Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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GENERAL
Troy Financial Corporation (the "Company") was formed in December 1998 to
acquire all of the capital stock of The Troy Savings Bank (the "Savings Bank")
upon the Savings Bank's conversion from a New York-chartered mutual savings bank
to a New York-chartered stock savings bank. As part of that conversion on March
31, 1999, the Company completed its initial public offering of stock, issuing
12,139,021 shares of common stock, par value $.0001 per share ("Common Stock")
including 408,446 shares contributed to The Troy Savings Bank Community
Foundation (the "Foundation"). The Company sold 11,730,575 shares of Common
Stock at a price of $10 per share through a subscription offering to certain
depositors of the Savings Bank. Net proceeds to the Company from the offering
were $113.7 million after conversion and offering costs. The Company invested
approximately $57 million of the net proceeds as capital of the Savings Bank,
and the Company used $9.6 million of the net proceeds from the conversion to
fund a loan to the Savings Bank's employee stock ownership plan (the "ESOP")
which allowed the ESOP to purchase 971,122 shares of Common Stock in the open
market. The Company's Common Stock is traded on the NASDAQ Stock Market National
Market Tier under the symbol "TRYF". During fiscal 2000, the Company established
a commercial bank subsidiary, The Troy Commercial Bank (the "Commercial Bank").
The Commercial Bank provides banking and financing services to municipalities.
As of September 30, 2000, the Commercial Bank had generated $3.2 million in
municipal deposits.
The consolidated financial condition and operating results of the Company are
primarily dependent upon the Savings Bank and its subsidiaries, and to a lesser
extent the Commercial Bank, and all references to the Company prior to March 31,
1999, except where otherwise indicated, are to the Savings Bank.
The Company is a community based, full-service financial services company
offering a wide variety of business, retail, and municipal banking products, as
well as a full range of trust, insurance, and investment services. The Company's
primary sources of funds are deposits and borrowings, which it uses to originate
real estate mortgages, both residential and commercial, commercial business
loans, and consumer loans throughout its primary market area which consists of
the six New York counties of Albany, Saratoga, Schenectady, Warren, Washington,
and Rensselaer (Troy).
The Company's profitability, like that of many financial institutions, is
dependent to a large extent upon its net interest income, which is the
difference between the interest it receives on earning assets, such as loans and
securities, and the interest it pays on interest bearing liabilities,
principally deposits and borrowings.
Results of operations are also affected by the provision for loan losses,
non-interest expenses such as salaries and employee benefits, occupancy and
other operating expenses, and to a lesser extent, non-interest income such as
trust service fees, loan servicing fees and service charges on deposit accounts.
Financial institutions in general, including the Company, are significantly
affected by economic conditions, competition and the monetary and fiscal
policies of the federal government. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, interest rate
conditions and funds availability. Deposit balances and cost of funds are
influenced by prevailing market rates on competing investments, customer
preferences and levels of personal income and savings in the Company's primary
market area.
On November 10, 2000, the Company completed the acquisition of Catskill
Financial Corporation ("Catskill") in a cash transaction for $23.00 per share,
for a total transaction value of approximately $90.0 million. The seven former
offices of Catskill Savings Bank are now open as full-service offices of the
Savings Bank. The combined regional bank has total assets of approximately $1.2
billion, deposits of $780 million and 21 full-service offices located in eight
New York counties throughout New York State's Capital and Catskill regions. In
accordance with the purchase method of accounting for business combinations, the
assets acquired and liabilities assumed were recorded by the Company at their
estimated fair value. Related operating results will be included in the
Company's consolidated financial statements from the date of acquisition.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
The Company's total assets were $922.0 million at September 30, 2000, an
increase of $6.9 million, or .8% from the $915.1 million at September 30, 1999.
The $6.9 million increase was principally due to a $31.8 million increase in
loans, partially offset by a $14.1 million decrease in securities available for
sale and a $12.1 million decrease in cash and cash equivalents. Asset generation
was funded primarily by an increase in borrowings of $29.9 million, which
partially offset a decrease in deposits of $7.4 million. In addition, borrowings
were used for stock repurchases which totaled approximately $21.0 million.
Cash and cash equivalents were $23.8 million at September 30, 2000, a decrease
of $12.1 million from the $35.9 million at September 30, 1999. The decrease was
principally due to a $21.6 million reduction in excess cash reserves held in
anticipation of Year 2000 liquidity needs, partially offset by a $9.4 million
increase in federal funds sold.
The Company's securities available for sale portfolio was $266.8 million at
September 30, 2000, a decrease of $14.1 million, or 5.0% compared to the $280.9
million as of September 30, 1999. The decrease in securities was principally due
to the use of funds from repayments and maturities for the continued growth in
the loan portfolio, as well as the repurchase of common stock.
Total loans receivable were $598.7 million as of September 30, 2000, an increase
of $31.8 million or 5.6% over the $566.9 million as of September 30, 1999.
Commercial real estate loans increased $16.6 million to $233.3 million at
September 30, 2000 or 39.0% of total loans, from $216.7 million at September 30,
1999, or 38.2% of total loans. Commercial business loans increased $20.9 million
to $87.2 million or 14.6% of total loans at September 30, 2000, up from $66.3
million, or 11.7% of total loans at September 30, 1999. The increase in
commercial real estate loans and commercial business loans is consistent with
the Company's strategy to increase these loan portfolios as part of its emphasis
on commercial banking activities. Construction loans decreased $6.5 million to
$7.3 million, or 1.2% of total loans. The decrease in construction loans was
primarily due to loans that have reached the end of their contract terms and
have transferred to a commercial real estate loan as well as a decline in new
project financing. Residential real estate loans increased $5.2 million to
$227.0 million or 37.9% of total loans at September 30, 2000, up from $221.7
million, or 39.1% at September 30, 1999. The increase in residential real estate
loans is primarily in home equity loans. The consumer loan portfolio decreased
$4.5 million from $48.9 million, or 8.6% of total loans at September 30, 1999,
to $44.3 million, or 7.4% of total loans at September 30, 2000. The decrease in
the consumer loan portfolio
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was principally the result of loan runoff from direct mail marketing programs
implemented in 1998 and 1999, in excess of the new loans generated by direct
mail marketing program implemented in 2000.
LOAN PORTFOLIO COMPOSITION
(Dollars in thousands)
<TABLE>
<CAPTION>
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AT SEPTEMBER 30, 2000 1999 1998 1997 1996
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PERCENT PERCENT PERCENT PERCENT PERCENT
OF OF OF OF OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
Residential mortgage $226,961 37.91% $221,721 39.11% $202,511 43.50% $214,638 45.23% $204,879 44.92%
Commercial 233,334 38.97 216,700 38.22 166,186 35.69 184,561 38.89 191,624 42.01
Construction 7,300 1.22 13,761 2.43 10,052 2.16 15,508 3.27 12,999 2.85
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Total real estate loans 467,595 78.10 452,182 79.76 378,749 81.35 414,707 87.39 409,502 89.78
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Commercial business loans 87,167 14.56 66,274 11.69 45,156 9.70 29,961 6.31 24,762 5.43
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Consumer loans:
Home equity lines of credit 5,019 0.84 6,776 1.20 8,575 1.84 9,883 2.08 9,387 2.06
Other consumer 39,320 6.56 42,081 7.42 33,445 7.18 20,539 4.33 13,159 2.88
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Total consumer loans 44,339 7.40 48,857 8.62 42,020 9.02 30,422 6.41 22,546 4.94
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Gross loans 599,101 567,313 465,925 475,090 456,810
Net deferred loan fees and
costs and unearned discount (364) -0.06 (407) -0.07 (344) -0.07 (501) -0.11 (684) -0.15
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Total loans 598,737 100.00% 566,906 100.00% 465,581 100.00% 474,589 100.00% 456,126 100.00%
Allowance for loan losses (11,891) (10,764) (8,260) (6,429) (4,304)
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Total loans receivable, net $586,846 $556,142 $457,321 $468,160 $451,822
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</TABLE>
Non-performing assets at September 30, 2000 were $6.9 million, or .75% of total
assets, compared to $9.7 million, or 1.06% of total assets at September 30,
1999. The $2.8 million decrease in non-performing assets at September 30, 2000
as compared to September 30, 1999 was attributable primarily to the repayment
during fiscal 2000 of three commercial real estate loans and the foreclosure of
another commercial real estate loan which was transferred to other real estate
owned and sold, partially offset by the addition of three other commercial real
estate loans. Other real estate owned decreased by $572,000, principally from a
decrease of $796,000 from the sale of a commercial real estate property,
partially offset by an increase of $164,000 in foreclosed residential real
estate.
NON-PERFORMING ASSETS
(Dollars in thousands)
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AT SEPTEMBER 30, 2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Non-accrual loans:
Real estate loans:
Residential mortgage $ 2,424 $ 2,707 $ 2,900 $ 2,598 $ 3,418
Commercial mortgage 2,829 4,210 6,327 3,438 6,613
Construction - - - 350 516
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Total real estate loans 5,253 6,917 9,227 6,386 10,547
Commercial business loans 103 10 31 33 105
Home equity lines of credit 84 58 259 - -
Other consumer loans 160 282 50 40 17
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Total non-accrual loans 5,600 7,267 9,567 6,459 10,669
Troubled debt restructurings 53 616 2,081 2,256 1,810
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Total non-performing loans 5,653 7,883 11,648 8,715 12,479
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Other real estate owned:
Residential real estate 240 76 345 589 622
Commercial real estate 1,033 1,769 1,527 2,101 1,903
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Total other real estate owned 1,273 1,845 1,872 2,690 2,525
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Total non-performing assets $ 6,926 $ 9,728 $13,520 $11,405 $15,004
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Allowance for loan losses $11,891 $10,764 $ 8,260 $ 6,429 $ 4,304
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Allowance for loan losses as a percentage of non-performing loans 210.35% 136.55% 70.91% 73.77% 34.49%
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Non-performing loans as a percentage of total loans 0.94% 1.39% 2.50% 1.84% 2.74%
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Non-performing assets as a percentage of total assets 0.75% 1.06% 1.89% 1.72% 2.28%
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</TABLE>
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The allowance for loan losses is established through a provision for loan losses
charged to earnings based on the Company's evaluation of risks inherent in its
entire loan portfolio. Such evaluation, which includes a review of all known
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'
ability to repay, prevailing economic conditions and trends and other factors
that warrant recognition in providing for an adequate allowance for loan losses.
ALLOWANCE FOR LOAN LOSSES
(Dollars in thousands)
<TABLE>
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AT OR FOR THE YEARS ENDED SEPTEMBER 30, 2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Total loans outstanding (at end of period) $ 598,737 $ 566,906 $ 465,581 $ 474,589 $ 456,126
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Average total loans outstanding $ 594,570 $ 505,489 $ 467,406 $ 471,779 $ 432,569
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Allowance for loan losses at beginning of year $ 10,764 $ 8,260 $ 6,429 $ 4,304 $ 4,297
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Loan charge-offs:
Residential real estate (412) (362) (521) (320) (578)
Commercial real estate (550) (252) (1,612) (1,286) (165)
Construction real estate (375) - (130) (140) (401)
Commercial business (40) (75) (51) (110) (17)
Home equity lines of credit - - - - -
Other consumer loans (565) (306) (132) (34) (8)
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Total charge-offs (1,942) (995) (2,446) (1,890) (1,169)
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Loan recoveries:
Residential real estate 84 40 147 80 92
Commercial real estate 155 176 57 13 83
Construction real estate 219 13 - - 58
Commercial business 6 8 4 12 9
Home equity lines of credit - - - - 1
Other consumer loans 42 12 19 10 5
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Total recoveries 506 249 227 115 248
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Loan charge-offs (net of recoveries) (1,436) (746) (2,219) (1,775) (921)
Provision charged to operations 2,563 3,250 4,050 3,900 928
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Allowance for loan losses at end of year $ 11,891 $ 10,764 $ 8,260 $ 6,429 $ 4,304
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Ratio of net charge-offs during the year
to average loans outstanding during the year 0.24% 0.15% 0.48% 0.38% 0.21%
Allowance as a percentage of non-performing loans 210.35% 136.55% 70.91% 73.77% 34.49%
Allowance as a percentage of total loans (end of year) 1.99% 1.90% 1.77% 1.35% 0.94%
</TABLE>
While the Company uses available information 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 estimating an
adequate level for the allowance. In addition, various regulatory agencies, as
an integral part of their examination process, periodically review the Company's
allowance for loan losses and other real estate owned. Such agencies may require
the Company to recognize additions to the allowance for loan losses or
writedowns of other real estate owned based on their judgements about
information available to them at the time of their examination, which may not be
currently available to management. Management believes the Company's allowance
for loan losses is adequate at September 30, 2000; however, future adjustments
could be necessary and the Company's results of operations could be adversely
affected if circumstances differ substantially from the assumptions used in the
determination of the allowance for loan losses.
ANALYSIS OF NET INTEREST INCOME
The Company's earnings are dependent largely on its net interest income, which
is the difference between the amount that the Company receives from its interest
earning assets and the amount that the Company pays out on its interest bearing
liabilities.
Average Balance Sheet. The following table sets forth certain information
relating to the Company's interest earning assets and interest bearing
liabilities for the periods indicated. The yields and rates were derived by
dividing tax equivalent interest income or interest expense by the average
balance of assets or liabilities, respectively, for the periods shown. Statutory
tax rates were used to calculate tax exempt income on a tax equivalent basis.
Average balances were computed based on average daily balances. The yields on
loans include net deferred fees and costs and discounts which are considered
yield adjustments. Non-accruing loans have been included in loan balances. The
yield on securities available for sale is computed based on amortized cost.
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<TABLE>
<CAPTION>
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FOR THE YEARS ENDED SEPTEMBER 30, 2000 1999 1998
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AVERAGE AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Total loans $594,570 $46,297 7.79% $505,489 $39,523 7.82% $467,406 $38,315 8.20%
Loans held for sale 2,265 183 8.08% 5,803 406 6.99% 6,829 527 7.72%
Investment securities
held to maturity 2,426 193 7.96% 2,826 222 7.86% 3,753 300 7.99%
Securities available for sale:
Taxable 111,330 7,316 6.57% 132,689 7,108 5.36% 69,171 4,121 5.96%
Tax-exempt 71,442 4,509 6.31% 58,020 3,407 5.87% 55,996 3,286 5.87%
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Total securities
available for sale 182,772 11,825 6.47% 190,709 10,515 5.51% 125,167 7,407 5.92%
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Federal funds sold and
other short-term investments 11,903 704 5.91% 46,745 2,371 5.07% 45,631 2,553 5.59%
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Total earning assets 793,936 59,202 7.46% 751,572 53,037 7.06% 648,786 49,102 7.57%
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Allowance for loan losses (11,379) (9,702) (6,725)
Cash and due from banks 18,758 16,898 10,782
Other non-earning assets 29,639 35,653 25,311
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Total assets $842,333 $794,421 $678,154
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INTEREST-BEARING LIABILITIES:
Deposits:
NOW and Super N.O.W. accounts $ 88,010 $ 1,943 2.21% $ 80,596 $ 1,758 2.18% $ 77,010 $ 1,696 2.20%
Money market deposit accounts 20,880 649 3.11% 18,500 555 3.00% 13,995 431 3.08%
Savings accounts 184,463 5,241 2.84% 195,558 5,581 2.85% 195,177 6,451 3.31%
Time deposit accounts 217,912 10,857 4.98% 243,978 12,261 5.04% 264,538 14,701 5.56%
Stock subscription funds in escrow - - - 9,069 253 2.79% - - -
Escrow accounts 3,322 64 1.93% 3,277 62 1.89% 3,704 60 1.62%
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Total interest-bearing deposits 514,587 18,754 3.64% 550,978 20,470 3.72% 554,424 23,339 4.21%
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Borrowings:
Securities sold under
agreements to repurchase 16,481 909 5.52% 3,286 102 3.10% 1,222 33 2.70%
Short-term borrowings 28,540 1,755 6.15% 12,581 633 5.04% - - -
Long-term debt 49,652 2,940 5.92% 44,720 2,577 5.76% 13,681 821 6.00%
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Total borrowings 94,673 5,604 5.92% 60,587 3,312 5.47% 14,903 854 5.73%
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Total interest-bearing
liabilities 609,260 24,358 4.00% 611,565 23,782 3.89% 569,327 24,193 4.25%
Demand deposits 44,421 33,860 25,399
Other non-interest-bearing
liabilities 17,071 17,088 10,726
Total shareholders' equity 171,581 131,908 72,702
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Total liabilities and
shareholders' equity $842,333 $794,421 $678,154
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Interest rate spread 3.46% 3.17% 3.32%
Net interest income and
net interest margin $34,844 4.39% $29,255 3.89% $24,909 3.84%
Ratio of interest-earning assets
to interest-bearing liabilities 130.31% 122.89% 113.96%
Tax equivalent adjustment 1,696 1,235 1,072
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Net interest income per
consolidated financial statements $33,148 $28,020 $23,837
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</TABLE>
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Rate/Volume Analysis. The following table presents the extent to which changes
in interest rates and changes in the volume of interest earning assets and
interest bearing liabilities have affected the Company's interest income and
interest expense during the periods indicated. Information is provided in each
category with respect to:
(1) changes attributable to changes in volume (changes in volume multiplied by
prior year rate); and
(2) changes attributable to changes in rate (changes in rate multiplied by
prior year volume).
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30, 2000 For the Year Ended September 30, 1999
COMPARED TO THE YEAR ENDED Compared to the Year Ended
SEPTEMBER 30, 1999 September 30, 1998
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INCREASE (DECREASE) Increase (Decrease)
DUE TO Due To
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VOLUME RATE NET Volume Rate Net
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(IN THOUSANDS) (In Thousands)
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<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Total loans $ 6,936 (162) 6,774 $ 3,636 (2,427) 1,209
Loans held for sale (299) 76 (223) (75) (47) (122)
Investment securities (32) 3 (29) (73) (5) (78)
Securities available for sale:
Taxable (509) 717 208 3,355 (368) 2,987
Tax-exempt 833 269 1,102 119 2 121
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Total securities available for sale 324 986 1,310 3,474 (366) 3,108
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Federal funds sold and other short-term investments (2,145) 478 (1,667) 65 (247) (182)
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Total earning assets 4,784 1,381 6,165 7,027 (3,092) 3,935
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Interest-bearing liabilities:
Deposits:
N.O.W. and Super N.O.W. accounts 163 22 85 78 (17) 61
Money market deposit accounts 73 22 95 135 (11) 124
Savings accounts (315) (25) (340) 13 (882) (869)
Time deposit accounts (1,299) (106) (1,405) (1,093) (1,346) (2,439)
Stock subscription funds in escrow (253) - (253) 253 - 253
Escrow accounts 1 1 2 (4) 6 2
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Total interest-bearing deposits (1,630) (86) (1,716) (618) (2,250) (2,868)
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Borrowings:
Securities sold under agreements to repurchase 676 131 807 63 5 68
Short-term borrowings 955 167 1,122 634 - 634
Long-term debt 290 73 363 1,787 (32) 1,755
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Total borrowings 1,921 371 2,292 2,484 (27) 2,457
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Total interest-bearing liabilities 291 285 576 1,866 (2,277) (411)
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Net interest income $ 4,493 1,096 5,589 $ 5,161 (815) 4,346
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</TABLE>
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COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 2000 AND
SEPTEMBER 30, 1999
General. The Company recorded net income of $8.6 million for the year ended
September 30, 2000, compared to a net income of $2.1 million for the year ended
September 30, 1999. The increase was the result of higher net interest income, a
reduction in the provision for loan losses, higher non-interest income and lower
non-interest expenses (primarily as a result of the $4.1 million stock
contribution to The Troy Savings Bank Community Foundation made in the quarter
ended March 31, 1999), partially offset by higher income tax expense. The
Company's basic and diluted earnings per share were $0.86 for the year ended
September 30, 2000.
Net Interest Income. Net interest income on a tax equivalent basis for the year
ended September 30, 2000, was $34.8 million, an increase of $5.6 million, or
19.1%, when compared to the year ended September 30, 1999. The increase was
primarily attributable to a $42.4 million increase in average interest earning
assets, funded primarily by the net proceeds from the Company's initial public
offering on March 31, 1999, which also offset the $2.3 million decrease in
average interest bearing liabilities. Net interest income was also positively
affected by the 40 basis point increase in the yield on average earning assets,
partially offset by the 11 basis point increase in the average cost of funds.
The decrease in average interest bearing liabilities was the result of a
decrease in average deposits of $36.4 million, primarily the result of a $26.1
million decrease in time deposit accounts, an $11.1 million decrease in savings
accounts and a $9.1 million decrease in stock subscription funds held in escrow
(representing the average balance of subscription offering funds held during
fiscal 1999 as a result of the initial public offering which was completed on
March 31, 1999), partially offset by a $7.4 million increase in interest-bearing
checking, and a $2.4 million increase in money market accounts. Almost
offsetting the decrease in deposits was a $34.1 million increase in average
borrowings. The Company has utilized longer-term borrowings with the FHLB to
provide some stability in its funding costs and to match the maturities of some
of its longer-term commercial real estate loans.
Interest and dividend income for the year ended September 30, 2000 was $59.2
million on a tax equivalent basis, an increase of $6.2 million, or 11.6%, over
the prior year.
The average yield on taxable available for sale securities increased by 121
basis points for the year ended September 30, 2000, compared to 1999, which more
than offset the $21.4 million decrease in the average balance of taxable
available for sale securities. The Company has invested on average for the year
ended September 30, 2000, approximately $37.0 million in short-term government
agency discount bonds to preserve certain thrift tax advantages while providing
liquidity comparable to federal funds and still offering a yield slightly higher
than the 5.91% average yield for federal funds sold. The average loan yield for
the year ended September 30, 2000 was 7.79%, down 3 basis points from the
previous year, but 122 basis points higher than the 6.57% average yield on
taxable available for sale securities. The Company has also invested in
tax-exempt municipal securities, primarily maturing within one year. The average
tax equivalent yield on these securities for 2000 was 6.31%, 44 basis points
higher than the yield for the same period in 1999, and 40 basis points higher
than the average yield on federal funds sold and other short term investments
for the year ended September 30, 2000.
Interest expense for the year ended September 30, 2000, was $24.4 million, an
increase of $576,000, or 2.4% over the year ended September 30, 1999. The change
was principally due to an 11 basis point increase in the average cost of funds,
partially offset by the decrease in average volume of interest bearing
liabilities. The average balance of interest bearing liabilities was $609.3
million for the year ended September 30, 2000, a decrease of $2.3 million, or
.4%. The average balance of borrowings was $94.7 million for the year ended
September 30, 2000, as compared to $60.6 million in the comparable period in
1999. The increase in borrowings more than offset the $26.1 million decline in
time deposit accounts and the $9.1 million decrease in stock subscription funds
held in escrow.
The Company's net interest margin was 4.39% for the year ended September 30,
2000, compared to 3.89% for 1999. The increase in net interest margin reflects a
$42.4 million increase in average earning assets, due primarily to the funding
provided by the Company's initial public offering on March 31, 1999, as well as
a 40 basis point increase in the average yield on earning assets, partially
offset by the 11 basis point increase in average cost of funds. The increase in
the yield on interest earning assets was caused by the investment of a
substantial portion of the offering proceeds in loans, primarily commercial real
estate and commercial business loans, with higher yields than securities and
federal funds and other short term investments. The increase in average cost of
funds was principally caused by the increase in volume of average borrowings and
the increase in the average rates paid on borrowings, partially offset by the
decrease in the volume of average deposits and the decrease in rates paid on
time deposit accounts
Provision For Loan Losses. The provision for loan losses was $2.6 million for
fiscal 2000, compared to $3.3 million for fiscal 1999. The allowance for loan
losses was $11.9 million, or 1.99% of period end loans at September 30, 2000, as
compared to $10.8 million, or 1.90% of period end loans at September 30, 1999.
The allowance for loan losses as a percentage of non-performing loans was
210.35% at September 30, 2000 as compared to 136.55% at September 30, 1999.
Non-performing loans were $5.7 million, or 0.94% of total loans at September 30,
2000, compared to $7.9 million, or 1.39% of total loans at September 30, 1999.
Net loan charge-offs increased $690,000 for the year ended September 30, 2000 as
compared to 1999.
In determining the appropriate provision for loan losses, management considers
the level of and trend in non-performing loans, the level of and trend in net
loan charge-offs, the dollar amount and mix of the loan portfolio, as well as
general economic conditions and real estate trends in the Company's market area,
which can impact the inherent risk of loss in the Company's loan portfolio. The
Company decreased its provision for loan losses in fiscal 2000 as compared to
fiscal 1999 primarily due to a decrease in non-performing loans, however the
company continues to increase its allowance due to an increase in net loan
charge-offs and a continuing increase in the percentage of loan types with
higher credit risk, such as commercial real estate loans and commercial business
loans. Commercial real estate loans and commercial business loans represent
53.5% of the total loan portfolio at September 30, 2000 compared to 49.9% at
September 30, 1999. The Company anticipates that loan quality will remain stable
and therefore anticipates that the provision for loan losses will continue to
decrease in fiscal 2001, but will remain at levels appropriate for the changing
mix in the loan portfolio.
15
<PAGE>
Non-Interest Income. Non-interest income was $3.7 million for the year ended
September 30, 2000, an increase of $632,000, or 20.7% from the year ended
September 30, 1999. The increase was principally due to the receipt of a
$449,000 award from the U. S. Government as a result of originating commercial
real estate loans, which qualified under the U. S. Treasury's Bank Enterprise
Award program, as well as a $327,000 gain from the partial sale of a limited
partnership interest. The Company also experienced a $186,000 increase, or
20.6%, in service charges on deposits, and approximately $240,000 of commission
income received from SBLI U.S.A. Life Insurance Company (prior to the
reorganization of SBLI in January 2000, the Company received payments from the
SBLI department which represented reimbursements of various operating costs and
were recorded as reductions of non-interest expenses). Impacting non-interest
income to a lesser extent was a $39,000 increase, or 5.9%, in trust service
fees, compared to the prior year. These increases were partially offset by a
$300,000 decrease in net gains from securities transactions, as well as a
$290,000 decrease in net gains from mortgage loan sales due to the substantially
lower volume in the 2000 period.
Non-Interest Expenses. Non-interest expenses for the year ended September 30,
2000 were $22.2 million, a decrease of $3.6 million, or 14.0%, over the prior
year. The decrease was principally due to the $4.1 million stock contribution
made in the quarter ended March 31, 1999 to the Foundation and the decrease in
other real estate owned expense in 2000, and to a lesser extent the decrease in
occupancy expense in 2000. Partially offsetting these decreases were increases
in compensation and employee benefits, furniture, fixtures and equipment,
computer charges, professional, legal and other fees and printing, postage and
telephone expenses. Compensation and employee benefits increased by $1.7 million
during the year ended September 30, 2000, as compared to the prior year, due
primarily to the additional costs in the 2000 period for the ESOP and restricted
stock awards. Furniture, fixtures and equipment increased by $74,000, or 10.2%,
compared to the prior year, primarily the result of the additional operating
costs related to the opening of the Wynantskill branch in December 1999.
Computer charges increased by $139,000, primarily due to increased processing
charges, as well as special programming costs associated with the Commercial
Bank and Troy Financial. Professional, legal and other fees increased by
$109,000, or 8.0% for the year ended September 30, 2000, over the prior year,
primarily due to an increase in costs related to operating as a stock
organization, partially offset by costs for consulting fees for establishing a
profitability measurement system, Y2K technology evaluations, and administrative
costs to establish the Small Business Investment Company incurred in the fiscal
year ended September 30, 1999. Printing, postage, and telephone increased by
$197,000, or 27.9%, compared to the prior year, primarily due to printing costs
for the Company's first annual report, increased costs for the direct mail
marketing program for 2000, and printing and mailing costs for the Company's
Dividend Reinvestment Plan which was implemented in fiscal 2000.
Other real estate owned expense decreased $1.0 million, or 130.9%, for the year
ended September 30, 2000, as compared to 1999. The decrease in expense was
principally due to a $382,000 gain on the sale of a foreclosed commercial real
estate property, and recognition of $286,000 in deferred gain from the pay-off
in 2000 of a commercial real estate loan which was made in 1997 to sell a
foreclosed commercial real estate property. In addition, the 1999 amount
included a write-down in value of a foreclosed commercial real estate property
and costs related to payment of taxes on other real estate owned.
Other expenses decreased $247,000, or 8.0%, for the year ended September 30,
2000, as compared to the prior year. This decrease was primarily attributable to
$408,000 in expenses for Year 2000 remediation efforts in 1999, as well as the
write-off of overdrawn escrow accounts in the year ended September 30, 1999,
partially off-set by increased costs in 2000 for storage and transportation of
cash reserves maintained for Year 2000 liquidity purposes, advertising and
marketing costs related to the opening of the Wynantskill branch, deferred
compensation costs for directors, costs associated with servicing loans, costs
for the establishment of the Commercial Bank, and costs related to the
implementation of a debit card product.
Income Taxes. Income tax expense for the year ended September 30, 2000, was $3.5
million, as compared to an income tax benefit of $85,000 for 1999. The increase
in income tax expense was primarily caused by the $10.1 million increase in
income before taxes for the year ended September 30, 2000, as compared to the
prior year.
COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998
General. The Company recorded net income of $2.1 million for the year ended
September 30, 1999, compared to a net loss of $878,000 for the year ended
September 30, 1998. The increase was principally the result of higher net
interest income, lower provision for loan losses, and higher non-interest
income, partially offset by higher non-interest expenses and income tax expense.
The Company's basic and diluted earnings per share were $0.32 for the period
April 1, 1999 through September 30, 1999, following the initial public offering.
Net Interest Income. Net interest income on a tax equivalent basis for the year
ended September 30, 1999, was $29.3 million, an increase of $4.3 million, or
17.4%, when compared to the year ended September 30, 1998. The increase was
primarily attributable to a $102.8 million increase in average interest earning
assets, which more than offset the $42.2 million increase in average interest
bearing liabilities. The increase in interest earning assets was principally
funded by the net proceeds received from the initial public offering and a $45.7
million increase in average borrowings. Net interest income was also positively
affected by the 36 basis point decrease in average cost of funds, which
partially offset the 51 basis point decrease in average yield on average
interest earning assets. The Company has utilized longer-term borrowings with
the FHLB to provide some stability in its funding costs and to match the
maturities of some of its longer-term commercial real estate loans.
Interest and dividend income for the year ended September 30, 1999 was $53.0
million on a tax equivalent basis, an increase of $3.9 million, or 8.0%, over
the prior year. The increase in the volume of earning assets more than offset
the 51 basis point decrease in the average yield on earning assets.
The average balance of taxable available for sale securities increased by $63.5
million for the year ended September 30, 1999, compared to 1998, which offset
the 60 basis points decrease in average yield. The Company has invested
primarily in short-term government agency discount bonds providing liquidity
comparable to federal funds while still offering a yield greater than the 5.07%
average yield for federal funds sold and other short-term investments. The
average loan yield for the
16
<PAGE>
year ended September 30, 1999 was 7.82%, down 38 basis points from the previous
year, but 246 basis points higher than the 5.36% average yield on taxable
available for sale securities. The Company has also invested in tax-exempt
municipal securities, primarily maturing within one year. The average tax
equivalent yield on these securities for 1999 was 5.87%, similar to the yield in
1998 and 80 basis points higher than the average yield on federal funds sold and
other short term investments for the year ended September 30, 1999.
Interest expense for the year ended September 30, 1999, was $23.8 million, a
decrease of $411,000, or 1.7% over the year ended September 30, 1998. The change
was principally due to a 36 basis point decrease in the average cost of funds,
which more than offset the increase in average volume of interest bearing
liabilities. The average balance of interest bearing liabilities was $611.6
million for the year ended September 30, 1999, an increase of $42.2 million, or
7.4%, primarily attributable to an increase in average borrowings of $45.7
million, which offset a $3.4 million decrease in average interest bearing
deposits, primarily the result of approximately $26 million in authorized
withdrawals from deposit accounts to pay for stock subscription orders, net of
deposit growth. The average balance of FHLB borrowings was $57.3 million for the
year ended September 30, 1999, as compared to $13.7 million in the previous
year. The increase in average FHLB debt more than offset the $20.6 million
decline in average time deposit accounts, which the Company experienced as a
result of the decrease in time deposit rates.
The Company's net interest margin was 3.89% for the year ended September 30,
1999, compared to 3.84% for 1998. The slight increase in net interest margin
reflects a $102.8 million increase in average earning assets, due primarily to
the Company's initial public offering and higher borrowings, which more than
offset the 51 basis point decline in average yield on earning assets, and the 36
basis point decrease in average cost of funds, which more than offset the
increase in average interest bearing liabilities. The decline in average cost of
funds was principally caused by the decrease in rates paid on savings accounts
and time deposits as well as the decrease in average rates paid on FHLB
borrowings, which was partially offset by the increase in average borrowings.
The decrease in the yield on interest earning assets was caused by the
investment of a substantial portion of the offering proceeds in short-term
government agency bonds and federal funds, with lower yields than long-term
securities, but which provide the liquidity required to fund higher yielding
loan growth.
Provision For Loan Losses. The provision for loan losses was $3.3 million for
fiscal 1999, compared to $4.1 million for fiscal 1998. The decrease in the
provision was primarily attributable to a reduction in non-performing loans of
$3.8 million from $11.6 million at September 30, 1998 to $7.9 million at
September 30, 1999. The allowance for loan losses provides coverage of 136.6% of
non-performing loans at September 30, 1999, as compared to 70.9% as of September
30, 1998. The percentage of the allowance for loan losses to period end loans
was 1.90% and 1.77% for fiscal years ended 1999 and 1998, respectively. The
decrease in provision was also the result of a decrease of $1.5 million in net
charge-offs to $746,000 for the year ended September 30, 1999 compared to the
prior year.
Non-Interest Income. Non-interest income was $3.0 million for the year ended
September 30, 1999, an increase of $495,000, or 19.4% from the year ended
September 30, 1998. The increase was principally caused by increases in net
gains from mortgage loan sales, trust service fees, loan servicing fees, and
service charges on deposits. Net gains from mortgage loan sales were up
$169,000, or 222.4%, during the year ended September 30, 1999, as compared to
1998. Trust service fees were up $206,000, or 44.9%, as a result of a higher
balance of assets managed than in the prior year. Loan servicing fees were up
$91,000, or 21.1% as a result of a higher balance of loans serviced for the year
ended September 30, 1999, as compared to the year ended September 30, 1998.
Service charges on deposit accounts were up $34,000, or 4.0%, compared to the
prior year, due primarily to a $20.7 million increases in transaction accounts
from September 30, 1999 to September 30, 1998.
Non-Interest Expenses. Non-interest expenses for the year ended September 30,
1999 were $25.8 million, an increase of $734,000, or 2.9%, over the prior year.
During fiscal 1999, the Company established a Community Foundation to which it
contributed 408,446 shares of common stock. In connection with this contribution
of common stock to the Community Foundation, the Company recorded a pre-tax
expense equal to the value of the contribution ($4.1 million) in the second
quarter of fiscal 1999. In fiscal 1999, in addition to the contribution of
common stock to the Community Foundation, the Company also contributed the Troy
Savings Bank Music Hall to the Music Hall Foundation. The pre-tax expense
related to this contribution was $229,000. The contribution of common stock to
the Community Foundation is intended to allow our local communities to share in
our potential growth and profitability over the long term.
Also contributing to the Company's increased non-interest expenses for the year
ended September 30, 1999 was a $621,000 increase in compensation and employee
benefits expense during the year ended September 30, 1999, as compared to the
prior year, as the Company began to record expenses for its employee stock
ownership plan and supplemental retirement and benefit restoration plan for
certain executive officers, both of which were adopted in connection with the
Savings Bank's conversion to the stock form. The increase in expense was
partially offset by a reduction in staffing levels over the comparable period
last year. Professional, legal and other fees increased by $438,000, or 47.4%
for the year ended September 30, 1999, over the prior year, primarily caused by
increased fees associated with operating a stock form organization as compared
to a mutual savings bank. Other real estate owned expense was down $306,000, or
28.2%, for the year ended September 30, 1999, as compared to 1998. The decrease
in expense was principally caused by a decrease in foreclosure costs. Other
expenses increased by $216,000, or 7.5%, for the year ended September 30, 1999,
as compared to 1998. This increase was primarily attributable to $408,000 for
Y2K remediation expenses, an increase of $107,000 for advertising, partially
offset by a reduction in subsidiary operating expenses in the year ended
September 30, 1999.
Income Taxes. Income tax benefit for the year ended September 30, 1999, was
$85,000, as compared to an income tax benefit of $1.9 million for 1998. The
decrease in income tax benefit was primarily caused by the $4.7 million increase
in income before taxes for the year ended September 30, 1999, as compared to the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is defined as the ability to generate cash flow to meet present and
future financial obligations and commitments. The Company's liquid assets
include cash and cash equivalents, loans held for sale,
17
<PAGE>
securities held to maturity that mature within one year and securities available
for sale. At September 30, 2000, the Company's liquid assets as a percentage of
deposits which have no withdrawal restrictions, time deposits which mature
within one year, short-term borrowings (including repurchase agreements) and
long-term debt maturing within one year was 46%.
The Company's primary sources of funds are deposits, borrowings and proceeds
from the redemption and maturity of federal funds sold and other short-term
securities. Although not a recurring source of funds, the sale of shares in the
initial public offering provided significant funding in fiscal 1999. The
Company's primary cash outflows are new loan originations, purchases of
securities, and deposit withdrawals. Management monitors its liquidity position
on a daily basis. Although maturities and scheduled amortization of loans are a
predictable source of funds, deposit outflows, mortgage prepayments and mortgage
loan sales are greatly influenced by changes in interest rates, economic
conditions, and competitors.
The Company attempts to provide stable and flexible sources of funding through
the management of its liabilities, including core deposit products offered
through its branch network, as well as various borrowings. Management believes
that the level of the Company's liquid assets combined with daily monitoring of
cash inflows and outflows provide adequate liquidity to fund outstanding loan
commitments, meet daily withdrawal requirements of the Company's depositors, and
meet all other daily obligations of the Company.
Consistent with its goals to operate a sound and profitable financial
organization, the Company actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. As of September 30, 2000
and 1999, total equity was $167.3 million and $180.4 million, respectively, or
18.1% and 19.7% of total assets at those respective dates. The reduction in the
equity to assets ratio is consistent with the Company's strategy to manage its
capital through asset growth, dividend payments, as reflected by the $0.23 per
share cash dividend paid during the year ended September 30, 2000, as well as
share repurchase programs. The Company repurchased 1,870,811 shares of common
stock in the year ended September 30, 2000. The Company utilized 446,165 of
these shares for awards of restricted stock under the Company's Long-Term Equity
Compensation Plan. In addition, 95,700 shares were purchased by the Company
through a deferred compensation plan maintained for directors. The cost basis of
the shares purchased through the deferred compensation plan is included in
treasury stock. As of September 30, 2000, the Company exceeded all of the
capital requirements of the Federal Reserve Board and the subsidiary banks
exceeded all of the capital requirements of the FDIC. See note 19 to the
consolidated financial statements for further information regarding regulatory
capital requirements.
MANAGEMENT OF INTEREST RATE RISK
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as movements in foreign currency exchange rates
and commodity prices, do not arise in the normal course of the Company's
business operations. Interest rate risk can be defined as an exposure to a
movement in interest rates that could have an adverse effect on the Company's
net interest income. Interest rate risk arises naturally from the imbalance in
the repricing, maturity and/or cash flow characteristics of assets and
liabilities.
A significant portion of the Company's loans are adjustable or variable rate
which could result in reduced levels of interest income during periods of
falling rates. In addition, in periods of falling interest rates, pre-payments
of loans typically increase, which would lead to reduced net interest income if
such proceeds could not be reinvested at a comparable spread. Also in a falling
rate environment, certain categories of deposits may reach a point where market
forces prevent further reduction in the interest rate paid on those instruments.
Generally, during extended periods when short-term and long-term interest rates
are relatively close, a flat yield curve, net interest margins could become
smaller, thereby reducing net interest income. The net effect of these
circumstances is reduced interest income, offset only by a nominal decrease in
interest expense, thereby narrowing the net interest margin.
The principal objectives of the Company's interest rate risk management program
are to:
(a) measure, monitor, evaluate and develop strategies in response to the
interest rate risk profile inherent in the Company's assets and
liabilities,
(b) determine the appropriate level of risk given the Company's business
strategy, operating environment, capital and liquidity requirements, and
performance objectives, and
(c) manage the risk consistent with the Company's guidelines.
Through such management, the Company seeks to reduce the vulnerability of its
operations to changes in interest rates by matching the maturities of the
Company's assets with those of the Company's liabilities and off-balance sheet
financial instruments.
The responsibility for interest rate risk management oversight is the function
of the Company's Asset/ Liability Management Committee ("ALCO"). The Company's
ALCO reviews the Company's asset/liability policies and interest rate risk
position. The Company's ALCO is chaired by the Company's chief financial
officer, and includes the Company's President, Trust and Investment Officer and
other members of the Company's senior management team. The ALCO meets at least
monthly to review consolidated statement of condition structure, formulate
strategy in light of expected economic conditions and review performance against
guidelines established to control exposure to the various types of inherent
risk, and reports the Company's interest rate risk position to the Company's
Board of Directors on a quarterly basis. The Company's ALCO considers
variability of net interest income under various rate scenarios. The ALCO also
evaluates the overall risk profile and determines actions to maintain and
achieve a posture consistent with policy guidelines. The Company, of course,
cannot predict the future movement of interest rates, and such movement could
have an adverse impact on the Company's consolidated financial condition and
results of operations.
In recent years, the Company has primarily utilized the following strategies to
manage interest rate risk:
(a) emphasizing the origination of adjustable rate loans such as adjustable
residential loans (although in the current rate environment adjustable rate
loan originations have slowed), and to a lesser extent commercial real
estate, commercial business and consumer loans;
18
<PAGE>
(b) selling substantially all of its 30 year fixed rate residential mortgage
loans in the secondary market, and from time to time, as conditions
warrant, selling substantially all of its 15 year fixed rate residential
mortgage loans in the secondary market;
(c) utilizing FHLB advances to better structure the maturities of its interest
rate sensitive liabilities; and
(d) investing in short-term securities which generally bear lower yields,
compared to longer-term investments, but which better position the Company
for increases in interest rates.
In order to reduce the interest rate risk associated with the portfolio of
conventional mortgage loans held for sale, as well as outstanding loan
commitments and uncommitted loan applications with rate lock agreements which
are intended to be held for sale, the Company enters into mandatory forward
sales commitments and option agreements to sell loans in the secondary market to
unrelated investors. At September 30, 2000, the Company had mandatory
commitments and cancelable options to sell fixed rate mortgage loans at set
prices amounting to approximately $5.0 million. The Company believes that it
will be able to meet the mandatory commitments without incurring any material
losses.
The primary tool utilized by management to measure interest rate risk is a
balance sheet/income statement simulation model. The model is used to execute
simulations of the Company's net interest income performance based upon
potential changes in interest rates over a select period of time. The model's
input data includes earning assets and interest- bearing liabilities, their
associated cash flow characteristics, repricing opportunities, maturities and
current rates. In addition, management makes certain assumptions in relation to
prepayment speeds for all assets and liabilities which possess optionality,
including loans and mortgage-backed securities. These assumptions are based on
industry standards for prepayments.
The model is first run under an assumption of a flat rate scenario (i.e. no
change in current interest rates) over a twelve month period. A second and third
model are run in which a gradual increase and decrease, respectively, of 200
basis points takes place over a twelve month period. Under these scenarios,
assets subject to repricing or prepayment are adjusted to account for faster or
slower prepayment assumptions. The resultant changes in net interest income are
then measured against the flat rate scenario.
The following table summarizes the percentage change in interest income and
interest expense by major earning asset and interest-bearing liability
categories as of September 30, 2000 in the rising and declining rate scenarios
from the forecasted interest income and interest expense amounts in a flat rate
scenario. Under the declining rate scenario, net interest income is expected to
increase from the flat rate scenario by less than 1% over a twelve month period.
Under the rising rate scenario, net interest income is also expected to increase
from the flat rate scenario by less than 1% over a twelve month period. This
level of variability is well within interest rate risk profile guidelines
acceptable to the Company.
<TABLE>
<CAPTION>
INTEREST RATE RISK PERCENTAGE CHANGE IN NET INTEREST INCOME
FROM FLAT RATE SCENARIO
------------------------------------------------------------------------------------------------------------------------------------
DECLINING RATE SCENARIO RISING RATE SCENARIO
<S> <C> <C>
Federal funds sold and other short-term investments (25.39%) 16.57%
Investment securities (held to maturity and available for sale) (11.36) 9.26
Loans (4.51) 4.13
------------------------------------------------------------------------------------------------------------------------------------
Total interest income (6.43) 5.69
------------------------------------------------------------------------------------------------------------------------------------
Core deposits (25.11) 16.79
Time deposits (9.03) 7.66
------------------------------------------------------------------------------------------------------------------------------------
Total deposits (14.62) 11.35
------------------------------------------------------------------------------------------------------------------------------------
Borrowings (16.97) 12.70
------------------------------------------------------------------------------------------------------------------------------------
Total interest expense (15.47) 11.85
------------------------------------------------------------------------------------------------------------------------------------
Net interest income .59 .65
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE>
The preceding sensitivity analysis does not represent a Company forecast and
should not be relied upon as being indicative of expected operating results.
These hypothetical estimates are based upon numerous assumptions including: the
nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, reinvestment/ replacement of asset and liability cashflows,
and others. While assumptions are developed based upon current economic and
local market conditions, the Company cannot make assurances as to the predictive
nature of these assumptions including how customer preferences or competitor
influences might change. Also, as market conditions vary from those assumed in
the sensitivity analysis, actual results will differ due to:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate changes on caps and floors on adjustable rate assets,
the potential effect of changing debt service levels on customers with
adjustable rate loans, depositors early withdrawals and product preference
changes, and other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that ALCO might take in responding to or
anticipating changes in interest rates.
IMPACT ON INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in accordance with
generally accepted accounting principles which require the measurement of
financial condition and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increasing cost of the
Company's operations. Unlike those of most industrial companies, the Company's
assets and liabilities are nearly all monetary. As a result, interest rates have
a greater impact on the Company's performance than do the effects of general
levels of inflation. In addition, interest rates do not necessarily move in the
direction, or to the same extent, as the price of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
The Company adopted the provisions of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective October 1, 2000. This statement
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of condition and measure those
instruments at fair value. Changes in fair value of the derivative financial
instruments are reported in either earnings or comprehensive income, depending
on the use of the derivative and whether or not it qualifies for hedge
accounting.
Special hedge accounting treatment is permitted only if specific criteria are
met, including a requirement that the hedging relationship be highly effective
both at inception and on an ongoing basis. Accounting for hedges varies based on
the type of hedge - fair value or cash flow. Results of effective hedges are
recognized in current earnings for fair value hedges and in other comprehensive
income for cash flow hedges. Ineffective portions of hedges are recognized
immediately in earnings and are not deferred.
The derivative instruments held by the Company as of September 30, 2000
consisted solely of instruments related to the Company's mortgage banking
activities. Based on current market rates and economic conditions, the adoption
of SFAS No. 133 as of October 1, 2000 did not have a material effect on the
Company's consolidated financial statements. However, there may be increased
volatility in net income and stockholders' equity on an ongoing basis as a
result of accounting for derivative instruments in accordance with SFAS No. 133.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL RESULTS SEP 30, JUN 30, MAR 31, DEC 31, SEP 30, JUN 30, MAR 31, DEC 31,
(In thousands, except per share data) 2000 2000 2000 1999 1999 1999 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $14,742 $14,380 $14,340 $14,044 $13,994 $13,346 $12,295 $12,167
Interest expense 6,228 5,965 6,256 5,909 5,894 5,580 6,108 6,200
------------------------------------------------------------------------------------------------------------------------------------
Net interest income 8,514 8,415 8,084 8,135 8,100 7,766 6,187 5,967
------------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 756 469 538 800 813 812 812 813
Total non-interest income 1,059 794 675 1,151 798 780 846 623
Total non-interest expenses 5,477 5,436 5,400 5,887 5,666 4,900 10,418 4,841
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income
tax expense (benefit) 3,340 3,304 2,821 2,599 2,419 2,834 (4,197) 936
Income tax expense (benefit) 978 1,005 752 719 656 874 (1,848) 233
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,362 $ 2,299 $ 2,069 $ 1,880 $ 1,763 $ 1,960 $(2,349) $ 703
------------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share (1) $ 0.25 $ 0.23 $ 0.21 $ 0.18 $ 0.16 $ 0.16 - -
Diluted earnings per share (1) 0.25 0.23 0.21 0.18 0.16 0.16 - -
------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Earnings per share data only applies to periods since the Company's initial public offering on March 31, 1999.
</FN>
</TABLE>
20
<PAGE>
FORWARD-LOOKING STATEMENTS
When used in this annual report or other filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions, such as analysis of the adequacy
of the allowance for loan losses or an analysis of the interest rate sensitivity
of the Company's assets and liabilities, are inherently based upon predictions
of future events and circumstances. Furthermore, from time to time, the Company
may publish other forward-looking statements relating to such matters as
anticipated financial performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. In order to comply with the terms of the safe
harbor, the Company notes that a variety of factors could cause the Company's
actual results and experience to differ materially from the anticipated results
or other expectations expressed in the Company's forward-looking statements.
Some of the risks and uncertainties that may affect the operations, performance,
development and results of the Company's business, the interest rate sensitivity
of its assets and liabilities, and the adequacy of its allowance for loan
losses, include but are not limited to the following:
o deterioration in local, regional, national or global economic conditions
which could result, among other things, in an increase in loan
delinquencies, a decrease in property values, or a change in the housing
turnover rate;
o changes in market interest rates or changes in the speed at which market
interest rates change;
o changes in laws and regulations affecting the financial service industry;
o changes in competition;
o changes in consumer preferences; and
o risks related to the Company's acquisition of Catskill, including the
ability to retain deposits, generate revenue from new locations, manage
costs, and implement integration plans.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any obligation, to
publicly release any revisions to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the
date of such statements.
21
<PAGE>
TROY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
---------------------------------------------
In thousands, except share and per share data 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 14,300 35,885
Federal funds sold 9,455 50
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 23,755 35,935
Loans held for sale 2,016 4,064
Securities available for sale, at fair value 266,750 280,871
Investment securities held to maturity
(fair value of $2,289 and $2,582 at
September 30, 2000 and 1999, respectively) 2,301 2,534
Net loans receivable 586,846 556,142
Accrued interest receivable 6,064 5,270
Other real estate owned 1,273 1,845
Premises and equipment, net 15,037 15,049
Other assets 17,986 13,386
------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 922,028 915,096
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits:
Savings accounts 177,589 191,968
Money market accounts 26,103 20,348
N.O.W. and demand accounts 134,001 123,345
Time accounts 218,279 227,712
------------------------------------------------------------------------------------------------------------------------------------
Total deposits 555,972 563,373
Mortgagors' escrow accounts 1,717 1,596
Securities sold under agreements to repurchase 105,781 3,736
Short-term borrowings 20,000 100,700
Long-term debt 53,027 44,497
Accrued interest payable 712 487
Official bank checks 7,472 9,651
Contributions payable 1,385 2,664
Other liabilities and accrued expenses 8,684 7,953
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 754,750 734,657
------------------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, $0.0001 par value, authorized 15,000,000 shares; none issued - -
Common stock, $0.0001 par value, authorized 60,000,000 shares; 12,139,021 shares issued 1 1
Additional paid-in capital 117,804 117,759
Unallocated common stock held by ESOP (9,027) (9,620)
Unvested restricted stock awards (3,847) -
Treasury stock, at cost (1,521,846 shares at September 30, 2000) (16,020) -
Retained earnings, substantially restricted 78,543 72,699
Accumulated other comprehensive loss (176) (400)
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 167,278 180,439
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 922,028 915,096
------------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
22
<PAGE>
TROY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
In thousands, except per share data 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $46,270 39,794 38,842
Securities available for sale:
Taxable 7,316 7,108 4,121
Tax-exempt 3,023 2,307 2,214
------------------------------------------------------------------------------------------------------------------------------------
10,339 9,415 6,335
------------------------------------------------------------------------------------------------------------------------------------
Investment securities held to maturity 193 222 300
Federal funds sold 704 2,371 2,553
------------------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 57,506 51,802 48,030
------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits and escrow accounts 18,754 20,470 23,339
Securities sold under agreements to repurchase and short-term borrowings 2,664 735 33
Long-term debt 2,940 2,577 821
------------------------------------------------------------------------------------------------------------------------------------
Total interest expense 24,358 23,782 24,193
------------------------------------------------------------------------------------------------------------------------------------
Net interest income 33,148 28,020 23,837
Provision for loan losses 2,563 3,250 4,050
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 30,585 24,770 19,787
------------------------------------------------------------------------------------------------------------------------------------
Non-interest income:
Service charges on deposits 1,076 892 858
Loan servicing fees 504 523 432
Trust service fees 704 665 459
Net (losses) gains from securities transactions (283) 17 8
Net (losses) gains from mortgage loan sales (45) 245 76
Other income 1,723 705 719
------------------------------------------------------------------------------------------------------------------------------------
Total non-interest income 3,679 3,047 2,552
------------------------------------------------------------------------------------------------------------------------------------
Non-interest expenses:
Compensation and employee benefits 12,587 10,839 10,218
Occupancy 1,972 2,094 2,101
Furniture, fixtures and equipment 802 728 1,080
Computer charges 1,647 1,508 1,424
Professional, legal and other fees 1,471 1,362 924
Printing, postage and telephone 904 707 614
Other real estate owned (241) 781 1,087
Contributions 205 4,706 4,759
Other expenses 2,853 3,100 2,884
------------------------------------------------------------------------------------------------------------------------------------
Total non-interest expenses 22,200 25,825 25,091
------------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) 12,064 1,992 (2,752)
Income tax expense (benefit) 3,454 (85) (1,874)
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 8,610 2,077 (878)
------------------------------------------------------------------------------------------------------------------------------------
Earnings per share:
Basic $ 0.86 0.32
------------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.86 0.32
------------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
23
<PAGE>
TROY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
In thousands, except share and per share data 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ 1 - -
Issuance of 11,730,575 shares
of $0.0001 par value common stock
in initial public offering - 1 -
Issuance of 408,446 shares
of $0.0001 par value common stock
to The Troy Savings Bank Community
Foundation in fiscal 1999 - - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 1 1 -
------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year 117,759 - -
Issuance of 11,730,575 shares of
common stock in initial public offering,
net of offering costs of $3,630 - 113,675 -
Issuance of 408,446 shares of
common stock to The Troy Savings
Bank Community Foundation - 4,084 -
Adjustment for ESOP shares
released for allocation 45 - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 117,804 117,759 -
------------------------------------------------------------------------------------------------------------------------------------
UNALLOCATED COMMON STOCK HELD BY ESOP
Balance at beginning of year (9,620) - -
Acquisition of 971,122 shares
of common stock by ESOP - (9,620) -
ESOP shares released for
allocation (59,836 shares) 593 - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (9,027) (9,620) -
------------------------------------------------------------------------------------------------------------------------------------
UNVESTED RESTRICTED STOCK AWARDS
Balance at beginning of year - - -
Grant of restricted stock
awards (446,165 shares) (4,824) - -
Amortization of restricted
stock awards 961 - -
Forfeiture of restricted
stock awards (1,500 shares) 16 - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (3,847) - -
------------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK
Balance at beginning of year - - -
Purchase of treasury stock
(1,966,511 shares) (20,963) - -
Grant of restricted stock
awards (446,165 shares) 4,959 - -
Forfeiture of restricted
stock awards (1,500 shares) (16) - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (16,020) - -
------------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance at beginning of year 72,699 70,622 71,500
Net income (loss) 8,610 $ 8,610 2,077 $ 2,077 (878) $ (878)
Cash dividends ($0.23 per share) (2,631) - -
Adjustment for grant of restricted stock awards (135) - -
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year 78,543 72,699 70,622
------------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
Balance at beginning of year (400) 407 42
Unrealized net holding gains (losses)
on securities available for sale arising
during the year (pre-tax of $90,
$(1,346) and $619, respectively) 54 (802) 370
Reclassification adjustment for net
losses (gains) on securities available for
sale realized in net income (loss) (pre-tax
of $283, $(9) and $(8), respectively) 170 (5) (5)
------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) 224 224 (807) (807) 365 365
------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ 8,834 $ 1,270 $ (513)
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year (176) (400) 407
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity at September 30 $ 167,278 $ 180,439 $ 71,029
------------------------------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
24
<PAGE>
TROY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
In thousands 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in cash and cash equivalents:
Net cash flows from operating activities:
Net income (loss) $ 8,610 2,077 (878)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 1,277 1,317 1,615
Provision for loan losses 2,563 3,250 4,050
Non-cash contribution expense 221 4,524 3,453
Amortization of restricted stock awards 961 - -
ESOP compensation expense 852 423 -
Net (accretion) amortization of (discount) premium on securities (1,257) (3,255) 65
Deferred tax benefit (1,086) (2,924) (3,027)
Net losses (gains) from securities transactions 283 (17) (8)
Net losses (gains) from mortgage loan sales 45 (245) (76)
Net (gain) loss on sales of other real estate owned (323) 11 106
Writedowns of other real estate owned 82 556 326
Net gain on sales of premises and equipment (36) (102) -
Net gain on sales of other assets (327) - -
Proceeds from sales of loans held for sale 12,937 46,669 44,496
Net loans made to customers and held for sale (10,934) (39,392) (51,813)
(Increase) decrease in accrued interest receivable (794) (983) 47
Increase in other assets (5,462) (1,102) (215)
Increase in accrued interest payable 225 127 300
(Decrease) increase in official bank checks, contributions payable,
and other liabilities and accrued expenses (3,162) 1,940 2,436
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 4,675 12,874 877
------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 68,045 44,136 54,782
Proceeds from maturities, calls and paydowns of securities available for sale 443,292 653,858 110,223
Purchases of securities available for sale (495,870) (779,186) (244,657)
Proceeds from maturities, calls and paydowns of investment securities held to maturity 233 954 517
Net loans (made to) repaid by customers (36,899) (103,341) 6,212
Proceeds from sales of other real estate owned 4,445 730 963
Purchases of premises and equipment (1,289) (2,810) (1,977)
Proceeds from sales of premises and equipment 60 413 -
Proceeds from sales of other assets 2,127 - -
------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,856) (185,246) (73,937)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued on following page)
25
<PAGE>
TROY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED SEPTEMBER 30, 2000, 1999 AND 1998
<TABLE>
<CAPTION>
In thousands 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in deposits $ (7,401) (14,829) 5,805
Net increase (decrease) in mortgagors' escrow accounts 121 (304) (16)
Net increase in securities sold under agreements to repurchase 102,045 1,212 2,152
Net (decrease) increase in short-term borrowings (80,700) 100,700 -
Proceeds from issuance of long-term debt 10,000 - 41,000
Payments on long-term debt (1,470) (443) (417)
Dividends paid (2,631) - -
Purchases of treasury stock (20,963) - -
Net proceeds from stock offering - 113,676 -
Acquisition of common stock by ESOP - (9,620) -
------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (999) 190,392 48,524
------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (12,180) 18,020 (24,536)
Cash and cash equivalents at beginning of year 35,935 17,915 42,451
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 23,755 35,935 17,915
------------------------------------------------------------------------------------------------------------------------------------
Supplemental information:
Cash paid for:
Interest on deposits and borrowings $ 24,133 23,655 23,893
Income taxes $ 3,350 1,181 1,569
Supplemental schedule of non-cash investing and financing activities:
Net reduction in loans resulting from the transfer to other real estate owned $ 3,632 1,270 577
Adjustment of securities available for sale to fair value, net of tax $ 224 (807) 365
Grant of restricted stock awards $ 4,959 - -
Forfeiture of restricted stock awards $ (16) - -
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
26
<PAGE>
TROY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
================================================================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Troy Financial Corporation (the "Parent
Company") and its subsidiaries (referred to together as the "Company") conform
to generally accepted accounting principles and reporting practices followed by
the banking industry. The more significant policies are described below.
(A) ORGANIZATION
The Company is a bank-based financial services company. The Parent Company's
savings bank subsidiary, The Troy Savings Bank (the "Savings Bank"), provides a
wide range of banking, financing, fiduciary and other financial services to
corporate, individual and institutional customers through its branch offices and
subsidiary companies. The Parent Company's commercial bank subsidiary, The Troy
Commercial Bank (the "Commercial Bank"), provides banking and financing services
to municipalities. The Commercial Bank began operations during fiscal 2000. The
Savings Bank and the Commercial Bank are regulated by the Federal Deposit
Insurance Corporation ("FDIC") and the New York State Banking Department.
The Savings Bank completed its conversion from a mutual savings bank to a stock
savings bank on March 31, 1999. Concurrent with the Savings Bank's conversion,
the Parent Company completed its initial public offering of common stock and
used 50% of the net proceeds to purchase all of the common stock of the Savings
Bank issued in the conversion. Prior to its initial public offering, the Parent
Company had no significant results of operations; therefore, financial
information prior to March 31, 1999 reflects the operations of the Savings Bank.
(B) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Parent Company
and its subsidiaries. All material intercompany accounts and transactions have
been eliminated. The Company utilizes the accrual method of accounting for
financial reporting purposes. Amounts in the prior years' consolidated financial
statements have been reclassified whenever necessary to conform with the current
year's presentation.
(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 income and expenses during the
reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of other real estate owned acquired in connection with
foreclosures. In connection with the determination of the allowance for loan
losses and the valuation of other real estate owned, management obtains
appraisals for properties.
Management believes that the allowance for loan losses is adequate and that
other real estate owned is recorded at its fair value less an estimate of the
costs to sell the properties. While management uses available information to
recognize losses on loans and other real estate owned, future additions to the
allowance for loan losses or writedowns of other real estate owned may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses and other real
estate owned. Such agencies may require the Company to recognize additions to
the allowance for loan losses or writedowns of other real estate owned based on
their judgments about information available to them at the time of their
examination which may not be currently available to management.
A substantial portion of the Company'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 Company's loan portfolio
and the recovery of a substantial portion of the carrying amount of other real
estate owned is dependent upon general economic and real estate market
conditions in these counties.
(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. It is the intention of management to sell these loans in
the near future. Gains and losses on the disposition of loans held for sale are
determined on the specific identification method.
Loans held for sale, as well as commitments to originate fixed rate mortgage
loans at a set interest rate, which will subsequently be sold in the secondary
mortgage market, are regularly evaluated and, if necessary, a valuation
allowance is recorded for unrealized losses attributable to changes in market
interest rates.
(F) MORTGAGE SERVICING RIGHTS
The Company recognizes as separate assets the rights to service mortgage loans
for others, regardless of how those servicing rights were acquired. Mortgage
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing income. Additionally, capitalized mortgage servicing
rights are assessed for impairment based on the fair value of those rights, and
any impairment is recognized through a valuation allowance by a charge to
income.
27
<PAGE>
================================================================================
(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 securities for resale over a short period are stated
at fair value with unrealized gains and losses reflected in current
earnings. All other debt and equity securities are classified as securities
available for sale and are reported at fair value, with net unrealized gains
or losses reported, net of income taxes, in accumulated other comprehensive
income or loss (a separate component of shareholders' equity). At September
30, 2000 and 1999, the Company 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 FHLB 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 the
disposition of securities are based on the net proceeds and the amortized
cost of the securities sold, using the specific identification method. The
amortized cost of securities is adjusted for amortization of premium and
accretion of discount, which is calculated on an effective interest method.
(H) NET LOANS RECEIVABLE
Loans receivable are reported at the principal amount outstanding, net of
unearned discount, net deferred loan fees and costs, and the allowance for
loan losses. Unearned discounts and net deferred loan fees and costs are
accreted to income using an effective interest method.
Loans considered doubtful of collection by management are placed on a
non-accrual status for the recording of interest. Generally, loans past due
90 days or more as to principal or interest are placed on non-accrual status
except for (1) those loans which, in management's judgment, are adequately
secured and in the process of collection, and (2) certain consumer and
open-end credit loans which are usually charged-off when they become 120
days past due. When a loan is placed on non-accrual status, all previously
accrued income that has not been collected is reversed from current year
interest income. Subsequent cash receipts are generally applied to reduce
the unpaid principal balance, however, interest on loans can also be
recognized as cash is received. Amortization of the related unearned
discount and net deferred loan fees and costs is suspended when a loan is
placed on non-accrual status. Loans are removed from non-accrual status when
they become current as to principal and interest or when, in the opinion of
management, the loans are expected to be fully collectible as to principal
and interest.
(I) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased through a provision for loan
losses charged to operations. Loans are charged against the allowance for
loan losses when management believes that the collectibility of all or a
portion of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb probable losses on existing
loans. Management's evaluation of the adequacy of the allowance for loan
losses is performed on a periodic basis and takes into consideration such
factors as the historical loan loss experience, changes in the 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.
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. 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 Company's impaired loans are
generally commercial-type loans which are collateral dependent.
(J) OTHER REAL ESTATE OWNED
Other real estate owned, representing properties acquired in settlement of
loans, is recorded on an individual asset basis at the lower of cost
(defined as the fair value at foreclosure or repossession) or the fair value
of the asset acquired less an estimate of the costs to sell the property. At
the time of foreclosure, the excess, if any, of the recorded investment in
the loan over the fair value of the property received is charged to the
allowance for loan losses. Subsequent declines in the value of such property
and net operating expenses of such properties are charged directly to
non-interest expenses. Properties are regularly reappraised and written down
to the fair value less the estimated costs to sell the property, if
necessary.
The recognition of gains and losses from the sale of other real estate owned
is dependent on a number of factors relating to the nature of the property
sold, terms of the sale, and the future involvement of the Company in the
property sold. If a real estate transaction does not meet certain down
payment and loan amortization requirements, income recognition is deferred
and recognized under an alternative method.
(K) PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation
and amortization. Depreciation is computed on the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are
amortized over the shorter of the terms of the related leases or the useful
lives of the assets.
(L) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
In securities repurchase agreements, the Company transfers the underlying
securities to a third party custodian's account that explicitly recognizes
the Company's interest in the securities. These agreements are accounted for
as secured financing transactions provided the Company maintains effective
control over the transferred securities and meets other criteria for such
28
<PAGE>
================================================================================
accounting as specified in Statement of Financial Accounting Standards
("SFAS") No. 125. The Company's agreements are accounted for as secured
financings; accordingly, the transaction proceeds are recorded as borrowed
funds and the underlying securities continue to be carried in the Company's
securities available for sale portfolio.
(M) INCOME TAXES
The Company accounts for income taxes in accordance with the asset and
liability method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and for unused tax carryforwards. Deferred tax
assets are recognized subject to management's judgment that those assets
will more likely than not be realized. A valuation allowance is recognized
if, based on an analysis of available evidence, management believes that all
or a portion of the deferred tax assets will not be realized. Adjustments to
increase or decrease the valuation allowance are charged or credited,
respectively, to income tax expense. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which the temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment
date.
(N) FINANCIAL INSTRUMENTS
In the normal course of business, the Company is a party to certain
financial instruments with off-balance-sheet risk such as commitments to
extend credit, unused lines of credit and standby letters of credit. The
Company's policy is to record such instruments when funded.
(O) OFFICIAL BANK CHECKS
The Company'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 Company and are ultimately paid through
the Company's Federal Reserve Bank correspondent account.
(P) TRUST ASSETS AND SERVICE FEES
Assets held by the Company in a fiduciary or agency capacity for its
customers are not included in the consolidated statements of condition since
these assets are not assets of the Company. Trust service fees are reported
on the accrual basis.
(Q) EMPLOYEE BENEFIT COSTS
The Company maintains a non-contributory pension plan covering
substantially all employees, as well as a supplemental retirement and
benefit restoration plan covering certain executive officers selected by the
Board of Directors. The costs of these plans, based on actuarial
computations of current and future benefits for employees, are charged to
current operating expenses. The Company also provides certain
post-retirement medical, dental and life insurance benefits to substantially
all employees and retirees. The cost of post-retirement benefits other than
pensions is recognized on an accrual basis as employees perform services to
earn the benefits.
(R) STOCK-BASED COMPENSATION
Compensation expense is recognized for the Company's Employee Stock
Ownership Plan ("ESOP") equal to the average fair value of shares committed
to be released for allocation to participant accounts. Any difference
between the average fair value of the shares committed to be released for
allocation and the ESOP's original acquisition cost is charged or credited
to shareholders' equity (additional paid-in capital). The cost of
unallocated ESOP shares (shares not yet released for allocation) is
reflected as a reduction of shareholders' equity.
The Company accounts for stock options granted under its Long-Term Equity
Compensation Plan in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. Accordingly, compensation expense is recognized
only if the exercise price of the option is less than the fair value of the
underlying stock at the grant date. SFAS No. 123, "Accounting for
Stock-Based Compensation," encourages entities to recognize the fair value
of all stock-based awards on the date of the grant as compensation expense
over the vesting period. Alternatively, SFAS No. 123 allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide pro forma
disclosures of net income and earnings per share as if the fair-value-based
method defined in SFAS No. 123 had been applied.
Restricted stock awards granted under the Long-Term Equity Compensation Plan
are also accounted for in accordance with APB Opinion No. 25. The fair value
of the shares awarded, measured as of the grant date, is recognized as
unearned compensation (a component of shareholders' equity) and amortized to
compensation expense over their respective vesting period.
<PAGE>
(S) EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share is computed in a manner similar to that of basic
earnings per share except that the weighted-average number of common shares
outstanding is increased to include the number of additional common shares
that would have been outstanding if all potentially dilutive common shares
(such as stock options and unvested restricted stock) were issued during the
reporting period using the treasury stock method. Unallocated common shares
held by the ESOP are not included in the weighted-average number of common
shares outstanding for either the basic or diluted earnings per share
calculations.
(T) COMPREHENSIVE INCOME
Comprehensive income represents the sum of net income and items of other
comprehensive income or loss, which are reported directly in shareholders'
equity, net of tax, such as the change in the net unrealized gain or loss on
securities available for sale. The Company has reported comprehensive income
and its components in the consolidated statements of changes in
shareholders' equity. Accumulated other comprehensive income or loss, which
is a component of shareholders' equity, represents the net unrealized gain
or loss on securities available for sale, net of tax.
29
<PAGE>
================================================================================
(U) SEGMENT REPORTING
The Company's operations are solely in the financial services industry and
include providing to its customers traditional banking services. The
Company operates primarily in the geographical regions of Rensselaer,
Albany, Schenectady, Saratoga, Washington and Warren counties of New York.
Management makes operating decisions and assesses performance based on an
ongoing review of its traditional banking operations, which constitute the
Company's only reportable segment.
(V) RECENT ACCOUNTING PRONOUNCEMENT
The Company adopted the provisions of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," effective October 1, 2000.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
condition and measure those instruments at fair value. Changes in the fair
value of the derivative financial instruments are reported in either
earnings or comprehensive income, depending on the use of the derivative and
whether or not it qualifies for hedge accounting.
Special hedge accounting treatment is permitted only if specific criteria
are met, including a requirement that the hedging relationship be highly
effective both at inception and on an ongoing basis. Accounting for hedges
varies based on the type of hedge - fair value or cash flow. Results of
effective hedges are recognized in current earnings for fair value hedges
and in other comprehensive income for cash flow hedges. Ineffective portions
of hedges are recognized immediately in earnings and are not deferred.
The derivative instruments held by the Company as of September 30, 2000
consisted solely of instruments related to the Company's mortgage banking
activities. Based on current market rates and economic conditions, the
adoption of SFAS No. 133 as of October 1, 2000 did not have a material
effect on the Company's consolidated financial statements. However, there
may be increased volatility in net income and stockholders' equity on an
ongoing basis as a result of accounting for derivative instruments in
accordance with SFAS No. 133.
(2) BUSINESS COMBINATION
The Company completed its acquisition of Catskill Financial Corporation
("Catskill") on November 10, 2000, paying $23.00 in cash for each share of
Catskill common stock outstanding. Total assets of approximately $305
million and total deposits of approximately $218 million were acquired.
Catskill was the holding company for Catskill Savings Bank. The seven former
branch offices of Catskill Savings Bank now operate as branch offices of the
Savings Bank. In accordance with the purchase method of accounting for
business combinations, the assets acquired and liabilities assumed will be
recorded by the Company at estimated fair value. Related operating results
will be included in the Company's consolidated financial statements from the
date of acquisition.
(3) LOANS HELD FOR SALE AND MORTGAGE SERVICING RIGHTS
At September 30, 2000 and 1999, loans held for sale consisted of
conventional residential mortgages originated for subsequent sale. At
September 30, 2000 and 1999, there was no valuation reserve necessary for
loans held for sale.
The Company retains the servicing rights on certain mortgage loans sold. At
September 30, 2000 and 1999, the unamortized balance of mortgage servicing
rights on loans sold with servicing retained was approximately $782 thousand
and $774 thousand, respectively. The estimated fair value of these mortgage
servicing rights was in excess of their carrying value at both September 30,
2000 and 1999, and therefore no impairment reserve was necessary.
30
<PAGE>
================================================================================
(4) SECURITIES AVAILABLE FOR SALE
The amortized cost and approximate fair value of securities available for sale
at September 30 are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
(In thousands) 2000
----------------------------------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government securities and agencies obligations $ 161,653 92 (561) 161,184
Obligations of states and political subdivisions 80,304 166 (111) 80,359
Mortgage-backed securities 2,138 14 (3) 2,149
Corporate debt securities 12,350 3 (8) 12,345
----------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale 256,445 275 (683) 256,037
Mutual funds and marketable equity securities 1,750 141 (26) 1,865
Non-marketable equity securities 8,848 - - 8,848
----------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 267,043 416 (709) 266,750
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
(In thousands) 1999
----------------------------------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------------------------------
U.S. Government securities and agencies obligations $ 172,544 3 (555) 171,992
Obligations of states and political subdivisions 73,126 221 (85) 73,262
Mortgage-backed securities 17,344 28 (240) 17,132
Corporate debt securities 5,651 27 (17) 5,661
----------------------------------------------------------------------------------------------------------------------
Total debt securities available for sale 268,665 279 (897) 268,047
Mutual funds and marketable equity securities 5,534 100 (148) 5,486
Non-marketable equity securities 7,338 - - 7,338
----------------------------------------------------------------------------------------------------------------------
Total securities available for sale $ 281,537 379 (1,045) 280,871
----------------------------------------------------------------------------------------------------------------------
</TABLE>
During 2000, proceeds from sales of securities available for sale totaled $68.0
million, with gross gains of $257 thousand and gross losses of $540 thousand.
During 1999, proceeds from sales of securities available for sale totaled $44.1
million, with gross gains of $9 thousand. 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.
As of September 30, 2000, the contractual maturity of debt securities available
for sale (mortgage-backed securities are shown separately) at amortized cost and
approximate fair value is as follows:
-------------------------------------------------------------------
(In thousands)
-------------------------------------------------------------------
APPROXIMATE
AMORTIZED FAIR
MATURITY RANGES COST VALUE
-------------------------------------------------------------------
Within one year $ 149,740 149,768
After one year to five years 85,488 85,324
After five years to ten years 17,173 16,891
Over ten years 1,906 1,905
Mortgage-backed securities 2,138 2,149
-------------------------------------------------------------------
Total $ 256,445 256,037
-------------------------------------------------------------------
31
<PAGE>
================================================================================
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Mortgage-backed securities available for sale consist entirely of direct
pass-through Freddie Mac and Ginnie Mae securities.
Other than U.S. government sponsored enterprise securities (securities issued by
Freddie Mac or Fannie Mae), and securities issued by the Federal Home Loan Bank
of New York, there were no securities of a single issuer that exceeded 10% of
shareholders' equity at September 30, 2000 and 1999.
The carrying value of securities available for sale pledged to secure
borrowings, deposits and for other purposes was approximately $127.4 million at
September 30, 2000.
(5) INVESTMENT SECURITIES HELD TO MATURITY
The amortized cost and approximate fair value of investment securities held to
maturity as of September 30 are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
(In thousands) 2000
----------------------------------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 1,301 36 (10) 1,327
Corporate and other debt securities 1,000 - (38) 962
----------------------------------------------------------------------------------------------------------------------
Total investment securities $ 2,301 36 (48) 2,289
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
(In thousands) 1999
----------------------------------------------------------------------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities $ 1,535 62 (5) 1,592
Corporate and other debt securities 999 5 (14) 990
----------------------------------------------------------------------------------------------------------------------
Total investment securities $ 2,534 67 (19) 2,582
----------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and approximate fair value of investment securities held to
maturity at September 30, 2000, by contractual maturity (mortgage-backed
securities are shown separately), are as follows:
-------------------------------------------------------------------
(In thousands)
-------------------------------------------------------------------
APPROXIMATE
AMORTIZED FAIR
MATURITY RANGES COST VALUE
-------------------------------------------------------------------
Over ten years $ 1,000 962
Mortgage-backed securities 1,301 1,327
-------------------------------------------------------------------
Total $ 2,301 2,289
-------------------------------------------------------------------
Actual maturities may differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or prepayment
penalties.
Mortgage-backed securities held to maturity consist entirely of direct
pass-through Ginnie Mae securities.
32
<PAGE>
================================================================================
(6) NET LOANS RECEIVABLE
A summary of net loans receivable at September 30 follows:
--------------------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Loans secured by real estate:
Residential $ 226,961 221,721
Commercial 233,334 216,700
Construction 7,300 13,761
--------------------------------------------------------------------------------
Total real estate loans 467,595 452,182
--------------------------------------------------------------------------------
Commercial business loans 87,167 66,274
--------------------------------------------------------------------------------
Home equity lines of credit 5,019 6,776
Other consumer loans 39,320 42,081
--------------------------------------------------------------------------------
Total consumer loans 44,339 48,857
--------------------------------------------------------------------------------
Total gross loans 599,101 567,313
Less: Unearned discount and
net deferred fees and costs (364) (407)
Allowance for loan losses (11,891) (10,764)
--------------------------------------------------------------------------------
Net loans receivable $ 586,846 556,142
--------------------------------------------------------------------------------
Non-performing loans at September 30 are as follows:
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Non-accrual loans $ 5,600 7,267 9,567
Restructured loans 53 616 2,081
--------------------------------------------------------------------------------
Total $ 5,653 7,883 11,648
--------------------------------------------------------------------------------
All restructured loans were performing according to their modified terms at
September 30, 2000, 1999 and 1998.
Had the above non-accrual loans been on accrual status, or had the interest rate
not been reduced with respect to the loans restructured in troubled debt
restructurings, the additional interest that would have been earned was
approximately $186 thousand, $326 thousand and $180 thousand for 2000, 1999 and
1998, respectively. There are no commitments to extend further credit on
non-performing loans.
Changes in the allowance for loan losses for the years ended September 30 were
as follows:
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Balance at beginning of year $ 10,764 8,260 6,429
Provision charged to operations 2,563 3,250 4,050
Loans charged-off (1,942) (995) (2,446)
Recoveries on loans charged-off 506 249 227
--------------------------------------------------------------------------------
Balance at end of year $ 11,891 10,764 8,260
--------------------------------------------------------------------------------
At September 30, 2000 and 1999, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 totaled $3.0 million and $4.9
million, respectively, for which the related allowance for loan losses was $764
thousand and $373 thousand, respectively. As of September 30, 2000 and 1999,
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,
2000, 1999 and 1998 was $3.3 million, $6.0 million and $5.9 million,
respectively. The total interest income recognized on impaired loans during the
period of impairment for each of the following respective years was
approximately $66 thousand, $200 thousand and $0 thousand for 2000, 1999 and
1998, respectively. The interest income recognized on impaired loans during the
period of impairment using the cash basis of income recognition was
approximately $3 thousand, $137 thousand and $0 thousand for 2000, 1999 and
1998, respectively.
Certain executive officers of the Company were customers of and had other
transactions with the Company in the ordinary course of business. Loans to these
parties were made in the ordinary course of business at the Company's normal
credit terms, including interest rate and collateralization. The aggregate of
such loans totaled less than 5% of total shareholders' equity at both September
30, 2000 and 1999.
(7) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at September 30:
--------------------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Loans $ 3,458 3,084
Securities available for sale 2,590 2,169
Investment securities held to maturity 16 17
--------------------------------------------------------------------------------
$ 6,064 5,270
--------------------------------------------------------------------------------
(8) OTHER REAL ESTATE OWNED
Other real estate owned at September 30 consists of the following:
--------------------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Commercial properties $ 1,033 1,769
Residential properties
(1-4 family) 240 76
--------------------------------------------------------------------------------
$ 1,273 1,845
--------------------------------------------------------------------------------
(9) PREMISES AND EQUIPMENT,NET
A summary of premises and equipment at September 30 is as follows:
--------------------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Land $ 2,084 1,633
Buildings 13,141 12,260
Furniture, fixtures and equipment 9,874 8,474
Leasehold improvements 3,200 3,457
Construction in progress 887 2,400
--------------------------------------------------------------------------------
29,186 28,224
Less accumulated
depreciation and amortization (14,149) (13,175)
--------------------------------------------------------------------------------
Premises and equipment, net $ 15,037 15,049
--------------------------------------------------------------------------------
33
<PAGE>
================================================================================
Depreciation and amortization expense was approximately $1.3 million, $1.3
million and $1.6 million for the years ended September 30, 2000, 1999 and 1998,
respectively. (10)Deposits A summary of deposits at September 30 is as follows:
--------------------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Savings accounts (2.75% to 5.50%) $ 177,589 191,968
--------------------------------------------------------------------------------
Time deposits:
1.79% to 3.99% 1,362 6,209
4.00% to 4.99% 55,906 160,315
5.00% to 5.99% 112,888 53,587
6.00% to 6.99% 48,123 4,833
7.00% to 7.99% - 2,768
--------------------------------------------------------------------------------
Total time deposits 218,279 227,712
--------------------------------------------------------------------------------
Money market accounts
(2.00% to 3.00%) 26,103 20,348
N.O.W. and Super N.O.W. accounts
(2.00% to 2.35%) 90,005 86,305
Demand deposit accounts
(non-interest bearing) 43,996 37,040
--------------------------------------------------------------------------------
Total transaction accounts 160,104 143,693
--------------------------------------------------------------------------------
Total deposits $ 555,972 563,373
--------------------------------------------------------------------------------
The contractual maturities of time deposits for the years subsequent to
September 30, 2000 are as follows:
--------------------------------------------------------------------------------
Years ending September 30,
--------------------------------------------------------------------------------
(In thousands)
2001 $ 166,624
2002 36,823
2003 7,869
2004 3,268
2005 and thereafter 3,695
--------------------------------------------------------------------------------
$ 218,279
--------------------------------------------------------------------------------
Individual time deposits with a balance of $100 thousand or greater totaled
approximately $30.0 million and $24.5 million at September 30, 2000 and 1999,
respectively.
Interest expense on deposits and escrow accounts for the years ended September
30 consisted of the following:
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Time accounts $ 10,857 12,514 14,701
Savings accounts 5,241 5,581 6,451
Money market accounts 649 555 431
N.O.W. and Super N.O.W. accounts 1,943 1,758 1,696
Escrow accounts 64 62 60
--------------------------------------------------------------------------------
$ 18,754 20,470 23,339
--------------------------------------------------------------------------------
(11) SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
AND SHORT-TERM BORROWINGS
A summary of securities sold under agreements to repurchase and short-term
borrowings as of September 30 and for the years then ended is presented below:
--------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Securities sold under
agreements to repurchase:
Balance at September 30 $ 105,781 3,736 2,524
Maximum month-end balance 105,781 4,745 2,544
Average balance during
the year 16,481 3,286 1,222
Average rate during the year 5.52% 3.10% 2.70%
Weighted-average rate at
September 30 6.42% 3.00% 3.45%
Short-term borrowings:
Balance at September 30 $ 20,000 100,700 -
Maximum month-end balance 100,000 100,700 -
Average balance during
the year 28,540 12,581 -
Average rate during the year 6.15% 5.04% -
Weighted-average rate at
September 30 6.60% 5.34% -
Average aggregate borrowing
rate during the year 5.92% 4.64% 2.70%
All securities repurchase agreements at September 30, 2000 mature within ninety
days. As of September 30, 2000, there was approximately $56 thousand of accrued
interest payable on the repurchase agreements. The fair value of the securities
subject to the repurchase agreements was approximately $110.3 million at
September 30, 2000, plus accrued interest receivable of approximately $139
thousand.
Short-term borrowings represent borrowings with original maturities of one year
or less.
The Company has established overnight and term lines of credit with the FHLB. If
advanced, such lines of credit will be collateralized by qualifying loans,
securities and FHLB stock. Total availability under these lines and other
borrowing programs of the FHLB was approximately $92.1 million and $84.6 million
at September 30, 2000 and 1999, respectively. Participation in the FHLB
borrowing programs requires an investment in FHLB stock. The recorded investment
in FHLB stock, included in securities available for sale on the consolidated
statements of condition, amounted to $8.8 million and $7.3 million at September
30, 2000 and 1999, respectively.
34
<PAGE>
(12) LONG-TERM DEBT
At September 30, 2000, long-term debt included a $3.0 million, 5.89% fixed rate
amortizing loan with a final balloon payment of $2.9 million due in January
2001, and other long-term borrowings of $50.0 million with a weighted-average
interest rate of 6.00% at September 30, 2000. Of the $50.0 million of long-term
borrowings, $40.0 million has fixed interest rates, with the interest rate on
the remaining $10.0 million tied to LIBOR, adjusted monthly. The
weighted-average contractual maturity of the $50.0 million of long-term
borrowings is 5.8 years at September 30, 2000. Long-term borrowings totaling
$10.0 million with a fixed rate of 5.50% and a contractual maturity in July
2008, are callable in February 2001. All long-term debt is with the FHLB.
The following table sets forth the contractual maturities of the long-term debt
as of September 30, 2000:
Years ending September 30,
--------------------------------------------------------------------------------
(In thousands)
--------------------------------------------------------------------------------
2001 $ 3,027
2002 -
2003 10,000
2004 -
2005 15,000
2006 and thereafter 25,000
--------------------------------------------------------------------------------
$53,027
--------------------------------------------------------------------------------
Collateral for the long-term debt at September 30, 2000 includes a blanket lien
on general assets of the Company and approximately $10.6 million of pledged
securities.
(13) INCOME TAXES
The components of income tax expense (benefit) for the years ended September 30
are as follows:
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Current tax expense:
Federal $ 3,759 2,319 850
State 781 520 303
Deferred tax benefit (1,086) (2,924) (3,027)
--------------------------------------------------------------------------------
Income tax expense (benefit) $ 3,454 (85) (1,874)
--------------------------------------------------------------------------------
The following is a reconciliation of the expected income tax expense (benefit)
and the actual income tax expense (benefit) for the years ended September 30.
The expected income tax expense (benefit) has been computed by applying the
statutory Federal tax rate to income before income tax expense (benefit):
--------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Income tax expense (benefit) at
applicable Federal statutory rate $ 4,102 677 (936)
Increase (decrease) in income tax
expense (benefit) resulting from:
Tax-exempt income (1,057) (712) (637)
State income tax expense
(benefit), net of Federal impact 415 60 (276)
Other (6) (110) (25)
--------------------------------------------------------------------------------
Income tax expense (benefit) $ 3,454 (85) (1,874)
--------------------------------------------------------------------------------
Effective tax rate 28.6% (4.3)% (68.1)%
--------------------------------------------------------------------------------
The tax effects of temporary differences and carryforwards that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
September 30 are presented below:
--------------------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 4,319 3,823
Other real estate owned 127 340
Charitable contribution carryforward 2,726 3,140
Accrued expenses 2,223 1,367
Depreciation 740 702
Deferred compensation 683 560
--------------------------------------------------------------------------------
Total gross deferred tax assets 10,818 9,932
--------------------------------------------------------------------------------
Deferred tax liabilities:
Pension costs (45) (147)
Prepaid expenses (280) (293)
Net deferred loan origination
fees and costs (130) (122)
Mortgage servicing rights (305) (302)
Other items (28) (124)
--------------------------------------------------------------------------------
Total gross deferred tax liabilities (788) (988)
--------------------------------------------------------------------------------
Net deferred tax asset at end of year 10,030 8,944
--------------------------------------------------------------------------------
Net deferred tax asset
at beginning of year 8,944 6,020
--------------------------------------------------------------------------------
Deferred tax benefit for the year $(1,086) (2,924)
--------------------------------------------------------------------------------
In addition to the deferred tax assets and liabilities described above, the
Company had a deferred tax asset of $117 thousand and $266 thousand at September
30, 2000 and 1999, respectively, related to the net unrealized loss on
securities available for sale.
A corporation's annual tax deduction for charitable contributions is subject to
a limitation based on a percentage of taxable income. Contributions in excess of
this limitation are carried forward and may be deducted in one or more of the
succeeding five tax years. As a result of the cash contributions and commitment
to The Troy Savings Bank Charitable Foundation, as well as the contribution of
common stock to The Troy Savings Bank Community Foundation, at September 30,
2000, the Company had an unused charitable contribution carry-forward of
approximately $5.1 million, which is available for deduction through 2003 and
2004.
35
<PAGE>
================================================================================
Deferred tax assets are recognized subject to management's judgment 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 Company believes it is more likely than not that the gross deferred
tax assets at September 30, 2000 will be realized.
As a savings institution, the Savings Bank is subject to special provisions in
the Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. Tax bad debt reserves consist of a
defined "base-year" amount, plus additional amounts ("excess reserves")
accumulated after the base year. Deferred tax liabilities are recognized with
respect to such excess reserves, as well as any portion of the base-year amount
that is expected to become taxable (or "recaptured") in the foreseeable future.
Federal tax laws include a requirement to recapture into taxable income (over a
six year period) the Federal bad debt reserves in excess of the base-year
amounts. The Savings Bank has established a deferred tax liability with respect
to such excess Federal reserves. New York State tax laws designate all state bad
debt reserves as the base-year amount.
Deferred tax liabilities have not been recognized with respect to the Federal
base-year reserve of $7.9 million and "supplemental" reserve (as defined) of
$1.0 million at September 30, 2000, and the state base-year reserve of $18.9
million at September 30, 2000, since the Company does not expect that the
base-year reserves will become taxable in the foreseeable future. Under the tax
laws, events that would result in taxation of certain of these reserves include
(i) redemptions of the Savings Bank's stock or certain excess distributions by
the Savings Bank to the Parent Company, and (ii) failure of the Savings Bank to
maintain a specified qualifying assets ratio or meet other thrift definition
tests for New York State tax purposes. The unrecognized deferred tax liability
at September 30, 2000 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, 2000 with respect to the
state base-year reserve was approximately $1.1 million (net of Federal benefit).
(14) EARNINGS PER SHARE
The following table sets forth certain information regarding the calculation of
basic and diluted earnings per share for the year ended September 30, 2000, and
for the year ended September 30, 1999, based on net income for the six-month
period from April 1, 1999 to September 30, 1999. Earnings per share information
for periods prior to the Company's initial public offering on March 31, 1999 is
not applicable.
<TABLE>
<CAPTION>
2000 1999
----------------------------------------------------------------------------------------------------------------------------------
Net Weighted Per Share Net Weighted Per Share
Income Avg. Shares Amount Income Avg. Shares Amount
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands, except share and per share data)
----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 8,610 10,030,520 $ 0.86 $ 3,723 11,526,139 $ 0.32
------- ------ ------- ------
Dilutive effect of potential common
shares outstanding:
Stock options 2,484 --
Restricted stock awards 33,573 --
----------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 8,610 10,066,577 $ 0.86 $ 3,723 11,526,139 $ 0.32
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Dilutive shares for stock options and restricted stock awards represent the
number of incremental shares computed using the treasury stock method.
(15)Employee Benefit Plans
The Company maintains a non-contributory pension plan with Retirement System
Group, Inc. covering substantially all its full-time employees. The benefits are
generally computed as two percent of the highest three year average annual
earnings (as defined by the plan) multiplied by years of credited service,
subject to various caps and adjustments as provided for in the plan. The amounts
contributed to the plan are determined annually on the basis of (a) the maximum
amount that can be deducted for Federal income tax purposes, or (b) the amount
certified by an actuary as necessary to avoid an accumulated funding deficiency
as defined by the Employee Retirement Income Security Act of 1974. Contributions
are intended to provide not only for benefits attributed to service to date but
also those expected to be earned in the future. Assets of the plan are primarily
invested in pooled equity and fixed income funds.
The following table sets forth the pension plan's funded status and amounts
recognized in the Company's consolidated financial statements at September 30:
36
<PAGE>
================================================================================
--------------------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Reconciliation of projected benefit
obligation:
Obligation at beginning of year $ 12,582 12,458
Service cost 636 660
Interest cost 903 829
Benefit payments (514) (493)
Actuarial gain (619) (872)
--------------------------------------------------------------------------------
Obligation at end of year $ 12,988 12,582
--------------------------------------------------------------------------------
Reconciliation of fair value of plan assets:
Fair value of plan assets at beginning
of year $ 14,990 12,805
Actual return on plan assets 2,572 2,295
Employer contributions -- 383
Benefit payments (514) (493)
--------------------------------------------------------------------------------
Fair value of plan assets at
end of year $ 17,048 14,990
--------------------------------------------------------------------------------
Reconciliation of funded status:
Funded status at end of year $ 4,060 2,408
Unrecognized net actuarial gain (4,190) (2,323)
Unrecognized prior service cost 244 292
--------------------------------------------------------------------------------
Prepaid pension cost at end of year $ 114 377
--------------------------------------------------------------------------------
Net periodic pension cost recognized in the Company's consolidated statements of
income for the years ended September 30 included the following components:
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Service cost $ 636 660 580
Interest cost 903 829 752
Expected return on plan assets (1,254) (1,085) (1,038)
Net amortization and deferral (22) 48 (68)
--------------------------------------------------------------------------------
Net periodic pension cost $ 263 452 226
--------------------------------------------------------------------------------
The actuarial assumptions used in determining the actuarial present value of the
projected benefit obligations as of September 30 were as follows:
--------------------------------------------------------------------------------
2000 1999 1998
--------------------------------------------------------------------------------
Discount rate 8.00% 7.25% 6.50%
Long-term rate of return 9.00% 8.50% 8.00%
Salary increase rate 5.50% 4.50% 4.50%
The Company maintains a 401(k) savings plan covering all salaried and
commissioned employees who become eligible to participate upon attaining the age
of twenty-one and completing one year of service. Participants may contribute
from 2% to 15% of their compensation. The Company made matching contributions
equal to 50% of the participants' contributions (up to a limit of 3% of the
participants' compensation) in fiscal 1998, and through March 31, 1999 of
fiscal 1999. Employer matching contributions vest 20% per year beginning after
one year of participation in the plan. Employer matching contributions were
approximately $77 thousand and $146 thousand for the years ended September 30,
1999 and 1998, respectively. The plan was amended effective April 1, 1999 to
discontinue employer matching contributions.
The Company has established a self-funded employee welfare benefit plan to
provide health care coverage (hospital medical, major medical and prescription
drug) for eligible employees 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 Company could incur up to a maximum of
approximately $978 thousand for the cost of covered claims for the plan year
ending December 31, 2000. The Company 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 Company provides certain medical, dental and life insurance benefits for
retired employees (post-retirement benefits). Substantially all of the Company's
employees will become eligible for those benefits if they reach normal
retirement age while working for the Company and have the required years of
service.
The following table sets forth the post-retirement benefit plan's funded status
and amounts recognized in the Company's consolidated financial statements at
September 30:
--------------------------------------------------------------------------------
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Reconciliation of accumulated post-
retirement benefit obligation:
Obligation at beginning of year $ 3,475 3,437
Service cost 150 189
Interest cost 228 223
Benefit payments (196) (186)
Actuarial gain (462) (188)
--------------------------------------------------------------------------------
Obligation at end of year $ 3,195 3,475
--------------------------------------------------------------------------------
Reconciliation of funded status:
Unfunded post-retirement
benefit obligation $(3,195) (3,475)
Unrecognized transition obligation 2,032 2,168
Unrecognized net actuarial gain (665) (192)
--------------------------------------------------------------------------------
Accrued post-retirement benefit
liability $(1,828) (1,499)
--------------------------------------------------------------------------------
Net periodic post-retirement benefit cost recognized in the Company's
consolidated statements of income for the years ended September 30 included the
following components:
--------------------------------------------------------------------------------
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Service cost $ 150 189 170
Interest cost 228 223 204
Amortization of transition obligation 136 136 136
Amortization of unrecognized gain (11) -- --
--------------------------------------------------------------------------------
Net periodic post-
retirement benefit cost $ 503 548 510
--------------------------------------------------------------------------------
37
<PAGE>
================================================================================
The weighted-average discount rate used in determining the accumulated
post-retirement benefit obligation was 8.00%, 7.25% and 6.50% as of September
30, 2000, 1999 and 1998, respectively.
For measurement purposes, 5% and 3% annual rates of increase in the per capita
cost of covered medical and dental costs, respectively, were assumed for fiscal
2000 and thereafter. The medical and dental cost trend rate assumptions have a
significant effect on the amounts reported. To illustrate, increasing the
assumed medical and dental cost trend rates one percentage point in each year
would increase the accumulated post-retirement benefit obligation as of
September 30, 2000 by approximately $264 thousand (8.3%), and increase the
aggregate of the service and interest cost components of net periodic
post-retirement benefit cost for fiscal 2000 by approximately $40 thousand
(10.6%). Decreasing the assumed medical and dental cost trend rates one
percentage point in each year would decrease the accumulated post-retirement
benefit obligation as of September 30, 2000 by approximately $240 thousand
(7.5%), and decrease the aggregate of the service and interest cost components
of net periodic post-retirement benefit cost for fiscal 2000 by approximately
$35 thousand (9.3%).
During the year ended September 30, 1999, the Company adopted a supplemental
retirement and benefit restoration plan for certain executive officers to
restore certain benefits that may be reduced due to Internal Revenue Service
regulations and to provide supplemental benefits to selected participants in
the ESOP who retire or otherwise terminate employment before the ESOP has repaid
the loan it incurred to purchase the Company's common stock. The benefits under
this plan are unfunded and as of September 30, 2000 and 1999, the accumulated
benefit obligation was approximately $962 thousand and $896 thousand,
respectively. As of September 30, 2000 and 1999, the Company had an accrued
benefit liability of $407 thousand and $158 thousand, respectively, related to
this plan. The Company recorded an expense of approximately $249 thousand and
$158 thousand related to this plan during the years ended September 30, 2000 and
1999, respectively.
(16) STOCK-BASED COMPENSATION PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company established an ESOP in conjunction with the Company's initial public
offering to provide substantially all employees of the Company the opportunity
to also become shareholders. The ESOP borrowed $9.7 million from the Company and
used the funds to purchase 971,122 shares of the common stock of the Company in
the open market. The loan will be repaid principally from the Company's
discretionary contributions to the ESOP over a period of fifteen years. At
September 30, 2000, the loan had an outstanding balance of $9.2 million and an
interest rate of 7.00%. Both the loan obligation and the unearned compensation
will be reduced by the amount of loan repayments to be made by the ESOP at the
end of each plan year ending on December 31. Shares purchased with the loan
proceeds are held in a suspense account for allocation among participants as the
loan is repaid. Shares released from the suspense account are allocated among
participants at the end of the plan year on the basis of relative compensation
in the year of allocation.
Unallocated ESOP shares are pledged as collateral on the loan and are reported
as a reduction of shareholders' equity. The Company reports compensation expense
equal to the average market price of the shares to be released from collateral
at the end of the plan year. The Company recorded approximately $852 thousand
and $423 thousand of compensation expense related to the ESOP for the years
ended September 30, 2000 and 1999, respectively.
The ESOP shares as of September 30, 2000 were as follows:
Allocated shares 58,447
Shares released for allocation --
Unallocated shares 911,286
------------------------------------------------------------
Total ESOP shares 969,733
------------------------------------------------------------
Market value of unallocated shares
at September 30, 2000 (in thousands) $ 10,708
------------------------------------------------------------
LONG-TERM EQUITY COMPENSATION PLAN
On October 1, 1999, the Company's shareholders approved the Troy Financial
Corporation Long-Term Equity Compensation Plan (the "LTECP"). The LTECP consists
of a stock option plan and a Management Recognition Plan (the "MRP"). The
primary objective of the LTECP is to enhance the Company's ability to attract
and retain highly qualified officers, employees, directors, consultants and
other service providers to advance the interests of the Company by providing
such persons with stronger incentives to continue to serve the Company and its
subsidiaries and to expend maximum effort to improve the business results and
earnings of the Company.
Under the LTECP, 1,213,902 shares of authorized but unissued common stock are
reserved for issuance upon option exercises. The Company also has the
alternative to fund option exercises with treasury stock. Options under the
LTECP may be either nonqualified stock options or incentive stock options. Each
option entitles the holder to purchase one share of common stock at an exercise
price equal to the fair market value of the stock on the grant date. Options
expire no later than ten years following the grant date. On October 1, 1999,
options to purchase 1,015,617 shares were granted at an exercise price of
$10.813 per share. These options have a ten year term and vest at a rate of 20%
per year from the grant date. At September 30, 2000, 1,005,867 of these options
were outstanding, as 9,750 options were forfeited during the year ended
September 30, 2000.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its stock options. SFAS No. 123 requires companies not using a fair value
based method of accounting for stock options or similar plans, to provide pro
forma disclosures of net income and earnings per share as if that method of
accounting had been applied.
The fair value of each option grant is estimated on the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants made on October 1, 1999: dividend yield of 1.85%;
expected volatility of 15.0%; risk-free interest rate of 6.22%; and expected
life of 7 years. The estimated weighted-average fair value of the options
granted on October 1, 1999 was $2.88 per option.
38
<PAGE>
================================================================================
Pro forma disclosures for the year ended September 30, 2000, utilizing the
estimated fair value of the options granted, are as follows:
Net income (in thousands):
As reported $ 8,610
Pro forma 8,171
Basic earnings per share:
As reported 0.86
Pro forma 0.81
Diluted earning per share:
As reported 0.86
Pro forma 0.81
Because the Company's stock options have characteristics significantly different
from those of traded options for which the Black-Scholes model was developed,
and because changes in the subjective input assumptions can materially affect
the fair value estimates, the existing model, in management's opinion, does not
necessarily provide a reliable single measure of the fair value of its stock
options. In addition, the pro forma effect on reported net income and earnings
per share for the year ended September 30, 2000, may not be representative of
the pro forma effects on reported net income and earnings per share for future
years.
Under the MRP, 485,561 shares of authorized but unissued shares are reserved for
issuance. The Company also has the alternative to fund the MRP with treasury
stock. On October 1, 1999, 446,165 shares of restricted stock were awarded under
the MRP. The fair market value of the shares awarded at the grant date was
$10.813 per share (or $4.8 million in the aggregate) and is being amortized to
expense on a straight-line basis over the five year vesting period of the
underlying shares. Compensation expense related to the MRP of $961 thousand was
recorded in the year ended September 30, 2000. The remaining unearned
compensation cost of $3.8 million was reported as a reduction of shareholders'
equity at September 30, 2000. Shares awarded under the MRP were transferred from
treasury stock at cost with the difference between the fair market value on the
grant date and the cost basis of the shares recorded as a reduction of retained
earnings. During the year ended September 30, 2000, 1,500 unvested MRP shares
were forfeited and transferred to treasury stock at the grant date fair market
value of $10.813 per share.
(17) COMMITMENTS AND CONTINGENT LIABILITIES
(A) LEASE OBLIGATIONS The Company leases several banking office facilities under
various noncancellable operating leases. These leases expire (excluding renewal
options) through 2009. Minimum rental commitments under lease contracts are as
follows:
Years ending September 30,
-------------------------------------------------------------------------
(In thousands)
-------------------------------------------------------------------------
2001 $ 560
2002 563
2003 514
2004 523
2005 307
Thereafter 265
-------------------------------------------------------------------------
$2,732
-------------------------------------------------------------------------
(B) DATA PROCESSING AGREEMENT
During the year ended September 30, 1997, the Company renewed its data
processing agreement through January 2002. At September 30, 2000, remaining
commitments under this agreement were approximately $1.2 million.
(C) OFF-BALANCE-SHEET FINANCING AND CONCENTRATIONS OF CREDIT
The Company is a party to certain financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
unused lines of credit and standby letters of credit. These instruments involve,
to varying degrees, elements of credit risk in excess of the amount recognized
in the consolidated financial statements. The contract amounts of these
instruments reflect the extent of involvement the Company has in particular
classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments as it does for
on-balance-sheet instruments.
Contract amounts of financial instruments that represent potential future
extensions of credit as of September 30 at fixed and variable interest rates are
as follows:
--------------------------------------------------------------------------------
2000
--------------------------------------------------------------------------------
(In thousands) FIXED VARIABLE TOTAL
--------------------------------------------------------------------------------
Financial instruments whose
contract amounts represent credit risk:
Commitments outstanding:
Conventional mortgages $ 2,055 4,150 6,205
Commercial real estate and
commercial business 3,777 10,904 14,681
Construction loans -- 19,608 19,608
--------------------------------------------------------------------------------
5,832 34,622 40,494
--------------------------------------------------------------------------------
Unused lines of credit:
Home equity -- 4,100 4,100
Commercial 228 70,407 70,635
Overdraft -- 3,326 3,326
--------------------------------------------------------------------------------
228 77,833 78,061
--------------------------------------------------------------------------------
Standby letters of credit -- 6,855 6,855
--------------------------------------------------------------------------------
$ 6,060 119,350 125,410
--------------------------------------------------------------------------------
39
<PAGE>
================================================================================
--------------------------------------------------------------------------------
1999
--------------------------------------------------------------------------------
(In thousands) FIXED VARIABLE TOTAL
--------------------------------------------------------------------------------
Financial instruments whose
contract amounts represent credit risk:
Commitments outstanding:
Conventional mortgages $ 12,088 1,368 13,456
Commercial real estate and
commercial business -- 18,380 18,380
Construction loans -- 20,270 20,270
--------------------------------------------------------------------------------
12,088 40,018 52,106
--------------------------------------------------------------------------------
Unused lines of credit:
Home equity -- 5,974 5,974
Commercial 6,412 58,445 64,857
Overdraft -- 2,863 2,863
--------------------------------------------------------------------------------
6,412 67,282 73,694
--------------------------------------------------------------------------------
Standby letters of credit -- 1,684 1,684
--------------------------------------------------------------------------------
$ 18,500 108,984 127,484
--------------------------------------------------------------------------------
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 Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral, if any, required by the Company
upon the extension of credit is based on management's credit evaluation of the
customer. Mortgage and construction loan commitments are secured by a first lien
on real estate. Collateral on extensions of credit for commercial loans varies
but may include accounts receivable, inventory, property, plant and equipment,
and income producing commercial property.
Commitments to extend credit may be written on a fixed rate basis exposing the
Company to interest rate risk given the possibility that market rates may change
between commitment and actual extension of credit.
Standby letters of credit are conditional commitments issued by the Company 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. Company policies
governing loan collateral apply to standby letters of credit at the time of
credit extension.
Certain residential mortgage loans are written on an adjustable rate basis and
include interest rate caps which limit annual and lifetime increases in the
interest rates on such loans. Generally, adjustable rate residential mortgages
have an annual rate increase cap of 2% and a lifetime rate increase cap of 5% to
6%. These caps expose the Company to interest rate risk should market rates
increase above these limits. At September 30, 2000 and 1999, approximately $57.9
million and $55.5 million of adjustable rate residential mortgage loans had
interest rate caps.
The Company generally enters into rate lock agreements at the time that
residential mortgage loan applications are taken. These rate lock agreements fix
the interest rate at which the loan, if ultimately made, will be originated.
Such agreements may exist with borrowers with whom commitments to extend loans
have been made, as well as with individuals who have not yet received a
commitment. The Company makes its determination of whether or not to identify a
loan as held for sale at the time rate lock agreements are entered into.
Accordingly, the Company is exposed to interest rate risk to the extent that a
rate lock agreement is associated with a loan application or a loan commitment
which is intended to be held for sale, as well as with respect to loans held for
sale.
At September 30, 2000 and 1999, the Company had rate lock agreements (certain of
which relate to loan applications for which no formal commitment has been made)
and conventional mortgage loans held for sale amounting to approximately $4.4
million and $8.5 million, respectively.
In order to reduce the interest rate risk associated with the portfolio of
conventional mortgage loans held for sale, as well as outstanding loan
commitments and uncommitted loan applications with rate lock agreements which
are intended to be held for sale, the Company enters into mandatory forward
sales commitments and option agreements to sell loans in the secondary market to
unrelated investors. At September 30, 2000 and 1999, the Company had mandatory
commitments and cancelable options to sell conventional fixed rate mortgage
loans at set prices amounting to approximately $5.0 million and $9.0 million,
respectively. The Company believes that it will be able to meet the mandatory
commitments without incurring any material losses.
(D) SERVICED LOANS
Total loans serviced by the Company for unrelated third parties were
approximately $236.3 million and $230.6 million at September 30, 2000 and 1999,
respectively.
(E) CONTINGENT LIABILITIES
In the ordinary course of business there are various legal proceedings pending
against the Company. Based on consultation with outside counsel, management
believes that the aggregate exposure, if any, arising from such litigation would
not have a material adverse effect on the Company's consolidated financial
statements.
(F) CHARITABLE FOUNDATION CONTRIBUTION COMMITMENT
In fiscal 1998, the Savings Bank contributed $1.0 million in cash to The Troy
Savings Bank Charitable Foundation (the "Foundation") and entered into a
binding, unconditional commitment to contribute an additional $4.0 million in
cash to the Foundation over the next three years. In fiscal 2000 and 1999, the
Savings Bank contributed an additional $1.5 million and $1.0 million,
respectively, in cash to the Foundation. The remaining cash contribution due to
the Foundation is $1.5 million for fiscal 2001.
40
<PAGE>
================================================================================
As of September 30, 2000 and 1999, the present value of the above commitment was
$1.4 million and $2.7 million, respectively, and was recorded as a liability in
the consolidated statements of condition. A related contribution expense of $4.5
million was recorded in the 1998 consolidated statement of income. The
difference between the present value of the initial commitment and the gross
amounts due to the Foundation is being amortized into contribution expense over
the initial three year payment period. Such amortization was $221 thousand and
$211 thousand in fiscal 2000 and 1999, respectively.
(G) CONCENTRATIONS OF CREDIT
The Company grants commercial, consumer and residential loans primarily to
customers throughout the six New York State counties of Albany, Rensselaer,
Saratoga, Schenectady, Warren and Washington. Although the Company has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent upon the real estate and construction related
sectors of the economy.
(H) RESERVE REQUIREMENT
The Company is required to maintain certain reserves of vault cash and/or
deposits with the Federal Reserve Bank. The amount of this reserve requirement,
included in cash and due from banks, was approximately $1.4 million and $1.1
million at September 30, 2000 and 1999, respectively.
(I) LIQUIDATION ACCOUNT AND DIVIDEND RESTRICTIONS
As part of the Savings Bank's conversion from a mutual savings bank to a stock
savings bank, the Savings Bank established a liquidation account in an amount
equal to the Savings Bank's total equity as of September 30, 1998. The
liquidation account is maintained for the benefit of eligible depositors who
continue to maintain their accounts at the Savings Bank after the conversion.
The liquidation account is reduced annually to the extent that eligible
depositors have reduced their qualifying deposits. Subsequent increases do not
restore an eligible account holder's interest in the liquidation account. In the
event of a complete liquidation, each eligible depositor will be entitled to
receive a distribution from the liquidation account in an amount proportionate
to the current adjusted qualifying balances for accounts then held. The Savings
Bank may not pay any dividends that would reduce shareholders' equity below the
required liquidation account balance.
The ability of the Savings Bank and the Commercial Bank to pay dividends to the
Parent Company is subject to various restrictions. Under New York State Banking
Law, dividends may be declared and paid only from the banks' respective net
profits, as defined. The approval of the Superintendent of Banks of the State of
New York is required if the total of all dividends declared in any year will
exceed the net profit for the year plus the retained net profits of the
preceding two years. At September 30, 2000, the subsidiary banks had
approximately $4.7 million in retained net profits which were available for
dividend payments.
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on-and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial assets or liabilities include the deferred tax assets and
liabilities and premises and equipment. In addition, the tax ramifications
related to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in the
estimates of fair value.
In addition there are significant intangible assets that are not considered,
such as the value of core deposits and the Company's branch network.
SHORT-TERM FINANCIAL INSTRUMENTS
The fair values of certain financial instruments are estimated to approximate
their carrying values because the remaining term to maturity of the financial
instrument is less than 90 days or the financial instrument reprices in 90 days
or less. Such financial instruments include cash and cash equivalents, accrued
interest receivable and accrued interest payable.
LOANS HELD FOR SALE
The estimated fair value of loans held for sale is determined by either using
quoted market rates or, in the case where a firm commitment has been made to
sell the loan, the firm committed price.
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES HELD TO MATURITY
Securities available for sale and investment securities held to maturity are
financial instruments which are usually traded in broad markets. Fair values are
based upon market prices. If a quoted market price is not available for a
particular security, the fair value is determined by reference to quoted market
prices for securities with similar characteristics.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type including residential real estate,
commercial real estate, construction, commercial loans and consumer loans.
41
<PAGE>
================================================================================
The estimated fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
respective loan portfolio. The estimated fair value for non-performing loans is
based on recent external appraisals or estimated cash flows discounted using a
rate commensurate with the risk associated with the estimated cash flows.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined using available market information and specific borrower
information.
Management has made estimates of fair value discount rates that it believes to
be reasonable. However, because there is no active market for many of these
loans, management has no basis to determine whether the estimated fair value
would be indicative of the value negotiated in an actual sale.
DEPOSIT LIABILITIES
The estimated fair value of deposits with no stated maturity, such as
non-interest bearing demand deposits, savings accounts, N.O.W. and Super N.O.W.
accounts, money market accounts and mortgagors' escrow deposits, is regarded to
be the amount payable on demand. The estimated fair value of time deposits is
based on the discounted value of contractual cash flows. The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities. The fair value estimates for deposits do not include the benefit
that results from the low-cost funding provided by the deposit liabilities as
compared to the cost of borrowing funds in the market.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE, SHORT-TERM BORROWINGS AND
LONG-TERM DEBT
The estimated fair value of securities sold under agreements to repurchase,
short-term borrowings and long-term debt is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for borrowings with similar maturities.
CONTRIBUTIONS PAYABLE
Contributions payable are recorded in the consolidated statements of condition
at the present value of the remaining commitments, therefore the estimated fair
value approximates the carrying value.
COMMITMENTS TO EXTEND CREDIT, UNUSED LINES OF CREDIT AND STANDBY LETTERS OF
CREDIT
The fair value of commitments to extend credit, unused lines of credit and
standby-letters of credit is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present credit-worthiness of the counterparties. For fixed
rate commitments to extend credit and unused lines of credit, fair value also
considers the difference between current levels of interest rates and the
committed rates. Based upon the estimated fair value of commitments to extend
credit, unused lines of credit and standby letters of credit, there are no
significant unrealized gains or losses associated with these financial
instruments.
TABLE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments as of
September 30 were as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
(In thousands) 2000 1999
------------------------------------------------------------------------------------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 23,755 23,755 35,935 35,935
Loans held for sale 2,016 2,016 4,064 4,064
Securities available for sale 266,750 266,750 280,871 280,871
Investment securities held to maturity 2,301 2,289 2,534 2,582
Loans 598,737 576,360 566,906 544,259
Less: Allowance for loan losses (11,891) -- (10,764) --
------------------------------------------------------------------------------------------------------------
Net loans 586,846 576,360 556,142 544,259
------------------------------------------------------------------------------------------------------------
Accrued interest receivable 6,064 6,064 5,270 5,270
Financial liabilities:
Deposits:
Demand, savings, money market, N.O.W. and
Super N.O.W. accounts 337,693 337,693 335,661 335,661
Time accounts 218,279 217,786 227,712 227,928
Mortgagors' escrow accounts 1,717 1,717 1,596 1,596
Securities sold under agreements to repurchase 105,781 105,781 3,736 3,736
Short-term borrowings 20,000 20,000 100,700 100,644
Long-term debt 53,027 51,201 44,497 42,229
Accrued interest payable 712 712 487 487
Official bank checks 7,472 7,472 9,651 9,651
Contributions payable 1,385 1,385 2,664 2,664
</TABLE>
42
<PAGE>
(19) REGULATORY CAPITAL REQUIREMENTS
FDIC regulations require institutions to maintain a minimum level of regulatory
capital. Under the regulations in effect at September 30, 2000 and 1999, banks
were required to maintain a minimum leverage ratio of Tier I ("leverage" or
"core") capital to adjusted quarterly average assets of 4.0%; and minimum ratios
of Tier I capital and total capital to risk-weighted assets of 4.0% and 8.0%,
respectively. The Federal Reserve Board has also adopted capital adequacy
guidelines for bank holding companies on a consolidated basis substantially
similar to those of the FDIC.
Under its prompt corrective action regulations, the FDIC is required to take
certain supervisory actions (and may take additional discretionary actions) with
respect to an undercapitalized institution. Such actions could have a direct
material effect on an institution's financial statements. The regulations
establish a framework for the classification of institutions into five
categories: well capitalized, adequately capitalized, under capitalized,
significantly under capitalized, and critically under capitalized. Generally an
institution is considered well capitalized if it has a Tier I capital ratio of
at least 5.0% (based on total adjusted quarterly average assets); a Tier I
risk-based capital ratio of at least 6.0%; and a total risk-based capital ratio
of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the FDIC about capital components,
risk-weighting and other factors.
As of September 30, 2000 and 1999, the Savings Bank, the Commercial Bank and the
Company met all capital adequacy requirements to which they were subject. Also
as of that date, each of the Savings Bank, the Commercial Bank and the Company
met the standards to be a well capitalized institution under the applicable
regulations.
The following is a summary of the actual capital amounts and actual and required
capital ratios as of September 30 for the Savings Bank and the consolidated
Company:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000
-----------------------------------------------------------------------------------------------------
REQUIRED RATIOS
MINIMUM CLASSIFICATION
ACTUAL CAPITAL CAPITAL AS WELL
AMOUNT RATIO ADEQUACY CAPITALIZED
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital:
Savings Bank $ 121,009 14.16% 4.00% 5.00%
Consolidated 167,049 19.88 4.00 5.00
Tier 1 Risk-Based Capital:
Savings Bank 121,009 19.12 4.00 6.00
Consolidated 167,049 25.01 4.00 6.00
Total Risk-Based Capital:
Savings Bank 129,015 20.38 8.00 10.00
Consolidated 175,493 26.28 8.00 10.00
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999
-----------------------------------------------------------------------------------------------------
REQUIRED RATIOS
MINIMUM CLASSIFICATION
ACTUAL CAPITAL CAPITAL AS WELL
AMOUNT RATIO ADEQUACY CAPITALIZED
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Tier 1 Capital:
Savings Bank $ 121,358 14.48% 4.00% 5.00%
Consolidated 180,339 21.21 4.00 5.00
Tier 1 Risk-Based Capital:
Savings Bank 121,358 19.36 4.00 6.00
Consolidated 180,339 28.71 4.00 6.00
Total Risk-Based Capital:
Savings Bank 129,193 20.61 8.00 10.00
Consolidated 188,191 29.96 8.00 10.00
</TABLE>
43
<PAGE>
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(20) CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY
The Parent Company began operations in conjunction with the Savings Bank's
mutual-to-stock conversion and the Parent Company's initial public offering of
its common stock. The following represent the Parent Company's statements of
condition as of September 30, 2000 and 1999, and its income statements and
statements of cash flows for the year ended September 30, 2000, and the period
from April 1, 1999 through September 30, 1999. These financial statements should
be read in conjunction with the Company's consolidated financial statements and
notes thereto.
--------------------------------------------------------------------------------
(In thousands) STATEMENTS OF CONDITION
--------------------------------------------------------------------------------
2000 1999
--------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 2,736 15
Securities available for sale 49,132 --
Loan receivable from ESOP 9,186 9,669
Receivable from Savings Bank -- 48,120
Accrued interest receivable 1,329 273
Other assets 3,425 2,293
Investment in equity of
subsidiary banks 131,140 121,456
--------------------------------------------------------------------------------
Total assets $196,948 181,826
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Payable to Savings Bank 28,467 1,387
Other liabilities and accrued expenses 1,203 --
--------------------------------------------------------------------------------
Total liabilities 29,670 1,387
--------------------------------------------------------------------------------
Total shareholders' equity 167,278 180,439
--------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 196,948 181,826
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(In thousands) INCOME STATEMENTS
--------------------------------------------------------------------------------
For the Period
For the April 1, 1999
Year Ended through
September 30, September 30,
2000 1999
--------------------------------------------------------------------------------
Interest and dividend income:
Dividends from Savings Bank $ 10,010 --
Loan receivable from ESOP 655 322
Securities available for sale 9 --
Federal funds sold and interest-
bearing deposits -- 567
--------------------------------------------------------------------------------
Total interest and dividend income 10,674 889
--------------------------------------------------------------------------------
Net gains from securities transactions 185 --
Other income 327 --
--------------------------------------------------------------------------------
Total non-interest income 512 --
--------------------------------------------------------------------------------
Compensation and employee benefits 1,004 --
Professional, legal and other fees 201 --
Printing, postage and telephone 135 --
Other expenses 243 38
--------------------------------------------------------------------------------
Total non-interest expenses 1,583 38
--------------------------------------------------------------------------------
Income before income taxes and
effect of subsidiaries' earnings
and distributions 9,603 851
Income tax benefit (expense) 220 (341)
Effect of subsidiaries' earnings and
distributions:
Distributions in excess of earnings (1,213) --
Equity in undistributed earnings -- 3,213
--------------------------------------------------------------------------------
Net income $ 8,610 3,723
--------------------------------------------------------------------------------
44
<PAGE>
================================================================================
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(In thousands) STATEMENTS OF CASH FLOWS
-----------------------------------------------------------------------------------------------
For the Period
For the April 1, 1999
Year Ended through
September 30, September 30,
2000 1999
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,610 3,723
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of restricted stock awards 961 --
Effect of subsidiaries' earnings
and distributions 1,213 (3,213)
Dividends from Savings Bank paid by
transfer of securities available for sale (10,003) --
Net gains from securities transactions (185) --
Increase in accrued interest receivable (1,056) (273)
Net increase in other assets (1,111) (659)
Net increase in other liabilities and
accrued expenses 1,203 (423)
-----------------------------------------------------------------------------------------------
Net cash used in
operating activities (368) (422)
-----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Investment in equity of subsidiary banks (10,002) (56,837)
Proceeds from sales of securities available
for sale 659 --
Purchases of securities available for sale (1,539) --
Loan made to ESOP -- (9,669)
Principal payments on loan receivable from ESOP 483 --
Net decrease (increase) in receivable from
Savings Bank 10,002 (48,120)
-----------------------------------------------------------------------------------------------
Net cash used in investing activities (397) (114,626)
-----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid (2,631) --
Purchases of treasury stock (20,963) --
Net increase in payable to Savings Bank 27,080 1,387
Net proceeds from stock offering -- 113,676
-----------------------------------------------------------------------------------------------
Net cash provided by
financing activities 3,486 115,063
-----------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 2,721 15
Cash and cash equivalents at beginning of period 15 --
-----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,736 15
-----------------------------------------------------------------------------------------------
Supplemental disclosures of non-cash investing
and financing activities:
Recognition of Savings Bank's total equity
on date of Parent Company's investment
in equity of Savings Bank $ -- 62,020
-----------------------------------------------------------------------------------------------
Adjustment of subsidiary banks' securities
available for sale to fair value, net of tax $ 257 (614)
-----------------------------------------------------------------------------------------------
Transfer of securities available for sale from
Savings Bank in satisfaction of receivable $38,118 --
-----------------------------------------------------------------------------------------------
Adjustment to Savings Bank's equity from
ESOP shares released for allocation $ 638 --
-----------------------------------------------------------------------------------------------
</TABLE>
45
<PAGE>
INDEPENDENT AUDITORS' REPORT
================================================================================
THE SHAREHOLDERS AND THE BOARD OF DIRECTORS
TROY FINANCIAL CORPORATION:
We have audited the accompanying consolidated statements of condition of Troy
Financial Corporation and subsidiaries (the "Company") as of September 30, 2000
and 1999, and the related consolidated statements of income, changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended September 30, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Troy Financial
Corporation and subsidiaries as of September 30, 2000 and 1999, and the results
of their operations and their cash flows for each of the years in the three-year
period ended September 30, 2000, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Albany, New York
November 17, 2000
46
