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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER: 00-25439
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TROY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 16-1559508
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
32 SECOND STREET
TROY, NEW YORK 12180
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
(518) 270-3313
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
(NOT APPLICABLE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK ($0.0001 PAR VALUE PER SHARE)
Indicate by check mark whether the registrant has (1) filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K (Section 299.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K [X]
Based upon the closing price of the registrant's common stock as of
December 1, 1999, the aggregate market value of the voting stock held by
non-affiliates of the registrant is $109.8 million.
The number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date is:
CLASS: COMMON STOCK, PAR VALUE $0.0001 PER SHARE
OUTSTANDING AT DECEMBER 1, 1999: 11,511,921 SHARES
Documents incorporated by reference
(1) Portions of the Definitive Proxy Statement for the Registrant's Annual
Meeting of Shareholders to be held on February 10, 2000 are incorporated by
reference into Part III, Items 10, 11, 12 and 13 of this Form 10-K.
ITEM 1. BUSINESS
BUSINESS OF TROY FINANCIAL CORPORATION
Troy Financial Corporation ("Troy Financial") is a Delaware corporation
that has registered with the Federal Reserve as the bank holding company for The
Troy Savings Bank (the "Bank"). Troy Financial's primary business is the
business of the Bank and the Bank's subsidiary companies. Troy Financial and the
Bank are collectively referred to as the "Company".
Presently, Troy Financial has no plans to own or lease any property, but
instead uses the premises and equipment of the Bank. Troy Financial does not
employ any persons other than certain officers of the Bank who are not
separately compensated by Troy Financial. Troy Financial may utilize the support
staff of the Bank from time to time, if needed, and additional employees will be
hired as appropriate to the extent Troy Financial expands its business in the
future.
Troy Financial is subject to regulation and supervision by the Federal
Reserve. See "--Regulation."
The Troy Savings Bank is a community oriented savings bank headquartered in
Troy, New York. The Bank operates through 14 full service branch offices in a
six county market area. As a full service financial institution, the Bank places
a particular emphasis on residential and commercial real estate loan products,
as well as retail and business banking products and services. The Bank and its
subsidiaries also offer a complete range of trust, insurance and investments
services, including securities brokerage, annuity and mutual funds sales, money
management and retirement plan services, and other traditional
investment/brokerage activities to individuals, families and businesses
throughout the six New York State counties of Albany, Saratoga, Schenectady,
Warren, Washington and Rensselaer, the county in which Troy is located.
The Company's goal is to be the primary source of financial products and
services for its business and retail customers. The Company's business strategy
is to serve as a community based, full-service financial services firm by
offering a wide variety of business and retail banking products, and trust,
insurance, investment management and brokerage services to its potential and
existing customers throughout its market area. In addition, Troy Financial
intends to establish or acquire a commercial bank and trust company that can
accept municipal deposits to complement the Company's municipal investment
activities.
The Company delivers its products and services and interacts with its
customers primarily through its 14 branches and 15 proprietary automated teller
machines ("ATMs") and its 24-hour telephone banking service ("Time$aver"). The
Company's branches are staffed by managers, branch operations supervisors and
customer sales and service representatives ("CSSRs") who are trained and
encouraged to market and service the Company's products and services, including
those of the Company's subsidiaries.
The Bank is subject to regulation, examination and supervision by the FDIC
and the New York State Banking Department ("NYSBD"), and is a member of the
Federal Home Loan Bank System ("FHLB System"). The Bank's deposits are insured
by the FDIC to the maximum extent provided by law. See "--Regulation."
LENDING ACTIVITY
The Company focuses its lending activity primarily on the origination of
commercial real estate loans, commercial business loans, residential mortgage
loans and consumer loans. The types of loans that the Company may originate are
subject to federal and state law and regulations. Interest rates charged by the
Company on loans are affected principally by the demand for such loans, the
supply of money available for lending purposes and the rates offered by its
competitors. These factors are, in turn, affected by general and economic
conditions, monetary policies of the federal government, including the Federal
Reserve, legislative tax policies and governmental budget matters. All loan
approval decisions are made locally, by individual loan officers or loan
committees, depending upon the size of the loan, and the Company responds to all
loan requests in a prompt and timely manner.
LOAN PORTFOLIO COMPOSITION. At September 30, 1999, the Company's loan
portfolio totaled $566.9 million, or 62.0% of total assets, and consisted
primarily of single family residential mortgage loans and commercial real estate
loans, as well as construction loans, commercial business loans and consumer
loans.
- 2 -
The commercial real estate loan portfolio totaled $216.7 million, or 38.2%
and 23.7% of the Company's loans and total assets, respectively, at September
30, 1999. Approximately 75% of the loans are secured by properties located in
the Company's six county market area, and an additional 11% are secured by
properties located in the New York City area. Approximately 26% of the
properties securing the loans are apartment buildings and cooperatives, 26% are
office buildings and warehouses and 17% are retail buildings. The Company's
commercial real estate loans range in size from $89,000 to $10.0 million, and
the median outstanding principal balance at September 30, 1999 was approximately
$230,000. The 20 largest commercial real estate loans range in size from $2.8
million to $10.0 million, and the Company had 55 loans with outstanding balances
of more than $1.0 million at September 30, 1999. The Company's largest
commercial real estate exposure at September 30, 1999 involving a single entity
was $27.0 million to a local real estate investor and related real estate
interests with whom the Company has had a fourteen year relationship.
The commercial business loan portfolio totaled $66.3 million, or 11.7% of
the Company's loans and 7.2% of total assets, at September 30, 1999, and
includes fixed and adjustable rate loans and adjustable rate lines of credit to
a diverse customer base which includes manufacturers, wholesalers, retailers,
service providers, educational institutions and government funded entities. The
Company's commercial business loans range in size from $10,000 to $10.0 million,
with an average principal balance outstanding of approximately $151,000 as of
September 30, 1999. The Company's 20 largest commercial business loans at that
date ranged in terms of total exposure, including outstanding balances and
unfunded commitments, from $2.0 million to $10.0 million.
The Company's portfolio of single family residential mortgage loans totaled
$221.7 million, or 39.1% of loans and 24.2% of total assets, at September 30,
1999, and consisted primarily of fixed rate and adjustable rate loans secured by
detached, single family homes located in the Company's market area, as well as
secured home equity and home improvement loans. As of September 30, 1999, the
Company's largest single family residential mortgage loan had an outstanding
balance of $744,000. As of that date, the typical residential mortgage loan held
by the Company in its portfolio had an average principal balance of
approximately $80,000, an initial loan-to-value ("LTV") ratio of 80% and was
secured by a detached, single family home.
The consumer loan portfolio totaled $48.9 million, or 8.6% of the Company's
loans and 5.3% of total assets, at September 30, 1999. The Company's consumer
loan portfolio includes home equity lines of credit, fixed rate consumer loans,
overdraft protection and "Creative Loans", which start with a modest below
market interest rate that increases each year. The Company's home equity lines
of credit and Creative Loans represented 13.9% and 18.9% of the Company's
consumer loan portfolio, respectively, at September 30, 1999. Personal fixed
rate loans originated through direct mail marketing programs represented $21.3
million, or 43.6% of the Company's consumer loan portfolio at September 30,
1999.
The following table presents the composition of the Company's loan
portfolio, excluding loans held for sale, in dollar amounts and percentages at
the dates indicated.
AT SEPTEMBER 30,
------------------------------------------------------------------
1999 1998 1997
-------------------- --------------------- ----------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- ---------- -------- ---------- ------- ----------
(DOLLARS IN THOUSANDS)
Real estate loans:
Residential mortgage........ $221,721 39.11% $ 202,511 43.50% $ 214,638 45.23%
Commercial.................. 216,700 38.22 166,186 35.69 184,561 38.89
Construction................ 13,761 2.43 10,052 2.16 15,508 3.27
-------- --------- --------- ------- --------- ------
Total real estate loans 452,182 79.76 378,749 81.35 414,707 87.39
-------- --------- --------- ------- --------- ------
Commercial business loans....... 66,274 11.69 45,156 9.70 29,961 6.31
-------- --------- --------- ------- --------- ------
Consumer loans:
Home equity lines of credit. 6,776 1.20 8,575 1.84 9,883 2.08
Other consumer.............. 42,081 7.42 33,445 7.18 20,539 4.33
-------- --------- --------- ------- --------- ------
Total consumer loans... 48,857 8.62 42,020 9.02 30,422 6.41
Net deferred loan fees and costs
and unearned discount........... . (407) (0.07) (344) (0.07) (501) (0.11)
-------- --------- --------- ------- --------- ------
Total loans............ 566,906 100.00% 465,581 100.00% 474,589 100.00%
Less:
Allowance for loan losses... (10,764) (8,260) (6,429)
-------- --------- ---------
Total loans receivable,
net.................. $556,142 $ 457,321 $ 468,160
======== ========= =========
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AT SEPTEMBER 30,
-------------------------------------------
1996 1995
--------------------- --------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
---------- -------- --------- --------
(DOLLARS IN THOUSANDS)
Real estate loans:
Residential mortgage............... $ 204,879 44.92% $ 193,720 46.92%
Commercial......................... 191,624 42.01 171,830 41.61
Construction....................... 12,999 2.85 9,354 2.27
--------- ------ --------- ------
Total real estate loans....... 409,502 89.78 374,904 90.80
--------- ------ --------- ------
Commercial business loans.............. 24,762 5.43 19,038 4.61
--------- ------ --------- ------
Consumer loans:
Home equity lines of credit........ 9,387 2.06 8,620 2.09
Other consumer..................... 13,159 2.88 11,140 2.69
--------- ------ --------- ------
Total consumer loans.......... 22,546 4.94 19,760 4.78
Net deferred loan fees and costs and
unearned discount...................... (684) (0.15) (790) (0.19)
--------- ------ --------- ------
Total loans................... 456,126 100.00% 412,912 100.00%
Less:
Allowance for loan losses.......... (4,304) (4,297)
--------- ---------
Total loans receivable, net... $ 451,822 $ 408,615
========= =========
The following table presents, at September 30, 1999, the dollar amount of
all loans in the Company's portfolio, excluding loans held for sale, and
contractually due after September 30, 2000, and whether such loans have fixed or
adjustable interest rates.
DUE AFTER
SEPTEMBER 30, 2000
-----------------------
AMOUNT PERCENT
---------- ----------
(DOLLARS IN THOUSANDS)
FIXED:
Residential mortgage... $ 160,514 31.54%
Commercial mortgage.... 127,871 25.13
Construction........... --- --
--------- --------
Total real estate
loans........... 288,385 56.67
Commercial business.... 30,531 6.00
Consumer:
Home equity lines of
credit............... --- --
Other consumer......... 30,082 5.91
Total consumer.... 30,082 5.91
--------- --------
Total fixed rate loans...... 348,997 68.58
ADJUSTABLE:
Residential mortgage... 60,777 11.94
Commercial mortgage.... 65,812 12.93
Construction........... 586 0.12
--------- --------
Total real estate
loans.......... 127,175 24.99
Commercial business.... 14,608 2.87
Consumer:
Home equity lines of
credit.............. 6,776 1.33
Other consumer......... 11,364 2.23
------- -------
Total consumer.... 18,140 3.56
--------- --------
Total adjustable rate loans. 159,924 31.42
--------- --------
Total loans................. $ 508,921 100.00%
========= ========
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Loan Maturity and Repricing. The following table shows the contractual
maturities of the Company's loan portfolio at September 30, 1999. The table does
not include loans held for sale, and does not take into account possible
prepayments or scheduled principal amortization.
At September 30, 1999
---------------------------------------------------------------------------------------
Real Estate Loans Home
-------------------------------------- Equity
Residential Commercial Lines Other
Mortgage Commercial Construction Business of Credit Consumer Total
-------- ---------- ------------ -------- --------- -------- -----
(In thousands)
Amounts due:
Within one year............... $ 430 $ 23,017 $ 13,175 $ 21,135 $ -- $ 635 $ 58,392
After one year:
More than one year to five years 2,872 90,040 586 17,507 -- 32,799 143,804
More than five years to ten
years........................ 27,042 80,970 -- 20,884 6,776 6,312 141,984
More than ten years to twenty
years........................ 93,738 22,532 -- 6,410 -- 2,335 125,015
More than twenty years........ 97,639 141 -- 338 -- -- 98,118
---------- -------- -------- -------- ------- ------- ---------
Total due after
September 30, 2000........ 221,291 193,683 586 45,139 6,776 41,446 508,921
---------- -------- -------- -------- ------- ------- ---------
Total amount due........ $221,721 $216,700 $ 13,761 $ 66,274 $ 6,776 $42,081 $ 567,313
========== ======== ======== ======== ======= ======= ---------
Less:
Net deferred loan fees and
costs and unearned discount.. (407)
Allowance for loans losses.... (10,764)
---------
Loans receivable, net....... $ 556,142
=========
The Company generally does not purchase loans from other financial
institutions. The Company does, however, sell or enter into commitments to sell
certain of its fixed rate mortgage loans to Freddie Mac, as well as to other
parties. Historically the Company has sold substantially all of its 15- and
30-year conforming fixed rate mortgage loans into the secondary mortgage market.
During 1999 and 1998 the Company sold $46.7 million and $44.5 million of fixed
rate mortgage loans into the secondary mortgage market. In late fiscal year
1998, the Company began to hold certain 15-year fixed rate mortgage loans in its
loan portfolio. In order to reduce the interest rate risk associated with
mortgage loans held for sale, as well as outstanding loan commitments and
uncommitted loan applications with rate lock agreements which are intended to be
held for sale, the Company enters into formal commitments to sell loans in the
secondary market, and may also enter into option agreements. The Company
typically retains servicing rights on loans sold in order to generate fee
income. As of September 30, 1999, the Company was servicing mortgage loans for
others, with an aggregate outstanding principal balance of $230.6 million.
The following is a more detailed discussion of the Company's current
lending practices.
Commercial Real Estate Lending. The Company originates commercial real
estate loans primarily in its six county market area, as well as New York City
and northern New York, and to a lesser extent in other states. Approximately
11%, 9% and 6%, respectively, of the Company's commercial real estate loans are
secured by real estate located in New York City, primarily Manhattan, Brooklyn
and the Bronx; northern New York; and states other than New York. At September
30, 1999, the Company's commercial real estate loan portfolio by sector is as
follows: 36% in apartment buildings and cooperatives; 29% in office and
warehouse buildings; 19% in retail buildings; 4% in buildings owned by
non-profit organizations; 4% in the hospitality industry; and 8% in other
property types.
The volume of the Company's commercial real estate lending increased
substantially in fiscal 1999 after relatively consistent activity in the prior
two years. The Company has originated $105.2 million, $27.4 million and $30.5
million of new loans in fiscal years 1999, 1998 and 1997, respectively. As part
of the Company's commercial real estate lending marketing effort, the Company's
commercial real estate loan officers call on prospective borrowers, follow up on
branch walk-ins and referrals and interact with representatives of the local
real estate industry.
In addition to developing business, the Company's commercial real estate
loan officers are responsible for the underwriting of commercial real estate
loans. The Company's underwriting standards focus on a review of the potential
borrower's cash flow, LTV ratios and rent-rolls, as well as the borrower's
leverage and working capital ratios, the real estate securing the loan, personal
guarantees and the borrower's other on-going projects. In general,
- 5 -
the Company seeks to underwrite loans with an LTV ratio of 75% or less, although
under certain circumstances it will accept an LTV ratio of up to 90%.
The Company assigns each commercial real estate loan a risk rating which
focuses on the loan's risk of loss. Following the loan officer's initial
underwriting and preparation of a credit memorandum, the loan file is reviewed
by the Vice President and Director of Commercial Real Estate Lending who then
has authority to approve the loan if the loan amount is less than $100,000, in
the case of unsecured loans, and less than $227,150, in the case of loans
secured by commercial real estate. Unsecured loans between $100,000 and $1.5
million and secured loans between $227,000 and $1.5 million require approval of
the Company's Commercial Mortgage Credit Committee. All loans in excess of $1.5
million require approval of the Loan Committee of the Board of Directors.
The commercial real estate loan officers are also responsible for
monitoring the Company's portfolio of commercial real estate loans on an
on-going basis, which includes reviewing annual financial statements,
verification that loan covenants have not been violated and property
inspections. In addition, the Company employs an annual review process in which
an outside consultant, who was previously the director of commercial lending for
a large New York commercial bank, reviews 75% to 80% of the Company's commercial
real estate portfolio to confirm the Company's assigned risk rating and to
review the Company's overall monitoring of the loan portfolio.
Commercial Business Lending. Since 1993, the Company has actively sought to
originate commercial business loans in its market area. During the year-ended
September 30, 1999, the Company originated $52 million of commercial business
loans. The Company's commercial loans generally range in size up to $10.0
million, and the borrowers are located within the Company's market area. The
Company offers both fixed rate loans, with terms ranging from three to seven
years, and adjustable rate lines of credit. As of September 30, 1999, 40.0% of
the Company's outstanding commercial loan portfolio consisted of variable rate
loan products. As a general rule, the Company sets the interest rates on its
loans based on the Company's prime rate or other index rates, plus a premium,
and its variable-rate loans reprice at least every 90 days. The Company's
commercial loans includes loans used for equipment financing, working capital
and accounts receivable, and these loans are made to a diverse customer base
which includes manufacturers, wholesalers, retailers, service providers,
educational institutions and government funded entities.
The Company solicits commercial loan business through its commercial loan
officers who call on potential borrowers and follow-up on referrals from other
Company employees. The commercial loan officers market the Company's commercial
loan products by focusing on the Company's competitive pricing, the Company's
reputation for service and the Company's ties to the local business communities.
In many cases, the Company's senior management, including the President, will
meet with prospective borrowers.
The Company also has a small business lending program whereby the Company
lends money to small, locally owned and operated businesses. During the
year-ending September 30, 1999, the Company originated 124 new small business
loans of up to $50,000, and as of September 30, 1999, the Company had over $14.0
million of such loans outstanding. Many of the Company's small business loans
are secured by cash collateral or marketable securities or are guaranteed by the
Small Business Administration.
In addition to developing business, the Company's commercial loan officers
are responsible for the underwriting of the commercial loans and the monitoring
of the ongoing relationship between the borrower and the Company. Following the
loan officer's initial underwriting and preparation of a credit memorandum, the
potential loan is reviewed by the Vice President and Director of Commercial
Lending who then has authority to approve the loan if the loan amount is less
than $100,000. Loans between $100,000 and $1.0 million require approval of the
Company's Commercial Loan Credit Committee, and loans in excess of $1.0 million
require approval of the Loan Committee of the Board of Directors. The Company's
underwriting standards focus on a review of the potential borrower's cash flow,
as well as the borrower's leverage and working capital ratios. To a lesser
extent, the Company will consider the collateral securing the loan and whether
there is a personal guarantee on the loan.
To assist with the initial underwriting and ongoing maintenance of the
Company's commercial loans, the Company employs the same risk rating system as
is used by the Company's commercial real estate loan department. See "--
Commercial Real Estate Lending." At the time a loan is initially underwritten,
as well as every time a loan is reviewed, the Company assigns a risk rating.
- 6 -
The Company monitors its commercial loan portfolio by closely watching all
loans with a risk rating which indicates certain adverse factors, such as debt
ratios or cash flow issues. In addition, the Company receives delinquency
reports beginning on the 10th of every month. If a loan payment is more than 20
days late, then the commercial loan officer begins active loan management, which
initially will include calling the borrower or sending a written notice.
Moreover, because the Company's lines of credit expire every 12 months, or five
months after the borrower's fiscal year end, and the borrower is required to
renew the line of credit at such time, the Company, in effect, reunderwrites the
loan annually. Because a term loan often includes a line of credit, the status
of the borrower and loan is reviewed annually because of the line of credit
review. In all reviews, the Company analyzes the borrower's most current
financial statements, and in some cases will visit the borrower or inspect the
borrower's business and properties.
Single Family Residential Lending. During the year ending September 30,
1999, the Company originated $95.8 million of single family residential real
estate loans. Substantially all of the Company's residential mortgage loans were
originated through the Family Mortgage Banking Co., Inc. (the "FMB"), the
Company's mortgage banking subsidiary. FMB currently employs six loan counselors
who are responsible for developing the Company's mortgage business by meeting
with referrals, networking with representatives of the local real estate
industry and sponsoring home buying seminars. In addition, the Company's CSSRs
are trained to refer potential mortgage customers to FMB. Although FMB meets
with applicants and assists with the application process, the Company handles
the processing, underwriting, funding and closing of all residential mortgage
loans. The single family residential mortgage loans not originated through FMB
generally are originated through independent mortgage brokers or by the Company.
The Company currently makes a variety of fixed rate and adjustable rate
("ARMs") mortgage loans which are secured by one- to four-family residences
located in the Company's six county market area. The Company offers mortgage
loans that conform to Freddie Mac guidelines, as well as jumbo loans, which
presently are loans in amounts over $227,150, and loans with other
non-conforming features. The Company will underwrite a single family residential
mortgage loan with an LTV ratio of up to 95% with private mortgage insurance,
and the Company's fixed rate mortgages generally have maturities of 10 to 30
years.
The Company offers a variety of ARM programs based on market demand. The
Company generally amortizes an ARM over 30 years. On select ARMs, the Company
offers a conversion option, whereby the borrower, at his or her option, can
convert the loan to a fixed interest rate after a predetermined period of time,
generally 10 to 57 months. Interest rates are generally adjusted based on a
specified margin over the Constant Treasury Maturity Index. Interest rate
adjustments on such loans are limited to both annual adjustment caps and a
maximum adjustment over the life of the loan. The origination of ARMs, as
opposed to fixed rate loans, helps to reduce the Company's exposure to increases
in interest rates. During periods of rising interest rates, however, ARMs may
increase credit risks not inherent in fixed rate loans, primarily because, as
interest rates rise, the underlying payments of the borrower rise, thereby
increasing the potential for default. The annual and lifetime adjustable caps do
however help to reduce such risks. The volume and type of ARMs originated
through FMB are affected by numerous market factors, including the level of
interest rates, competition, consumer preferences and the availability of funds.
At September 30, 1999, the Company held $55.5 million of ARMs in its loan
portfolio, most of which were one-year ARMs.
Single family residential loans are generally underwritten according to
Freddie Mac guidelines. The Company requires borrowers who obtain mortgage loans
with an LTV ratio greater than 80% to obtain private mortgage insurance in an
amount sufficient to reduce the Company's exposure to not more than 80% of the
lower of the purchase price or appraised value. In addition, the Company
requires escrow accounts for the payment of taxes and insurance if the LTV ratio
exceeds 80%, but will permit borrowers to request an escrow account waiver if
the LTV ratio is less than 80%. Substantially all mortgage loans originated by
the Company include due-on-transfer clauses which provide the Company with the
contractual right to deem the loan immediately due and payable, in most
instances, if the borrower transfers ownership of the property without the
Company's consent. The Company's staff underwriters have authority to approve
loans in amounts up to $227,150. Loans between $227,150 and $1.0 million require
the approval of the Company's Commercial Mortgage Credit Committee, and loans in
excess of $1.0 million require the approval of the Loan Committee of the Board
of Directors.
- 7 -
In an effort to help low and moderate income home buyers in the Company's
communities, the Company participates in residential mortgage programs and
products sponsored by the State of New York Mortgage Agency ("SONYMA") and the
Federal Housing Authority ("FHA"). SONYMA and FHA mortgage programs provide low
and moderate income households with smaller down payment and below-market rate
loans. The Company typically sells the SONYMA loans back to SONYMA for sale in
the secondary market. The Company is also a charter member of the Capital
District Affordable Housing Partnership, a local lending consortium which makes
mortgage funds available to home buyers who are unable to obtain conventional
financing. The Company participates in the Capital District Community Loan and
the FHLB Home Buyer's Club. In the past five years, the Company has also made
available to low-to-moderate income first-time home buyers over $15 million of
conventional no down payment mortgages for its loan portfolio.
To complement the Company's portfolio of residential mortgage loan
products, the Company also originates fixed rate home equity mortgage loans.
These loans are secured by a first or second mortgage on the owner-occupied
property. During fiscal 1999, the Company originated $7.8 million of home equity
mortgage loans. As of September 30, 1999, the average size of the Company's
outstanding home equity mortgage loans in its residential mortgage loan
portfolio was $19,000.
Consumer Lending. In addition to the Company's residential mortgage and
construction loans, the Company offers a variety of consumer credit products,
including home equity lines of credit, variable rate or Creative Loans, fixed
rate consumer loans and overdraft protection. The objective of the Company's
consumer lending program is to maintain a profitable loan portfolio and to serve
the credit needs of the Company's customers and the communities in which it does
business, while providing for adequate liquidity, diversification and safe and
sound banking practices.
The Company offers home equity lines of credit in amounts up to $100,000.
The home equity lines of credit have fixed interest rates and are available only
if the LTV ratio is less than 80%. The Company's Creative Loans begin with a
modest below market interest rate which increases each year, and are generally
secured by personal property and do not carry prepayment penalties. The average
balance on the Company's Creative Loans for fiscal 1999 was $11.1 million.
The Company's fixed rate consumer loans are typically made to finance the
purchase of new or used automobiles. In such cases, the Company offers 100%
financing on new automobiles with terms available up to 60 months and 80%
financing on used automobiles with loan terms dependent upon the year of
vehicles. The Company also offers unsecured lines of credit or overdraft
protection to credit qualified depositors who maintain checking accounts with
the Company. In addition to covering overdrafts on checking accounts, these
unsecured lines of credit are accessible to borrowers from ATMs throughout the
world.
The Company markets its consumer credit products through its branches,
local advertisements and direct mailings. Applications can be completed at any
branch of the Company, and in most cases, the Company will respond to a
customer's completed credit application within 24 hours, including the funding
of the loan if the borrower is approved. Individual authority to approve
consumer loans varies by the amount of the loan and whether it is real estate
related. Consumer loans are underwritten according to the Company's Consumer
Loans Underwriting practices, and loan approval is based primarily on review of
the borrower's employment status, credit report and credit score.
Construction Lending. The Company offers residential construction loans to
individuals who are constructing their own homes in the Company's market area.
Generally, the builders utilized by the Company's construction loan borrowers
are ones with whom the Company is familiar and has a long-standing relationship.
The Company's loan administration group monitors the periodic disbursements of
all construction loans, and before advances are made the Company's independent
appraisers provide reports comparing the progress of the construction to the
preconstruction schedule. In many cases, the Company converts construction loans
to traditional residential or commercial mortgage loans, as the case may be,
following completion of construction. During the year ended September 30, 1999,
the Company originated $6.5 million of residential construction loans.
Residential construction loans outstandings are reported with residential
mortgage loans. As of September 30, 1999, the Company had $13.8 million of
commercial real estate construction loans outstanding, or 2.4% of the Company's
loans and 1.5% of total assets.
- 8 -
The Company's construction loans generally have terms of up to six months,
and require payments of interest only. If construction is not completed on
schedule, the Company charges the borrower additional fees in connection with an
extension of the loan. The Company's staff underwriters have approval authority
of up to $227,150. Loans in excess of $227,150 require approval of the
Commercial Mortgage Credit Committee, and loans in excess of $1.5 million
require approval of the Loan Committee of the Board of Directors. The Company
will not make construction loans in excess of $1.5 million, or greater than 95%
of the estimated cost of construction.
Construction lending generally involves greater credit risk than permanent
financing on owner-occupied real estate. The risk of loss is dependent largely
upon the accuracy of the initial estimate of the property's value at completion
of construction, compared to the estimated cost, including interest, of
construction, and the ability of the builder to complete the project. If the
estimate of the value proves to be inaccurate, then the Company may be
confronted with a project that, when completed, has a value which is
insufficient to assure full repayment of the loan.
The Company also makes construction loans on commercial real estate
projects where the borrowers are well known to the Company and have the
necessary liquidity and financial capacity to support the projects through to
completion, and where the source of permanent financing, either the Company or
another institution, can be verified. All commercial real estate construction
lending is done on a recourse basis. As of September 30, 1999, the Company had
$13.8 million of commercial real estate construction loans outstanding, or 2.4%
of the Company's loans and 1.5% of total assets.
Loan Review. As part of the portfolio monitoring process, all commercial
business loans, regardless of size, and all commercial real estate loans over
$750,000 are subjected to an annual detailed loan review process. All classified
loans (see below) in both portfolios are subjected to this process quarterly.
Current financial information is analyzed and the loan rating is evaluated to
determine if it still accurately represents the level of risk posed by the
credit. These reviews are then reviewed by an outside consultant who opines on
the reasonableness of the loan officers' conclusions with respect to the loan's
risk rating and the related allowance for loan loss, if any. For the classified
loans, these quarterly reviews and review by the consultant are complemented by
a quarterly loan officers' meeting with the consultant and the Company's Chief
Credit Officer. The conclusions reached at these meetings become an integral
part of the quarterly analysis of loan loss reserve adequacy.
Delinquent Loans. It is the policy of the management of the Company to
monitor the Company's loan portfolio to anticipate and address potential and
actual delinquencies. The procedures taken by the Company vary depending on the
type of loan.
With respect to single family residential mortgage loans and consumer
loans, when a borrower fails to make a payment on the loan, the Company takes
immediate steps to have the delinquency cured and the loan restored to current
status. On the 15th of every month, the Credit Administration Department runs
delinquency reports. The Company's collection manager and her staff then contact
the borrower by telephone to ascertain the reason for the delinquency and the
prospects of repayment. Written notices are also sent at that time. The borrower
is again contacted by telephone on the 20th and 26th of the month if payment has
not been received. After 30 days another notice is sent and the borrower is
reported as delinquent. The Credit Administration Department continues to call
the borrower, and if payment has not been received by the 60th day, then another
notice is sent informing the borrower that the loan must be brought current
within the next 30 days or foreclosure proceedings will be commenced. Generally,
the Company does not accrue interest on loans more than 90 days past due. The
Company's procedures for single family residential loans which have previously
been sold by the Company but which the Company currently services are identical
during the first 60 days. After 60 days, the Company follows the Freddie Mac or
applicable investor guidelines and timeframes regarding delinquent loan
accounts.
With respect to commercial real estate and commercial business loans, the
Credit Administration Department delivers delinquency reports to the respective
departments beginning on the 10th of every month. If a loan payment is more than
20 days late, then the loan officer begins active loan management.
Classified Assets. The Company's classification policies require the
classification of loans and other assets such as debt and equity securities,
considered to be of lesser quality, as "substandard," "doubtful" or "loss"
assets. An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the
- 9 -
borrower or of the collateral pledged, if any. Substandard assets include those
characterized by the distinct possibility that the institution will sustain some
loss if the deficiencies are not corrected. Assets classified as "doubtful" have
all of the weaknesses inherent in those classified as substandard, with the
added characteristic that the weaknesses present make collection or liquidation
in full, on the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as "loss" are those considered
uncollectible and of such little value that their continuance as assets without
the establishment of a specific loss reserve is not warranted. At September 30,
1999, the Company had classified $10.7 million and $10,000 of assets as
"substandard" and "doubtful," respectively. At such date, the Company did not
have any assets classified as "loss."
At September 30, 1999, the Company had three lending relationships each
with an outstanding principal balance in excess of $1.0 million which had an
internal adverse classification. Each of the classified loans was a commercial
real estate loan and classified as "substandard." A brief description of the
loans follows:
o One commercial real estate loan with an outstanding principal
balance of $2.4 million. The loan is secured by a warehouse industrial
property located outside of New York State and is also personally
guaranteed. As of September 30, 1999, the loan was on non-accrual status
and considered impaired. Subsequent to September 30, 1999, the Company
foreclosed on the loan and sold the property.
o A $1.9 million commercial real estate loan secured by a
multi-family residential property located outside of New York State. The
property which secures the loan, prior to the borrower's purchase, was
the subject of the Company's foreclosure proceedings. As of September
30, 1999, the loan is current and the borrower is seeking to refinance
with other financial institutions.
o Three cross-collateralized commercial real estate loans totalling
$1.3 million and secured by multi-family residential apartment projects
located in upstate New York outside of the Company's market area. As of
September 30, 1999, the loans were on non-accrual status and considered
impaired. The Company has begun foreclosure proceedings.
In addition to classified assets, the Company also has certain "special
mention" or "watch list" assets which have characteristics, features or other
potential weaknesses that warrant special attention. At September 30, 1999,
special mention assets totaled $4.2 million, or 0.46% of total assets.
Non-Performing Assets. It is the policy of the Company to place a loan on
non-accrual status when the loan is contractually past due 90 days or more, or
when, in the opinion of management, the collection of principal and/or interest
is in doubt. At such time, all accrued but unpaid interest is reversed against
current period income and, as long as the loan remains on non-accrual status,
interest is recognized only when received, if considered appropriate by
management. In certain cases, the Company will not classify a loan which is
contractually past due 90 days or more as non-accruing if management determines
that the particular loan is well secured and in the process of collection. In
such cases, the loan is simply reported as "past due." Loans are removed from
non-accrual status when such loans become current as to principal and interest
or when, in the opinion of management, the loans are expected to be fully
collectible as to principal and interest. The Company did not have any loans
classified as 90 days past due and still accruing interest at September 30,
1999. Non-performing loans also include troubled debt restructurings ("TDRs").
TDRs are loans whose repayment criteria have been renegotiated to below market
terms (given the credit risk inherent in the loan) due to the borrowers'
inability to repay the loans in accordance with the loans' original terms. At
September 30, 1999, the Company classified $616,000, or 0.07% of total assets,
as TDRs.
The Company classifies property that it acquires as a result of foreclosure
or settlement in lieu thereof as other real estate owned ("OREO"). The Company
records OREO at the lower of the unpaid principal balance or fair value less
estimated costs to sell at the date of acquisition and subsequently recognizes
any decrease in fair value by a charge to income. At September 30, 1999, the
Company had $76,000 of OREO resulting from single family residential mortgage
loans, and $1.8 million of OREO resulting from commercial real estate loans.
- 10 -
The following presents the amounts and categories of non-performing assets
at the dates indicated.
AT SEPTEMBER 30,
------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
Non-accrual loans:
Real estate loans:
Residential mortgage........... $2,707 $ 2,900 $ 2,598 $ 3,418 $ 3,676
Commercial mortgage............ 4,210 6,327 3,438 6,613 4,241
Construction................... -- -- 350 516 --
-------- -------- -------- -------- --------
Total real estate loans... 6,917 9,227 6,386 10,547 7,917
Commercial business loans......... 10 31 33 105 236
Home equity lines of credit....... 58 259 -- -- --
Other consumer loans.............. 282 50 40 17 2
-------- -------- -------- -------- --------
Total non-accrual loans... 7,267 9,567 6,459 10,669 8,155
Loans contractually past due 90 days or
more other than non-accruing...... -- -- -- -- 4
Troubled debt restructurings... 616 2,081 2,256 1,810 3,602
-------- -------- -------- -------- --------
Total non-performing loans 7,883 11,648 8,715 12,479 11,761
Other real estate owned assets:
Residential real estate........ 76 345 589 622 67
Commercial real estate......... 1,769 1,527 2,101 1,903 2,122
-------- -------- -------- -------- --------
Total other real estate
owned................... 1,845 1,872 2,690 2,525 2,189
Total non-performing assets $ 9,728 $ 13,520 $ 11,405 $ 15,004 $ 13,950
========= ======== ======== ======== ========
Allowance for loan losses........... $ 10,764 $ 8,260 $ 6,429 $ 4,304 $ 4,297
========= ======== ======== ======== ========
Allowance for loan losses as a
percentage of non-performing loans.. 136.55% 70.91% 73.77% 34.49% 36.54%
Non-performing loans as a percentage of
total loans....................... 1.39% 2.50% 1.84% 2.74% 2.85%
Non-performing assets as a percentage
of total assets...................... 1.06% 1.89% 1.72% 2.28% 2.22%
For the fiscal years ended 1999, 1998 and 1997, the gross interest income
that would have been recorded had the non-accrual loans been on an accrual basis
or had the rate not been reduced with respect to the loans restructured in
trouble debt restructurings amounted to $553,000, $591,000 and $528,000,
respectively. The amounts included in interest income on these loans were
$227,000, $411,000 and $99,000 for the fiscal years ended 1999, 1998 and 1997,
respectively.
Allowance for Loan Losses. In originating loans, there is a substantial
likelihood that loan losses will be experienced. The risk of loss varies with,
among other things, general economic conditions, the type of loan, the
creditworthiness of the borrower and, in the case of a collateralized loan, the
quality of the collateral securing the loan. In an effort to minimize loan
losses, the Company monitors its loan portfolio by reviewing delinquent loans
and taking appropriate measures. In addition, with respect to the Company's
commercial real estate and commercial business loans, the Company closely
watches all loans with a risk rating that indicates potential adverse factors.
Moreover, on an annual basis, the Company reviews borrowers' financial
statements, including rent-rolls if appropriate, and in some cases inspects
borrowers' properties, in connection with the annual renewal of lines of credit.
The Company's outside consultant periodically reviews the credit quality of the
loans in the Company's commercial real estate and commercial business loan
portfolios, and, together with the Company's Commercial Loan Credit Committee,
reviews on a quarterly basis all classified loans over $100,000 with a risk
rating that indicates the loan has certain weaknesses.
Based on management's on-going review of the Company's loan portfolio,
including the risks inherent in the portfolio, historical loan loss experience,
general economic conditions and trends and other factors, the Company maintains
an allowance for loan losses to cover probable loan losses. The allowance for
loan losses is established through a provision for loan losses charged to
operations. The provision for loan losses is based upon a number of factors,
including the historical loan loss experience, changes in the nature and volume
of the loan portfolio, overall portfolio quality, review of specific problem
loans, industry trends, and general economic conditions that may affect
borrowers' abilities to pay. Loans are charged against the allowance for loan
losses when management believes that the collectibility of all or a portion of
the principal is unlikely. The allowance is an amount that management believes
will be adequate to absorb probable losses on existing loans that may become
uncollectible based on evaluation of the collectibility of loans and prior loan
loss experience. Based on information currently known to
- 11 -
management, management considers the current level of reserves adequate to cover
probable loan losses, although there can be no assurance that such reserves will
in fact be sufficient to cover actual losses. At September 30, 1999, the
Company's allowance for loan losses was $10.8 million, or 1.90% of total loans,
and 136.6% of non-performing loans at that date. Net charge-offs during the year
ending September 30, 1999 were $746,000. As a result of the current level of
non-performing loans and net charge-offs, as well as consideration of the
general economic trends in the Company's market area, the Company anticipates
that its provision for loan losses will remain at approximately its current
levels through at least the first fiscal quarter ending December 31, 1999. There
can be no assurance, however, that such loan losses will not exceed estimated
amounts or that the provision for loan losses will not increase in future
periods. The Company will continue to monitor and modify its allowance for loan
losses as conditions dictate.
The following table is a summary of the activity in the Company's allowance
for loan losses for the last five years:
FOR THE YEARS ENDED SEPTEMBER 30,
-----------------------------------------------------------
1999 1998 1997 1996 1995
---------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
Total loans outstanding (at end of
period)............................... $566,906 $ 465,581 $ 474,589 $ 456,126 $ 412,912
========= ========= ========= ========= =========
Average total loans outstanding $505,489 $ 467,406 $ 471,779 $ 432,569 $ 398,793
========= ========= ========= ========= =========
Allowance for loan losses at beginning of
Year.................................. $ 8,260 $ 6,429 $ 4,304 $ 4,297 $ 4,190
---------- --------- --------- --------- ---------
Loan charge-offs:
Residential real estate............ (362) (521) (320) (578) (199)
Commercial real estate............. (252) (1,612) (1,286) (165) (392)
Construction real estate........... -- (130) (140) (401) (82)
Commercial business................ (75) (51) (110) (17) (286)
Home equity lines of credit........ -- -- -- -- (3)
Other consumer loans............... (306) (132) (34) (8) (72)
---------- --------- --------- --------- ---------
Total charge-offs............. (995) (2,446) (1,890) (1,169) (1,034)
---------- --------- --------- --------- ---------
Loan recoveries:
Residential real estate............ 40 147 80 92 34
Commercial real estate............. 176 57 13 83 94
Construction real estate........... 13 -- -- 58 --
Commercial business................ 8 4 12 9 9
Home equity lines of credit........ -- -- -- 1 4
Other consumer loans............... 12 19 10 5 35
---------- --------- --------- --------- ---------
Total recoveries.............. 249 227 115 248 176
---------- --------- --------- --------- ---------
Loan charge-offs (net of recoveries).... (746) (2,219) (1,775) (921) (858)
Provision charged to operations......... 3,250 4,050 3,900 928 965
---------- --------- --------- --------- ---------
Allowance for loan losses at end of year $10,764 $ 8,260 $ 6,429 $ 4,304 $ 4,297
========= ========= ========= ========= =========
Ratio of net charge-offs during the year
to average loans outstanding during the
year.................................. .15% .48% .38% .21% .22%
Allowance as a percentage of
non-performing loans.................... 136.55% 70.91% 73.77% 34.49% 36.54%
Allowance as a percentage of total loans
(end of year)......................... 1.90% 1.77% 1.35% .94% 1.04%
- 12 -
The following table presents the Company's percent of allowance for loan
losses to total allowance and the percent of loans to total loans in each of the
categories listed at the dates indicated. This allocation is based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is neither indicative of the specific amounts or the loan categories
in which future charge-offs may be taken nor is it an indicator of future loss
trends. The allocation of the allowance to each category does not restrict the
use of the allowance to absorb losses in any category.
AT SEPTEMBER 30,
-------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------- --------------------------------
PERCENT PERCENT PERCENT
OF LOANS OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ----- ------ --------- ----- ------ --------- -----
(DOLLARS IN THOUSANDS)
ALLOCATION OF ALLOWANCE
FOR LOAN LOSSES:
Real estate loans:
Residential mortgage $ 1,967 18.28% 39.11% $ 1,316 15.93% 43.50% $ 878 13.66% 45.23%
Commercial mortgage. 5,379 49.97 38.22 3,964 47.99 35.69 3,240 50.39 38.89
Construction........ 95 .88 2.43 131 1.59 2.16 127 1.98 3.27
Commercial business
Loans................. 1,716 15.94 11.69 1,503 18.20 9.70 1,275 19.84 6.31
Home equity lines of
Credit................ 6 .06 1.20 31 .37 1.84 31 .48 2.08
Other consumer loans.... 645 5.99 7.42 488 5.91 7.18 278 4.32 4.33
Net deferred loan fees and
costs and unearned discount -- -- (.07) -- -- (.07) -- -- (.11)
Unallocated............. 956 8.88 827 10.01 -- 600 9.33 --
------- ----- ----- -------- ----- ----- ------- ----- -----
Total........... $10,764 100% 100% $ 8,260 100% 100% $ 6,429 100% 100%
======= === === ======== === === ======= === ===
AT SEPTEMBER 30,
----------------------------------------------------------------
1996 1995
------------------------------ --------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO TOTAL TO TOTAL TO TOTAL
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ----- ------ --------- -----
(DOLLARS IN THOUSANDS)
ALLOCATION OF ALLOWANCE
FOR LOAN LOSSES:
Real estate loans:
Residential mortgage $ 372 8.64% 44.92% $ 308 7.17% 46.92%
Commercial mortgage. 2,624 60.97 42.01 2,549 59.32 41.60
Construction........ 149 3.46 2.85 458 10.66 2.27
Commercial business
loans................. 801 18.61 5.43 814 18.94 4.61
Home equity lines of
credit................ 31 .72 2.06 27 .63 2.09
Consumer and other loans 96 2.23 2.88 83 1.93 2.69
Net deferred loan fees
and costs and unearned -- -- (.15) -- -- (.19)
discount................
Unallocated............. 231 5.37 -- 58 1.35 --
------ ----- ----- ------ ----- ----
Total........... $4,304 100% 100% $4,297 100% 100%
====== ==== ===== ====== ==== ====
Securities
The Company separates its securities portfolio into securities available
for sale and investment securities held to maturity. At September 30, 1999, the
Company had $280.9 million, or 30.7% of total assets in securities available for
sale and $2.5 million, or 0.3% of total assets, in investment securities held to
maturity. These portfolios consist primarily of U.S. government securities and
agency obligations, corporate debt securities, municipal securities,
- 13 -
mortgage-backed securities, mutual funds and equity securities. Management
determines the appropriate classification of securities at the time of purchase.
If management has the positive intent and ability to hold debt securities to
maturity, then they are classified as investment securities held to maturity and
are carried at amortized cost. Securities that are identified as trading account
assets for resale over a short period are stated at fair value with unrealized
gains and losses reflected in current earnings. All other debt and equity
securities are classified as securities available for sale and are reported at
fair value, with net unrealized gains or losses reported, net of income taxes,
as a separate component of equity. At September 30, 1999, the Company did not
hold any securities considered to be trading securities. As a member of the FHLB
of New York, the Company is required to hold FHLB stock, which is carried at
cost because the FHLB stock is not marketable and may only be resold to the FHLB
of New York.
The Company's investment policy focuses investment decisions on maintaining
a balance of high quality, diversified investments. In making its investments,
the Company also considers liquidity, the potential need for collateral to be
used for pledging purposes, and earnings. Investment decisions are made by the
Company's Trust and Investment Officer who has authority to purchase, sell or
trade securities qualifying as eligible investments under applicable law and in
conformance with the Company's investment policy. In addition, the Company's
Director of Municipal Finance is authorized to purchase municipal securities for
the Company's portfolio.
Under the Company's investment policy, securities eligible for the Company
to purchase include: U.S. Treasury obligations, securitized loans from the
Company's loan portfolio, municipal securities, certain corporate obligations,
equity mutual funds, common stock, preferred stock, convertible preferred,
convertible notes and bonds, U.S. governmental agency or agency sponsored
obligations, collateralized mortgage obligations and REMICs, banker's
acceptances and commercial paper, certificates of deposit and federal funds.
- 14 -
The following table presents the composition of the Company's securities
available for sale and investment securities held to maturity in dollar amounts
and percentages at the dates indicated.
AT SEPTEMBER 30,
---------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
CARRYING PERCENT CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL VALUE OF TOTAL
----- -------- ----- -------- ----- --------
(DOLLARS IN THOUSANDS)
Securities available for sale
(fair value):
U.S. Government securities
and agency obligations.... $171,992 61.24% $ 117,220 59.27% $ 57,620 49.02%
Obligations of states and
political subdivisions... 73,262 26.08 51,681 26.13 20,833 17.72
Mortgage-backed securities. 17,132 6.10 3,744 1.89 4,653 3.96
Corporate debt securities.. 5,661 2.02 16,984 8.59 27,168 23.11
Mutual funds and marketable
equity securities........ 5,486 1.95 4,822 2.44 3,971 3.38
Non-marketable equity
securities............... 7,338 2.61 3,307 1.68 3,307 2.81
-------- ------ --------- ------ -------- ------
Total securities
available for sale.. 280,871 100.00% 197,758 100.00% 117,552 100.00%
-------- ------ --------- ------ -------- ------
Investment securities held to
Maturity (amortized cost):
Mortgage-backed securities. 1,535 60.58% 1,980 56.85% 2,497 62.42%
Corporate and other debt
securities............... 999 39.42 1,503 43.15 1,503 37.58
-------- ------ --------- ------ -------- ------
Total investment
securities held to
maturity............ 2,534 100.00% 3,483 100.00% 4,000 100.00%
-------- ------ --------- ------ -------- ------
Total securities portfolio...... $283,405 $ 201,241 $121,552
======== ========= ========
- 15 -
The following table presents information regarding the carrying value,
weighted average yields and contractual maturities of the Company's debt
securities available for sale and investment securities held to maturity
portfolios as of September 30, 1999. Weighted average yields are based on
amortized cost.
AT SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------------------------------
MORE THAN ONE MORE THAN FIVE MORE THAN
ONE YEAR OR LESS YEAR TO FIVE YEARS YEARS TO TEN YEARS TEN YEARS TOTAL
-------------------- ------------------------------------------ ---------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(DOLLARS IN THOUSANDS)
Securities available
for sale (fair value):
U.S. Government
securities
and agency
obligations $ 129,948 5.23% $ 34,775 6.22% $ 7,269 6.85% $ % $171,992 5.50%
Obligations of
states and
Political
subdivisions(1) 43,576 5.41 19,855 6.24 9,053 6.89 778 6.60 73,262 5.83
Mortgage-backed
securities 220 6.57 1,063 7.10 15,849 6.60 17,132 6.63
Corporate debt
securities 1,018 9.09 4,643 6.11 5,661 6.65
--------- -------- ------- ------- --------
Total due... $ 174,542 5.30% $ 59,493 6.22% $17,385 6.88% $16,627 6.60% $268,047 5.69%
========= ======== ======= ======= ========
Investment securities
held to maturity
(amortized cost):
Mortgage-backed
securities 770 8.73 765 8.07 1,535 8.40
Corporate debt
securities 999 7.13 999 7.13
--------- -------- --------
Total due... $ 770 8.73% $ 1,764 7.54% $ 2,534 7.90%
========= ======== ======= ======= ========
- ----------
(1) Weighted average yields are presented on a tax equivalent basis, using an
assumed tax rate of 35%.
- 16 -
The following is a more detailed discussion of the Company's securities
available for sale and investment securities held to maturity portfolios.
U.S. Government Securities and Agency Obligations. The Company invests in
U.S. Treasury securities, and also debt securities and mortgage-backed
securities issued by government agencies and government- sponsored agencies such
as Fannie Mae, the FHLBs, Ginnie Mae and Freddie Mac. At September 30, 1999, the
Company's investment in U.S. Treasury securities totaled $10.3 million,
comprised of $309,000 of U.S. Treasury Bills with an average yield of 4.89% and
$10.0 million of U.S. Treasury Notes with an average yield of 5.25%. At
September 30, 1999, all such securities were classified as available for sale.
At the same date, the Company also held, as available for sale, $161.6 million
of non-government guaranteed bonds issued by the FHLBs, Freddie Mac and Fannie
Mae, of which $129.6 million are discount notes. These securities had an average
yield of 5.52%, and of these securities which were rated, all had ratings of
"AAA." The Company's investment policy does not limit the amount of U.S.
government and agency obligations that can be held.
Corporate Debt Securities. The Company's corporate debt securities
portfolio, at September 30, 1999, totaled $6.7 million, and consisted of general
corporate obligations, public utility and telephone bonds. All of the Company's
corporate debt securities were rated "BBB" or higher, and $5.7 million and $1.0
million were classified as available for sale and held to maturity,
respectively. The Company's investment policy limits the amount of corporate
debt securities to 25% of the Company's total securities portfolio or
approximately $70.9 million at September 30, 1999.
Municipal Securities. At September 30, 1999, $64.2 million, of the
Company's securities consisted of tax exempt municipal bonds and notes, all of
which were classified as available for sale. Of that $64.2 million, $44.8
million were invested in general obligations of jurisdictions in the State of
New York, of which $40.5 million represented relationship investments in 54
separate municipalities, including counties, cities, school districts, towns,
villages and fire districts. In addition, the Company held $19.4 million in
bonds of various municipalities throughout the United States. The Company also
held $9.1 million in taxable municipal securities in bonds of municipalities
within New York State. The Company's municipal securities have a weighted
average maturity of 13 months and a taxable equivalent yield of 5.83% at
September 30, 1999. Interest earned on municipal bonds is exempt from federal
and, in some cases, state income taxes. The Company's investment policy limits
the amount of municipal securities to 15% of the Company's total assets or
approximately $137.3 million at September 30, 1999.
Mutual Funds and Equity Securities. At September 30, 1999, the Company's
mutual funds and equity securities portfolio totaled $12.8 million, all of which
was classified as available for sale. The single largest investment in one
issuer was $7.3 million of FHLB of New York stock, which the Company is required
to hold as a member institution. At September 30, 1999, the Company also had a
$5.4 million investment in Federated mutual funds, consisting of $4.0 million in
a Federated ARMs Fund, which invests primarily in adjustable and floating rate
mortgage securities, and $1.4 million in various other Federated mutual funds,
which invest primarily in the common stock of nationally recognized
corporations. The Company's investment policy limits the Company's investments
in common and preferred stock and mutual funds to 3% of the Company's total
assets, or $27.5 million at September 30, 1999. The investment policy presently
limits the Company's investment in the securities of any single issuer to
$500,000 and limits an investment in any stock mutual fund to .75% of total
assets ($6.9 million at September 30, 1999).
SOURCES OF FUNDS
The Company's lending and investment activities are primarily funded by
deposits, repayments and prepayments of loans and securities, proceeds from the
sale of loans and securities, proceeds from maturing securities and cash flows
from operations. In addition, the Company borrows from the FHLB of New York to
fund its operations.
Deposits. The Company offers a variety of deposit accounts with a range of
interest rates and terms. The Company's deposit accounts consist of interest
bearing checking, non-interest bearing checking, business checking, regular
savings, money market savings and time deposit accounts. The maturities of the
Company's time deposit accounts range from three months to five years. In
addition, the Company offers IRAs and Keogh accounts. To enhance its deposit
products and increase its market share, the Company offers overdraft protection
and direct
- 17 -
deposit for its retail banking customers and cash management services for its
business customers. In addition, the Company offers a low-cost interest bearing
checking account service to its customers over 55 years of age. Rates on deposit
products are set by the Company's ALCO Committee.
At September 30, 1999, the Company's deposits totaled $563.4 million or
83.2% of interest bearing liabilities. At September 30, 1999, the balance of
core deposits, which is defined to include NOW accounts, money market accounts,
savings accounts and non-interest bearing checking accounts, totaled $335.7
million, or 59.6% of total deposits. At September 30, 1999, the Company had a
total of $227.7 million in time deposit accounts, or 40.4% of total deposits,
and $177.2 million had maturities of one year or less.
The flow of deposits is influenced significantly by general economic
conditions, changes in interest rates and competition. The Company's deposits
are obtained primarily from the six counties in which the Company's branches are
located. The Company relies primarily on the competitive pricing of its deposit
products and customer service and long-standing relationships to attract and
retain these deposits, although market interest rates and rates offered by
competing financial institutions affect the Company's ability to attract and
retain deposits. The Company uses traditional means of advertising its deposit
products, including local radio and print media, and does not solicit deposits
from outside its market area. In addition, the Company does not use brokers to
obtain deposits, and at September 30, 1999, the Company had no brokered
deposits.
The following table presents the dollar amount and percent of deposits in
the various types of deposit programs offered by the Company as of the dates
indicated.
AT SEPTEMBER 30,
----------------------------------------------------------------
1999 1998 1997
------------------ --------------------- --------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
------ -------- ------ -------- ------ --------
(DOLLARS IN THOUSANDS)
Savings accounts............. $ 191,968 34.08% $ 198,509 34.33% $198,929 34.75%
--------- ------ --------- ----- -------- -----
Time deposit accounts:
2.00 - 3.99%............ 6,209 1.10 682 0.12 268 0.04
4.00 - 4.99%............ 160,315 28.46 10,174 1.76 5,893 1.03
5.00 - 5.99%............ 53,587 9.51 236,312 40.87 246,686 43.10
6.00 - 6.99%............ 4,833 0.86 6,679 1.15 11,762 2.06
7.00 - 7.99%............ 2,768 0.49 2,698 0.47 2,578 0.45
8.00 - 9.99%............ -- -- 129 0.02 160 0.03
-------- -------- -------- ---- --------- -----
Total.............. 227,712 40.42 256,674 44.39 267,345 46.71
Money market accounts........ 20,348 3.61 15,708 2.72 13,121 2.29
NOW and Super NOW accounts... 86,305 15.32 76,195 13.18 71,442 12.48
--------- ----- --------- ----- -------- -----
Total interest
bearing Accounts. 526,333 93.43 547,086 94.62 550,838 96.23
Demand accounts.............. 37,040 6.57 31,116 5.38 21,560 3.77
--------- ----- --------- ----- -------- -----
Total deposits..... $ 563,373 100% $ 578,202 100% $572,397 100%
========= ===== ========= ===== ======== ====
- 18 -
The following table sets forth, by various rate categories, the amount of
the Company's time deposit accounts outstanding by maturities at the dates
indicated.
AMOUNTS DUE AT SEPTEMBER 30, 1999
-----------------------------------------------------------
ONE YEAR ONE TO TWO TO THREE TO
OR LESS TWO YEARS THREE YEARS FIVE YEARS TOTAL
------- --------- ----------- ---------- -----
(IN THOUSANDS)
Time deposit accounts:
2.00 - 3.99%.... $ 6,209 $ -- $ -- $ -- $ 6,209
4.00 - 4.99%.... 131,952 20,064 4,303 3,996 160,315
5.00 - 5.99%.... 31,415 14,897 3,732 3,543 53,587
6.00 - 6.99%.... 4,833 4,833
7.00 - 7.99%.... 2,768 2,768
--------- -------- -------- ------ --------
Total...... $ 177,177 $ 34,961 $ 8,035 $7,539 $227,712
========= ======== ======== ====== ========
At September 30, 1999, the Company had outstanding $227.7 million in time
deposit accounts, maturing as follows:
WEIGHTED
MATURITY PERIOD AMOUNT AVERAGE RATE
--------------- ------ ------------
(DOLLARS IN THOUSANDS)
TIME DEPOSITS LESS THAN $100,000:
Three months or less............ $ 42,680 4.53%
Over three months through six
months........................ 58,241 4.64
Over six months through 12 months 56,578 4.75
Over 12 months.................. 45,724 5.08
---------
Total...................... $ 203,223 4.74%
=========
TIME DEPOSITS MORE THAN $100,000:
Three months or less............ $ 7,896 4.29%
Over three months through six
months....................... 7,782 4.68
Over six months through 12 months 4,000 4.55
Over 12 months.................. 4,811 5.11
---------
Total...................... $ 24,489 4.62%
=========
Borrowings. The principal source of the Company's borrowing is through FHLB
advances and repurchase agreements. The FHLB system functions in a reserve
credit capacity for member savings associations and certain other home financing
institutions. Members of a FHLB are required to own stock in the FHLB, and, at
September 30, 1999, the Company owned approximately $7.3 million of FHLB stock.
The Company uses FHLB advances as an alternative funding source to fund its
lending activities when it determines that it can profitably invest the borrowed
funds over their term. As of September 30, 1999, the Company had outstanding
FHLB advances of approximately $145.2 million. Such borrowings had a weighted
average interest rate of 5.49% and a weighted average term of 1.9 years.
At September 30, 1999, the Company also had $3.7 million of borrowed funds
in the form of securities sold under agreements to repurchase at an agreed upon
price and date. The Company generally enters into these agreements only as an
accommodation to its business customers but may utilize this funding source more
often in the future.
TRUST SERVICES
The Trust Department of the Company offers a full range of services,
including living trusts, executor services, testamentary trusts, employee
benefit plan management, custody services and investment management, primarily
to corporations, unions and other institutions. The Trust Department has
retained the services of two independent financial services firms to provide
investment advice and to ratify the decisions of the Trust Department. Operation
of the Trust Department is overseen by a Trust Committee which consists of two
trust officers and four members of the Company's Board of Directors who rotate
on a semi-annual basis. The Trust Department markets its services through its
trust officers who call on the Company's existing customers, the Company's CSSRs
and branch managers who cross-sell the Trust Department's services, and free
seminars open to the public. As of September 30, 1999, the Trust Department
managed over $315.3 million of assets, which includes $113.7 million over which
the Trust Department has discretionary investment authority. The Trust
Department's fee income, which totaled $665,000 for the year ended September 30,
1999, supplements the Company's rate-sensitive interest income.
- 19 -
SAVINGS BANK LIFE INSURANCE
Since 1939, the Company, through its Savings Bank Life Insurance Department
("SBLI"), has been offering a wide variety of low-cost insurance policies,
including whole life, single premium life, senior life and children's term, to
its customers who live or work in the State of New York. New York law mandates
that SBLI activities be segregated from those of the Company and, while the SBLI
does not directly affect the Company's earnings, management believes that
offering SBLI is beneficial to the Company's relationship with its customers.
The SBLI pays its own expenses and reimburses the Company for expenses incurred
on its behalf.
SUBSIDIARY ACTIVITIES
The following are descriptions of the Bank's wholly owned subsidiaries,
which are indirectly owned by Troy Financial.
The Family Investment Services Co., Inc. The Family Investment Services Co.
("FISC"), which was incorporated in May 1989, is the Bank's wholly owed
full-service brokerage firm, offering a complete range of investment products,
including mutual funds and debt, equity and government securities, on a
fee-per-transaction basis. FISC's goal is to market its products and services to
the Company's existing customers who seek alternatives to traditional financial
institution savings products. As a complement to the Company's municipal
investment activities, FISC intends to begin underwriting general obligation
securities of state and political subdivisions. FISC has two full time employees
who interface with the Company's branches to facilitate referrals from the CSSRs
and branch managers, as well as one officer who assists customers with
investment decisions and trading. As of September 30, 1999, FISC held
approximately $79.0 million of customer assets. FISC is a member of the National
Association of Securities Dealers and is insured by the Securities Insurance
Protection Corporation.
Family Mortgage Banking Co. FMB, which was incorporated in April 1987, is
the Bank's wholly owned mortgage banking subsidiary. The Company originates the
majority of its residential real estate and residential construction loans
through FMB.
Other Subsidiaries. The Bank has ten other wholly owned subsidiaries: The
Family Advertising Co. is an advertising agency; T.S. Capital is licensed by the
Small Business Administration as a Small Business Investment Corporation in
order to offer small business loans and make equity investments in small
businesses; The Family Insurance Agency, Inc. is an insurance agency that offers
a full range of life and health insurance products, as well as taxed-deferred
annuities; and T.S. Real Property Inc., Troy SB Real Estate Co., 32 Second
Street, Camel Hill Corporation, 507 Heights Corp. and Realty Umbrella, Ltd. are
all related to the management of, or investment in, the Company's foreclosed or
purchased real estate. Troy Realty Funding Corp. is a real estate investment
trust formed in 1999 to enhance both portfolio yields and capital growth. The
Bank funded Troy Realty Funding Corp with approximately $197 million in
commercial real estate mortgages. The interest income earned on those assets is
passed through to the Bank in the form of dividends.
COMPETITION
The Company faces significant competition for both deposits and loans. The
deregulation of the financial services industry and the commoditization of
savings and lending products has led to increased competition among savings
banks and other financial institutions for a significant portion of the deposit
and lending activity that had traditionally been the arena of savings banks and
savings and loan associations. The Company competes for deposits with other
savings banks, savings and loan associations, commercial banks, credit unions,
money market and other mutual funds, insurance companies, brokerage firms and
other financial institutions, many of which are substantially larger in size and
have greater financial resources than the Company.
The Company's competition for loans comes principally from savings banks,
savings and loan associations, commercial banks, mortgage banks, credit unions,
finance companies and other institutional lenders, many of whom maintain offices
in the Company's market area. The Company's principal methods of competition
include providing competitive loan and deposit pricing, personalized customer
service, access to senior management of the Company and continuity of banking
relationships.
- 20 -
Although the Company is subject to competition from other financial
institutions, some of which have much greater financial and marketing resources,
the Company believes it benefits by its position as a community oriented
financial services provider with a long history of serving its market area.
Management believes that the variety, depth and stability of the communities
which the Company services support the service and lending activities conducted
by the Company.
REGULATION
Troy Financial, as a bank holding company, is subject to regulation,
supervision, and examination by the Federal Reserve Board. The Bank, as a New
York-chartered bank and trust company, is subject to regulation, supervision,
and examination by the FDIC as its primary federal regulator and by the
Superintendent as its state regulator.
Bank Holding Company Regulation
Troy Financial is a bank holding company subject to the regulation,
supervision, and examination of the Federal Reserve Board under the Bank Holding
Company Act. Troy Financial is required to file periodic reports and other
information with the Federal Reserve, and the Federal Reserve may conduct
examinations of Troy Financial and the Bank.
Troy Financial is subject to capital adequacy guidelines of the Federal
Reserve. The guidelines apply on a consolidated basis and require bank holding
companies to maintain a ratio of tier 1 capital to total assets of 4.0% to 5.0%.
There is a minimum ratio of 3.0% established for the most highly rated bank
holding companies. The Federal Reserve's capital adequacy guidelines also
require bank holding companies to maintain a minimum ratio of qualifying total
capital to risk-weighted assets of 8.0%, and a minimum ratio of tier 1 capital
to risk-weighted assets of 4.0%. As of September 30, 1999, Troy Financial's
ratio of tier 1 capital to total assets was 21.21%, its ratio of tier 1 capital
to risk-weighted assets was 28.71%, and its ratio of qualifying total capital to
risk-weighted assets was 29.96%.
Troy Financial's ability to pay dividends to its stockholders and expand
its line of business through the acquisition of new banking or nonbanking
subsidiaries can be restricted if its capital falls below levels established by
the Federal Reserve's guidelines. In addition, any bank holding company whose
capital falls below levels specified in the guidelines can be required to
implement a plan to increase capital.
The Federal Reserve is empowered to initiate cease and desist proceedings
and other supervisory actions for violations of the Bank Holding Company Act, or
the Federal Reserve's regulations, orders or notices issued thereunder. Under
Federal Reserve regulations, banks and bank holding companies which do not meet
minimum capital adequacy guidelines are considered to be undercapitalized and
are required to submit an acceptable plan for achieving capital adequacy.
Federal Reserve approval is required if Troy Financial seeks to acquire
direct or indirect ownership or control of any voting shares of a bank if, after
such acquisition, Troy Financial would own or control directly or indirectly
more than 5% of the voting stock of the bank. Federal Reserve approval also must
be obtained if a bank holding company acquires all or substantially all of the
assets of a bank or merges or consolidates with another bank holding company.
Bank holding companies like Troy Financial are currently prohibited from
engaging in activities other than banking and activities so closely related to
banking or managing or controlling banks as to be a proper incident thereto. The
Federal Reserve regulations contain a list of permissible nonbanking activities
that are closely related to banking or managing or controlling banks. These
activities include lending activities, certain data processing activities,
securities brokerage and investment advisory services, trust activities and
leasing activities. A bank holding company must file an application or notice
with the Federal Reserve prior to acquiring more than 5% of the voting shares of
a company engaged in such activities.
On November 12, 1999, President Clinton signed legislation to reform the
U.S. banking laws, including the Bank Holding Company Act. The changes made to
the Bank Holding Company Act by this legislation, referred to
- 21 -
as the Gramm-Leach-Bliley Act, will be effective on March 11, 2000, and will
expand the permissible activities of bank holding companies like Troy Financial.
Upon the effective date of the legislation, Troy Financial will be permitted to
own and control depository institutions and to engage in activities that are
financial in nature or incidental to financial activities, or activities that
are complementary to a financial activity and do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. The legislation identifies certain activities that are deemed to be
financial in nature, including nonbanking activities currently permissible for
bank holding companies to engage in both within and outside the United States,
as well as insurance and securities underwriting and merchant banking
activities. The Federal Reserve is authorized under the legislation to identify
additional activities that are permissible financial activities, but only after
consultation with the Department of the Treasury.
In order to take advantage of this new authority, a bank holding company's
depository institution subsidiaries must be well capitalized and well managed
and have at least a satisfactory record of performance under the Community
Reinvestment Act. The Bank currently meets these requirements. No prior notice
to the Federal Reserve would be required to acquire a company engaging in these
activities or to commence these activities directly or indirectly through a
subsidiary.
Under the Change in Bank Control Act, persons who intend to acquire control
of a bank holding company, either directly or indirectly or through or in
concert with one or more persons, must give 60 days' prior written notice to the
Federal Reserve. "Control" would exist when an acquiring party directly or
indirectly has voting control of at least 25% of Troy Financial's voting
securities or the power to direct the management or policies of the company.
Under Federal Reserve regulations, a rebuttable presumption of control would
arise with respect to an acquisition where, after the transaction, the acquiring
party has ownership, control or the power to vote at least 10% (but less than
25%) of Troy Financial's common stock.
The New York Banking Law requires prior approval of the New York Banking
Board before any action is taken that causes any company to acquire direct or
indirect control of a banking institution that is organized in the State of New
York. The term "control" is defined generally to mean the power to direct or
cause the direction of the management and policies of the banking institution
and is presumed to exist if the company owns, controls or holds with power to
vote 10% or more of the voting stock of the banking institution.
Bank Regulation
The Bank is a New York-chartered savings bank, and its deposit accounts are
insured up to applicable limits by the Federal Deposit Insurance Corporation
(the "FDIC") under the Bank Insurance Fund ("BIF"). The Bank is subject to
extensive regulation by the New York State Banking Department ("NYSBD") as its
chartering agency, and by the FDIC as the deposit insurer. The Bank must file
reports with the NYSBD and the FDIC concerning its activities and financial
condition, and it must obtain regulatory approval prior to entering into certain
transactions, such as mergers with, or acquisitions of, other depository
institutions and opening or acquiring branch offices. The NYSBD and the FDIC
conduct periodic examinations to assess the Bank's compliance with various
regulatory requirements. This regulation and supervision is intended primarily
for the protection of the deposit insurance funds and depositors. The regulatory
authorities have extensive discretion in connection with the exercise of their
supervisory and enforcement activities, including the setting of policies with
respect to the classification of assets and the establishment of adequate loan
loss reserves for regulatory purposes.
The Bank derives its lending, investment and other powers primarily from
the applicable provisions of the New York Banking Law and the regulations
adopted thereunder. Under these laws and regulations, savings banks, including
the Bank, may invest in real estate mortgages, consumer and commercial loans,
certain types of debt securities, including certain corporate debt securities
and obligations of federal, state and local governments and agencies, certain
types of corporate equity securities and certain other assets. A savings bank
may also exercise trust powers upon approval of the NYSBD. Under the New York
Banking Law, the Bank is not permitted to declare, credit or pay any dividends
if capital stock is impaired or would be impaired as a result of the dividend.
In addition, the New York Banking Law provides that the Bank cannot declare and
pay dividends in any calendar year in excess of its "net profits" for such year
combined with its "retained net profits" of the two preceding years, less any
required transfer to surplus or a fund for the retirement of preferred stock,
without prior regulatory approval.
- 22 -
The Bank is subject to minimum capital requirements imposed by the FDIC
that are substantially similar to the capital requirements imposed on Troy
Financial. The FDIC regulations require that the Bank maintain a minimum ratio
of qualifying total capital to risk-weighted assets of 8.0%, and a minimum ratio
of tier 1 capital to risk-weighted assets of 4.0%. In addition, under the
minimum leverage-based capital requirement adopted by the FDIC, the Bank must
maintain a ratio of tier 1 capital to average total assets (leverage ratio) of
at least 3% to 5%, depending on the Bank's CAMELS rating. As of September 30,
1999, the Bank's ratio of total capital to risk-weighted assets was 20.61%, its
ratio of tier 1 capital to risk-weighted assets was 19.36%, and the Bank's ratio
of tier 1 capital to average total assets was 14.48%. Capital requirements
higher than the generally applicable minimum requirements may be established for
a particular bank if the FDIC determines that a bank's capital is, or may
become, inadequate in view of its particular circumstances. Failure to meet
capital guidelines could subject a bank to a variety of enforcement actions,
including actions under the FDIC's prompt corrective action regulations.
State banks are limited in their investments and activities engaged in as
principal to those permissible under applicable state law and that are
permissible for national banks and their subsidiaries, unless such investments
and activities are specifically permitted by the Federal Deposit Insurance Act
or the FDIC determines that such activity or investment would pose no
significant risk to the BIF. The FDIC has by regulation determined that certain
real estate investment and securities underwriting activities do not present a
significant risk to the BIF provided they are conducted in accordance with the
regulations. Provisions of the Gramm-Leach-Bliley Act which will be effective on
March 11, 2000, will expand the permissible activities of national banks to
include the activities noted above that will be permissible for bank holding
companies, other than insurance underwriting, merchant banking and real estate
development or investment activities.
The FDIC, as well as the NYSBD, has extensive enforcement authority over
insured savings banks, including the Bank. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue cease
and desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.
The Bank is subject to quarterly payments on semiannual insurance premium
assessments for its FDIC deposit insurance. The FDIC implements a risk-based
deposit insurance assessment system. Deposit insurance assessment rates
currently are within a range of $0.00 to $0.27 per $100 of insured deposits,
depending on the assessment risk classification assigned to each institution.
Under current FDIC assessment guidelines, the Bank expects that it will not
incur any FDIC deposit insurance assessments during the next fiscal year,
although the current system for assigning assessment risk classifications to
insured depository institutions is being reviewed by the FDIC and the deposit
insurance assessments are subject to change. The Bank is subject to separate
assessments to repay bonds ("FICO bonds") issued in the late 1980's to
recapitalize the former Federal Savings and Loan Insurance Corporation. The
annual rate of assessments for the payments on the FICO bonds for the quarter
beginning on October 1, 1999 is 1.184 basis points for BIF-assessable deposits
and 5.92 basis points for SAIF-assessable deposits.
Transactions between the Bank and any of its affiliates are governed by
Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any
company or entity that controls, is controlled by or is under common control
with the bank. Currently, a subsidiary of a bank that is not also a depository
institution is not treated as an affiliate of a bank for purposes of Sections
23A and 23B, but the Gramm-Leach-Bliley Act provides that certain subsidiaries
of the Bank which engage in activities not permissible for a national bank to
engage in directly would be considered affiliates for purposes of Sections 23A
and 23B. Generally, Sections 23A and 23B (i) limit the extent to which a bank or
its subsidiaries may engage in "covered transactions" with any one affiliate to
an amount equal to 10% of such institution's capital stock and surplus, and
limit such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (ii) require that all such transactions be on
terms that are consistent with safe and sound banking practices. The term
"covered transaction" includes the making of loans, purchase of or investment in
securities is