Troy Savings' 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 the
fiscal year. Troy Savings' 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. Troy Savings' 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 Troy Savings'
loans. During fiscal 1997, the average balance of loans increased $39.2 million
to
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$471.8 million, while the average yield on loans decreased from 8.36% to 8.23%.
Troy Savings' 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. Troy Savings used
proceeds from its maturing securities available for sale to fund its loan
growth.
Interest Expense. Troy Savings' interest expense increased by $334,000
during the year ended September 30, 1997 to $23.4 million primarily due to an
increase in interest paid on deposits. The two largest categories of interest
bearing deposits are savings accounts and time deposits. Although 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 savings
accounts, interest expense on 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 Troy Savings' loan portfolio. As a result of
this increased inherent risk, management increased Troy Savings' provision for
loan losses from $928,000 in fiscal 1996 to $3.9 million in fiscal 1997. The
increased 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 Troy Savings' historical net loan charge-off
experience which was .22% and .15% of average loans in fiscal years 1995 and
1994, 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 Troy
Savings' classified and special mention loans increased from $18.9 million at
September 30, 1996 to $25.2 million at September 30, 1997. Troy Savings also
began to change the mix of assets in Troy Savings' 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. Troy Savings' 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 Troy Savings' other income,
although this decrease was partially offset by a $69,000 increase in Troy
Savings' trust income resulting from an increase in trust assets under Troy
Savings' management. In fiscal 1996, Troy Savings received $435,000 in
nonrecurring recoveries of previously charged-off investments. Troy Savings did
not have a similar recovery in fiscal 1997.
Non-interest Expense. Troy Savings' 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 Troy Savings' 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 Troy Savings' 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, Troy Savings 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.
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LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability to generate cash flow to meet present
and future financial obligations and commitments. Troy Savings' 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,
Troy Savings' 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%.
Troy Savings' primary sources of funds are borrowings and proceeds from the
redemption and maturity of federal funds sold and other short-term securities.
Troy Savings' primary cash outflows are new loan originations, purchases of
securities, and deposit withdrawals. Management monitors its liquidity position
on a daily basis. Although maturities and scheduled amortization of loans are a
predictable source of funds, deposit outflows, mortgage prepayments and mortgage
loan sales are greatly influenced by changes in interest rates, economic
conditions, and competitors.
Troy Savings attempts to provide stable and flexible sources of funding
through the management of its liabilities, including core deposit products
offered through its branch network as well as FHLB advances. Management believes
that the level of Troy Savings' liquid assets combined with daily monitoring of
cash inflows and outflows provide adequate liquidity to fund outstanding loan
commitments, meet daily withdrawal requirements of Troy Savings' depositors, and
meet all other daily obligations of Troy Savings.
Consistent with its goals to operate a sound and profitable financial
organization, Troy Savings 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
9.9% and 10.8% of total assets at those respective dates. As of September 30,
1998, Troy Savings exceeded all of the capital requirements of the FDIC. Troy
Savings' 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 ("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
(a) issued guidelines to financial institutions for addressing the Year
2000 issues;
(b) set milestones that financial institutions are expected to meet in
becoming Year 2000 compliant; and
(c) established testing recommendations to assure timely compliance.
Troy Savings started its Year 2000 compliance plans in 1996, and has followed
the guidelines and recommendations of the FFIEC throughout its planning and
implementation process.
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In order to address Troy Savings' particular Year 2000 issues, Troy Savings
commenced a Year 2000 remediation and compliance program (the "Year 2000
Project") managed by a project group consisting of representatives from all
business units and functional departments within Troy Savings. The Year 2000
Project is directed by a vice president who directly reports on the Year 2000
Project to the President/Chief Executive Officer of Troy Savings. The Year 2000
Project is overseen by the Board of Directors which receives quarterly reports
from the project group.
Troy Savings' inventory and assessment of all technologies, equipment and
third party providers began in 1996. Substantially all of Troy Savings' 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 Troy Savings' core banking systems. Finally, Troy
Savings assessed its machinery, vaults, security systems, elevators, HVAC
systems, telephone, communications and any vendor supplied goods or services to
complete plans for remediation, repair or replacement where necessary, and has
monitored vendors' compliance programs against required standards.
In 1996, Troy Savings negotiated the renewal of its data processing
contract for core banking systems with its third party service provider. In
October 1998, Troy Savings 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, Troy
Savings has attempted to obtain all applicable warranties from the vendors or
service providers, and where appropriate, Troy Savings is arranging alternate
service or software providers in the way of contingency planning should the
primary vendor not provide timely and adequate solutions. Troy Savings, 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
Troy Savings' systems rely will be Year 2000 compliant.
Troy Savings 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 Year 2000
Project includes not only direct incremental amounts expended by Troy Savings
for upgrading or replacing software, systems and equipment, but also the use of
internal resources devoted to the Year 2000 Project that would have otherwise
been devoted to other business opportunities. It is difficult to quantify the
economic costs of internal resources so re-directed.
Troy Savings estimates that it will make direct expenditures for the Year
2000 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 Year 2000 Project. A substantial portion of the upgrades relate to a
new branch automation system which, although not considered by Troy Savings as
mission critical, has been accelerated. While these are estimates, Troy Savings
does not expect the costs of the Year 2000 Project to have a significant impact
on its consolidated financial condition and results of operations. Troy Savings
is currently soliciting contracts from independent information technology
consultants for the purpose of, among other things, verifying and validating
Troy Savings' risk and cost estimates, systems testing and contingency plans. As
of September 30, 1998, Troy Savings has spent approximately $173,000 on Year
2000-related matters.
The potential impact of Year 2000 on Troy Savings' customers, both
borrowers and depositors, has been examined. Troy Savings is aware that if
significant commercial borrowers suffer losses or illiquidity because of their
own Year 2000 problems, including those of others with whom they do business or
on whom they are dependent, Troy Savings may suffer losses from or experience
illiquidity. Troy Savings' 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.
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Troy Savings believes that its Year 2000 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, Troy Savings and its subsidiaries have developed
contingency plans for non-compliant systems. The contingency plans vary with the
affected systems.
Troy Savings is obtaining assurances that its primary vendors, key service
providers, and, as noted above, significant credit customers will also be Year
2000 compliant. Beginning in January 1999 and expected to continue throughout
the year, Troy Savings commenced testing and validating its vendors'
confirmations of Year 2000 compliance, except in situations involving
non-mission critical systems and processes or where contingency plans indicate
less than one day of interruptions before replacement, correction or changes are
possible. In those situations, Troy Savings will rely upon vendors'
confirmations. Troy Savings intends to pursue legal action against vendors in
situations where it is found that such vendors' representations concerning Year
2000 compliance are found to be false. Troy Savings is not aware of any
limitation that would preclude such actions. Contingency plans and alternative
arrangements have been made, or will be made in advance, wherever possible.
Failure of Troy Savings' mission critical systems could impair the ability
of Troy Savings to do business and service its customers; failure of large or
numerous borrowers to repay their loans could impair Troy Savings' capital;
failure of utilities and the public infrastructure could adversely affect Troy
Savings' operations. Despite Troy Savings' efforts with respect to Year 2000
readiness, including its Year 2000 Project, there can be no assurance that
partial or total systems interruptions or business interruptions or the
associated costs would not have an adverse effect upon Troy Savings' business,
consolidated financial condition, results of operations and business prospects.
IMPACT ON INFLATION AND CHANGING PRICES
Troy Savings' 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
Troy Savings' operations. Unlike those of most industrial companies, Troy
Savings' assets and liabilities are nearly all monetary. As a result, interest
rates have a greater impact on Troy Savings' performance than do the effects of
general levels of inflation. In addition, interest rates do not necessarily move
in the direction, or to the same extent, as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In November 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, Troy Savings
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, Troy Financial 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 Troy Financial, 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 Troy Financial'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 Troy Financial to choose either a new fair value based method or the
Accounting Principles Board ("APB") Opinion 25 intrinsic value based method of
accounting for its stock-based compensation
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arrangements. SFAS No. 123 requires pro forma disclosures of net income and
earnings per share computed as if the fair value based method had been applied
in financial statements of companies that follow accounting for such
arrangements under APB Opinion 25. SFAS No. 123 applies to all stock-based
employee compensation plans in which an employer grants shares of its stock or
other equity instruments to employees except for employee stock ownership plans.
SFAS No. 123 also applies to plans in which the employer incurs liabilities to
employees in amounts based on the price of the employer's stock (e.g., stock
option plans, stock purchase plans, restricted stock plans and stock
appreciation rights). This statement also specifies the accounting for
transactions in which a company issues stock options or other equity for
services provided by nonemployees or to acquire goods or services from outside
suppliers or vendors. Troy Financial 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 Troy Financial'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. Troy Financial 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 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. Troy Financial 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, Troy Financial 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
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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. Troy Financial 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. Troy Financial 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. Troy
Financial is currently evaluating the impact of this statement, which is
effective for fiscal quarters beginning after December 15, 1998, on its
consolidated financial statements.
BUSINESS OF TROY FINANCIAL CORPORATION
Troy Financial is a newly formed Delaware corporation that will register
with the Federal Reserve as the bank holding company for Troy Savings. Troy
Financial has not engaged in any significant business to date and, in the
future, its primary business will be the business of Troy Savings.
Presently, Troy Financial has no plans to own or lease any property, but
will instead use the premises and equipment of Troy Savings. Troy Financial does
not intend to employ any persons other than certain officers of Troy Savings who
will not be separately compensated by Troy Financial. Troy Financial may utilize
the support staff of Troy Savings from time to time, if needed, and additional
employees will be hired as appropriate to the extent Troy Financial expands its
business in the future.
Troy Financial will be subject to regulation and supervision by the Federal
Reserve. See "Business of Troy Financial Corporation" and "Regulation and
Supervision -- Regulation of Troy Financial."
BUSINESS OF TROY SAVINGS BANK
GENERAL
Troy Savings is a community oriented savings bank headquartered in Troy,
New York and was originally chartered in 1823. As a full service financial
institution, Troy Savings places a particular emphasis on residential and
commercial real estate loan products, as well as retail and business banking
products and services. Troy Savings and its subsidiaries also offer a complete
range of trust, insurance and investments services, including securities
brokerage, annuity and mutual funds sales, money management and retirement plan
services, and other traditional investment/brokerage activities to individuals,
families and businesses throughout the six New York State counties of Albany,
Saratoga, Schenectady, Warren, Washington and Rensselaer, the county in which
Troy is located.
Troy Savings' goal is to be the primary source of financial products and
services for its business and retail customers. Troy Savings' business strategy
is to serve as a community based, full-service financial services firm by
offering a wide variety of business and retail banking products, and trust,
insurance, investment management and brokerage services to its potential and
existing customers throughout its market area. In addition, Troy Financial
intends to establish or acquire a commercial bank and trust company that can
accept municipal deposits to complement Troy Savings' municipal investment
activities. In the future, Troy Savings may open new branches to better serve
its existing customers and to increase its market share, especially in those
areas in which Troy Savings, through Family Mortgage Banking Co., Inc. ("FMB"),
its wholly owned subsidiary, originates residential mortgage loans. Whereas Troy
Savings' strategy since the
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<PAGE> 63
mid-1980s has been to provide a wide variety of financial products and services
to attract an equally wide variety of customers, Troy Savings also is now
focusing on expanding each customer's relationship by cross-selling multiple
products and services.
Troy Savings 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"). Troy
Savings' branches are staffed by managers, branch operations supervisors and
customer sales and service representatives ("CSSRs") who are trained and
encouraged to market and service Troy Savings' products and services, including
those of Troy Savings' subsidiaries. See "-- Subsidiaries." Currently, Troy
Savings 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 Troy Savings is 54 years of age, lives
within Troy Savings' six county market area, and has 1.7 accounts with an
aggregate deposit balance of approximately $13,800.
Troy Savings 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 Troy Savings' market area or local institutions
that have recently been acquired by larger out-of-market institutions. Troy
Savings has served individuals, families and businesses in its six county market
area for over 175 years, and Troy Savings maintains a highly visible role in its
communities by participating in and sponsoring charities and charitable events.
Many of Troy Savings' employees, including its senior officers and department
managers, serve on civic and community boards. The Troy Savings Bank Music Hall,
located in Troy Savings' headquarters building, hosts many concerts and other
events each year. Troy Savings' four most senior officers, including the
President and Chief Executive Officer, have been with Troy Savings for a
combined 55 years, and have worked in Troy Savings' market area for over 90
years. Many of Troy Savings' officers have come to work for Troy Savings after
working for its competitors which were acquired by or merged with out-of-market
financial institutions.
Troy Savings is subject to regulation, examination and supervision by the
FDIC and the New York State Banking Department ("NYSBD"), and is a member of the
Federal Home Loan Bank System ("FHLB System"). Troy Savings' deposits are
insured by the FDIC to the maximum extent provided by law.
MARKET AREA
Troy Savings currently operates 14 full service banking offices, including
one branch in a local supermarket, in a six county market. Troy Savings' 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 Troy Savings' market area.
The New York state government employs approximately 53,000 people in Troy
Savings' market area, and the 10 largest employers in Albany and Rensselaer
Counties employ almost 37,000 workers. Troy Savings' 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 Troy Savings' market area has decreased from 6.95% to a
current rate of 3.65%.
LENDING ACTIVITY
Troy Savings focuses its lending activity primarily on the origination of
residential and commercial real estate loans, commercial business loans and
consumer loans. The types of loans that Troy Savings may originate are subject
to federal and state law and regulations. Interest rates charged by Troy Savings
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
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<PAGE> 64
committees, depending upon the size of the loan, and Troy Savings responds to
all loan requests in a prompt and timely manner.
Loan Portfolio Composition. At September 30, 1998, Troy Savings' 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.
Troy Savings' 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 Troy Savings' market area, as well as
secured home equity and home improvement loans. As of September 30, 1998, Troy
Savings' largest single family residential mortgage loan had an outstanding
balance of $796,000. As of that date, the typical residential mortgage loan held
by Troy Savings in its portfolio had an average principal balance of
approximately $80,000, an initial loan-to-value ("LTV") ratio of 80% and was
secured by a detached, single family home.
The commercial real estate loan portfolio totaled $166.2 million, or 35.7%
and 23.2% of Troy Savings' loans and total assets, respectively, at September
30, 1998. Approximately 72.3% of the loans are secured by properties located in
Troy Savings' 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. Troy
Savings' 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 Troy Savings had 47 loans with outstanding balances of more
than $1.0 million at September 30, 1998. Troy Savings' 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 Troy Savings has
had a seven year relationship.
The commercial business loan portfolio totaled $45.2 million, or 9.7% of
Troy Savings' 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. Troy
Savings' 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.
Troy Savings' 20 largest commercial business loans at that date ranged in terms
of total exposure, including outstanding balances and unfunded commitments, from
$1.2 million to $8.0 million.
The consumer loan portfolio totaled $42.0 million, or 9.0% of Troy Savings'
loans, and 5.9% of total assets, at September 30, 1998. Troy Savings' 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. Troy Savings' home equity lines of
credit and Creative Loans represented 20% and 31% of Troy Savings' consumer loan
portfolio, respectively, at September 30, 1998.
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<PAGE> 65
The following table presents the composition of Troy Savings' 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>
<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>
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<PAGE> 66
The following table presents, at September 30, 1998, the dollar amount of
all loans in Troy Savings' 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>
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<PAGE> 67
Loan Maturity and Repricing. The following table shows the contractual
maturities of Troy Savings' 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>
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<PAGE> 68
Loan Originations and Sales. The following table presents Troy Savings'
loan originations, sales and principal repayments for the periods indicated.
<TABLE>
<CAPTION>
HOME
REAL ESTATE EQUITY
--------------------------------------- COMMERCIAL LINES OF OTHER
RESIDENTIAL COMMERCIAL CONSTRUCTION BUSINESS CREDIT CONSUMER
----------- ---------- ------------ ---------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance as of September 30, 1995................. $199,557 $171,830 $ 9,354 $ 19,038 $ 8,620 $ 11,140
Add: Loan originations, other advances, and
purchases.................................. 47,928 25,443 18,692 51,975 1,291 6,435
Less: Principal repayments, sales,
charge-offs, transfers to OREO and other
reductions................................. (41,135) (5,649) (15,047) (46,251) (524) (4,416)
-------- -------- -------- -------- ------- --------
Balance as of September 30, 1996................. 206,350 191,624 12,999 24,762 9,387 13,159
Add: Loan originations, other advances, and
purchases.................................. 36,080 30,566 24,407 51,206 997 17,613
Less: Principal repayments, sales,
charge-offs, transfers to OREO and other
reductions................................. (24,089) (37,629) (21,898) (46,007) (501) (10,233)
-------- -------- -------- -------- ------- --------
Balance at September 30, 1997.................... 218,341 184,561 15,508 29,961 9,883 20,539
Add: Loan originations, other advances, and
purchases.................................. 79,360 27,432 24,662 78,619 507 19,987
Less: Principal repayments, sales,
charge-offs, transfers to OREO and other
reductions................................. (84,094) (45,807) (30,118) (63,424) (1,815) (7,081)
-------- -------- -------- -------- ------- --------
Balance at September 30, 1998.................... $213,607 $166,186 $ 10,052 $ 45,156 $ 8,575 $ 33,445
======== ======== ======== ======== ======= ========
<CAPTION>
NET
DEFERRED FEES
AND UNEARNED TOTAL
SUBTOTAL DISCOUNTS LOANS(1)
--------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance as of September 30, 1995................. $ 419,539 $(790) $ 418,749
Add: Loan originations, other advances, and
purchases.................................. 151,764 151,764
Less: Principal repayments, sales,
charge-offs, transfers to OREO and other
reductions................................. (113,022) (113,022)
--------- ---------
Balance as of September 30, 1996................. 458,281 (684) 457,597
Add: Loan originations, other advances, and
purchases.................................. 160,869 160,869
Less: Principal repayments, sales,
charge-offs, transfers to OREO and other
reductions................................. (140,357) (140,357)
--------- ---------
Balance at September 30, 1997.................... 478,793 (501) 478,292
Add: Loan originations, other advances, and
purchases.................................. 230,567 230,567
Less: Principal repayments, sales,
charge-offs, transfers to OREO and other
reductions................................. (232,339) (232,339)
--------- ---------
Balance at September 30, 1998.................... $ 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.
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<PAGE> 69
Troy Savings generally does not purchase loans from other financial
institutions. Troy Savings 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 Troy Savings has sold substantially all of its 15- and
30-year conforming fixed rate mortgage loans into the secondary mortgage market.
During 1998 and 1997 Troy Savings sold $44.5 million and $13.4 million of
mortgage loans into the secondary mortgage market. In late fiscal year 1998,
Troy Savings began to hold certain 15-year fixed rate mortgage loans in its loan
portfolio. In order to reduce the interest rate risk associated with mortgage
loans held for sale, as well as outstanding loan commitments and uncommitted
loan applications with rate lock agreements which are intended to be held for
sale, Troy Savings enters into formal commitments to sell loans in the secondary
market, and may also enter into option and delivery agreements. Troy Savings
typically retains servicing rights on loans sold in order to generate fee
income. As of September 30, 1998, Troy Savings was servicing mortgage loans for
others, with an aggregate outstanding principal balance of $195.7 million.
The following is a more detailed discussion of Troy Savings' current
lending practices.
Single family Residential Lending. During the year ending September 30,
1998, Troy Savings originated $79.4 million of single family residential real
estate loans. Substantially all of Troy Savings' residential mortgage loans were
originated through FMB, Troy Savings' mortgage banking subsidiary. FMB currently
employs six loan counselors who are responsible for developing Troy Savings'
mortgage business by meeting with referrals, networking with representatives of
the local real estate industry and sponsoring home buying seminars. In addition,
Troy Savings' CSSRs are trained to refer potential mortgage customers to FMB.
Although FMB meets with applicants and assists with the application process,
Troy Savings 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 Troy Savings.
Troy Savings currently makes a variety of fixed rate and adjustable rate
("ARMs") mortgage loans which are secured by one- to four-family residences
located in Troy Savings' six county market area. Troy Savings offers mortgage
loans that conform to FreddieMac guidelines, as well as jumbo loans, which
presently are loans in amounts over $227,150, and loans with other
non-conforming features. Troy Savings will underwrite a single family
residential mortgage loan with an LTV ratio of up to 95% with private mortgage
insurance, and Troy Savings' fixed rate mortgages generally have maturities of
10 to 30 years.
Troy Savings offers a variety of ARM programs based on market demand. Troy
Savings generally amortizes an ARM over 30 years. On select ARMs, Troy Savings
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 Troy Savings' 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, Troy Savings 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. Troy Savings requires borrowers who obtain mortgage loans
with an LTV ratio greater than 80% to obtain private mortgage insurance in an
amount sufficient to reduce Troy Savings' exposure to not more than 80% of the
lower of the purchase price or appraised value. In addition, Troy Savings
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
Troy Savings include due-on-transfer clauses which provide Troy Savings with the
contractual right to deem the loan immediately due and payable, in most
instances, if the borrower transfers ownership of the property without
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<PAGE> 70
Troy Savings' consent. Troy Savings' 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 Troy Savings' 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 Troy Savings'
communities, Troy Savings 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.
Troy Savings typically sells the SONYMA loans back to SONYMA for sale in the
secondary market. Troy Savings 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.
Troy Savings participates in the Capital District Community Loan and the FHLB
Home Buyer's Club. In the past five years, Troy Savings 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 Troy Savings' portfolio of residential mortgage loan
products, Troy Savings 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, Troy Savings
originated $2.8 million of home equity mortgage loans. As of September 30, 1998,
the average size of Troy Savings' outstanding home equity mortgage loans in its
residential mortgage loan portfolio was $20,000.
Construction Lending. Troy Savings offers residential construction loans
to individuals who are constructing their own homes in Troy Savings' market
area. Generally, the builders utilized by Troy Savings' construction loan
borrowers are ones with whom Troy Savings is familiar and has a long-standing
relationship. Troy Savings' loan administration group monitors the periodic
disbursements of all construction loans, and before advances are made Troy
Savings' independent appraisers provide reports comparing the progress of the
construction to the preconstruction schedule. In many cases, Troy Savings
converts construction loans to traditional residential or commercial mortgage
loans, as the case may be, following completion of construction. As a result,
Troy Savings would report such loans as residential or commercial mortgage
loans, respectively. During the year ended September 30, 1998, Troy Savings
originated $24.7 million of construction loans. As of September 30, 1998, Troy
Savings had $10.1 million of commercial real estate construction loans
outstanding, or 2.16% of Troy Savings' loans and 1.4% of total assets.
Troy Savings' construction loans generally have terms of up to six months,
and require payments of interest only. If construction is not completed on
schedule, Troy Savings charges the borrower additional fees in connection with
an extension of the loan. Troy Savings' 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. Troy Savings
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 Troy Savings may be
confronted with a project that, when completed, has a value which is
insufficient to assure full repayment of the loan.
Troy Savings also makes construction loans on commercial real estate
projects where the borrowers are well known to Troy Savings and have the
necessary liquidity and financial capacity to support the projects through to
completion, and where the source of permanent financing, either Troy Savings or
another institution, can be verified. All commercial real estate construction
lending is done on a recourse basis. At September 30, 1998, Troy Savings had
$10.1 million in outstanding commercial real estate construction loans.
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<PAGE> 71
Commercial Real Estate Lending. Troy Savings 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%, respectively, of Troy Savings' 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. At
September 30, 1998, Troy Savings' 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 buildings
owned by non-profit organizations; 4.7% in the hospitality industry; and 7.9% in
other property types.
The volume of Troy Savings' commercial real estate lending has been
relatively consistent over the last three years. Troy Savings 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 Troy Savings' commercial real
estate lending marketing effort, Troy Savings' 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, Troy Savings' commercial real estate
loan officers are responsible for the underwriting of commercial real estate
loans. Troy Savings' 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, Troy Savings
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%.
Troy Savings 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
Troy Savings' 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 Troy Savings' 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, Troy Savings 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 Troy Savings' commercial
real estate portfolio to confirm Troy Savings' assigned risk rating and to
review Troy Savings' overall monitoring of the loan portfolio.
Commercial Business Lending. Since 1993, Troy Savings has actively sought
to originate commercial business loans in its market area. During the year-ended
September 30, 1998, Troy Savings originated $50.9 million of commercial business
loans. Troy Savings' commercial loans generally range in size up to $2.5
million, and all of the borrowers are located within Troy Savings' market area.
Troy Savings 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 Troy Savings' outstanding commercial loan portfolio consisted of variable
rate loan products. As a general rule, Troy Savings sets the interest rates on
its loans based on Troy Savings' prime rate or other index rates, plus a
premium, and its variable-rate loans reprice at least every 90 days. Troy
Savings' commercial loans includes loans used for equipment financing, working
capital and accounts receivable, and some of Troy Savings' outstanding loans are
to a diverse customer base which includes manufacturers, wholesalers, retailers,
service providers, educational institutions and government funded entities.
Troy Savings 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 Troy Savings' commercial
loan products by focusing on Troy Savings' competitive pricing, Troy
52
<PAGE> 72
Savings' reputation for service and Troy Savings' ties to the local business
communities. In many cases, Troy Savings' senior management, including the
President, will meet with prospective borrowers.
Troy Savings also has a small business lending program whereby Troy Savings
lends money to small, locally owned and operated businesses. During the
year-ending September 30, 1998, Troy Savings originated 146 new small business
loans of up to $50,000, and as of September 30, 1998, Troy Savings had over $2.3
million of such loans outstanding. Many of Troy Savings' small business loans
are secured by cash collateral or marketable securities or are guaranteed by the
Small Business Administration.
In addition to developing business, Troy Savings' commercial loan officers
are responsible for the underwriting of the commercial loans and the monitoring
of the ongoing relationship between the borrower and Troy Savings. 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 Troy
Savings' Commercial Loan Credit Committee, and loans in excess of $1.0 million
require approval of the Loan Committee of the Board of Trustees. Troy Savings'
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, Troy Savings 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 Troy
Savings' commercial loans, Troy Savings employs the same risk rating system as
is used by Troy Savings' 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, Troy Savings assigns a
risk rating.
Troy Savings 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, Troy Savings 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 Troy Savings' lines of credit expire every 12 months, or five
months after the borrower's fiscal year end, and the borrower is required to
renew the line of credit at such time, Troy Savings, in effect, reunderwrites
the loan annually. Because a term loan often includes a line of credit, the
status of the borrower and loan is reviewed annually because of the line of
credit review. In all reviews, Troy Savings 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 Troy Savings' residential mortgage
and construction loans, Troy Savings 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 Troy
Savings' consumer lending program is to maintain a profitable loan portfolio and
to serve the credit needs of Troy Savings' customers and the communities in
which it does business, while providing for adequate liquidity, diversification
and safe and sound banking practices.
Troy Savings 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%. Troy Savings' Creative Loans begin with a
modest below market interest rate which increases each year, and are generally
secured by personal property and do not carry prepayment penalties. The average
balance on Troy Savings' Creative Loans for fiscal 1998 was $13.8 million.
Troy Savings' fixed rate consumer loans are typically made to finance the
purchase of new or used automobiles. In such cases, Troy Savings 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. Troy Savings also offers unsecured lines of credit or overdraft
protection to credit qualified depositors who maintain checking accounts with
Troy Savings. In addition to covering overdrafts on checking accounts, these
unsecured lines of credit are accessible to borrowers from ATMs throughout the
world.
53
<PAGE> 73
Troy Savings markets its consumer credit products through its branches,
local advertisements and direct mailings. Applications can be completed at any
branch of Troy Savings, and in most cases, Troy Savings 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 Troy Savings' 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 Troy Savings' 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 Troy Savings to
monitor Troy Savings' loan portfolio to anticipate and address potential and
actual delinquencies. The procedures taken by Troy Savings 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, Troy Savings 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. Troy Savings' 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,
Troy Savings does not accrue interest on loans more than 90 days past due. Troy
Savings' procedures for single family residential loans which have previously
been sold by Troy Savings but which Troy Savings currently services are
identical during the first 60 days. After 60 days, Troy Savings 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.
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<PAGE> 74
The following table sets forth Troy Savings' delinquent loans at the dates
indicated.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------------------------- -------------------------------------------
60-89 90 DAYS OR MORE 60-89 90 DAYS OR MORE
-------------------- -------------------- -------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential mortgage............ 10 $ 710 42 $ 2,811 20 $1,500 36 $ 1,850
Commercial mortgage............. 2 342 8 6,194 2 2,027 9 4,004
Construction.................... -- -- -- -- -- -- -- --
-- ------ -- -------- -- ------ -- --------
Total real estate loans.... 12 1,052 50 9,005 22 3,527 45 5,854
-- ------ -- -------- -- ------ -- --------
Commercial business................. 3 11 5 215 -- -- 7 1,017
-- ------ -- -------- -- ------ -- --------
Consumer loans:
Home equity lines of credit..... -- -- 7 245 -- -- 4 180
Other consumer.................. 3 9 14 50 -- -- 9 41
-- ------ -- -------- -- ------ -- --------
Total consumer loans....... 3 9 21 295 -- -- 13 221
-- ------ -- -------- -- ------ -- --------
Total loans.............. 18 1,072 76 9,515 22 3,527 65 7,092
== ====== == ======== == ====== == ========
Total delinquent loans to total
loans............................. 2.27% 2.24%
======== ========
Total loans......................... $465,581 $474,589
======== ========
<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 SEPTEMBER 30, 1994
------------------------------------------- -------------------------------------------
60-89 90 DAYS OR MORE 60-89 90 DAYS OR MORE
-------------------- -------------------- -------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE OF LOANS BALANCE
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential mortgage............ 22 $1,316 35 $ 2,699 18 $ 780 27 $ 2,125
Commercial mortgage............. 1 37 14 4,854 7 2,454 12 5,097
Construction.................... 1 1,200 1 116 1 1,200 -- --
-- ------ -- -------- -- ------ -- --------
Total real estate loans.... 24 2,553 50 7,669 26 4,434 39 7,222
-- ------ -- -------- -- ------ -- --------
Commercial business................. 3 80 10 548 2 424 17 1,240
-- ------ -- -------- -- ------ -- --------
Consumer loans:
Home equity lines of credit..... 2 106 -- -- 3 191 -- --
Other consumer.................. 5 26 3 35 2 2 1 --
-- ------ -- -------- -- ------ -- --------
Total consumer loans....... 7 132 3 35 5 193 1 --
-- ------ -- -------- -- ------ -- --------
Total loans.............. 34 2,765 63 8,252 33 5,051 57 8,462
== ====== == ======== == ====== == ========
Total delinquent loans to total
loans............................. 2.67% 3.50%
======== ========
Total loans......................... $412,912 $386,018
======== ========
</TABLE>
55
<PAGE> 75
Classified Assets. Troy Savings' 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, Troy Savings had classified $15.5 million and $811,000 of assets as
"substandard" and "doubtful," respectively. At such date, Troy Savings did not
have any assets classified as "loss."
At September 30, 1998, Troy Savings 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 Troy Savings' 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 Troy Savings' 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 Troy Savings' 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 Troy
Savings' market area. The loan has been delinquent at various times.
In addition to classified assets, Troy Savings 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 Troy Savings 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, Troy Savings will not classify a loan which is
contractually past due 90 days or more as non-accruing if management determines
that the particular loan is well secured and in the process of collection. In
such cases, the loan is simply reported as "past due." Loans are removed from
non-accrual status when such loans become current as to principal and interest
or when, in the opinion of management, the loans are expected to be fully
collectible as to principal and interest. Troy Savings did not have any loans
classified as 90 days past due and still accruing interest at September 30,
1998. In certain cases, Troy Savings 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, Troy
Savings classified $2.1 million, or .29% of total assets, as TDRs.
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<PAGE> 76
Troy Savings classifies property that it acquires as a result of
foreclosure or settlement in lieu thereof as other real estate owned ("OREO").
Troy Savings 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, Troy Savings 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 presents 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>
For the fiscal years ended 1998, 1997 and 1996, the gross interest income
that would have been recorded had the non-accrual loans been on an accrual basis
or had the rate not been reduced with respect to the loans restructured in
trouble debt restructurings amounted to $591,000, $528,000, and $825,000,
respectively. The amounts included in interest income on these loans were
$411,000, $99,000, and $336,000 for the fiscal years ended 1998, 1997, and 1996,
respectively.
Allowance for Loan Losses. In originating loans, there is a substantial
likelihood that loan losses will be experienced. The risk of loss varies with,
among other things, general economic conditions, the type of loan, the
creditworthiness of the borrower and, in the case of a collateralized loan, the
quality of the collateral securing the loan. In an effort to minimize loan
losses, Troy Savings monitors its loan portfolio by reviewing delinquent loans
and taking appropriate measures. In addition, with respect to Troy Savings'
commercial real estate and commercial business loans, Troy Savings closely
watches all loans with a risk rating that indicates potential adverse factors.
Moreover, on an annual basis, Troy Savings reviews
57
<PAGE> 77
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. Troy Savings' outside consultant periodically reviews the
credit quality of the loans in Troy Savings' commercial real estate and
commercial business loan portfolios, and, together with Troy Savings' 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 Troy Savings' loan portfolio,
including the risks inherent in the portfolio, historical loan loss experience,
general economic conditions and trends and other factors, Troy Savings 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. The provision for loan losses is based upon a number of factors,
including the historical loan loss experience, changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of specific problem
loans, industry trends, and general economic conditions that may affect
borrowers' abilities to pay. Loans are charged against the allowance for loan
losses when management believes that the collectibility of all or a portion of
the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb 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, Troy Savings' 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 Troy
Savings' market area, Troy Savings 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. Troy Savings will continue to monitor and modify its allowance for loan
losses as conditions dictate.
58
<PAGE> 78
The following table is a summary of the activity in Troy Savings' 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>
59
<PAGE> 79
The following table presents Troy Savings' 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>
AT SEPTEMBER 30,
------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ ---------- -------- ------ ---------- -------- ------ ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <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% $ 372 8.64% 44.92%
Commercial mortgage.... 3,964 47.99 35.69 3,240 50.39 38.89 2,624 60.97 42.01
Construction........... 131 1.59 2.16 127 1.98 3.27 149 3.46 2.85
Commercial business
loans.................... 1,503 18.20 9.70 1,275 19.84 6.31 801 18.61 5.43
Home equity lines of
credit................... 31 .37 1.84 31 .48 2.08 31 .72 2.06
Other consumer loans....... 488 5.91 7.18 278 4.32 4.33 96 2.23 2.88
Net deferred loan costs and
unearned discount........ -- -- (.07) -- -- (.11) -- -- (.15)
Unallocated................ 827 10.01 -- 600 9.33 -- 231 5.37 --
------ ----- ----- ------ ----- ----- ------ ----- -----
Total.............. $8,260 100% 100% $6,429 100% 100% $4,304 100% 100%
====== ===== ===== ====== ===== ===== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
AT 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
Troy Savings separates its securities portfolio into securities available
for sale and investment securities held to maturity. At September 30, 1998, Troy
Savings 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. Troy Financial'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
60
<PAGE> 80
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, Troy Savings did not hold any
securities considered to be trading securities. As a member of the FHLB of New
York, Troy Savings 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.
Troy Savings' investment policy focuses investment decisions on maintaining
a balance of high quality, diversified investments. In making its investments,
Troy Savings also considers liquidity, the potential need for collateral to be
used for pledging purposes, and earnings. Investment decisions are made by Troy
Savings' Trust and Investment Officer who has authority to purchase, sell or
trade securities qualifying as eligible investments under applicable law and in
conformance with Troy Savings' investment policy. In addition, Troy Savings'
director of municipal finance is authorized to purchase municipal securities for
Troy Savings' portfolio.
Under Troy Savings' investment policy, securities eligible for Troy Savings
to purchase include: U.S. Treasury Obligations, securitized loans from Troy
Savings' 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 presents the composition of Troy Savings' 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 1996
------------------- ------------------- -------------------
CARRYING PERCENT CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL VALUE OF TOTAL
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <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% $ 81,053 54.43%
Obligations of states and
political subdivisions....... 51,681 26.13 20,833 17.72 1,548 1.04
Mortgage-backed securities..... 3,744 1.89 4,653 3.96 5,374 3.61
Corporate debt securities...... 16,984 8.59 27,168 23.11 53,959 36.23
Mutual funds and marketable
equity securities............ 4,822 2.44 3,971 3.38 3,704 2.49
Non-marketable equity
securities................... 3,307 1.68 3,307 2.81 3,279 2.20
-------- ------ -------- ------ -------- ------
Total securities available
for sale................ 197,758 100.00% 117,552 100.00% 148,917 100.00%
-------- ------ -------- ------ -------- ------
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% 3,012 66.71%
Corporate and other debt
securities................... 1,503 43.15 1,503 37.58 1,503 33.29
-------- ------ -------- ------ -------- ------
Total investment
securities held to
maturity................ 3,483 100.00% 4,000 100.00% 4,515 100.00%
-------- ------ -------- ------ -------- ------
Total securities portfolio.......... $201,241 $121,552 $153,432
======== ======== ========
</TABLE>
61
<PAGE> 81
The following table presents information regarding the carrying value,
weighted average yields and contractual maturities of Troy Savings' 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 MORE THAN FIVE
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <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 7.95%
Obligations of states and
political
subdivisions(1)............ 27,656 5.79 23,160 6.22 273 6.34
Mortgage-backed securities... -- -- 365 6.67 1,410 7.10
Corporate debt securities.... 3,024 5.61 13,960 5.55 -- --
-------- ------- ------
Total due................ $145,852 5.21% $39,485 5.92% $1,731 7.01%
======== ======= ======
Investment securities held to
maturity (amortized cost):
Mortgage-backed securities... -- -- -- -- 560 8.20
Corporate debt securities.... -- -- -- -- -- --
-------- ------- ------
Total due................ -- -- -- -- $ 560 8.20%
======== ======= ======
<CAPTION>
AT SEPTEMBER 30, 1998
-----------------------------------------
MORE THAN
TEN YEARS TOTAL
------------------- -------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available for sale
(fair value):
U.S. Government securities
and agency obligations..... $ -- --% $117,220 5.07%
Obligations of states and
political
subdivisions(1)............ 592 6.39 51,681 5.99
Mortgage-backed securities... 1,969 7.37 3,744 7.19
Corporate debt securities.... -- -- 16,984 5.56
------ --------
Total due................ $2,561 7.24% $189,629 5.40%
====== ========
Investment securities held to
maturity (amortized cost):
Mortgage-backed securities... 1,420 8.60 1,980 8.49
Corporate debt securities.... 1,503 7.14 1,503 7.19
------ --------
Total due................ $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%.
The following is a more detailed discussion of Troy Savings' available for
sale and investment securities held to maturity portfolios.
U.S. Government Securities and Agency Obligations. Troy Savings invests in
U.S. Treasury securities, and also debt securities and mortgage-backed
securities issued by government agencies and government-sponsored agencies such
as FannieMae, the FHLBs, GinnieMae and FreddieMac. At September 30, 1998, Troy
Savings' 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, Troy Savings also held, as
available for sale, $71.9 million of non-government guaranteed bonds issued by
the FHLBs, 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." Troy Savings' investment policy
limits the amount of U.S. government and agency obligations to 17% of Troy
Savings' total assets or approximately $121.8 million.
Corporate Debt Securities. Troy Savings' 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 Troy
Savings' 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. Troy Savings' investment policy limits the amount of corporate
debt securities to 25% of Troy Savings' Investment Securities portfolio or
approximately $179.2 million.
Municipal Securities. At September 30, 1998, $51.7 million, carrying
value, of Troy Savings' 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 obligations 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, Troy Savings held
$18.5 million in bonds of various municipalities throughout the United States.
Troy Savings' 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, in some cases, state income taxes.
Troy Savings' investment
62
<PAGE> 82
policy limits the amount of municipal securities to 15% of Troy Savings' total
assets or approximately $107.5 million. Following the conversion, Troy Savings
expects to invest in additional municipal securities.
Equity Securities. At September 30, 1998, Troy Savings' 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 stock, which Troy Savings is required to hold as a member institution.
At September 30, 1998, Troy Savings 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. Troy Savings' investment
policy limits Troy Savings' investments in common and preferred stock and mutual
funds to 3% of Troy Savings' total assets, or $21.5 million. The investment
policy presently limits Troy Savings' 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
Troy Savings' 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, Troy Savings borrows from the FHLB of New York to
fund its operations.
Deposits. Troy Savings offers a variety of deposit accounts with a range
of interest rates and terms. Troy Savings' deposit accounts consist of interest
bearing checking, non-interest bearing checking, business checking, regular
savings, money market savings and time deposit accounts. The maturities of Troy
Savings' time deposit accounts range from three months to five years. In
addition, Troy Savings offers IRAs and Keogh accounts. To enhance its deposit
products and increase its market share, Troy Savings offers overdraft protection
and direct deposit for its retail banking customers and cash management services
for its business customers. In addition, Troy Savings offers a low-cost interest
bearing checking account service to its customers over 55 years of age. Rates on
deposit products are set by Troy Savings' ALCO Committee.
At September 30, 1998, Troy Savings' 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, which is 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, Troy Savings 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.
The flow of deposits is influenced significantly by general economic
conditions, changes in interest rates and competition. Troy Savings' deposits
are obtained primarily from the six counties in which Troy Savings' branches are
located. Troy Savings 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 Troy Savings' ability to attract and
retain deposits. Troy Savings 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, Troy Savings does not use brokers to
obtain deposits, and at September 30, 1998, Troy Savings had no brokered
deposits.
63
<PAGE> 83
The following table presents Troy Savings' deposit flow schedule for the
periods indicated.
<TABLE>
<CAPTION>
MONEY NOW/ TIME TOTAL NO.
SAVINGS MARKETS SUPER NOW DEPOSITS DEMAND TOTAL OF ACCOUNTS
-------- ------- --------- -------- ------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AS OF SEPTEMBER 30, 1995......... $209,920 $11,280 $66,498 $249,491 $15,273 $552,462 72,531
Net deposits (withdrawals)........... (8,647) 2,078 1,967 (10,130) 4,319 (10,413)
Interest credited.................... 6,798 379 1,547 13,833 -- 22,557
-------- ------- ------- -------- ------- --------
BALANCE AS OF SEPTEMBER 30, 1996......... 208,071 13,737 70,012 253,194 19,592 564,606 71,458
Net deposits (withdrawals)........... (15,790) (1,049) (161) (48) 1,968 15,080
Interest credited.................... 6,648 433 1,591 14,199 -- 22,871
-------- ------- ------- -------- ------- --------
BALANCE AS OF SEPTEMBER 30, 1997......... 198,929 13,121 71,442 267,345 21,560 572,397 70,185
Net deposits (withdrawals)........... (6,871) (2,156) 3,057 (25,432) 9,556 (17,534)
Interest credited.................... 6,451 431 1,696 14,761 -- 23,339
-------- ------- ------- -------- ------- --------
BALANCE AS OF SEPTEMBER 30, 1998......... $198,509 $15,708 $76,195 $256,674 $31,116 $578,202 70,057
======== ======= ======= ======== ======= ========
</TABLE>
The following table presents the dollar amount and percent of deposits in
the various types of deposit programs offered by Troy Savings as of 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>
Savings accounts.................... $198,509 34.33% $198,929 34.75% $208,071 36.85%
-------- ----- -------- ----- -------- -----
Time deposit accounts:
2.00 - 2.99%................... 624 0.11 257 0.04 252 0.05
3.00 - 3.99%................... 58 0.01 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 0.47 2,578 0.45 2,500 0.44
8.00 - 8.99%................... 12 -- 53 0.01 65 0.01
Over 9.00%..................... 117 0.02 107 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>
64
<PAGE> 84
The following table sets forth, by various rate categories, the amount of
Troy Savings' time deposit accounts outstanding by maturities at the dates
indicated.
<TABLE>
<CAPTION>
AMOUNTS 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 deposit 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, Troy Savings had outstanding $256.7 million in time
deposit accounts, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
- --------------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
TIME DEPOSITS 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............................................. $223,225 5.41%
========
TIME DEPOSITS MORE THAN $100,000:
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............................................. $ 33,449 5.39%
========
</TABLE>
Borrowings. The principal source of Troy Savings' borrowing is through
FHLB advances and repurchase agreements. The FHLB system functions in a reserve
credit capacity for member savings associations and certain other home financing
institutions. Members of a FHLB are required to own stock in the FHLB, and, at
September 30, 1998, Troy Savings owned approximately $3.2 million of FHLB stock.
Troy Savings 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, Troy Savings 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, Troy Savings 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. Troy Savings 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 Troy Savings offers a full range of services,
including living trusts, executor services, testamentary trusts, employee
benefit plan management, custody services and investment
65
<PAGE> 85
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 Troy Savings' board of
trustees who rotate on a semi-annual basis. The Trust Department markets its
services through its trust officers who call on Troy Savings' existing
customers, Troy Savings' 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 Troy Savings' rate-sensitive interest
income.
SAVINGS BANK LIFE INSURANCE
Since 1939, Troy Savings, 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 Troy Savings and,
while the SBLI does not directly affect Troy Savings' earnings, management
believes that offering SBLI is beneficial to Troy Savings' relationship with its
customers. The SBLI pays its own expenses and reimburses Troy Savings for
expenses incurred on its behalf.
SUBSIDIARY ACTIVITIES
The following are descriptions of Troy Savings' wholly owned subsidiaries,
which, following the conversion, will be indirectly owned by Troy Financial.
The Family Investment Services Co., Inc. The Family Investment Services
Co. ("FISC"), which was incorporated in May 1989, is Troy Savings' 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
Troy Savings' existing customers who seek alternatives to traditional financial
institution savings products. As a complement to Troy Savings' 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 Troy Savings' branches to facilitate referrals from the CSSRs
and branch managers, as well as one officer who assists customers with
investment decisions and trading. As of September 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
Troy Savings' wholly owned mortgage banking subsidiary. Troy Savings originates
the majority of its residential real estate and residential construction loans
through FMB.
Other Subsidiaries. Troy Savings 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, Troy Savings' foreclosed or
purchased real estate.
COMPETITION
Troy Savings 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. Troy Savings
66
<PAGE> 86
competes for deposits with other savings banks, savings and loan associations,
commercial banks, credit unions, money market and other mutual funds, insurance
companies, brokerage firms and other financial institutions, many of which are
substantially larger in size and have greater financial resources than Troy
Savings.
Troy Savings' 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 Troy Savings' market area. Troy Savings' principal methods of competition
include providing competitive loan and deposit pricing, personalized customer
service, access to senior management of Troy Savings and continuity of banking
relationships.
Although Troy Savings is subject to competition from other financial
institutions, some of which have much greater financial and marketing resources,
Troy Savings believes it benefits by its position as a community oriented
savings bank with a long history of serving its market area. Management believes
that the variety, depth and stability of the communities which Troy Savings
services support the service and lending activities conducted by Troy Savings.
PROPERTIES
Troy Savings currently conducts its business through 14 full-service
banking offices. The following table sets forth Troy Savings' 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
Latham, NY 12110
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
(continued on following page)
</TABLE>
67
<PAGE> 87
<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>
Schenectady Office............................. Owned 1987 N/A 233,496
1626 Union Street
Schenectady, NY 12309
Clifton Park/Halfmoon Office................... Owned 1972 N/A 199,842
Routes 9 and 146(2)
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.
(2) In January 1999, the branch relocated to 2 Tower Way near the Crossings.
LEGAL PROCEEDINGS
Troy Savings 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 Troy Savings.
PERSONNEL
As of September 30, 1998, Troy Savings had 215 full-time employees and 36
part-time employees. The employees are not represented by a collective
bargaining unit, and Troy Savings believes that its relations with its employees
are good. Troy Savings offers various employee benefits, including medical,
dental and life insurance, and a pension and 401(k) savings plan.
REGULATION AND SUPERVISION
GENERAL
Troy Savings 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. Troy Savings is subject to extensive regulation by the NYSBD as
its chartering agency, and by the FDIC as the deposit insurer. After the
conversion, Troy Savings will be a New York-chartered stock savings bank with
deposits insured under the Bank Insurance Fund, and will continue to be subject
to extensive regulation by the NYSBD and the FDIC. Except as otherwise indicated
below, the discussion that follows of the regulations that currently apply to
Troy Savings will apply to the same extent to Troy Savings after the conversion.
Troy Savings 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
68
<PAGE> 88
and the FDIC conduct periodic examinations to assess Troy Savings' compliance
with various regulatory requirements, and to ascertain the condition of Troy
Savings and ensure that Troy Savings is being operated in a safe and sound
manner. 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. Troy Financial, 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 under the federal
securities laws. Any change in the regulations governing Troy Savings or Troy
Financial, whether by a bank regulatory agency or through legislation, could
have a material adverse impact on Troy Savings and Troy Financial and their
operations and stockholders.
The following is a summary of laws and regulations applicable to Troy
Savings and Troy Financial. The operations of Troy Savings and Troy Financial
may be affected by legislative and regulatory changes as well as by changes in
the policies of various regulatory authorities.
NEW YORK REGULATION OF TROY SAVINGS
Powers. Troy Savings gets its lending, investment and other powers
primarily from provisions of the New York Banking Law and regulations. Under
these laws and regulations, savings banks, including Troy Savings, 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 New York Banking Board. The exercise of these
lending, investment and other powers are limited by federal law and regulations.
See "-- Federal Regulation of Troy Savings" and "-- Activity Restrictions on
State-Chartered Banks."
Community Reinvestment Act. The New York Banking Law, like the provisions
of the federal Community Reinvestment Act ("CRA") discussed below, requires each
New York banking institution to serve the credit needs of its local community
("NY CRA"). Under the regulations, the NYSBD makes biennial community
reinvestment evaluations of each banking institution and assess each
institution's compliance with the NY CRA. Troy Savings' latest NY CRA rating was
"Outstanding."
Dividends. Under the New York Banking Law, Troy Savings 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 Troy Savings 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
of Banks ("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. 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.
FEDERAL REGULATION OF TROY SAVINGS
Capital Requirements. The FDIC has adopted risk-based minimum capital
regulations for insured state nonmember banks, such as Troy Savings. 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
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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, 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 these 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. Troy Savings
currently is not subject to any individually imposed minimum capital
requirements.
Failure to meet capital guidelines could subject Troy Savings 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 FDIC assesses Troy Saving's exposure to declines in the economic value
of the bank's capital due to changes in interest rates when assessing the bank's
capital adequacy. Under such a risk assessment, examiners will evaluate Troy
Savings' 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 the bank's interest rate risk management
process, the overall financial condition of the bank and the level of other
risks at the bank for which capital is needed. Institutions with significant
interest rate risk may be required to hold additional capital.
The following table shows Troy Savings' 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% $107,299 14.38% $29,845 4.0%
Tier 1 risk-based capital................... 70,114 14.02 107,299 20.68 20,755 4.0
Total risk-based capital.................... 76,368 15.27 113,553 21.88 41,509 8.0
</TABLE>
As the preceding table shows, Troy Savings exceeded the minimum capital
adequacy requirements at the date indicated.
Activity Restrictions on State-Chartered Banks. Section 24 of the Federal
Deposit Insurance Act generally limits the activities and investments of
state-chartered 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 law or the FDIC
determines that such activity or investment would pose no significant risk to
the Bank Insurance Fund. Any bank that held, at the time of passage of Section
24, 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 Section 24, Troy Savings received approval from the FDIC to
retain certain real estate investments until December 31, 1999.
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Enforcement. The FDIC has extensive enforcement authority over Troy
Savings. 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:
- insolvency;
- substantial dissipation of assets or earnings through violations of law
or unsafe or unsound practices;
- existence of an unsafe or unsound condition to transact business;
- 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
- insufficient capital.
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.
Deposit Insurance. Troy Savings is subject to quarterly payments on
semiannual insurance premium assessments for its FDIC deposit insurance. The
FDIC implements a risk-based deposit insurance assessment system. Deposit
insurance assessment rates currently are within a range of $0.00 to $0.27 per
$100 of insured deposits, depending on the assessment risk classification
assigned to each institution. Under current FDIC assessment guidelines, Troy
Savings expects that it will not incur any FDIC deposit insurance assessments
for the first half of 1999. However, the deposit insurance assessments imposed
by the FDIC are subject to change.
Troy Savings is subject to assessments for the payments on the bonds issued
in the late 1980's to recapitalize the former Federal Savings and Loan Insurance
Corporation. The annual rate of assessments for the payments on the FICO bonds
for the quarter beginning on January 1, 1999 was 1.22 basis points for
BIF-assessable deposits and 6.1 basis points for SAIF-assessable deposits.
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.
Community Reinvestment Act. Under the CRA, as implemented by FDIC
regulations, a savings bank has an 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 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.
The FDIC rates an institution based on its actual performance in meeting
community needs. The evaluation system focuses on a lending test, an investment
test, and a service test.
In its most recent examination for CRA performance, Troy Savings received
an "Outstanding" rating from the FDIC.
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Safety and Soundness Standards. Troy Savings 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:
- internal controls, information systems and internal audit systems;
- loan documentation;
- credit underwriting;
- interest rate exposure;
- asset growth and quality;
- earnings; and
- 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 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 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:
- restrict asset growth;
- require the institution to increase its ratio of tangible equity to
assets;
- restrict the rates of interest that the institution may pay; or
- take any other action that would better carry out the purpose of the
corrective action.
Troy Savings 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.
Prompt Corrective Action. Under the FDIC's prompt corrective action
regulations, insured institutions will be considered:
- "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),
- "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),
- "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
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composite CAMELS 1 in its most recent report of examination and is not
experiencing or anticipating significant growth),
- "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
- "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, Troy Savings 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 the FDIC. An undercapitalized institution
also is generally prohibited from increasing its average total assets, making
acquisitions, establishing any branches, or engaging in any new line of
business, except in accordance with an accepted capital restoration plan or with
the approval of the FDIC. In addition, the FDIC may take any other action that
it determines will better carry out the purpose of prompt corrective action
initiatives.
Dividend Restrictions. Troy Savings 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 Troy
Savings becomes "undercapitalized" under the "prompt corrective action"
initiatives of the FDIC, payment of dividends would be prohibited without the
prior approval of the FDIC. Troy Savings also could be subject to these dividend
restrictions if the FDIC determines that Troy Savings is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice.
Required Reserves. Under Federal Reserve regulations, Troy Savings 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)
and an initial reserve of $1,395,000 plus 10% (subject to adjustment 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) are exempted from the reserve 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 Troy Savings' interest-earning assets.
REGULATION OF TROY FINANCIAL
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:
- a bank holding company or,
- if the company is a banking institution, another banking institution, or
- each of two or more banking institutions.
An entity like Troy Financial 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 Troy Financial, however, establishes or
acquires a New York-chartered commercial bank and trust company, Troy Financial
will be a "bank holding company" for purposes of New York Banking Law.
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Federal Regulation. Following the consummation of the conversion, Troy
Financial 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 Troy Savings. See "-- Federal Regulation of Troy Savings -- Capital
Requirements." On a pro forma basis after the conversion, Troy Financial'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 Troy Financial 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. Troy Financial 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:
- making or servicing loans;
- performing certain data processing services;
- providing discount and full service brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed primarily to
promote community welfare; and
- acquiring a savings and loan association.
Troy Financial 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 Troy Financial'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 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 Troy Financial 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.
Under applicable regulations, Troy Financial will be restricted from
repurchasing any of its common stock issued in the conversion prior to the first
anniversary of the conversion without the prior approval of the New York
Superintendent and, if necessary, the FDIC. During the second and third years
after the conversion,
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Troy Financial may not acquire in excess of five percent of the common stock
during any 12-month period without the prior approval of the New York
Superintendent. In reviewing whether to permit stock repurchases, the New York
Superintendent will review, among other things, the financial condition and
capital structure of Troy Financial, and its prospects for future earnings.
ACQUISITION OF TROY FINANCIAL
New York Change in Bank Control Restrictions. The New York Banking Law
generally requires prior approval of the New York Banking Board before any
action is taken that causes any company to acquire direct or indirect control of
a banking institution that is organized in the State of New York. 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 Troy Financial's shares of common stock. Under the CBCA, the Federal Reserve
takes into consideration certain factors, including the financial and managerial
resources of the acquirer, the convenience and needs of the communities served
by Troy Financial and Troy Savings, 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 Troy Financial
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 Troy Financial, the ability to control in any
manner the election of a majority of Troy Financial's directors, or to otherwise
have the power to exercise a controlling influence over the management or
policies of Troy Financial.
FEDERAL HOME LOAN BANK SYSTEM
Troy Savings is a member of the FHLB System. The FHLB provides a central
credit facility primarily for member institutions. Troy Savings, as a member of
FHLB of New York, is required to acquire and hold shares of 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, Troy
Savings owned $3.2 million of FHLB 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, Troy Savings had $44.9
million of outstanding advances from the FHLB of New York.
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TAXATION
FEDERAL TAXATION
General. Troy Financial and Troy Savings 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 Troy Savings' 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 Troy
Savings or Troy Financial. Based on the Internal Revenue Service ("IRS") and New
York State statutes of limitations for tax examinations, Troy Savings 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 Troy Savings is discussed below. Before
enactment of the 1996 Act on August 20, 1996, Troy Savings could take a federal
income tax deduction for annual additions to its reserve for bad debts, within
specified formula limits. Troy Savings' 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 Troy Savings' actual loss experience (the "Experience Method"), or a
percentage equal to 8% of Troy Savings' 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. Troy Savings' deduction with respect to non-qualifying loans was
required to be computed under the Experience Method. Each year, Troy Savings
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, Troy Savings is not permitted to make additions to its
bad debt reserves for tax purposes. Instead, Troy Savings is required to utilize
the specific charge-off method for bad debts. In addition, Troy Savings is
required to recapture (i.e., take into income) over a six-year period the excess
of the balance 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,
Troy Savings' tax bad debt reserve exceeded the balance of the reserve as of
September 30, 1988 by $1.4 million and Troy Savings 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 Troy Savings makes "non-dividend
distributions" to Troy Financial, such distributions will be considered to have
been made from Troy Savings' 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 Troy Savings' taxable income. Non-dividend distributions is
defined as distributions in excess of Troy Savings' 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 Troy Savings' current or accumulated earnings
and profits will not be so included in Troy Savings' 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, Troy Savings makes a
non-dividend distribution to Troy Financial, 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
Troy Savings. Troy Savings 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
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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 Troy Savings, whether or not an
Alternative Minimum Tax ("AMT") is paid. Troy Savings does not expect to be
subject to the AMT.
Dividends Received Deduction. Troy Financial may exclude from its income
100% of dividends received from Troy Savings 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
Troy Financial and Troy Savings do not file a consolidated tax return, except
that if Troy Financial and Troy Savings own more than 20% of the stock of a
corporation distributing a dividend, then 80% of any dividends received may be
excluded.
MANAGEMENT OF TROY FINANCIAL CORPORATION
DIRECTORS OF TROY FINANCIAL CORPORATION
The Board of Directors of Troy Financial 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 information regarding the directors of Troy
Financial, each of whom will be an initial director upon completion of the
conversion and is currently a trustee of Troy Savings.
<TABLE>
<CAPTION>
AGE AS OF POSITIONS(S) HELD
NAME DECEMBER 31, 1998 WITH TROY FINANCIAL TERM 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>
The biographical information of each director is set forth below under
"Management of Troy Savings Bank -- Biographical Information." Initially the
directors of Troy Financial will not receive additional fees for their services
as directors of Troy Financial. See "Management of Troy Savings
Bank -- Compensation of Trustees" for a discussion of fees paid to trustees of
Troy Savings.
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EXECUTIVE OFFICERS OF TROY FINANCIAL
The executive officers of Troy Financial are the same as the executive
officers of Troy Savings. 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 shows
information regarding the executive officers.
<TABLE>
<CAPTION>
AGE AS OF POSITION(S) HELD
NAME DECEMBER 31, 1998 WITH TROY FINANCIAL AND BANK
- ---- ----------------- ----------------------------
<S> <C> <C>
Daniel J. Hogarty, Jr. ................ 59 Chairman of the Board of Troy
Financial; Trustee of Troy Savings;
President and Chief Executive Officer
Kevin M. O'Bryan....................... 49 Senior Vice President; Secretary
Michael C. Mahar....................... 51 Senior Vice President
Edward M. Maziejka, Jr. ............... 39 Vice President; Chief Financial Officer
</TABLE>
The biographical information for each executive officer is set forth below
under "Management of Troy Savings Bank -- Biographical Information."
Since the formation of Troy Financial, none of the executive officers,
directors or other personnel has received remuneration from Troy Financial.
Executive officers of Troy Financial will be compensated as described below
under "Management of Troy Savings Bank."
MANAGEMENT OF TROY SAVINGS BANK
TRUSTEES OF TROY SAVINGS BANK
The direction and control of Troy Savings has been vested in its Board of
Trustees. Upon consummation of the conversion, each of the current trustees of
Troy Savings will become directors of the stock-chartered Bank for terms that
expire in the same year as their respective terms on the Board of Troy
Financial. 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 shows information regarding the Board of Trustees of
Troy Savings.
<TABLE>
<CAPTION>
POSITIONS HELD
NAME WITH TROY SAVINGS TRUSTEE SINCE
- ---- ----------------- -------------
<S> <C> <C>
Daniel J. Hogarty, Jr. ................ President; Chief Executive Officer; Trustee 1985
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>
BIOGRAPHICAL INFORMATION
Trustees of Troy Savings
Daniel J. Hogarty, Jr. joined Troy Savings in 1985 and has been Troy
Savings' President, Chief Executive Officer and a trustee since that time. Mr.
Hogarty also serves as President and/or Director of nine of Troy Savings'
subsidiaries.
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<PAGE> 98
George H. Arakelian has served as a trustee of Troy Savings 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 Troy Savings 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 Troy Savings since 1980.
Dr. Fleming is an orthodontist practicing in Troy, New York.
Willie A. Hammett has served as a trustee of Troy Savings 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 Troy Savings 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 Troy Savings 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 Troy Savings since 1979. Mr.
O'Haire is President of Ryan & O'Haire Agency, Inc. located in Troy, New York.
Marvin L. Wulf has served as a trustee of Troy Savings since 1973. Mr. Wulf
is an Economic Development Specialist for the City of Troy, New York.
Executive Officers of Troy Savings who are not Trustees
Kevin M. O'Bryan joined Troy Savings in 1976 and is a Senior Vice President
and Troy Savings' Chief Credit Officer and Secretary. Mr. O'Bryan's primary
responsibilities include oversight of all of Troy Savings' lending departments.
Prior to his appointment as Senior Vice President and Chief Credit Officer in
1992, Mr. O'Bryan held numerous positions in Troy Savings' commercial mortgage
department. Mr. O'Bryan is also 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
Troy Savings. Mr. O'Bryan is also President and Director of Camel Hill
Corporation, 507 Height, and T.S. Capital Corp., which are also subsidiaries of
Troy Savings.
Michael C. Mahar joined Troy Savings in 1988 and is a Senior Vice President
of Troy Savings. Mr. Mahar's primary responsibilities include oversight of Troy
Savings' retail banking, deposit services, sales and marketing, and operations.
Prior to that appointment in 1992, Mr. Mahar was the director of Troy Savings'
commercial lending program.
Edward M. Maziejka, Jr. joined Troy Savings in 1988 and is Troy Savings'
Chief Financial Officer. Prior to that appointment in 1993, Mr. Maziejka was
Vice President of Financial Administration of Troy Savings. 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 Troy Savings. 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 Troy Savings.
MEETINGS AND COMMITTEES OF THE BOARDS OF TROY SAVINGS
The Board of Trustees of Troy Savings 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
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<PAGE> 99
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 Troy Savings 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, Troy Financial and Troy
Savings 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
Troy Savings' Bylaws require that a trustee retire at the end of the
calendar year in which the trustee reaches the age of 75. Troy Savings' 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 Troy Savings for at
least 20 years and who is at least 70 years old. Trustees Emeritus may attend
all 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
a majority vote of the Board of Trustees. Upon conversion, Trustees Emeritus
will receive the same meeting fees as trustees of Troy Savings.
HONORARY TRUSTEES
Troy Savings' 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 Troy Savings 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 $100,000.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
------------------------------
ANNUAL COMPENSATION(1) RESTRICTED
NAME AND ------------------------------ STOCK ALL OTHER
PRINCIPAL POSITIONS YEAR SALARY ($) BONUS ($) AWARDS ($)(2) OPTIONS (#)(2) COMPENSATION(3)
- ------------------- ---- ---------- --------- ------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Hogarty, Jr. .... 1998 $577,967(4) -- -- -- $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>
(continued on following page)
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<PAGE> 100
- ---------------
(1) 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.
(2) As a mutual institution, Troy Savings does not have any stock based plans.
Troy Financial does, however, intend to adopt such plans following the
conversion.
(3) Reflects matching contributions made by Troy Savings under a 401(k) plan.
(4) Includes deferred compensation of $98,000.
REPORT OF INDEPENDENT COMPENSATION CONSULTANT
Pursuant to the NYSBD's regulations governing the conversion, Troy Savings
must obtain the opinion of an independent compensation consultant as to whether
the total compensation for the executive officers, directors or trustees of Troy
Savings, 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. Troy Savings has
obtained two opinions from William M. Mercer, Incorporated, which provide that,
based upon public data of similarly situated publicly traded financial
institutions operating in the relevant markets as of December 18, 1998, with
respect to the total cash compensation (base salary and annual incentive) for
executive officers and total compensation for trustees of Troy Savings, such
compensation, viewed as a whole and on an individual basis, is reasonable in
comparison to the total compensation (base salary, annual incentives and
estimated present value of long-term incentives) provided by 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
Upon the conversion, Troy Financial and Troy Savings intend to enter into
employment agreements with three executive officers, including Messrs. Hogarty
and O'Bryan (the "Employment Agreements") and employment protection agreements
with six other officers (the "Employment Protection Agreements").
The following summarizes the principal terms of the Employment Agreements:
- term -- initially three-years, with possible year-to-year renewals;
- specified annual salary, plus annual cost of living and merit increases;
- discretionary bonuses;
- participation in all benefit and compensation plans; and
- car or automobile allowance.
As of September 30, 1998, the base salaries for Messrs. Hogarty and O'Bryan are
$600,000 and $160,000, respectively.
Troy Financial and Troy Savings may terminate an executive officer's
employment at any time during the term of an Employment Agreement. Unless the
termination is for "cause" (as defined in the Employment Agreement), Troy
Financial and Troy Savings will be required to pay the following amounts to the
executive officer:
- three times the executive officer's annual base salary plus bonus; and
- the value of the additional retirement benefits that the executive
officer would have been entitled to receive under Troy Savings' qualified
benefit plans and Supplemental Retirement and Benefits Restoration Plan
("Supplemental Plan") if the executive officer had continued to be
employed for three years.
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<PAGE> 101
The foregoing amounts will be paid in a lump sum. Troy Financial and Troy
Savings will also provide the terminated executive:
- insurance and other non-pension benefits for three years;
- outplacement services; and
- indemnification and director and officer liability insurance.
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;
- the Supplemental Plan; and
- any other benefit that would otherwise be forfeited.
If an executive officer terminates his employment with "good reason" (as
defined in the Employment Agreements), the above provisions will also apply, as
if Troy Financial and Troy Savings had terminated his employment without cause.
If the executive officer is subject to the federal excise tax imposed on
excess parachute payments, Troy Financial and Troy Savings will pay to the
executive officer a gross-up amount sufficient, after all taxes, to pay the
excise tax and any interest and penalties. However, if making the gross-up
payment would not produce a net after-tax benefit to the executive officer of at
least $50,000 more than the amount the executive officer could receive without
triggering the excise tax, the amounts payable to the executive officer will be
reduced as necessary to avoid the excise tax.
After termination, the executive officer cannot have any other employment
during a specified noncompetition period with a substantial competitor (as
defined in the Employment Agreements) of Troy Savings or Troy Financial if:
- the executive officer terminates his employment without consent and
without good reason or
- Troy Financial and Troy Savings terminate the officer's employment for
cause.
The noncompetition period is one year or the remaining term of the agreement
plus six months, whichever is less. The Employment Agreements also contain
provisions relating to unauthorized disclosure of confidential information and
return of written materials upon termination of employment.
The principal terms of the Employment Protection Agreements are:
- term -- initially three-years, with possible renewals;
- no severance or other compensation is payable following termination of
employment except in the context of a change of control;
- severance is payable if, either before and in connection with a change of
control, or within up to two years after a change of control, Troy
Financial and Troy Savings 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);
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- severance amount is two times the officer's annual salary;
- if severance is payable, employee welfare benefits continue for two years
after the termination; and
- except to the extent limited by applicable regulations, stock options,
Restricted Stock and other equity compensation arrangements, and deferred
compensation and other employee benefits that would otherwise be
forfeited are fully vested.
However, severance and other benefits, including accelerated vesting, will be
limited to the maximum amount that can be paid to the officer without
constituting an "excess parachute payment" under the IRC.
For purposes of the Employment Protection Agreements, a "change of control"
means any of the following:
- the acquisition by any individual, entity or group (a "Person") of
beneficial ownership of 20% or more of either the outstanding shares of
Troy Financial's common stock, or the combined voting power of Troy
Financial's outstanding voting securities that are entitled to vote
generally in the election of directors ("Voting Securities"), except that
the following will not constitute a change of control:
(1) any acquisition directly from Troy Financial,
(2) any acquisition by Troy Financial,
(3) any acquisition by any employee benefit plan or trust of Troy
Financial or Troy Savings, or
(4) any acquisition pursuant to a transaction that complies with
clauses (a), (b) and (c) of the second bullet below.
- individuals who, as of the conversion, constituted the "Incumbent Board"
(as defined) cease for any reason to constitute at least a majority of
Troy Financial's Board of Directors;
- a reorganization, merger or consolidation or sale or other disposition of
all or substantially all of Troy Financial's assets or Troy Financial's
acquisition of the stock or assets of another entity (a "Business
Combination"), unless:
(a) the beneficial owners of Troy Financial'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 (the "Resulting Corporation") in
substantially the same proportions as before,
(b) no Person, excluding any employee benefit plan or trust of Troy
Financial or Troy Savings or of the Resulting Corporation,
beneficially owns, directly or indirectly, 20% or more of the
Resulting common stock or the combined voting power of the Resulting
Voting Securities, except to the extent of the Person's ownership
before the Business Combination and
(c) at least a majority of the members of the board of directors of the
Resulting Corporation were members of the Incumbent Board;
- approval by Troy Financial's stockholders of a complete liquidation or
dissolution of Troy Financial.
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Employee Severance Compensation Plan
Upon conversion, Troy Savings 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 be eligible to
participate in the Severance Plan. Generally, after a change of control, each
full-time 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 two-weeks' pay for
each year of service, up to a maximum of one year's salary.
Other Benefit Plans
General. Troy Savings currently provides hospitalization, major medical
and prescription drug benefits to employees, on a self-funded basis (up to
applicable stop loss amounts). Troy Savings also provides life and disability
insurance to employees and certain health care and life insurance benefits to
retired employees.
Defined Benefit Pension Plan. Troy Savings maintains a non-contributory
defined benefit pension plan covering substantially all of its full-time
salaried employees (the "Pension Plan"). A participant is 100% vested after five
years of service, upon attaining normal retirement age or upon a change of
control (as defined above).
The normal retirement benefit (generally at age 65) is based on the
participant's highest three-year average annual base earnings during the
participant's final 10-years of participation, subject to a limitation on the
amount of compensation that can be taken into account under the IRC. The annual
benefit provided to a participant at normal retirement age is:
- 2% of average annual earnings, times years of credited service, up to
32.5 years, plus
- .4% of average annual earnings that exceed 50% of the Social Security
wage base, times years of credited service, 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 begins receiving early retirement benefits before satisfying
the foregoing age and service requirements, his benefits will be actuarially
reduced.
The Pension Plan also provides a surviving spouse benefit if the
participant dies before retirement or other termination of employment with a
vested retirement benefit.
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<PAGE> 104
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 23 years, respectively.
<TABLE>
<CAPTION>
FINAL YEARS OF SERVICE
AVERAGE -----------------------------------------------------
SALARY 15 20 25 30 35
------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
$75,000............................. $24,948 $33,264 $41,580 $ 49,896 $ 53,646
100,000.............................. 33,948 45,264 56,580 67,896 72,896
125,000.............................. 42,948 57,264 71,580 85,896 92,146
150,000.............................. 51,948 69,264 86,580 103,896 111,396
160,000 and above(1)................. 55,548 74,064 92,580 111,096 119,096
</TABLE>
- ---------------
(1) For the 1998 plan year the maximum compensation under IRC Section 401(a)(17)
is limited to $160,000.
401(k) Savings Plan. Troy Savings 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, Troy Savings 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. Following the conversion, we intend to discontinue
making matching contributions.
All participants' pre-tax contributions plus earnings are fully vested.
Matching contributions become vested at a rate of 20% per year of service,
beginning when the employee has completed two years of service. A participant
also will be fully vested if he becomes disabled, reaches age 65 or dies, or if
a change of control (as defined above) occurs.
Participants may direct the investment of amounts contributed to their
401(k) Plan accounts. Troy Savings intends to amend the 401(k) Plan to permit
participants to invest in Troy Financial's common stock as one of the investment
options. The following provisions will apply to investments in Company stock:
- the 401(k) Plan will purchase common stock from Troy Financial or in open
market transactions;
- the 401(k) Plan trustee will vote the common stock in accordance with
participants' directions, subject to the 401(k) Plan and applicable law;
- the trustee will vote shares of common stock as to which no directions
are received from participants in accordance with its fiduciary duties;
- the trustee will also follow the directions 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, Troy Savings'
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, Troy
Savings intends to implement the ESOP. The ESOP will be a noncontributory,
tax-qualified stock purchase plan that invests primarily in common stock of Troy
Financial. 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
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<PAGE> 105
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.
Troy Financial anticipates that it will lend enough money to the ESOP so
that it can purchase 8% of the common stock issued in the conversion, including
shares contributed to the Community Foundation. Troy Financial's loan will be
secured by the common stock purchased by the ESOP. Common stock purchased with
the loaned funds 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. The
ESOP trustee will allocate released 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 received from Troy Savings (and
dividends paid on the purchased shares that have not been allocated to
participants' accounts, if any). The loan will bear interest, based on
prevailing market rates. Subject to limitations imposed by the IRC, Troy Savings
will be entitled to a federal income tax deduction for the amounts it
contributes to the ESOP.
All employees of Troy Savings 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. 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
ESOP account. An ESOP participant will be fully vested in the event of
disability, death, attainment of age 65 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. 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 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
Troy Financial'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 ERISA. The trustee will not be affiliated
with Troy Financial.
The ESOP may be amended by the Board of Directors of Troy Savings, except
that no amendment may be made which would reduce the vested interest of any
participant or divert assets of the ESOP trust fund away from the exclusive
benefit of participants or their beneficiaries.
Future purchases by the ESOP of common stock from Troy Financial or in the
market, which are not currently contemplated, would be subject to applicable
laws, regulations and market conditions.
Long-Term Equity Compensation Plan. Troy Financial and Troy Savings
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. Troy Financial
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 Troy Financial as an
incentive to contribute to its success.
The Equity Compensation Plan will consist of a stock option plan and the
MRP. Troy Financial anticipates that the Equity Compensation Plan will permit
Troy Financial to grant:
- stock options intended to qualify as incentive options under Section 422
of the IRC ("Incentive Options") to officers and other employees,
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<PAGE> 106
- stock options that do not qualify as Incentive Options ("Non-Statutory
Options") to directors, officers, employees, independent contractors and
Trustees Emeritus; 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).
Troy Financial 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 1,048,654 shares based upon the issuance of
10,486,540 shares), for options issued under the Equity Compensation Plan.
Assuming stockholders approve the Equity Compensation Plan, Troy Financial plans
to contribute cash to a trust established under the Plan so that the trust can
buy 4% of the shares of common stock issued in the conversion, including shares
contributed to the Community Foundation (419,462 shares assuming 10,486,540
shares are issued), that will be used for grants of Restricted Stock under the
MRP. Alternatively, Troy Financial may reserve an equivalent number of its
authorized but unissued shares for grants of Restricted Stock. Troy Financial
expects that the Equity Compensation Plan will remain in effect for 10 years.
If Troy Financial implements the Equity Compensation Plan within one year
following the conversion, applicable regulations provide that:
- no individual officer or employee may receive more than 25% of the
options or Restricted Stock;
- non-employee directors may not receive more than 5% individually, or 30%
in the aggregate, of the options or Restricted Stock;
- the exercise price of options cannot be lower than the market price on
the date of grant; and
- vesting of Restricted Stock and options may not be accelerated except
upon death or disability.
A compensation committee of Troy Financial's directors 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 and to
determine whether 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.
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 grant date (110% if an
Incentive Option is granted to an owner of more than 10% of the outstanding
common stock). The maximum option term is 10 years (five years if an Incentive
Option granted to an owner of more than 10% of the outstanding common stock).
The Equity Compensation Plan will specify a maximum number of shares that may be
covered by options granted to any employee in any calendar year. 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 specify the number of shares of
Restricted Stock it grants to an eligible individual and the nature of the
vesting and other restrictions that apply to each grant.
Troy Financial expects that options granted pursuant to the Equity
Compensation Plan generally will be exercisable for at least three months after
a participant terminates employment or service, unless the compensation
committee determines otherwise. Troy Financial 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 Troy Financial, to limitations to prevent such
accelerated vesting from constituting an excess parachute payment under the IRC.
Incentive Options and Restricted Stock
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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.
Appropriate adjustments will be made to shares available under the Equity
Compensation Plan and to shares covered by outstanding awards to reflect changes
in Troy Financial's capitalization.
The Equity Compensation Plan will provide that Troy Financial's Board of
Directors may amend it prospectively, except that stockholder approval will be
required if necessary to satisfy IRC requirements for Incentive Options or to
enable nonqualified options to meet the definition of qualified performance
related compensation under Section 162(m) of the 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 equal to the
difference between the exercise price and the fair market value of the common
stock on the date of exercise and Troy Financial 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.
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 grant date and for one year after the date of exercise of the
option. Troy Financial will not be entitled to any business expense deduction
with respect to the grant or exercise of an Incentive Option, except as
discussed below.
If an employee does not complete the special holding period set forth
above, he will recognize ordinary income when he disposes 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 Troy Financial complies with applicable reporting
requirements, it will be allowed a business expense deduction to the extent the
employee recognizes ordinary income.
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. Upon the vesting of shares of Restricted Stock (assuming no Section
83(b) election), the grantee will realize ordinary income equal to the value of
the shares that become vested and Troy Financial will generally be entitled to a
deduction for tax purposes in the same amount, except as limited by Section
162(m) of the IRC, if the employee's annual compensation exceeds $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 and
Troy Financial generally will be entitled to a deduction in a like amount. A
grantee who makes a Section 83(b) election will not be entitled to any tax
deduction if he subsequently forfeits the shares.
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 he has an "excess parachute payment" under the IRC. In that case,
Troy Financial would not be allowed to claim a deduction for the amount that
constituted an excess parachute payment.
Supplemental Retirement and Benefit Restoration Plan
Troy Savings intends to implement a non-tax qualified Supplemental
Retirement and Benefit Restoration Plan (the "Supplemental Plan") to provide
additional benefits to designated employees. Troy Savings anticipates that three
executive officers, including Messrs. Hogarty and O'Bryan, will participate in
the Supplemental Plan. Participants will receive additional retirement benefits
that cannot be provided under Troy Savings' 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
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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
pension amount at age 65 equal to 65% of his average annual earnings (the
"Pension Amount"), reduced by any amounts actually payable under the Pension
Plan and an offset amount, in Mr. Hogarty's case, of $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. No more than
$500,000 of Mr. Hogarty's annual compensation will be counted. In the event of
the participant's death, the Pension Amount (reduced by the death benefit
payable under the Pension Plan) will be paid to his surviving spouse for life,
beginning when the participant would have reached age 65. The Pension Amount
will be actuarially reduced if benefits are paid before the participant attains
age 65, unless the participant is eligible for an unreduced early retirement
benefit under the Pension Plan, and will be reduced by the benefit payable at
that time under the Pension Plan.
Each participant in the Supplemental Plan will also be entitled to an
annual defined contribution amount, based on the matching contribution Troy
Savings would make to the 401(k) Plan, if any, if the participant made the
maximum allowable pre-tax contribution, and there were no nondiscrimination
limitations, reduced by the maximum matching contribution that could actually be
made under such circumstances, but applying existing nondiscrimination
provisions. The defined contribution amounts will be reflected in a bookkeeping
account on Troy Savings' 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, to an additional benefit if
shares have not been allocated under the ESOP because the ESOP has not repaid
its loan. The benefit will be based on the number of shares of common stock that
were allocated to the participant under the ESOP during the last plan year
before the retirement, termination of employment or change of control,
multiplied by the number of years remaining in the term of the ESOP loan. The
vesting provisions of the ESOP 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 Troy Savings. Troy Savings
may establish a trust to provide funds to pay benefits under the Supplemental
Plan, but the assets of the trust will be subject to claims of Troy Savings'
creditors in the event of insolvency and, if the trust invests in Troy
Financial's common stock, Troy Savings will have the right to substitute other
assets for the common stock.
TRANSACTIONS WITH RELATED PERSONS
Executive officers of Troy Savings were customers of, and had other
transactions with, Troy Savings in the ordinary course of business. Loans to
these parties were made on Troy Savings' normal credit terms, including interest
rates and collateralization. The aggregate of such loans totaled less than 5% of
Troy Savings' total equity at September 30, 1998. Troy Financial intends that
all transactions between Troy Financial and its executive officers, directors,
holders of 10% or more of Troy Financial's stock and affiliates thereof, will
contain terms no less favorable to Troy Financial than could have been obtained
by it in arms-length negotiations with unaffiliated persons and will be approved
by a majority of Troy Financial's independent directors who do not have any
interest in the transaction.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND TRUSTEES
The following table sets forth the number of shares of stock Troy Savings'
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 presents the total expected beneficial
ownership of stock as to all trustees and executive officers as a group. The
table includes proposed subscriptions, if any, by associates, and does not
include subscription orders by the ESOP, which are expected to be 8% of the
shares issued in the conversion,
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including shares contributed to the Community Foundation. The table also does
not include shares to be contributed to the Community Foundation, which amount
will vary depending upon the number of shares 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.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED OF THE ESTIMATED
PRICE RANGE PRICE RANGE
---------------------- ---------------------
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 1.33% 100,000 .95%
George H. Arakelian....................... 1,000,000 100,000 1.33 100,000 .95
Richard B. Devane......................... 20,000 2,000 -- 2,000 --
Michael E. Fleming........................ 300,000 30,000 .40 30,000 .29
Willie Anderson Hammett................... 200,000 20,000 .26 20,000 .20
Thomas B. Healy........................... 500,000 50,000 .66 50,000 .49
Keith D. Millsop.......................... 400,000 40,000 .53 40,000 .39
Edward G. O'Haire......................... 400,000 40,000 .53 40,000 .39
Marvin L. Wulf............................ 200,000 20,000 .26 20,000 .20
Michael C. Mahar.......................... 60,000 6,000 .08 6,000 .06
Edward M. Maziejka, Jr. .................. 70,000 7,000 .09 7,000 .07
Kevin M. O'Bryan.......................... 100,000 10,000 .13 10,000 .10
All Trustees and Executive Officers as a
group (12 persons)................... $4,250,000 425,000 5.64% 425,000 4.17%
</TABLE>
THE CONVERSION
THE BOARD OF TRUSTEES OF TROY SAVINGS AND THE NEW YORK SUPERINTENDENT HAVE
APPROVED THE PLAN OF CONVERSION SUBJECT TO THE APPROVAL OF TROY SAVINGS'
DEPOSITORS AND THE SATISFACTION OF OTHER CONDITIONS. THE 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 Troy Savings adopted a plan of
conversion, as amended on December 10, 1998 and January 28, 1999 (the "Plan of
Conversion"). Under the Plan of Conversion, Troy Savings will convert to a New
York State-chartered stock savings bank under the same name. The Plan of
Conversion also contemplates that, upon the conversion of Troy Savings to a
stock savings bank, all of the stock of Troy Savings will be owned by a bank
holding company that will sell its own stock to depositors and members of the
public. The Plan of Conversion has been approved by the New York Superintendent
and Troy Savings has received a notice of intent not to object to the Plan of
Conversion from the FDIC, subject to approval of the Plan of Conversion by Troy
Savings' eligible depositors. The Federal Reserve has approved the application
of Troy Financial to become a bank holding company by acquiring Troy Savings. A
special meeting of eligible depositors has been called for this purpose to be
held on March 26, 1999.
In the conversion, Troy Financial will acquire all of the issued and
outstanding shares of Troy Savings' capital stock. Troy Financial 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, a Syndicated
Community Offering, an underwritten firm commitment public offering or through a
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combination thereof. If a holding company is not utilized and thus Troy
Financial is not utilized, then the common stock of Troy Savings 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, Troy Financial intends to contribute to the Community Foundation a
number of shares of its authorized but unissued common stock. The Community
Foundation, along with the established Charitable Foundation, will provide for
charitable and educational activities. The Community Foundation will allow Troy
Savings' local communities to share in the potential growth and any
profitability of Troy Financial and Troy Savings over the long-term.
Although the Plan of Conversion has been unanimously approved by the Board
of Trustees of Troy Savings present at a meeting duly called under Troy Savings'
Bylaws, and pursuant to the notice requirements of the New York Banking Law, the
Plan of Conversion must also be approved by the affirmative vote of at least 75%
in amount of deposit liabilities represented in person or by proxy at the
Special Meeting and 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 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's independent appraisal will
be updated and the final price of the shares of common stock will be determined
at the completion of the Subscription Offering, if all shares are subscribed
for, or at the completion of the Community or Syndicated Community Offering.
FinPro 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 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 Troy Savings upon
written request directed to the Troy Conversion Center and is available for
inspection at the offices of Troy Savings 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."
PURPOSES OF THE CONVERSION
The Board of Trustees has carefully considered the corporate structures and
charter alternatives available to Troy Savings, including maintaining Troy
Savings' current form. Based on this evaluation, the Board of Trustees has
determined that the stock form, and concurrent holding company formation, is in
the best interests of Troy Savings, its depositors and the communities served by
Troy Savings. If the holding company formation cannot be accomplished, the Board
of Trustees still believes that the stock form is in the best interests of Troy
Savings, its depositors and the communities served by Troy Savings.
Troy Savings, as a New York State-chartered savings bank, does not have
stockholders and has no authority to issue stock. By converting to the stock
form, Troy Savings will be structured in the form used by most financial service
providers, including savings banks, and therefore will enable Troy Financial and
Troy Savings to compete more effectively with such institutions. The conversion
will also allow Troy Financial to access the capital markets in order to raise
additional capital as needed, and will facilitate Troy Financial's establishment
or acquisition of a commercial bank and trust company that can accept municipal
deposits to complement Troy Savings' municipal investment activities. The newly
raised capital may also be used to increase Troy Savings' 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, Troy Financial will be in a
position after the conversion, subject to regulatory limitations and Troy
Financial's
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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 Troy Savings' capital base is
significant. At September 30, 1998, Troy Savings had Tier I Leverage capital of
$70.1 million, or 9.89% of total adjusted quarterly average assets. Assuming
that $114.7 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 Troy Financial to purchase the capital stock of Troy Savings, Troy
Savings' Tier I Leverage capital would increase to $112.9 million, resulting in
a pro forma leverage capital ratio of 15.02% giving effect to the conversion.
After completion of the conversion, the unissued common stock and preferred
stock authorized by Troy Financial's certificate of incorporation will permit
Troy Financial, 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, Troy Financial 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, Troy
Financial 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 Troy Savings Bank -- Executive Compensation."
EFFECTS OF CONVERSION
General. Each depositor in a non-stock or 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 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 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 Troy Savings of accepting deposits and making loans will continue
without interruption. Troy Savings will continue to be subject to regulation by
the New York Superintendent and the FDIC. After conversion, Troy Savings will
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continue to provide services for depositors and borrowers under current policies
by its present management and staff.
The trustees of Troy Savings at the time of conversion will serve as
directors of Troy Savings after the conversion. The directors of Troy Financial
will consist of the same individuals who will serve on the Board of Directors of
Troy Savings. All officers of Troy Savings at the time of conversion will retain
their positions after the conversion.
Effect on Deposit Accounts. Under the Plan of Conversion, each depositor
in Troy Savings 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 Troy Savings 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 Troy Savings are vested exclusively in the Board of
Trustees. After the conversion, direction of Troy Savings will be under the
control of the Board of Directors of Troy Savings. Troy Financial, as the holder
of all of the outstanding stock of Troy Savings, will have exclusive voting
rights with respect to any matters concerning Troy Savings requiring stockholder
approval, including the election of directors of Troy Savings.
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 Troy
Financial. Each holder of common stock will, subject to the restrictions and
limitations set forth in Troy Financial's Certificate of Incorporation, be
entitled to vote on any matters to be considered by Troy Financial's
stockholders, including the election of directors of Troy Financial.
Tax Effects. Troy Savings 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. Troy Savings has also received an opinion from KPMG 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 Troy Savings
or its Eligible Account Holders and Supplemental Eligible Account Holders or
Troy Financial, 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 Troy Savings were to liquidate after
conversion, all claims of creditors (including those of depositors, to the
extent of their deposit balances) would also 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 Troy Financial as the holder of Troy Savings' 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. Troy Savings and Troy
Financial have retained FinPro to make such appraisal. For its services in
making such appraisal, FinPro will receive a fee of $46,500, including fees
related to the preparation of a business plan for Troy Financial and Bank, and
will be reimbursed for certain of its expenses. Troy Savings and Troy Financial
have agreed to indemnify FinPro 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's liability results from its negligence or willful
misconduct.
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An appraisal has been made by FinPro in reliance upon the information
contained in this Prospectus, including the Consolidated Financial Statements.
FinPro also considered the following factors, among others: the present and
projected operating results and financial condition of Troy Financial and Troy
Savings, 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 Troy Savings' existing
marketing area; the quality and depth of Troy Savings' management; certain
historical, financial and other information relating to Troy Savings; a
comparative evaluation of the operating and financial statistics of Troy Savings
with those of other savings institutions; the aggregate size of the offering of
the common stock; the impact of conversion on Troy Savings' net worth and
earnings potential; the proposed dividend policy of Troy Financial and Troy
Savings; 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 Troy Savings' 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 Midwest regions. The Board
of Trustees of Troy Savings and Board of Directors of Troy Financial have
reviewed the appraisal of FinPro in determining the reasonableness and adequacy
of such appraisal consistent with New York Banking Board and FDIC regulations
and have reviewed the methodology and reasonableness of assumptions utilized by
FinPro 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 has advised Troy Financial and Troy
Savings that, in its opinion dated as of January 29, 1999, the estimated pro
forma market value of the common stock being sold in connection with the
conversion ranged from a minimum of $75,395,000 to a maximum of $102,005,000
(the "estimated price range") with a midpoint of $88,700,000. This establishes
the number of shares to be offered (7,539,500 to 10,200,500), 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, Troy
Financial may be required to offer up to an additional 15% above the maximum
number of shares or 11,730,575 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 Troy
Financial or Troy Savings 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 DID NOT INDEPENDENTLY VERIFY THE CONSOLIDATED FINANCIAL
STATEMENTS AND OTHER INFORMATION PROVIDED BY TROY SAVINGS, NOR DID FINPRO VALUE
INDEPENDENTLY THE ASSETS OR LIABILITIES OF TROY SAVINGS. THE APPRAISAL CONSIDERS
TROY SAVINGS AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF
THE LIQUIDATION VALUE OF TROY SAVINGS. 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 confirms to Troy Savings, Troy Financial, 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 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 ($117,305,750) or less than the
minimum of the estimated price range ($75,395,000), Troy Savings and Troy
Financial, 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,
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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 February 12, 2001.
If all shares of common stock are not sold through the Subscription
Offering and Community Offering, then Troy Savings and Troy Financial 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 confirms to Troy Savings, Troy Financial, 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 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 Troy Financial 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, Troy Savings 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 ($75,395,000) or more than 15% above the maximum of the estimated
price range ($117,305,750), and Troy Financial and Troy Savings 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 February
12, 2001. If such resolicitation is not effected, Troy Savings will return all
funds promptly with interest.
Copies of the appraisal report of FinPro 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 Troy Savings' main
office located at 32 Second Street, Troy, New York 12180, during regular
business hours of Troy Savings. 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
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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's
estimate of the pro rata market value of the common stock ranging from a minimum
of $75,395,000 to a maximum plus 15% of $117,305,750, the number of shares of
common stock expected to be issued is between a minimum of 7,539,500 shares and
a maximum plus 15% of 11,730,575 shares. The actual number of shares issued
between this range will depend on a number of factors and shall be determined by
Troy Savings and Troy Financial 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 Troy Financial and Troy Savings 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 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 Troy Financial'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 Troy Financial'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."
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 the number of shares used
to fund the Community Foundation. Assuming the sale of shares in the offerings
at the maximum of the estimated price range, Troy Financial intends to
contribute 286,040 shares of its common stock from authorized but unissued
shares to the Community Foundation immediately following the completion of the
conversion. In that event, Troy Financial will have total shares of common stock
outstanding of 10,486,540 shares. Of that amount, the Community Foundation will
own 2.73%. 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 2.73% 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 Troy Savings 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 Troy Savings 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
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minimum purchase limitations set forth in the Plan of Conversion and as
described below under "-- Limitations on 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 Purchases." Subscription rights as Eligible
Account Holders received by trustees and Officers of Troy Savings and their
associates based on increased deposits in Troy Savings 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 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.
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 609,013 shares and
971,122 shares, based on the issuance of 7,612,660 shares (minimum) and
12,139,021 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 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
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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 March 15, 1999 at 3:00 p.m., New York time ("Expiration Date"),
unless extended for up to 45 days by Troy Savings and Troy Financial 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. Troy Savings 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 45 days after the Expiration Date,
unless such period is extended with the consent of the New York Superintendent
and FDIC, all funds delivered to Troy Savings pursuant to the Subscription
Offering will be returned promptly to the subscribers with interest and all
withdrawal authorizations will be canceled. If an extension beyond the 45 day
period following the Expiration Date is granted, Troy Savings 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 Troy Savings of their intention to confirm, modify, or rescind their
subscription. If an affirmative response to any resolicitation is not received
by Troy Financial from a subscriber, such order will be rescinded and all
subscription funds will be promptly returned with interest. Such extensions may
not go beyond February 12, 2001.
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 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,
Troy Financial and Troy Savings may establish the relative preferences,
priorities, purchase limitations and share allocation procedures for persons
subscribing for shares. Troy Savings may establish all other terms and
conditions of such offer. Troy Savings will make a distribution of the stock to
be sold in the Community Offering in such a manner as to promote a wide
distribution of the stock, and will give a preference to natural persons
residing in the counties in which Troy Savings has its home office or branch
offices. Troy Savings 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.
RESIDENCE OF PURCHASERS
Troy Financial and Troy Savings 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 or Community
Offering by, a person residing in a foreign country.
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MARKETING AND UNDERWRITING ARRANGEMENTS
Troy Savings and Troy Financial 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 Troy Savings and Troy Financial
in its solicitation of subscriptions and purchase orders for shares of common
stock in the offerings. Sandler O'Neill will use its best efforts to help us
sell at least 7,539,500 shares of common stock but is not required to sell any
specific amount of common stock. 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
Troy Savings or Company and any immediate family member thereof and the ESOP for
which Sandler O'Neill will not receive a fee. If a selected dealers agreement is
entered into in connection with a Syndicated Community Offering, Troy Financial
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 an 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 6.10% 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 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
Troy Financial, Sandler O'Neill will be entitled to a fee for its management
advisory services in an amount to be agreed upon by Troy Savings 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. Troy Financial and Troy Savings 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, assuming the same assumptions used in calculating the
pro forma data, are expected to be $707,000 and $975,000 at the minimum and the
maximum of the estimated price range, respectively. See "Pro Forma Data" for
such 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 Troy Savings 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 Troy Financial and Troy
Savings 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 Troy Savings may participate in
the offering in ministerial capacities or by 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. Troy Financial 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 Troy Financial or Troy
Savings 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 March 10, 1999 or hand delivered any
later than March 13, 1999. Execution of the stock order form and certification
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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 Troy
Savings' deposit account (which may be given by completing the appropriate
blanks in the stock order form), must be received by Troy Savings at any of its
offices by 3:00 p.m., New York time, on March 15, 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, Troy Savings and Troy Financial 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, Troy Financial and Troy Savings 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. Troy Financial and Troy Savings 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 Troy Savings unless
the 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 Troy Savings as of the eligibility record date (June 30, 1997) and
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:
(1) in cash if delivered in person at any branch office of Troy Savings,
(2) by check or money order, or
(3) by authorization of withdrawal from deposit accounts maintained with
Troy Savings.
No wire transfers will be accepted. Interest will be paid on payments made by
cash, check or money order at Troy Savings' 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 Troy Savings to withdraw the amount of the
purchase price from his deposit account, Troy Savings will do so as of the
effective date of the conversion. Troy Savings 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 Troy Savings'
passbook rate. If a certificate account or other time deposit matures prior to
the conversion's completion or termination, such funds will earn interest at
Troy Savings' 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
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commitment from Troy Financial 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 Troy Savings' 401(k) Plan) are not maintained at Troy
Savings and that the terms of the IRA or qualified plan permit the purchase.
Persons with self-directed IRAs or qualified plan accounts maintained at Troy
Savings 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 10% stockholders 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.
RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the conversion, the New York Banking Board
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.
TROY SAVINGS AND TROY FINANCIAL WILL PURSUE LEGAL ACTION IF 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 of Conversion 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 Troy Financial to
assist Troy Financial and Troy Savings in the sale of the common stock. TROY
FINANCIAL AND TROY SAVINGS 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 Subscription and
Community Offerings 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).
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Payments made in the form of check, money order or cash will earn interest
at Troy Savings' passbook rate of interest from the date such payment is
actually received by Troy Savings 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 Troy Savings 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
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 Troy Savings 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 45 days
following the Subscription Offering Expiration Date, unless extended by Troy
Financial with the approval of the New York Superintendent and FDIC. Such
extensions may not be beyond February 12, 2001. 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 a 15% increase in the estimated price range 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 (838,923 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;
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(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 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 Troy Savings or
Troy Financial 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
Troy Savings 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 Troy Financial and Troy Savings. If such amount is increased,
subscribers for the maximum amount will be, and certain other large subscribers
in the sole discretion of Troy Savings may be, given the opportunity to increase
their subscriptions up to the then applicable limit.
The overall maximum purchase limitation has been established at 100,000
shares or $1.0 million and the individual amount permitted to be subscribed for
may not be reduced by Troy Savings 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:
(a) any corporation or organization (other than Troy Financial, Troy
Savings or a majority-owned subsidiary of Troy Savings) of which such
person is an officer, partner or 10% stockholder;
(b) 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 Troy Savings; and
(c) 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 Troy Savings.
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 Troy Savings Bank -- Subscriptions by Executive
Officers and Trustees," "-- Certain Restrictions on Purchase or Transfer of
Shares After Conversion" and "Restrictions on Acquisition of Troy Financial
Corporation."
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LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of Troy Savings in its
present mutual form, each depositor would have a claim to receive their pro rata
share of any assets of Troy Savings 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 Troy Savings 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 Troy Savings. 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 Troy Savings above that amount.
The Plan of Conversion 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 Troy Savings'
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
Troy Savings for the benefit of the Eligible Account Holders and Supplemental
Eligible Account Holders who continue to maintain their deposit accounts at Troy
Savings in the event of a complete liquidation of Troy Savings 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 December 31, 1998, 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 Troy Savings (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 Troy Savings' 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 Troy Savings 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 Troy Savings. 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 Troy
Savings or Troy Financial, 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 the balance in the deposit account at
the close of business on the last day of any period for which Troy Savings or
Troy Financial, as the case may be, has prepared audited financial statements
subsequent to June 30, 1997 or December 31, 1998, as the case may be, or the
amount in such deposit account as of June 30, 1997 or December 31, 1998, 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
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deposit account. If any such deposit account is closed, the related subaccount
shall be reduced to zero. A time deposit 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
Troy Savings subsequent to the conversion and only out of funds available for
such purpose after payment of all creditors.
Troy Savings 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 Troy Savings, except that Troy Savings 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.
TAX ASPECTS
Consummation of the conversion is expressly conditioned upon the receipt by
Troy Savings of either a favorable ruling from the IRS or an opinion of counsel
with respect to federal income taxation, and an opinion of KPMG LLP with respect
to certain New York state taxation, to the effect that the conversion will not
be a taxable transaction to Troy Financial, Troy Savings, 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, Troy Savings has received an opinion of its
counsel, Hogan & Hartson L.L.P., which has been filed with the SEC as an exhibit
to Troy Financial's Registration Statement to the effect that for federal income
tax purposes, among other matters:
- Troy Savings' change in form from mutual to stock ownership will
constitute a reorganization under section 368(a)(1)(F) of the IRC and
neither Troy Savings nor Troy Financial will recognize any gain or loss
as a result of the conversion;
- no gain or loss will be recognized by Troy Savings or Troy Financial upon
the purchase of Troy Savings' capital stock by Troy Financial or by Troy
Financial upon the purchase of its common stock in the conversion;
- 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 Troy Savings in its stock form plus their interests
in the liquidation account in exchange for their deposit accounts in Troy
Savings;
- the tax basis of the depositors' deposit accounts in Troy Savings
immediately after the conversion will be the same as the basis of their
deposit accounts immediately prior to the conversion;
- the tax basis of each Eligible Account Holder's or Supplemental Eligible
Account Holder's interest in the liquidation account will be zero;
- 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
- the tax basis to the stockholders of the common stock of Troy Financial
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.
Troy Savings has also received an opinion from KPMG 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 Troy Savings or its Eligible Account
Holders and Supplemental Eligible Account Holders or Troy Financial, subject to
the limitations and qualifications in such opinion.
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In the opinion of FinPro, 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 Troy
Savings 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 Troy Savings or Troy Financial 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 such director, trustee or executive officer or
any exchange of such shares in connection with a merger or acquisition involving
Troy Savings or Troy Financial, 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 Troy Financial 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 Troy
Savings or Troy Financial 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
Troy Savings 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 Troy Savings, 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 Troy Savings at any time prior to the Special Meeting, and
at any time thereafter, with the concurrence of the New York Superintendent and
FDIC.
ESTABLISHMENT OF THE COMMUNITY FOUNDATION
As part of the conversion, Troy Financial intends to establish and transfer
to the Community Foundation, for a nominal consideration, from its authorized,
but unissued common stock, common stock in an amount equal to the difference
between 8% of the gross proceeds from the shares of common stock sold in the
conversion and $5.3 million, which is the amount of contributions made or
committed to the Charitable Foundation and the Music Hall Foundation ($5.0
million of cash contributions and the value of the Music Hall). The funding of
the Community Foundation with common stock of Troy Financial furthers the stated
goals of the Community Foundation, and enables the community to share in the
potential growth and any profitability of Troy Financial and Troy Savings over
the long-term.
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The Community Foundation will be dedicated to the promotion of charitable
and educational purposes, 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 Troy Financial.
Troy Savings will be the sole voting member of the Community Foundation and
will have the power to elect 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 Troy Savings. 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 and educational purposes, 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.
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
Troy Financial held by the Community Foundation. As a condition to receiving the
New York Superintendent's approval of the Plan of Conversion and the
nonobjection of the FDIC to Troy Savings' conversion, the Community Foundation
has agreed to a number of conditions which are discussed below. See
"-- Regulatory Conditions Imposed on the Community Foundation."
The number of shares of common stock contributed to the Community
Foundation by Troy Financial will vary based upon the number of shares 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
73,160, 179,600, 286,040 and 408,446 shares, which would have a market value of
$731,600, $1,796,000, $2,860,400 and $4,084,460, respectively, assuming a $10.00
per share price. Troy Financial and Troy Savings 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 Troy Financial and Troy Savings
over the long-term.
The Community Foundation would receive working capital from any dividends
that may be paid on Troy Financial'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. Upon completion of the conversion and the contribution of
shares to the Community Foundation immediately following the conversion, Troy
Financial would have 7.6 million, 9.0 million, 10.5 million and 12.1 million
shares issued and outstanding, respectively, at the minimum, midpoint, maximum
and maximum plus 15% of the estimated price range. Because Troy Financial will
have an increased number of shares outstanding, the voting and ownership
interests of stockholders in Troy Financial's common stock would be diluted by
0.96%, 1.98%, 2.73% or 3.36%, respectively, as compared to
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their interests in Troy Financial if the Community Foundation was not funded
with common stock. For additional discussion of the dilutive effect, see "Pro
Forma Data."
Tax Considerations. Troy Financial and Troy Savings 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. Troy Financial's tax advisors, however, have not rendered any
advice on the condition to the contribution to be agreed to by the Community
Foundation and Charitable Foundation which requires that all shares of common
stock of Troy Financial held by the Community Foundation and Charitable
Foundation be voted in the same ratio as all other outstanding shares of common
stock of Troy Financial on all proposals considered by stockholders of Troy
Financial. The New York Superintendent and FDIC would waive this voting
restriction if it would cause the Community Foundation or Charitable Foundation
to lose its tax-exempt status or subject the Community Foundation or Charitable
Foundation to an excise tax, upon submission of a legal opinion satisfactory to
the New York Superintendent and FDIC. See "-- Regulatory Conditions Imposed on
the Community Foundation."
Troy Financial and Troy Savings have received an opinion of Hogan & Hartson
L.L.P., their tax advisor, that Troy Financial's transfer of its own stock to
the Community Foundation for a nominal consideration would not constitute an act
of self-dealing, and that Troy Financial 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 a limitation based on 10% of Troy Financial's annual taxable income.
In fiscal 1998, Troy Savings 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 Troy Savings' cash contribution and
future binding commitment, Troy Savings 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,
Troy Savings recognized the entire tax benefit associated with this contribution
expense. In fiscal 1999, Troy Financial also intends to contribute the Music
Hall to the Music Hall Foundation. The pre-tax cost of this contribution is
estimated at $300,000, which represents the approximate fair value of the Music
Hall.
Under Delaware law, Troy Financial 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. Troy Financial and Troy Savings 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, Troy Financial and Troy Savings 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, Troy Financial and Troy Savings believe
that the contribution to the Community Foundation is justified given Troy
Savings' capital position and its earnings, the substantial additional capital
being raised in the conversion and the potential benefits of the Community
Foundation to Troy Savings' community. In this regard, assuming the sale of the
common stock at the maximum plus 15% of the estimated price range, Troy
Financial would have
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pro forma consolidated stockholders' equity of $172.6 million or 21.1% of pro
forma consolidated assets and Troy Savings' pro forma leverage and Tier I
risk-based capital ratios would be 15.02% and 21.64% respectively. See
"Regulatory Capital Compliance," "Capitalization," and "Comparison of Valuation
and Pro Forma Information With and Without Contribution to the Community
Foundation." Thus, the amount of the contribution will not adversely impact the
consolidated financial condition of Troy Financial and Troy Savings, and Troy
Financial and Troy Savings therefore believe that the amount of the charitable
contribution is reasonable given Troy Financial's and Troy Savings' pro forma
capital positions. As such, Troy Financial and Troy Savings believe that the
contribution does not raise safety and soundness concerns.
At this time, Troy Financial estimates the tax benefit of the contribution
of common stock to the Community Foundation to be between approximately $627,000
(assuming contribution of 179,174 shares at the midpoint of the estimated price
range, a $10.00 per share price and a combined tax rate of 35%) and $1.4 million
(assuming contribution of 408,446 shares at the maximum plus 15% of the
estimated price range, a $10.00 per share price and a combined tax rate of 35%).
There can be no assurances that the 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 do not qualify, the IRS may disallow Troy Financial's deductions for
its contributions, in whole or in part. If Troy Financial is not permitted to
deduct part or all of the contribution expense, its results of operations will
be adversely impacted.
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 New
York Superintendent's approval and FDIC's non-objection of Troy Savings'
conversion:
(1) the Community Foundation will be subject to examination by the NYSBD
and FDIC;
(2) the Community Foundation must comply with supervisory directives
imposed by the NYSBD and FDIC;
(3) the Community Foundation will operate in accordance with written
policies adopted by the board of directors, including a conflict of
interest policy;
(4) the Community Foundation must provide a proposed operating plan prior
to conversion and annual reports to the FDIC describing the grants made
and grant recipients; and
(5) any shares of common stock of Troy Financial held by the Community
Foundation must be voted by the Community Foundation at the same ratio
as the shares voted on each and every proposal considered by the
stockholders of Troy Financial; provided, however, that, consistent
with this condition, the New York Superintendent and FDIC may waive
this voting restriction under certain circumstances if compliance with
the voting restriction would cause the Community Foundation to lose its
tax-exempt status or cause the IRS to deny a request for the
recognition of its tax-exempt status.
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In order for the New York Superintendent and FDIC to waive such voting
restriction, Troy Financial's or the Community Foundation's legal counsel must
render an opinion satisfactory to the New York Superintendent and FDIC that
compliance with the voting restriction would have the effect described in clause
(5) above. There can be no assurances that a legal opinion addressing these
issues will be rendered, or if rendered, that the New York Superintendent and
FDIC will grant an unconditional waiver of the voting restriction. For example,
the regulators may impose conditions on the Community Foundation's board of
directors if a waiver is granted. In no event will the voting restriction
survive the sale of shares of the common stock held by the Community Foundation.
The New York Superintendent and FDIC have required that the Charitable
Foundation agree to be bound by these same regulatory conditions.
RESTRICTIONS ON ACQUISITION OF TROY FINANCIAL CORPORATION
Provisions in Troy Financial's Certificate of Incorporation and Bylaws and
in its management remuneration plan, together with provisions of Delaware
corporate law, may have anti-takeover effects. In addition, Troy Savings'
Restated Organization Certificate and Bylaws and management remuneration plan
may also have anti-takeover effects. Finally, regulatory restrictions may make
it difficult to acquire either Troy Financial or Troy Savings.
RESTRICTIONS IN TROY FINANCIAL'S CERTIFICATE OF INCORPORATION AND BYLAWS
The following discussion is a general summary of some of the provisions of
Troy Financial'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 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. These provisions will also render the removal of the current Board of
Directors or management of Troy Financial more difficult. See "Additional
Information" if you would like to obtain a copy of Troy Financial's Certificate
of Incorporation and Bylaws.
Limitation on Voting Rights. The Certificate of Incorporation of Troy
Financial provides that no beneficial owner in excess of 10% of the then
outstanding shares of common stock (the "Limit") can 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 Troy Financial 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 Troy Financial
or Troy Savings 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 Troy Financial 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 Troy Financial is divided
into three classes. Each class consists of approximately one-third of the
members of the board. Each class serves a three-year term, with approximately
one-third of the board being elected each year. Troy Financial's Certificate of
Incorporation
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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 use its voting power to gain control of the
Board of Directors without the consent of the incumbent Board of Directors of
Troy Financial. Directors may be removed by the stockholders only for cause by
the affirmative vote 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 at a
special meeting of stockholders called for such a purpose. 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 Troy Financial may be
called at any time by a majority of the Board of Directors of Troy Financial or
by the holders of at least 66 2/3% of the voting power of all outstanding shares
of capital stock of Troy Financial 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 Troy Financial 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 Troy Financial'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 Troy Financial. The 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 of Directors 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. Troy Financial's
Board of Directors 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. To approve certain "Business Combinations" with "Interested
Stockholders" (each as defined in Troy Financial's Certificate of Incorporation)
and related transactions, the Certificate of Incorporation requires the approval
of:
(a) the holders of at least 80% of the total number of outstanding shares
of voting stock and
(b) 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 (b) 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 of Troy Financial, 80% approval is
not required if the Business Combination has been approved by at least 66 2/3%
of Troy Financial's directors, who are not affiliated with
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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 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. "Interested Stockholder" is
defined to include, among others, any person (other than Troy Financial, 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 outstanding voting stock,
(b) is an affiliate of Troy Financial 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 outstanding voting stock, or
(c) 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
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.
"Business Combination" is defined to include:
(1) any merger or consolidation of Troy Financial 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;
(2) 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 Troy Financial or any of its
subsidiaries, of any assets of Troy Financial or any subsidiary that
have an aggregate book value as of the end of Troy Financial's most
recent fiscal quarter of 10% or more of the total market value of the
outstanding shares of Troy Financial 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 Troy Financial;
(3) any issuance or transfer by Troy Financial or any subsidiary of any
equity securities of Troy Financial or any subsidiary having an
aggregate market value of five percent or more of the total market
value of the outstanding shares of Troy Financial or such subsidiary to
any Interested Stockholder or any affiliate or associate of any
Interested Stockholder, other than Troy Financial 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 Troy Financial
or any other method affording substantially proportionate treatment to
the holders of voting stock;
(4) any adoption of any plan or proposal for the liquidation or dissolution
of Troy Financial or any subsidiary proposed by or on behalf of an
Interested Stockholder or any affiliate or associate of such Interested
Stockholder, other than Troy Financial or any of its subsidiaries; and
(5) any reclassification of securities (including any reverse stock split),
or recapitalization of Troy Financial, or any merger or consolidation
of Troy Financial 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 Troy Financial or any subsidiary which is
directly or indirectly owned by any Interested Stockholder
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or any affiliate or associate of any Interested Stockholder, other than
Troy Financial or any of its subsidiaries.
Evaluation of Offers. The Certificate of Incorporation of Troy Financial
further provides that the Board of Directors of Troy Financial, when evaluating
any offer of another party to make a tender or exchange offer for any equity
security of Troy Financial, merge or consolidate Troy Financial with another
institution, or purchase or otherwise acquire all or substantially all of the
properties and assets of Troy Financial, shall, in connection with the exercise
of its judgment in determining what is in the best interests of Troy Financial
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
Troy Financial, 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 Troy Financial, 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 Troy Financial, even if the
price offered is significantly greater than the then market price of any equity
security of Troy Financial.
Amendment of Certificate of Incorporation and Bylaws. Amendments to Troy
Financial's Certificate of Incorporation must be approved by 66 2/3% of the
Board of Directors and by a majority 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 Troy Financial, 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 Troy
Financial's Certificate of Incorporation which governs Business Combinations.
Troy Financial's Bylaws may be amended or repealed by a majority vote of the
Board of Directors of Troy Financial then in office. The stockholders may also
amend or repeal the Bylaws of Troy Financial 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 Troy Financial 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 Troy Financial 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 Troy Financial. The notice
provision requires a stockholder who desires to raise new business to provide
certain information to Troy Financial 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 Troy Financial with certain information concerning the
nominee and the proposing stockholder.
ANTI-TAKEOVER EFFECTS OF TROY FINANCIAL'S CERTIFICATE OF INCORPORATION AND
BYLAWS AND BENEFIT PLANS ADOPTED IN CONVERSION
The provisions described above are intended to reduce Troy Financial'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 Troy Financial or Troy
Savings or a tender or exchange offer for their stock. See "Management of Troy
Savings Bank -- Benefit Plans." Troy Financial and Troy Savings have entered or
intend to enter into agreements with key officers and employees and Troy Savings
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 Troy Financial or Troy
Savings. See "Management of Troy Savings Bank -- Benefit Plans." The foregoing
provisions and limitations may make it more difficult for companies or persons
to acquire control of Troy Financial and Troy
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Savings. Additionally, the provisions could deter offers to acquire the
outstanding shares of Troy Financial which might be viewed by stockholders to be
in their best interests.
Troy Financial's Board of Directors believes that the provisions of the
Certificate of Incorporation and Bylaws and Troy Financial's benefit plans are
in the best interest of Troy Financial 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 Troy Financial 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.
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:
(1) 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;
(2) 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;
(3) 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
(4) 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 TROY SAVINGS' RESTATED ORGANIZATION CERTIFICATE AND BYLAWS
Although the Board of Trustees of Troy Savings is not aware of any effort
that might be made to obtain control of Troy Savings after conversion, the Board
of Trustees believes that it is appropriate to adopt certain provisions
permitted by the General Regulations of the New York Banking Board 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 Troy
Financial, as Troy Savings' sole stockholder.
Troy Savings' 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 Troy Savings 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
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<PAGE> 134
the New York Superintendent, is prohibited for a period of three years following
the both the consummation of the conversion of Troy Savings from a mutual to a
stock savings bank and the concurrent acquisition by Troy Financial of all of
the outstanding capital stock of Troy Savings. 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, Troy Savings'
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 Troy Savings
in the years immediately following the conversion.
DESCRIPTION OF CAPITAL STOCK OF TROY FINANCIAL CORPORATION
GENERAL
Troy Financial 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 preferred stock having a par value of
$.0001 per share (the "Preferred Stock"). In connection with the conversion,
Troy Financial currently expects to issue up to 10,200,500 shares of common
stock (or up to 11,730,575 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, Troy Financial currently expects to issue up to 10,486,540
shares of common stock at the maximum of the estimated price range (or
12,139,021 shares at the maximum plus 15% of the estimated price range). Troy
Financial does not expect to issue any shares of Preferred Stock. The Board of
Directors of Troy Financial 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 Troy Financial's
common stock will have the same relative rights as, and will be identical in all
respects to, all the other shares of Troy Financial's common stock. Upon receipt
by Troy Financial of the full specified purchase price therefor, the common
stock will be fully paid and non-assessable.
THE COMMON STOCK OF TROY FINANCIAL 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 Troy Financial may declare and pay
dividends upon the shares of Troy Financial's common stock out of Troy
Financial's statutory surplus or out of certain net profits of Troy Financial,
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 Troy Financial 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 Troy
Financial will possess exclusive voting rights in Troy Financial. Each holder of
shares of common stock will be entitled to attend all special and annual
meetings of the stockholders of Troy Financial 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 Troy Financial'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, Troy Savings' corporate powers
and control are vested in its Board of Trustees, who elect the officers of Troy
Savings and who fill any vacancies on the Board of Trustees as it exists upon
conversion. Subsequent to conversion, voting rights of Troy Savings will vest
exclusively with Troy Financial which will be the owner of Troy Savings'
outstanding capital stock. The
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Board of Directors of Troy Financial will vote Troy Savings' capital stock, and,
consequently, the holders of the common stock of Troy Financial will not have
direct control of Troy Savings.
Liquidation. In the event of any dissolution, liquidation or winding up of
Troy Financial, 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
Troy Financial remaining after Troy Financial 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 Troy Financial will not
be entitled to preemptive rights with respect to any shares or other securities
of Troy Financial which may be issued.
PREFERRED STOCK
None of the shares of Troy Financial's authorized Preferred Stock will be
issued in the conversion. The Board of Directors of Troy Financial expressly is
authorized, subject to limitations prescribed by the Delaware General
Corporation Law and the provisions of Troy Financial'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 TROY SAVINGS BANK
GENERAL
If the holding company form of organization is not utilized in connection
with the conversion, Troy Savings may offer shares of its common stock in
connection with the conversion. Prior to doing so, Troy Savings will conduct a
resolicitation of depositors. The following is a discussion of the capital stock
of Troy Savings.
The Restated Organization Certificate of Troy Savings 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 Troy Savings 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 Troy Savings' stockholders, except to the
extent that such approval is required by governing law. All of the issued and
outstanding common stock of Troy Savings will be held by Troy Financial as Troy
Savings' sole stockholder.
THE CAPITAL STOCK OF TROY SAVINGS 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 Troy Savings' common stock will be entitled to
receive and to share equally in such dividends as may be declared by the Board
of Directors of Troy Savings 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 Troy Savings' 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
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Corporation -- Anti-Takeover Effects of Troy Financial's Certificate of
Incorporation and Bylaws and Benefit Plans Adopted in Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding up of
Troy Savings, the holders of its common stock will be entitled to receive, after
payment of all debts and liabilities of Troy Savings (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" and "-- Liquidation Rights"), all assets of
Troy Savings available for distribution in cash or in kind.
Preemptive Rights. Holders of the common stock of Troy Savings will not be
entitled to preemptive rights with respect to any shares of Troy Savings which
may be issued. Upon receipt by Troy Savings of the full specified purchase price
therefor, the common stock of Troy Savings will be fully paid and non-
assessable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is Registrar and
Transfer Company.
EXPERTS
The consolidated financial statements of Troy Savings 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 LLP, independent certified public accountants, as indicated in its
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 has consented to the publication herein of the summary of its report
to Troy Savings and Troy Financial 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 have been passed upon for Troy Savings and Troy Financial by
Hogan & Hartson L.L.P., Washington, D.C., special counsel to Troy Savings and
Troy Financial. The New York State income tax consequences of the conversion
have been passed upon for Troy Savings and Troy Financial by KPMG LLP. Certain
legal matters will be passed upon for Sandler O'Neill by Muldoon, Murphy &
Faucette LLP, Washington, D.C.
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ADDITIONAL INFORMATION
Troy Financial 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 Troy Financial. The
conversion valuation appraisal report may also be inspected by Eligible Account
Holders and Supplemental Eligible Account Holders at the offices of Troy Savings
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.
Troy Savings 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.
Troy Financial 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, Troy Financial will register its common
stock with the SEC under Section 12(g) of the Exchange Act, and, upon such
registration, Troy Financial and the 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, Troy Financial has undertaken
that it will not terminate such registration for a period of at least three
years following the conversion. In the event that Troy Savings amends the plan
of conversion to eliminate the concurrent formation of Troy Financial as part of
the conversion, Troy Savings will register its stock with the FDIC under Section
12(g) of the Exchange Act and, upon such registration, Troy Savings 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 Troy Financial
and the Restated Organization Certificate and Bylaws of Troy Savings are
available without charge from Troy Savings. Troy Savings' principal office is
located at 32 Second Street, Troy, New York 12180 and its telephone number is
(518) 270-3200.
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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-7
</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> 139
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 LLP
October 30, 1998
Albany, New York
F-2
<PAGE> 140
THE TROY SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
SEPTEMBER 30, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
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
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 141
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> 142
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> 143
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:
Cash flows from operating activities:
Net income (loss)................................... $ (878) $ 3,658 $ 5,078
Adjustments to reconcile net income (loss) to net
cash 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)
--------- -------- ---------
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-6
<PAGE> 144
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.
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.
F-7
<PAGE> 145
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(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.
(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.
F-8
<PAGE> 146
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(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.
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.
(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
F-9
<PAGE> 147
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
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.
(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.
F-10
<PAGE> 148
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
(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.
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-11
<PAGE> 149
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>
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>
F-12
<PAGE> 150
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) SECURITIES AVAILABLE FOR SALE (CONTINUED)
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>
<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>
APPROXIMATE
AMORTIZED FAIR
MATURITY RANGES COST 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-13
<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.
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
F-14
<PAGE> 152
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) NET LOANS RECEIVABLE -- (CONTINUED)
$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>
(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>
F-15
<PAGE> 153
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) PREMISES AND EQUIPMENT, NET -- (CONTINUED)
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.
(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-16
<PAGE> 154
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(9) DEPOSITS -- (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.
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>
F-17
<PAGE> 155
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) EMPLOYEE BENEFIT PLANS -- (CONTINUED)
<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>
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).
F-18
<PAGE> 156
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) EMPLOYEE BENEFIT PLANS -- (CONTINUED)
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>
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-19
<PAGE> 157
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES -- (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>
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
F-20
<PAGE> 158
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) INCOME TAXES -- (CONTINUED)
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.
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-21
<PAGE> 159
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 $3.2 million at September 30, 1998
and 1997.
(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.
F-22
<PAGE> 160
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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>
(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.
F-23
<PAGE> 161
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) COMMITMENTS AND CONTINGENT LIABILITIES -- (CONTINUED)
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>
<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 $41,622 $50,547
====== ======= =======
</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
F-24
<PAGE> 162
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) COMMITMENTS AND CONTINGENT LIABILITIES -- (CONTINUED)
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.
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-25
<PAGE> 163
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) COMMITMENTS AND CONTINGENT LIABILITIES -- (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.
(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.
F-26
<PAGE> 164
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
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.
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
F-27
<PAGE> 165
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
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.
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>
F-28
<PAGE> 166
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS -- (CONTINUED)
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.
(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%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 AMOUNT RATIO
------------------ ------- -----
<S> <C> <C>
Leverage (Tier I) Capital................................... $70,943 10.64%
Risk-based Capital:
Tier I............................................ $70,943 15.01%
Total............................................. $77,372 16.37%
</TABLE>
(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
F-29
<PAGE> 167
THE TROY SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) ADOPTION OF PLAN OF CONVERSION -- (CONTINUED)
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 1-4% 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.
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-30
<PAGE> 168
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------------------------------------------------------
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...................... 1
Summary.................................... 3
Risk Factors............................... 7
Troy Financial Corporation................. 9
The Troy Savings Bank...................... 9
Recent Developments........................ 10
Selected Consolidated Financial and Other
Data..................................... 13
Use of Proceeds............................ 15
Dividend Policy............................ 15
Market for the Common Stock................ 16
Regulatory Capital Compliance.............. 17
Capitalization............................. 18
Pro Forma Data............................. 19
Comparison of Valuation and Pro Forma
Information With and Without Contribution
to the Community Foundation.............. 24
The Troy Savings Bank and Subsidiaries
Consolidated Statements of Income........ 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 27
Business of Troy Financial Corporation..... 43
Business of Troy Savings Bank.............. 43
Regulation and Supervision................. 68
Taxation................................... 76
Management of Troy Financial Corporation... 77
Management of Troy Savings Bank............ 78
The Conversion............................. 90
Restrictions on Acquisition of Troy
Financial Corporation.................... 110
Description of Capital Stock of Troy
Financial Corporation.................... 115
Description of Capital Stock of Troy
Savings Bank............................. 116
Transfer Agent and Registrar............... 117
Experts.................................... 117
Legal and Tax Opinions..................... 117
Additional Information..................... 118
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
------------------------
UNTIL MARCH 19, 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.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
10,200,500 SHARES
[TROY FINANCIAL CORPORATION LOGO]
(PROPOSED BANK HOLDING COMPANY
FOR THE TROY SAVINGS BANK)
COMMON STOCK
------------------------
PROSPECTUS
------------------------
FEBRUARY 12, 1999
Sandler O'Neill & Partners, L.P.
------------------------------------------------------
------------------------------------------------------
