<PAGE> 1
As filed with the Securities and Exchange Commission on January 29, 1999
Registration No. 333-68813
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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TROY FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C> <C>
Delaware 6712 16-1559508
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
</TABLE>
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32 Second Street
Troy, New York 12180
(518) 270-3313
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
--------------------
Daniel J. Hogarty, Jr.
President and Chief Executive Officer
Troy Financial Corporation
32 Second Street
Troy, New York 12180
(518) 270-3313
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------------
Copies to:
<TABLE>
<S> <C>
Stuart G. Stein, Esquire Joseph A. Muldoon, Jr., Esquire
Roger A. Seiken, Esquire Muldoon, Murphy & Faucette
Hogan & Hartson L.L.P. 5101 Wisconsin Avenue, N.W.
555 Thirteenth Street, N.W. Washington, D.C. 20016
Washington, D.C. 20004 (202) 362-0840
(202) 637-5600
</TABLE>
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
--------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with the provisions of
section 8(a) of the securities act of 1933, as amended, or until this
registration statement shall become effective on such date as the securities and
exchange commission, acting pursuant to said section 8(a), may determine.
<PAGE> 2
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 29, 1999
PROSPECTUS
TROY FINANCIAL CORPORATION
(PROPOSED HOLDING COMPANY FOR THE TROY SAVINGS BANK)
10,200,500 SHARES OF COMMON STOCK
(ANTICIPATED MAXIMUM OF APPRAISAL RANGE)
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The Troy Savings Bank is converting from the mutual form to the stock form of
organization. As part of this conversion, The Troy Savings Bank will become a
subsidiary of Troy Financial Corporation. Troy Financial is offering its common
stock to depositors with subscription rights. The subscription offering will
terminate at ___ p.m., New York time, on ____, 1999. There also will be a
community or public offering, which may terminate at any time without notice,
but no later than ____, 1999, without regulatory approval. The minimum
subscription order is 25 shares, or $250, and the maximum order is 50,000
shares, or $500,000, subject to adjustment. Troy Financial anticipates that its
common stock will be quoted on the Nasdaq Stock Market 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 1-800-___ for
further assistance.
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TERMS OF OFFERING
<TABLE>
<CAPTION>
<S> <C>
o PRICE PER SHARE $10.00
o NUMBER OF SHARES OFFERED 10,200,500
o AGGREGATE AMOUNT OF COMMON STOCK OFFERED $102,005,000
o ESTIMATED UNDERWRITING DISCOUNTS, COMMISSIONS
AND OTHER EXPENSES $2,468,000
o ESTIMATED NET PROCEEDS TO TROY FINANCIAL CORPORATION $99,537,000
</TABLE>
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PLEASE READ THE RISK FACTORS ON PAGE __ BEFORE SUBSCRIBING FOR ANY COMMON STOCK.
---------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION,
THE FEDERAL DEPOSIT INSURANCE CORPORATION NOR THE NEW YORK STATE BANKING
DEPARTMENT HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THESE SECURITIES ARE NOT DEPOSITS OR ACCOUNTS AND ARE NOT INSURED OR GUARANTEED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
---------------
Sandler O'Neill & Partners, L.P. will use its best efforts to help us sell at
least 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.
, 1999
<PAGE> 3
[MAP/PICTURE OF HEADQUARTERS--MUSIC HALL]
References in this document to "we," "us," "our," and "Troy Financial"
refer to Troy Financial Corporation and, in some cases, to both Troy Financial
Corporation and The Troy Savings Bank. References to Troy Savings refer to The
Troy Savings Bank.
<PAGE> 4
QUESTIONS AND ANSWERS
The following are frequently asked questions. You should read this
entire prospectus, including the Risk Factors beginning on page ___ and The
Conversion beginning on page _____, for more information.
Q. HOW MANY SHARES OF STOCK ARE BEING OFFERED, AND AT WHAT PRICE?
A. We are offering for sale up to 10,200,500 shares of common stock at a
subscription price of $10.00 per share. We must sell at least 7,539,500
shares. If the appraised market value of the common stock changes due
to market or financial conditions, then, without notice to you, we may
be required to sell up to 11,730,575 shares.
Q: WHAT PARTICULAR FACTORS SHOULD I CONSIDER WHEN DECIDING WHETHER TO
PURCHASE THE STOCK?
A: There are many important factors for you to consider before making an
investment decision. Therefore, you should read this entire prospectus
before making your investment decision.
Q. WILL DIVIDENDS BE PAID ON THE STOCK?
A. Our Board of Directors has not made a decision as to the payment of
dividends.
Q: WILL I BE ABLE TO SELL MY STOCK AFTER I PURCHASE IT?
A: Unless you are one of our officers, directors or trustees, our stock
will be freely transferable. We anticipate having our stock quoted on
the Nasdaq Stock Market under the symbol "TRYF." There can be no
assurance, however, that someone will want to buy your shares or that
you will be able to sell them for more money than you originally paid.
Q. WILL MY STOCK BE COVERED BY DEPOSIT INSURANCE OR GUARANTEED BY ANY
GOVERNMENT AGENCY?
A. No. Unlike insured deposit accounts at Troy Savings, our stock will not
be insured or guaranteed by the Federal Deposit Insurance Corporation,
or FDIC, or any other government agency.
Q: HOW MUCH STOCK MAY I SUBSCRIBE FOR?
A: The minimum subscription is 25 shares, or $250, and the maximum
subscription is 50,000 shares, or $500,000, subject to adjustment.
If we do not sell enough shares to depositors in the subscription
offering, the remaining shares will be sold in the community or public
offering. Each purchaser in that offering may purchase up to 50,000
shares, or $500,000, subject to adjustment.
All purchases in the subscription and the community offering, when
added together, however, may not exceed 100,000 shares, or $1,000,000,
subject to adjustment if the appraised market value changes.
Q. WHEN IS THE DEADLINE TO SUBSCRIBE FOR STOCK?
A. We must receive a properly signed order form with the required payment
on or before ______ p.m., New York time, on ____________, 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. Subscription orders may be delivered in
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person to any branch office of Troy Savings during regular banking
hours, or by mail in the enclosed YELLOW envelope marked STOCK ORDER
RETURN. Subscription orders received after the subscription offering
expiration date may be held for participation in the community or
public offering. If the stock offering is not completed by ______,1999
and if not otherwise extended, then all funds will be returned promptly
with interest, and all withdrawal authorizations will be canceled.
Q. CAN I CHANGE MY MIND AFTER I PLACE AN ORDER TO SUBSCRIBE FOR STOCK?
A. No. After we receive your order form and 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; (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). Please do not send cash in the mail.
Q: WILL I RECEIVE INTEREST ON MY SUBSCRIPTION PAYMENT?
A. Subscriptions payments will be placed in an interest bearing escrow
account at Troy Savings, and will earn interest at our passbook rate.
Depositors who elect to pay by withdrawal will continue to receive
interest on their accounts until the funds are withdrawn.
Q. CAN I SUBSCRIBE FOR SHARES USING FUNDS IN MY INDIVIDUAL RETIREMENT
ACCOUNT OR IRA AT TROY SAVINGS?
A. You cannot purchase stock with your existing IRA at Troy Savings. You
may, however, establish a self-directed IRA with an outside trustee to
subscribe for stock using your IRA funds. Please call our Conversion
Center (1-800-____) to get more information. Please understand that the
transfer of IRA funds takes time, so please make arrangements as soon
as possible.
Q: CAN I PURCHASE STOCK ON BEHALF OF SOMEONE ELSE OR TRANSFER MY RIGHTS TO
SOMEONE ELSE?
A: No, you may only purchase stock for yourself, and you may not transfer
your subscription rights.
Q: WHAT HAPPENS IF THERE ARE NOT ENOUGH SHARES OF STOCK TO FILL ALL
ORDERS?
A: If there is an oversubscription, then you may not receive any or all of
the shares you want to purchase.
Q: WHO CAN HELP ANSWER ANY OTHER QUESTIONS I MAY HAVE ABOUT THE STOCK
OFFERING?
A: For answers to other questions we encourage you to read this
prospectus. Questions may also be directed to the Troy Conversion
Center at 1-800-____, Monday through Friday, between the hours of 10:00
a.m. and 4:00 p.m. You may also write to:
Troy Conversion Center
------------
Troy, New York ____
Please note that the Troy Conversion Center will be closed for bank
holidays. TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48
HOURS PRIOR TO THE EXPIRATION DATE OF _______, 1999 IN ACCORDANCE WITH
FEDERAL LAW, NO PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS
PRIOR TO _____, 1999 OR HAND DELIVERED ANY LATER THAN TWO DAYS PRIOR TO
_____, 1999.
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<PAGE> 6
SUMMARY
This summary highlights selected information from this prospectus and
does not contain all the information that you need to know before making an
informed investment decision. Therefore, you should read this entire prospectus.
This prospectus contains certain 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 such
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, but not all, of the factors that may cause
such a difference include those discussed in the Risk Factors section beginning
on page ___ of this prospectus.
THE COMPANIES
TROY FINANCIAL CORPORATION
32 Second Street
Troy, New York 12180
(518) 270-3133
Troy Financial Corporation has not engaged in any significant business
to date. We were established in December 1998 as a Delaware corporation to be
the bank holding company for The Troy Savings Bank. Please see pages __.
THE TROY SAVINGS BANK
32 Second Street
Troy, New York 12180
(518) 270-3133
Troy Savings Bank is a community oriented mutual savings 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, New York 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 ____.
Troy Savings also is recognized as home to the renowned Troy Savings
Bank Music Hall, a 1,200 seat facility located on the upper floors of the
headquarters of Troy Savings. The Music Hall has been an integral part of the
Troy community since it opened in 1875. Troy Savings has a history, which it is
committed to preserve, of ensuring that the Music Hall is available to its
patrons and the community, thereby fulfilling the purpose designated by its
founders.
THE CONVERSION
The Board of Trustees of Troy Savings has adopted a plan to convert
Troy Savings from a mutual to stock form savings bank. As part of that plan, we
are offering our common stock in concurrent subscription and community
offerings, and if we do not sell at least 7,539,500 shares, we will also offer
our common stock in a syndicated community or public offering. We will use a
portion of the proceeds from the stock offering to acquire Troy Savings.
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<PAGE> 7
Immediately following the stock offering, we will also contribute up to
$2.9 million of common stock to a charitable foundation. In addition, we also
expect to provide stock-based compensation to our officers, directors, trustees
and employees. Please see pages ____.
THE STOCK OFFERING AND DETERMINATION OF OUR MARKET VALUE OR ESTIMATED PRICE
RANGE
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 an independent appraisal
of our market value. FinPro, Inc., an independent appraisal firm experienced in
appraisals of converting savings banks, performed the appraisal. FinPro has
estimated that, in its opinion, at January 29, 1999, our aggregate market
value, or estimated price range, is between $75,395,000 and $102,005,000. This
results in an offering of between 7,539,500 and 10,200,500 shares, assuming an
offering price of $10.00 per share. The appraisal is based in part upon Troy
Savings' financial condition and results of operations and the effect of the
additional capital raised by the sale of stock. The $10.00 price per share was
determined by our Board of Trustees. Prior to completion of the conversion, if
our appraised market value changes due to market or financial conditions, then,
without notice to you, we may be required to sell 11,730,575 shares. In
addition, 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 _____.
PERSONS ELIGIBLE TO PURCHASE STOCK IN THE SUBSCRIPTION OFFERING
The following persons and benefit plan, in the order of priority
listed, are eligible to purchase 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 tax-qualified employee stock ownership plan established to
provide retirement benefits to our employees.
3. Depositors with accounts at Troy Savings with balances of at
least $100 on December 31, 1998, but who did not hold deposit
accounts at Troy Savings with balances of at least $100 on
June 30, 1997.
SUBSCRIPTION RIGHTS ARE NON-TRANSFERABLE
You may not sell or assign your rights to purchase stock in the
subscription offering, and any transfer of those rights is prohibited by law. If
you exercise your subscription rights, you will be required to certify that you
are purchasing shares solely for your own account and that you have no agreement
or understanding regarding the sale or transfer of shares. We intend to pursue
any and all legal and equitable remedies if we become aware of the transfer of
subscription rights and will not honor orders known by us to involve the
transfer of such rights. Please see pages ____.
ANY REMAINING SHARES MAY BE SOLD IN A COMMUNITY OR PUBLIC OFFERING
Any shares remaining after the subscription offering, will be sold in a
community and/or syndicate community offering
TERMINATION OF THE STOCK OFFERING
The subscription offering will terminate at ____ p.m., New York time,
on _____, 1999. The community offering or public offering, if any, may terminate
at any time without notice, but no later than _____, 1999, unless a later date
is approved by the New York Superintendent of Banks and the Federal Deposit
Insurance Corporation. Please see pages ____.
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MARKET FOR THE COMMON STOCK
We are a new company and have never issued stock. Consequently, there
is no existing market for our stock. We anticipate, however, having our stock
quoted on the Nasdaq Stock Market National Market under the symbol "TRYF."
Please see pages ____.
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 ____.
USE OF THE PROCEEDS FROM THE SALE OF OUR STOCK
After deduction of expenses, we estimate the proceeds from the sale of
our stock to be between $73.2 million and $99.5 million depending upon the
number of shares sold. If our market value or estimated price range increases
and we sell 11,730,575 shares of stock, then we estimate the net proceeds will
be $114.7 million. We will use approximately 50% of the net proceeds to purchase
all of the capital stock of Troy Savings. We intend to use a portion of the
remainder of the net proceeds to fund a loan to our employee stock ownership
plan to enable it to purchase 838,922 shares of our stock. We will invest the
remaining net proceeds in short-term securities and deposit accounts, and
otherwise use the net 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, which 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. We may consider
acquisitions of other financial services firms and/or branch offices, although
at this time, we do not have any arrangements, understandings or agreements
regarding potential transactions.
Troy Savings will use the funds it receives from us in exchange for all
of its capital stock for the operation of its business, including making loans
and purchasing securities. The additional funds in Troy Savings will also count
as regulatory capital and therefore will support future growth of the total
assets of Troy Savings. Please see pages _____.
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 ___ through ___. OUR COMMON
STOCK IS NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION
OR ANY OTHER GOVERNMENT AGENCY.
In addition, two important factors that investors should consider in
evaluating stocks of savings banks, including Troy Savings, are 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 a stockholders' equity or book value per share of $17.78,
assuming 7,539,500 shares are sold at $10 per share, our price-to-book ratio
would be 56.24% as of September 30, 1998. If we sell 10,200,500 shares at $10
per share, assuming a stockholders' equity or book value per share of $15.15 per
share, our price-to-book ratio would be 66.01% as of September 30, 1998.
The price/earnings or P/E ratio represents the price per share of stock
divided by its 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
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1998, would be 25.78x and 31.52x, assuming the issuance of 7,539,500 and
10,200,500 shares of stock, respectively, at $10 per share.
$2.9 MILLION CONTRIBUTION OF STOCK TO A CHARITABLE FOUNDATION WILL DILUTE
STOCKHOLDERS' EQUITY AND VOTING INTERESTS
Following the stock offering, we plan to contribute up to $2.9 million
of our common stock to a newly formed charitable foundation, assuming we sell
10,200,500 shares. As a result of our contribution, persons purchasing shares in
the stock offering will have their ownership and voting interests diluted by
2.73%. Please see pages ____.
OUR OFFICERS AND EMPLOYEES WILL RECEIVE BENEFITS FOLLOWING THE STOCK OFFERING
The Board of Trustees of Troy Savings has analyzed benefit plans to
retain and attract high caliber executive officers and employees, maintain their
attention and loyalty in change of control situations and align their interests
with those of our stockholders. Because the Board of Trustees has concluded that
the cost of establishing and maintaining these benefit plans would be justified
by the resulting benefits, we intend to adopt the following benefit plans:
o LONG-TERM EQUITY COMPENSATION PLAN. Following the stock offering, we
intend to adopt an equity compensation plan, subject to stockholder
approval. This plan will consist of a stock option plan and a
management recognition plan that will provide for grants of options
and shares of restricted stock, respectively, to directors,
officers, employees and independent contractors. We anticipate that
1,048,650 shares would be reserved for issuance under stock options
and we intend to make grants of 419,460 shares of restricted stock.
o EMPLOYEE STOCK OWNERSHIP PLAN. We have established an employee stock
ownership plan for the benefit of our employees and officers. This
benefit plan intends to subscribe for up to 838,922 shares of stock
in the subscription offering, or purchase shares in the open market
if the subscription offering is oversubscribed, and to finance its
subscription with funds borrowed from us. Subject to receipt of any
necessary regulatory approvals or opinions, we intend to make cash
contributions to this benefit plan as required to service its debt.
The stock will be distributed to eligible employees as the loan is
repaid.
o SUPPLEMENTAL RETIREMENT AND BENEFIT RESTORATION PLAN. We intend to
implement a non-tax qualified benefit plan to provide additional
retirement benefits to select executive officers and/or highly
compensated employees. This would provide these participants with
additional retirement benefits that we cannot provide under our
other tax-qualified retirement plans because of limitations in
effect under federal tax laws.
o EMPLOYMENT AGREEMENTS, EMPLOYMENT PROTECTION AGREEMENTS AND EMPLOYEE
SEVERANCE COMPENSATION PLANS. We intend to enter into employment
agreements with three executive officers and employment protection
agreements with additional officers of Troy Savings that will
provide for, among other things, cash payments to be made, and
benefits to be continued, upon their termination of employment in
certain circumstances and upon a change of control situation. These
agreements may increase the cost of acquiring us, thereby
discouraging future takeover attempts. Troy Financial also intends
to establish an employee compensation severance plan which will
provide eligible employees with severance pay benefits in the event
of termination of employment after a change of control.
o CASH PAYMENTS AND ACCELERATED VESTING. Our employee stock ownership
plan, supplemental retirement and benefits restoration plan and
long-term equity compensation plan may provide for cash payments
and/or accelerated vesting upon a change of control of Troy
Financial and subsequent termination of our employees. This
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may discourage or increase the cost of an acquisition of us and may
reduce the amount that stockholders might otherwise receive for
their shares.
The following table presents the dollar value and percentage of shares
to be issued in the offering, including shares issued to a charitable
foundation, of the shares to be allocated under the employee stock ownership
plan to all eligible employees over a 10 year period in accordance with the
requirements of the Employee Retirement Income Security Act of 1974, as
amended, and the proposed long term equity compensation plan that Troy
Financial intends to adopt within one year of the consummation of the
conversion, subject to stockholder approval. As to the employee stock ownership
plan, the table assumes shares are allocated to participants at $10.00 per
share and that 10,200,500 shares are sold, with 286,030 shares contributed to a
charitable foundation. Stock options will be granted with an exercise price
equal to the fair market value of common stock on the day of grant. Recipients
of stock options realize value only in the event of an increase in the price of
the common stock following the date of grant of the stock options.
<TABLE>
<CAPTION>
Percentage of
Shares Issued,
Including
Estimated Shares Issued
Value to a Charitable
of Shares (1) Foundation
------------- ----------
<S> <C> <C>
Employee stock ownership plan $8,389,200 8.0%
Long-term equity compensation plan:
Management recognition plan $4,194,600 4.0%
Stock option plan -- 10.0%
---------- ----
$12,583,800 22.0%
========== ====
</TABLE>
VOTING CONTROL OF EXECUTIVE OFFICERS AND TRUSTEES
Executive officers and trustees of Troy Savings and parties related to
them propose to purchase stock in the offering in an aggregate amount equal to
$4,250,000, or 4.15% of the stock sold, assuming that we sell 10,200,500 shares.
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 the
stock, assuming that 10,200,500 shares are sold in the offering and 286,030
shares are contributed to a charitable foundation following the offering. Please
see page .
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RISK FACTORS
An investment in our common stock involves certain risks. To understand
these risks and to evaluate an investment in our common stock, you should read
this entire prospectus, including the following risk factors.
FACTORS WHICH WILL NEGATIVELY IMPACT EARNINGS
o Charitable Contributions. In fiscal 1999, we expect to incur contribution
expenses 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 of
tax benefits from the contributions.
o Increase in Loan Loss Provisions. A future increase in Troy Savings'
provision for loan losses would negatively impact earnings. The greater the
loan loss provision, the lower our earnings will be for that fiscal year.
Earnings in 1998 and 1997 were adversely affected by an increase in the
provisions for loan losses. Troy Savings' provisions for loan losses in
fiscal years 1998 and 1997 were $4.1 million and $3.9 million,
respectively, as compared to $928,000 for fiscal 1996. As a result of the
trends in Troy Savings' loan portfolio, including the current level of
non-performing loans and net charge-offs, as well as consideration of the
general economic trends in Troy Savings' market area, we anticipate that
the provision for loan losses will continue in the current range through at
least fiscal 1999. There can be no assurances, however, 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 Conditions
and Results of Operations -- Results of Operations" beginning on page ____.
o Changes in Interest Rates. Our earnings are dependent on net interest
income. Net interest income is the difference between the amount that we
receive from interest earning assets, such as loans and investment
securities, and the amount that we pay out on interest bearing liabilities,
such as deposit accounts. As interest rates change, the amount we earn on
interest earning assets may change at a different pace than the cost of our
interest bearing liabilities. If our cost of funds increases faster than
the yield on our interest earning assets, net interest income, and thus our
earnings, would be reduced. Generally, during extended periods when short
term and long term interest rates are relatively close, net interest
margins become smaller, thereby reducing net interest income.
At September 30, 1998, Troy Savings' one-year interest rate sensitivity
"gap" was 5.37%. This represents the amount by which Troy Savings' interest
sensitive assets in a given period exceed its interest sensitive
liabilities for the same period stated as a percentage of total assets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Management of Interest Rate Risk."
Although the management of Troy Savings has implemented an interest rate
risk management program, there is no assurance that the program will
prevent changes in the interest rate environment from impacting our net
interest income and earnings. Troy Savings also cannot predict the future
movement of interest rates, and adverse movements not protected by the
program could impact our consolidated financial condition and results of
operations.
o Stock Based Benefit Plans. Employee Stock Ownership Plan. 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. The increase in our compensation
expense will depend upon the fair value of our stock at the time the shares
are
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released to our employees and the costs associated with the acquisition of
our stock by the employee stock ownership plan. Accordingly, we can not
determine the impact on our future earnings. See "Pro Forma Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Impact of Accounting Pronouncements."
Management Recognition Plan. 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. The exact amount of the increased
compensation expense, however, cannot be predicted because it will depend
upon the specific amount of stock grants and the percentage which vests in
each year. See "Pro Forma Data" and "Management -- Benefits -- Management
Recognition Plan."
OUR RETURN ON EQUITY IN THE FUTURE MAY BE BELOW THE INDUSTRY AVERAGE
The stock offering will increase our equity position significantly, yet
we may not be able to deploy this increased capital immediately. Accordingly,
until we can leverage our increased capital through the growth of
interest-earning assets, such as loans and investment securities, we expect our
return on equity to be below the industry average. Our ability to leverage our
new capital will be significantly affected by industry competition for loans and
deposits, and we anticipate that it will take time to deploy such capital
prudently.
At September 30, 1998, Troy Savings' ratio of equity to assets was
9.91%. Had we sold 7,539,500 or 10,200,500 shares of our stock at $10 per share
during fiscal 1998, our ratio of equity to assets would have been 19.81% and
21.13%, respectively. The average ratio of equity to assets for savings banks
with assets of $____ million to $___ million is __%.
THE YEAR 2000 PROBLEM COULD SIGNIFICANTLY IMPACT OUR CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Failure of any of Troy Savings' critical systems, significant credit
customers systems, key servicers systems, or the public infrastructure may cause
Troy Savings to suffer serious consequences including, but not limited to, the
inability of Troy Savings to do normal business and service its customers.
Despite Troy Savings' efforts with respect to Year 2000 readiness, there can be
no assurance that partial or total systems or business interruptions or the
associated costs would not have a material adverse effect upon Troy Savings'
business and our consolidated financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Compliance," beginning on page ____.
RISK OF ANTI-TAKEOVER PROVISIONS AND ACTIONS
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 or
impede the approval of matters, that stockholders may deem to be in their best
interest. The anti-takeover provisions and actions are:
o Purchases by the Board and Management. The Board of Trustees and executive
officers expect to purchase 425,000 shares of our stock, assuming we sell
10,200,500 shares. When combined with the potential acquisition of our
stock by our stock-based benefit plans, our management may have voting
control of up to 26.0% of our stock on a fully diluted basis, assuming the
sale of 10,200,500 shares and the contribution of 286,030 shares to a
charitable foundation.
9
<PAGE> 13
o Allocation of Shares in Employee Stock ownership Plan. The shares of stock
allocated to our employees under our employee stock ownership plan may be
voted by our employees. The plan trustee will vote unallocated shares, and
allocated shares as to which no instructions are received in the same
manner as the allocated shares for which it receives instructions, subject
to the requirements of its fiduciary duties. This could have an
anti-takeover effect.
o Contribution of Shares to Charitable Foundation. After the contribution of
stock to the charitable foundation, the foundation will own 2.80% of our
outstanding shares, assuming the sale of 10,200,500 shares. Federal bank
regulators require that the shares of stock held by the charitable
foundation be voted in the same proportion as all other shares of common
stock on all proposals considered by our stockholders. This voting
requirement will be waived if it would jeopardize the foundation's
tax-exempt status or result in a prohibited transaction. If this condition
is waived in the future, the foundation's Board of Directors, which is
comprised of individuals who are also trustees of Troy Savings, would
exercise sole voting power over the shares.
o Provisions of Law and Contracts. Delaware corporate law, federal law and
our certificate of incorporation may make it difficult and expensive for
someone to pursue an unwanted takeover attempt of us. Likewise, provisions
in our proposed employment and employment protection agreements and benefit
programs that provide for cash payments or the vesting of benefits upon a
change of control may also have an anti-takeover effect. This all 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. See "Restrictions on Acquisition of Troy
Financial Corporation-- Restrictions in Troy Financial's Certificate of
Incorporation and Bylaws-- Stockholder Vote Required to Approve Business
Combination with Interested Stockholders" and "Management of Troy Savings--
Benefit Plans."
IF REAL ESTATE VALUES IN OUR MARKET AREA WORSEN, OUR FINANCIAL CONDITION AND
EARNINGS COULD BE ADVERSELY AFFECTED
Based on charge off levels, loan appraisal reports and its knowledge of
the market area, management believes that portions of its market area show signs
of declining or stagnant real estate values supporting loan collateral. As a
result, since 1997, Troy Savings has experienced increased loan charge-offs and
high delinquency and non-performing loan levels. Troy Savings has taken steps
to address this situation, including increased loan loss provisions. 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.
If the real estate values in portions of our market area worsen, we may
continue to see increasing charge-off levels. This would have an adverse impact
on our financial condition and earnings.
YOU COULD HAVE DIFFICULTY SELLING OUR STOCK IF AN ACTIVE TRADING MARKET DOES NOT
DEVELOP
Because we are a new company, no market exists for our stock. Unless an
active and liquid trading market develops, you may not be able to sell your
shares at the time you desire to sell your shares. We have, however, applied to
have our stock quoted on the Nasdaq Stock Market 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" on page ___.
10
<PAGE> 14
DISTRIBUTION OF SUBSCRIPTION RIGHTS COULD RESULT IN ADVERSE INCOME TAX
CONSEQUENCES TO YOU
If the Internal Revenue Service were to determine that subscription
rights have an ascertainable value, then you could be taxed upon receipt or
exercise of them. 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."
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) 270-3313.
THE TROY SAVINGS BANK
The Troy Savings Bank is a community oriented mutual 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, New York 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 Federal Deposit Insurance Corporation and the New York Superintendent of
Banks. Troy Savings is a member of the Federal Home Loan Bank System, and
deposits at Troy Savings are insured by the Federal Deposit Insurance
Corporation 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) 270-3313.
11
<PAGE> 15
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 the "Management's Discussion and Analysis
of Financial Condition and Results of Operations" section beginning on page ___.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
Total assets............................ $ 716,649 $ 662,448 $ 657,524 $ 629,652 $ 607,259
Loans receivable, net................... 457,321 468,160 451,822 408,615 381,828
Securities available for sale
(fair value).......................... 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
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Interest and dividend income............ $ 48,030 $ 48,287 $ 46,862 $ 44,578 $ 39,129
Interest expense........................ 24,193 23,351 23,017 20,883 17,591
----------- ----------- ----------- ----------- -----------
Net interest income.................. 23,837 24,936 23,845 23,695 21,538
Provision for loan losses............... 4,050 3,900 928 965 1,930
----------- ----------- ----------- ----------- -----------
Net interest income after provision
for loan losses.................... 19,787 21,036 22,917 22,730 19,608
Operating income:
Service charges on deposits.......... 858 822 802 809 787
Loan servicing fees.................. 432 460 443 430 441
Trust income......................... 459 362 293 234 106
Net gains from securities
sales or calls..................... 8 4 1 34 136
Net gains (losses) from mortgage
loan sales......................... 76 14 (14) 18 172
Other income......................... 719 1,075 1,340 784 998
----------- ----------- ----------- ----------- -----------
Total other operating income....... 2,552 2,737 2,865 2,309 2,640
Other operating expenses:
Compensation and employee
benefits........................... 10,218 9,573 9,009 7,596 6,984
Occupancy............................ 2,101 2,089 1,956 1,519 1,317
Furniture, fixtures, and equipment... 1,080 901 961 884 523
Computer charges..................... 1,424 1,322 1,248 1,221 1,208
Professional, legal, and other fees.. 924 726 658 670 605
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>
12
<PAGE> 16
<TABLE>
<CAPTION>
AT OR FOR THE YEAR 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. See "Summary -- The Troy Savings Bank
Community Foundation." 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>
<CAPTION>
<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.
13
<PAGE> 17
USE OF PROCEEDS
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. 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. We will use approximately 50% of the net proceeds to
acquire Troy Savings. Based on anticipated net proceeds of $73.2 million to
$99.5 million, we expect to utilize between $36.6 million and $49.8 million for
that purpose.
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. Assuming that we sell 7,539,500 shares and contribute
73,153 shares to the charitable foundation, based on the minimum of our
appraised market value or estimated price range, or sell 10,200,500 shares and
contribute 286,030 shares to the charitable foundation based on the maximum of
our estimated price range, the amount of our loan to the employee stock
ownership plan would be $6.1 million or $8.4 million, respectively. If our
appraised market value is increased and we sell 11,730,575 shares of stock and
contribute 408,436 shares to the charitable foundation, then our loan would be
$9.7 million. We expect the term of the loan to be between 10 and 15 years at an
interest rate of approximately ___%.
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/or branch offices, although at this time, we do not have any
current arrangements, understandings or agreements regarding any transactions.
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.
The determination of whether to declare dividends will depend upon a
number of factors, including the amount of net proceeds from the stock 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.
14
<PAGE> 18
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 thereon. 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 and/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 only
out of the net profits of Troy Savings. Under New York Banking Law, the term
"net profits" includes the remainder of all earnings from current operations
plus actual recoveries on loans and investments and other assets, after
deducting from the total thereof all current operating expenses, actual losses,
accrued dividends on preferred stock, if any, and all federal and state taxes.
The approval of the New York Superintendent 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 Federal Deposit Insurance Corporation.
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 from a mutual to stock form 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. We
anticipate, however, having our stock quoted on the Nasdaq Stock Market National
Market under the symbol "TRYF" upon completion of the stock offering and
compliance with certain other criteria, including, among other things, 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 resales of our
stock can be made at or above the purchase price. See "The Conversion -- Number
of Shares to be Issued."
15
<PAGE> 19
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
------ ------- ------ ------- ------ -------
<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
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT SEPTEMBER 30, 1998
-----------------------------------------
ADJUSTED
MAXIMUM MAXIMUM
10,200,500 SHARES 11,730,575 SHARES
------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<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 Federal Deposit Insurance Corporation 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.
16
<PAGE> 20
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.............. -- 73,926 88,157 102,396 118,767
Retained earnings (3)................... 70,622 70,622 70,622 70,622 70,622
Net unrealized gain on securities
available for sale, net of taxes 407 407 407 407 407
Less:
Expense of contribution
to Community Foundation (4)........... -- (732) (1,792) (2,860) (4,084)
Plus:
Estimated tax benefit of contribution
to Community Foundation (5)........... -- 256 627 1,001 1,429
Less:
Common stock acquired by
the ESOP (6).......................... -- (6,090) (7,239) (8,389) (9,711)
Common stock acquired
by the MRP (6)........................ -- (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) 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.
(4) The amount of the contribution of common stock to the Community Foundation
will be recognized as an expense in the fiscal quarter in which the
contribution is made, which is expected to be the second quarter of fiscal
1999. No effect has been given to 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. See "The
Conversion -- The Troy Savings Bank Community Foundation."
(5) Represents the estimated tax benefit of the contribution of common stock to
the Community Foundation based on an assumed 35% tax rate and a $10.00 per
share price. The recognition of the tax benefit is limited to 10% of 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 Operation -- 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."
(6) Assumes that 8% of the number of shares of common stock sold in the
conversion, including the shares contributed to the Community Foundation,
will be purchased by the ESOP. The funds used to acquire the ESOP shares
will be borrowed from 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."
17
<PAGE> 21
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 750,000 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 has been sold at
the beginning of the period and the net proceeds, less the proceeds used to fund
the ESOP loan and purchase the Management Recognition Plan ("MRP") shares, were
invested by Troy Savings and Troy Financial at the beginning of the period.
The assumed return of 4.29% (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 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
18
<PAGE> 22
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
----------------------------------------------------------------
Minimum Midpoint Maximum 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 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
========= ========= ========= =========
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>
- ---------- (See footnotes on next page)
19
<PAGE> 23
(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.
(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. See "Summary -- The Troy Savings Bank Community Foundation."
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: (i) 8% of the number of shares of common stock sold in
conversion, including shares contributed to the Community Foundation, will
be purchased by the ESOP; (ii) the funds used to acquire such shares will
be borrowed by the ESOP from the net conversion proceeds retained by Troy
Financial; (iii) Troy Savings intends to make contributions to the ESOP in
amounts at least equal to the principal and interest requirement of the
debt; and (iv) payment of the ESOP debt is based upon equal installments of
principal and interest over a 10 year period. Assuming 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
20
<PAGE> 24
common stock. In the event that MRP grants are made from authorized but
unissued shares in an amount equal to 4% of the number of shares of common
stock sold in the conversion, including the shares contributed to the
Community Foundation, the interests of existing stockholders would be
diluted by approximately 3.85%. In that case and assuming all MRP shares
are outstanding, for the year ended September 30, 1998, pro forma net
income per share would be $0.03, $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 -- Benefit Plans."
(9) Stockholders' equity represents the difference between the stated amounts
of Troy Savings' 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 "The Conversion -- Liquidation Rights" and
"Regulation and Supervision" and "Taxation." The amounts shown for
stockholders' equity do not represent fair market values or amounts, if
any, distributable to stockholders in the unlikely event of liquidation.
(10) 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.
21
<PAGE> 25
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH NO 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. 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.
22
<PAGE> 26
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 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
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......................... 1,000.00 500.00 333.33 250.00
Offering price to pro forma
net income per share, as adjusted............ 25.78 25.32 28.82 27.91
Pro forma market capitalization to assets...... 9.75% 9.98% 11.41% 11.57%
Pro Forma Financial Ratios:
Return (loss) on assets........................ 0.01% 0.02% 0.04% 0.05%
Return (loss) on assets, as adjusted........... 0.36% 0.37% 0.38% 0.38%
Return (loss) 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 (10,580,000 (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......................... 250.00 200.00 200.00 166.67
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>
- ----------
NM -- Not Meaningful
23
<PAGE> 27
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 other financial statements and notes thereto beginning on
page F-1 of this Prospectus.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 38,842 39,050 36,413
Securities available for sale:
Taxable 4,121 7,262 8,521
Tax exempt 2,214 119 --
----------- ----------- -----------
6,335 7,381 8,521
Investment securities 300 353 410
Federal funds sold 2,553 1,503 1,518
----------- ----------- -----------
Total interest and dividend income 48,030 48,287 46,862
----------- ----------- -----------
Interest expense:
Deposits and escrows 23,339 22,812 22,557
Short-term borrowings 33 271 230
Long-term debt 821 268 230
----------- ----------- -----------
Total interest expense 24,193 23,351 23,017
----------- ----------- -----------
Net interest income 23,837 24,936 23,845
Provision for loan losses 4,050 3,900 928
----------- ----------- -----------
Net interest income after provision for loan losses 19,787 21,036 22,917
----------- ----------- -----------
Non-interest income:
Service charges on deposits 858 822 802
Loan servicing fees 432 460 443
Trust income 459 362 293
Net gains from securities sales or calls 8 4 1
Net gains (losses) from mortgage loan sales 76 14 (14)
Other income 719 1,075 1,340
----------- ----------- -----------
Total non-interest income 2,552 2,737 2,865
----------- ----------- -----------
Non-interest expense:
Compensation and employee benefits 10,218 9,573 9,009
Occupancy 2,101 2,089 1,956
Furniture, fixtures and equipment 1,080 901 961
Computer charges 1,424 1,322 1,248
Professional, legal and other fees 924 726 658
Printing, postage and telephone 614 559 543
Other real estate owned 1,087 380 499
Contribution expense 4,759 102 479
Other 2,884 2,887 2,845
----------- ----------- -----------
Total non-interest expense 25,091 18,539 18,198
----------- ----------- -----------
Income (loss) before income tax expense (benefit) (2,752) 5,234 7,584
Income tax expense (benefit) (1,874) 1,576 2,506
----------- ----------- -----------
Net income (loss) $ (878) 3,658 5,078
=========== =========== ===========
</TABLE>
24
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Troy Financial Corporation has not engaged in any significant business
to date. 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. 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. For example, in periods of falling interest rates, prepayments of
loans typically increase, which would lead to reduced net interest income if
such proceeds could not be reinvested at a comparable spread. Also in a falling
rate environment, certain categories of deposits may reach a point where market
forces prevent further reduction in the interest rate paid on those instruments.
Generally, during extended periods when short term and long term interest rates
are relatively close (i.e. a flat yield curve), net interest margins could
become smaller, thereby reducing net interest income. The net effect of these
25
<PAGE> 29
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 (i) measure, monitor, evaluate and develop strategies in response
to the interest rate risk profile inherent in Troy Savings' consolidated balance
sheet accounts, (ii) determine the appropriate level of risk given Troy Savings'
business strategy, operating environment, capital and liquidity requirements,
and performance objectives and (iii) 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: (i) emphasizing the origination of
adjustable rate residential mortgage loans, and to a lesser extent commercial
real estate, commercial business and consumer loans; (ii) selling substantially
all of its fixed rate residential mortgage loans in the secondary market; (iii)
utilizing FHLB advances to better structure the maturities of its interest rate
sensitive liabilities; and (iv) investing in short-term securities which
generally bear lower yields, compared to longer-term investments, but which
better position 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 "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
26
<PAGE> 30
sensitive assets. Accordingly, during a period of rising interest rates, a
negative gap would tend to affect net interest income adversely. Conversely,
during a period of falling interest rates, a negative gap position would tend to
result in an increase in net interest income.
The following table ("Gap table") sets forth the amounts of interest
earning assets and interest bearing liabilities, which are outstanding as of
September 30, 1998, and which are anticipated by 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 The Troy Savings
Bank -- Lending Activities," "Business of The Troy Savings Bank -- Securities"
and "Business of The Troy Savings Bank -- Sources of Funds."
27
<PAGE> 31
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
-----------------------------------------------------------------------------------------
MORE
MORE MORE THAN
THAN THREE THAN SIX 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
-------- ------- ---------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 agree-
ments 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%
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
-------------------------------------------------------------------------------------------
MORE MORE
THAN THAN
THREE FIVE
YEARS YEARS MORE
TO FIVE AVERAGE TO 10 AVERAGE THAN 10 AVERAGE FAIR
YEARS RATE YEARS RATE YEARS RATE TOTAL VALUE
--------- ------- ----------- ------- -------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 agree-
ments 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>
28
<PAGE> 32
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, up $54.2
million, or 8.2%, from $662.4 million at September 30, 1997. This increase was
primarily in the securities available for sale portfolio which increased by
$80.2 million, or 68.2%, from $117.6 million at September 30, 1997 to $197.8
million at September 30, 1998. This increase was partially offset by a $10.8
million reduction in loans receivable, net. The growth in securities available
for sale was primarily funded by a $40.6 million increase in borrowings, and
proceeds from the redemption and maturity of federal funds sold and other
short-term securities.
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 ($27.4 million in fiscal 1998, compared to $30.6 million in fiscal
1997), and the decline in the portfolio can be attributed primarily to the
payoff of five loans, totaling $17.4 million. In contrast to the decline in real
estate loans, from fiscal year end 1997 to fiscal year end 1998, 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, as well as 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
29
<PAGE> 33
evaluation, which includes a review of all loans for which full collectibility
may not be reasonably assured, considers the market value of the underlying
collateral, growth and composition of the loan portfolio, delinquency trends,
adverse situations that may affect borrowers' abilities to repay, prevailing
economic conditions and trends and other factors that warrant recognition in
providing for an adequate allowance for loan losses. See "Business of The Troy
Savings Bank -- Lending Activities -- Allowance for Loan Losses."
While 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 by $2.2 million in net charge-offs for the
same period. At September 30, 1998 the allowance for loan losses equaled 70.9%
of total non-performing loans, down slightly from 73.8% at September 30, 1997.
The balance of the allowance is maintained at a level which is, in management's
judgment, representative of the amount of risk inherent in Troy Savings' loan
portfolio. See "Business of The 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. Most of this
increase was attributable to a $40.6 million increase in FHLB borrowings.
Deposits remained relatively stable at $578.2 million at September 30, 1998,
compared to $572.4 million at September 30, 1997. During fiscal 1998, 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.
30
<PAGE> 34
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 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 YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
-------- --------- ------- -------- --------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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>
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<PAGE> 35
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: (i) changes attributable to changes in volume (changes
in volume multiplied by prior year rate); (ii) changes attributable to changes
in rate (changes in rate multiplied by prior volume); and (iii) changes in
rate/volume (change in rate times the change in volume). The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
Interest yields on loans include deferred fees and discounts, and all yields are
tax effected.
<TABLE>
<CAPTION>
Year Ended September 30, 1998 Year Ended September 30, 1997
Compared to Compared to
Year Ended September 30, 1997 Year Ended September 30, 1996
----------------------------- -----------------------------
Increase (Decrease) Increase (Decrease)
Due To Due To
------------------- -------------------
Volume Rate Net Volume Rate Net
------- ------ -------- -------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Interest earning assets:
Loans:
Residential mortgage.......................... $ (149) $ -- $ (149) $ 854 $ 80 $ 934
Commercial mortgage........................... (1,120) (95) (1,215) 847 (90) 757
Construction.................................. (142) (132) (274) 247 (122) 125
------- ----- ------- ------- ----- -------
Total real estate loans...................... (1,411) (227) (1,638) 1,948 (132) 1,816
Commercial business........................... 973 (49) 924 417 (62) 355
Consumer loans:
Home equity lines of credit.................. (36) 4 (32) 47 (21) 26
Other consumer............................... 132 78 210 660 (159) 501
------- ----- ------- ------- ----- -------
Total consumer loans........................ 96 82 178 707 (180) 527
------- ----- ------- ------- ----- -------
Total loans................................... (342) (194) (536) 3,072 (374) 2,698
Loans held for sale............................ 315 13 328 (55) (6) (61)
Securities held to maturity.................... (41) (12) (53) (59) 2 (57)
Securities available for sale (amortized cost)
Taxable....................................... (3,117) (24) (3,141) (1,273) 14 (1,259)
Tax exempt.................................... 3,098 4 3,102 92 92 184
------- ----- ------- ------- ----- -------
Total securities available for sale
(amortized cost)........................... 19 (20) (39) (1,181) 106 (1,075)
Federal funds sold and other
short-term investments........................ 1,011 39 1,050 (23) 8 (15)
------- ----- ------- ------- ----- -------
Interest earning assets..................... 924 (174) 750 1,754 (264) 1,490
Interest bearing liabilities:
Deposits:
NOW and Super NOW accounts.................... 120 (14) 106 36 7 43
Money market accounts......................... (5) 3 (2) 48 6 54
Savings accounts.............................. (216) 20 (196) (172) 21 (151)
Time deposit accounts......................... 189 425 614 511 (182) 329
Escrow accounts................................ (2) 7 5 7 (27) (20)
------- ----- ------- ------- ----- -------
Total interest bearing deposits.............. 86 441 527 430 (175) 255
Borrowings:
Securities sold under
agreement to repurchase...................... 7 (3) 4 13 3 16
Short-term borrowings......................... (121) (121) (242) 9 16 25
Long-term debt................................ 548 5 553 49 (11) 38
------- ----- ------- ------- ----- -------
Total borrowings............................. 434 (119) 315 71 8 79
------- ----- ------- ------- ----- -------
Total interest bearing liabilities...... 520 322 842 501 (167) 334
------- ----- ------- ------- ----- -------
Net Interest Income........................... $ 404 $(496) $ (92) $ 1,253 $ (97) $ 1,156
======= ===== ======= ======= ===== =======
</TABLE>
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND
SEPTEMBER 30, 1997
General. 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
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<PAGE> 36
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%, down 12 basis points from 3.96% for the year
ended September 30, 1997. The yield on average interest earning assets decreased
from 7.66% to 7.57%, while the rate paid on average interest bearing liabilities
increased from 4.16% to 4.25%. 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, down from $48.4 million for the year ended
September 30, 1997. Interest on loans decreased $536,000 from $38.9 million for
the year ended September 30, 1997 to $38.3 million for the year ended September
30, 1998. The average balance of loans decreased $4.4 million to $467.4 million,
and the average yield on loans also decreased three basis points from 8.23% to
8.20% for the year ended September 30, 1998. Tax equivalent interest income on
securities available for sale decreased by $39,000 and interest income on
investment securities held to maturity declined by $53,000 for the year ended
September 30, 1998. The average balance of securities available for sale
increased only slightly from $124.7 million for the year ended September 30,
1997 to $125.2 million for the year ended September 30, 1998. At the same time,
the tax effected average yield on securities available for sale decreased five
basis points from 5.97% to 5.92%. The interest income on federal funds sold
increased $1.0 million to $2.5 million, and the average balance of federal funds
sold and other short-term investments increased from $27.6 million to $45.6
million. 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 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 have continued into fiscal
1998, and it is expected that these trends may continue through at least fiscal
1999. During fiscal 1998, net loan charge-offs were $2.2 million, representing a
25.0% increase from fiscal 1997, when net loan charge-offs were $1.8 million. In
addition, nonperforming
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<PAGE> 37
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. Based upon the reduction in classified and special mention loans from
$25.2 million at September 30, 1997 to $18.7 million at September 30, 1998, and
the reduction in loans 60-89 days past due, Troy Savings has set its provision
for loan losses in anticipation that this rate of increase in nonperforming
loans will not continue at its current pace. The increased provision in recent
years also reflects the change in the mix of assets in 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,
although 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.
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, in fiscal 1999, 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 the $5.3
million committed to the Charitable Foundation, which represents the $5.0
million cash contributions 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 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. 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.
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<PAGE> 38
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 (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 received a $1.9 million
income tax benefit, as compared to a $1.6 million income expense for the year
ended September 30, 1997. The reduction in income tax expense is primarily the
result of the fiscal 1998 pre-tax loss of $2.8 million as compared to the fiscal
1997 pre-tax income of $5.2 million. Also contributing to the change in income
tax expense was an increase in the level of investments in tax exempt securities
from an average investment of $3.2 million during fiscal 1997 to an average
investment of $56.0 million during fiscal 1998, the result of which was a
significant increase in tax exempt income.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND
SEPTEMBER 30, 1996
GENERAL. 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 this
same period. 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 $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.
35
<PAGE> 39
INTEREST EXPENSE. Troy Savings' interest expense increased slightly by
$334,000 during the year ended September 30, 1997 to $23.4 million. Most of this
increase was related to interest paid on Troy Savings' interest bearing
depository accounts. The two largest categories of interest bearing deposits are
savings accounts and time deposits. Although Troy Savings' 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 Troy Savings' savings
accounts, Troy Savings' interest expense on its time deposits for the year ended
September 30, 1997 increased by $329,000 to $14.1 million. This increase is the
result of an increase in the average balance of time deposits from $251.0
million in fiscal 1996 to $261.0 million in fiscal 1997, offset by an eight
basis point reduction in the rates paid on these deposits from 5.48% in fiscal
1996 to 5.40% in fiscal 1997.
PROVISION FOR LOAN LOSSES. In fiscal 1997, there was evidence of
increases in the level of inherent risk in 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 inherent risk was manifested in a number of developments,
ratios and trends considered by management. Net loan charge-offs increased from
$921,000 in fiscal 1996, or .21% of average loans, to $1.8 million, or .38% of
average loans, in fiscal 1997. This increase in the level of net loan
charge-offs also represented a significant increase from 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.
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
36
<PAGE> 40
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 Federal
Deposit Insurance Corporation ("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 (otherwise referred to as "Year 2000 compliant"), Further, any
changes, revisions or new components of systems or equipment configurations may
prove to be incompatible with those existing or upgraded. As a result, the
testing of changed components and of systems and subsystems as a whole, is
critical, but also time and resource consuming.
In order to protect the integrity of the banking system, the federal
banking regulatory authorities (collectively known as the Federal Financial
Institutions Examination Council, or "FFIEC") have (i) issued guidelines to
financial institutions for addressing the Year 2000 issues; (ii) set milestones
that financial institutions are expected to meet in becoming Year 2000
compliant; and (iii) established testing recommendations to assure timely
compliance. 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.
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
37
<PAGE> 41
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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<PAGE> 42
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 its 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
39
<PAGE> 43
method of accounting for its stock-based compensation arrangements. SFAS No. 123
requires pro forma disclosures of net income and earnings per share computed as
if the fair value based method had been applied in financial statements of
companies that follow accounting for such arrangements under APB Opinion 25.
SFAS No. 123 applies to all stock-based employee compensation plans in which an
employer grants shares of its stock or other equity instruments to employees
except for employee stock ownership plans. SFAS No. 123 also applies to plans in
which the employer incurs liabilities to employees in amounts based on the price
of the employer's stock (e.g., stock option plans, stock purchase plans,
restricted stock plans and stock appreciation rights). This statement also
specifies the accounting for transactions in which a company issues stock
options or other equity for services provided by nonemployees or to acquire
goods or services from outside suppliers or vendors. Troy Financial 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,
40
<PAGE> 44
"Employers' Accounting for Post Retirement Benefits Other Than Pensions." SFAS
No. 132 standardizes the disclosure requirements of SFAS No. 87 and SFAS No. 106
to the extent practicable and recommends a parallel format for presenting
information about pensions and other post retirement benefits. SFAS No. 132 is
applicable to all entities and addresses disclosure only. The statement does not
change any of the measurement or recognition provisions provided for in SFAS No.
87, SFAS No. 88 or SFAS No. 106. SFAS No. 132 is effective for fiscal years
beginning after December 15, 1997. 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.
41
<PAGE> 45
BUSINESS OF TROY FINANCIAL CORPORATION
Troy Financial Corporation is a newly formed Delaware corporation that
will register with the Federal Reserve as the bank holding company for 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 THE TROY SAVINGS BANK
GENERAL
The Troy Savings Bank is a community oriented savings bank
headquartered in Troy, New York and was originally chartered in 1823. As a full
service financial institution, 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, New York 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 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.
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<PAGE> 46
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 Superintendent of Banks ("New York Superintendent"),
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 ACTIVITIES
Troy Savings focuses its lending activities primarily on the
origination of residential and commercial real estate loans, commercial business
loans and consumer loans. The types of loans that 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
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.
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<PAGE> 47
The typical residential mortgage loan held by Troy Savings in its portfolio has
an average principal balance of approximately $80,000 and a loan-to-value
("LTV") ratio of 80%, secured by a detached, single family home.
Troy Savings' 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.
Troy Savings' 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 range in terms
of total exposure, including outstanding balances and unfunded commitments, from
$1.2 million to $8.0 million.
Troy Savings' 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 20.4% and 31% of Troy
Savings' consumer loan portfolio, respectively, at September 30, 1998.
The following table sets forth 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
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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>
44
<PAGE> 48
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-----------------------------------------
1995 1994
-----------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- -------- --------- --------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Real estate loans:
Residential mortgage.......................... $ 193,720 46.92% $ 175,769 45.53%
Commercial.................................... 171,830 41.61 170,744 44.23
Construction.................................. 9,354 2.27 5,949 1.54
--------- ----- --------- -----
Total real estate loans..................... 374,904 90.80 352,462 91.30
Commercial business loans........................ 19,038 4.61 16,046 4.16
Consumer loans:
Home equity lines of credit................... 8,620 2.09 10,144 2.63
Other consumer................................ 11,140 2.69 8,133 2.11
--------- ----- --------- -----
Total consumer loans........................ 19,760 4.78 18,277 4.74
Net deferred loan fees and unearned discount..... (790) (0.19) (767) (0.20)
--------- ----- --------- -----
Total loans.................................. 412,912 100.00% 386,018 100.00%
Less:
Allowance for loan losses..................... (4,297) (4,190)
--------- ---------
Total loans receivable, net...................... $ 408,615 $ 381,828
========= =========
</TABLE>
The following table sets forth, at September 30, 1998, the dollar
amount of all loans in 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
----------- -------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
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> 49
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
-------- ---------- ------------ -------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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> 50
LOAN ORIGINATIONS AND SALES. The following table sets forth Troy
Savings' loan originations, sales and principal repayments for the periods
indicated.
<TABLE>
<CAPTION>
REAL ESTATE HOME EQUITY
------------------------------------------ COMMERCIAL LINE OF
RESIDENTIAL COMMERCIAL CONSTRUCTION BUSINESS CREDIT
----------- ---------- ------------ -------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance as of September 30, 1995......... $ 199,557 $ 171,830 $ 9,354 $ 19,038 $ 8,620
Add: Loan originations, other
advances, and purchases.............. 47,928 25,443 18,692 51,975 1,291
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions................. (41,135) (5,649) (15,047) (46,251) (524)
--------- --------- --------- --------- ---------
Balance as of September 30, 1996......... 206,350 191,624 12,999 24,762 9,387
Add: Loan originations, other
advances, and purchases.............. 36,080 30,566 24,407 51,206 997
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions................. (24,089) (37,629) (21,898) (46,007) (501)
--------- --------- --------- --------- ---------
Balance at September 30, 1997............ 218,341 184,561 15,508 29,961 9,883
Add: Loan originations, other
advances, and purchases.............. 79,360 27,432 24,662 78,619 507
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions................. (84,094) (45,807) (30,118) (63,424) (1,815)
--------- --------- --------- --------- ---------
Balance at September 30, 1998............ $ 213,607 $ 166,186 $ 10,052 $ 45,156 $ 8,575
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
NET
DEFERRED FEES
OTHER AND UNEARNED TOTAL
CONSUMER SUBTOTAL DISCOUNTS LOANS (1)
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Balance as of September 30, 1995......... $ 11,140 $ 419,539 $ (790) $418,749
Add: Loan originations, other
advances, and purchases.............. 6,435 151,764 -- 151,764
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions................. (4,416) (113,022) -- (113,022)
-------- --------- ------- --------
Balance as of September 30, 1996......... 13,159 458,281 (684) 457,597
Add: Loan originations, other
advances, and purchases.............. 17,613 160,869 -- 160,869
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions................. (10,233) (140,357) -- (140,357)
-------- --------- ------- --------
Balance at September 30, 1997............ 20,539 478,793 (501) 478,292
Add: Loan originations, other
advances, and purchases.............. 19,987 230,567 -- 230,567
Less: Principal repayments, sales,
charge-offs, transfers to OREO
and other reductions................. (7,081) (232,339) -- (232,339)
-------- --------- ------- --------
Balance at September 30, 1998............ $ 33,445 $ 477,021 $ (344) $476,677
======== ========== ======= ========
</TABLE>
- ----------
(1) Total loans include loans held for sale of $11.1 million, $3.7 million,
$1.5 million and $5.8 million for fiscal years 1998, 1997, 1996 and 1995,
respectively.
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<PAGE> 51
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 generally 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 1998, Troy
Savings began to hold in its loan portfolio certain 15-year fixed rate mortgage
loans. In order to reduce the interest rate risk associated with mortgage loans
held for sale, as well as outstanding loan commitments and uncommitted loan
applications with rate lock agreements which are intended to be held for sale,
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 offers a variety of fixed rate and adjustable
rate ("ARMs") mortgage loans 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 (presently 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 borrower's 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
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<PAGE> 52
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 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 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.
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<PAGE> 53
Troy Savings also makes construction loans on commercial real estate
projects where the borrowers are well known to Troy Savings, 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.
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% 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, respectively. 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 not for
profits; 4.7% in the hospitality industry (hotels and motels); 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 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,
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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
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, re-underwrites
the loan annually. Because a term loan often includes a line of credit, the
status of the borrower and loan is reviewed annually because of the line of
credit review. In all reviews, 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
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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 (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.
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.
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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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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
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------
60-89 90 DAYS OR MORE
-------------------- --------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS BALANCE OF LOANS BALANCE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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
-------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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>
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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:
o 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.
o A $1.9 million commercial real estate loan secured by a multi-family
residential property located outside of New York State. The property
which secures the loan, prior to the borrower's purchase, was the
subject of 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.
o 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.
o 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.
o 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.
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<PAGE> 59
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.
Troy Savings classifies property that it acquires as a result of
foreclosure on a loan 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 table sets forth the amounts and categories of
non-performing assets at the dates indicated.
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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.
56
<PAGE> 60
ALLOWANCE FOR LOAN LOSSES. In originating loans, there is a substantial
likelihood that loan losses will be experienced. The risk of loss varies with,
among other things, general economic conditions, the type of loan, the
creditworthiness of the borrower over the term of the loan and, in the case of a
collateralized loan, the quality of the collateral securing the loan. In an
effort to minimize loan losses, 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
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.
57
<PAGE> 61
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
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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>
58
<PAGE> 62
The following table sets forth 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>
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>
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 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
59
<PAGE> 63
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 sets forth 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
----- -------- ----- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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>
60
<PAGE> 64
The following table sets forth certain 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 YEAR MORE THAN FIVE MORE THAN
ONE YEAR OR LESS TO FIVE YEARS YEARS TO TEN YEARS TEN YEARS
--------------------- ------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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 6.34 592 6.39
Mortgage-backed securities............... -- -- 365 6.67 1,410 7.10 1,969 7.37
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% $ 2,561 7.24%
========= ==== ========= ==== ========= ==== ========= ====
Investment securities held to maturity
(amortized cost):
Mortgage-backed securities............... -- -- -- -- 560 8.20 1,420 8.60
Corporate debt securities................ -- -- -- -- -- -- 1,503 7.14
--------- ---- --------- ---- --------- ---- --------- ----
Total due............................ -- -- -- -- $ 560 8.20% $ 2,923 7.82%
========= ==== ========= ==== ========= ==== ========= ====
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1998
---------------------
TOTAL
---------------------
WEIGHTED
CARRYING AVERAGE
VALUE YIELD
----- -----
<S> <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)............. 51,681 5.99
Mortgage-backed securities............... 3,744 7.19
Corporate debt securities................ 16,984 5.56
--------- ----
Total due............................ $ 189,629 5.40%
========= ====
Investment securities held to maturity
(amortized cost):
Mortgage-backed securities............... 1,980 8.49
Corporate debt securities................ 1,503 7.19
--------- ----
Total due............................ $ 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 debt 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 FHLB, FreddieMac and FannieMae.
These securities had an average coupon rate and an average yield of 5.55% and
5.24%, respectively, and of these securities which were rated, all had ratings
of `AAA' or higher. 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 obligation securities of
jurisdictions in the State of New York, of which $27.8 million represented
relationship investments in 54 separate municipalities, including counties,
cities, school districts, towns, villages and fire districts. In addition, 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 state income taxes, and the
average yield on municipal securities is 50 to 90 basis points higher than that
of U.S. Treasury securities. Troy Savings' investment 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.
61
<PAGE> 65
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 common 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. 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. See "Risk Factors -- Interest Rate Sensitivity."
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.
62
<PAGE> 66
The following table sets forth 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
------- ------- --------- -------- ------ ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
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 sets forth the dollar amount of deposits in the
various types of deposit programs offered by Troy Savings as of the dates
indicated.
<TABLE>
<CAPTION>
BALANCE AS OF SEPTEMBER 30,
----------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------- -------------------
(DOLLARS IN THOUSANDS)
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Savings accounts............................ $198,509 34.33% $198,929 34.75% $208,071 36.85%
Time deposit accounts:
2.00 - 2.99%............................. 624 .11 257 0.04 252 0.05
3.00 - 3.99%............................. 58 .01 9 -- 3,736 0.66
4.00 - 4.99%............................. 10,174 1.76 5,893 1.03 57,153 10.12
5.00 - 5.99%............................. 236,312 40.87 246,686 43.10 171,279 30.34
6.00 - 6.99%............................. 6,679 1.15 11,762 2.06 18,118 3.21
7.00 - 7.99%............................. 2,698 .47 2,578 0.45 2,500 0.44
8.00 - 8.99%............................. 12 -- 53 0.01 65 0.01
Over 9.00%............................... 117 .02 107 0.02 91 0.02
-------- ----- -------- ----- -------- -----
Total.................................. 256,674 44.39 267,345 46.71 253,194 44.85
Money market accounts....................... 15,708 2.72 13,121 2.29 13,737 2.43
NOW and Super NOW accounts ................. 76,195 13.18 71,442 12.48 70,012 12.40
======== ===== ======== ===== ======== =====
Total interest bearing accounts.......... 547,086 94.62 550,838 96.23 545,014 96.53
Demand accounts............................. 31,116 5.38 21,560 3.77 19,592 3.47
-------- ----- -------- ----- -------- -----
Total deposits.......................... $578,202 100% $572,397 100% $564,606 100%
======== ===== ======== ===== ======== =====
</TABLE>
The following table sets forth, by various rate categories, the amount
of Troy Savings' certificate of deposit accounts outstanding at the dates
indicated.
<TABLE>
<CAPTION>
AMOUNT DUE AT SEPTEMBER 30, 1998
----------------------------------------------------------------------
ONE YEAR ONE TO TWO TO THREE TO FIVE YEARS
OR LESS TWO YEARS THREE YEARS FIVE YEARS OR MORE TOTAL
------- --------- ----------- ---------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Time deposits accounts:
2.00 - 2.99%............ $ 624 $ -- $ -- $ -- $ -- $ 624
3.00 - 3.99%............ 49 9 -- -- -- 58
4.00 - 4.99%............ 8,376 1,699 99 -- -- 10,174
5.00 - 5.99%............ 183,730 31,437 14,753 6,281 111 236,312
6.00 - 6.99%............ 1,847 4,832 -- -- -- 6,679
7.00 - 7.99%............ -- 2,698 -- -- -- 2,698
8.00 - 8.99%............ 12 -- -- -- -- 12
Over 9.00%.............. 117 -- -- -- -- 117
--------- -------- --------- --------- -------- ---------
Total................. $ 194,755 $ 40,675 $ 14,852 $ 6,281 $ 111 $ 256,674
========= ======== ========= ========= ======== =========
</TABLE>
63
<PAGE> 67
At September 30, 1998, Troy Savings had outstanding $256.7 million in
certificates of deposit accounts, maturing as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
NON-JUMBO CDS (LESS THAN $100,000):
Three months or less............................................. $ 46,731 5.33%
Over three months through six months............................. 59,597 5.22
Over six months through 12 months................................ 59,357 5.39
Over 12 months................................................... 57,540 5.71
--------
Total non-jumbo certificates of deposit........................ $223,225 5.41%
========
JUMBO CDS ($100,000 OR MORE):
Three months or less............................................. $ 9,510 5.19%
Over three months through six months............................. 12,136 5.30
Over six months through 12 months................................ 7,424 5.45
Over 12 months................................................... 4,379 5.97
--------
Total jumbo certificates of deposit............................ $ 33,449 5.39%
========
</TABLE>
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<PAGE> 68
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 capital stock in the FHLB,
and, at September 30, 1998, Troy Savings owned approximately $3.2 million of
FHLB capital 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 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.
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<PAGE> 69
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 assist customers with investment
decisions and trading. As of September 1, 1998, FISC held approximately $61.3
million of customer assets. FISC is a member of the National Association of
Securities Dealers and is insured by the Securities Insurance Protection
Corporation.
FAMILY MORTGAGE BANKING CO. FMB, which was incorporated in April 1987,
is 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 competes for deposits with other
savings banks, savings and loan associations, commercial banks, credit unions,
money market mutual funds, insurance companies, brokerage firms and other
financial institutions, many of which are substantially larger in size and have
greater financial resources than 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. See "Risk Factors
- -- Competition." 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.
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<PAGE> 70
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.
Schenectady, NY 12309
Colonie Office................... Leased 1994 3/31/07 32,943
103 Wolf Road
Colonie, NY 12205
Guilderland Office............... Leased 1997 6/9/07 324,790
1704 Western Avenue
Guilderland, NY 12203
Schenectady Office............... Owned 1987 N/A 233,496
1626 Union Street
Schenectady, NY 12309
Clifton Park Office.............. Owned 1972 N/A 199,842
Routes 9 and 146
Clifton Park, NY 12065
Clifton Park-Hannaford Office.... Leased 1995 8/14/00 115,537
9 Clifton Country Road
Clifton Park, NY 12065
Quaker Road Office............... Owned 1995 N/A 1,713,275
44 Quaker Road
Queensbury, NY 12804
Queensbury Office................ Leased 1979 9/30/04 171,449
739 Upper Glen Street
Queensbury, NY 12804
Whitehall Office................. Owned 1971 N/A 246,247
184 Broadway
Whitehall, NY 12887
</TABLE>
- ----------
(1) The net book value of the headquarters will be reduced by an estimated
$300,000 upon contribution of the Music Hall to the Music Hall Foundation.
LEGAL PROCEEDINGS
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.
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<PAGE> 71
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
is satisfactory. 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 New York
State Banking Department ("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 New York
Banking Department 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 and the FDIC conduct periodic examinations to assess Troy
Savings' compliance with various regulatory requirements. This regulation and
supervision is intended primarily for the protection of the deposit insurance
funds and depositors. The regulatory authorities have extensive discretion in
connection with the exercise of their supervisory and enforcement activities,
including the setting of policies with respect to the classification of assets
and the establishment of adequate loan loss reserves for regulatory purposes.
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 shareholders.
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 NYSBD. 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
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<PAGE> 72
below, requires New York banking institutions 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 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 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.
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<PAGE> 73
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
---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
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.
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: (i) insolvency; (ii)
substantial dissipation of assets or earnings through violations of law or
unsafe or unsound practices; (iii) existence of an unsafe or unsound condition
to transact business; (iv) likelihood that a bank will be unable to meet the
demands of its depositors or to pay its obligations in the normal course of
business; and (v) insufficient capital. 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
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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.
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 (i) internal controls, information systems and internal audit
systems; (ii) loan documentation; (iii) credit underwriting; (iv) interest rate
exposure; (v) asset growth and quality; (vi) earnings; and (vii) compensation
and benefit standards for officers, directors, employees and principal
stockholders. The guidelines are intended to set out standards that the FDIC
will use to identify and address problems at institutions before capital becomes
impaired. Institutions are required to, among other things, establish and
maintain a system to identify problem assets and prevent deterioration of those
assets in a manner commensurate with their size and the nature and scope of
their operations. Furthermore, institutions must establish and maintain a system
to evaluate and monitor earnings and ensure that earnings are sufficient to
maintain adequate capital and reserves in a manner commensurate with their size
and the nature and scope of their operation.
A 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: (i) restrict asset growth; (ii)
require the institution to increase its ratio of tangible equity to assets;
(iii) restrict the rates of interest that the institution may pay; or (iv) take
any other action that would better carry out the purpose of the corrective
action. 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
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<PAGE> 75
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 (i) "well capitalized" if
the institution has a total risk-based capital ratio of 10% or greater, a Tier 1
risk-based capital ratio of 6% or greater, and a leverage ratio of 5% or greater
(provided that the institution is not subject to an order, written agreement,
capital directive or prompt corrective action directive to meet and maintain a
specified capital level for any capital measure), (ii) "adequately capitalized"
if the institution has a total risk-based capital ratio of 8% or greater, a Tier
1 risk based capital ratio of 4% or greater and a leverage ratio of 4% or
greater (3% or greater if the institution is rated composite CAMELS 1 in its
most recent report of examination and is not experiencing or anticipating
significant growth), (iii) "undercapitalized" if the institution has a total
risk-based capital ratio that is less than 8%, or a Tier 1 risk-based ratio of
less than 4% and a leverage ratio that is less than 4% (3% if the institution is
rated composite CAMELS 1 in its most recent report of examination and is not
experiencing or anticipating significant growth), (iv) "significantly
undercapitalized" if the institution has a total risk-based capital ratio that
is less than 6%, Tier 1 risk-based capital ratio of less than 3% or a leverage
ratio that is less than 3%, and (v) "critically undercapitalized" if the
institution has a ratio of tangible equity to total assets that is equal to or
less than 2%. Under certain circumstances, the FDIC can reclassify a well
capitalized institution as adequately capitalized and may require an adequately
capitalized institution or an undercapitalized institution to comply with
supervisory actions as if it were in the next lower category (except that the
FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). At September 30, 1998, 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
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Banking Law, the term "bank holding company," is defined generally to include
any "company" that, directly or indirectly, either controls the election of a
majority of the directors of, or owns, controls or holds with power to vote more
than 10% of the voting stock of (i) a bank holding company or, (ii) if the
company is a banking institution, another banking institution, or (iii) each of
two or more banking institutions. 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.
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: (i) making or servicing loans; (ii)
performing certain data processing services; (iii) providing discount and full
service brokerage services; (iv) acting as fiduciary, investment or financial
advisor, (v) leasing personal or real property; (vi) making investments in
corporations or projects designed primarily to promote community welfare; and
(vii) acquiring a savings and loan association.
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.
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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, 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 Banking Board of New York State 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 capital stock in
that FHLB in an amount equal to the greater of 1.0% of the aggregate principal
amount of its unpaid residential mortgage loans, home purchase contracts and
similar obligations at the beginning of each year, 5% of its FHLB advances
outstanding, or one per cent of thirty per cent of total assets. At September
30, 1998, Troy Savings owned $3.2 million of FHLB common stock.
Advances from the FHLB of New York are secured by a member's shares of
stock in the FHLB of New York, certain types of mortgages and other assets.
Interest rates charged for advances vary depending upon maturity and cost of
funds to the FHLB of New York. As of September 30, 1998, Troy Savings had $44.9
million of outstanding advances from the FHLB of New York.
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 IRS and New York State statutes of
limitations for tax examinations, Troy Savings cannot be examined for fiscal
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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 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
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an Alternative Minimum Tax ("AMT") is paid. Troy Savings does not expect to be
subject to the AMT.
Dividends Received Deduction and Other Matters. 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 certain information regarding the directors of Troy
Financial, each of whom will be an initial director upon completion of the
conversion.
<TABLE>
<CAPTION>
POSITIONS HELD TERM
NAME AGE(1) WITH TROY FINANCIAL EXPIRES
---- ------ ------------------- -------
<S> <C> <C> <C>
Daniel J. Hogarty, Jr........................ 59 Chairman of the Board; 2000
President; Chief
Executive Officer
George H. Arakelian.......................... 64 Director 2001
Richard B. Devane............................ 64 Director 2001
Michael E. Fleming........................... 68 Director 2002
Willie Anderson Hammett...................... 54 Director 2000
Thomas B. Healy.............................. 52 Director 2000
Keith D. Millsop............................. 72 Director 2002
Edward G. O'Haire............................ 67 Director 2001
Marvin L. Wulf............................... 73 Director 2002
</TABLE>
- -----------
(1) As of December 31, 1998.
The biographical information of each director is set forth below under
"-- Biographical Information." Initially the directors of Troy Financial will
not receive additional fees for their services as directors of Troy Financial.
See "-- Compensation of Trustees" for a discussion of fees paid to trustees of
Troy Savings.
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 sets forth
certain information regarding the executive officers of Troy Financial and Bank.
<TABLE>
<CAPTION>
POSITION(S) HELD
NAME AGE(1) 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 of Troy Financial and Troy
Savings
Kevin M. O'Bryan............................... 49 Senior Vice President; Secretary
Michael C. Mahar............................... 51 Senior Vice President
Edward M. Maziejka, Jr......................... 39 Vice President and Chief Financial Officer
</TABLE>
- -----------
(1) As of December 31, 1998.
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The biographical information for each executive officer is set forth
below under "-- 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."
MANAGEMENT OF TROY SAVINGS BANK
TRUSTEES OF THE 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 sets forth certain
information regarding the Board of Trustees of Troy Savings.
<TABLE>
<CAPTION>
POSITIONS HELD TRUSTEE
NAME WITH TROY SAVINGS SINCE
---- ----------------- -----
<S> <C> <C>
Daniel J. Hogarty, Jr.................................... President; Chief Executive 1985
Officer; Trustee
George H. Arakelian...................................... Trustee 1988
Richard B. Devane........................................ Trustee 1970
Michael E. Fleming....................................... Trustee 1981
Willie Anderson Hammett.................................. Trustee 1990
Thomas B. Healy.......................................... Trustee 1995
Keith D. Millsop......................................... Trustee 1979
Edward G. O'Haire........................................ Trustee 1979
Marvin L. Wulf........................................... Trustee 1973
</TABLE>
- -----------
(1) As of December 31, 1998.
BIOGRAPHICAL INFORMATION
TRUSTEES OF TROY SAVINGS
Daniel J. Hogarty, Jr. joined Troy Savings in 1985 and has been Troy
Savings' President, Chief Executive Officer and trustee since that time. Mr.
Hogarty also serves as President and/or Director of nine of Troy Savings'
subsidiaries.
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.
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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 Insurance Agency 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 has 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 AND TROY FINANCIAL
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 Trust Committee. Subsequent to the conversion, the Board of
Trustees may consider and make revisions to the current structure of its
committees.
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<PAGE> 82
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 regular meetings of the Board and may take part in the Board's discussions,
but shall not be eligible to vote. In addition, Trustees Emeritus are not
counted for the purpose of determining a quorum, and Trustees Emeritus may be
removed by 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 $100,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (2) LONG TERM COMPENSATION AWARDS
----------------------------------------- -----------------------------
RESTRICTED
NAME AND STOCK ALL OTHER
PRINCIPAL POSITIONS YEAR(1) SALARY($) BONUS($) AWARDS($) (4) OPTIONS(#)(4) COMPENSATION(5)
- ---------------------- ------- --------------- -------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Daniel J. Hogarty, Jr. 1998 $ 577,967(3) -- -- -- $ 10,000
President and Chief
Executive Officer
Kevin M. O'Bryan 1998 $ 154,048 -- -- -- $ 8,789
Senior Vice President,
Chief Credit Officer
and Secretary
</TABLE>
- -----------
(1) All data for fiscal years ended September 30, 1998.
(2) For fiscal year ended September 30, 1998, there were no perquisites with
an aggregate value for any named individual in excess of the lesser of
$50,000 or 10% of the individual's salary and bonus or other annual
compensation not categorized as salary or bonus.
(3) Includes deferred compensation of $98,000.
(4) As a mutual institution, Troy Savings does not have any stock based
plans. Troy Financial does, however, intend to adopt such plans following
the conversion.
(5) Reflects matching contributions made by Troy Savings
under a 401(k) plan.
REPORT OF INDEPENDENT COMPENSATION CONSULTANT
Pursuant to the NYBD regulations governing the conversion, Troy Savings
must obtain the opinion of an independent compensation consultant as to whether
or not the total compensation for
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<PAGE> 83
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 and proper in comparison to the
compensation provided to similarly situated publicly-traded financial
institutions, and that, with respect to the amount of shares of common stock to
be reserved under the ESOP and Equity Compensation Plan that such amounts
reserved for granting are reasonable in comparison to similar publicly traded
financial institutions.
BENEFIT PLANS
EMPLOYMENT AND EMPLOYMENT PROTECTION AGREEMENTS
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 four other officers (the "Employment Protection Agreements").
The following summarizes the principal terms of the Employment
Agreements:
- term -- initially three-years, automatically renewing, extended
automatically to three years upon a change of control (defined
below);
- 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's
qualified benefit plans and Supplemental Retirement and Benefits
Restoration Plan ("Supplemental Plan") if the executive officer
had continued to be employed for three years.
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;
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- 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 the executive officer's options and Restricted Stock cannot be vested because
of regulatory constraints, Troy Financial and Troy Savings will pay the
executive officer an amount of cash equal to the value of the unvested options
and Restricted Stock.
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
paying 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 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. A substantial competitor means a:
- commercial or savings bank,
- savings and loan association, or
- mortgage banking company, or
- a holding company affiliate of any of the foregoing
if the executive officer would be primarily based at an office within 35 miles
of Troy Savings's home office. 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, automatically renewing, extended
automatically to two years upon a change of control (defined
below);
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- no severance or other compensation 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 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);
- severance amount is two times the officer's annual salary;
- if severance is payable, employee welfare benefits continue
for two years after the termination;
- 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;
- if the options and Restricted Stock cannot be vested
because of regulatory constraints, Troy Financial and Troy
Savings will pay an amount of cash equal to the value of
the unvested options and Restricted Stock.
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 and 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:
(a) the outstanding shares of Troy Financial's common
stock or
(b) 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:
any acquisition:
(1) directly from Troy Financial,
(2) by Troy Financial,
(3) by any employee benefit plan or trust of
Troy Financial or Troy Savings, or
(4) pursuant to a transaction that complies with
clauses (a), (b) and (c) of the second
bullet below.
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<PAGE> 86
- 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; or
- approval by Troy Financial's stockholders of a complete
liquidation or dissolution of Troy Financial.
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 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 customary hospitalization, major
medical and prescription drug benefits to employees, on a self-funded basis (up
to applicable stop loss insurance 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:
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- 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.
The following table sets forth, as of September 30, 1998, estimated
annual pension benefits for individuals at age 65 payable in the form of a life
annuity under the most advantageous plan provisions for various levels of
compensation and years of service. The figures in this table are based upon the
assumption that the Pension Plan continues in its present form and do not
reflect Social Security benefits and benefits payable under the ESOP. At
September 30, 1998, the estimated years of credited service of Messrs. Hogarty
and O'Bryan were 13 and 22 years, respectively.
[INSERT PENSION PLAN TABLE]
401(k) Savings Plan. 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.
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;
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- 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's
contributions to the 401(k) Plan on behalf of Messrs. Hogarty and O'Bryan were
$10,000 and $8,789, respectively.
Employee Stock Ownership Plan. In connection with the conversion, 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 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
or her 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.
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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,
- stock options that do not qualify as Incentive Options
("Non-Statutory Options") to directors, officers, employees and
independent contractors; and
- shares of common stock, which may be made subject to vesting
restrictions (Restricted Stock), to directors, officers, employees
and independent contractors (including Trustees Emeritus).
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 1,048,653 shares based upon the issuance of
10,486,530 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 (that is, 419,461 shares assuming
10,486,530 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 grant;
- 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
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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 on 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's 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 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 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
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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 who
makes grantee 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's qualified retirement plans, because
of limitations in effect under the IRC. In addition, the Supplemental Plan will
make up for benefits lost under the ESOP allocation procedures if participants
retire or otherwise terminate employment before the ESOP has repaid the funds it
will borrow to purchase common stock.
Each participant in the Supplemental Plan will be entitled to an annual
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, in Mr. Hogarty's case, by $26,000 per year. The benefit will be fully
vested upon completion of five years of service (including service before
adoption) and will be reduced in proportion to years of service if the
participant retires or terminates employment before age 65. 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 before the participant attains (or
would have attained) 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 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's books and will be credited with earnings based on the performance of
investments selected by the participant. The defined contribution amounts will
be fully vested and will be paid in a lump sum upon the participant's retirement
or other termination of employment.
Each participant in the Supplemental Plan will also be entitled, at
retirement or other termination of employment, or upon a change of control (as
defined above) to an additional benefit if shares have not been allocated under
the ESOP because the ESOP has not repaid its loan. The
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benefit will be based on (a) 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 (b) 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's
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 CERTAIN RELATED PERSONS
Certain 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 sets forth the total expected
beneficial ownership of stock as to all trustees and executive officers as a
group.
<TABLE>
<CAPTION>
AT THE MINIMUM AT THE MAXIMUM
OF THE ESTIMATED PRICE OF THE ESTIMATED PRICE
RANGE(1) RANGE(1)
------------------------------ ----------------------------
AS A % AS A %
NUMBER OF SHARES NUMBER OF SHARES
NAME AMOUNT OF SHARES OFFERED OF SHARES OFFERED
- ---- ---------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Daniel J. Hogarty, Jr.................. $1,000,000 75,735(2) 1.00% 100,000 .98%
George H. Arakelian.................... 1,000,000 75,735(2) 1.00 100,000 .98
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) $4,250,000 376,470 4.97% 425,000 4.15%
</TABLE>
- ---------------------------------------
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the conversion, including
shares contributed to the Community Foundation. Also does not include
shares to be contributed to the Community Foundation, 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.
(2) Reduced to reflect the aggregate purchase limitation of 1% of the shares.
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THE CONVERSION
THE BOARD OF TRUSTEES OF THE BANK AND THE NEW YORK SUPERINTENDENT HAVE
APPROVED THE PLAN OF CONVERSION SUBJECT TO THE APPROVAL OF THE BANK'S DEPOSITORS
AND THE SATISFACTION OF CERTAIN OTHER CONDITIONS. SUCH APPROVAL BY THE NEW YORK
SUPERINTENDENT, HOWEVER, DOES NOT CONSTITUTE A RECOMMENDATION OR ENDORSEMENT OF
THE PLAN OF CONVERSION BY THE NEW YORK SUPERINTENDENT.
GENERAL
On July 15, 1998, the Board of Trustees of Troy Savings adopted a plan of
conversion, as amended on December 10, 1998 (the "Plan of Conversion"), pursuant
to which Troy Savings will convert from a New York State-chartered mutual
savings bank to a New York State-chartered capital stock savings bank under the
same name. The Plan of Conversion also contemplates that, upon the conversion of
Troy Savings to the stock form of organization, all of the stock of Troy Savings
will be owned by a bank holding company organized as a Delaware corporation that
will issue its own common stock to certain depositors and members of the general
public. The Plan of Conversion has been approved by the New York Superintendent
and Troy Savings has received a notice of intent not to object to the Plan of
Conversion from the FDIC, subject to, among other things, approval of the Plan
of Conversion by Troy Savings' eligible depositors. A special meeting of
eligible depositors has been called for this purpose to be held on ____, 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 and/or a Syndicated
Community Offering, through an underwritten firm commitment public offering or
through a combination thereof. If a holding company is not utilized and thus
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 activities in Troy Savings' community. 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 eligible depositors of Troy
Savings 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 and/or Syndicated Offering. FinPro is
a consulting firm experienced in the valuation and appraisal
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of savings institutions. See "-- Stock Pricing" for additional information as to
the determination of the estimated pro forma market value of the common stock.
The following is a brief summary of pertinent aspects of the Plan of
Conversion. The summary is qualified in its entirety by reference to the
provisions of the Plan of Conversion. A copy of the Plan of Conversion is
available from Troy Savings upon written request directed to ______ 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."
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
committed or anticipated to be contributed to the Charitable 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.
The Community Foundation will be dedicated to the promotion of charitable
purposes within Troy Savings' communities, including, but not limited to,
providing grants to the Music Hall Foundation and other qualifying charitable
organizations. In order to serve the purposes for which it was formed and
maintain its Section 501(c)(3) qualification, the Community Foundation may sell
the common stock contributed to it by Troy Financial.
Troy Savings will be the sole voting member of the Community Foundation
and will have the power to elects its board of directors. The board of directors
of the Community Foundation will be selected from the individuals who, from time
to time, are serving as directors of 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 purposes, including community
development, as set forth in Section 501(c)(3) of the IRC. The Community
Foundation's certificate of incorporation will further provide that no part of
the net earnings of the Community Foundation will inure to the benefit of, or be
distributable to its directors, officers or members of Troy Financial or Bank.
The board of directors of the Community Foundation will have authority
over the affairs of the Community Foundation. The directors of the Community
Foundation will establish the policies with respect to grants or donations by
the Community Foundation, consistent with the purposes for which the Community
Foundation was established. The directors of the Community Foundation will at
all times be bound by their fiduciary duties to advance the Community
Foundation's charitable goals, to protect the assets of the Community Foundation
and to act in a manner consistent with its charitable purposes. The directors of
the Community Foundation will also be responsible for directing the activities
of the Community Foundation, including the management of the common stock of
Troy Financial held by the Community Foundation. However, as a condition to
receiving the nonobjection of the FDIC to Troy Savings' Conversion, the
Community Foundation has agreed that
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all shares of common stock held by the Community Foundation will be voted in the
same ratio as all other shares of Troy Financial's common stock on all proposals
considered by stockholders of Troy Financial; provided, however, that the FDIC
shall waive this voting restriction under certain circumstances if compliance
with the voting restriction would: (i) cause a violation of the law of the State
of Delaware; (ii) would cause the Community Foundation to lose its tax-exempt
status, or cause the IRS to deny the Community Foundation's request for a
determination that it is an exempt organization or otherwise have a material and
adverse tax consequence on the Community Foundation; or (iii) would cause the
Community Foundation to be subject to an excise tax under Section 4941 of the
IRC. In order for the FDIC to waive such voting restriction, Troy Financial's or
the Community Foundation's legal counsel must render an opinion satisfactory to
the FDIC that compliance with the voting restriction would have the effect
described in clauses (i), (ii) or (iii) above. Under those circumstances, the
FDIC will grant a waiver of the voting requirement upon submission of such legal
opinion(s) by Troy Financial or the Community Foundation that are satisfactory
to the FDIC. In the event that the FDIC were to waive the voting requirement,
the directors would direct the voting of the common stock held by the Community
Foundation.
The 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
73,153, 179,174, 286,030 and 408,436 shares, which would have a market value of
$731,530, $1,791,740, $2,860,300 and $4,084,360, 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. One of the conditions imposed on the gift of common stock by
Troy Financial is that the amount of common stock that may be sold by the
Community Foundation in any one year shall not exceed 5% of the average market
value of the assets held by the Community Foundation, except where the board of
directors of the Community Foundation determines that the failure to sell an
amount of common stock greater than such amount would result in a long-term
reduction of the value of the Community Foundation's assets and as such would
jeopardize the Community Foundation's capacity to carry out its charitable
purposes. Upon completion of the conversion and the contribution of shares to
the Community Foundation immediately following the conversion, 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 their interests in Troy Financial
if the Community Foundation was not funded with common stock. For additional
discussion of the dilutive effect, see "Risk Factors -- Contribution to the
Community Foundation" and "Pro Forma Data."
TAX CONSIDERATIONS. 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)
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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 which requires that all
shares of common stock of Troy Financial held by the Community 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
FDIC would waive this voting restriction if it would cause the Community
Foundation to lose its tax-exempt status or subject the Community Foundation to
an excise tax, upon submission of a legal opinion satisfactory to the FDIC. See
"-- Regulatory Conditions Imposed on the Community Foundation."
Under Delaware law, 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 in excess of the 10% annual
limitation 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 pro forma consolidated
stockholders' equity of $173.0 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 No
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.
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 the 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).
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 408,436 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
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and the Music Hall Foundation are not tax-exempt charities under Section
501(c)(3) of the IRC. If one or more of the foundations do not qualify, the IRS
may disallow 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. See
"Risk Factors -- Contribution to the Community Foundation."
As a private foundation, earnings and gains, if any, from the sale of
common stock or other assets are exempt from federal and state corporate
taxation. However, investment income, such as interest, dividends and capital
gains, will be subject to a federal excise tax of 2.0%. The foundations will
each be required to make an annual filing with the IRS within four and one-half
months after the close of their fiscal year to maintain their tax-exempt status.
The foundations will each be required to publish a notice that the annual
information return will be available for public inspection for a period of 180
days after the date of such public notice. The information return for a private
foundation must include, among other things, an itemized list of all grants made
or approved, showing the amount of each grant, the recipient, any relationship
between a grant recipient and the foundation's managers and a concise statement
of the purpose of each grant. The foundations will also be required to file
annual reports with the Charities Bureau of the Office of the Attorney General
of the State of New York
REGULATORY CONDITIONS IMPOSED ON THE COMMUNITY FOUNDATION. Establishment
of the Community Foundation is subject to the following conditions to be agreed
to by the Community Foundation in writing as a condition to receiving the FDIC's
non-objection of Troy Savings' Conversion: (i) the Community Foundation will be
subject to examination by the FDIC; (ii) the Community Foundation must comply
with supervisory directives imposed by the FDIC; (iii) the Community Foundation
will operate in accordance with written policies adopted by the board of
directors, including a conflict of interest policy; and (iv) any shares of
common stock of Troy Financial held by the Community Foundation must 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; provided,
however, that, consistent with the condition, the FDIC shall waive this voting
restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware;
(b) would cause the Community Foundation to lose its tax-exempt status or
otherwise have a material and adverse tax consequence on the Community
Foundation; or (c) would cause the Community Foundation to be subject to an
excise tax under Section 4941 of the IRC. In order for the FDIC to waive such
voting restriction. Troy Financial's or the Community Foundation's legal counsel
must render an opinion satisfactory to FDIC that compliance with the voting
restriction would have the effect described in clauses (a), (b) or (c) above.
There can be no assurances that a legal opinion addressing these issues will be
rendered, or if rendered, that the FDIC will grant an unconditional waiver of
the voting restriction. In no event will the voting restriction survive the sale
of shares of the common stock held by the Community Foundation.
PURPOSES OF THE CONVERSION
The Board of Trustees has carefully considered the corporate structures
and charter alternatives available to Troy Savings, including maintaining Troy
Savings' current form. Based on this evaluation, the Board of Trustees has
determined that the mutual to stock conversion, and concurrent holding company
formation, is in the best interests of Troy Savings, its depositors and the
communities served by Troy Savings. If the concurrent holding company formation
cannot be accomplished, the Board of Trustees still believes that the mutual to
stock conversion is in the best interests of Troy Savings, its depositors and
the communities served by Troy Savings.
Troy Savings, as a New York State-chartered mutual savings bank, does not
have stockholders and has no authority to issue capital stock. By converting to
the capital stock form of organization, Troy Savings will be structured in the
form used by most financial service providers, including savings banks, and
therefore will enable Troy Financial and Bank 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
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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 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 -- Executive Compensation."
EFFECTS OF CONVERSION
GENERAL. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the net worth of
the institution based upon the balance in his or her account, which interest may
only be realized in the event of a liquidation of the institution. However, this
ownership interest is tied to the depositor's account and has no tangible market
value separate from such deposit account. Any depositor who opens a deposit
account obtains a pro rata ownership interest in the net worth of the
institution without any additional payment beyond the amount of the deposit. A
depositor who reduces or closes his account receives a portion or all of the
balance in the account but nothing for his ownership interest in the net worth
of the institution, which is lost to the extent that the balance in the account
is reduced.
Consequently, mutual savings bank depositors normally have no way to
realize the value of their ownership interest, which may have realizable value
only in the unlikely event that the mutual savings bank is liquidated. In such
event, the depositors of record at that time, as owners, would have a claim to
share pro rata in any residual surplus and reserves after other claims,
including claims of depositors to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, depositors lose all
rights to the net worth of the mutual savings bank, except to the extent
depositors have rights to claim a pro rata share of funds representing the
liquidation account established in connection with the Conversion. Additionally,
permanent nonwithdrawable capital stock is created and offered to depositors
which represents the ownership of the institution's net worth, subject to
certain claims of Eligible Account
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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
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, 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 common 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 Incorporation discussed
below, 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
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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' capital stock.
STOCK PRICING
The Plan of Conversion requires that the purchase price of the common
stock must be based on the appraised pro forma market value of the common stock,
as determined on the basis of an independent appraisal. 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 $_____, 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.
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/or 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 NYBB 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 28, 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
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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, Company, New York
Superintendent and FDIC that, to the best of its knowledge, nothing of a
material nature has occurred which, taking into account all relevant factors,
would cause FinPro 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, commence a resolicitation of
subscribers or take such other actions as permitted by the New York
Superintendent and FDIC in order to complete the Conversion. In the event that a
resolicitation is commenced, unless an affirmative response is received within a
reasonable period of time, all funds will be promptly returned to investors as
described above. A resolicitation following the conclusion of the Subscription
Offering and Community Offering would not exceed 45 days or, if following the
Syndicated Community Offering, would not exceed 60 days, unless such
resolicitation period is further extended by the New York Superintendent or FDIC
for periods of up to 60 days not to extend beyond ___, 1999.
If all shares of common stock are not sold through the Subscription
Offering and Community Offering, then 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, Company, New York
Superintendent and FDIC that, to the best of its knowledge, nothing of a
material nature has occurred which, taking into account all relevant factors,
including those which would be involved in a cancellation of the Syndicated
Community Offering, would cause FinPro 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
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permitted to decrease or cancel their subscriptions). Any change in the
estimated price range must be approved by the New York Superintendent and FDIC.
A resolicitation, if any, following the conclusion of the Subscription and
Community Offerings would not exceed 45 days, or if following the Syndicated
Community Offering, 60 days, unless further extended by the New York
Superintendent or FDIC for periods up to 60 days not to extend beyond _________,
1999. If such resolicitation is not effected, 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 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 7,395,500 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
Company subject to New York Superintendent and FDIC approval, if necessary.
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the estimated
price range or more than 15% above the maximum of the estimated price range, if
the Plan is not terminated by 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 common stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and 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 286,030 shares of its common stock from authorized but unissued
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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 10,486,530 shares. Of that amount, the Community Foundation will
own 2.80%. 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 minimum purchase limitations
set forth in the Plan of Conversion and as described below under "-- Limitations
on common stock Purchases."
PRIORITY 1: ELIGIBLE ACCOUNT HOLDERS. Each Eligible Account Holder will
receive, without payment, as a first priority, nontransferable subscription
rights to subscribe for shares of common stock in the Subscription Rights
Offering up to the amount permitted to be purchased in the Community Offering,
currently $500,000 of common stock, subject to the overall maximum purchase
limitation. See "-- Limitations on common stock Purchases." Subscription rights
as Eligible Account Holders received by trustees and Officers of 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
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.
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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 609,012 shares and
971,121 shares, based on the issuance of 7,612,653 shares (minimum) and
12,139,011 shares (maximum plus 15%), respectively.
PRIORITY 3: SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS. To the extent there
are sufficient shares of common stock remaining after the satisfaction of
subscriptions by Eligible Account Holders and the ESOP, each Supplemental
Eligible Account Holder will receive, without payment, as a third priority,
nontransferable subscription rights to subscribe for shares of common stock
equal to the amount permitted to be subscribed for in the Community Offering
which amount is currently $500,000, subject to the overall maximum purchase
limitation. See "-- Limitations on common stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares of common stock in excess of the
total number of such shares eligible for subscription, the shares of Conversion
Stock shall be allocated among the subscribing Supplemental Eligible Account
Holders so as to permit each subscribing Supplemental Eligible Account Holder,
to the extent possible, to purchase a number of shares sufficient to make his or
her total allocation of Conversion Stock equal to the lesser of 100 shares or
the number of shares subscribed for by the Supplemental Eligible Account Holder.
Any shares remaining after that allocation will be allocated among the remaining
subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each
remaining Supplemental Eligible Account Holder whose subscription remains
unsatisfied bears to the total amount of the qualifying deposits of all
remaining Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied. If any shares remain after the above allocations, such shares shall
then be allocated among those remaining Supplemental Eligible Account Holders
whose subscriptions remain unfilled on the same principle until all available
shares have been allocated or all subscriptions satisfied.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his or her stock order form all accounts in which such
Supplemental Eligible Account Holder has an ownership interest. Failure to list
an account could result in less shares being allocated than if all accounts had
been disclosed. Subscription rights received by an Eligible Account Holder shall
be applied in partial satisfaction of the subscription rights to be received as
a Supplemental Eligible Account Holder.
EXPIRATION DATE FOR THE SUBSCRIPTION OFFERING. The Subscription Offering
will expire on ________, 1999 at 12:00 noon, New York time ("Expiration Date"),
unless extended for up to ____ days by Troy Savings and Company or such
additional periods with the approval of the New York Superintendent and FDIC, if
required. Subscription rights which have not been exercised prior to the
Expiration Date will become void. 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 ___ 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 ____ 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
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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
__________, 1999.
COMMUNITY OFFERING
If shares of common stock remain available following the Subscription
Offering, then those remaining shares will be sold, as a fourth priority, in a
Community Offering to certain members of the general public. Participants in the
Community Offering may, together with any associate or group of persons acting
in concert, subscribe for up to $500,000 of common stock subject to the minimum
and maximum purchase limitations set forth in the Plan of Conversion See
"--Limitations on common stock Purchases." The shares may be made available in
the Community Offering through a direct community marketing program which may
provide for utilization of a broker, dealer, consultant or investment banking
firm. In offering the unsubscribed for shares to the public in the Community
Offering, Troy Financial and Troy Savings may establish the relative
preferences, priorities, purchase limitations and allocation of shares among
persons, including Bank investors, subscribing for shares. Troy Savings may
establish all other terms and conditions of such offer. Troy Savings shall make
distribution of the common stock to be sold in the Community Offering in such a
manner as to promote a wide distribution of common stock. 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.
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 by, a
person residing in a foreign country.
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 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. In the event that 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 a NASD member firm
pursuant to a selected dealers agreement; provided, however, that the aggregate
fees payable to Sandler O'Neill for common stock sold by them pursuant to such a
selected dealers agreement shall not exceed 1.10% of the aggregate purchase
price and provided, further, however, that the aggregate fees payable to Sandler
O'Neill and the selected dealers will not exceed 1.10% of the aggregate purchase
price of the common stock sold by selected dealers. Fees to Sandler O'Neill and
to any other broker-dealer may be deemed to be underwriting fees, and Sandler
O'Neill and such 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
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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
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 the assumptions
used to arrive at these estimates.
Sandler O'Neill, in its role as conversion agent, will also perform proxy
solicitation services, conversion agent services and records management services
for 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 Bank may
participate in the solicitation of offers to purchase common stock. Questions of
prospective purchasers will be directed to executive officers or registered
representatives. Other employees of Troy Savings may participate in the Offering
in ministerial capacities or providing clerical work in effecting a sales
transaction. Such other employees have been instructed not to solicit offers to
purchase common stock or provide advice regarding the purchase of common stock.
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 five days prior to such date or hand
delivered any later than two days prior to such date. Execution of the stock
order form and certification form will confirm receipt or delivery in accordance
with Rule 15c2-8. Stock order and certification forms will only be distributed
with a prospectus.
To purchase shares in the Subscription and Community Offerings, an
executed stock order form and certification form with the required payment for
each share subscribed for, or with appropriate authorization for withdrawal from
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 ___ p.m., New York time, on _______, 1999. Stock order forms which
are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, Troy Savings and Company are not obligated to
accept orders submitted on photocopied or facsimilied stock order forms and will
not accept stock order forms unaccompanied by an executed certification form.
Notwithstanding the foregoing, Troy Financial and Bank shall have the right,
each in their sole discretion, to permit institutional investors to submit
irrevocable orders together with a legally binding commitment for payment and to
thereafter pay for the shares of common stock for which they subscribe in the
Community Offering at any time prior to 48 hours before the completion of the
Conversion. 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.
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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/or the supplemental eligibility record date ([December 31, 1998])
must list all accounts on the stock order form giving all names in each account
and the account number.
Payment for subscriptions may be made (i) in cash if delivered in person
at any branch office of Troy Savings, (ii) by check or money order, or (iii) 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 account 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
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 or any subsidiary of 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 or any subsidiary of 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 ten percent shareholders who use self-directed IRA or qualified
plan account funds to purchase shares of common stock in the Subscription and
Community Offerings make such purchases for the exclusive benefit of the IRAs or
qualified plan accounts.
Certificates representing shares of common stock purchased will be mailed
to purchasers at the address specified in properly completed stock order forms,
as soon as practicable following consummation of the sale of all shares of
common stock. Any certificates returned as undeliverable will be disposed of in
accordance with applicable law.
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RESTRICTIONS ON TRANSFER OF SUBSCRIPTION RIGHTS AND SHARES
Prior to the completion of the Conversion, the NYBB regulations prohibit
any person with subscription rights, including the Eligible Account Holders, the
ESOP and Supplemental Eligible Account Holders, from transferring or entering
into any agreement or understanding to transfer the legal or beneficial
ownership of the subscription rights issued under the Plan or the shares of
common stock to be issued upon their exercise. Such rights may be exercised only
by the person to whom they are granted and only for his or her account. Each
person exercising such subscription rights will be required to certify that he
or she is purchasing shares solely for his or her own account and that he or she
has no agreement or understanding regarding the sale or transfer of such shares.
The regulations also prohibit any person from offering or making an announcement
of an offer or intent to make an offer to purchase such subscription rights or
shares of common stock prior to the completion of the Conversion.
TROY SAVINGS AND TROY FINANCIAL WILL PURSUE ANY AND ALL LEGAL AND
EQUITABLE REMEDIES (INCLUDING FORFEITURE) IN THE EVENT THEY BECOME AWARE OF THE
TRANSFER OF SUBSCRIPTION RIGHTS AND WILL NOT HONOR ORDERS KNOWN BY THEM TO
INVOLVE THE TRANSFER OF SUCH RIGHTS.
SYNDICATED COMMUNITY OFFERING
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of common stock not purchased in the Subscription and Community
Offerings, if any, will be offered for sale to the general public in a
Syndicated Community Offering through a syndicate of registered broker-dealers
to be formed and managed by Sandler O'Neill acting as agent of 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 Community
Offering by any persons, together with associates of or persons acting in
concert with such persons, will be aggregated with purchases in the Syndicated
Community Offering and be subject to an overall maximum purchase limitation of
$1.0 million (100,000 shares).
Payments made in the form of a check, money order or in cash will earn
interest at 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
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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 ___ days
following the Subscription Expiration Date, unless extended by Troy Financial
with the approval of the New York Superintendent and FDIC. Such extensions may
not be beyond ______, 1999. See "-- Stock Pricing" above for a discussion of
rights of subscribers, if any, in the event an extension is granted.
LIMITATIONS ON PURCHASES
The Plan includes the following limitations on the number of shares of
common stock which may be purchased during the Conversion:
(1) No less than 25 shares;
(2) Each Eligible Account Holder may subscribe for and purchase in the
Subscription Offering up to the amount permitted to be purchased in the
Community Offering, currently $500,000 of common stock, subject to the
overall maximum purchase limitation described in (7) below;
(3) The ESOP is permitted to purchase, in the aggregate, up to 10% of the
shares of common stock issued in the Conversion, including shares issued
in the event of an increase in the estimated price range of 15%, and the
ESOP intends to purchase 8% of the shares of common stock issued in
connection with the Conversion, including shares contributed to the
Community Foundation (838,922 shares using the maximum of the estimated
price range);
(4) Each Supplemental Eligible Account Holder may subscribe for and purchase
in the Subscription Offering up to the amount permitted to be purchased
in the Community Offering, currently $500,000 of common stock, subject to
the overall maximum purchase limitation described in (7) below;
(5) Persons purchasing shares of common stock in the Community Offering,
together with associates of and groups of persons acting in concert with
such persons, may purchase in the Community Offering up to $500,000 of
common stock, subject to the overall maximum purchase limitation
described in (7) below;
(6) Persons purchasing shares of common stock in the Syndicated Community
Offering, together with associates of and persons acting in concert with
such persons, may purchase in the Syndicated Offering up to $500,000 of
common stock subject to the overall maximum purchase limitation described
in (7) below and, provided further, that shares of common stock purchased
in the Community Offering by any persons, together with associates of and
persons acting in concert with such persons, will be aggregated with
purchases in the Syndicated Community Offering in applying the $500,000
purchase limitation;
(7) Eligible Account Holders and Supplemental Eligible Account Holders may
purchase stock in the Community Offering and Syndicated Community
Offering, subject to the purchase limitations described in (5) and (6)
above, provided that, except for the ESOP, the overall
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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
Company and their associates in the aggregate, excluding purchases by the
ESOP.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of depositors of
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 may not be reduced to less than
100,000 shares or $1.0 million and the individual amount permitted to be
subscribed for may not be reduced by 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 in which such person has a substantial beneficial
interest or serves as a trustee or in a similar fiduciary capacity; 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 -Subscriptions by Executive
Officers, Directors and Trustees," "-- Certain Restrictions on Purchase or
Transfer of Shares After Conversion" and "Restrictions on Acquisition of Troy
Financial Corporation."
LIQUIDATION RIGHTS
In the unlikely event of a complete liquidation of 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 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
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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 _____, 1999, as the case may
be, or to such balance as it may be subsequently reduced, as hereinafter
provided. The initial liquidation account balance shall not be increased, and
shall be subject to downward adjustment to the extent of any downward adjustment
of any subaccount balance of any Eligible Account Holder or Supplemental
Eligible Account Holder in accordance with the Conversion Regulations.
In the unlikely event of a complete liquidation of 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' capital
stock. No merger, consolidation, purchase of bulk assets with assumption of
deposit accounts and other liabilities, or similar transactions with an
FDIC-insured savings bank, in which 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 (i) 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 _____, 1999, as the case may be, or (ii) the
amount in such deposit account as of June 30, 1997 or ____, 1999, as the case
may be, the subaccount balance for such deposit account shall be adjusted by
reducing such subaccount balance in an amount proportionate to the reduction in
such deposit balance. In the event of such downward adjustment, the subaccount
balance shall not be subsequently increased, notwithstanding any subsequent
increase in the deposit balance of the related deposit account. If any such
deposit account is closed, the related subaccount shall be reduced to zero. A
time account shall be deemed to be closed upon its maturity date regardless of
any renewal. A distribution of each subaccount balance may be made only in the
event of a complete liquidation of 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.
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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.
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
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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 Company will be subject to a restriction
that the shares not be sold for a period of one year following the date of
purchase or acquisition, except in the event of the death or judicial
declaration of incompetency of 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 Company will also be subject to the insider trading rules promulgated
pursuant to the Exchange Act.
INTERPRETATION, AMENDMENT AND TERMINATION
All interpretations of the Plan of Conversion and application of its
provisions to particular circumstances by a majority of the Board of Trustees of
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.
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 certain 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
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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 of which shall contain approximately one-third of the
whole number of the members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. Troy Financial's Certificate of Incorporation and Bylaws
provide that the size of the Board shall be determined by resolution of the
Board of Directors. The Certificate of Incorporation and the Bylaws provide that
any vacancy occurring in the Board, including a vacancy created by an increase
in the number of directors or resulting from death, resignation, retirement,
disqualification, removal from office or other cause, shall be filled, for the
remainder of the unexpired term, exclusively by a majority vote of the directors
then in office. The classified Board is intended to provide for continuity of
the Board of Directors and to make it more difficult and time consuming for a
stockholder group to fully use its voting power to gain control of the Board of
Directors without the consent of the incumbent Board of Directors of Troy
Financial. Directors may be removed by the stockholders only for cause by the
affirmative vote, at a special meeting of stockholders called for such a
purpose, of the holders of at least 66-2/3% of the voting power of all then
outstanding shares of capital stock entitled to vote thereon. In the absence of
these provisions, the vote of the holders of a majority of the shares could
remove the entire Board, with or without cause, and replace it with persons of
such holders choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting in the
election of directors. Special meetings of stockholders of 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 then 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.
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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 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
currently has no plans for the issuance of additional shares, other than the
issuance of additional shares upon exercise of stock options.
Stockholder Vote Required to Approve Business Combinations with
Interested Stockholders. In order to approve certain "Business Combinations"
with "Interested Stockholders" (each as defined in Troy Financial's Certificate
of Incorporation) and related transactions, the Certificate of Incorporation
requires the approval of (i) the holders of at least 80% of the total number of
outstanding shares of voting stock and (ii) the holders of 66-2/3% of the voting
power of the outstanding shares of voting stock, excluding for purposes of
calculating the affirmative vote and the total number of outstanding shares of
voting stock under this clause (ii) above, all shares of voting stock of which
the beneficial owner is the Interested Stockholder involved in the Business
Combination or any affiliate or associate of such Interested Stockholder. Under
Delaware law, absent this provision, business combinations, including mergers,
consolidations and sales of all or substantially all of the assets of a
corporation must, subject to certain exceptions, be approved by the vote of the
holders of only a majority of the outstanding shares of common stock of the
company and any other affected class of stock.
Under the Certificate of Incorporation, the 80% approval is not required
if (i) the Business Combination has been approved by at least 66-2/3% of Troy
Financial's directors, who are not affiliated with the Interested Stockholder(s)
and were members of the Board of Directors prior to the time that the Interested
Stockholder (including any affiliate or associate of such Interested
Stockholder) became an Interested Stockholder, then in office at a duly
constituted meeting of the Board of Directors called for such purpose or (ii) if
the proposed transaction meets certain price and procedure conditions in the
Certificate of Incorporation designed to afford stockholders a fair price in
consideration for their shares. In each such case, where stockholder approval is
required, the approval of only a majority of the outstanding shares of voting
stock is sufficient. The term "Interested Stockholder" is defined to include,
among others, any person (than 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 then 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 then
outstanding voting stock; or (c) which is an assignee of or has otherwise
succeeded to the beneficial ownership of any shares of voting stock that were at
any time within the two-year period immediately prior to any such date
beneficially owned by an Interested Stockholder, if such assignment or
succession shall have occurred in the course of a transaction or series of
transactions not utilizing the facilities of a national securities exchange,
occurring on The Nasdaq Stock Market, Inc., or involving a public distribution.
The term "Business Combination" is defined to include: (i) any merger or
consolidation of 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;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition
other than in the usual and regular course
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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; (iii)
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; (iv) 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 (v) 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 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 (a) make a tender or exchange offer for any equity
security of Troy Financial, (b) merge or consolidate Troy Financial with another
institution, or (c) 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
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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 -- 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 -- Benefit Plans." The foregoing
provisions and limitations may make it more difficult for companies or persons
to acquire control of Troy Financial and Troy 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.
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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: (i) any business combination if, prior to the date a person became
an Interested Stockholder, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder; (ii) any business combination involving a person who
acquired at least 85% of the outstanding voting stock in the transaction in
which he became an Interested Stockholder, excluding, for purposes of
determining the number of shares outstanding, shares owned by the corporation's
directors who are also officers and certain employee stock plans; (iii) any
business combination with an Interested Stockholder that is approved by the
board of directors and by a 66-2/3% vote of the outstanding voting stock not
owned by the Interested Stockholder; and (iv) certain business combinations that
are proposed after the corporation had received other acquisition proposals and
which are approved or not opposed by a majority of certain continuing members of
the board of directors. A corporation may exempt itself from the requirements of
the statute by adopting an amendment to its certificate of incorporation or
bylaws electing not to be governed by Section 203. At the present time, the
Board of Directors does not intend to propose any such amendment.
RESTRICTIONS IN 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 Troy Banking Board of the State of New
York to protect the interests of the converted Bank and its sole stockholder
from any hostile takeover. Such provisions may, indirectly, inhibit a change of
control of Troy Financial, as Troy Savings' sole stockholder. See "Risk Factors
- -- Certain Anti-Takeover Provisions."
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 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
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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 10,486,530
shares of common stock at the maximum of the estimated price range (or
12,139,011 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 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
119
<PAGE> 120
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 THE 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' shareholders, 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 shareholder.
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 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
120
<PAGE> 121
Holders and Supplemental Eligible Account Holders (see "The Conversion --
Effects of Conversion -- 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 their report with respect thereto, and are included herein in reliance upon
the authority of said firm as experts in accounting and auditing in giving said
report.
FinPro 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 will be 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
will be 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.
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.
121
<PAGE> 122
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) 270-3313.
122
<PAGE> 123
THE TROY SAVINGS BANK AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Independent Auditors' Report............................................................................................. F-2
Consolidated Statements of Condition at September 30, 1998 and 1997...................................................... F-3
Consolidated Statements of Income for the Years Ended September 30, 1998, 1997 and 1996.................................. F-4
Consolidated Statements of Changes in Equity for the Years Ended September 30, 1998,
1997 and 1996...................................................................................................... F-5
Consolidated Statements of Cash Flows for Years Ended September 30, 1998,
1997 and 1996...................................................................................................... F-6
Notes to Consolidated Financial Statements............................................................................... F-8
</TABLE>
All schedules are omitted because the required information is not applicable or
is included in the Consolidated Financial Statements and related Notes.
The financial statements of the Holding Company have been omitted because the
Holding Company has not yet issued any stock, has no assets, no liabilities and
has not conducted any business other than that of an organizational nature.
F-1
<PAGE> 124
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> 125
F-7
THE TROY SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Condition
September 30, 1998 and 1997
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
Cash and due from banks $ 12,330 13,903
Federal funds sold 5,585 28,548
-------- --------
Total cash and cash equivalents 17,915 42,451
Loans held for sale 11,096 3,703
Securities available for sale, at fair value 197,758 117,552
Investment securities held to maturity (fair value of $3,621 and
$4,162, at September 30, 1998 and 1997, respectively) 3,483 4,000
Net loans receivable 457,321 468,160
Accrued interest receivable 4,287 4,334
Other real estate owned 1,872 2,690
Premises and equipment, net 14,096 13,734
Other assets 8,821 5,824
-------- --------
Total assets $716,649 662,448
======== ========
LIABILITIES AND EQUITY
Liabilities:
Due to depositors:
Savings accounts 198,509 198,929
Money Market accounts 15,708 13,121
N.O.W. and demand accounts 107,311 93,002
Time accounts 256,674 267,345
-------- --------
Total deposits 578,202 572,397
Mortgagors' escrow accounts 1,900 1,916
Securities sold under agreement to repurchase 2,524 372
Federal Home Loan Bank of New York long-term debt 44,940 4,356
Accrued interest payable 360 60
Official bank checks 8,841 7,988
Contribution payable 3,453 -
Other liabilities and accrued expenses 5,400 3,817
-------- --------
Total liabilities 645,620 590,906
-------- --------
Commitments and contingent liabilities (note 14)
Equity:
Surplus 18,306 18,306
Undivided profits 52,316 53,194
Net unrealized gain on securities available for sale, net of tax 407 42
-------- --------
Total equity 71,029 71,542
-------- --------
Total liabilities and equity $716,649 662,448
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<PAGE> 126
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> 127
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> 128
THE TROY SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended September 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Net cash flows from operating activities:
Net income (loss) $ (878) 3,658 5,078
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Depreciation 1,615 1,426 1,442
Net amortization (accretion) of premium/discount
on securities 65 85 (358)
Deferred tax benefit (3,027) (1,442) (333)
Net gains from securities sales or calls (8) (4) (1)
Provision for loan losses 4,050 3,900 928
Net (gains) losses from mortgage loan sales (76) (14) 14
Net loss on sale of other real estate owned 106 12 54
Net write-down of other real estate owned 326 - 359
Proceeds from sale of loans held for sale 44,496 13,443 30,025
Net loans made to customers and held for sale (51,813) (15,660) (25,664)
Decrease (increase) in accrued interest receivable 47 439 (497)
Decrease (increase) in other assets (215) 93 1,774
Increase (decrease) in accrued interest payable 300 (59) (52)
Decrease in mortgagors' escrow accounts (16) (473) (1,419)
Increase (decrease) in other liabilities,
accrued expenses, and official bank checks 5,889 (2,015) 3,515
--------- --------- ---------
Net cash provided by operating
activities 861 3,389 14,865
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of securities available for sale 54,782 - 61
Proceeds from maturity and redemption of securities
available for sale 110,223 78,199 97,393
Purchase of securities available for sale (244,657) (46,125) (103,592)
Proceeds from maturity and redemption of
investment securities 517 519 14,609
Purchase of investment securities - - (15,479)
Proceeds from sale of other real estate owned 963 2,629 353
Net loans repaid from (made to) customers 6,212 (22,701) (44,987)
Capital expenditures (1,977) (930) (1,702)
--------- --------- ---------
Net cash (used in) provided by
investing activities (73,937) 11,591 (53,344)
--------- --------- ---------
(Continued)
</TABLE>
F-6
<PAGE> 129
THE TROY SAVINGS BANK AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
Years ended September 30, 1998, 1997 and 1996
(in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits $ 5,805 7,790 12,145
Net increase (decrease) in securities sold under
agreement to repurchase 2,152 222 (693)
Increase (decrease) in FHLB of New York
short-term borrowings - (5,000) 5,000
Issuance of long-term debt 41,000 - 5,000
Payments on long-term debt (417) (393) (250)
--------- --------- ---------
Net cash provided by financing
activities 48,540 2,619 21,202
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents (24,536) 17,599 (17,277)
Cash and cash equivalents at beginning of year 42,451 24,852 42,129
--------- --------- ---------
Cash and cash equivalents at end of year $ 17,915 42,451 24,852
========= ========= =========
Supplemental information:
Cash paid for:
Interest on deposits and borrowings $ 23,893 23,410 23,068
Income taxes $ 1,569 3,826 2,209
Supplemental schedule of noncash investing
activities:
Net reduction in loans resulting from the
transfer to other real estate owned $ 577 2,462 853
Investment securities transferred to securities
available for sale in accordance with the FASB
"Special Report," fair value of securities
transferred $98,700 $ - - 98,384
Increase (decrease) in equity from change in net
unrealized gain/loss on securities available for
sale, net of tax $ 365 476 (452)
Increase in deferred gain on sale of other real
estate $ - 344 -
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 130
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CONSOLIDATION POLICY
The consolidated financial statements include the accounts of The
Troy Savings Bank and its wholly owned subsidiaries. All material
intercompany accounts and transactions have been eliminated in
consolidation.
(b) BASIS OF PRESENTATION
The accompanying consolidated financial statements of The Troy
Savings Bank and subsidiaries (the Bank) conform, in all material
respects, to generally accepted accounting principles and to
general practice within the savings bank industry. The Bank
utilizes the accrual method of accounting for financial reporting
purposes.
(c) USE OF ESTIMATES
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change in the near term relate to the determination of
the allowance for loan losses and the valuation of other real
estate owned acquired in connection with foreclosures. In
connection with the determination of the allowance for loan losses
and the valuation of other real estate owned, management obtains
appraisals for properties.
Management believes that the allowance for loan losses is adequate
and that other real estate owned is recorded at its fair value
less an estimate of the costs to sell the properties. While
management uses available information to recognize losses on loans
and other real estate owned, future additions to the allowance or
write downs of other real estate owned may be necessary based on
changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses and other
real estate owned. Such agencies may require the Bank to recognize
additions to the allowance or write downs of other real estate
owned based on their judgments about information available to them
at the time of their examination which may not be currently
available to management.
F-8
<PAGE> 131
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
A substantial portion of the Bank's loans are secured by real
estate located throughout the six New York State Counties of
Albany, Rensselaer, Saratoga, Schenectady, Warren and Washington.
In addition, a substantial portion of the other real estate owned
is located in those same markets. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan
portfolio and the recovery of a substantial portion of the
carrying amount of other real estate owned is dependent upon
market conditions in these market areas.
(d) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash
and cash equivalents consists of cash on hand, due from banks, and
federal funds sold.
(e) LOANS HELD FOR SALE
Loans held for sale are recorded at the lower of cost or fair
value, determined on an aggregate basis. Gains and losses on the
disposition of loans held for sale are determined on the specific
identification method. It is the intention of management to sell
these loans in the near future.
Loans held for sale, as well as commitments to originate fixed
rate mortgage loans at a set interest rate, which will
subsequently be sold in the secondary mortgage market, are
regularly evaluated and, if necessary, a valuation reserve for
changes in interest rates is recorded.
(f) MORTGAGE SERVICING RIGHTS
As of October 1, 1996, the Bank adopted Statement of Financial
Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights", (SFAS No. 122) as amended by SFAS No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" (SFAS No. 125) which require entities to recognize as
separate assets, the rights to service mortgage loans for others,
regardless of how those servicing rights were acquired.
Additionally, these Statements require that the capitalized
mortgage servicing rights be assessed for impairment based on the
fair value of those rights, and that impairment, if any, be
recognized through a valuation allowance. The adoption of SFAS
No.'s 122 and 125, did not have a material effect on the Bank's
consolidated financial statements.
F-9
<PAGE> 132
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(g) SECURITIES AVAILABLE FOR SALE, AND INVESTMENT SECURITIES HELD TO
MATURITY
Management determines the appropriate classification of securities
at the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity, they are classified
as investment securities held to maturity and are carried at
amortized cost. Securities that are identified as trading account
assets for resale over a short period are stated at fair value
with unrealized gains and losses reflected in current earnings.
All other debt and equity securities are classified as securities
available for sale and are reported at fair value, with net
unrealized gains or losses reported, net of income taxes, as a
separate component of equity. At September 30, 1998 and 1997, the
Bank did not hold any securities considered to be trading
securities. As a member of the Federal Home Loan Bank of New York
(FHLB), the Bank is required to hold stock which is carried at
cost since there is no readily available market value.
Unrealized losses on securities which reflect a decline in value
which is other than temporary, if any, are charged to income.
Gains or losses on disposition of securities are based on the net
proceeds and the amortized cost of the securities sold, using the
specific identification method. The amortized cost of securities
is adjusted for amortization of premium and accretion of discount,
which is calculated on an effective interest method.
In November 1995, the staff of the Financial Accounting Standards
Board released its Special Report, "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and
Equity Securities." The Special Report contained, among other
things, a provision that allowed entities to, concurrent with the
initial adoption of the Special Report (November 15, 1995), but no
later than December 31, 1995, reassess the appropriateness of the
classifications of all securities held at that time. In
conjunction with the provisions of this Special Report, in
December 1995, the Bank transferred certain securities with an
amortized cost totaling $98.4 million and a fair value totaling
$98.7 million from investment securities held to maturity to
securities available for sale.
(h) NET LOANS RECEIVABLE
Loans receivable are reported at the principal amount outstanding,
net of unearned discount, net deferred loan fees, and the
allowance for loan losses. Discounts and net loan fees on loans
are accreted to income to provide a level-yield of interest on the
underlying loans.
F-10
<PAGE> 133
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
Loans considered doubtful of collection by management are placed
on a nonaccrual status for the recording of interest. Generally
loans past due 90 days or more as to principal or interest are
placed on nonaccrual status except for those loans which, in
management's judgment, are adequately secured and in the process
of collection and certain consumer and open-end credit loans which
are usually charged off at 120 days past due. When a loan is
placed on nonaccrual status, all previously accrued income that
has not been collected is reversed from current year interest
income, and subsequent cash receipts are generally applied to
reduce the unpaid principal balance. Amortization of related
unearned discount and net deferred fees is suspended when a loan
is placed on nonaccrual status. Loans are removed from nonaccrual
status when they become current as to principal and interest or
when in the opinion of management, the loans are expected to be
fully collectible as to principal and interest.
(i) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision
for loan losses charged to operations. Loans are charged against
the allowance for loan losses when management believes that the
collectibility of all or a portion of the principal is unlikely.
The allowance is an amount that management believes will be
adequate to absorb losses on existing loans that may become
uncollectible, based on evaluations of the collectibility of loans
and prior loan loss experience. Management's evaluation of the
adequacy of the allowance for loan losses is performed on a
periodic basis and takes into consideration such factors as the
historical loan loss experience, changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of
specific problem loans and current economic conditions that may
affect borrowers' ability to pay.
As of October 1, 1995 the Bank adopted SFAS No. 114, "Accounting
by Creditors for Impairment of a Loan" (SFAS No. 114) as amended
by SFAS No. 118, "Accounting by Creditors for Impairment of a
Loan-Income Recognition and Disclosures," (SFAS No. 118). These
Statements prescribe recognition criteria for loan impairment and
measurement methods for certain impaired loans and all loans whose
terms are modified in troubled debt restructurings subsequent to
the adoption of these Statements. Under these Statements, a loan
is considered impaired when it is probable that the borrower will
not repay the loan according to the original contractual terms of
the loan agreement, or when a loan (of any loan type) is
restructured in a troubled debt restructuring subsequent to
October 1, 1995. The allowance for loan losses related to impaired
loans is based on discounted cash flows using the loan's initial
effective interest rate or the fair value of the collateral for
certain loans where repayment of the loan is expected to be
provided solely by the underlying collateral (collateral dependent
loans). The Bank's impaired loans are generally collateral
dependent. These Statements are principally related to commercial
type loans, however, certain provisions related to restructured
loans are applicable to all loan types. The adoption of these
Statements did not have a material effect on the Bank's
consolidated financial statements.
F-11
<PAGE> 134
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(j) OTHER REAL ESTATE OWNED
Other real estate owned includes real estate acquired in
settlement of loans. Other real estate owned is recorded on an
individual asset basis at the lower of cost (defined as the fair
value at initial investment), or the fair value of the asset
acquired less an estimate of the costs to sell the property. At
the time of foreclosure, the excess, if any, of the loan value
over the fair value of the property received is charged to the
allowance for loan losses. Subsequent declines in the value of
such property and net operating expenses of such properties are
charged directly to other operating expenses. Properties are
regularly reappraised and written down to the fair value less the
estimated cost to sell the property, if necessary.
The recognition of gains and losses from the sale of other real
estate owned is dependent on a number of factors relating to the
nature of the property sold, terms of the sale, and the future
involvement of the Bank and subsidiaries in the property sold. If
a real estate transaction does not meet certain down payment and
loan amortization requirements, income recognition is deferred and
recognized under an alternative method.
(k) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated
depreciation. Depreciation is computed on the straight-line method
over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the terms of the
related leases or the useful lives of the assets.
(l) INCOME TAXES
The Bank accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes" (SFAS No. 109). Under the asset
and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets are recognized
subject to management's judgment that those assets will more
likely than not be realized. A valuation allowance is recognized
if, based on an analysis of available evidence, management
believes that all or a portion of the deferred tax assets will not
be realized. Adjustments to increase or decrease the valuation
allowance are charged or credited, respectively, to income tax
expense. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years
in which the temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
F-12
<PAGE> 135
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
(m) STATUTORY TRANSFER TO SURPLUS
A quarterly transfer of 10% of net income (before dividends paid
to depositors and losses on sale of assets) is generally required
to be made to surplus under New York State Banking Law. No
transfer is required, however, if the net worth of the bank
exceeds 10% of deposits.
(n) FINANCIAL INSTRUMENTS
In the normal course of business, the Bank is a party to certain
financial instruments with off-balance-sheet risk such as
commitments to extend credit, unused lines of credit and standby
letters of credit. The Bank's policy is to record such instruments
when funded.
(o) OFFICIAL BANK CHECKS
The Bank's official checks (including tellers' checks, loan
disbursement checks, interest checks, expense checks, money
orders, and payroll checks) are drawn on deposit accounts at the
Bank and are ultimately paid through the Bank's Federal Reserve
correspondent account.
(p) RECLASSIFICATIONS
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform with the current year's
presentation.
(q) TRUST ASSETS AND SERVICE FEES
Assets held by the Bank in a fiduciary or agency capacity for its
customers are not included in the consolidated statements of
condition since these assets are not assets of the Bank. Trust
service fees are reported on the accrual basis.
(r) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 130",
"Reporting Comprehensive Income". SFAS No. 130 states that
comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct
entries to equity, such as the mark to market adjustment on
securities available for sale, foreign currency items and minimum
pension liability adjustments. This statement is effective for
fiscal years beginning after December 15, 1997. Management does
not believe that the impact of adopting this Statement will be
material to the Company's consolidated financial statements.
F-13
<PAGE> 136
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(1), CONTINUED
In June 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for reporting by public companies of
operating segments within the company, disclosures about products
and services, geographic areas and major customers. This statement
is effective for periods beginning after December 15, 1997.
Management does not believe that the adoption of SFAS No. 131 will
have a material impact on the Company's consolidated financial
statements.
In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits,"
which amends the disclosure requirements of SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions." SFAS No. 132 standardizes the disclosures of SFAS No.
87 and No. 106 to the extent practical and recommends a parallel
format for presenting information about pensions and other
postretirement benefits. This Statement is applicable to all
entities and addresses disclosure only. The Statement does not
change any of the measurement or recognition provisions provided
for in SFAS No. 87, No. 88 or No. 106. The Statement is effective
for fiscal years beginning after December 15, 1997. Management
anticipates providing the required disclosures in the September
30, 1999 consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other
contracts, and for hedging activities. This Statement is effective
for all fiscal quarters of fiscal years beginning after June 15,
1999. Management is currently evaluating the impact of this
Statement on the Company's consolidated financial statements.
(2) LOANS HELD FOR SALE
At September 30, 1998 and 1997, loans held for sale consisted of
conventional mortgages originated for subsequent sale. At
September 30, 1998 and 1997, there was no valuation reserve
related to loans held for sale.
F-14
<PAGE> 137
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3) SECURITIES AVAILABLE FOR SALE
The amortized cost and approximate fair value of securities available for
sale at September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
----------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities and agencies obligations $ 117,174 46 - 117,220
Obligations of states and political subdivisions 51,324 357 - 51,681
Mortgage-backed securities 3,616 128 - 3,744
Corporate debt securities 16,826 160 (2) 16,984
--------- -------- -------- --------
Total debt securities available for sale 188,940 691 (2) 189,629
Mutual funds and marketable equity securities 4,831 74 (83) 4,822
Non-marketable equity securities 3,307 - - 3,307
--------- -------- -------- --------
Total securities available for sale $ 197,078 765 (85) 197,758
========= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1997
----------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
U.S. Government securities and agencies obligations $ 57,658 52 (90) 57,620
Obligations of states and political subdivisions 20,829 6 (2) 20,833
Mortgage-backed securities 4,561 92 - 4,653
Corporate debt securities 27,145 87 (64) 27,168
-------- -------- -------- --------
Total debt securities available for sale 110,193 237 (156) 110,274
Mutual funds and marketable equity securities 3,983 53 (65) 3,971
Non-marketable equity securities 3,307 - - 3,307
-------- -------- -------- --------
Total securities available for sale $117,483 290 (221) 117,552
======== ======== ======== ========
</TABLE>
F-15
<PAGE> 138
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(3), CONTINUED
During 1998, proceeds from sales of securities available for sale totaled
$54.8 million, with gross gains of $9 thousand and gross losses of $1
thousand. During 1997 there were no sales of securities available for
sale. During 1996 proceeds from the sale of securities available for sale
totaled $61 thousand with gross gains of $1 thousand.
As of September 30, 1998, the contractual maturity schedule
(mortgaged-backed securities are shown separately) of debt securities
available for sale at amortized cost and approximate fair value is as
follows.
<TABLE>
<CAPTION>
Approximate
Amortized fair
Maturity ranges cost value
--------------- --------- ------------
(in thousands)
<S> <C> <C>
Within one year $ 145,761 145,852
From one year to five years 38,661 39,120
From five years to ten years 318 321
Over ten years 584 592
Mortgage-backed securities 3,616 3,744
---------------- ---------------
$ 188,940 189,629
================ ===============
</TABLE>
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
Mortgaged-backed securities consist entirely of direct pass through
Government National Mortgage Association (GNMA) and Freddie Mac
securities.
Other than U.S. Government Securities there are no securities of a single
issuer that exceed 10% of equity at September 30, 1998 and 1997.
(4) INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and approximate fair value of investment securities as
of September 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 1,980 118 - 2,098
Corporate and other debt securities 1,503 20 - 1,523
---------- --------- --------- ------------
Total investment securities $ 3,483 138 - 3,621
========== ========= ========= ============
</TABLE>
F-16
<PAGE> 139
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(4), CONTINUED
<TABLE>
<CAPTION>
1997
----------------------------------------------------------------
Gross Gross Approximate
Amortized unrealized unrealized fair
cost gains losses value
---- ----- ------ -----
(in thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 2,497 160 (1) 2,656
Corporate and other debt securities 1,503 7 (4) 1,506
---------- --------- --------- ------------
Total investment securities $ 4,000 167 (5) 4,162
========== ========= ========= ============
</TABLE>
The amortized cost and approximate fair value of investment securities
held to maturity at September 30, 1998, by contractual maturity
(mortgage-backed securities are shown separately), are as follows:
<TABLE>
<CAPTION>
Amortized Approximate
Maturity ranges cost fair value
--------------- ------------ ----------
(in thousands)
<S> <C> <C>
Over ten years $ 1,503 1,523
Mortgage-backed securities 1,980 2,098
------------ ------------
Total $ 3,483 3,621
============ ============
</TABLE>
Actual maturities may differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
No provision has been made for losses on investment securities held to
maturity in which the current market prices are less than the carrying
values since the Bank has the positive intent and ability to hold all
investment securities to maturity, and the Bank does not anticipate that
the unrealized loss, if any, is other than temporary.
F-17
<PAGE> 140
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5) NET LOANS RECEIVABLE
A summary of loans receivable at September 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Loans secured by real estate:
Residential $ 202,511 214,638
Commercial 166,186 184,561
Construction 10,052 15,508
--------- ---------
Total real estate loans 378,749 414,707
Commercial business 45,156 29,961
Home equity lines 8,575 9,883
Other consumer loans 33,445 20,539
--------- ---------
Total consumer loans 42,020 30,422
Less: Net unearned discount and deferred fees (344) (501)
Allowance for loan losses (8,260) (6,429)
--------- ---------
Loans receivable, net $ 457,321 468,160
========= =========
</TABLE>
Non performing loans receivable at September 30, are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Non-accrual loans $ 9,567 6,459 10,669
Restructured loans 2,081 2,256 1,810
--------- --------- ---------
Total $ 11,648 8,715 12,479
========= ========= =========
</TABLE>
All restructured loans are performing according to their modified terms
at September 30, 1998 and 1997.
Had the above non-accrual loans been on an accrual basis or had the
interest rate not been reduced with respect to the loans restructured
in trouble debt restructurings, the additional interest that would have
been earned was $180 thousand, $429 thousand, and $489 thousand for
1998, 1997 and 1996, respectively. There are no commitments to extend
further credit on the restructured loans.
F-18
<PAGE> 141
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(5), CONTINUED
Changes in the allowance for loan losses for the years ended September
30, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Balance, beginning of year $ 6,429 4,304 4,297
Provision charged to operations 4,050 3,900 928
Loans charged off (2,446) (1,890) (1,169)
Recoveries on loans charged-off 227 115 248
------- ------- -------
Balance, end of year $ 8,260 6,429 4,304
======= ======= =======
</TABLE>
At September 30, 1998 and 1997, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 totaled $8.4 million and
$6.1 million, respectively, for which the related allowance for loan
losses was approximately $1.2 million and $1.0 million, respectively. As
of September 30, 1998 and 1997, there were no impaired loans which did
not have an allowance for loan loss. The average recorded investment in
impaired loans for the years ended September 30, 1998 and 1997 was
approximately $5.9 million and $7.0 million, respectively. The total
interest income recognized on impaired loans, during the period of
impairment, was $0, $99 thousand, and $336 thousand for 1998, 1997 and
1996, respectively. The interest income recognized on impaired loans,
during the period of impairment, using the cash basis of income
recognition was $0, $98 thousand and $315 thousand for 1998, 1997, and
1996, respectively.
Certain executive officers of the Bank were customers of and had other
transactions with the Bank in the ordinary course of business. Loans to
these parties were made in the ordinary course of business at the Bank's
normal credit terms, including interest rate and collateralization. The
aggregate of such loans totaled less than 5% of total equity at September
30, 1998 and 1997.
(6) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at September 30,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Loans $2,770 2,925
Securities available for sale 1,494 1,386
Investment securities 23 23
------ ------
$4,287 4,334
====== ======
</TABLE>
F-19
<PAGE> 142
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(7) OTHER REAL ESTATE OWNED
Other real estate owned at September 30, 1998 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Other real estate owned:
Residential (1-4 family) $ 345 589
Commercial properties 1,527 2,101
------ ------
$1,872 2,690
====== ======
</TABLE>
(8) PREMISES AND EQUIPMENT, NET
A summary of premises and equipment at September 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Land $ 1,423 1,423
Buildings 12,621 12,520
Furniture, fixtures and equipment 8,002 7,516
Leasehold improvements 3,450 3,075
Construction in progress 1,225 210
-------- --------
26,721 24,744
Less accumulated depreciation (12,625) (11,010)
-------- --------
Premises and equipment, net $ 14,096 13,734
======== ========
</TABLE>
Depreciation expense was approximately $1.6 million for the year ended
September 30, 1998 and $1.4 million in each of the years ended September
30, 1997 and 1996.
F-20
<PAGE> 143
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9) DEPOSITS
A summary of depositors' balances at September 30, 1998 and 1997 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Savings accounts (2.75% to 5.5%) $198,509 198,929
-------- --------
Time accounts:
2.00% to 2.99% 624 257
3.00% to 3.99% 58 9
4.00% to 4.99% 10,174 5,893
5.00% to 5.99% 236,312 246,686
6.00% to 6.99% 6,679 11,762
7.00% to 7.99% 2,698 2,578
8.00% to 8.99% 12 53
9.00% to 9.99% 117 107
-------- --------
Total time accounts 256,674 267,345
-------- --------
Money market accounts (2.00% to 3.00%) 15,708 13,121
N.O.W. and Super N.O.W. accounts (2.00% to 2.35%) 76,195 71,442
Demand accounts (0%) 31,116 21,560
-------- --------
Total money market, N.O.W. and demand deposit
accounts 123,019 106,123
-------- --------
Total deposits $578,202 572,397
======== ========
</TABLE>
The contractual maturities of time accounts for the years subsequent to
September 30, 1998 is as follows:
<TABLE>
<CAPTION>
Years ending September 30,
(in thousands)
<S> <C>
1999 $ 194,755
2000 40,675
2001 14,852
2002 6,281
Thereafter 111
--------
$256,674
========
</TABLE>
F-21
<PAGE> 144
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(9), CONTINUED
Interest expense on deposits and escrows for the years ended September
30, 1998, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
(in thousands)
<S> <C> <C> <C>
Time accounts $14,701 14,087 13,758
Savings accounts 6,451 6,647 6,798
Money market accounts 431 433 379
N.O.W. and Super N.O.W. accounts 1,696 1,590 1,547
Escrow accounts 60 55 75
------- ------- -------
$23,339 22,812 22,557
======= ======= =======
</TABLE>
Individual time accounts in excess of $100 thousand totaled $33.4 million
and $28.7 million at September 30, 1998 and 1997, respectively.
(10) EMPLOYEE BENEFIT PLANS
The Bank maintains a non-contributory pension plan with the Retirement
System Group, Inc., covering substantially all its full-time employees.
The benefits are generally computed as two percent of the highest three
year "average annual earnings" multiplied by years of credited service,
subject to various caps and adjustments as provided for in the plan. The
amounts contributed to the plan are determined annually on the basis of
(a) the maximum amount that can be deducted for federal income tax
purposes or (b) the amount certified by an actuary as necessary to avoid
an accumulated funding deficiency as defined by the Employee Retirement
Income Security Act of 1974. Contributions are intended to provide not
only for benefits attributed to service to date but also those expected
to be earned in the future. Assets of the plan are primarily invested in
pooled equity and fixed income funds.
F-22
<PAGE> 145
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), CONTINUED
The following table sets forth the plan's funded status and amounts
recognized in the banks consolidated financial statements as of September
30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits of
$9.8 million and, $8.3 million at September 30, 1998 and
1997, respectively $(10,182) (8,467)
======== ========
Projected benefit obligation for service rendered to date (12,458) (10,388)
Plan assets at fair value 12,805 13,160
-------- --------
Plan assets in excess of projected benefit obligation 347 2,772
Unrecognized net gain from past experience different from
that assumed and effects and changes in assumptions (241) (2,513)
Unrecognized net transition asset at January 1, 1987 being
recognized over 11.2 years - (14)
Unrecognized past service asset 339 387
-------- --------
Prepaid pension cost included in other assets $ 445 632
======== ========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net periodic pension cost included the following components:
Service cost $ 580 482 361
Interest cost 752 699 559
Expected return on plan assets (1,038) (868) (488)
Net amortization (68) (51) (211)
-------- -------- --------
Net periodic pension cost $ 226 262 221
======== ======== ========
</TABLE>
The actuarial assumptions used in determining the actuarial present value
of the projected benefit obligation as of September 30, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Discount Rate 6.50% 7.25% 7.75%
Long-term rate of return 8.00% 8.00% 8.00%
Salary increase rate 4.50% 5.00% 5.50%
</TABLE>
F-23
<PAGE> 146
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), CONTINUED
The Bank maintains a 401(k) savings plan covering all salaried and
commissioned employees who become eligible to participate upon attaining
the age of twenty-one and completing a year of service. Participants may
contribute from 2% to 15% of their compensation. The Bank made matching
contributions equal to 50% of the participants' contributions (up to a
limit of 3% of the participants' compensation) in fiscal 1998, 1997 and
1996. Employer matching contributions vest 20% per year beginning after
one year of participation in the plan. Employer matching contributions
were approximately $146 thousand, $125 thousand and $120 thousand for
each of the years ended September 30, 1998, 1997 and 1996, respectively.
The Bank has established a self-funded employee welfare benefit plan to
provide health care coverage (hospital medical, major medical, and
prescription drug) for eligible employees and their dependents who enroll
in the plan. This self insurance program is administered by an unrelated
company. Under the terms of the self insurance program, the Bank could
incur costs up to a maximum of approximately $828 thousand for the cost
of covered claims for the plan year ended December 31, 1998. The Bank has
purchased a $1.0 million insurance policy to cover claims in excess of
the maximum costs under the plan. In addition, there are lower maximum
cost limitations for individual claims.
The Bank provides certain health care and life insurance benefits for
retired employees. Substantially all of the Bank's employees will become
eligible for those benefits if they reach normal retirement age while
working for the Bank. As of October 1, 1995, the Bank adopted SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (SFAS No. 106).
The following table sets forth the plan's funded status and amounts
recognized in the consolidated financial statements at September 30, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
------- -------
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retired employees $(1,769) (2,072)
Active employees fully eligible for benefits (533) (255)
Other active plan participants (1,135) (1,126)
------- -------
Unfunded postretirement benefit obligation (3,437) (3,453)
Unrecognized net loss 15 253
Unrecognized transition obligation 2,304 2,440
------- -------
Accrued postretirement benefit cost included in
other liabilities $(1,118) (760)
======= =======
</TABLE>
F-24
<PAGE> 147
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(10), CONTINUED
Net periodic post retirement benefit cost recognized in the consolidated
statements of income for the years ended September 30, 1998, 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Service cost $170 124 115
Interest cost 204 237 217
Amortization of transition obligation at
October 1, 1995 being amortized over
20 years 136 136 136
---- ---- ----
Net periodic postretirement benefit cost $510 497 468
==== ==== ====
</TABLE>
The weighted-average discount rate used in determining the accumulated
post retirement benefit obligation was 6.5%, 7.25% and 8.0% as of
September 30, 1998, 1997, and 1996 respectively.
For measurement purposes, 5% and 3% annual rates of increase in the per
capita cost of covered medical and dental costs, respectively, was
assumed for fiscal 1998 and thereafter. The medical and dental cost trend
rate assumptions have a significant effect on the amounts reported. To
illustrate, increasing the assumed medical and dental cost trend rates
one percentage point in each year would increase the accumulated
postretirement benefit obligation as of September 30, 1998 by
approximately $332 thousand (10%) and increase the aggregate of the
service and interest cost components of the net periodic postretirement
benefit cost for fiscal 1998 by approximately $56 thousand (15%).
(11) INCOME TAXES
The components of income tax (benefit) expense for the years ended
September 30, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(in thousands)
<S> <C> <C> <C>
Current tax expense:
Federal $ 850 2,694 2,444
State 303 324 395
Deferred tax benefit (3,027) (1,442) (333)
------- ------- -------
Income tax (benefit) expense $(1,874) 1,576 2,506
======= ======= =======
</TABLE>
F-25
<PAGE> 148
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
The following is a reconciliation of the expected income tax (benefit)
expense and the actual income tax (benefit) expense. The expected income
tax (benefit) expense has been computed by applying the statutory federal
tax rate to income before income tax (benefit) expense:
<TABLE>
<CAPTION>
Years ended September 30,
---------------------------------------
1998 1997 1996
------ ------ ------
(dollars in thousands)
<S> <C> <C> <C>
Income tax (benefit) expense at applicable federal statutory rate $ (936) 1,780 2,578
Increase (decrease) in income tax (benefit) expense resulting from:
Tax exempt securities income (637) (46) (10)
State income tax (benefit) expense, net of Federal impact (276) 214 261
Reduction in the valuation allowance for deferred tax assets - - (245)
Reduction in New York State bad debt reserve resulting from tax law changes
- (349) -
Rehabilitation credits - - (42)
Other (25) (23) (36)
------- ------- -------
Income tax (benefit) expense $(1,874) 1,576 2,506
======= ======= =======
Effective tax rate (68.1)% 30.1% 33.0%
======= ======= =======
</TABLE>
F-26
<PAGE> 149
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
September 30, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------ ------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Differences in reporting the provision for loan losses $2,815 2,084
Differences in reporting expenses related to other real estate owned 248 182
Differences in reporting certain accrued expenses 2,689 667
Differences in reporting depreciation 603 397
Deferred compensation 386 335
------ ------
Total gross deferred tax assets 6,741 3,665
Deferred tax liabilities:
Differences in reporting pension costs 178 253
Differences in reporting prepaid expenses 259 252
Deferred net loan origination fees 157 133
Mortgage servicing rights 127 34
------ ------
Total gross deferred tax liabilities 721 672
------ ------
Net deferred tax asset at end of year 6,020 2,993
Net deferred tax asset at beginning of year 2,993 1,551
------ ------
Deferred tax benefit for the year $3,027 1,442
====== ======
</TABLE>
In addition to the deferred tax assets and liabilities described above,
the Bank also has a deferred tax liability of approximately $273 thousand
and $28 thousand at September 30, 1998 and 1997, respectively, related to
the net unrealized gain on securities available for sale.
Deferred tax assets are recognized subject to management's judgement that
realization is more likely than not. Based on the sufficiency of
temporary taxable items, historical taxable income, as well as estimates
of future taxable income, the Bank believes it is more likely than not
that the entire net deferred tax asset at September 30, 1998 and 1997
will be realized. During the year ended September 30, 1996 the valuation
allowance of $245 thousand was reduced to zero.
F-27
<PAGE> 150
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(11), CONTINUED
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions
historically have been determined using methods based on loss experience
or a percentage of taxable income. Tax bad debt reserves are maintained
equal to the excess of allowable deductions over actual bad debt losses
and other reserve reductions. These reserves consist of a defined
base-year amount, plus additional amounts ("excess reserves") accumulated
after the base year. SFAS No. 109 requires recognition of deferred tax
liabilities with respect to such excess reserves, as well as any portion
of the base-year amount which is expected to become taxable (or
"recaptured") in the foreseeable future.
Certain amendments to the Federal and New York State tax laws regarding
bad debt deductions were enacted in July and August 1996, respectively.
The Federal amendments include elimination of the percentage of taxable
income method for tax years beginning after December 31, 1995, and
imposition of a requirement to recapture into taxable income (over a
period of approximately six years) the bad debt reserves in excess of the
base-year amounts. The Bank previously established, and will continue to
maintain, a deferred tax liability with respect to such excess Federal
reserves. The New York State amendments redesignate the Bank's state bad
debt reserves at December 31, 1995 as the base-year amount and also
provide for future additions to the base-year reserve using the
percentage of taxable income method. As a result of the redesignation of
the New York State base-year reserve, the Bank reduced its deferred tax
liabilities related to the previous excess New York State reserve
resulting in a deferred tax benefit in fiscal 1997 of approximately $349
thousand.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal base-year reserve of $7.9 million
and "supplemental" reserve (as defined) of $1.0 million at September 30,
1998, and the state base-year reserve of $18.9 million at September 30,
1998, since the Bank does not expect that these amounts will become
taxable in the foreseeable future. Under New York State tax law, as
amended, events that would result in taxation of these reserves include
the failure of the Bank to maintain a specified qualifying assets ratio
or meet other thrift definition tests for tax purposes. The unrecognized
deferred tax liability at September 30, 1998 with respect to the Federal
base-year reserve and supplemental reserve was $2.7 million and $340
thousand, respectively. The unrecognized deferred tax liability at
September 30, 1998 with respect to the state base-year reserve was
approximately $1.7 million.
F-28
<PAGE> 151
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(12) SHORT-TERM BORROWINGS
A summary of short-term borrowings is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(dollars in thousands)
<S> <C> <C> <C>
Securities Sold Under Agreements to Repurchase:
Balance at September 30 $ 2,524 372 149
Maximum month-end balance 2,544 2,352 761
Average during the year 1,222 704 386
Average rate during the year 2.70% 4.12% 3.37%
Rate at September 30 3.45% 5.10% 4.31%
Federal Home Loan Bank of New York Short-Term Borrowings:
Balance at September 30 - - 5,000
Maximum month-end balance - 10,000 10,000
Average during the year - 4,403 4,220
Average rate during the year - 5.50% 5.14%
Rate at September 30 - - 5.45%
Average aggregate borrowing rates 2.70% 5.30% 5.27%
</TABLE>
Securities sold under agreements to repurchase generally mature within
ninety days. The Company maintains control over the securities
underlying the agreements.
The Company has established overnight and term lines of credit with the
Federal Home Loan Bank of New York (FHLB). If advanced, such lines of
credit will be collateralized by qualifying loans, securities,
mortgage-backed securities, and FHLB stock loans. Total availability
under these lines was approximately $67.1 million and $67.0 million at
September 30, 1998 and 1997, respectively. Participation in the FHLB
program requires an investment in FHLB stock. Investment in FHLB stock,
included in securities available for sale on the consolidated balance
sheets, amounted to $3.3 million at September 30, 1998 and 1997.
F-29
<PAGE> 152
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(13) FEDERAL HOME LOAN BANK OF NEW YORK LONG-TERM DEBT
At September 30, 1998, long term debt included a $3.9 million 5.89%
fixed rate amortizing loan and other long term borrowings of $41.0
million bearing interest of 5.8%. The following table sets forth
maturities of the long-term borrowings of September 30, 1998.
<TABLE>
<CAPTION>
Years ended September 30,
(in thousands)
<S> <C>
1999 $ 443
2000 469
2001 3,028
2002 -
2003 10,000
2004 and thereafter 31,000
----------
$ 44,940
==========
</TABLE>
Collateral for borrowings include a blanket lien on general assets of
the Bank and approximately $11.0 million of pledged securities.
(14) COMMITMENTS AND CONTINGENT LIABILITIES
(a) LEASE OBLIGATIONS
The Bank leases several banking office facilities under
various noncancellable operating leases. These leases expire
(excluding renewal options) in periods ranging from 1 to 10
years. Minimum rental commitments under lease contracts are as
follows:
<TABLE>
<CAPTION>
Years ending September 30, Office facilities
-----------------
(in thousands)
<S> <C>
1999 $ 448
2000 502
2001 540
2002 542
2003 547
2004 and thereafter 1,065
----------
$ 3,644
==========
</TABLE>
F-30
<PAGE> 153
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), CONTINUED
(b) DATA PROCESSING
During the year ended September 30, 1997, the Bank renewed its
data processing agreement for a five year period beginning
February 1, 1997. At September 30, 1998, commitments under
this agreement were approximately $3.8 million.
(c) OFF-BALANCE-SHEET FINANCING AND CONCENTRATIONS OF CREDIT
The Bank is a party to certain financial instruments with
off-balance-sheet risk in the normal course of business to
meet the financing needs of its customers. These financial
instruments include commitments to extend credit, unused lines
of credit and standby letters of credit. These instruments
involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the consolidated financial
statements. The contract amounts of these instruments reflect
the extent of involvement the Bank has in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of
nonperformance by the other party to the commitments to extend
credit and standby letters of credit is represented by the
contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments as it does
for on-balance-sheet instruments.
Contract amounts of financial instruments that represent the
future extension of credit as of September 30, 1998 and 1997
at fixed and variable interest rates are as follows:
<TABLE>
<CAPTION>
September 30, 1998
-------------------------------------------------
(in thousands)
Fixed Variable Total
----- -------- -----
<S> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments outstanding:
Conventional mortgages $ 10,212 13,487 23,699
Construction loans - 14,575 14,575
------------ ----------- --------
10,212 28,062 38,274
------------ ----------- --------
Unused lines of credit:
Home equity lines of credit - 6,242 6,242
Commercial lines of credit 25,846 25,077 50,923
Overdraft lines of credit - 1,572 1,572
------------ ----------- --------
25,846 32,891 58,737
------------ ----------- --------
Standby letters of credit - 2,721 2,721
------------ ----------- --------
$ 36,058 63,674 99,732
============ =========== ========
</TABLE>
F-31
<PAGE> 154
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), CONTINUED
<TABLE>
<CAPTION>
September 30, 1997
-------------------------------------------------
(in thousands)
Fixed Variable Total
----- -------- -----
<S> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments outstanding:
Conventional mortgages $ 5,801 2,019 7,820
Construction loans - 5,570 5,570
------------ ----------- ---------
5,801 7,589 13,390
------------ ----------- ---------
Unused lines of credit:
Home equity lines of credit - 6,192 6,192
Commercial lines of credit 3,124 24,460 27,584
Overdraft lines of credit - 1,446 1,446
------------ ----------- ---------
3,124 32,098 35,222
------------ ----------- ---------
Standby letters of credit - 1,935 1,935
------------ ----------- ---------
$ 8,925 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 extensions of credit for commercial loans varies
but may include accounts receivable, inventory, property,
plant and equipment, and income producing commercial property.
Commitments to extend credit may be written on a fixed rate
basis exposing the Bank to interest rate risk given the
possibility that market rates may change between commitment
and actual extension of credit.
Standby letters of credit are conditional commitments issued
by the Bank to guarantee payment on behalf of a customer and
guarantee the performance of a customer to a third party. The
credit risk involved in issuing these instruments is
essentially the same as that involved in extending loans to
customers. Since a portion of these instruments will expire
unused, the total amounts do not necessarily represent future
cash requirements. Each customer is evaluated individually for
creditworthiness under the same underwriting standards used
for commitments to extend credit and on-balance sheet
instruments. Bank policies governing loan collateral apply to
standby letters of credit at the time of credit extension.
F-32
<PAGE> 155
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), CONTINUED
Certain residential mortgage loans are written on an
adjustable-rate basis and include interest rate caps which
limit annual and lifetime increases in the interest rates on
such loans. Generally, adjustable rate residential mortgages
have an annual rate increase cap of 2% and a lifetime rate
increase cap of 5% to 6%. These caps expose the Bank to
interest rate risk should market rates increase above these
limits. At September 30, 1998 and 1997 approximately $75.6
million and $104.6 million of adjustable rate residential
loans had interest rate caps.
The Bank generally enters into rate lock agreements at the
time that residential mortgage loan applications are taken.
These rate lock agreements fix the interest rate at which the
loan, if ultimately made, will be originated. Such agreements
may exist with borrowers with whom commitments to extend loans
have been made, as well as with individuals who have not yet
received a commitment. The Bank makes its determination of
whether or not to identify a loan as held for sale at the time
rate lock agreements are entered into. Accordingly, the Bank
is exposed to interest rate risk to the extent that a rate
lock agreement is associated with a loan application or a loan
commitment which is intended to be held for sale, as well as
with respect to loans held for sale.
At September 30, 1998 and 1997, the Bank had rate lock
agreements (certain of which relate to loan applications for
which no formal commitment has been made) and conventional
mortgage loans held for sale amounting to approximately $20.3
million and $8.6 million, respectively.
In order to reduce the interest rate risk associated with the
portfolio of conventional mortgage loans held for sale, as
well as outstanding loan commitments and uncommitted loan
applications with rate lock agreements which are intended to
be held for sale, the Bank enters into agreements to sell
loans in the secondary market to unrelated investors on a loan
by loan basis, and may also enter into option agreements. At
September 30, 1998 and 1997, the Bank had mandatory
commitments and cancelable options to sell conventional fixed
rate mortgage loans at set prices amounting to approximately
$25.0 million and $11.0 million, respectively. The Bank
believes that it will be able to meet these commitments
without incurring any material losses.
(d) SERVICED LOANS
The total loans serviced by the Bank for unrelated third
parties were approximately $195.7 million at September 30,
1998 and $146.1 million at September 30, 1997.
F-33
<PAGE> 156
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(14), CONTINUED
(e) CONTINGENT LIABILITIES
In the ordinary course of business there are various legal
proceedings pending against the Bank. Based on consultation
with outside counsel, management considers that the aggregate
exposure, if any, arising from such litigation would not have
a material adverse effect on the Bank's consolidated financial
statements.
(f) CHARITABLE FOUNDATION CONTRIBUTION COMMITMENT
In 1998, the Bank contributed $1.0 million to the Troy Savings
Bank Charitable Foundation (the Foundation) and entered into a
binding unconditional commitment to contribute an additional
$4.0 million to the Foundation over the next 3 years as
follows:
<TABLE>
<CAPTION>
Years ending September 30,
(in thousands)
<S> <C>
1999 $ 1,000
2000 1,500
2001 1,500
-------
$ 4,000
=======
</TABLE>
The present value of the above commitment of $3.5 million has
been recorded as a liability on the Bank's September 30, 1998
consolidated statement of condition. A related contribution
expense of $3.5 million, in addition to the $1.0 million paid
to the Foundation, has been recorded on the Bank's 1998
consolidated statement of income.
(g) CONCENTRATIONS OF CREDIT
The Bank grants commercial, consumer and residential loans to
customers throughout the six New York State counties of
Albany, Rensselaer, Saratoga, Schenectady, Warren and
Washington. Although the Bank has a diversified loan
portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the real estate and
construction related sectors of the economy.
(h) RESERVE REQUIREMENT
The Bank is required to maintain certain reserves of vault
cash and/or deposits with the Federal Reserve Bank. The amount
of this reserve requirement, included in cash and due from
banks, was approximately $46 thousand.
F-34
<PAGE> 157
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15) DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
(SFAS No. 107) requires that the Bank disclose estimated fair values
for its financial instruments. Fair value estimates are made at a
specific point in time, based on relevant market information and
information about the financial instrument. These estimates do not
reflect any premium or discount that could result from offering for
sale at one time the Bank's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the
Bank's financial instruments, fair value estimates are based on
judgments regarding future expected net cash flows, current economic
conditions, risk characteristics of various financial instruments, and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could
significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial assets or liabilities
include the deferred tax assets and bank premises and equipment. In
addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates of fair value
under SFAS No. 107.
In addition there are significant intangible assets that SFAS No. 107
does not recognize, such as the value of core deposits, the Bank's
branch network, and other items generally referred to as goodwill.
Short-Term Financial Instruments
The fair values of certain financial instruments are estimated to
approximate their carrying values because the remaining term to
maturity of the financial instrument is less than 90 days or the
financial instrument reprices in 90 days or less. Such financial
instruments include cash and due from banks, Federal funds sold,
accrued interest receivable, accrued interest payable, and securities
sold under agreements to repurchase.
Loans Held for Sale
The estimated fair value of loans held for sale, is calculated by
either using quoted market rates or in the case where a firm commitment
has been made to sell the loan, the firm committed price.
Securities Available for Sale and Investment Securities Held to
Maturity
Securities available for sale and investment securities held to
maturity are financial instruments which are usually traded in broad
markets. Fair values are based upon market prices. If a quoted market
price is not available for a particular security, the fair value is
determined by reference to quoted market prices for securities with
similar characteristics.
F-35
<PAGE> 158
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15), CONTINUED
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type including,
residential real estate, commercial real estate, construction other
commercial loans and consumer loans.
The estimated fair value of performing loans is calculated by
discounting scheduled cash flows through the estimated maturity using
estimated market discount rates that reflect the credit and interest
rate risk inherent in the respective loan portfolio. Estimated fair
value for non-performing loans is based on recent external appraisals
or estimated cash flows discounted using a rate commensurate with the
risk associated with the estimated cash flows. Assumptions regarding
credit risk, cash flows, and discount rates are judgmentally determined
using available market information and specific borrower information.
Management has made estimates of fair value discount rates that it
believes to be reasonable. However, because there is no active market
for many of these loans, management has no basis to determine whether
the estimated fair value would be indicative of the value negotiated in
an actual sale.
Deposit Liabilities
The estimated fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings, NOW and money market
accounts and mortgagors' escrow deposits, is regarded to be the amount
payable on demand as of September 30, 1998 and 1997. The estimated fair
value of time accounts is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities. The fair value
estimates for deposits do not include the benefit that results from the
low-cost funding provided by the deposit liabilities as compared to the
cost of borrowing funds in the market.
Long-Term Debt
The estimated fair value of long-term debt is based on the discounted
value of contractual cash flows. The discount rate is estimated using
the rates currently offered for similar long-term debt issues.
Commitments to Extend Credit, Unused Lines of Credit, and Standby
Letters of Credit
The fair value of commitments to extend credit, unused lines of credit
and standby-letters of credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of
the counterparties. For fixed rate commitments to extend credit and
unused lines of credit, fair value also considers the difference
between current levels of interest rates and the committed rates. Based
upon the estimated fair value of commitments to extend credit, unused
lines of credit, and standby letters of credit, there are no
significant unrealized gains or losses associated with these financial
instruments.
F-36
<PAGE> 159
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(15), CONTINUED
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments
as of September 30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 17,915 17,915 42,451 42,451
Loans held for sale 11,096 11,096 3,703 3,703
Securities available for sale 197,758 197,758 117,552 117,552
Investment securities held to maturity 3,483 3,621 4,000 4,162
Loans 465,581 469,713 474,589 473,253
Less: Allowance for loan losses 8,260 - 6,429 -
----------- ----------- ----------- ------------
Net loans 457,321 469,713 468,160 473,253
Accrued interest receivable 4,287 4,287 4,334 4,334
Financial liabilities:
Deposits:
Demand, savings, money market,
and NOW accounts 321,528 321,528 305,052 305,052
Time accounts 256,674 258,254 267,345 267,712
Securities sold under agreements to repurchase 2,524 2,524 372 372
Accrued interest payable 360 360 60 60
Mortgagors' escrow accounts 1,900 1,900 1,916 1,916
Contribution payable 3,453 3,453 - -
Long-term debt 44,940 44,940 4,356 4,356
</TABLE>
Note: Loans held for sale represent the only trading financial
instruments; all other financial instruments are considered
to be held for purposes other than trading.
F-37
<PAGE> 160
] THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(16) REGULATORY CAPITAL REQUIREMENTS
Federal Deposit Insurance Corporation regulations require banks to
maintain a minimum level of regulatory capital. Under the regulations
in effect at September 30, 1998 and 1997, the Bank was required to
maintain a minimum leverage ratio of Tier I (core) capital to average
adjusted quarterly assets of 4.00%; and minimum ratios of Tier I (core)
capital and total capital to risk weighted assets of 4.00% and 8.00%,
respectively.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary
actions) with respect to an undercapitalized institution. Such actions
could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the
classification of savings institutions into five categories: well
capitalized, adequately capitalized, under capitalized, significantly
under capitalized, and critically under capitalized. Generally an
institution is considered well capitalized if it has a Tier I (core)
capital ratio of at least 5.0% (based on total adjusted quarterly
average assets); a Tier I risk-based capital ratio of at least 6.0%;
and a total risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC
about capital components, risk weighting and other factors.
Management believes that, as of September 30, 1998 and 1997, the Bank
met all capital adequacy requirements to which it is subject. Further,
the most recent FDIC notification categorized the Bank as a
well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's capital
classification.
The following is a summary of the Bank's actual capital amounts and
ratios as of September 30, 1998 and 1997:
<TABLE>
<CAPTION>
September 30, 1998 Amount Ratio
------------------ ------ -----
(dollars in thousands)
<S> <C> <C>
Leverage (Tier I) Capital $ 70,114 9.89%
Risk-based Capital:
Tier I $ 70,114 14.02%
Total $ 76,368 15.27%
September 30, 1997 Amount Ratio
------------------ ------ -----
Leverage (Tier I) Capital $ 70,943 10.64%
Risk-based Capital:
Tier I $ 70,943 15.01%
Total $ 77,372 16.37%
</TABLE>
F-38
<PAGE> 161
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17) ADOPTION OF PLAN OF CONVERSION
On July 15, 1998 the Board of Trustees of the Bank, subject to
regulatory approval and approval by members of the Bank, unanimously
adopted a Plan of Conversion (as amended and restated, the Plan), to
convert from a New York State-chartered mutual savings bank to a New
York State-chartered stock savings bank with the concurrent formation
of a holding company. The conversion is expected to be accomplished
through amendment of the Bank's Organization Certificate and
the sale of the holding company's common stock in an amount equal to
the proforma market value of the Bank after giving effect to the
conversion. A subscription offering of the sale of the holding
company's common stock will be offered with priority rights to certain
of the Bank's depositors, and the employee stock ownership plan
expected to be set up as part of the Plan. Any shares of the holding
company's common stock not sold in the subscription offering will be
offered for sale to the general public.
At the time of conversion, the Bank will establish a liquidation
account in an amount equal to its total equity as of the date of the
latest consolidated balance sheet appearing in the final prospectus.
The liquidation account will be maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Bank after
the conversion. The liquidation account will be reduced annually to the
extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's
interest in the liquidation account. In the event of a complete
liquidation, each eligible depositor will be entitled to receive a
distribution from the liquidation account in an amount proportionate to
the current adjusted qualifying balances for accounts then held. The
Bank may not pay dividends that would reduce stockholders' equity below
the required liquidation account balance.
Conversion costs will be deferred and deducted from the proceeds of the
shares sold in the conversion. If the conversion is not completed, all
costs will be charged to expense. As of September 30, 1998,
approximately $120.8 thousand of conversion costs had been deferred.
Pursuant to the Plan, the holding company intends to contribute holding
company common stock in an amount equal to 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.
F-39
<PAGE> 162
THE TROY SAVINGS BANK AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
(17), CONTINUED
The Community Foundation will submit a request to the Internal Revenue
Service to be recognized as a tax-exempt organization and will likely
be classified as a private foundation. A contribution of common stock
to the Community Foundation by the holding company may be tax
deductible, subject to an annual limitation of all contributions based
on 10% of the holding company's annual taxable income (before
contributions). To the extent that the Bank determines that such annual
taxable income will, more likely than not, be sufficient to allow for
the deduction, the holding company would be able to carry forward any
unused portion of the deduction for five years following the
contribution. Upon funding the Community Foundation, the holding
company will recognize an expense in the full amount of the
contribution, offset in part by any corresponding tax benefit, during
the quarter in which the contribution is made.
F-40
<PAGE> 163
===============================================================================
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...........................................................
Risk Factors......................................................
Troy Financial Corporation........................................
The Troy Savings Bank.............................................
Selected Consolidated Financial and Other Data....................
Use of Proceeds...................................................
Dividend Policy...................................................
Market for the common stock.......................................
Regulatory Capital Compliance.....................................
Capitalization....................................................
Pro Forma Data....................................................
Comparison of Valuation and Pro Forma
Information with No Contribution to
the Community Foundation.......................................
The Troy Savings Bank and Subsidiaries
Consolidated Statements of Income..............................
Management's Discussion and Analysis of Financial
Condition and Results of Operations............................
Business of Troy Financial Corporation............................
Business of The Troy Savings Bank.................................
Regulation and Supervision........................................
Taxation..........................................................
Management of Troy Financial Corporation..........................
Management of Troy Savings Bank...................................
The Conversion....................................................
Restrictions on Acquisition of
Troy Financial Corporation.....................................
Description of Capital Stock of Troy Financial Corporation........
Description of Capital Stock of The Troy Savings Bank.............
Transfer Agent and Registrar......................................
Experts...........................................................
Legal and Tax Opinions............................................
Additional Information............................................
Index to Consolidated Financial Statements........................ F-1
</TABLE>
UNTIL ______, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
===============================================================================
===============================================================================
10,200,500 SHARES
TROY FINANCIAL
CORPORATION
[LOGO]
(PROPOSED BANK HOLDING COMPANY
FOR THE TROY SAVINGS BANK)
COMMON STOCK
--------------------------
PROSPECTUS
--------------------------
, 1999
SANDLER O'NEILL & PARTNERS, L.P.
===============================================================================
<PAGE> 164
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts, except the
Securities and Exchange Commission registration fee, are estimated, and based
on the maximum of the Estimated Price Range. The SEC fee is based on the
maximum, plus 15%, of the Estimated Price Range.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- ------
<S> <C>
SEC registration fees $ 32,759
NASD fee 10,000
Nasdaq listing fee 75,000
New York State Banking Department filing fee 5,000
Counsel fees and expenses 600,000
Accounting fees and expenses 255,000
Appraisal and business plan fees 46,500
Conversion agent fees 30,000
Marketing agent fees 975,000
Benefit consultant fees 30,000
Printing, postage and mailing 225,000
Blue sky fees and expenses 20,000
Other expenses 29,741
----------
TOTAL $2,334,000
==========
</TABLE>
- ---------------
All expenses of registration incurred in connection with this
Registration Statement are being borne by the Registrant.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to the provisions of the General Corporation Law
of the State of Delaware (the "DGCL") and Section 12 of the Company's
Certificate of Incorporation.
The Registrant is a Delaware corporation subject to the applicable
indemnification provisions of the DGCL. Section 145 of the DGCL provides for
the indemnification, under certain circumstances, of persons who are or were
directors, officers, employees or agents of a corporation, or are or were
serving at the request of a corporation in such a capacity with another
business organization or entity, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement in actions, suits or
proceedings, whether civil, criminal, administrative, or investigative, brought
or threatened against or involving such persons because of such person's
service in any such capacity. In the case of actions brought by or in the
right of a corporation, Section 145 provides for indemnification of expenses
(including attorneys' fees) if the person seeking indemnification acted in good
faith and in a manner that such person reasonably believed to be in or not
opposed to the best interests of the corporation, and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall been adjudged liable to the corporation unless and only
upon a determination by the Court of Chancery or the court in which such action
or suit was brought that, despite the adjudication of liability but in view of
all the circumstances of the case, such person is reasonably and fairly
entitled to indemnity for such expenses.
II-1
<PAGE> 165
The Company's Certificate of Incorporation provides that, to the
extent permitted by law, the Company shall fully indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative
or investigative) by reason of the fact that such person is or was a director
or officer of the Company, or is or was serving at the request of the Company
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Moreover, to the extent permitted by law, the Company will fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was an employee or agent of the Company, or is or was serving
at the request of the Company as an employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding. The Company will also advance expenses
upon receipt of an undertaking by or on behalf of the director or officer to
repay such amount if it shall ultimately be determined that such director or
officer is not entitled to indemnification. Section 8 of the Company's Bylaws
provides for similar indemnification of such persons.
ITEM 15: RECENT SALES OF UNREGISTERED SECURITIES
ITEM 701. During the past three years, the Registrant has not sold
any unregistered securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following Exhibits are filed herewith or incorporated herein by
reference:
1.1 Engagement Letter, dated as of July 15, 1998, between The Troy Savings
Bank and Sandler O'Neill & Partners, L.P.*
1.2 Form of Agency Agreement between Troy Financial Corporation, The Troy
Savings Bank and Sandler O'Neill & Partners, L.P.**
2 Amended and Restated Plan of Conversion of The Troy Savings Bank, dated
July 15, 1998, and amended on December 10, 1998.*
3.1 Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1
hereto).*
4.2 Bylaws of the Company (filed as Exhibit 3.2 hereto).*
4.3 Form of stock certificate of Troy Financial Corporation.*
5.1 Opinion of Hogan & Hartson L.L.P.
8.1 Opinion of Hogan & Hartson L.L.P. as to certain federal income tax
matters. **
II-2
<PAGE> 166
8.2 Opinion of KPMG Peat Marwick LLP as to certain New York State tax
matters. **
8.3 Opinion of FinPro, Inc. as to value of subscription rights.*
10.1 The Troy Savings Bank 401(k) Savings Plan. **
10.2 Form of Executive Officer Employment Agreement.**
10.3 Form of Employment Protection Agreement. **
10.4 Form of Severance Compensation Plan. **
10.5 Form of Supplemental Retirement and Benefits Restoration Plan. **
10.6 Engagement Letter, dated as of September 16, 1998, between The Troy
Savings Bank and FinPro, Inc., for conversion appraisal services and
services related to the preparation of the business plan of The Troy
Savings Bank.*
10.7 Engagement Letter, dated as of July 15, 1998, between The Troy Savings
Bank and Sandler O'Neill & Partners, L.P., for conversion agent
services.*
21 Subsidiaries of The Troy Savings Bank.*
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of FinPro, Inc.*
23.3 Consents of Hogan & Hartson L.L.P. (contained in Exhibit 5.1 and
Exhibit 8.1).
23.4 Consent of William M. Mercer, Inc.
24.1 Power of Attorney (incorporated herein by reference from the signature
Page of the Registration Statement filed by Troy Financial Corporation
on December 11, 1998).
27 Financial Data Schedule.*
99.1 Appraisal Report of FinPro, Inc. **
99.2 Form of marketing materials to be used in connection with the offerings.
**
- ------------
* Previously filed.
** To be filed by amendment.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or
events arising after the effective date of the Registration Statement (or the
most recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
Registration Statement;
II-3
<PAGE> 167
(iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
(4) To provide to the underwriter at the closing
specified in the underwriting agreements, certificates in such denominations
and registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE> 168
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Troy, New York, on
January 28.
TROY FINANCIAL CORPORATION
(Registrant)
By: /s/ Daniel J. Hogarty, Jr.
-----------------------------------------
Daniel J. Hogarty, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on January 28.
<TABLE>
<CAPTION>
NAME TITLE
- ---- -----
<S> <C>
/s/ Daniel J. Hogarty, Jr.
- ----------------------------
Daniel J. Hogarty, Jr. President, Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Edward M. Maziejka, Jr.
- ----------------------------
Edward M. Maziejka, Jr. Chief Financial Officer
(Principal Financial Officer)
/s/ George H. Arakelian
- ----------------------------
George H. Arakelian Director
/s/ Richard B. Devane
- ----------------------------
Richard B. Devane Director
</TABLE>
II-5
<PAGE> 169
<TABLE>
<S> <C>
/s/ Michael E. Fleming
- ----------------------------
Michael E. Fleming Director
/s/ Willie A. Hammett
- ----------------------------
Willie A. Hammett Director
/s/ Thomas B. Healy
- ----------------------------
Thomas B. Healy Director
/s/ Keith D. Millsop
- ----------------------------
Keith D. Millsop Director
/s/ Edward G. O'Haire
- ----------------------------
Edward G. O'Haire Director
/s/ Marvin L. Wulf
- ----------------------------
Marvin L. Wulf Director
</TABLE>
II-6
<PAGE> 170
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBITS NUMBER
- ------ -------- ------
<S> <C>
1.1 Engagement Letter, dated as of July 15, 1998, between The Troy Savings Bank and Sandler O'Neill & Partners, L.P.*
1.2 Form of Agency Agreement between Troy Financial Corporation, The Troy Savings Bank and Sandler O'Neill & Partners, L.P.**
2 Amended and Restated Plan of Conversion of The Troy Savings Bank, dated July 15, 1998, and amended on December 10, 1998.*
3.1 Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Certificate of Incorporation of the Company (filed as Exhibit 3.1 hereto).*
4.2 Bylaws of the Company (filed as Exhibit 3.2 hereto).*
4.3 Form of stock certificate of Troy Financial Corporation.*
5.1 Opinion of Hogan & Hartson L.L.P.
8.1 Opinion of Hogan & Hartson L.L.P. as to certain federal income tax matters. **
8.2 Opinion of KPMG Peat Marwick LLP as to certain New York State tax matters. **
8.3 Opinion of FinPro, Inc. as to value of subscription rights.*
10.1 The Troy Savings Bank 401(k) Savings Plan. **
10.2 Form of Executive Officer Employment Agreement.**
10.3 Form of Employment Protection Agreement. **
10.4 Form of Severance Compensation Plan. **
10.5 Form of Supplemental Retirement and Benefits Restoration Plan. **
10.6 Engagement Letter, dated as of September 16, 1998, between The Troy Savings Bank and FinPro, Inc., for conversion
appraisal services and services related to the preparation of the business plan of The Troy Savings Bank.*
10.7 Engagement Letter, dated as of July 15, 1998, between The Troy Savings Bank and Sandler O'Neill & Partners, L.P., for
conversion agent services.*
21 Subsidiaries of The Troy Savings Bank.*
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of FinPro, Inc.*
</TABLE>
II-7
<PAGE> 171
<TABLE>
<S> <C>
23.3 Consents of Hogan & Hartson L.L.P. (contained in Exhibit 5.1 and Exhibit 8.1).
23.4 Consent of William M. Mercer, Inc.
24.1 Power of Attorney (incorporated herein by reference from the Signature Page of
the Registration Statement filed by Troy Financial Corporation on
December 11, 1998).
27 Financial Data Schedule.*
99.1 Appraisal Report of FinPro, Inc. **
99.2 Form of marketing materials to be used in connection with the offerings. **
</TABLE>
- ------------
* Previously filed.
** To be filed by amendment.
II-8
<PAGE> 1
EXHIBIT 5.1
January 29, 1999
Board of Directors
Troy Financial Corporation
32 Second Street
Troy, NY 12180
Ladies and Gentlemen:
We are acting as special counsel to Troy Financial Corporation, a
Delaware corporation (the "Company"), in connection with its registration
statement on Form S-1, as amended (the "Registration Statement") filed with the
Securities and Exchange Commission relating to the proposed public offering of
up to 11,783,475 shares of the Company's common stock, par value $.0001 per
share, all of which shares (the "Shares") are to be sold by the Company. This
opinion letter is furnished to you at your request to enable you to fulfill the
requirements of Item 601(b)(5) of Regulation S-K, 17 C.F.R. Section
229.601(b)(5), in connection with the Registration Statement.
For purposes of this opinion letter, we have examined copies of the
following documents:
1. An executed copy of the Registration Statement.
2. The Certificate of Incorporation of the Company, as certified
by the Secretary of the Company on the date hereof as being
complete, accurate and in effect.
3. The Bylaws of the Company, as certified by the Secretary of
the Company on the date hereof as being complete, accurate and
in effect.
4. The proposed form of Agency Agreement between the Company, The
Troy Savings Bank (the "Bank") and Sandler O'Neill & Partners,
L.P., filed as Exhibit 1.2 to the Registration Statement (the
"Agency Agreement").
5. The Amended and Restated Plan of Conversion of the Bank, dated
July 15, 1998 and amended on December 10, 1998 and January 28,
1999 (the "Plan").
6. Resolutions of the Board of Trustees of the Bank adopted on
July 15, 1998, December 10, 1998 and January 28, 1999 and a
<PAGE> 2
unanimous written consent of the Board of Directors of the
Company dated January 28, 1999, as certified by the
Secretary of the Company on the date hereof as being
complete, accurate and in effect, relating to the issuance
and sale of the Shares and arrangements in connection
therewith.
In our examination of the aforesaid documents, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity, accuracy and completeness of all documents submitted to us, and
the conformity with the original documents of all documents submitted to us as
certified, telecopied, photostatic, or reproduced copies. This opinion letter is
given, and all statements herein are made, in the context of the foregoing.
This opinion letter is based as to matters of law solely on the
General Corporation Law of the State of Delaware. We express no opinion herein
as to any other laws, statutes, regulations, or ordinances.
Based upon, subject to and limited by the foregoing, we are of the
opinion that following (i) final action of the Stock Committee of the Board of
Directors of the Company approving the final form of the Agency Agreement, (ii)
execution and delivery by the Company of the Agency Agreement, (iii)
effectiveness of the Registration Statement, (iv) issuance of the Shares
pursuant to the terms of the Agency Agreement and the Plan, and (v) receipt by
the Company of the consideration for the Shares specified in the resolutions of
the Board of Directors, the Shares will be validly issued, fully paid and
nonassessable under the General Corporation Law of the State of Delaware.
We assume no obligation to advise you of any changes in the
foregoing subsequent to the delivery of this opinion letter. This opinion letter
has been prepared solely for your use in connection with the filing of the
Registration Statement on the date of this opinion letter and should not be
quoted in whole or in part or otherwise be referred to, nor filed with or
furnished to any governmental agency or other person or entity, without the
prior written consent of this firm.
We hereby consent to the filing of this opinion letter as Exhibit
5.1 to the Registration Statement and to the reference to this firm under the
caption "Legal Matters" in the prospectus constituting a part of the
Registration Statement. In giving this consent, we do not thereby admit that we
are an "expert" within the meaning of the Securities Act of 1933, as amended.
Very truly yours,
/s/ HOGAN & HARTSON L.L.P.
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANT'S CONSENT
The Board of Trustees
The Troy Savings Bank
We consent to the use in Amendment No. 1 to the Registration Statement
(No. 333-68813) on Form S-1 and in the Application for Conversion on Form
86-AC and in the Notice and Application for Conversion of Troy Financial
Corporation of our report dated October 30, 1998, on the Consolidated
Financial Statements of The Troy Savings Bank and subsidiaries as of September
30, 1998 and 1997, and for each of the years in the three-year period ended
September 30, 1998.
We also consent to the reference to our firm under the heading "Experts" in the
related prospectus.
/s/ KPMG LLP
Albany, New York
January 29, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT
We hereby consent to the reference to this firm and our opinion in the
Registration Statement on Form S-1 filed by Troy Financial Corporation, Troy,
New York (the "Company"), and all amendments thereto; in the Application for
Conversion on Form 86-AC filed by The Troy Savings Bank (the "Bank"), and all
amendments thereto, and in the Notice and Application for Conversion filed with
the Federal Deposit Insurance Company and all amendments thereto.
/S/ WILLIAM M. MERCER, INCORPORATED
WILLIAM M. MERCER, INCORPORATED
New York, New York Dated
December 18, 1998
