PROSPECTUS
[Logo]
COHOES BANCORP, INC.
(Proposed Holding Company for Cohoes Savings Bank)
Minimum of 5,950,000 and Maximum of 8,050,000 Shares of Common Stock
Cohoes Savings Bank is converting from the mutual to the stock form of
organization. As part of the conversion, Cohoes Savings Bank will become a
wholly owned subsidiary of Cohoes Bancorp, Inc. Cohoes Bancorp, Inc. was formed
in September, 1998 and upon consummation of the conversion will own all of the
shares of Cohoes Savings Bank. The common stock of Cohoes Bancorp, Inc. is being
offered for sale to the public in accordance with a plan of conversion which
must be approved by the Superintendent of Banks of the State of New York, the
Federal Deposit Insurance Corporation and by a majority of the votes eligible to
be cast by voting depositors of Cohoes Savings Bank and by 75% of the deposit
liabilities represented ^ in person or by proxy at the special meeting called to
vote on the Conversion.
Terms of the Offering
An independent appraiser has estimated the pro forma market value of Cohoes
Savings Bank, on a converted basis, to be between $59,500,000 and $80,500,000.
Based on this estimate, Cohoes Bancorp, Inc. will offer between 5,950,000 shares
and 8,050,000 shares to depositors, trustees and officers of Cohoes Savings
Bank, the Employee Stock Ownership Plan and the public. In addition, Cohoes
Bancorp, Inc. intends to issue a number of shares equal to 3% of the shares sold
in the ^ Conversion to a charitable foundation. Cohoes Bancorp, Inc. may
increase the number of shares offered up to 9,257,500 shares, subject to
regulatory approval. Based on these estimates, we are making the following
offering of shares of common stock:
<TABLE>
<S> <C> <C> <C>
Adjusted
Minimum Midpoint Maximum Maximum
Per Share Price............................. $10.00 $10.00 $10.00 $10.00
Number of Shares............................ 5,950,000 7,000,000 8,050,000 9,257,500
Underwriting Commission and Other Expenses.. $ 1,595,000 $ 1,711,000 $ 1,826,000 $ 1,959,000
Net Proceeds to Cohoes Bancorp, Inc......... $57,905,000 $68,289,000 ^ $78,674,000 $90,616,000
Net Proceeds Per Share...................... $9.73 $9.76 $9.77 $9.79
</TABLE>
Please refer to Risk Factors beginning on page ^ 13 of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
These securities are subject to risk, including the loss of investment.
Neither the Securities and Exchange Commission, the Superintendent of Banks of
the State of New York, the New York State Banking Department, the Federal
Deposit Insurance Corporation, nor any state securities regulator has approved
or disapproved these securities or determined if this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
For information on how to subscribe for common stock, call the Stock Information
Center at (518) 235-4000.
KEEFE, BRUYETTE & WOODS, INC.
--------------------
The date of this Prospectus is ^ November 12, 1998
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[INSERT MAP]
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GLOSSARY
AICPA American Institute of Certified Public Accountants.
AMTI Alternative Minimum Taxable Income.
APB Accounting Practice Bulletin.
ARM Adjustable Rate Mortgage.
Associate The term "Associate" of a person is defined to mean
(i) any corporation or organization (other
than the Bank or its subsidiaries or the
Holding Company) of which such person is a
director, officer, partner or 10% shareholder;
(ii) any trust or other estate in which such
person has a substantial beneficial interest
or serves as trustee or in a similar fiduciary
capacity; provided, however that such term
shall not include any employee stock benefit
plan of the Holding Company or the Bank in
which such a person has a substantial
beneficial interest or serves as a trustee or
in a similar fiduciary capacity, and
(iii) any relative or spouse of such person,
or relative of such spouse, who either has the
same home as such person or who is a ^ trustee
or officer of ^ the Bank or its subsidiaries
or the Holding Company.
ATM Automated Teller Machine.
Bank Cohoes Savings Bank.
BIF Bank Insurance Fund
Board of Directors Board of Directors of Cohoes Bancorp, Inc.
Board of Trustees Board of Trustees of Cohoes Savings Bank.
Bylaws Bylaws of Cohoes Bancorp, Inc.
Code The Internal Revenue Code of 1986, as amended.
Conversion Simultaneous conversion of Cohoes Savings Bank
to stock form, the issuance of Cohoes Savings
Bank's outstanding capital stock to Cohoes
Bancorp, Inc. and Cohoes ^ Bancorp, Inc.'s
offer and sale of Holding Company Common
Stock.
Conversion Shares Shares of Cohoes Bancorp, Inc. offered to complete
conversion of Cohoes Savings Bank to stock form.
CRA Community Reinvestment Act.
Department The New York State Banking Department.
DCGL Delaware General Corporations Law.
Eligible Account Savings account holders of Cohoes Savings Bank with
Holders account balances of at least $100 as of the close
of business on March 31, ^ 1997.
ERISA Employee Retirement Income Security Act of 1974,
as amended.
Estimated Valuation Estimated pro forma market value of the Common
Range Stock ranging from $59,500,000 to $80,500,000.
ESOP Cohoes Bancorp, Inc. Employee Stock Ownership Plan.
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Exchange Act Securities Exchange Act of 1934, as amended.
FASB Financial Accounting Standards Board.
FDIA Federal Deposit Insurance Act.
FDIC Federal Deposit Insurance Corporation.
FHLB Federal Home Loan Bank.
FHLMC Federal Home Loan Mortgage Corporation.
FNMA Federal National Mortgage Association.
Foundation Cohoes Savings Foundation, Inc. or the Foundation
FRB Federal Reserve Board.
Freddie Mac Federal Home Loan Mortgage Corporation.
GAAP Generally Accepted Accounting Practices.
HOLA Home Owners' Loan Act.
Holding Company Cohoes Bancorp, Inc.
Holding Company Common Shares of Cohoes Bancorp, Inc.
Stock
IRS Internal Revenue ^ Service.
KBW Keefe, Bruyette & Woods, Inc.
NASD National Association of Securities Dealers, Inc.
Nasdaq National Association of Securities Dealers
Automated Quotation System--National Market.
NPV Net portfolio value.
NYBB New York Banking Board.
OCC Office of the Comptroller of the Currency.
Offering The offering of between 5,950,000 and 8,050,000
shares of Cohoes Bancorp, Inc. common stock at
$10.00 per share in the Conversion.
ORE Other Real Estate Owned.
OTS Office of Thrift Supervision.
Plan or Plan of Conversion Plan of Cohoes Savings
Bank to convert from a New York chartered
mutual savings bank to a New York chartered
stock savings bank and the issuance of all of
Cohoes Savings Bank 's outstanding capital
stock to Cohoes Bancorp, Inc. and the issuance
of Cohoes Bancorp, Inc.'s Common Stock to the
public.
QTL Qualified thrift lender.
ROA Return On Average Assets.
ROE Return On Average Equity.
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RP Financial RP Financial, LC., independent appraiser.
RRP Recognition and Retention Plan to be submitted
for approval at a meeting of the Holding
Company's stockholders to be held at least six
months after the completion of the Conversion.
SAIF Savings Association Insurance Fund of the FDIC.
SEC Securities and Exchange Commission.
Securities Act Securities Act of 1933, as amended.
SFAS Statement of Financial Accounting Standard.
Stock Contribution Shares contributed by the Holding Company to
Cohoes Savings Foundation, Inc.
Stock Option and The Cohoes Bancorp, Inc. Stock Option and
Incentive Plan Incentive Plan for directors and officers to be
submitted for approval at a meeting of the
Holding Company's shareholders to be held at
least six months after the completion of the
Conversion.
Subscription Offering Offering of non-transferable rights
to subscribe for the Common Stock, in order of
priority, to Eligible Account Holders, the
ESOP, and Supplemental Eligible Account
Holders.
Superintendent Superintendent of Banks of the New York State
Banking Department.
Voting Record Date The close of business on September
30, 1998, the date for determining voting
depositors entitled to vote at the Special
Meeting.
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SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering fully, you should read this entire document carefully, including
the financial statements and the notes to the financial statements. References
in this document to "Cohoes Savings", the "Bank", "we", "us", and "our" refer to
Cohoes Savings Bank either in its present form or as a stock savings bank
following the Conversion. In certain circumstances where appropriate, "we,"
"us," or "our" refer collectively to Cohoes Savings Bank and Cohoes Bancorp,
Inc. References in this document to the "Holding Company" refer to Cohoes
Bancorp, Inc. All information contained in this Prospectus with respect to the
Holding Company, the Bank and its subsidiaries has been supplied by the Holding
Company and the Bank.
The Holding Company:
Cohoes Bancorp, Inc.
75 Remsen Street
Cohoes, New York 12047-2892
Cohoes Bancorp, Inc. is not an operating company and has not engaged in
any significant business to date. It was formed in September, 1998 as a
Delaware-chartered corporation to be the holding company for the Bank. The
holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. See
"Cohoes Bancorp, Inc." on page ^ 20.
The Bank:
Cohoes Savings Bank
75 Remsen Street
Cohoes, New York 12047-2892
Cohoes Savings Bank was established in Cohoes, New York in 1851. We are
a community and customer oriented New York chartered mutual savings bank serving
primarily the Cohoes, New York and surrounding area through 17 full service
banking offices located throughout Albany, Saratoga, Schenectady and Rensselaer
Counties, and a portion of Warren County in New York. We provide financial
services to individuals, families and small businesses. Historically, we have
emphasized residential mortgage lending, primarily originating one- to
four-family mortgage loans. Our deposits are insured up to the applicable limits
by the Federal Deposit Insurance Corporation. At June 30, 1998, we had total
assets of $535.7 million, deposits of $449.5 million, and total equity of $53.3
million. See "Cohoes Savings Bank" on ^ page 21.
Financial and operational highlights of the Bank include the following:
o Focus on Residential lending. A cornerstone of our lending
program has long been one- to four-family residential lending. We
believe that, in comparison to many other types of assets, one-
to four-family residential loans carry acceptable yields and
credit risk. In addition, such loans create strong ties to
consumers which can be utilized to market other financial
products. At June 30, 1998, we had $258.4 million (or 62.1% of
total loans) of one- to four-family residential loans and $22.0
million of home equity lines of credit. See "Business of Cohoes
Savings Bank - Lending Activities." In recent years, in order to
increase the yield on interest-earning assets and to increase the
amount of our interest rate sensitive assets, we have increased
originations of multi-family and commercial real estate loans
which have adjustable rates and/or shorter terms to maturity than
one- to four-family residential real estate loans. See "Risk
Factors - Risks Associated with Multi-Family and Commercial Real
Estate Loans."
o Interest Rate Sensitivity. We, like virtually all financial
institutions, are vulnerable to changes in interest rates. In
managing our asset/liability mix, we may, at times, place more
emphasis on enhancing our short-term net interest margin than on
limiting interest rate risk. At June 30, 1998, based upon certain
assumptions utilized by us in assessing interest rate risk, the
value of our net portfolio equity would have declined by 7.7% and
14.8% if there would have been instantaneous increases in
interest rates of 100 and 200 basis points, respectively. See
"Risk Factors - Interest Rate Risk Exposure" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations of Cohoes Savings Bank - Asset/Liability Management."
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o Asset Quality. Our ratio of non-performing assets to total assets
was 1.15% and our ratio of non-performing loans to total loans
was 1.36% at June 30, 1998. Reflecting our focus on residential
lending, our ratio of net charge-offs to average total loans was
.24%, .37%, .10%, .06% and .01% for fiscal years 1998, 1997,
1996, 1995, and 1994, respectively. At June 30, 1998, our ratio
of allowance for loan losses to total loans was .85% and our
ratio of allowance for loan losses to total non-performing loans
was 62.54%. See "Business Delinquencies and Non-Performing
Assets."
o Commitment to Growth. We believe that in order to remain an
independent community-based financial institution in the rapidly
changing financial services industry, we must be competitive. In
order to remain competitive, we are committed to growing the Bank
through acquisitions although none are currently contemplated and
through other facets of our business, including insurance
services, which can increase noninterest income for us. See
"Business of Cohoes Savings Bank - Subsidiary and Other
Activities." During fiscal 1998, we experienced a 4.7% increase
in deposit accounts. In addition, we experienced a $14.5 million
increase in loans receivable. See "Business of Cohoes Savings
Bank - Lending."
The Stock Offering
We are offering between 5,950,000 and 8,050,000 shares of common stock
at $10.00 per share in the Conversion. We may increase the offering to 9,257,500
shares without further notice to you. Any increase over 9,257,500 shares would
require the approval of the Superintendent and the FDIC. You may not change or
cancel any stock order previously delivered to us as a result of an increase in
the offering within these limits.
Stock Purchase Priorities. The shares of Holding Company Common Stock
will be offered on the basis of priorities. Certain depositors and the ESOP
established by us will receive subscription rights to purchase shares of common
stock. Any remaining shares not subscribed for may be offered in a direct
community offering or a public offering. See "The ^ Offering ^" on pages ^ 100
to ^ 111.
Prohibition on Transfer of Subscription Rights. You may not sell or
assign your subscription rights. Any transfer of subscription rights is
prohibited by law and may result in the forfeiture of your subscription rights.
Stock Pricing and Number of Shares to be Issued. We set the purchase
price per share of the common stock at $10.00. This is the price most commonly
used in recent years in stock offerings involving Conversions of mutual savings
institutions. The number or range of shares of common stock to be issued in the
offering is based on an independent appraisal of the pro forma market value of
the common stock by RP Financial, an appraisal firm experienced in appraisals of
savings institutions. RP Financial has estimated that as of September 4, 1998,
and as updated as of October 23, 1998, the estimated valuation range of Holding
Company Common Stock was between $59,500,000 and $80,500,000 (with a midpoint of
$70,000,000). The Estimated Valuation Range represents our estimated market
value after giving effect to the sale of the common stock in this offering and
the issuance of a number of shares equal to 3% of the shares issued in the
Conversion to the Foundation. Based on this valuation and the $10.00 per share
price, the number of shares of common stock that we will issue in the offering
will range from between 5,950,000 shares and 8,050,000 shares. The establishment
of, and contribution to, the Cohoes Savings Foundation had the effect of
reducing our market valuation. See "Risk Factors - ^ Risks Associated with the
Establishment of the Charitable Foundation" on pages ^ 18 to 20 and "Comparison
of Valuation and Pro Forma Information With No Foundation" on ^ page 29.
The appraisal was based both upon our financial condition and results
of operations and upon the effect of the additional capital we will raise in
this Offering. The independent appraisal will be updated before we complete the
Conversion. Changes in market and financial conditions and demand for the common
stock may cause the estimated valuation range to increase by up to 15%, to up to
$92,575,000. If this occurs, the maximum number of shares that can be sold in
this offering can increase to up to 9,257,500 shares (plus the 277,725 shares to
be issued to the Cohoes Savings Foundation). If the Estimated Valuation Range is
either below $59,500,000 or above $92,575,000, then you will be notified and
will have the opportunity to modify or cancel your order. See "The ^ Offering -
Stock Pricing and Number of Shares to be Issued" on pages ^ 100 to ^ 103.
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The independent valuation prepared by RP Financial is not a
recommendation as to the advisability of purchasing the Holding Company Common
Stock. Accordingly, you should not buy the Holding Company Common Stock based
solely on the independent valuation.
Termination of the Offering. The subscription offering will terminate
at ^ 12:00 noon, Cohoes, New York time, on ^ December 16, 1998. Any direct
community offering or public offering may terminate at any time without notice,
but no later than ^ January 31, 1999, without approval by the Superintendent of
Banks of the New York State Banking Department and the FDIC. If the offering is
not completed by ^ January 31, 1999, all subscribers will be notified and will
be given the opportunity to cancel or modify their order.
Benefits to Management and Employees from the Offering. Our employees
will participate in the offering through individual purchases and through
purchases of stock through our employee stock ownership plan, which is a type of
retirement plan. We also intend to implement a RRP and a Stock Option and
Incentive Plan, which may benefit the officers, employees and directors. If we
adopt the RRP, such individuals will be awarded stock at no cost to them. The
RRP and Stock Option and Incentive Plan may not be adopted until at least six
months after the Conversion and are subject to stockholder approval. We also
intend to enter into employment agreements with certain executive officers
following completion of the offering. See "Management of the Bank - Benefit
Plans" on pages ^ 85 to ^ 88.
The Charitable Foundation. To further our commitment to the local
community, we intend to establish the Foundation as part of the Conversion. We
will make a contribution to the Foundation, in the form of shares of common
stock, equal to 3% of the shares issued in the Conversion. The Foundation will
be dedicated exclusively to supporting charitable causes and community
development in the Bank's primary market area. Due to the issuance of shares of
common stock to the Foundation, persons purchasing shares in the offering will
have their ownership and voting interest in the Holding Company diluted by 2.9%.
We will incur an expense equal to the full amount of the contribution to the
Foundation, offset in part by a tax benefit, during the quarter in which the
contribution is made. Such expense will reduce our earnings. See "Risk Factors -
^ Risks Associated with the Establishment of the Charitable Foundation" on pages
^ 18 to 20, "Pro Forma Data" on pages ^ 26 to ^ 28 and "The Conversion - ^
Establishment of Cohoes Savings Foundation" on pages ^ 94 to ^ 98.
Use of the Proceeds Raised from the Sale of Holding Company Common
Stock in the Offering. We will use the net proceeds received from the offering
as follows. The percentages used are estimates.
o 50% will be used to buy all of the capital stock of the Bank.
o 8% will be loaned to the employee stock ownership plan to fund
its purchase of common stock.
o 42% will be retained and initially be placed in short-term
investments, which may later be used as a possible source of
funds for stock repurchases, the payment of dividends to
stockholders, and for other general corporate purposes.
The proceeds received by the Bank will increase our capital and will be
available for expansion of our retail banking franchise through future lending
and investment, in addition to general corporate purposes. See "Use of Proceeds"
on ^ page 22.
The Holding Company and the Bank Following the Conversion
Assuming the Conversion had been consummated as of June 30, 1998, we
would have had, on a pro forma basis at the maximum of the estimated valuation
range, total consolidated assets of $605.4 million, total consolidated
liabilities of $482.4 million, including $449.5 million of deposits, and total
consolidated stockholders' equity of $123.0 million. See "Pro Forma Unaudited
Financial Information." In addition, at June 30, 1998, the Bank would have had,
on a pro forma basis at the maximum of the estimated valuation range, leverage
capital of $82.7 million or 14.7% of adjusted total assets and risk-based
capital of $86.2 million or 25.4% of total risk-weighted assets, respectively.
See "Regulatory Capital."
Upon completion of the Conversion, we will be a well capitalized,
independent community-oriented financial institution with 17 full service branch
offices. Our business strategy will be to operate as a community oriented
financial
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institution dedicated to meeting the borrowing and savings needs of our
customers while providing superior service. We will seek to implement this
strategy by (i) increasing our origination of loans in our market area and
emphasizing retail banking, including the origination of single-family
residential mortgage loans and consumer loans; (ii) continuing to expand our
insurance and investments activities, which provide alternative sources of
income to our traditional banking activities; (iii) maintaining asset quality;
(iv) maintaining a high level of capital; and (v) continuing our pattern of
controlled growth.
As a New York chartered savings bank, we will continue to be subject to
comprehensive regulation and examination by the Department, as our chartering
authority and primary regulator, and by the FDIC, which administers the Bank
Insurance Fund, which will insure our deposits to the maximum extent permitted
by law. We will be a member of the FHLB of New York, which is one of the 12
regional banks which comprise the FHLB System. We will be further subject to
regulations of the FRB governing reserves required to be maintained against
deposits and certain other matters. The Holding Company will be a registered
savings and loan holding company and will be subject to examination and
regulation by both the OTS and the Department and subject to various reporting
and other requirements of the SEC. Our principal executive offices following
consummation of the Conversion will be located at 75 Remsen Street, Cohoes, New
York, 12047, and our telephone number will be (518) 233-6500.
Dividends
Cohoes Bancorp, Inc. intends to pay dividends in the future. However,
the amount and timing of such payments has yet to be determined. The
determination to pay a dividend is dependent upon a number of factors, including
(i) the amount of the net proceeds retained by the Holding Company in the
Conversion, (ii) investment opportunities available, (iii) capital requirements,
(iv) regulatory limitations, (v) results of operations and financial condition,
(vi) tax considerations, and (vii) general economic conditions. See "Dividends"
on ^ page 23.
Market for the Common Stock
We anticipate the Holding Company Common Stock to be traded on The
Nasdaq National Market System under the symbol "COHB". It is possible that an
active and liquid trading market, however, may not develop or be maintained.
Investors should have a long-term investment intent. Persons purchasing shares
may not be able to sell their shares when they desire or sell them at a price
equal to or above $10.00. KBW has informed us that it has agreed to make a
market in the common stock. KBW will, however, not be subject to any obligation
with respect to such efforts. See "Market for the Common Stock" on page ^ 23.
Prospectus Delivery and Procedures for Common Stock
To ensure that each person or entity is properly identified as to such
party's stock purchase priorities, such party must list all deposit accounts on
the order form accompanying this prospectus, giving all names on each account
and the account numbers at the applicable date. The failure to provide accurate
and complete account information on the order form may result in a reduction or
elimination of your order.
Only orders submitted on original order forms will be accepted for
processing. Photocopies or facsimile copies of order forms or the form of
certification will not be accepted. Payment by cash, check, money order, bank
draft or withdrawal from an existing account at the Bank must accompany your
order form. No wire transfers will be accepted. See "The ^ Offering - Procedure
for Purchasing Shares in Subscription and Community Offerings" on pages 107 to
108.
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the respective expiration dates for the Offering, in accordance with
Rule 15c2-8 of the Exchange Act, as amended, no Prospectus will be mailed later
than five days prior to such date or hand delivered any later than two days
prior to such date. Execution of the stock order form will confirm receipt or
delivery in accordance with Rule 15c2-8. Stock order forms will only be
distributed with a Prospectus and a certification form requiring each
prospective investor to acknowledge, among other things, that the shares of
Holding Company Common Stock are not insured by the Bank, the FDIC or any other
governmental agency and that such prospective investor has received a copy of
this Prospectus, which, among other things, describes the risks involved in the
investment in the Holding Company Common Stock.
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Nontransferability of Subscription Rights
The subscription rights of Eligible Account Holders, Supplemental
Eligible Account Holders and Employee Benefit Plans are nontransferable.
Certificates representing shares of Common Stock purchased in the Subscription
Offering must be registered in the name of the Eligible Account Holder or
Supplemental Eligible Account Holder, as the case may be. Joint stock
registration will be allowed only if the qualifying deposit account is so
registered. See "The Conversion - Restrictions on Transfer of Subscription
Rights and Shares of Common Stock."
Voting Control of Officers and Directors
Trustees and executive officers of the Bank and the Holding Company are
expected to purchase approximately ^ 4.4% and ^ 3.2%, respectively, of the
shares of Common Stock outstanding, based upon the minimum and the maximum of
the Estimated Valuation Range including shares issued to the Foundation.
Additionally, assuming the implementation of the ESOP, RRP and Stock Option
Plan, trustees, executive officers and employees have the potential to control
the voting of approximately ^ 26.5% or ^ 25.5% of the Common Stock at the
minimum and the maximum of the Estimated Valuation Range, including shares
issued to the Foundation, respectively.
Additionally, the Foundation will hold Common Stock in an amount equal
to 3% of the Common Stock sold in the Conversion, which such shares of Common
Stock may be voted as directed by the Board of Directors of the Foundation,
which will initially consist of six Directors of whom four will be officers or
trustees of the Bank. However, the FDIC and the Superintendent of Banks of the
New York State Banking Department (the "Superintendent") have imposed conditions
regarding voting of the Common Stock by the Foundation. See "The Conversion -
Establishment of Cohoes Savings Foundation."
Role of the Marketing Agent
The Bank and the Holding Company have engaged KBW as a financial and
marketing advisor in connection with the offering of the Holding Company Common
Stock and KBW has agreed to use its best efforts to assist the Holding Company
with the solicitation of subscriptions and purchase orders for shares of Holding
Company Common Stock in the Offerings. Based upon negotiations between the Bank
and the Holding Company, KBW will receive a fee for services provided in
connection with the Offerings equal to 1.20% of the aggregate Purchase Price of
Holding Company Common Stock sold in the Offerings. No fees will be paid to KBW
with respect to any shares of Holding Company Common Stock purchased by any
trustee, director, executive officer or employee of the Bank or the Holding
Company or members of their immediate families or any employee benefit plan of
the Holding Company or the Bank. See "The Offering - Marketing and Underwriting
Arrangements."
Expiration Date for the Subscription Offering
The Expiration Date for the Subscription Offering is 12:00 noon Eastern
time on ^ December 16, 1998 unless extended by the Bank for an initial period of
up to 45 days after the Expiration Date or for one or more additional 60 day
periods thereafter, upon approval of the Superintendent, and if necessary, the
FDIC. The Subscription Offering may not be extended beyond ^ December 21, 2000.
See "The Conversion - Subscription Offering and Subscription Rights."
No Board Recommendations
The Bank's Board of Trustees and the Holding Company's Board of
Directors are not making ^ any recommendations to depositors or other potential
investors regarding whether such persons should purchase the Common Stock. An
investment in the Common Stock must be made pursuant to each investor's
evaluation of his or her best interests.
Conversion Center
If you have any questions regarding the purchase of Holding Company
Common Stock or the Conversion, call the Conversion Center at (518) 235-4000.
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Important Risks in Owning the Holding Company's Common Stock
Before you decide to purchase stock in the offering, you should read
the "Risk Factors" section on pages ^ 13 to ^ 70 of this document, in addition
to the other sections of this Prospectus. The Holding Company Common Stock is
subject to investment risk, including the possible loss of the principal of your
investment.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF COHOES SAVINGS BANK
The summary information presented below under "Selected Consolidated
Financial Data" and "Selected Operating Data" for, and as of the end of, each of
the years ended June 30 is derived from the Bank's audited financial statements.
The following information is only a summary and you should read it along with
our financial statements and notes beginning on page F-1.
<TABLE>
<CAPTION>
At June 30,
1998 1997 1996 1995 1994
------------ ------------- ------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Data:
Total assets...................... $535,716 $491,700 $463,363 $459,336 $403,334
Cash and cash equivalents......... 14,229 16,664 8,900 15,179 15,235
Loans, net ...................... 412,759 398,530 393,970 379,088 313,419
Investment securities............. 45,424 25,273 25,969 40,052 48,825
Securities available-for-sale..... 48,720 35,475 20,886 10,433 13,776
Deposits.......................... 449,541 429,390 404,539 398,963 346,459
^ Borrowings...................... 19,897 --- 2,116 6,117 105
Total equity...................... 53,282 49,092 44,290 40,130 36,276
Real estate owned................. 509 1,874 421 396 437
Nonperforming loans............... 5,649 6,688 7,793 5,063 4,892
</TABLE>
<TABLE>
<CAPTION>
For the Fiscal Year Ended June 30,
1998 1997 1996 1995 1994
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income............................. $ 38,423 $ 36,285 $ 35,383 $ 32,100 $ 27,560
Interest expense.................................. 19,262 17,821 18,164 15,405 12,388
------ ------- ------ ------ ------
Net interest income.......................... 19,161 18,464 17,219 16,695 15,172
Provision for loan losses......................... 1,400 1,325 490 330 750
------ ------- ------ ------ ------
Net interest income after provision
for loan losses 17,761 17,139 16,729 16,365 14,422
Noninterest income
Net gain (loss) on sale of mortgage loans 81 106 (20) (102) 226
Other........................................ 2,662 2,684 2,487 2,293 2,050
Noninterest expense............................... 13,767 12,314 11,919 12,152 11,114
------ ------- ------ ------ ------
Income before income taxes........................ 6,737 7,615 7,277 6,404 5,584
Income taxes...................................... 2,650 2,972 2,882 2,565 2,194
------ ------- ------ ------ ------
Net income................................... $ 4,087 $ 4,643 $ 4,395 $ 3,839 $ 3,390
====== ======= ====== ====== ======
Selected Operating Ratios and Other Data:
Performance Ratios:
Yield on average interest-earning assets.......... 7.96% 8.04% 7.98% 7.76% 7.38%
Rate paid on average interest-bearing liabilities. 4.33 4.27 4.42 3.99 3.57
Net interest rate spread.......................... 3.63 3.77 3.56 3.77 3.81
Net interest margin (1)........................... 3.97 4.09 3.89 4.04 4.06
Net interest income after provision for loan losses
to noninterest expense...................... 129.01 139.18 140.36 134.67 129.76
Noninterest expense as a percent of average assets 2.75 2.62 2.59 2.82 2.86
Return on average assets (2)...................... 0.82 0.99 0.95 0.89 0.87
Return on average equity (3)...................... 7.88 9.87 10.28 9.95 9.85
Ratio of average equity to average assets......... 10.35 10.03 9.28 8.95 8.85
Efficiency ratio (4).............................. 62.85 57.94 60.55 64.34 63.70
Asset Quality Ratios:
Nonperforming loans as a percent of total loans... 1.36 1.66 1.96 1.32 1.54
Nonperforming assets as a percent of total assets. 1.15 1.74 1.77 1.19 1.32
Allowance for loan losses as a percent of total loans 0.85 0.77 0.82 0.82 0.95
Allowance for loan losses as a percent of
nonperforming loans.......................... 62.54 46.43 41.69 61.88 61.55
Net loans charged-off to average loans............ 0.24 0.37 0.10 0.06 0.01
Branch Locations:
Traditional....................................... 7 7 6 5 4
Supermarket....................................... 9(6) 8 4 4 3
Public accommodation (5).......................... 1 1 1 1 1
- -----------------
<FN>
(1) Net interest income as a percentage of average interest-earning assets.
(2) Ratio of net earnings to average total assets.
(3) Ratio of net earnings to average total equity.
(4) The Efficiency Ratio is computed by dividing noninterest expense by the sum
of net interest income and noninterest income.
(5) The public accommodation office is expected to become a full service branch
office on October 1, 1998.
(6) The Queensbury branch location opened for business in July, 1998.
</FN>
</TABLE>
7
<PAGE>
RECENT FINANCIAL DATA
The following table sets forth selected financial data of the Bank at
and for the periods indicated. Financial data as of September 30, 1998 and for
the three months ended September 30, 1998 and 1997 are unaudited. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation have been included. The results of operations
and other data for the three months ended September 30, 1998, are not
necessarily indicative of the results of operations for the fiscal year ending
June 30, 1999.
At September 30 At June 30,
1998 1998
(In Thousands)
Selected Consolidated Financial Data:
Total assets $551,156 $535,716
Cash and cash equivalents 20,325 14,229
Loans, net 429,029 412,759
Investment securities 45,180 45,424
Securities available-for-sale 41,285 48,720
Deposits 448,648 449,541
Borrowings 39,689 19,897
Total equity 54,452 53,282
Real estate owned 802 509
Nonperforming loans ^ 5,634 5,649
For the Three Months Ended
^ September 30,
1998 1997
----------------- -----------
(In Thousands)
Selected Operating Data:
Total interest income $10,116 $9,485
Interest expense 5,209 4,766
--------- ------
Net interest income 4,907 4,719
Provision for loan losses 180 150
--------- ------
Net interest income after
provision for loan losses 4,727 4,569
Noninterest income
^Net gain on sale of mortgage loans 6 11
Other 672 648
Noninterest expense 3,793 3,232
--------- ------
Income before income taxes 1,612 1,996
Income taxes 629 798
--------- ------
Net income $983 $1,198
========= ======
(footnotes on next page)
8
<PAGE>
For the Three Months Ended
September 30,
1998 1997
Selected Operating Ratios and Other Data
Performance Ratios:
Yield on average interest-earning assets 7.67% 7.93%
Rate paid on average
interest-bearing liabilities 4.28 4.31
Net interest rate spread 3.39 3.62
Net interest margin (1) 3.72 3.95
Net interest income after provision
for loan losses to noninterest expense 124.62 141.37
Noninterest expense as a percent of
average assets 2.80 2.62
Return on average assets (2) 0.73 0.97
Return on average equity (3) 7.26 9.57
Ratio of average equity to average assets 9.98 10.14
Efficiency ratio (4) 67.91 60.10
At September 30, At June 30,
1998 1998
Asset Quality Ratios:
Nonperforming loans as a
percentage of total loans ^ 1.30 1.36
Nonperforming assets as a
percentage of total assets ^1.17 1.15
Allowance for loan losses as a
percentage of total loans 0.84 ^ 0.85
Allowance for loan losses as a
percentage of nonperforming loans ^64.25 62.54
Branch Locations:
Traditional 8 7
Supermarket 9 ^9(5)
Public accommodation --- 1
- ------------------
(1) Net interest income as a percentage of average interest-earning assets.
(2) Ratio of net earnings to average total assets.
(3) Ratio of net earnings to average total equity.
(4) The Efficiency Ratio is computed by dividing noninterest expense by the sum
of net interest income and noninterest income.
(5) The Queensbury branch location opened for business in July, 1998.
9
<PAGE>
Nonperforming Assets
The following table sets forth the amounts and categories of
nonperforming assets in the Bank's portfolio at September 30, 1998 and June 30,
1998.
At At
September 30, 1998 June 30, 1998
(Dollars in Thousands)
Non-accrual loans:
One- to four-family real estate $2,641 $2,635
Multi-family and commercial real estate 566 823
Conventional second mortgages 34 35
Consumer loans 149 105
Commercial business loans --- 65
-------- -------
Total non-accrual loans 3,390 3,663
Loans contractually past due 90 days or
more and still accruing interest:
Consumer loans 57 57
-------- ----------
Total loans 90 days or more past
due and still accruing interest 57 57
Troubled debt restructurings 2,187 1,929
------- -------
Total nonperforming loans 5,634 5,649
Real estate owned (ORE) 802 509
-------- --------
Total nonperforming ^ assets $6,436 $6,158
====== ======
Allowance for loan losses $3,620 $3,533
====== ======
Coverage of nonperforming loans 64.25% 62.54%
====== ======
Total nonperforming loans as a percentage
of total loans 1.30% 1.36%
======= =======
Total nonperforming ^ loans as a
percentage of total ^ assets 1.02% 1.05%
======= =======
10
<PAGE>
MANAGEMENT'S DISCUSSION OF RECENT FINANCIAL DATA
Recent Development. On October 23, 1998, the Bank terminated ^ a merger
agreement with SFS Bancorp, Inc. In connection with the termination, the Bank
paid an agreed-upon breakup fee of $2.0 million. The breakup fee will be
recognized in the quarter ended December 31, 1998, resulting in an after tax
charge to earnings of approximately $1.2 million.
Financial Condition. Total assets increased $15.5 million from $535.7
million at June 30, 1998 to $551.2 million at September 30,1998. The increase
was primarily due to an increase in the loan portfolio which was funded by an
increase in borrowings.
Net Income. Net income for the three months ended September 30, 1998
was $983,000, down from $1.2 million for the three months ended September 30,
1997. The ^ $215,000 decrease was primarily due to increases in the provision
for loan losses and noninterest expense which was partially offset by ^
increases in net interest income and noninterest income.
Net Interest Income. Net interest income for the quarter ended
September 30, 1998 was $4.9 million, up $188,000 from the quarter ended
September 30, 1997. The increase was primarily the result of an increase of
$48.5 million in average earning assets from $474.6 million for the quarter
ended September 30, 1997 to $523.1 million for the same period in 1998. Average
interest-bearing liabilities also increased during the same period, up $43.7
million. The Bank's net interest margin for the quarter ended September 30, 1998
was 3.72%, down 23 basis points from 3.95% for the quarter ended September 30,
1997. As a result of the yield on average earning assets decreasing from 7.93%
to 7.67%, while the rate paid on average interest-bearing liabilities also
decreased from 4.31% to 4.28%.
Interest Income. Interest income for the quarter ended September 30,
1998 was $10.1 million, up from $9.5 million for the comparable period in 1997.
The largest component of interest income is interest on loans. Interest on loans
increased from $8.4 million for the quarter ended September 30, 1997 to $8.6
million for the quarter ended September 30, 1998. The average balance of loans
increased $19.4 million to $424.3 million, while the average yield on loans
decreased 18 basis points from 8.21% to 8.03%. The increase in interest on loans
was supplemented by increases in interest on securities available for sale and
investment securities. Interest income on these categories of earning assets
increased $223,000, and $296,000, respectively. Substantially all of the ^
increase in interest income on these assets ^ is attributed to ^ an increase in
volume. The average balance of securities available for sale increased from
$29.6 million for the quarter ended September 30, 1997 to $43.9 million for the
quarter ended September 30, 1998. The average balance of investment securities
increased from $25.4 million in 1997 to $47.8 million in 1998. The interest on
federal funds sold decreased $110,000 as a result of a decrease in the average
balance of federal funds sold of $8.1 million. The changes in rates on
securities available for sale, investment securities and federal funds sold, as
well as the changes in volume and rate on other categories of interest earning
assets, was not significant.
Interest Expense. Interest expense increased during the quarter ended
September 30, 1998 to $5.2 million, up from $4.8 million for the comparable
period in 1997. Substantially all of the Bank's interest expense is from the
Bank's interest-bearing deposits. The largest category of interest-bearing
deposits is time deposits. Interest on time deposits from the quarter ended
September 30, 1998 was $3.3 million, down $69,000 from the $3.4 million in 1997.
This decrease is primarily the result of a decrease of 8 basis points in the
average rates paid on these deposits from 5.85% in 1997 to 5.77% in 1998. The
increase in interest expense is primarily the result of an increase in interest
on borrowings for the quarter ended September 30, 1998 to $373,000. This
increase was entirely attributable to an increase in the average balance of
borrowings, to $25.0 million in the quarter ended September 30, 1998. The
average balance of other categories of interest-bearing liabilities increased
modestly, while the rates paid remained relatively stable.
Provision for Loan Losses. The provision for loan losses of $180,000 in
the quarter ended September 30, 1998 increased slightly over the $150,000
provision in the quarter ended September 30, 1997. The increase in the provision
is attributed to the increase in the average balance of loans outstanding.
Noninterest Income. Total noninterest income for the quarter ended
September 30, 1998 was $678,000, relatively unchanged from the $659,000 for the
quarter ended September 30, 1997. Service charges on deposits
11
<PAGE>
increased slightly to $198,000 for the quarter ended September 30, 1998, from
$193,000 for the quarter ended September 30, 1997. Loan servicing revenue
declined $25,000 from $131,000 for the quarter ended September 30, 1997 to ^
$106,000 for the quarter ended September 30, 1998. The decline relates to a
reduction in the balance of loans serviced for others. Other noninterest income
^ increased $43,000 primarily as a result of the establishment of ATM surcharges
in April 1998.
Noninterest Expense. Total noninterest expense increased ^ $561,000 to
$3.8 million for the quarter ended September 30, 1998, up from $3.2 million for
the comparable period in 1997. Increases in compensation and benefits of
$188,000, occupancy of $137,000 and other expenses of $189,000 were the primary
contributors to the overall increase. The increase in compensation and benefits
resulted from general merit increases and incentive payments for Bank employees.
Occupancy increased as a result of increases in depreciation and maintenance
services. Other noninterest expense increased as a result of increases in office
supplies and ORE expense.
Income Tax Expense. Income tax expense decreased from $798,000 for the
quarter ended September 30, 1997 to ^ $629,000 for the comparable period in
1998. The reduction is primarily the result of less income before income tax
expense, $1.6 million in the quarter ended September 30, 1998 as compared to
$2.0 million in the same quarter of 1997.
Capital Requirements. The following table sets forth the Bank's
historical compliance with its capital requirements at September 30, 1998. See
"Regulatory Capital" for information regarding the Bank's capital compliance.
September 30, 1998
Amount Percent (1)
(Dollars in Thousands)
GAAP Capital $54,452 9.88%
======= ======
Leverage capital
Actual $54,253 9.97%
Requirement 21,763 4.00%
-------- ------
Excess $32,490 5.97%
======= ======
Risk-based capital (2)
Actual $57,873 16.88%
Requirement 27,425 8.00%
-------- ------
Excess $30,448 8.88%
======= ======
(1) Adjusted total or adjusted risk-weighted assets, as appropriate. As of
September 30, 1998, the adjusted total and risk-weighted assets of the
Bank were $544.1 million and $342.8 million, respectively.
(2) Does not reflect the interest rate risk component to be added to the
risk-based capital requirements or, in the case of the core capital
requirement, the 4.0% requirement to be met in order for an institution
to be "adequately capitalized" under applicable laws and regulations.
See "Regulation - Regulatory Capital Requirements."
12
<PAGE>
RISK FACTORS
In addition to other information in this document, you should consider
carefully the following risk factors in evaluating an investment in our common
stock.
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
As a result of the Conversion, our equity will increase substantially.
Expenses are expected to increase due to the costs associated with our employee
stock ownership plan, our RRP, and being a public company. Because of the
increases in our equity and expenses, our return on equity may decrease as
compared to our performance in previous years. A lower return on equity could
limit the trading price potential of the Holding Company Common Stock. See "Use
of Proceeds" and "Pro Forma Data."
In addition, we intend to initially invest the additional capital being
raised through the offering into shorter-term, lower-yielding assets (i.e.,
federal funds sold) and gradually reinvest the additional capital into
longer-term, higher-yielding loans and mortgage-backed securities as
opportunities arise. Until the additional capital can be effectively reinvested,
our return on equity is expected to decrease from the Bank's historic levels.
Dilutive Effect of Issuance of Additional Shares
If the RRP is approved by stockholders of the Holding Company, the RRP
intends to acquire an amount of Holding Company Common Stock equal to 4% of the
Shares sold in the Conversion and including shares issued to the Foundation. If
such shares are acquired at a per share price equal to the purchase price, the
cost of such shares would be $3.3 million, assuming the number of Conversion
Shares sold are equal to the maximum of the Estimated Offering Range. Such
shares of Holding Company Common Stock may be acquired in the open market with
funds provided by the Holding Company, if permissible, or from authorized but
unissued shares of Holding Company Common Stock. In the event that the RRP
acquires authorized but unissued shares of Holding Company Common Stock from the
Holding Company, the interests of existing stockholders will be diluted.
Assuming the issuance of 8,050,000 Shares in the Offering and the contribution
of 241,500 shares of Holding Company Common Stock to the Foundation, the
issuance of authorized but unissued shares of Holding Company Common Stock to
such plan in an amount equal to 4% of the Conversion Shares sold in the
Conversion would dilute the voting interests of existing stockholders by
approximately 3.6%, and net income per share and stockholders' equity per share
would be decreased by a corresponding amount. Awards made to eligible
participants pursuant to the RRP will be awarded at no cost to the participant.
See "Pro Forma Unaudited Financial Information - Additional Pro Forma Data" and
"Management Benefits - Recognition and Retention Plan."
If a Stock Option and Incentive Plan is approved by stockholders of the
Holding Company, the Holding Company intends to reserve for future issuance
pursuant to such plan a number of shares of Holding Company Common Stock equal
to an aggregate of 10% of the Conversion Shares and the contribution of shares
to the Foundation (829,150 shares, based on the issuance of the maximum
8,050,000 shares and the contribution of 241,500 shares to the Foundation). Such
shares may be authorized but previously unissued shares, treasury shares or
shares purchased by the Holding Company in the open market or from private
sources. Assuming the issuance of 8,050,000 Conversion Shares and the
contribution of 241,500 shares of Holding Company Common Stock to the
Foundation, if only authorized but previously unissued shares are used under
such plan, the issuance of the total number of shares available under such plan
would dilute the voting interests of existing stockholders by approximately
9.1%, and net income per share and stockholders' equity per share would be
decreased by a corresponding amount. See "Pro Forma Unaudited Financial
Information - Additional Pro Forma Data" and "Management - Benefits."
Interest Rate Risk Exposure
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest and dividend
income on earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings.
Changes in the level of interest rates affect the amount of loans originated by
the Bank as well as the market value of the Bank's earning assets. Moreover,
increases in interest rates also can result in disintermediation, which is the
flow of funds away from savings institutions into other
13
<PAGE>
investments, such as corporate securities and other investment vehicles, which
generally pay higher rates of return than savings institutions. Finally, a
flattening of the "yield curve" (i.e., a decline in the difference between long
and short term interest rates) or an inverted yield curve (i.e., where short
term interest rates are higher than long term interest rates), could adversely
impact net interest income. As a result of a decline in the yield earned on
average interest-earning assets that exceeded a decline in the rate paid on its
average liabilities, the Bank's average interest rate spread decreased from
3.77% for 1997 to 3.63% for 1998. No assurance can be given that the Bank's
average interest rate spread will not decrease further in future periods. Any
such decrease in the Bank's average interest rate spread could adversely affect
the Bank's net interest income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Cohoes Savings Bank -
Asset/Liability Management."
If an institution's interest-earning assets have longer effective
maturities than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institutions' net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in interest
rates. The Bank attempts to reduce the vulnerability of its operations to
changes in interest rates by maintaining significant amounts of liquid assets
and assets with relatively short estimated lives. Changes in interest rates also
can affect the average life of loans and mortgage-related and other securities.
Decreases in interest rates in recent periods have resulted in increased
prepayments of loans and mortgage backed securities, as borrowers refinanced to
reduce borrowing costs. Under these circumstances, the bank is subject to
reinvestment risk to the extent that it is not able to reinvest such prepayments
at rates which are comparable to the rates on the maturing loans or securities.
See "Business of Cohoes Savings Bank Lending Activities."
Risks Related to Multi-Family and Commercial Real Estate Loans; Geographic
Concentration of Loans
The Bank originates multi-family and commercial real estate loans,
which amounted to $93.2 million (or 22.4% of the Bank's loan portfolio) as of
June 30, 1998. Multi-family and commercial real estate lending generally is
considered to involve a higher degree of risk than single-family residential
lending due to a variety of factors, including generally larger loan balances,
the dependency on successful operation of the project for repayment, loan terms
which often do not require full amortization of the loan over its term and
successfully developing and/or selling the property. See "Business of Cohoes
Savings Bank - Lending Activities." As of June 30, 1998, the Bank had $823,000
of non-performing multi-family and commercial real estate loans (excluding
restructured loans which are performing under the restructured terms).
In addition, the Bank had $25.9 million of commercial real estate loans
secured by property located in New York City as of June 30, 1998. At that date,
the entire commercial real estate loan portfolio located in New York City was
performing in accordance with its respective terms. However, no assurance can be
made that the New York City economy will continue at current levels or that such
loans will continue to perform in accordance with their terms in the future.
Competition
The Bank experiences significant competition in its local market area
in both originating real estate and other loans and attracting deposits. This
competition arises from other savings institutions as well as credit unions,
mortgage banks, commercial banks, mutual funds and national and local securities
firms. Due to their size, many competitors can achieve certain economies of
scale and as a result offer a broader range of products and services than the
Bank. The Bank attempts to mitigate the effect of such factors by emphasizing
customer service and community outreach. Such competition may limit the Bank's
growth in the future. See "Business of the Bank - Competition."
Takeover Defensive Provisions
Holding Company and Bank Governing Instruments. Certain provisions of
the Holding Company's Certificate of Incorporation and Bylaws and the Bank's
Restated Organization Certificate and Bylaws assist the Holding Company and the
Bank in maintaining its status as an independent publicly owned corporation.
However, such provisions may also block stockholders from approving a potential
takeover of the Holding Company which a majority of such stockholders believe to
be in their best interests. These provisions provide for, among other things,
limiting voting rights
14
<PAGE>
of beneficial owners of more than 10% of the Holding Company Common Stock,
staggered terms for directors, noncumulative voting for directors, limits on the
calling of special meetings, a fair price/supermajority vote requirement for
certain business combinations and certain notice requirements. The 10% vote
limitation would not affect the ability of an individual who is not the
beneficial owner of more than 10% of the Holding Company Common Stock to solicit
revocable proxies in a public solicitation for proxies for a particular meeting
of stockholders and to vote such proxies.
Any or all of these provisions may discourage potential proxy contests and
other takeover attempts, particularly those which have not been negotiated with
the Board of Directors. In addition, the Holding Company's certificate of
incorporation also authorizes preferred stock with terms to be established by
the Board of Directors which may rank prior to the Holding Company Common Stock
as to dividend rights, liquidation preferences, or both, may have full or
limited voting rights and may have a dilutive effect on the ownership interests
of holders of the Holding Company Common Stock. See "Restrictions on Acquisition
of the Holding Company and the Bank."
Provisions in Management Contracts and Benefit Plans. Certain
provisions contained in the proposed management contracts and benefit plans that
provide for cash payments or the vesting of benefits upon a change of control of
the Holding Company or the Bank may have an anti-takeover effect and could
discourage an acquisition of the Holding Company. See "Management of the Bank -
Employment Agreements."
Voting Control of Directors and Executive Officers. The trustees and
executive officers (13 persons) of the Bank propose to purchase an aggregate of
approximately ^ 261,000 shares, representing approximately ^ 4.4% of the shares
offered in the Conversion at the minimum of the Estimated Valuation Range, and ^
3.2% of the shares offered in the Conversion at the maximum of the Estimated
Valuation Range, exclusive of shares that may be attributable to directors and
officers through the RRP, the Stock Option and Incentive Plan and the ESOP,
which may give directors, executive officers and employees the potential to
control the voting of additional Holding Company Common Stock and including
shares issued to the Foundation. A number of shares equal to 4% of the shares of
Holding Company Common Stock issued in the Conversion, including shares issued
to the Foundation, will be available for issuance under the RRP (331,660 shares
at the maximum of the Estimated Valuation Range), and a number of shares equal
to 10% of the shares issued in the Conversion, including shares issued to the
Foundation, will be available for issuance under the Stock Option and Incentive
Plan (829,150 shares at the maximum of the Estimated Valuation Range). It is
intended that the ESOP will purchase 8% of the shares issued in the Conversion,
including shares issued to the Foundation (663,320 shares at the maximum of the
Estimated Valuation Range). In connection with the Conversion, the Foundation
will receive 241,500 shares of Holding Company Common Stock at the maximum of
the Estimated Valuation Range which, if a waiver of the voting restriction
imposed on such Holding Company Common Stock is obtained from the FDIC and the
Superintendent, may be voted as determined by the Board of Directors of the
Foundation who will initially consist of four Directors of the Holding Company
and the Bank and two outside directors. Thus, after the Conversion, the
aggregate number of shares which may be controlled by directors and executive
officers of the Holding Company, including those to be issued to the Foundation
and those that may be issued under the Stock Option and Incentive Plan and the
RRP totaled ^ 1,663,310 at the maximum of the Estimated Valuation Range, or ^
18.2% of the total number of shares at the maximum of the Estimated Valuation
Range, including shares issued to the Foundation, on a fully diluted basis
(including shares available for issuance under the Stock Option and Incentive
Plan and RRP). Management's voting control could, together with additional
stockholder support, defeat proposals requiring a minimum of 80% approval of
stockholders. As a result, this voting control may preclude takeover attempts
that certain stockholders deem to be in their best interest and tend to
perpetuate existing management. See "Restrictions on Acquisition of the Holding
Company and the Bank--Restrictions in the Holding Company's Certificate of
Incorporation and Bylaws."
Post-Conversion Compensation and Other Expense
After completion of the Conversion, the Holding Company's noninterest
expense is likely to increase as a result of the financial accounting, legal and
tax expenses usually associated with operating as a public company. See
"Regulation" and "Taxation" and "Additional Information." In addition, it is
currently anticipated that the Holding Company will record additional expense
based on the proposed RRP. See "Pro Forma Data" and "Management of the Bank -
Benefit Plans" and "-- RRP." Finally, the Holding Company will also record
additional expense as a result of the adoption of the ESOP. See "Management of
the Bank - Benefit Plans - Employee Stock Ownership Plan."
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP 93-6") requires an employer to record compensation
expense in an amount equal to the fair value of shares committed to be
15
<PAGE>
released to employees from an employee stock ownership plan. Assuming shares of
common stock appreciate in value over time, SOP 93-6 would increase compensation
expense relating to the ESOP to be established in connection with the
Conversion. It is not possible to determine at this time the extent of such
impact on future net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of New Accounting
Standards" and "Pro Forma Data."
In addition, the Holding Company will experience additional expense in
the quarter in which the Conversion is completed as a result of the shares that
are contributed by the Holding Company to the charitable foundation. See "The
Conversion -- Establishment of ^ Cohoes Savings Foundation."
Subsequent to June 30, 1998, Cohoes Savings Bank terminated its
proposed merger with SFS Bancorp, Inc. and paid an agreed upon fee of $2.0
million to SFS Bancorp, Inc. The payment of this fee is not reflected in any
historical or pro forma information presented.
Absence of Active Market for the Common Stock
The Holding Company, as a newly organized company, has never issued
capital stock and, consequently, there is no established market for the Holding
Company Common Stock at this time. The Holding Company has received approval to
have its common stock listed on The Nasdaq National Market System (the "Nasdaq
NMS") under the symbol "COHB" conditioned on the consummation of the Conversion.
The Nasdaq NMS requires a minimum of three market makers in order to be eligible
for inclusion on the Nasdaq NMS. Keefe Bruyette and Woods has indicated its
intention to make a market in the Holding Company's Common Stock following
completion of the Conversion. The Company believes it will have additional
market makers and will meet the eligibility requirements for inclusion on the
Nasdaq NMS. A public trading market having the desirable characteristics of
depth, liquidity and orderliness depends upon the existence of willing buyers
and sellers at any given time, the presence of which is dependent upon the
individual decisions of buyers and sellers over which neither the Holding
Company nor any market maker has control. Accordingly, there can be no assurance
that an active and liquid trading market for the Holding Company Common Stock
will develop or that, if developed, will continue, nor is there any assurance
that purchasers of the Holding Company Common Stock will be able to sell their
shares at or above the purchase price for Holding Company Common Stock. In the
event a liquid market for the Holding Company Common Stock does not develop or
market makers for the Holding Company Common Stock discontinue their activities,
such occurrences may have an adverse impact on the liquidity of the Holding
Company Common Stock and the market value of the Holding Company Common Stock.
See "Market for Common Stock."
Year 2000 Compliance
General. The year 2000 ("Y2K") issue confronting the Bank and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six ^ digit dates that
provided only two digits to identify the calender year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have ^ increased their focus
upon Y2K compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council ("FFIEC") has issued several interagency
statements on Y2K Project Management Awareness. These statements require
financial institutions to, among other things, examine the Y2K implications of
their reliance on vendors and with respect to data exchange and the potential
impact of the Y2K issue on their customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure risk and prepare a plan to address the Y2K issue. In
addition, the federal banking regulators have issued safety and soundness
guidelines to be followed by insured depository institutions, such as the Bank,
to assure resolution of any Y2K problems. The federal banking agencies have
asserted that Y2K testing and certification is a key safety and soundness issue
in conjunction with regulatory examinations and, thus, that an ^ institution's
failure to address appropriately the Y2K issue could result in supervisory
action, including the reduction of the ^ institution's supervisory ratings, the
denial of applications for approval of mergers or acquisitions or the imposition
of civil money penalties.
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Risk. Like most financial institutions service providers, the Bank and
its operations may be significantly affected by the Y2K issue due to its
dependence on technology and date-sensitive data. Computer software and hardware
and other equipment, both within and outside the Bank's direct control and third
parties with whom the Bank electronically or ^ operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated, and the
Bank could experience an inability to process transactions, prepare statements
or engage in similar normal business activities. Likewise, under certain
circumstances, a failure to adequately address the Y2K issue could adversely
affect the viability of the Bank's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could result in a significant adverse impact on the Bank's operations and,
in turn, its financial condition and ^ results of operations.
State of Readiness. During November 1997, the Bank formulated its plan
to address the Y2K issue. Since that time, the Bank has taken the following
steps:
o Established senior management advisory and review
responsibilities;
o Completed a Bank-wide inventory of applications and system
software;
o Built an internal tracking database for application and vendor
software;
o Developed compliance plans and schedules for all lines of
business;
o Initiated vendor compliance verification;
o Begun awareness and education activities for employees through
existing internal communication channels; and
o Developed a process to respond to customer inquiries as well as
help educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Bank's Y2K plan:
Awareness Phase. The Bank formally established a Y2K plan headed by a
senior manager, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes milestones,
budget estimates, strategies, and methodologies to track and report the status
of the project. Members of the project team also attended conferences and
information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is substantially complete.
Assessment Phase. The Bank's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was made to quantify the extent of the Bank's Y2K
exposure. A corporate inventory (which is periodically updated as new technology
is acquired and as systems progress through subsequent phases) was developed to
identify and monitor Y2K readiness for information systems (hardware, software,
utilities and vendors) as well as environmental systems (security systems,
facilities, etc.). Systems were prioritized based on business impact and
available alternatives. Mission critical systems supplied by vendors were
researched to determine Y2K readiness. If Y2K-ready versions were not available,
the Bank began identifying functional replacements which were either upgradable
or currently Y2K- ready, and a formal plan was developed to repair, upgrade or
replace all mission critical systems. This phase is substantially complete.
Beginning in October 1998, all unsecured credits greater than $100,000
were sent a questionnaire developed by the Bank's credit administration staff to
evaluate Y2K exposure. The Bank also contacted its most significant borrowers
informing them of the Y2K issue. Because the Bank's loan portfolio is primarily
real estate-based and is diversified with regard to individual borrowers and
types of businesses, and the Bank's primary market area is not significantly
dependent on one employer or industry, the Bank does not expect any significant
or prolonged Y2K-related
17
<PAGE>
difficulties that will affect net earnings or cash flow. As part of the current
credit approval process, all new and renewed loans are evaluated for Y2K risk.
Renovation Phase. The Bank's corporate inventory revealed that Y2K
upgrades were available for all vendor supplied mission critical systems, and
all these Y2K-ready versions have been delivered and placed into production and
have entered the validation process (with the exception of hardware upgrades to
certain of the Bank's automated teller machines and the voice response unit
("vru") which are expected to be completed by December 31, 1998).
Validation Phase. The validation phase is designed to test the ability
of hardware and software to accurately process date sensitive data. The Bank
currently is in the process of validation testing of each mission critical
system, with the degree of completion of such testing ranging from 25% to 100%.
The Bank's validation phase is expected to be completed by March 31, 1999 for
all mission critical systems. During the validation testing process to date, no
significant Y2K problems have been identified relating to any modified or
upgraded mission critical systems.
Implementation Phase. The Bank's plan calls for putting Y2K-ready code
into production before having actually completed Y2K validation testing.
Y2K-ready modified or upgraded versions have been installed and placed into
production with respect to all mission critical systems (with the exception of
the Bank's automated teller machine network and vru as to which hardware
upgrades are expected to be completed and in production by December 31, 1998).
Bank Resources Invested. The Bank's Y2K project team has been assigned
the task of ensuring that all systems across the Bank are identified, analyzed
for Y2K compliance, corrected, if necessary, tested, and changes put into
service by the end of 1998. The Y2K project team members represent all
functional areas of the Bank, including branches, data processing, loan
administration, accounting, item processing and operations, compliance, internal
audit, human resources, and marketing. The team is headed by a vice president
who reports directly to a member of the Bank's senior management team. The
Bank's Board of Directors oversees the Y2K plan and provides guidance and
resources to, and receives quarterly updates from, the Y2K project team.
The Bank expenses all costs associated with the required system changes
as those costs are incurred, and such costs are being funded through operating
cash flows. The total cost of the Y2K conversion project for the Bank is
estimated to be $109,000, all of which were incurred and expensed by the Bank
through June 30, 1998. The Bank does not expect significant increases in future
data processing costs related to Y2K compliance.
Contingency Plans. During the assessment phase, the Bank began to
develop back-up or contingency plans for each of its mission critical systems.
Virtually all of the Bank's mission critical systems are dependent upon third
party vendors or service providers, therefore, contingency plans include
selecting a new vendor or service provider and converting to their system. In
the event a current vendor's system fails during the validation phase and it is
determined that the vendor is unable or unwilling to correct the failure, the
Bank will convert to a new system from a pre-selected list of prospective
vendors. In each such case, realistic trigger dates have been established to
allow for orderly and successful conversions. For some systems, contingency
plans consist of using spreadsheet software or reverting to manual systems until
system problems can be corrected. Although the Bank has been informed that each
of its primary vendors anticipates that all mission critical systems either are
or will timely be Y2K-ready, no warranties have been received from such vendors.
Risks Associated with the Establishment of the Charitable Foundation
Pursuant to the Plan of Conversion, the Holding Company and the Bank
intend to voluntarily establish a charitable foundation in connection with the
Conversion. The Foundation has been incorporated under Delaware law as a
non-stock corporation and will be funded with the Stock Contribution. The Stock
Contribution will be dilutive to the ownership and voting interests of
stockholders and will have an adverse impact on the earnings of the Holding
Company on a consolidated basis in the period the Foundation is established.
As a condition to receiving the non-objection of the FDIC to the
Conversion and the approval of the Conversion by the Superintendent, the
Foundation will commit in writing to the FDIC and the Superintendent that all
shares of Holding Company Common Stock held by the Foundation will be voted in
the same ratio as all other shares of the Holding Company Common Stock on all
proposals considered by stockholders of the Holding Company;
18
<PAGE>
provided, however, that, consistent with the condition, the FDIC and the
Superintendent may waive this voting restriction under certain circumstances if
compliance with the voting restriction would: (i) cause a violation of the laws
of the State of Delaware; (ii) cause the Foundation to lose its tax-exempt
status, or cause the IRS to deny the Foundation's request for a determination
that it is an exempt organization or otherwise have a material and adverse tax
consequence on the Foundation; or (iii) cause the Foundation to be subject to an
excise tax under Section 4941 of the Code. In order for the FDIC and the
Superintendent to waive such voting restriction, the Holding Company's or the
Foundation's legal counsel must render an opinion satisfactory to FDIC and the
Superintendent that compliance with the voting restriction would have the effect
described in clauses (i), (ii) or (iii) above. Under those circumstances, the
FDIC and the Superintendent may grant a waiver of the voting restriction upon
submission of such opinion(s) by the Holding Company or the Foundation which are
satisfactory to the FDIC and the Superintendent. There can be no assurances that
a legal opinion addressing these issues will be rendered, or if rendered, that
the FDIC and the Superintendent will grant an unconditional waiver of the voting
restriction. As of the date hereof, no event has occurred which would require
the Holding Company to seek a waiver from the FDIC and the Superintendent of the
voting restriction.
Adverse Impact on Earnings. The Stock Contribution will have an adverse
impact on the Holding Company's earnings. The Holding Company will recognize an
expense in the amount of $2.4 million ($1.4 million net of taxes) in the quarter
in which the Conversion is completed based on the issuance of shares at the
maximum of the Estimated Valuation Range, which is expected to be the second
quarter of fiscal 1999. Such expense will have a material adverse impact on the
Holding Company's earnings in the fiscal quarter and year recorded. The Holding
Company has been advised by its legal counsel that the Stock Contribution should
be tax deductible, subject to a limitation based on 10% of the Holding Company's
annual taxable income. If the Stock Contribution had been made at June 30, 1998,
the Bank would have reported net income of $2.7 million for the fiscal year
rather than net income of $4.1 million.
In the future, the Holding Company may make additional contributions to
the Foundation, although the Holding Company has no current plans regarding the
amount or timing of any such future contributions. The amount of future
contributions, if any, will be determined based upon, among other factors, an
assessment of the Holding Company's then current financial position, operations,
and prospects and on the need for charitable activities in the Bank's market
area. Any such contributions, regardless of form, will result in an increase in
other operating expense and thus a reduction in net earnings. In addition, any
contributions of authorized but unissued shares would dilute the interests of
outstanding stockholders. However, the Holding Company currently anticipates
that any future contributions of shares by it to the Foundation will be funded
through shares repurchased in the open market.
Dilution of Stockholders' Interests. The Stock Contribution will
involve the donation of a number of shares equal to 3% of the shares of the
Holding Company Common Stock issued in the Conversion or up to 241,500 shares of
Holding Company Common Stock, par value $0.01 per share, or the sale of such
shares for their aggregate par value of $2,415 based on the maximum of the
Estimated Valuation Range, to the Foundation. Upon completion of the Conversion
and the Stock Contribution, the Holding Company will have 8,291,500 shares
issued and outstanding at the maximum of the Estimated Valuation Range, of which
the Foundation will own 241,500 shares, or 3.0%. As a result, persons purchasing
shares in the Conversion will have their share ownership and voting interest in
the Holding Company diluted by 2.9%. See "Pro Forma Data."
Possible Nondeductibility of the Stock Contribution. It is expected
that the IRS will rule that the Foundation is exempt from federal income tax
under Section 501(a) of the Code as an organization described in Section
501(c)(3) of the Code. As such, the Holding Company will be entitled to a
deduction in the amount of the Stock Contribution, subject to an annual
limitation based on 10% of the Holding Company's annual taxable income. The
Holding Company, however, would be able to carry forward any unused portion of
the deduction for five years following the Stock Contribution for Federal and
New York income tax purposes. Based on present information, the Holding Company
currently estimates that the Stock Contribution should be fully deductible for
Federal and New York income tax purposes. However, no assurances can be given
that the Holding Company will have sufficient pre-tax income over the five-year
period following the year in which the Stock Contribution is made to utilize
fully the carryover related to the excess contribution.
Potential Change in Valuation and Capital if the Stock Contribution is
Not Made. The Stock Contribution was taken into account by RP Financial in
determining the estimated pro forma market value of the Holding Company. The
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<PAGE>
aggregate price of the shares of Holding Company Common Stock being offered in
the Offering is based upon the Appraisal. The pro forma aggregate price of the
shares being offered for sale in the Conversion is currently estimated to be
between $59.5 million and $80.5 million, with a midpoint of $70.0 million.
If the Stock Contribution is not part of the Conversion, the Estimated
Valuation Range of the shares being offered is estimated to be between $62.9
million and $85.1 million. This represents an increase of $4.0 million at the
midpoint of the Estimated Valuation Range. In such event the estimated pro forma
stockholders' equity of the Holding Company would be approximately ^ $116.6
million at the midpoint based on a pro forma price to book ratio of ^ 63.5% and
a pro forma price to earnings ratio of ^ 12.2x. See "Comparison of Valuation and
Pro Forma Information with No Stock Contribution."
The decrease in the amount of Holding Company Common Stock being
offered for sale as a result of the Stock Contribution will not have a
significant effect on the Holding Company's or the Bank's capital position. The
Bank's regulatory capital is significantly in excess of its regulatory capital
requirements and will further exceed such requirements following the Conversion.
See "Comparison of Valuation and Pro Forma Information with No Stock
Contribution."
Potential Anti-Takeover Effect. Upon completion of the Conversion, the
Foundation would own 2.9% of the Holding Company's outstanding shares. Such
shares will be owned solely by the Foundation; however pursuant to the terms of
the Stock Contribution as mandated by the FDIC and the Superintendent, the
shares of Holding Company Common Stock must be voted in the same proportion as
all other shares of Holding Company Common Stock on all proposals considered by
the Holding Company's stockholders. See "The Conversion - Establishment of
Cohoes Savings Foundation." In the event that the FDIC and the Superintendent
were to waive this voting restriction, the Foundation's Board of Directors would
exercise sole voting power over such shares and would no longer be subject to
the voting restriction. However, the FDIC and the Superintendent could impose
additional conditions at that time on the composition of the Board of the
Foundation or which otherwise relate to control of the Common Stock of the
Holding Company held by the Foundation. See "The Conversion - Establishment of
The Cohoes Savings Foundation." If a waiver of the voting restriction were
granted by the FDIC and the Superintendent and no further conditions were
imposed on the Foundation at that time, management of the Holding Company and
the Bank could benefit to the extent that the Board of Directors of the
Foundation determines to vote the shares of Holding Company Common Stock held by
the Foundation in favor of proposals supported by the Holding Company and the
Bank. Furthermore, when the Foundation's shares are combined with shares
purchased directly by executive officers and directors of the Holding Company,
shares issued pursuant to proposed stock benefit plans, and shares held in the
Bank's ESOP, the aggregate of such shares could exceed 20% of the Holding
Company's outstanding Common Stock, which could enable management to defeat
proposals requiring 80% stockholder approval. Consequently, this potential
voting control might preclude takeover attempts that other stockholders deem to
be in their best interest, and might tend to perpetuate management. Since the
ESOP shares are allocated to eligible employees of the Bank, any unallocated
shares will be voted in a manner calculated to most accurately reflect the
instructions received from participants regarding the allocated shares so long
as such vote is in accordance with the provisions of ERISA, and because awards
under the proposed stock benefit plans may be granted to employees other than
executive officers and directors, management of the Holding Company does not
expect to have voting control of all shares held or to be allocated by the ESOP
or other stock benefit plans. See "-- Takeover Defensive Provisions."
There are no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the management
or policies of the Holding Company by the Foundation, including agreements
related to voting, acquisition or disposition of the Holding Company Common
Stock. Finally, as the Foundation sells its shares of Holding Company Common
Stock over time, its ownership interest and voting power in the Holding Company
is expected to decrease.
COHOES BANCORP, INC.
The Holding Company was formed at the direction of the Bank in
September 1998 for the purpose of becoming a savings and loan holding company
and owning all of the outstanding stock of the Bank issued in the Conversion.
The Holding Company is incorporated under the laws of the State of Delaware. The
Holding Company is authorized to do
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<PAGE>
business in the State of New York, and generally is authorized to engage in any
activity that is permitted by the Delaware General Corporation Law. The business
of the Holding Company initially will consist only of the business of the Bank.
The holding company structure will, however, provide the Holding Company with
greater flexibility than the Bank has to diversify its business activities,
through existing or newly formed subsidiaries, or through acquisitions or
Mergers of stock financial institutions, as well as, other companies. Although
there are no current arrangements, understandings or agreements regarding any
such activity or acquisition, the Holding Company will be in a position after
the Conversion, subject to regulatory restrictions, to take advantage of any
favorable acquisition opportunities that may arise.
The assets of the Holding Company will consist initially of the stock
of the Bank, a note evidencing the Holding Company's loan to the ESOP and up to
50% of the net proceeds from the Conversion (less the amount used to fund the
ESOP loan). See "Use of Proceeds." Initially, any activities of the Holding
Company are anticipated to be funded by such retained proceeds and the income
thereon and dividends from the Bank, if any. See "Dividends" and "Regulation -
The Holding Company." Thereafter, activities of the Holding Company may also be
funded through sales of additional securities, through borrowings and through
income generated by other activities of the Holding Company. At this time, there
are no plans regarding such other activities other than the intended loan to the
ESOP to facilitate its purchase of Holding Company Common Stock in the
Conversion. See "Management of the Bank - Benefit Plans -Employee Stock
Ownership Plan."
The executive office of the Holding Company is located at 75 Remsen
Street, Cohoes, New York 12047-2892. Its telephone number at that address is
(518) 233-6500.
COHOES SAVINGS BANK
The Bank serves the financial needs of communities in its market area
through its main office and 16 other full service branch offices located
throughout the Bank's primary market area. Its deposits are insured up to
applicable limits by the FDIC. At June 30, 1998, the Bank had total assets of
$535.7 million, deposits of $449.5 million and total equity of $53.3 million (or
9.95% of total assets).
The Bank has been, and intends to continue to be, an independent,
community oriented financial institution. The Bank's business involves
attracting deposits from the general public and using such deposits, together
with other funds, to originate primarily residential mortgage loans, and to a
lesser extent, commercial and multi-family real estate, consumer and commercial
business loans. The Bank originates its loans primarily in the Bank's market
area and to a lesser extent, it has in the past originated multi-family and
commercial real estate loans in New York City. However, depending upon market
conditions and as a result of the somewhat depressed economy in the Bank's
primary market area, the Bank may explore lending opportunities outside its
primary market area in the future. At June 30, 1998, $258.4 million, or 62.07%,
of the Bank's total loan portfolio consisted of residential mortgage loans. See
"Business of the Bank - Lending Activities." The Bank also invests in government
agency and corporate debt securities and other permissible investments. See
"Business of the Bank - Investment Activities."
The executive office of the Bank is located at 75 Remsen Street,
Cohoes, New York 12047-2892. Its telephone number at that address is (518)
233-6500.
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USE OF PROCEEDS
Although the actual net proceeds from the sale of the Conversion Shares
cannot be determined until the Conversion is completed, it is presently
anticipated that such net proceeds will be between $57.9 million and $76.7
million (or up to $90.6 million in the event of an increase in the aggregate pro
forma market value of the Holding Company Common Stock of up to 15% above the
maximum of the Estimated Valuation Range). See "Pro Forma Data" and "The
Conversion - Stock Pricing" and "--Number of Shares to be Issued" as to the
assumptions used to arrive at such amounts.
In exchange for all of the common stock of the Bank issued in the
Conversion, the Holding Company will contribute approximately 50% of the net
proceeds from the sale of the Conversion Shares to the Bank. On an interim
basis, the proceeds will be invested by the Holding Company and the Bank in
short-term investments similar to those currently in the Bank's portfolio. The
specific types and amounts of short-term assets will be determined based on
market conditions at the time of the completion of the Conversion. In addition,
the Holding Company intends to provide the funding for the ESOP loan. Based upon
the initial purchase price of $10.00 per share, the dollar amount of the ESOP
loan would range from $4.9 million (based upon the sale of shares at the minimum
of the Estimated Valuation Range) to $6.6 million (based upon the sale of shares
at the maximum of the Estimated Valuation Range). The interest rate to be
charged by the Holding Company on the ESOP loan will be based upon the prime
rate of interest as reported in the Wall Street Journal at the time of
origination. It is anticipated that the ESOP will repay the loan through
periodic tax-deductible contributions from the Bank over a fifteen-year period.
The net proceeds received by the Bank will become part of the Bank's
general funds for use in its business and will be used to support the Bank's
existing operations, subject to applicable regulatory restrictions. Immediately
upon the completion of the Conversion, it is anticipated that the Bank will
invest such proceeds into short-term assets. Subsequently, the Bank intends to
redirect the net proceeds to the origination of loans, subject to market
conditions.
After the completion of the Conversion, the Holding Company will
redirect the net proceeds invested by it in short-term assets into a variety of
securities similar to those already held by the Bank, as well as in deposit
accounts with the Bank. Also, the Holding Company may use a portion of the
proceeds to fund the RRP, subject to stockholder approval of such plan.
Compensation expense related to the RRP will be recognized as share awards vest.
See "Pro Forma Data." Following stockholder ratification of the RRP, the RRP
will be funded either with shares purchased in the open market or with
authorized but unissued shares. Based upon the initial purchase price of $10.00
per share, the amount required to fund the RRP through open-market purchases
would range from approximately $2.5 million (based upon the sale of shares at
the minimum of the Estimated Valuation Range and including shares issued to the
Foundation) to approximately $3.3 million (based upon the sale of shares at the
maximum of the Estimated Valuation Range). In the event that the per share price
of the Holding Company Common Stock increases above the $10.00 per share
purchase price following completion of the Offering, the amount necessary to
fund the RRP would also increase. The use of authorized but unissued shares to
fund the RRP could dilute the holdings of stockholders who purchase Holding
Company Common Stock in the Conversion and who receive Exchange Shares in the
Merger. See "Business of the Bank - Lending Activities" and " - Investment
Activities" and "Management of the Bank - Benefit Plans - Employee Stock
Ownership Plan" and "- RRP."
The proceeds may also be utilized by the Holding Company to repurchase
(at prices which may be above or below the initial offering price) shares of the
Holding Company Common Stock through an open market repurchase program subject
to applicable regulations, although the Holding Company currently has no
specific plan to repurchase any of its stock. In the future, the Board of
Directors of the Holding Company will make decisions on the repurchase of the
Holding Company Common Stock based on its view of the appropriateness of the
price of the Holding Company Common Stock as well as the Holding Company's and
the Bank's investment opportunities and capital needs.
The Bank may use a portion of the proceeds to fund the creation of one
or more new branch offices within its primary market area. In addition, the
Holding Company or the Bank might consider expansion through the acquisition of
other financial services providers (or branches, deposits or assets thereof),
although there are no specific plans, negotiations or written or oral agreements
regarding any acquisitions at this time.
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<PAGE>
DIVIDENDS
The Holding Company currently plans to pay dividends in the future.
However, the amount and timing of such payments has yet to be determined.
Dividends, when and if paid, will be subject to determination and declaration by
the Board of Directors at its discretion. The Board will take into account the
Holding Company's consolidated financial condition, the Bank's regulatory
capital requirements, tax considerations, industry standards, economic
conditions, regulatory restrictions, general business practices and other
factors.
It is not presently anticipated that the Holding Company will conduct
significant operations independent of those of the Bank for some time following
the Conversion. As such, the Holding Company does not expect to have any
significant source of income other than earnings on the net proceeds from the
Conversion retained by the Holding Company (which proceeds are currently
estimated to range from $57.9 million to $76.7 million based on the minimum and
the maximum of the Estimated Valuation Range, respectively or $28.9 million to
$38.4 million after the purchase of the stock of the Bank) and dividends from
the Bank, if any. Consequently, the ability of the Holding Company to pay cash
dividends to its stockholders will be dependent upon such retained proceeds and
earnings thereon, and upon the ability of the Bank to pay dividends to the
Holding Company. See "Description of Capital Stock - Holding Company Capital
Stock - Dividends." The Bank, like all savings banks regulated by the FDIC, is
subject to certain restrictions on the payment of dividends based on its net
income, its capital in excess of the regulatory capital requirements and the
amount of regulatory capital required for the liquidation account to be
established in connection with the Conversion. In addition, under New York state
banking law, a New York chartered stock savings bank may declare and pay
dividends out of its net profits, unless there is an impairment of capital, but
approval of the Superintendent is required if the total of all dividends
declared in a calendar year would exceed the total of its net profits for that
year combined with its retained net profits of the preceding two years, subject
to certain adjustments. See "The Conversion - Effects of Conversion -- Deposit
Accounts and Loans" and "Regulation - The Bank -- Capital Requirements" and "-
Limitations on Dividends." Earnings allocated to the Bank's "excess" bad debt
reserves and deducted for federal income tax purposes cannot be used by the Bank
to pay cash dividends to the Holding Company without adverse tax consequences.
See "Regulation" and "Taxation."
MARKET FOR COMMON STOCK
The Bank, as a mutual savings bank, and the Holding Company, as a newly
organized company, have never issued capital stock. Consequently, there is not
at this time an existing market for the Holding Company Common Stock. The
Holding Company has been approved for listing of the Holding Company Common
Stock on the Nasdaq NMS under the symbol "COHB" upon completion of the
Conversion. In order to be quoted on the Nasdaq NMS, among other criteria, there
must be at least three market makers for the Holding Company Common Stock. KBW
has agreed to act as a market maker for the Holding Company Common Stock
following the Conversion, and assist in securing additional market makers to do
the same. A public trading market having the desirable characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of both
willing buyers and sellers of the Holding Company Common Stock at any given
time. Accordingly, there can be no assurance that an active and liquid market
for the Holding Company Common Stock will develop or be maintained or that
resales of the Holding Company Common Stock can be made at or above the purchase
price. See "The Conversion - Stock Pricing" and "-- Number of Shares to be
Issued."
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<PAGE>
REGULATORY CAPITAL
At June 30, 1998, the Bank exceeded all of the regulatory capital
requirements applicable to it. The table below sets forth the historical
regulatory capital of the Bank at June 30, 1998 and the pro forma regulatory
capital of the Bank after giving effect to the Conversion, based upon the sale
of the number of shares shown in the table. The pro forma regulatory capital
amounts reflect the receipt by the Bank of 50% of the net Conversion proceeds,
minus the amounts to be loaned to the ESOP and contributed to the RRP. The pro
forma risk-based capital amounts assume the investment of the net proceeds
received by the Bank in assets which have a risk-weight of 20% under applicable
regulations, as if such net proceeds had been received at June 30, 1998.
<TABLE>
<CAPTION>
Pro Forma at June 30, 1998 Based on
---------------------------------------------------------------------------------------
Cohoes Savings Bank Minimum Midpoint Maximum Maximum As Adjusted
Historical at ---------------------------------------------------------------------------------------
June 30, 1998
Conversion Shares Sold Conversion Shares Sold Conversion Shares Sold Conversion Shares Sold
at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
--------------------- ---------------------- --------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets (1) Amount Assets (1)
------- ---------- ------ --------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GAAP Capital..... $53,282 9.95% $74,880 13.32% $78,775 13.86% $82,669 14.46% $87,148 15.10%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Leverage capital:
Actual........ $53,270 ^10.13% $74,868 13.56% $78,763 14.14% $82,657 14.71% $87,136 15.36%
Requirement... 21,033 4.00 22,093 4.00 22,283 4.00 22,474 4.00% 22,693 4.00
------- ------ ------- ------ ------- ------ -------- ------ -------- -----
Excess........ $32,237 6.13% $52,775 9.56% $56,479 10.14% $60,183 10.71% $64,443 11.36%
======= ====== ======= ====== ======= ===== ======= ===== ======= =====
Risk-based capital(2):
Actual........ $56,803 17.08% $78,401 23.21% $82,296 24.29% $86,190 25.37% $90,669 26.60%
Requirement... 26,601 8.00 27,025 8.00 27,101 8.00 27,177 8.00 27,265 8.00
------- ------ ------- ------ ------- ------ -------- ------ -------- -----
Excess........ $30,202 9.08% $51,376 15.21% $55,194 16.29% $59,013 17.37% $63,404 18.60%
======= ====== ======= ===== ======= ===== ======= ===== ======= =====
- --------------
<FN>
(1) Adjusted total or adjusted risk-weighted assets, as appropriate. As of June
30, 1998, the adjusted total and risk-weighted assets of the Bank were
$525.8 million and $332.5 million, respectively.
(2) Does not reflect the interest rate risk component to be added to the
risk-based capital requirements or, in the case of the core capital
requirement, the 4.0% requirement to be met in order for an institution to
be "adequately capitalized" under applicable laws and regulations. See
"Regulation - Regulatory Capital Requirements."
</FN>
</TABLE>
24
<PAGE>
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at June 30, 1998 and the pro forma consolidated capitalization of the Holding
Company after giving effect to the Conversion, based upon the sale of shares at
the maximum of the Estimated Valuation Range and the other assumptions set forth
under "Pro Forma Unaudited Financial Information - Additional Pro Forma Data."
<TABLE>
<CAPTION>
The Holding Company - Pro Forma Consolidated
Based Upon Sale at $10.00 Per Share
---------------------------------------------------------
9,257,500
5,950,000 7,000,000 8,050,000 Shares(1)
Cohoes Savings Shares Shares Shares (15% above
Bank (Minimum of (Midpoint of (Maximum of Maximum of
Historical Range) Range) Range) Range)
------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Deposits (2).............................. $449,541 $449,541 $449,541 $449,541 $449,541
Borrowings................................ 19,897 19,897 19,897 19,897 19,897
-------- -------- -------- --------- ---------
Total deposits and borrowings............. $469,438 $469,438 $469,438 $469,438 $469,438
======== ======== ======== ======== ========
Stockholders' equity:
Serial preferred stock, $0.01 par value..
^ 5,000,000 shares authorized............
none to be outstanding................. $ --- $ --- $ --- $ --- $ ---
Common stock, $0.01 par value,
^ 25,000,000 shares authorized
shares to
be issued as reflected (3)............. --- 61 72 83 95
Additional paid-in capital............... --- 59,629 70,317 81,006 93,298
Retained earnings (4)(5)................. 53,270 52,199 52,010 51,821 51,604
Net unrealized gain on available-for-sale
securities, net of taxes............... 12 12 12 12 12
Less:
Common stock held or to be acquired
by the ESOP (6)................. --- (4,903) (5,768) (6,633) (7,628)
Common stock to be acquired by the
RRP (7).......................... --- (2,451) (2,884) (3,317) (3,814)
------- -------- ------- ------ -------
Total stockholders' equity................ $53,282 $104,547 $113,759 $122,972 $133,567
======= ======== ======== ======== ========
- ----------
<FN>
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
Holding Company Common Stock in the Offerings. Such withdrawals would reduce
pro forma deposits by the amount of such withdrawals.
(3) Reflects the issuance of the Conversion Shares to be sold in the Offering.
No effect has been given to the issuance of additional shares of Holding
Company Common Stock pursuant to the proposed Stock Option and Incentive
Plan. See "Pro Forma Unaudited Financial Information Additional Pro Forma
Data" and "Management - Benefits - Stock Option and Incentive Plan." Also
reflects issuance of additional shares of Holding Company Common Stock to
the Foundation.
(4) The retained earnings of the Bank will be substantially restricted after the
Conversion by virtue of the liquidation account to be established in
connection with the Conversion. See "The Conversion - Liquidation Rights."
In addition, certain distributions from the Bank's retained earnings may be
treated as being from its accumulated bad debt reserve for tax purposes,
which would cause the Bank to have additional taxable income.
See "Taxation."
(5) Pro forma stockholders' equity includes the effect of an estimated one-time
expense of approximately $1.8 million, $2.1 million, $2.4 million and $2.8
million ($1.1 million, $1.3 million, $1.5 million and $1.7 million, net of
tax) relating to the contribution of 178,500, 210,000, 245,000 and 277,725
shares of Holding Company Common Stock to the Foundation at the minimum,
midpoint, maximum and maximum as adjusted of the valuation range. Since the
estimated expense non-recurring, it has not been reflected in the pro forma
combined income statement and related per share calculations. The expense is
expected to be incurred shortly following the Conversion. Pro forma
stockholders' equity does not include the effect of the $2.0 million fee
($1.2 million net of tax) paid to SFS Bancorp, Inc. as a result of the
termination of the proposed merger between the Holding Company and SFS
Bancorp, Inc.
(6) Assumes that an amount equal to 8% of the Holding Company Common Stock sold
in the Offerings will be purchased by the ESOP, which is reflected as a
reduction of stockholders' equity. The ESOP shares will be purchased with
funds loaned to the ESOP by the Holding Company. See "Pro Forma Unaudited
Financial Information - Additional Pro Forma Data" and "Management -
Benefits - Employee Stock Ownership Plan."
(7) The Holding Company intends to adopt the RRP and to submit such plan to
stockholders at an annual or special meeting of stockholders held at least
six months following the consummation of the Conversion. If the plan is
approved by stockholders, the Holding Company intends to purchase a number
of shares of Holding Company Common Stock equal to 4% of the Holding Company
Common Stock sold in the Offering. Assumes that stockholder approval had
been obtained and that the shares have been purchased in the open market at
the purchase price. However, in the event the Holding Company issues
authorized but unissued shares of Holding Company Common Stock to the RRP in
the amount of 4% of the Holding Company Common Stock sold in the Offering
(including shares issued to the Foundation), the voting interests of
existing stockholders would be diluted approximately 2.8% (assuming the
issuance of 8,050,000 Conversion Shares and the contribution of 241,500
shares of Holding Company Common Stock to the Foundation). The shares are
reflected as a reduction of stockholders' equity. See "Pro Form Unaudited
Financial Information - Additional Pro Forma Data" and "Management -
Benefits - Recognition and Retention Plan."
</FN>
</TABLE>
25
<PAGE>
PRO FORMA DATA
The following tables provide unaudited pro forma data with respect to
the Holding Company's stockholders' equity, net income and related per share
amounts based upon the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range. The actual net proceeds from the sale of the
Conversion Shares cannot be determined until the Conversion is completed.
However, net proceeds are currently estimated to be between $57.9 million and
$78.7 million (or $90.6 million in the event the Estimated Valuation Range is
increased by 15%) based upon the following assumptions: (i) all Conversion
Shares will be sold in the Subscription Offering; (ii) KBW will receive a fee
equal to 1.20% of the aggregate purchase price for sales in the Subscription
Offering (excluding the sale of shares to the ESOP, employee benefit plans,
officers, directors and their immediate families and the Foundation); (iii) the
Holding Company will contribute to the Foundation a number of shares equal to
3.0% of the shares of Holding Company Common Stock issued in the Conversion from
authorized but unissued shares; and (iv) total expenses, including the marketing
fees paid to KBW, of the Conversion will be between $1.6 million and $1.8
million (or $2.0 million in the event the Estimated Valuation Range is increased
by 15%). Actual expenses may vary from those estimated. It is also assumed that
Conversion Shares had been sold at the beginning of the period and the net
proceeds from the Offering had been invested at 5.37% which represents the yield
on one-year U.S. Government securities at June 30, 1998. The yield on one-year
U.S. Government securities was used rather than the arithmetic average of the
average yield on total interest-earning assets and the average rate paid on
deposits, because the yields on one-year U.S. Government securities are believed
to be more reflective of market interest rates. The effect of withdrawals from
deposit accounts at the Bank for the purchase of Conversion Shares in the
Offering has not been reflected. A combined effective federal and state income
tax rate of 40.0% has been assumed for the period, resulting in an after-tax
yield of 3.22% for the year ended June 30, 1998.
The following pro forma unaudited information is based, in part, on
historical information related to the Holding Company and assumptions as to
future events. For these and other reasons, the pro forma unaudited financial
data may not be representative of the financial effects of the Conversion at the
dates on which such transactions actually occur and should not be taken as
indicative of future results of operations. Pro forma stockholders' equity
represents the difference between the stated amount of assets and liabilities of
the Holding Company computed in accordance with GAAP.
Subsequent to June 30, 1998, Cohoes Savings Bank terminated its
proposed merger with SFS Bancorp, Inc. and paid an agreed upon fee of $2.0
million to SFS Bancorp, Inc. The payment of this fee is not reflected in any
historical or pro forma information presented.
The following tables give effect to the issuance of a number of shares
equal to 3.0% of the Common Stock of the Holding Company sold in the Conversion
from authorized but unissued shares to the Foundation concurrently with the
completion of the Conversion. The pro forma stockholders' equity is not intended
to represent the fair market value of the Holding Company Common Stock and may
be different than amounts that would be available for distribution to
stockholders in the event of liquidation.
26
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended June 30, 1998
-----------------------------------------------------------------
5,950,000 7,000,000 8,050,000 9,257,500
Conversion Conversion Conversion Conversion
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 Per $10.00 Per $10.00 Per $10.00 Per Share
Share (Minimum Share (Midpoint Share (Maximum (15% above
of Range) of Range) of Range) Maximum of Range)
-----------------------------------------------------------------
(Dollars in Thousands, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Gross proceeds................................ $ 59,500 $ 70,000 $ 80,500 $ 92,575
Plus: Shares acquired by Foundation........... 1,785 2,100 2,415 2,777
--------- -------- -------- --------
Pro forma market capitalization.............. $ 61,285 $ 72,100 $ 82,915 $ 95,352
========= ======== ======== ========
Gross proceeds................................ $ 59,500 $ 70,000 $ 80,500 $ 92,575
Less offering expenses and commissions........ 1,595 1,711 1,826 1,959
--------- -------- -------- --------
Estimated net proceeds................... $ 57,905 $ 68,289 $ 78,674 $ 90,616
Less: Shares purchased by the ESOP............ (4,903) (5,768) (6,633) (7,628)
Shares purchased by the RRP.... (2,451) (2,884) (3,317) (3,814)
--------- -------- -------- --------
Total estimated net proceeds, as adjusted(1)...... $ 50,551 $ 59,637 $ 68,724 $ 79,174
========= ======== ======== ========
Net income(2):
Historical............................... $ 4,087 $ 4,087 $ 4,087 $ 4,087
Pro forma income on net proceeds, as adjusted 1,629 1,922 2,214 2,551
Pro forma ESOP adjustment(3)................. (196) (231) (265) (305)
Pro forma RRP adjustment(4)........... (294) (346) (398) (458)
--------- -------- -------- ---------
Pro forma net income..................... $ 5,226 $ 5,432 $ 5,638 $ 5,875
========= ======== ======== =========
Diluted net income per share(2)(5):
Historical............................... $0.72 $0.61 $0.53 $0.46
Pro forma income on net proceeds, as adjusted 0.29 0.29 0.29 0.29
Pro forma ESOP adjustment(3)................. (0.03) (0.03) (0.03) (0.03)
Pro forma RRP adjustment(4)........... (0.05) (0.05) (0.05) (0.05)
-------- ------- ------- --------
Pro forma diluted net income per share(4)(6) $ 0.93 $ 0.82 $ 0.74 $ 0.67
======== ======== ======= =======
Offering price to pro forma diluted net income
per share(5) 10.75x 12.20x 13.51x 14.93x
======== ======== ======= =======
Stockholders' equity:
Historical............................... $ 53,282 $ 53,282 $ 53,282 $ 53,282
Estimated net proceeds................... 57,905 68,289 78,674 90,616
Plus: Shares issued to Foundation....... 1,785 2,100 2,415 2,777
Less: Contribution to Foundation........ (1,785) (2,100) (2,415) (2,777)
Plus: Tax benefit of contribution to Foundation 714 840 966 1,111
Less: Common stock acquired by the ESOP(3).. (4,903) (5,768) (6,633) (7,628)
Common stock to be acquired by the RRP(4) (2,451) (2,884) (3,317) (3,814)
--------- --------- -------- --------
Pro forma stockholders' equity(4)(6)(7)...... $ 104,547 $ 113,759 $122,972 $133,567
======== ======== ======== ========
Stockholders' equity per share(5):
Historical............................... $ 8.69 $ 7.39 $ 6.43 $ 5.59
Estimated net proceeds................... 9.45 9.47 9.49 9.50
Plus: Shares issued to Foundation....... 0.29 0.29 0.29 0.29
Less: Contribution to Foundation........ (0.29) (0.29) (0.29) (0.29)
Plus: Tax benefit of contribution to Foundation 0.12 0.12 0.12 0.12
Less: Common stock acquired by the ESOP(3).. (0.80) (0.80) (0.80) (0.80)
Common stock to be acquired by the RRP(4) (0.40) (0.40) (0.40) (0.40)
-------- --------- -------- --------
Pro forma stockholders' equity per share(4)(6)(7) $ 17.06 $ 15.78 $ 14.84 $ 14.01
========= ========= ======== ========
Purchase price as a percentage of pro forma
stockholders' equity per share(5)....... 58.62% 63.37% 67.39% 71.38%
===== ===== ===== =====
- ----------------------
<FN>
(1) Estimated net proceeds, as adjusted, consist of the estimated net proceeds
from the Offering minus (i) the proceeds attributable to the purchase by
the ESOP; and (ii) the value of the shares to be purchased by the RRP,
subject to stockholder approval, after the Conversion at an assumed
purchase price of $10.00 per share.
(2) Does not give effect to the non-recurring expense that will be recognized
in 1998 as a result of the establishment of the Foundation or the one-time
payment of $2.0 million to SFS Bancorp, Inc. in connection with the
termination of its merger with Cohoes Savings Bank. The Holding Company
will recognize an after-tax expense for the amount of the contribution to
the Foundation which is expected to be $1.1 million, $1.3 million, $1.4
million and $1.7 million at the minimum, midpoint, maximum and maximum, as
adjusted. Assuming the contribution to the Foundation was expensed during
the year ended June 30, 1998, pro forma net earnings (loss) per share would
be $0.73, $0.63, $0.55 and $0,48, at the minimum, midpoint, maximum and
maximum, as adjusted, respectively. Per share net income data is based on
5,654,563, 6,652,427, 7,650,291 and 8,797,834 shares outstanding which
represents Conversion Shares sold in the Offering, shares contributed to
the Foundation and shares to be allocated or distributed under the ESOP and
RRP for the period presented.
(Footnotes continued on next page)
27
<PAGE>
(3) It is assumed that 8.0% of the Conversion Shares sold in the Offering will
be purchased by the ESOP with funds loaned by the Holding Company. The
Holding Company and the Bank intend to make annual contributions to the
ESOP in an amount at least equal to the principal and interest requirement
of the debt. The pro forma net earnings assumes (i) that the loan to the
ESOP is payable over 15 years, with the ESOP shares having an average fair
value of $10.00 per share in accordance with SOP 93-6, entitled "Employers'
Accounting for Employee Stock Ownership Plans," of the AICPA, and (ii) the
effective tax rate was 40.0% for the period. See "Management - Benefits -
Employee Stock Ownership Plan."
(4) It is assumed that the RRP will purchase, following stockholder approval of
such plan, a number of shares of Holding Company Common Stock equal to 4.0%
of the Conversion Shares for issuance to directors, officers and employees.
Funds used by the RRP to purchase the shares initially will be contributed
to the RRP by the Holding Company. It is further assumed that the shares
were acquired by the RRP at the beginning of the period presented in open
market purchases at the purchase price and that 20.0% of the amount
contributed, net of taxes, was an amortized expense during the year ended
June 30, 1998. The issuance of authorized but unissued shares of Holding
Company Common Stock pursuant to the RRP in the amount of 4.0% of the
Conversion Shares sold in the Offering would dilute the voting interests of
existing stockholders by approximately 3.0% and under such circumstances
pro forma net earnings per share for the year ended June 30, 1998 would be
$0.90, $0.80, $0.72 and $0.65, at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, respectively, and pro
forma stockholders' equity per share at June 30, 1998 would be $16.79,
$15.56, $14.15 and $13.85 at the minimum, midpoint, maximum and 15% above
the maximum of such range, respectively. There can be no assurance that the
actual purchase price of shares purchased by or issued to the RRP will be
equal to the purchase price. See "Management - Benefits - Recognition and
Retention Plan."
(5) The diluted per share calculations are determined by adding the number of
Conversion Shares assumed to be issued in the Conversion, as well as shares
of Holding Company Common Stock to be contributed to the Foundation and,
for purposes of calculating earnings per share, in accordance with SOP
93-6, subtracting 473,937 shares, 557,573 shares, 641,209 shares, and
737,391 shares, respectively, representing the ESOP shares which have not
been committed for release during the year ended June 30, 1998. The
calculation of ESOP shares released assumes that such shares are earned and
released ratably over the year, using a 15-year amortization period. Thus,
it is assumed at June 30, 1998 that 5,654,563, 6,652,427, 7,650,291 and
8,797,8341 shares of Holding Company Common Stock are outstanding at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. Assuming the uncommitted ESOP shares were
not subtracted from the number of shares of Holding Company Common Stock
outstanding at June 30, 1998, the offering price as a multiple of pro forma
net earnings per share would be 11.73x, 13.27x, 14.71x and 16.23x at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. For purposes of calculating pro forma
stockholders' equity per share, it is assumed that shares outstanding total
6,128,500, 7,210,000, 8,291,500 and 9,535,225 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range.
(6) No effect has been given to the issuance of additional shares of Holding
Company Common Stock pursuant to the Stock Option and Incentive Plan, which
will be adopted by the Holding Company following the Conversion and
presented for approval by stockholders at an annual or special meeting of
stockholders of the Holding Company held no earlier than six months
following the consummation of the Conversion. If the Stock Option and
Incentive Plan is approved by the stockholders, an amount equal to 10% of
the Conversion Shares sold in the Offering, including shares issued to the
Foundation, or 612,850, 721,000, 829,150 and 953,522 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively, will be reserved for future issuance upon the exercise
of options to be granted under the Stock Option and Incentive Plan. The
issuance of Holding Company Common Stock pursuant to the exercise of
options under the Stock Option and Incentive Plan will result in the
dilution of existing stockholders' interests. Assuming stockholder approval
of the Stock Option and Incentive Plan, that all these options were
exercised at the beginning of the period at an exercise price of $10.00 per
share and that the shares to fund the RRP are acquired thorough open market
purchases at the purchase price, pro forma diluted net earnings per share
for the year ended June 30, 1998 would be $0.87, $0.77, $0.70 and $0.63 at
the minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively, and pro forma stockholders' equity per share
at June 30, 1998 would be $16.42, $15.25, $14.39 and $13.64 at the minimum,
midpoint, maximum and 15% above the maximum of such range, respectively.
See "Management - Benefits - Stock Option and Incentive Plan."
(7) The retained earnings of the Bank will be substantially restricted after
the Conversion by virtue of the liquidation account to be established in
connection with the Conversion. See "Dividend Policy" and "The Conversion -
Effects of the Conversion - Effects on Liquidation Rights." In addition,
certain distributions from the Bank's retained earnings may be treated as
begin from its accumulated bad debt reserve for tax purposes, which would
cause the Bank to have additional taxable income. See "Taxation - Federal
Taxation." Pro forma stockholders' equity and pro forma stockholders'
equity per share (i) reflect certain nonrecurring charges, net of tax (see
Note 5 to the Pro Forma Unaudited Consolidated Statement of Financial
Condition) and (ii) do not give effect to the liquidation account or the
bad debt reserves established by the Bank for federal income tax purposes
in the event of a liquidation of the Bank.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to
15% to reflect changes in market and financial conditions following the
commencement of the Offering.
</FN>
</TABLE>
28
<PAGE>
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH NO FOUNDATION
In the event that the Foundation were not being established as part of
the Conversion, RP Financial has estimated that the pro forma aggregate market
capitalization of the Holding Company would be approximately $85.1 million at
the maximum, which is approximately $2.2 million greater than the pro forma
aggregate market capitalization of the Holding Company if the Foundation is
included, and would result in an approximately $4.6 million increase in the
amount of Holding Company Common Stock offered for sale in the Conversion. The
pro forma price to book ratio and pro forma price to earnings ratio would be
approximately the same under both the current appraisal and the estimate of the
value of the Holding Company without the Foundation. Further, assuming the
maximum of the Estimated Valuation Range, pro forma stockholders' equity per
share and pro forma earnings per share would be substantially the same at $14.84
and $14.84, respectively, and $0.74 and $0.74 respectively, with the Foundation
or without the Foundation. The pro forma price to book ratio and the pro forma
price to earnings ratio are substantially the same with and without the
Foundation at the maximum at 67.39% and 67.39%, respectively, and 13.51x and
13.51x, respectively. There is no assurance that in the event the Foundation was
not formed that the appraisal prepared at the time would have concluded that the
pro forma market value of the Holding Company would be the same as that
estimated herein. Any appraisals prepared at that time would be based on the
facts and circumstances existing at the time, including, among other things,
market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Valuation Range, assuming the Conversion
was completed at June 30, 1998.
<TABLE>
<CAPTION>
At the Maximum
At the Minimum At the Midpoint At the Maximum As Adjusted
-------------------------------------------------------------------------------------------
With No With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Estimated offering amount.......... $ 59,500 $ 62,900 $70,000 $ 74,000 $ 80,500 $ 85,100 $ 92,575 $ 97,865
Pro forma market capitalization.... 61,285 62,900 72,100 74,000 82,915 85,100 95,352 97,865
Total assets....................... 586,981 589,434 596,193 599,079 605,406 608,724 616,001 619,817
Total liabilities.................. 482,434 482,434 482,434 482,434 482,434 482,434 482,434 482,434
Pro forma stockholders' equity..... 104,547 107,000 113,759 116,645 122,972 126,290 133,567 137,383
Pro forma consolidated net earnings 5,226 5,315 5,432 5,537 5,638 5,759 5,875 6,014
Pro forma stockholders'
equity per share 17.06 17.01 15.78 15.76 14.84 14.84 14.01 14.03
Pro forma consolidated net earnings
per share 0.93 0.92 0.82 0.82 0.74 0.74 0.67 0.67
Pro forma pricing ratios:
Offering price as a percentage
of pro forma stockholders'
equity per share 58.62% 58.79% 63.37% 63.45% 67.39% 67.39% 71.38% 71.28%
Offering price to pro forma
net earnings ^ per share(1).... 10.75x 10.87x 12.20x 12.20x 13.51x 13.51x 14.93x 14.93x
Pro forma market capitalization
to assets 10.44% 10.67% 12.09% 12.35% 13.70% 13.98% 15.48% 15.79%
Pro forma financial ratios:
Return on assets (2)............. 0.89% 0.90% 0.91% 0.92% 0.93% 0.95% 0.96% 0.97%
Return on stockholders' equity (3) 5.00% 4.97% 4.78% 4.75% 4.58% 4.56% 4.40% 4.38%
Stockholders' equity to assets.. 17.81% 18.15% 19.08% 19.47% 20.31% 20.75% 21.68% 22.17%
- ---------------
<FN>
(1) If the contribution to the Foundation had been expensed during the year
ended June 30, 1998, the offering price to pro forma net earnings per share
would have been 13.58x, 15.90x, 18.20x and 20.81x at the minimum, midpoint,
maximum and maximum, as adjusted, respectively.
(2) If the contribution to the Foundation had been expensed during the year
ended June 30,1998, return on assets would have been 0.71%, 0.70%, 0.69%
and 0.69% at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(3) If the contribution to the Foundation had been expensed during the year
ended June 30,1998, return on stockholders' equity would have been 3.99%,
3.68%, 3.42% and 3.17% at the minimum, midpoint, maximum and maximum, as
adjusted, respectively.
</FN>
</TABLE>
29
<PAGE>
STATEMENTS OF OPERATIONS
The following Consolidated Statements of Operations of the Bank for
each of the years in the three-year period ended June 30, 1998 have been audited
by Arthur Andersen LLP, whose report thereon appears elsewhere herein. The
Consolidated Statements of Operations should be read in conjunction with the
other financial statements and notes thereto included elsewhere in this
Prospectus.
30
<PAGE>
COHOES SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(000's omitted)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
INTEREST INCOME:
<S> <C> <C> <C>
Interest and fees on mortgage loans ...................... $ 28,793 $ 28,236 $ 26,587
Consumer and other loans ................................. 4,780 4,930 5,516
Investment securities and securities available for sale .. 4,108 2,847 3,096
Federal funds sold and interest-bearing deposits ......... 742 272 184
------------- ------------- -------------
Total interest income ....................... 38,423 36,285 35,383
------------- ------------- -------------
INTEREST EXPENSE:
Deposits (Note 11) ....................................... 18,816 17,568 17,741
Mortgagors' escrow deposits .............................. 114 120 126
Borrowings ............................................... 332 133 297
------------- ------------- -------------
Total interest expense ...................... 19,262 17,821 18,164
------------- ------------- -------------
Net interest income ......................... 19,161 18,464 17,219
PROVISION FOR LOAN LOSSES (Note 7) ........................... 1,400 1,325 490
------------- ------------- -------------
Net interest income after provision
for loan losses ........................... 17,761 17,139 16,729
------------- ------------- -------------
NONINTEREST INCOME:
Service charges on deposits .............................. 746 765 741
Loan servicing revenue ................................... 495 568 605
Net gain (loss) on sale of mortgage loans ................ 81 106 (20)
Other .................................................... 1,421 1,351 1,141
------------- ------------- -------------
Total noninterest income .................... 2,743 2,790 2,467
------------- ------------- -------------
NONINTEREST EXPENSE:
Compensation and benefits ................................ 7,322 6,253 6,286
Occupancy ................................................ 2,686 2,493 2,247
FDIC deposit insurance premium ........................... 65 37 33
Advertising .............................................. 430 307 291
Other .................................................... 3,264 3,224 3,062
------------- ------------- -------------
Total noninterest expense ................... 13,767 12,314 11,919
------------- ------------- -------------
Income before income tax expense ............ 6,737 7,615 7,277
INCOME TAX EXPENSE (Note 15) ................................. 2,650 2,972 2,882
------------- ------------- -------------
Net income .................................. $ 4,087 $ 4,643 $ 4,395
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF COHOES SAVINGS
General
The Holding Company has only recently been formed and accordingly has
no results of operations at this time. As a result, the following discussion
principally reflects the operations of the Bank and its subsidiaries. The Bank's
primary market area, with 17 full-service branches consists of Albany, Saratoga,
Schenectady and Rensselaer counties in New York and a portion of Warren county
in New York. The Bank has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services. The Bank's principal business is attracting deposits from customers
within its market area and investing those funds, together with funds from
operations and, to a much lesser extent, borrowings, in primarily residential
mortgage loans, including home equity loans, and to a lesser extent, in consumer
loans, commercial real estate, construction loans and commercial business loans
and government and corporate debt securities. See "Business of the Bank -
Lending Activities". The financial condition and operating results of the Bank
are dependent on its net interest income which is the difference between the
interest income earned on its assets, primarily loans and investments, and the
interest expense on its liabilities, primarily deposits and borrowings. Net
income is also affected by other operating income, such as loan servicing
income, fees on deposit related services, gains on sales of securities, other
operating expenses, such as compensation and occupancy expenses, provisions for
loan losses, and Federal and state income taxes.
The Bank's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards and actions of
regulatory agencies. Future changes in applicable laws, regulations or
government policies may have a material impact on the Bank. Lending activities
are substantially influenced by the demand for and supply of housing,
competition among lenders, and level of interest rates and the availability of
funds. The ability to gather deposits and the cost of funds are influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments, including mutual funds and stocks.
Market Risk and Asset/Liability Management
Interest rate risk is the most significant market risk affecting the
Bank. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Bank's
business activities.
Interest rate risk is defined as an exposure to a movement in interest
rates that could have an adverse effect on the Bank's net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net income.
Similarly, when earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Bank's interest rate risk. Management's asset/liability
committee meets monthly to review the Bank's interest rate risk position and
profitability, and to recommend adjustments for consideration by the Board of
Trustees. Management also reviews loan and deposit pricing, and the Bank's
securities portfolio, formulates investment strategies and oversees the timing
and implementation of transactions. Notwithstanding the Bank's interest rate
risk management activities, the potential for changing interest rates is an
uncertainty that can adversely affect net income.
In adjusting the Bank's asset/liability position, the Board and
management attempt to manage the Bank's interest rate risk while enhancing net
interest margins. At times, depending on the level of general interest rates,
the relationship between long- and short-term interest rates, market conditions
and competitive factors, the Board and management may determine to increase the
Bank's interest rate risk position somewhat in order to increase its net
interest margins. The Bank's results of operations and net portfolio values
remain vulnerable to changes in interest rates and to fluctuations in the
difference between long- and short-term interest rates.
32
<PAGE>
Consistent with the asset/liability management philosophy described
above, the Bank has taken several steps to manage its interest rate risk. First,
the Bank has structured the security portfolio to shorten the maturities of its
earning assets. The Bank's recent purchases of securities have had terms to
maturity of seven years or less. At June 30, 1998, the Bank had securities with
a carrying value of $76.2 million with contractual maturities of five years or
less. The Bank's residential real estate portfolio is composed of either one,
three or five year adjustable rate mortgages or floating-rate home equity loans,
except for approximately $103.5 million of fixed rate products. The Bank also
manages interest rate risk by emphasizing lower cost, more stable non-time
deposit accounts. In the current low rate environment, longer-term time deposits
are welcomed although not particularly popular with the Bank's customer base.
One approach used to quantify interest rate risk is the net market
value analysis. In essence, this analysis calculates the difference between the
present value of liabilities and the present value of expected cash flows from
assets and off-balance sheet contracts. A second approach is to quantify the
impact on net interest income due to changes in cash flows, interest income and
interest expense resulting from shifts in interest rates. The following tables
set forth, at June 30, 1998, an analysis of the Bank's interest rate risk as
measured by the estimated changes in net market value of its assets and
liabilities and net interest income resulting from instantaneous and sustained
parallel shifts in interest rates (+ or - 200 basis points, measured in 50 basis
point increments).
Assumed Change Net
in Interest Rates Interest Dollar Percent
(Basis Points) Income Change Change
-200 $ 19,986 $ 826 4.31%
-150 19,770 610 3.18
-100 19,244 84 0.44
-50 19,204 44 0.23
0 19,160 --- 0.00
+50 19,153 (7) (0.04)
+100 19,137 (23) (0.12)
+150 19,056 (104) (0.54)
+200 18,918 (242) (1.26)
Assumed Change Net
in Interest Rates Market Dollar Percent
(Basis Points) Value Change Change
-200 $ 99,941 $ 10,985 12.35%
-150 97,343 8,387 9.43
-100 94,643 5,687 6.39
-50 91,845 2,889 3.25
0 88,956 --- 0.00
+50 85,741 (3,215) (3.61)
+100 82,151 (6,805) (7.65)
+150 79,056 (9,900) (11.13)
+200 75,804 (13,152) (14.78)
Certain assumptions utilized by management in assessing the interest
rate risk of the Bank were employed in preparing data included in the preceding
table. These assumptions were based upon proprietary data selected by management
and are reflective of historical results or current market conditions. These
assumptions relate to interest rates, repayment rates, deposit decay rates, and
the market values of certain assets under the various interest rate scenarios.
Prepayment assumptions for mortgage-backed securities and residential
mortgage loans were based upon industry standards for prepayments. The Bank's
mortgage-backed securities and residential mortgages are the only assets or
liabilities which management assumed possess optionality for purposes of
determining market value changes.
33
<PAGE>
Management assumed that non-maturity deposits could be maintained with
rate adjustments not directly proportionate to the change in market interest
rate. These assumptions are based upon management's analysis of its customer
base and competitive factors.
The net market value and net interest income tables presented above are
predicated upon a stable balance sheet with no growth or change in asset or
liability mix. In addition, the net market value table is based upon the present
value of discounted cash flows using management's estimates of current
replacement rates to discount the cash flows. The net interest income table is
based upon a cash flow simulation of the Bank's existing assets and liabilities.
It was also assumed that delinquency rates would not change as a result of
changes in interest rates although there can be no assurance that this will be
the case. Even if interest rates change in the designated amounts, there can be
no assurance that the Bank's assets and liabilities would perform as set forth
above. Also, a change in the US Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
changes to the net market value and net interest income other than those
indicated above.
The Bank does not currently engage in trading activities or use
derivative instruments to manage interest rate risk. Instruments such as
interest rate swaps, caps and floors may be utilized under certain interest rate
risk scenarios in order to manage interest rate risk. Such activities may be
permitted with the approval of the Board of Trustees, and management continually
evaluates the usefulness of such instruments in managing interest rate risk.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income is affected by the relative amounts of interest-earning assets
and interest-bearing liabilities, and the interest rates earned or paid on them.
34
<PAGE>
The following table presents, for the periods indicated, the total
dollar amount of interest income from the average interest-earning assets and
the resultant yields earned, the total dollar amount of interest expense on
average interest-bearing liabilities and the resultant rates paid, expressed
both in dollars and percentages as well as the weighted average yields earned
and rates paid. No tax equivalent adjustments were made. All average balances
are daily average balances.
Non-accruing loans have been included in the table as loans carrying zero yield.
<TABLE>
<CAPTION>
Average Yield Year Ended June 30,
Earned/ 1998 1997 1996
Average ---------------------------------------------------------------------------------
Rate Paid Average Interest Average Interest Average Interest
at June 30, Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
1998 Balance Paid Rate Balance Paid Rate Balance Paid Rate
---------- ------- ------ ---------- ------- ------ ---------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets
Loans receivable................ 8.09% $404,781 $ 33,573 8.29% $401,262 $ 33,166 8.27% $390,273 $ 32,104 8.23%
Securities available for sale... 6.18 30,336 1,933 6.37 19,330 1,253 6.48 14,350 872 6.08
Investment securities........... 6.28 30,372 1,926 6.34 22,240 1,373 6.17 31,950 1,993 6.24
Federal funds sold.............. 5.50 13,321 739 5.55 4,641 245 5.28 2,255 127 5.63
FHLB stock...................... 7.45 3,479 249 7.16 3,400 218 6.41 3,346 230 6.87
Other interest-earning assets... 6.00 184 3 1.63 416 30 7.21 967 57 5.89
-------- ------- ---- -------- -------- ---- -------- ------- ----
Total interest-earning assets... 7.72 482,473 38,423 7.96 451,289 36,285 8.04 443,141 35,383 7.98
------- -------- -------
Non-earning assets................... 18,714 17,919 17,264
-------- -------- -------
Total assets.................... $501,187 $469,208 $460,405
======== ======== ========
Interest-bearing liabilities
Savings accounts................ 3.00% $120,959 3,623 3.00 $123,518 3,698 2.99 $123,976 3,718 3.00
School savings accounts......... 5.50 15,112 837 5.54 11,895 661 5.56 8,271 460 5.56
Money market accounts........... 3.32 18,163 569 3.13 15,607 447 2.86 17,089 488 2.86
Demand deposits................. 0.59 47,075 304 0.65 41,124 275 0.67 35,073 246 0.70
Time deposits................... 5.78 230,794 13,483 5.84 215,183 12,487 5.80 214,420 12,829 5.98
Escrow accounts................. 2.00 7,065 114 1.61 7,396 120 1.62 7,249 126 1.74
Borrowings...................... 6.05 5,467 332 6.07 2,392 133 5.56 4,694 297 6.33
-------- ------- ------- -------- -------- ------
Total interest-bearing liabilities 4.28 444,635 19,262 4.33 417,115 17,821 4.27 410,772 18,164 4.42
------- -------- ------
Other liabilities.................... 4,677 5,033 6,898
Net worth............................ 51,875 47,060 42,735
-------- ------- --------
Total liabilities and net worth $501,187 $469,208 $460,405
======== ======== ========
Net interest income.................. $19,161 $ 18,464 $17,219
======= ======== =======
Net interest rate spread (1)......... 3.44% 3.63% 3.77% 3.56%
==== ==== ==== ====
Net earning assets (2)............... $ 37,838 $34,174 $ 32,369
======== ======= ========
Net yield on average
interest-earning assets(3) 3.97% 4.09% 3.89%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.09x 1.08x 1.08x
- ----------------
<FN>
(1) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(2) Net earning assets represents total interest-earning assets less total
interest-bearing liabilities.
(3) Net yield on average interest-earning assets, or net interest margin,
represents net interest income as a percentage of average interest-earning
assets.
</FN>
</TABLE>
35
<PAGE>
The following schedule presents the dollar amount of changes in
interest and dividend income and interest expense for major components of
earning assets and interest-bearing liabilities. It distinguishes between the
changes related to outstanding balances and those due to the changes in interest
rates. For each category of earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by prior-period rate) and (ii) changes in rate
(i.e., changes in rate multiplied by prior-period volume). For purposes of this
table, changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionally to the change due to volume and the change
due to rate.
<TABLE>
<CAPTION>
Years Ended June 30, Years Ended June 30,
1998 vs. 1997 1997 vs. 1996
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income from:
Loans receivable................ $ 292 $ 115 $ 407 $ 908 $ 154 $ 1,062
Securities available for sale... 701 (21) 680 320 61 381
Investment securities........... 515 38 553 (600) (20) (620)
Federal Funds sold.............. 481 13 494 126 (8) 118
FHLB............................ 5 26 31 4 (16) (12)
Other interest-earning assets... (11) (16) (27) (38) 11 (27)
------ ----- ------- ------ ----- --------
Total interest and dividend income 1,983 155 2,138 720 182 902
------ ----- ------- ------ ----- --------
Interest expense for:
Savings accounts................ (78) 2 (75) (14) (6) (20)
School savings accounts......... 178 (2) 176 201 --- 201
Money market accounts........... 77 44 122 (42) 1 (41)
Demand deposits................. 39 (10) 29 41 (12) 29
Time deposits................... 911 85 996 46 (385) (342)
Escrow accounts................. (5) (1) (6) 3 (9) (6)
Borrowings...................... 186 13 199 (131) (33) (164)
----- ------ ----- ------ ----- --------
Total interest expense 1,310 131 1,441 104 (447) (343)
----- ------ ----- ------ ------ --------
Net interest income.......... $ 673 $ 24 $ 697 $ 616 $ 629 $ 1,245
====== ====== ====== ====== ===== ========
</TABLE>
36
<PAGE>
Financial Condition
Comparison of June 30, 1998 and June 30, 1997
Assets. Total assets at June 30, 1998 was $535.7 million, up $44.0
million, or 8.9% from the $491.7 million at June 30, 1997. The increase was
evenly divided with the loan portfolio, up $14.3 million, securities available
for sale up $13.2 million and investment securities up $20.1 million. This
growth in earning assets was funded by an increase in deposits from $429.4
million on June 30, 1997 to $449.5 million at June 30, 1998 and an increase in
borrowings of $19.9 million over the same period. These increases, as well as
fluctuations in other asset and liability categories, are discussed below.
Loans. The overall increase in total loans is primarily made up of
increases in one to four family real estate and commercial business loans offset
by a decrease in consumer loans. One- to four-family real estate loans increased
$14.8 million, from $243.6 million to $258.4 million. The growth in this
portfolio is primarily a result of the Bank's decision to retain in its
portfolio a limited amount of 15 to 30 year fixed rate one to four family real
estate loans at a time when adjustable rate loans are less popular. A portion of
these loans were retained and match funded using long-term FHLB advances. See
"Business of Cohoes Savings Bank -- Borrowings." Commercial business loans
increased from $12.1 million at June 30, 1997, to $15.0 million at June 30,
1998. Consumer loans decreased $2.5 million to a balance of $49.7 million at
June 30, 1998 from $52.2 million at June 30, 1997. Most of this decrease relates
to a reduction in outstanding balances on home equity lines of credit.
Allowance for Loan Losses. The allowance for loan losses increased from
$3.1 million at June 30, 1997 to $3.5 million at June 30, 1998, an increase of
$428,000. This increase is the result of the $1.4 million provision for loan
losses taken in the year ended June 30, 1998 offset by $972,000 in net
charge-offs for the same period. The adequacy of the allowance for loan losses
is evaluated quarterly by management based upon a review of significant loans,
with particular emphasis on nonperforming and delinquent loans that management
believes warrant special attention. At June 30, 1998 the allowance for loan
losses provided coverage of 62.5% of total nonperforming loans, up from 46.4% at
June 30, 1997. The balance of the allowance is maintained at a level which is,
in management's judgment, reflective of the amount of risk inherent in the loan
portfolio. See "Business of the Bank - Asset Quality - Allowance for Loan
Losses."
Securities Available for Sale and Investment Securities. The balances
of securities available for sale and investment securities (collectively
"securities") increased from $35.5 million and $25.3 million, respectively, at
June 30, 1997 to $48.7 million and $45.4 million, respectively, as of June 30,
1998. These increases were the result of the purchase of securities totaling
$82.9 million offset by paydowns, maturities and calls of securities totaling
$49.5 million and sales totaling $60,000 during the year ended June 30, 1998.
Management's intention is to continue purchasing securities with available funds
in excess of loan demand. During the year ended June 30, 1998, loan demand was
stronger than in fiscal 1997.
Bank Premises and Equipment. The balance of bank premises and equipment
decreased from $7.7 million at June 30, 1997 to $7.3 million at June 30, 1998.
This decrease was a result of approximately $763,000 in computer-related
expenditures offset by $1.1 million in depreciation.
Other Real Estate Owned. The balance of other real estate owned
decreased from $1.9 million at June 30, 1997 to $509,000 at June 30, 1998, a
decrease of approximately $1.4 million. The majority of this decrease relates to
the sale in September 1997 of the Bank's largest ORE property that had a balance
of $1.0 million at June 30, 1997.
Deposits. Total deposits increased $20.1 million, or 4.7%, from $429.4
million at June 30, 1997 to $449.5 million at June 30, 1998. Of this total
increase, time deposits increased $743,000 (.3%), savings accounts increased
$1.7 million (1.4%), school savings accounts increased $3.3 million (24.1%),
money market accounts increased $6.2 million (40.3%), and demand accounts
increased $8.1 million (17.7%).
Borrowings. The balance of borrowings increased $19.9 million all of
which was the result of new borrowings during the year ended June 30, 1998 as
the bank matched financed portfolioed fixed-rate loans with these borrowings.
37
<PAGE>
Ten year fixed rate, fifteen year amortizing FHLB borrowings were used to fund
certain fixed rate one to four family real estate loans.
Comparison of June 30, 1997 and June 30, 1996
Assets. Total assets at June 30, 1997 stood at $491.7 million, up $28.3
million, or 6.1%, from $463.4 million at June 30, 1996. The increase was
concentrated in the loan portfolio which increased $4.6 million, ending June 30,
1997 at $398.5 million and securities available for sale which increased $14.6
million, ending June 30, 1997 at $35.5 million. This growth in loans and
securities was funded by an increase of $24.9 million in deposits from $404.5
million on June 30, 1996 to $429.4 million at June 30, 1997. These increases as
well as fluctuations in other asset and liability categories are discussed
below.
Loans. The overall increase in total loans is primarily made up of
increases in one- to four-family real estate loans, offset by decreases in the
Bank's commercial real estate and commercial business loans. Total one to four
family real estate loans increased $8.7 million, or 3.7%, which increased the
level of total residential real estate as a percentage of total loans from 59.1%
at June 30, 1996 to 60.6% at June 30, 1997. Commercial real estate loans fell
from $96.6 million at June 30, 1996 to $94.0 million at June 30, 1997. At June
30, 1997, commercial real estate loans represented 23.4% of total loans.
Commercial business loans decreased $1.2 million to a balance of $12.1 million
at June 30, 1997 from $13.3 million at June 30, 1996. Commercial business loans
are loans to businesses which are either unsecured or are secured by non-real
estate business assets.
Allowance for Loan Losses. The allowance for loan losses decreased from
$3.2 million at June 30, 1996 to $3.1 million at June 30, 1997, a decrease of
$144,000. This decrease is the result of a $1.3 million provision for loan
losses taken in the year ended June 30, 1997 offset by $1.5 million in net
charge-offs for the same period. At June 30, 1997, the allowance for loan losses
provided coverage of 46.4% of total non-performing loans, up slightly from 41.7%
at June 30, 1996. The balance of the allowance is maintained at a level which
is, in management's judgment, representative of the amount of risk inherent in
the Bank's loan portfolio. In determining the appropriate level of the allowance
for loan losses, management considers past and anticipated loss experience,
evaluations of real estate collateral, current and anticipated economic
conditions, geographical concentration of loans, volume and type of lending, and
the levels of non-performing and other classified loans. The amount of the
allowance is based on estimates and the ultimate losses may vary from such
estimates. Management of the Bank assesses the allowance for loan losses on a
quarterly basis and makes provisions for loan losses in order to maintain the
adequacy of the allowance. See "Business of the Bank - Asset Quality - Allowance
for Loan Losses."
Securities Available for Sale and Investment Securities. The balance of
securities available for sale increased from $20.9 million at June 30, 1996 to
$35.5 million as of June 30, 1997. The balance of investment securities
decreased slightly from $26.0 million at June 30, 1996 to $25.3 million as of
June 30, 1997. The increase in securities available for sale and slight decrease
in investment securities (collectively "securities") during the year ended June
30, 1997 were driven by purchases of securities totaling $28.7 million, which
were offset by paydowns, maturities and calls of securities totaling $14.7
million and sales totaling $287,000.
Bank Premises and Equipment. The balance of Bank premises and equipment
increased from $6.9 million at June 30, 1996 to $7.7 million at June 30, 1997.
This increase was a result of expenditures totaling $1.8 million for the most
part relating to the opening of four new branch locations during the year ended
June 30, 1997 offset by $1.1 million in depreciation.
Other Real Estate Owned. The balance of other real estate owned
increased from $421,000 at June 30, 1996 to $1.9 million at June 30, 1997, an
increase of approximately $1.5 million. This increase directly relates to the
addition during the year ended June 30, 1997 of an ORE property that had a
balance of $1.0 million at June 30, 1997.
Deposits. Total deposits increased $24.9 million, or 6.2%, from $404.5
million at June 30, 1996 to $429.4 million at June 30, 1997. Of this total
increase, time deposits increased $20.6 million (9.8%), school savings accounts
increased $3.3 million (31.1%), demand accounts increased $5.1 million (12.5%),
while savings accounts decreased $3.1 million (2.4%) and money market accounts
decreased $1.1 million (6.6%).
38
<PAGE>
Borrowings. Borrowings decreased $2.1 million during the year ended
June 30, 1997. There were no borrowings at June 30, 1997. This decrease was a
result of an increase in deposit balances which exceeded loan demand.
Operating Results
Comparison of Year Ended June 30, 1998 and Year Ended June 30, 1997
Net Income. Net income for the year ended June 30, 1998 was $4.1
million, down from $4.6 million for the year ended June 30, 1997. Noninterest
expense increased $1.5 million for the year ended June 30, 1998 as compared to
the previous year. This increase was in part offset by an increase in net
interest income of $697,000 and a reduction in income tax expense of $322,000.
Net Interest Income. Net interest income for the year ended June 30,
1998 was $19.2 million, up $697,000 from the year ended June 30,1997. The
increase was primarily the result of the increase of $31.2 million in average
earning assets from $451.3 million for the year ended June 30, 1997 to $482.5
million for the same period in 1998. Average interest-bearing liabilities also
increased $27.5 million during the same period. The net impact of these volume
increases resulted in an increase in net interest income of $673,000. The Bank's
net interest margin for the year ended June 30, 1998 was 3.97%, down 12 basis
points from 4.09% for the year ended June 30, 1997. The yield on average earning
assets decreased from 8.04% to 7.96% , while the rate paid on average
interest-bearing liabilities increased from 4.27% to 4.33%, producing a decrease
in net interest spread of 14 basis points from 3.77% during fiscal 1997 to 3.63%
during fiscal 1998.
Interest Income. Interest income for the year ended June 30, 1998 was
$38.4 million, up from $36.3 million for the comparable period in 1997. The
largest component of the Bank's interest income is interest on loans. Interest
on loans increased from $33.2 million for the year ended June 30, 1997 to $33.6
million for the year ended June 30, 1998. This increase of $407,000 is the
result of both volume increases and rate increases. The average balance of loans
increased $3.5 million to $404.8 million, while the yield on loans increased 2
basis points from 8.27% to 8.29%. The increase in interest earned on loans was
supplemented by increases in interest earned on securities available for sale,
investment securities and federal funds. Interest income on these categories of
earning assets increased $680,000, $553,000 and $494,000, respectively.
Substantially all of the increases in interest income on these assets are
attributed to increases in volume. The average balance of securities available
for sale increased from $19.3 million for the year ended June 30, 1997 to $30.3
million for the year ended June 30, 1998. This increase in volume resulted in an
increase in interest income of $701,000. The average balance of investment
securities increased from $22.2 million in 1997 to $30.4 million in 1998,
resulting in a $515,000 increase in interest income due to volume. The average
balance of federal funds increased from $4.6 million in 1997 to $13.3 million in
1998. The increase in the volume of federal funds resulted in a $481,000
increase in interest income in the year ended June 30, 1998 as compared to the
year ended June 30, 1997. The changes in rates on securities available for sale,
investment securities and federal funds, as well as the changes in volume and
rate on other categories of interest-earning assets was not significant.
Interest Expense. Interest expense increased during the year ended June
30, 1998 to $19.3 million, up from $17.8 million for the comparable period in
1997. Substantially all of the Bank's interest expense is from the Bank's
interest-bearing deposits. The largest category of interest-bearing deposits is
time deposits. Interest paid on time deposits for the year ended June 30, 1998
was $13.5 million, up $1.0 million from the $12.5 million in 1997. This increase
is the result of an increase in the average balance of time deposits, from
$215.2 million in 1997 to $230.8 million in 1998 and an increase of 4 basis
points in the rates paid on these deposits from 5.80% in 1997 to 5.84% in 1998,
primarily due to competitive market conditions. Interest expense on savings
accounts was relatively flat, decreasing $75,000 from 1997 to 1998, almost
entirely attributed to a reduction in the average balance of savings accounts of
$2.6 million as depositors sought higher yielding investment opportunities.
Interest on school savings accounts increased $176,000, from $661,000 for the
year ended June 30, 1997 to $837,000 for the year ended June 30, 1998,
substantially all of which was the result of an increase in the average balance
of school savings accounts of $3.2 million. Interest on money market accounts
increased $122,000, from $447,000 for the year ended June 30, 1997 to $569,000
for the year ended June 30, 1998. The increase is attributed to an increase in
the average balance of money market accounts of $2.6 million as well as an
increase of 27 basis points in the rates paid on these money market accounts,
from 2.86% to 3.13% in compliance with the Bank's strategy to attract money
market accounts and remain
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competitive in its primary market area. Interest on borrowings for the year
ended June 30, 1998 was $332,000, up from $133,000 in 1997. Most of this
increase was attributable to an increase in the average balance of borrowings,
from $2.4 million in 1997 to $5.5 million in 1998 as the Bank attempted to match
fund fixed rate residential loans with borrowings. Fluctuations in interest
expense on other categories of interest-bearing liabilities were not
significant.
Provision for Loan Losses. The provision for loan losses of $1.4
million in the year ended June 30, 1998 remained consistent with the $1.3
million provision in the year ended June 30, 1997. The amount of the provision
is attributed to the $13.3 million increase in outstanding loans tempered by the
reduction in the level of net charge-offs from $1.5 million for the year ended
June 30, 1997 to $972,000 for the year ended June 30, 1998.
Noninterest Income. Total noninterest income for the year ended June
30, 1998 was $2.7 million, relatively unchanged from the $2.8 million for the
year ended June 30, 1997. Service charges on deposits declined only slightly to
$746,000 for the year ended June 30, 1998, from $765,000 for the year ended June
30, 1997. Loan servicing revenue declined $73,000 from $568,000 for the year
ended June 30, 1997 to $495,000 for the year ended June 30, 1998. The decline
relates to a reduction in the balance of loans serviced for others due to
repayments on such loans exceeding loan sales during 1998. Fluctuations in other
noninterest income categories were not significant.
Noninterest Expense. Total noninterest expense increased $1.5 million
to $13.8 million for the year ended June 30, 1998, up from $12.3 million for the
comparable period in 1997. Increases in compensation and benefits of $1.1
million, occupancy of $193,000 and advertising of $123,000 were the primary
contributors to the overall increase. The increase in compensation and benefits
is the result of a decrease in the post-retirement benefit expense based on
revised actuarial assumptions in 1997, the recognition of a full year's salary
expense for employees at the four new branch locations opened in the year ended
June 30, 1997, an increase in the cost of health insurance benefits of $114,000
as well as general merit increases for the Bank's employees during the year
ended June 30, 1998. The increase in occupancy is directly attributed to a full
year's cost associated with the opening of the four branch locations mentioned
above. The increase in advertising is generally the result of the additional
cost of customer binders, brochures and media print for the introduction of
imaging for all demand account products during the month of June 1998. The
remaining categories of noninterest expense did not experience significant
fluctuation.
Income Tax Expense. Income tax expense decreased from $3.0 million for
the year ended June 30, 1997 to $2.7 million for the comparable period in 1998.
The reduction is primarily the result of less income before income tax expense,
$6.7 million in 1998 as compared to $7.6 million in 1997.
Comparison of Year Ended June 30, 1997 and Year Ended June 30, 1996
Net Income. Net income for the year ended June 30, 1997 was $4.6
million, up from $4.4 million for the year ended June 30, 1996. Net interest
income increased $1.2 million and noninterest income increased $323,000 for the
year ended June 30, 1997 as compared to the previous year. These increases were
in part offset by increases in the provision for loan losses of $835,000,
noninterest expense of $395,000 and income tax expense of $90,000.
Net Interest Income. Net interest income for the year ended June 30,
1997 was $18.5 million, up $1.2 million from the year ended June 30,1996. The
increase was partially the result of the increase of $8.2 million in average
earning assets from $443.1 million for the year ended June 30, 1996 to $451.3
million for the same period in 1997. Interest-bearing liabilities also increased
during the same period, up $6.3 million. The net impact of these volume
increases resulted in an increase in net interest income of $616,000. Net
interest income also increased by $629,000 due to changes in the yield on
average earning assets and rate paid on average interest-bearing liabilities.
The yield on average earning assets increased from 7.98% to 8.04%, while the
rate paid on average interest-bearing liabilities decreased from 4.42% to 4.27%.
The Bank's net interest margin for the year ended June 30, 1997 was 4.09%, up 20
basis points from 3.89% for the year ended June 30, 1996.
Interest Income. Interest income for the year ended June 30, 1997 was
$36.3 million, up from $35.4 million for the comparable period in 1996. The
largest component of interest income is interest on loans. Interest on loans
increased from $32.1 million for the year ended June 30, 1996 to $33.2 million
for the year ended June 30, 1997. This increase of $1.1 million is primarily the
result of an $11.0 million increase in the average balance of loans to $401.3
million, while the yield on loans increased 4 basis points from 8.23% to 8.27%.
The increase in interest on loans was
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complemented by an increase in interest on securities available for sale, offset
by a decrease in interest on investment securities. Interest income on
securities available for sale increased $381,000 while interest income on
investments fell $620,000. Substantially all of the increases in interest income
on securities available for sale are attributed to higher volume. The average
balance of securities available for sale increased from $14.4 million for the
year ended June 30, 1996 to $19.3 million for the year ended June 30, 1997. This
increase in volume resulted in an increase in interest income of $320,000. The
average balance of investment securities decreased from $32.0 million in 1996 to
$22.2 million in 1997, resulting in a $600,000 decrease in interest income due
to volume as the Bank used liquidity to fund increased loan demand. The changes
in rates on securities available for sale and investment securities account for
the remainder of the fluctuations in interest income on these asset categories.
The changes in volume and rate on other categories of interest-earning assets
were not significant.
Interest Expense. Interest expense decreased during the year ended June
30, 1997 to $17.8 million, down from $18.2 million for the comparable period in
1996. Substantially all of the Bank's interest expense is from the Bank's
interest-bearing deposits. The largest category of interest-bearing deposits is
time deposits. Interest on time deposits for the year ended June 30, 1997 was
$12.5 million, down $342,000 from the $12.8 million in 1996. This decrease is
primarily the result of a decrease of 18 basis points in the rates paid on these
deposits from 5.98% in 1996 to 5.80% in 1997, reflecting the general decline in
market interest rates, offset by a slight increase in the average balance of
time deposits of $763,000 due to a decline in general market rates. Interest
expense on savings accounts was relatively flat, decreasing $20,000 from 1996 to
1997, primarily attributable to a reduction in the average balance of savings
accounts of $458,000. Interest on school savings accounts increased $201,000,
from $460,000 for the year ended June 30, 1996 to $661,000 for the year ended
June 30, 1997, substantially all of which was the result of an increase in the
average balance of school savings accounts of $3.6 million. Interest on
borrowings for the year ended June 30, 1997 was $133,000, down from $297,000 in
1996. Most of this decrease was attributable to a decrease in the average
balance of borrowings, from $4.7 million in 1996 to $2.4 million in 1997.
Fluctuations in interest expense on other categories of interest-bearing
liabilities were not significant.
Provision for Loan Losses. The provision for loan losses increased from
$490,000 in the year ended June 30, 1996 to $1.3 million in the year ended June
30, 1997. This increase is primarily the result of increases in net charge-offs
from $374,000 for the year ended June 30, 1996 to $1.5 million for the year
ended June 30, 1997. The increase in net charge-offs combined with the continued
growth of the loan portfolio, continued economic weaknesses in the Bank's market
area, declining real estate values securing much of the loan portfolio as well
as management's evaluation of the prospects for its market area resulted in the
increase in the provision. See "Business of the Bank - Asset Quality -Allowance
for Loan Losses."
Noninterest Income. Total noninterest income increased $323,000 for the
year ended June 30, 1997 as compared to the same period in 1996. Income from
service charges on deposits increased only slightly to $765,000 for the year
ended June 30, 1997, from $741,000 for the year ended June 30, 1996. Loan
servicing revenue decreased $37,000 from $605,000 in the year ended June 30,
1996 to $568,000 in the year ended June 30, 1997. The decline relates to a
reduction in the balance of loans serviced for others. Net gain (loss) on the
sale of mortgage loans increased from a loss of $20,000 for the year ended June
30, 1996 to a gain of $106,000 for the year ended June 30, 1997. Other
noninterest income increased from $1.1 million for the year ended June 30, 1996
to $1.4 million for the year ended June 30, 1997. This increase was the result
of increases in ATM fees, loan assignment fees, rents collected on ORE
properties and gains on the sale of securities.
Noninterest Expense. Total noninterest expense increased $395,000 to
$12.3 million for the year ended June 30, 1997, up from $11.9 million for the
comparable period in 1996. The increase in occupancy of $246,000 and other
noninterest expense of $162,000 were the primary contributors to the overall
increase. The decrease in compensation and benefits resulted from general merit
increases for the Bank's employees during the year ended June 30, 1997, offset
by a decrease in the post-retirement benefit expense based on revised actuarial
assumptions. The increase in occupancy was directly attributed to the increased
lease expense associated with the opening of four new branch locations in the
year ended June 30, 1997. The increase in other noninterest expense was
generally attributed to an increase in legal fees associated with the collection
and foreclosure of delinquent loans.
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Income Tax Expense. Income tax expense increased from $2.9 million for
the year ended June 30, 1996 to $3.0 million for the comparable period in 1997.
The increase is the result of more income before income tax expense, $7.6
million in 1997 as compared to $7.3 million in 1996.
Liquidity and Capital Resources
Liquidity. Liquidity is defined as the ability to generate sufficient
cash flow to meet all present and future funding commitments, depositor
withdrawals and operating expenses. Management monitors the Bank's liquidity
position on a daily basis and evaluates its ability to meet depositor
withdrawals or make new loans or investments. The Bank's liquid assets include
cash and cash equivalents, investment securities that mature within one year,
and its portfolio of securities available for sale. At June 30, 1998, the Bank's
liquid assets as a percentage of deposits which have no withdrawal restrictions,
time deposits which mature within one year, and short-term borrowings was 16.8%.
The Bank's cash inflows result primarily from loan repayments,
maturities, calls and paydowns of securities, new deposits, and to a lesser
extent, drawing upon the Bank's credit lines with the FHLB of New York. The
Bank's cash outflows are substantially new loan originations, securities
purchases, and deposit withdrawals. The timing of cash inflows and outflows are
closely monitored by management although changes in interest rates, economic
conditions, and competitive forces strongly impact the predictability of these
cash flows. The Bank attempts to provide stable and flexible sources of funding
through the management of its liabilities, including core deposit products
offered through its branch network as well as with limited use of borrowings.
Management believes that the level of the Bank's liquid assets combined with
daily monitoring of inflows and outflows provide adequate liquidity to fund
outstanding loan commitments, meet daily withdrawal requirements of our
depositors, and meet all other daily obligations of the Bank.
Capital. Consistent with its goals to operate a sound and profitable
financial organization, the Bank actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. Total equity was $53.3
million at June 30, 1998, 9.9% of total assets on that date. As of June 30, 1997
and 1996, total equity was $49.1 million and $44.3 million, respectively, or
10.0% and 9.6% of total assets at the respective dates. As of June 30, 1998, the
Bank exceeded all of the capital requirements of the FDIC. The Bank's regulatory
capital ratios at June 30, 1998 were as follows: Tier I (leverage) capital,
10.6%; Tier I risk-based capital, 16.0%; and Total risk-based capital, 17.1%.
The regulatory capital minimum requirements to be considered well capitalized
are 5.0%, 6.0%, and 10.0%, respectively.
Impact of the Year 2000
General. The year 2000 ("Y2K") issue confronting the Bank and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six ^ digit dates that
provided only two digits to identify the calender year in the date field. With
the impending new millennium, these programs and computers will recognize "00"
as the year 1900 rather than the year 2000.
Financial institution regulators recently have ^ increased their focus
upon Y2K compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council ("FFIEC") has issued several interagency
statements on Y2K Project Management Awareness. These statements require
financial institutions to, among other things, examine the Y2K implications of
their reliance on vendors and with respect to data exchange and the potential
impact of the Y2K issue on their customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure risk and prepare a plan to address the Y2K issue. In
addition, the federal banking regulators have issued safety and soundness
guidelines to be followed by insured depository institutions, such as the Bank,
to assure resolution of any Y2K problems. The federal banking agencies have
asserted that Y2K testing and certification is a key safety and soundness issue
in conjunction with regulatory examinations and, thus, that an ^ institution's
failure to address appropriately the Y2K issue could result in supervisory
action, including the reduction of the ^ institution's supervisory ratings, the
denial of applications for approval of mergers or acquisitions or the imposition
of civil money penalties.
Risk. Like most financial institutions service providers, the Bank and
its operations may be significantly affected by the Y2K issue due to its
dependence on technology and date-sensitive data. Computer software and hardware
and other equipment, both within and outside the Bank's direct control and third
parties with whom the Bank
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electronically or ^ operationally interfaces (including without limitation its
customers and third party vendors) are likely to be affected. If computer
systems are not modified in order to be able to identify the year 2000, many
computer applications could fail or create erroneous results. As a result, many
calculations which rely on date field information, such as interest, payment or
due dates and other operating functions, could generate results which are
significantly misstated, and the Bank could experience an inability to process
transactions, prepare statements or engage in similar normal business
activities. Likewise, under certain circumstances, a failure to adequately
address the Y2K issue could adversely affect the viability of the Bank's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Y2K issue could result in a significant adverse impact
on the Bank's operations and, in turn, its financial condition and ^ results of
operations.
State of Readiness. During November 1997, the Bank formulated its plan
to address the Y2K issue. Since that time, the Bank has taken the following
steps:
o Established senior management advisory and review
responsibilities;
o Completed a Bank-wide inventory of applications and system
software;
o Built an internal tracking database for application and vendor
software;
o Developed compliance plans and schedules for all lines of
business;
o Initiated vendor compliance verification;
o Begun awareness and education activities for employees through
existing internal communication channels; and
o Developed a process to respond to customer inquiries as well as
help educate customers on the Y2K issue.
The following paragraphs summarize the phases of the Bank's Y2K plan:
Awareness Phase. The Bank formally established a Y2K plan headed by a
senior manager, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes milestones,
budget estimates, strategies, and methodologies to track and report the status
of the project. Members of the project team also attended conferences and
information sharing sessions to gain more insight into the Y2K issue and
potential strategies for addressing it. This phase is substantially complete.
Assessment Phase. The Bank's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was made to quantify the extent of the Bank's Y2K
exposure. A corporate inventory (which is periodically updated as new technology
is acquired and as systems progress through subsequent phases) was developed to
identify and monitor Y2K readiness for information systems (hardware, software,
utilities and vendors) as well as environmental systems (security systems,
facilities, etc.). Systems were prioritized based on business impact and
available alternatives. Mission critical systems supplied by vendors were
researched to determine Y2K readiness. If Y2K-ready versions were not available,
the Bank began identifying functional replacements which were either upgradable
or currently Y2K- ready, and a formal plan was developed to repair, upgrade or
replace all mission critical systems. This phase is substantially complete.
Beginning in October 1998, all unsecured credits greater than $100,000
were sent a questionnaire developed by the Bank's credit administration staff to
evaluate Y2K exposure. The Bank also contacted its most significant borrowers
informing them of the Y2K issue. Because the Bank's loan portfolio is primarily
real estate-based and is diversified with regard to individual borrowers and
types of businesses, and the Bank's primary market area is not significantly
dependent on one employer or industry, the Bank does not expect any significant
or prolonged Y2K-related difficulties that will affect net earnings or cash
flow. As part of the current credit approval process, all new and renewed loans
are evaluated for Y2K risk.
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Renovation Phase. The Bank's corporate inventory revealed that Y2K
upgrades were available for all vendor supplied mission critical systems, and
all these Y2K-ready versions have been delivered and placed into production and
have entered the validation process (with the exception of hardware upgrades to
certain of the Bank's automated teller machines and the voice response unit
("vru") which are expected to be completed by December 31, 1998).
Validation Phase. The validation phase is designed to test the ability
of hardware and software to accurately process date sensitive data. The Bank
currently is in the process of validation testing of each mission critical
system, with the degree of completion of such testing ranging from 25% to 100%.
The Bank's validation phase is expected to be completed by March 31, 1999 for
all mission critical systems. During the validation testing process to date, no
significant Y2K problems have been identified relating to any modified or
upgraded mission critical systems.
Implementation Phase. The Bank's plan calls for putting Y2K-ready code
into production before having actually completed Y2K validation testing.
Y2K-ready modified or upgraded versions have been installed and placed into
production with respect to all mission critical systems (with the exception of
the Bank's automated teller machine network and vru as to which hardware
upgrades are expected to be completed and in production by December 31, 1998).
Bank Resources Invested. The Bank's Y2K project team has been assigned
the task of ensuring that all systems across the Bank are identified, analyzed
for Y2K compliance, corrected, if necessary, tested, and changes put into
service by the end of 1998. The Y2K project team members represent all
functional areas of the Bank, including branches, data processing, loan
administration, accounting, item processing and operations, compliance, internal
audit, human resources, and marketing. The team is headed by a vice president
who reports directly to a member of the Bank's senior management team. The
Bank's Board of Directors oversees the Y2K plan and provides guidance and
resources to, and receives quarterly updates from, the Y2K project team.
The Bank expenses all costs associated with the required system changes
as those costs are incurred, and such costs are being funded through operating
cash flows. The total cost of the Y2K conversion project for the Bank is
estimated to be $109,000, all of which were incurred and expensed by the Bank
through June 30, 1998. The Bank does not expect significant increases in future
data processing costs related to Y2K compliance.
Contingency Plans. During the assessment phase, the Bank began to
develop back-up or contingency plans for each of its mission critical systems.
Virtually all of the Bank's mission critical systems are dependent upon third
party vendors or service providers, therefore, contingency plans include
selecting a new vendor or service provider and converting to their system. In
the event a current vendor's system fails during the validation phase and it is
determined that the vendor is unable or unwilling to correct the failure, the
Bank will convert to a new system from a pre-selected list of prospective
vendors. In each such case, realistic trigger dates have been established to
allow for orderly and successful conversions. For some systems, contingency
plans consist of using spreadsheet software or reverting to manual systems until
system problems can be corrected. Although the Bank has been informed that each
of its primary vendors anticipates that all mission critical systems either are
or will timely be Y2K-ready, no warranties have been received from such vendors.
Impact of Inflation and Changing Prices
The Bank's consolidated financial statements are prepared in accordance
with generally accepted accounting principles which require the measurement of
financial condition and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increasing cost of the
Bank's operations. Unlike most industrial companies, nearly all assets and
liabilities of the Bank are monetary. As a result, interest rates have a greater
impact on the Bank's performance than do the effects of general levels of
inflation. In addition, interest rates do not necessarily move in the direction,
or to the same extent as the price of goods and services.
Impact of New Accounting Standards/ Existing Pronouncements to be Adopted by the
Holding Company
In November 1993, the AICPA issued Statement of Position 93-6 ("SOP
93-6"), "Employers' Accounting for Employee Stock Ownership Plans", which is
effective for years beginning after December 15, 1993. SOP 93-6 requires the
measure of compensation expense recorded by employers for leveraged ESOPs to be
the fair value of ESOP shares
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committed to be released. The Holding Company has adopted an ESOP in connection
with the Conversion, which is expected to purchase 8% of the Holding Company
Common Stock issued in the Conversion, including shares issued to the
Foundation. Under SOP 93-6, the Holding Company will recognize compensation cost
equal to the average fair value of the ESOP shares during the periods in which
they become committed to be released. Employers with internally leveraged ESOPs
such as the Holding Company will not report the loan receivable from the ESOP as
an asset and will not report the ESOP debt from the employer as a liability. The
effects of SOP 93-6 on future operating results cannot be determined at this
time.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation" ("SFAS No. 123"). This statement establishes financial
accounting standards for stock-based employee compensation plans. SFAS No. 123
permits the Holding Company to choose either a new fair value based method or
the Accounting Principles Board ("APB") Opinion 25 intrinsic value based method
of accounting for its stock-based compensation arrangements. SFAS No. 123
requires pro forma disclosures of net income and earnings per share computed as
if the fair value based method had been applied in financial statements of
companies that follow accounting for such arrangements under APB Opinion 25.
SFAS No. 123 applies to all stock-based employee compensation plans in which an
employer grants shares of its stock or other equity instruments to employees
except for employee stock ownership plans. SFAS No. 123 also applies to plans in
which the employer incurs liabilities to employees in amounts based on the price
of the employer's stock, (e.g., stock option plans, stock purchase plans,
restricted stock plans, and stock appreciation rights). The Statement also
specifies the accounting for transactions in which a company issues stock
options or other equity instruments for services provided by non-employees or to
acquire goods or services from outside suppliers or vendors. The Holding Company
expects to utilize the intrinsic value based method prescribed by APB Opinion
No. 25. Accordingly, the impact of adopting this Statement will not be material
to the Holding Company's consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share".
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS"). This Statement supersedes APB Opinion No. 15, "Earnings per
Share" and related interpretations. SFAS No. 128 replaces the presentation of
primary EPS with the presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Unvested restricted stock awards are considered
outstanding common shares and included in the computation of basic EPS as of the
date that they are fully vested. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. This Statement is
effective for financial statements issued for periods ending after December 15,
1997, including interim periods. The Holding Company will adopt this Statement
for all financial statements prepared after the Conversion.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which establishes standards for disclosure
about an entity's capital structure. In accordance with SFAS No. 129, companies
will be required to provide in the financial statements a complete description
of all aspects of their capital structure, including call and put features,
redemption requirements and Conversion options. The disclosures required by SFAS
No. 129 are for financial statements for periods ending after December 15, 1997.
The Holding Company will adopt this Statement for all financial statements
prepared after the Conversion
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and displaying
comprehensive income. SFAS No. 130 states that comprehensive income includes the
reported net income of an enterprise adjusted for items that are currently
accounted for as direct entries to equity, such as the mark to market adjustment
on securities available for sale, foreign currency items and minimum pension
liability adjustments. This Statement is effective for both interim and annual
periods after December 15, 1997. Management anticipates developing the required
information in accordance with this new Statement.
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<PAGE>
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes standards
for reporting by public companies about operating segments of their business.
SFAS No. 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. This Statement is effective
for periods beginning after December 15, 1997. At this time, management does not
anticipate that the adoption of this Statement will significantly impact the
Holding Company's financial reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-retirement Benefits," which amends the disclosure
requirements of SFAS No. 87. "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions." Statement No. 132
standardizes the disclosure requirements of Statements No. 87 and No. 106 to the
extent practicable and recommends a parallel format for presenting information
about pensions and other post-retirement benefits. This Statement is applicable
to all entities and addresses disclosure only. The Statement does not change any
of the measurement or recognition provisions provided for in Statements No. 87,
No. 88, or No. 106. The Statement is effective for fiscal years beginning after
December 15, 1997. Management anticipates providing the required disclosures in
the June 30, 1999 consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. SFAS No. 133 will
not impact the Bank's accounting or disclosures.
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BUSINESS OF THE HOLDING COMPANY
The Holding Company, a Delaware corporation, was organized in
September, 1998 at the direction of the Board of Trustees of the Bank for the
purpose of owning all of the outstanding capital stock of the Bank upon
consummation of the Conversion. Upon consummation of the Conversion, the Holding
Company, as the sole stockholder of the Bank, will be a unitary savings and loan
holding company regulated by the OTS. As a unitary savings and loan holding
company, the Holding Company generally has no restrictions on its activities. If
the Holding Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Holding Company would thereupon become a multiple savings and loan holding
company. See "Regulation - Holding Company Regulation."
The Holding Company is currently not an operating company. Following
the Conversion, in addition to directing, planning and coordinating the business
activities of the Bank, the Holding Company will initially invest the proceeds
of the Conversion primarily in federal funds, government and federal agency
mortgage-backed securities, other debt securities, equity securities, deposits
of or loans to the Bank or a combination thereof. In addition, the Holding
Company intends to fund the loan to the ESOP to enable the ESOP to purchase up
to 8% of the Common Stock to be issued in the Conversion, including shares
issued to the Foundation. See "Use of Proceeds." In the future, the Holding
Company may acquire or organize other operating subsidiaries, including other
financial institutions, or it may merge with or acquire other financial
institutions and financial services related companies, although there are no
current plans for any such expansion. Although there are no current
arrangements, understandings or agreements regarding any such opportunities or
transactions, the Holding Company will be in a position after the Conversion,
subject to regulatory limitations and the Holding Company's financial position,
to take advantage of any such acquisition and expansion opportunities that may
arise. Initially, the Holding Company will neither own nor lease any property
but will instead use the premises, equipment and furniture of the Bank. The
Holding Company does not currently intend to employ any persons other than
certain officers of the Bank who will not be separately compensated by the
Holding Company. The Holding Company may utilize the support staff of the Bank
from time to time, if needed. Additional employees will be hired as appropriate
to the extent the Holding Company expands its business in the future.
BUSINESS OF THE BANK
General
The Bank is a community-oriented mutual savings bank which was
chartered by the State of New York in 1851. The principal business of the Bank
consists of attracting retail deposits from the general public and using those
funds, together with funds from operations and, to a much lesser extent,
borrowings, to originate primarily one- to four-family residential mortgage
loans, including home equity loans, and, to a lesser extent, multi-family and
commercial real estate, consumer and commercial business loans. The Bank
originates its loans primarily in its market area and, to a lesser extent, the
Bank also originates commercial real estate loans in New York City. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Bank also invests in mortgage-backed securities, U.S.
Government and agency obligations and, to a limited extent, corporate debt
securities. Revenues are derived primarily from interest on loans and
securities.
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank's deposit accounts are insured up to
applicable limits by the FDIC. The Bank only solicits deposits in its primary
market area and does not currently solicit brokered deposits. The Bank is a
member of the FHLB of New York.
Market Area
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Bank's primary market area is comprised of
Albany, Saratoga, Schenectady, and Rensselaer Counties, and a portion of Warren
County in New York, which are serviced through the Bank's main office and 16
other full service banking offices. The Bank's main office and seven of its
branch offices are located in Albany County. Based on the most recent
information available, the Bank had less than 10% of total bank and thrift
deposits in its market area.
47
<PAGE>
The Bank's primary market area consists principally of suburban and
rural communities with service, wholesale/retail trade, government and
manufacturing serving as the basis of the local economy. Service jobs and
governmental jobs represent the largest type of employment in the Bank's primary
market area, with jobs in wholesale/retail trade accounting for one of the
largest employment sectors. Management believes that its market area continues
to show economic weakness with declining real estate values.
Lending Activities
General. The Bank primarily originates fixed- and adjustable-rate, one-
to four-family mortgage loans, including home equity lines of credit and second
mortgages, secured by the borrower's primary residence. The Bank's general
practice is to originate fixed and adjustable rate mortgage loans with terms to
maturity between 5 and 30 years and until December 1997, sold substantially all
its fixed rate mortgage loans on the secondary market. Currently, the Bank has
been retaining its 30-year and 15-year fixed rate mortgage loans for its
portfolio as the declining interest rate environment has made it more difficult
to originate adjustable-rate loans. The Bank retains all adjustable rate
mortgage loans in its portfolio. The Bank also originates multi-family and
commercial real estate, consumer and commercial business loans. In-market loan
originations are generated by eight on-staff loan originators, the Bank's
marketing efforts, which include print, radio and television advertising, lobby
displays and direct contact with local civic and religious organizations, as
well as by the Bank's present customers, walk-in customers and referrals from
real estate agents, brokers and builders. The Bank also has established
relationships with certain mortgage brokers that take applications for
residential mortgage loans (under Cohoes underwriting guidelines) on behalf of
Cohoes. During fiscal 1998, $5.2 million of the Bank's loans were originated
through mortgage brokers. At June 30, 1998, the Bank's loan portfolio totaled
approximately $416.3 million.
The Bank originates fixed and adjustable rate consumer loans. ARM and
consumer loans are originated in order to increase the percentage of loans with
more frequent terms to repricing or shorter maturities than long-term
fixed-rate, one-to four-family mortgage loans. See "--Loan Portfolio
Composition" and "--One- to Four-Family Residential Real Estate Lending."
Loan applications are initially considered and approved at various
levels of authority, depending on the type and amount of the loan. Bank
employees with lending authority are designated, and their lending limit
authority defined, by the Board of Trustees. The approval of the Bank's Board of
Trustees is required for any loans over $500,000. Pursuant to the Bank's lending
policy, certain senior officers may approve loans up to $500,000.
The Bank is not subject to state or federal regulation limiting the
aggregate amount of mortgage loans it is permitted to make to one borrower or
affiliated groups of borrowers. New York law does require lending policies that
avoid imprudent mortgage concentrations. However, the aggregate amount of
commercial loans that the Bank is permitted to make to any one borrower or group
of related borrowers is generally limited to 15% of unimpaired capital and
surplus. At June 30, 1998, the Bank's loans-to-one-borrower limit was
approximately $8.0 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount.
At June 30, 1998, the Bank's largest lending relationship consisted of
five loans to a group of borrowers secured by professional buildings and
warehouse space, and totaling $3.9 million. The next largest lending
relationship consisted of six loans aggregating approximately $3.3 million
primarily secured by an office building and a self-storage facility. The third
largest lending relationship consisted of eight loans totaling approximately
$3.3 million secured by two mobile home parks and a car wash facility. The
fourth largest lending relationship consisted of four loans totaling
approximately $3.2 million secured by a participation in a shopping center and
office/apartment building. The fifth largest lending relationship consisted of
eight loans totaling approximately $2.6 million secured by an office building
and commercial building lots. As of June 30, 1998, each of the five
relationships discussed above were performing in accordance with their
applicable terms.
The types of loans that the Bank may originate are subject to federal
and state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are in turn
affected by, among other things, economic conditions, monetary policies of the
federal government, including the FRB, and tax policies.
48
<PAGE>
The following table sets forth the composition of the Bank's loan
portfolio in dollar amounts and as a percentage of the portfolio at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
1998 1997 1996 1995 1994
------------------- ----------------- ------------------- --------------- ----------------
Amount %of Total Amount %of Total Amount %of Total Amount %of Total Amount %of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family real estate.. $ 258,399 62.07% $243,620 60.62% $234,900 59.06% $227,253 59.38% $179,836 56.79%
Multi-family and commercial real estate 93,229 22.39 93,979 23.39 96,623 24.29 86,659 22.65 77,642 24.52
-------- ------- ------- ------ -------- ------- ------- ------- -------- -------
Total real estate loans..... 351,628 84.46 337,599 84.01 331,523 83.35 313,912 82.03 257,478 81.31
Consumer loans:
Home equity lines of credit... 21,976 5.28 25,205 6.27 27,342 6.87 30,792 8.05 31,741 10.02
Conventional second mortgages. 15,093 3.63 14,069 3.50 11,111 2.79 10,765 2.81 10,444 3.30
Automobile loans.............. 9,783 2.35 9,290 2.31 9,982 2.51 9,790 2.56 7,211 2.28
Credit cards.................. 1,655 0.40 2,152 0.54 2,767 0.70 3,350 0.88 3,093 0.97
Other consumer loans.......... 1,184 0.28 1,438 0.36 1,776 0.45 2,117 0.55 2,131 0.67
------ ------- ------- ------ -------- ------- ------ ------- ------- -------
Total consumer loans........ 49,691 11.94 52,154 12.98 52,978 13.32 56,814 14.85 54,620 17.24
Commercial business loans.......... 14,991 3.60 12,096 3.01 13,250 3.33 11,942 3.12 4,578 1.45
------- ------- ------- ------ -------- ------- ------- ------- ------- -------
Total loans................ 416,310 100.00% 401,849 100.00% 397,751 100.00% 382,668 100.00% 316,676 100.00%
====== ====== ====== ====== ======
Less:
Net deferred loan origination fees
and costs (18) (214) (532) (447) (246)
Allowance for loan losses..... (3,533) (3,105) (3,249) (3,133) (3,011)
------- -------- ------ ------ -------
Total loans, net......... $412,759 $398,530 $393,970 $379,088 $313,419
======== ======== ======== ======== ========
</TABLE>
49
<PAGE>
The following table shows the composition of the Bank's loan portfolio
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
------------------- ------------------ ----------------
Amount Percent Amount Percent Amount Percent
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Loans
Real estate:.............................
One- to four-family real estate..... $ 88,389 21.23% $ 21,365 5.32% $ 15,975 4.02%
Multi-family and commercial real estate 42,274 10.15 51,859 12.90 64,369 16.18
--------- ------- -------- ------- ------- -------
Total real estate loans........ 130,663 31.38 73,224 18.22 80,344 20.20
Consumer:
Home equity lines of credit...... --- -- --- -- --- --
Conventional second mortgages....... 15,093 3.63 14,069 3.50 11,111 2.79
Automobile loans.................... 9,783 2.35 9,290 2.31 9,982 2.51
Credit cards........................ 1,655 0.40 2,152 0.54 2,767 0.70
Other consumer loans................ 1,184 0.28 1,438 0.36 1,776 0.45
--------- ------- -------- ------- ------- -------
Total consumer loans........... 27,715 6.66 26,949 6.71 25,636 6.45
Commercial business loans............. 5,651 1.36 3,700 0.92 3,280 0.82
--------- ------- -------- ------- ------- -------
Total fixed-rate loans......... 164,029 39.40 103,873 25.85 109,260 27.47
Adjustable-Rate Loans
Real estate:
One- to four-family real estate..... 170,010 40.84 222,255 55.31 218,925 55.04
Multi-family and commercial real estate 50,955 12.24 42,120 10.48 32,254 8.11
--------- ------- -------- ------- ------- -------
Total real estate loans........ 220,965 53.08 264,375 65.79 251,179 63.15
Consumer:
Home equity lines of credit...... 21,976 5.28 25,205 6.27 27,342 6.87
Conventional second mortgages....... --- -- --- -- --- --
Automobile loans.................... --- -- --- -- --- --
Credit cards........................ --- -- --- -- --- --
Other consumer loans................ --- -- --- -- --- --
--------- ------- -------- ------- ------- -----
Total consumer loans........... 21,976 5.28 25,205 6.27 27,342 6.87
Commercial business loans............. 9,340 2.24 8,396 2.09 9,970 2.51
--------- ------- -------- ------- ------- ------
Total adjustable-rate loans.... 252,281 60.60 297,976 74.15 288,491 72.53
--------- ------- -------- ------- ------- ------
Total loans.................... 416,310 100.00% 401,849 100.00% 397,751 100.00%
======= ======= =======
Less:
Net deferred loan origination fees and costs (18) (214) (532)
Allowance for loan losses................ (3,533) (3,105) (3,249)
--------- ------- -------
Total loans receivable, net......... $ 412,759 $398,530 $393,970
========= ======== =========
</TABLE>
50
<PAGE>
The following table illustrates the contractual maturity of the Bank's
loan portfolio at June 30, 1998. Mortgages which have adjustable or renegotiable
interest rates are shown as maturing in the period in which the contract is due.
The schedule does not reflect the effects of possible prepayments or enforcement
of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate Loans Consumer Loans
Other Weighted
One- to four- Multi-family Commercial Home equity Conventional Automobile consumer Total Average
family commercial business lines of second Loans Credit loans Amount Rate
loans credit mortgages cards
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amounts Due:
0 months to 1 year........ $ 14 $ 18,965 $ 4,975 $ --- $ 165 $ 460 $ 1,655 $ 68 $ 26,302 8.52%
After 1 year:
1 to 2 years........... 51 7,874 2,825 --- 456 1,703 --- 145 13,054 9.40
2 to 3 years........... 84 6,488 1,380 --- 810 2,582 --- 224 11,568 8.78
3 to 5 years........... 742 5,395 3,068 --- 4,593 4,982 --- 114 18,894 8.42
5 to 10 years.......... 9,401 34,418 1,578 221 7,135 26 --- 340 53,119 8.48
10 to 15 years......... 41,247 10,151 200 3,736 1,926 30 --- 100 57,390 7.90
Over 15 years.......... 206,860 9,938 965 18,019 8 --- --- 193 235,983 7.87
------- ---------- ------- ---------- ---------- --------- -------- ----- ------- -----
Total due after 1 year.... 258,385 74,264 10,016 21,976 14,928 9,323 --- 1,116 390,008 8.06
------- --------- ------- ---------- ---------- --------- -------- ----- -------
Total amount due.......... $258,399 $ 93,229 $14,991 $ 21,976 $ 15,093 $ 9,783 $ 1,655 $1,184 416,310 8.09
======= ======== ======= ========== ========== ========== ======== ======
Less:
Net deferred loan origination fees and costs (18)
Allowance for loan losses (3,533)
Total loans receivable, net $412,759
========
</TABLE>
51
<PAGE>
The following table sets forth the dollar amounts in each loan category
at June 30, 1998 that are contractually due after June 30, 1999, and whether
such loans have fixed or adjustable interest rates.
Due after June 30, 1999
Fixed Adjustable Total
(In Thousands)
Residential real estate..................... $ 85,919 $ 172,466 $ 258,385
Commercial real estate...................... 26,412 47,852 74,264
---------- ----------- -----------
Total real estate loans........... 112,331 220,318 332,649
Commercial business loans................... 4,984 5,032 10,016
Consumer loans
Home equity lines of credit............ --- 21,976 21,976
Conventional second mortgages.......... 14,928 --- 14,928
Automobile loans....................... 9,323 --- 9,323
Credit cards........................... --- --- ---
Other consumer loans................... 1,116 --- 1,116
---------- ----------- -----------
Total consumer loans.............. 25,367 21,976 47,343
---------- ----------- -----------
Total loans....................... $ 142,682 $ 247,326 $ 390,008
========== =========== ===========
Residential Real Estate Lending
Cohoes' residential real estate loans consist of primarily one- to
four-family, owner occupied mortgage loans. At June 30, 1998, $258.4 million, or
62.07% of Cohoes' total loans consisted of one- to four-family residential first
mortgage loans. At June 30, 1998, approximately $88.4 million or 21.23% of
Cohoes' one- to four-family residential first mortgage loans provided for fixed
rates of interest and for repayment of principal over a fixed period not to
exceed 30 years. Cohoes does not originate fixed-rate loans for terms longer
than 30 years. Cohoes' fixed-rate one- to four-family residential mortgage loans
are priced competitively with the market. Accordingly, Cohoes attempts to
distinguish itself from its competitors based on quality of service.
Cohoes generally underwrites its fixed-rate one- to four-family
residential first mortgage loans using Fannie Mae guidelines. Until December
1997, the Bank sold substantially all fixed-rate residential mortgage loans it
originated to the secondary market, and continues to service the loans it sells.
Currently, the Bank generally holds for investment all adjustable and fixed rate
one- to four-family residential first mortgage loans it originates. In
underwriting one- to four-family residential first mortgage loans, Cohoes
evaluates, among other things, the borrower's ability to make monthly payments
and the value of the property securing the loan. Properties securing real estate
loans made by Cohoes are appraised by independent fee appraisers approved by the
Bank's Board of Trustees. Cohoes requires borrowers to obtain title insurance,
and fire and property insurance (including flood insurance, if necessary) in an
amount not less than the amount of the loan or the replacement cost of the
dwelling.
The Bank currently offers one- and five-year residential ARM loans with
an interest rate that adjusts annually after the initial period, based on the
change in the corresponding term United States Treasury index. These loans
provide for up to a 2.0% periodic cap and a lifetime cap of 6.0% over the
initial rate. As a consequence of using caps, the interest rates on these loans
may not be as rate sensitive as the Bank's cost of funds. Borrowers of ARM loans
are generally qualified at the initial interest rate (however, for one-year
ARMs, borrowers are qualified at the maximum rate after the first adjustment).
The Bank offers one-year ARM loans that are convertible (from the second through
the fifth year of the loan) into fixed-rate loans with interest rates based upon
the then current market rates. ARM loans generally pose greater credit risks
than fixed-rate loans, primarily because as interest rates rise, the required
periodic payment by the borrower rises, increasing the potential for default.
However, as of June 30, 1998, the Bank had not experienced higher default rates
on these loans relative to its other loans. See "--Asset Quality-Non-Performing
Assets."
52
<PAGE>
The Bank's one- to four-family mortgage loans do not contain prepayment
penalties and do not permit negative amortization of principal. Real estate
loans originated by the Bank generally contain a "due on sale" clause allowing
the Bank to declare the unpaid principal balance due and payable upon the sale
of the security property. The Bank has waived the due on sale clause on loans
held in its portfolio from time to time to permit assumptions of the loans by
qualified borrowers.
Generally, Cohoes does not originate residential mortgage loans where
the ratio of the loan amount to the value of the property securing the loan
(i.e., the "loan-to-value" ratio) exceeds 95%. If the loan-to-value ratio
exceeds 80%, Cohoes generally requires that the borrower obtain private mortgage
insurance in amounts intended to reduce the Bank's exposure to 80% or less of
the lower of the appraised value or the purchase price of the property securing
the loan. See "-- Loan Origination and Sale of Loans." In addition, on occasion
the Bank will make a loan for the construction of the borrower's primary
residence. At June 30, 1998 the Bank had $1.7 million in loans outstanding for
the construction of the borrower's residence.
Multi-Family and Commercial Real Estate Lending
The Bank has engaged in multi-family and commercial real estate lending
secured primarily by apartment buildings, office buildings, nursing homes, strip
shopping centers and mobile home parks located in the Bank's primary market
area. At June 30, 1998, the Bank had $93.2 million of multi-family and
commercial real estate loans, representing 22.39% of the Bank's total loan
portfolio. As of June 30, 1998, $25.8 million of this portfolio was secured by
property located in New York City.
Multi-family and commercial real estate loans generally have terms to
maturity that do not exceed 20 years. Cohoes' current lending guidelines
generally require that the property securing a loan generate net cash flows of
at least 120% of debt service after the payment of all operating expenses,
excluding depreciation, and the loan-to-value ratio not exceed 80% on loans
secured by such properties. As a result of a decline in the value of some
properties in the Bank's primary market area and due to economic conditions, the
current loan-to-value ratio of some commercial real estate loans in the Bank's
portfolio may exceed the initial loan-to-value ratio, and the current debt
service ratio may exceed the initial debt service ratio. Adjustable rate
multi-family and commercial real estate loans are generally written as ten-year
balloon loans, which adjust after five years to a margin over the five-year
United States Treasury index, and amortize over a term up to 20 years. In
underwriting commercial real estate loans, the Bank analyzes the financial
condition of the borrower, the borrower's credit history, the reliability and
predictability of the net income generated by the property securing the loan and
the value of the property itself. The Bank generally requires personal
guarantees of the borrowers in addition to the secured property as collateral
for such loans. Appraisals on properties securing commercial real estate loans
originated by the Bank are performed by independent fee appraisers approved by
the Board of Trustees.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effect of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by commercial real estate is typically dependent upon the
successful operation of the related real estate project. If the cash flow from
the project is reduced (for example, if leases are not obtained or renewed, or a
bankruptcy court modifies a lease term, or a major tenant is unable to fulfill
its lease obligations), the borrower's ability to repay the loan may be impaired
and the value of the property may be reduced.
Consumer Lending
The Bank offers a variety of secured and unsecured consumer loans,
including home equity lines of credit and second mortgages and, to a lesser
extent, automobile and credit card loans. Substantially all of the Bank's
consumer loans are originated on property located or for customers residing in
the Bank's primary market area. At June 30, 1998, the Bank's consumer loan
portfolio totaled $49.7 million, or 11.94% of the Bank's total loan portfolio.
53
<PAGE>
The Bank's home equity lines of credit and second mortgages are secured
by a lien on the borrower's residence and generally do not exceed $100,000.
Cohoes uses the same underwriting standards for home equity lines of credit and
second mortgages as it uses for one- to four-family residential mortgage loans.
Home equity lines of credit and second mortgages are generally originated in
amounts which, together with all prior liens on such residence, do not exceed
80% of the appraised value of the property securing the loan. The interest rates
for home equity loans and lines of credit float at a stated margin over the
prime rate and second mortgages generally have fixed interest rates. Home equity
lines of credit require interest and principal payments on the outstanding
balance for the term of the loan. The terms of the Bank's home equity lines of
credit are generally 25 years. As of June 30, 1998, the Bank had $22.0 million,
or 5.28% of the Bank's total loan portfolio outstanding, in home equity lines of
credit, with an additional $12.9 million of unused home equity lines of credit,
and $15.1 million, or 3.63% of the Bank's total loan portfolio, in second
mortgages.
The underwriting standards employed by the Bank for consumer loans
other than home equity lines of credit and second mortgages generally include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is the primary consideration,
the underwriting process also includes a comparison of the value of the property
securing the loan, if any, in relation to the proposed loan amount.
The Bank's automobile loans are originated as installment loans with a
fixed interest rate and terms of up to 60 months for new vehicles and up to 60
months for certain used vehicles. The Bank originates its automobile loans
directly and will loan up to 100% of the value of a new automobile and up to 90%
of the value of a used automobile.
At June 30, 1998, Cohoes had $9.8 million of automobile loans.
The Bank does not originate any consumer loans on an indirect basis
(i.e., where loan contracts are purchased from retailers of goods or services
which have extended credit to their customers).
Consumer loans may entail greater credit risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by assets which may decline in value. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of high initial
loan-to-value ratios, repossession, rehabilitation and carrying costs, and the
greater likelihood of damage, loss or depreciation of the property, and thus are
more likely to be affected by adverse personal circumstances. In the case of
automobile loans, which may have loan balances in excess of the resale value of
the collateral, borrowers may abandon the collateral property making
repossession by the Bank and subsequent losses more likely. The application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on consumer loans, including automobile
loans.
Commercial Business Lending
At June 30, 1998, commercial business loans comprised $15.0 million, or
3.60% of the Bank's total loan portfolio. Most of the Bank's commercial business
loans have been extended to finance local businesses and include primarily short
term loans to finance machinery and equipment purchases, inventory and accounts
receivable. Commercial business loans also involve the extension of revolving
credit for a combination of equipment acquisitions and working capital needs.
The terms of loans extended on machinery and equipment are based on the
projected useful life of such machinery and equipment, generally not to exceed
seven years. Lines of credit generally are available to borrowers provided that
the outstanding balance is paid in full (i.e., the credit line has a zero
balance) for at least 30 days every year. All lines of credit are reviewed on an
annual basis. In the event the borrower does not meet this 30 day requirement,
the line of credit may be terminated and the outstanding balance may be
converted into a fixed term loan. The Bank has a few standby letters of credit
outstanding which are offered at competitive rates and terms and are generally
on a secured basis.
Unlike residential mortgage loans, commercial business loans are
typically made on the basis of the borrower's ability to make repayment from the
cash flow of the borrower's business. As a result, the availability of funds for
the
54
<PAGE>
repayment of commercial business loans may be substantially dependent on the
success of the business itself (which, in turn, is often dependent in part upon
general economic conditions). The Bank's commercial business loans are usually,
but not always, secured by business assets. However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business.
The Bank commercial business lending policy includes credit file
documentation and analysis of the borrower's background, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of other conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
the Bank's current credit analysis. The Bank generally obtains personal
guarantees on its commercial business loans. Nonetheless, such loans are
believed to carry higher credit risk than more traditional savings bank loans.
Loan Originations and Sales
Mortgage and commercial loan originations are developed from the
continuing business with depositors and borrowers, soliciting realtors and other
brokers and walk-in customers. Residential and commercial loans are originated
by the Bank's staff of salaried and commissioned loan personnel, as well as
through established relationships with certain mortgage brokers. The Bank
currently originates substantially all its mortgage loans to conform with the
underwriting standards of Fannie Mae and Freddie Mac. As such, these loans are
saleable to the secondary market.
While the Bank originates both fixed- and adjustable-rate loans, its
ability to originate loans is dependent upon demand for loans in the markets in
which it serves. Demand is affected by the applicable local economy and the
interest rate environment. Until December 1997, the Bank sold all its fixed-rate
loans to the secondary market, servicing retained. Currently, the Bank generally
retains its fixed-rate and adjustable-rate real estate loans in its portfolio.
At June 30, 1998, the Bank serviced approximately $233.1 million of loans for
others.
During the year ended June 30, 1998, the Bank originated $180.7 million
of loans, compared to $141.5 million in fiscal 1997.
In periods of economic uncertainty, the Bank's ability to originate
large dollar volumes of loans with acceptable underwriting characteristics may
be substantially reduced or restricted which may result in a decrease in
operating earnings.
55
<PAGE>
The following table shows the loan origination and repayment activities
of the Bank for the periods indicated.
Year Ended
June 30,
1998 1997 1996
-------- ----------- -----------
(In Thousands)
Loans at beginning of period..... $401,849 $ 397,751 $ 382,668
-------- ----------- -----------
Originations by type:
Real estate loans:
One- to four-family.......... 107,991 74,641 73,829
Multi-family and commercial
real estate 33,171 32,132 20,521
-------- ----------- -----------
Total real estate loans 141,162 106,773 94,350
Consumer loans:
Home equity lines of credit.. 8,243 9,092 10,108
Conventional second mortgages 5,918 7,069 4,240
Automobile loans............. 6,766 5,189 6,466
Credit cards................. 2,561 3,052 3,408
Other consumer loans......... 822 814 1,024
-------- ----------- -----------
Total consumer loans 24,310 25,216 25,246
Commercial business loans....... 15,195 9,461 10,726
-------- ----------- -----------
Total loans originated....... 180,667 141,450 130,322
-------- ----------- -----------
Less:
Principal repayments............ 155,969 123,732 98,618
Loan sales...................... 8,105 9,567 15,747
Charge-offs.................... 1,038 1,376 239
Transfers to ORE............... 1,094 2,677 635
-------- ----------- -----------
Total loan reductions 166,206 137,352 115,239
-------- ----------- -----------
Net Loan Activity................ 14,461 4,098 15,083
-------- ----------- -----------
Loans at end of period........... $416,310 $ 401,849 $ 397,751
======== =========== ===========
56
<PAGE>
Asset Quality
Delinquency Procedures. When a borrower fails to make a required
payment on a one- to four-family residential mortgage loan, the Bank attempts to
cure the deficiency by contacting the borrower. Written contacts are made after
payment is 15 days past due and, in most cases, deficiencies are cured promptly.
The Bank attempts to contact the borrower by telephone to arrange payment of the
delinquency between the 16th and the 30th day. If these efforts have not
resolved the delinquency within 45 days after the due date, a second written
notice is sent to the borrower, and on the 60th day a notice is sent to the
borrower warning that foreclosure proceedings will be commenced unless the
delinquent amount is paid. If the delinquency has not been cured within a
reasonable period of time after the foreclosure notice has been sent, the Bank
may obtain a forbearance agreement or may institute appropriate legal action to
foreclose upon the property. If foreclosed, property collateralizing the loan is
sold at a public sale and may be purchased by the Bank. If the Bank is in fact
the successful bidder at the foreclosure sale, upon receipt of a deed to the
property, the Bank generally sells the property at the earliest possible date.
Collection efforts on consumer, commercial business and multi-family
and commercial real estate loans are similar to efforts on one- to four-family
residential mortgage loans, except that collection efforts on consumer and
multi-family commercial real estate loans generally begin within 15 days after
the payment date is missed. The Bank also maintains periodic contact with
commercial loan customers and monitors and reviews the borrowers' financial
statements and compliance with debt covenants on a regular basis.
Delinquent Loans. The following table sets forth information concerning
delinquent loans as June 30, 1998, in dollar amounts and as a percentage of the
Bank's loan portfolio. The amounts presented represent the total remaining
principal balances of the related loans, rather than the actual payment amounts
which are overdue.
<TABLE>
<CAPTION>
June 30, 1998
60-89 days 90 days or more Total loans delinquent 60 days or more
---------------------------- ------------------------------ --------------------------------------
Principal Percent Principal Percent Principal Percent
Number Balance of Loan Number Balance of Loan Number Balance of Loan
of Loans of Loans Category of Loans of Loans Category of Loans of Loans Category
------- --------- --------- -------- ---------- -------- -------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family
real estate 9 $ 757 0.29% 33 $2,635 1.02% 42 $3,392 1.31%
Multi-family and commercial
real estate 3 263 0.28 6 823 0.88 9 1,086 1.17
-- ------- ---- ------ ------ ---- --
Total real estate loans 12 1,020 0.29 39 3,458 0.98 51 4,478 1.27
Consumer loans:
Home equity lines of credit 1 14 0.06 1 40 0.18 2 54 0.25
Conventional second mortgages 1 41 0.27 3 35 0.23 4 76 0.50
Automobile loans........... 3 10 0.10 6 32 0.33 9 42 0.43
Credit cards............... 9 23 1.39 20 57 3.44 29 80 4.83
Other consumer loans....... 2 2 0.17 8 33 2.79 10 35 2.96
-- ------ ---- ---- ------ ---- -- -----
Total consumer loans.. 16 90 0.18 38 197 0.40 54 287 0.58
Commercial business loans....... -- --- -- 1 65 0.43 1 65 0.43
-- ------ ---- -- ------ ---- -- -----
Total delinquent loans 28 $1,110 0.27% 78 $3,720 0.89% 106 $4,830 1.16%
== ====== ==== == ====== ==== === ====== ====
</TABLE>
57
<PAGE>
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets. Loans are generally placed on non-accrual
status when the loan is contractually past due 90 days or more or when the
collection of principal and/or interest in full becomes doubtful. When loans are
designated as non-accrual, 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. ORE includes assets acquired in settlement of loans.
<TABLE>
<CAPTION>
June 30,
1998 1997 1996 1995 1994
-------- -------- ------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual loans:
One- to four-family real estate.......................... $ 2,635 $ 2,835 $ 1,852 $ 441 $ 891
Multi-family and commercial real estate.................. 823 1,246 3,438 1,820 1,299
Conventional second mortgages............................ 35 62 48 35 84
Consumer loans........................................... 105 380 245 40 17
Commercial business loans................................ 65 217 --- --- ---
-------- -------- ------- -------- -------
Total non-accrual loans................................ 3,663 4,740 5,583 2,336 2,291
Loans contractually past due 90 days or more and still
accruing interest:
Multi-family and commercial real estate.................. --- --- --- 308 317
Consumer loans........................................... 57 42 158 67 18
-------- -------- ------- -------- -------
Total loans 90 days or more past due and still
accruing interest 57 42 158 375 335
Troubled debt restructurings.............................. 1,929 1,906 2,052 2,352 2,266
-------- -------- ------- -------- -------
Total non-performing loans............................. 5,649 6,688 7,793 5,063 4,892
Real estate owned (ORE)................................... 509 1,874 421 396 437
-------- -------- ------- -------- -------
Total non-performing assets............................ $ 6,158 $ 8,562 $ 8,214 $ 5,459 $ 5,329
======== ======== ======= ======== =======
Allowance for loan losses................................. $ 3,533 $ 3,105 $ 3,249 $ 3,133 $ 3,011
======== ======== ======= ======== =======
Coverage of non-performing loans.......................... 62.54% 46.43% 41.69% 61.88% 61.55%
===== ===== ===== ===== =====
Total non-performing loans as a percentage of total loans. 1.36% 1.66% 1.96% 1.32% 1.54%
===== ===== ===== ===== =====
Total non-performing loans as a percentage of total assets 1.05% 1.36% 1.68% 1.10% 1.21%
===== ===== ===== ===== =====
</TABLE>
58
<PAGE>
Non-Accruing Loans. At June 30, 1998, the Bank had approximately $3.7
million in non-accruing loans, which constituted 0.9% of the Bank's total loan
portfolio. As of such date, there were no non-accruing loans or aggregate
non-accruing loans-to-one-borrower in excess of $750,000.
For the year ended June 30, 1998 accumulated interest income on
nonaccrual loans of approximately $214,000 was not recognized as income.
Accruing Loans Contractually Past Due 90 Days or More. As of June 30,
1998, the Bank had approximately $57,000 in accruing loans contractually past
due 90 days or more.
Troubled Debt Restructurings. As of June 30, 1998, the Bank had
approximately $1.9 million of troubled debt restructurings (which involve
forgiving a portion of interest or principal on the loan or restructuring a loan
to a rate materially less than that of market rates). At that date, there were
no troubled debt restructurings in excess of $750,000.
ORE. As of June 30, 1998, the Bank had $509,000 of ORE. At that date,
ORE consisted of 14 residential and one commercial property located in the
Bank's primary market area. Real estate and other assets acquired by the Bank as
a result of foreclosure or by deed-in-lieu of foreclosure or repossession are
classified as ORE until sold. When property is classified as ORE, it is recorded
at the lower of cost or fair value (net of disposition costs) at that date and
any writedown resulting therefrom is charged to the allowance for loan losses.
Subsequent writedowns are charged to operating expenses. Net expense from ORE is
expensed as incurred.
Other Loans of Concern. As of June 30, 1998, there was $636,000 of
other loans not included in the table or discussed above where known information
about the possible credit or other problems of borrowers caused management to
have doubts as to the ability of the borrower to comply with present loan
repayment terms. These loans have been considered by management in conjunction
with the analysis of the adequacy of the allowance for loan losses.
Allowance for Loan Losses. The allowance for loan losses is replenished
through a provision for loan losses charged to operations. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Recoveries on loans previously
charged-off are credited to the allowance for loan losses. The allowance is an
amount that management believes will be adequate to absorb losses on existing
loans that may become uncollectible. Management's evaluation of the adequacy of
the allowance for loan losses is performed on a periodic basis and takes into
consideration such factors as the historical loan loss experience, changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that may affect
borrowers' ability to pay.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in determining the level of the
allowance. Future additions to the Bank's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. In addition, regulatory agencies, as an integral part of the
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
upon their judgment of the information available to them at the time of their
examination. At June 30, 1998, the Bank had a total allowance for loan losses of
$3.5 million, representing 62.5% of total non-performing loans.
59
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses at the dates and for the periods indicated.
<TABLE>
<CAPTION>
At or for the fiscal year ended June 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- --------------- --------------- ------------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses,
beginning period $ 3,105 $ 3,249 $ 3,133 $ 3,011 $ 2,308
Charged-off loans:
Real estate loans...............
One- to four-family real estate 432 619 128 79 35
Multi-family and commercial
real estate 93 343 21 --- ---
-------- --------- --------- ---------- ----------
Total real estate loan
charge-offs 525 962 149 79 35
Commercial business loans
charge-offs 218 105 4 --- ---
Consumer loans
Home equity lines of credit 84 39 18 --- ---
Conventional second mortgages 16 1 --- --- 7
Automobile loans........... 121 55 23 28 1
Credit cards............... 212 353 132 91 1
Other consumer loans....... 41 56 75 37 14
-------- --------- --------- ---------- ----------
Total consumer loan charge-offs 474 504 248 156 23
-------- --------- --------- ---------- ----------
Total charged-off loans 1,217 1,571 401 235 58
Recoveries on loans previously
charged-off:
One- to four-family real estate 78 28 4 --- ---
Multi-family and commercial
real estate 93 40 13 --- ---
-------- --------- --------- ----------- ----------
Total real estate loan recoveries 171 68 17 --- ---
Commercial business loan recoveries 35 --- 1 --- ---
Consumer loans
Home equity lines of credit --- 4 --- --- ---
Conventional second mortgages --- --- 3 8 ---
Automobile loans........... 8 5 --- 3 1
Credit cards............... 23 16 4 2 ---
Other consumer loans....... 8 9 2 14 10
-------- --------- --------- ---------- ----------
Total consumer loan recoveries 39 34 9 27 11
-------- --------- --------- ---------- ----------
Total recoveries...... 245 102 27 27 11
-------- --------- --------- ---------- ----------
Net loans charged-off................ (972) (1,469) (374) (208) (47)
Provision for loan losses............ 1,400 1,325 490 330 750
-------- --------- --------- ---------- ----------
Allowance for loan losses,
end of period $ 3,533 $ 3,105 $ 3,249 $ 3,133 $ 3,011
======== ========= ========= ========== ==========
Net charged-off loans to
average loans 0.24% 0.37% 0.10% 0.06% 0.01%
====== ====== ====== ====== ======
Allowance for loan losses to
total loans 0.85% 0.77% 0.82% 0.82% 0.95%
====== ====== ====== ====== ======
Allowance for loan losses to
nonperforming loans 62.54% 46.43% 41.69% 61.88% 61.55%
====== ====== ====== ====== ======
Net charged-off loans to
allowance for loan losses 27.51% 47.31% 11.51% 6.64% 1.56%
====== ====== ====== ====== ======
Recoveries to charged-offs........... 20.13% 6.49% 6.73% 11.49% 18.97%
====== ====== ====== ====== ======
</TABLE>
60
<PAGE>
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Bank. 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 not indicative of either the specific amounts or the loan
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. The allocation to each category does not
restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
------------------------------------ ------------------------------- ---------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Percent of in Each Percent of in Each Percent of in Each
Allowance Allowance Category Allowance Allowance Category Allowance Allowance Category
for Loan to Total to Total for Loan to Total to Total for Loan to Total to Total
Losses Allowance Allowance Losses Allowance Allowance Losses Allowance Allowance
------------- ----------- ---------- --------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate loans
One- to four-family real estate $ 649 18.37% 62.07% $ 493 15.88% 60.62% $ 591 18.19% 59.06%
Multi-family and commercial
real estate..... 1,438 40.70 22.39 1,339 43.12 23.39 1,848 56.88 24.29
------- ------- ------ -------- ------ ------ ------ ------ -------
Total real estate loans 2,087 59.07 84.46 1,832 59.00 84.01 2,439 75.07 83.35
Consumer loans
Home equity lines of credit 41 1.16 5.28 24 0.77 6.27 158 4.86 6.87
Conventional second mortgages 26 0.74 3.63 22 0.71 3.50 9 0.28 2.79
Automobile loans..... 74 2.09 2.35 35 1.13 2.31 40 1.23 2.51
Credit cards......... 154 4.36 0.40 132 4.25 0.54 183 5.63 0.70
Other consumer loans ... 45 1.27 0.28 56 1.80 0.36 102 3.14 0.45
------- ------- ------- --------- ------ ------ ------ ------ -------
Total consumer loans $ 340 9.62 11.94 269 8.66 12.98 492 15.14 13.32
Commercial business loans 164 4.64 3.60 215 6.93 3.01 227 6.99 3.33
Unallocated............ 942 26.67 -- 789 25.41 -- 91 2.80 --
------- ------- ------- --------- ------ ------- ------- ------ -------
Total............. $ 3,533 100.00% 100.00% $ 3,105 100.00% 100.00% $ 3,249 100.00% 100.00%
======= ======= ======= ========= ======= ======= ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
June 30,
1995 1994
----------------------------------- --------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Allowance Category Allowance Allowance Category
for Loan to Total to Total for Loan to Total to Total
Losses Allowance Allowance Losses Allowance Allowance
-------- ----------- ---------- ----------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans
One- to four-family real estate $ 861 27.48% 59.38% $ 292 9.70% 56.78%
Multi-family and commercial
real estate..... 1,426 45.52 22.65 1,610 53.47 24.52
------ ------- ------ ------- ------ -----
Total real estate loans 2,287 73.00 82.03 1,902 63.17 81.30
Consumer loans
Home equity lines of credit --- -- 8.05 -- -- 10.02
Conventional second mortgages 75 2.39 2.81 15 0.50 3.30
Automobile loans..... 66 2.11 2.56 15 0.50 2.28
Credit cards......... 382 12.19 0.88 263 8.73 0.98
Other consumer loans ... 158 5.04 0.55 71 2.36 0.67
------ -------- ------ ------ ------ ------
Total consumer loans 681 21.73 14.85 364 12.09 17.25
Commercial business loans 102 3.26 3.12 -- -- 1.45
Unallocated............ 63 2.01 -- 745 24.74 --
------ ------- ------- ------ ------- ------
Total............. $3,133 100.00% 100.00% $3,011 100.00% 100.00%
====== ======= ======= ====== ======= ======
</TABLE>
61
<PAGE>
Investment Activities
The Bank is authorized to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements and federal
funds. Subject to various restrictions, the Bank may also invest its assets in
investment grade commercial paper and corporate debt securities and mutual funds
whose assets conform to the investments that the Bank is otherwise authorized to
make directly.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, and, to a much lesser extent, to provide collateral for
borrowings and to fulfill the Bank's asset/liability management policies. To
date, the Bank's investment strategy has been directed toward high-quality
assets (primarily federal agency obligations and mortgage-backed securities)
with short and intermediate terms (five years or less) to maturity. At June 30,
1998, the weighted average term to maturity or repricing of the security
portfolio was 3.8 years. This did not take into account securities which may be
called prior to their contractual maturity or repricing. See Notes 5 and 6 of
the Notes to Consolidated Financial Statements for information regarding the
maturities of the Bank's investment and mortgage-backed securities.
Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with unrealized holding
gains and losses reflected in current earnings. All other debt and marketable
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. As a member of the FHLB of New
York, the Bank is required to hold stock in the FHLB of New York which is
carried at cost since there is no readily available market value.
Historically, the Bank has not held any securities considered to be trading
securities.
The following table sets forth the composition of the Bank's securities
available for sale and investment securities at the dates indicated.
<TABLE>
<CAPTION>
June 30,
1998 1997 1996
------------------- -------------------- -----------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities available for sale, at fair value:
Debt securities
US Government and Agency obligations $23,237 47.69% $18,437 51.97% $ 7,302 34.96%
Other obligations................... 276 0.57 493 1.39 764 3.65
Mortgage-backed securities....... 16,946 34.78 6,762 19.06 --- --
Collateralized mortgage obligations. 4,003 8.22 6,302 17.77 9,404 45.03
------- ------ ------- ------ ------ ------
Total debt securities.......... 44,462 91.26 31,994 90.19 17,470 83.64
Equity securities........................ 4,258 8.74 3,481 9.81 3,416 16.36
------- ------ ------- ------ ------ ------
Total securities available for sale $48,720 100.00 $35,475 100.00 $20,886 100.00
======= ====== ======= ====== ======= ======
Investment securities at amortized cost:
US Government and Agency obligations $22,025 48.49 6,049 23.93 10,339 39.81
Other obligations................... 388 0.85 848 3.36 1,923 7.41
Mortgage-backed securities....... 23,011 50.66 18,376 72.71 12,073 46.49
Industrial and financial............ -- -- -- -- 1,634 6.29
------- ------ ------- ------ ------- ------
Total investment securities.... $45,424 100.00% $25,273 100.00% $25,969 100.00%
------- ====== ------- ====== ------- ======
Investment securities at fair value...... $45,547 $25,186 $25,520
======= ======= =======
</TABLE>
62
<PAGE>
The following table sets forth information regarding the scheduled
maturities, amortized cost, and weighted average yields for the Bank's
securities portfolios at June 30, 1998 by contractual maturity. The table does
not take into consideration the effects of scheduled repayments or possible
prepayments.
<TABLE>
<CAPTION>
At June 30, 1998
Less than 1 year 1 to 5 years 5 to 10 years Over 10 years Total Securities
----------------- ------------------ ----------------- ------------------- -----------------
Weighted Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Fair
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Value
-------- ------- -------- ------- -------- ------- -------- ------- --------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for sale:
US Government and Agency obligations $ -- --% $ 23,296 6.05% $ -- --% $ -- --% $23,296 6.05% $23,237
Other obligations................ -- -- 71 5.09 200 6.60 -- -- 271 6.20 276
Mortgage-backed securities....... -- -- 16,855 6.39 -- -- -- -- 16,855 6.39 16,946
Collateralized mortgage obligations 179 6.91 2,432 5.85 1,408 6.65 -- -- 4,019 6.18 4,003
Other equity securities.......... -- -- -- -- -- -- 708 5.63 708 5.63 706
------ ---- ---------- ---- ------- ----- ------- ---- ------- ---- -------
Sub-total.................. 179 6.91 42,654 6.17 1,608 6.64 708 5.63 45,149 6.18 45,168
FHLB stock....................... -- -- -- -- -- -- 3,552 7.45 3,552 7.45 3,552
------ ---- ---------- ---- ------- ----- ------- ---- ------- ---- -------
Total securities available for sale $ 179 6.91 $ 42,654 6.17 $ 1,608 6.64 $ 4,260 7.15 $48,701 6.27 $48,720
====== ==== ========== ==== ======= ==== ======= ==== ======= ==== =======
Investment securities:
US Government and Agency obligations $ 25 7.38 $ 22,000 6.08 $ -- -- $ -- -- $22,025 6.08 $21,999
Other obligations................ -- -- 271 6.40 117 7.25 -- -- 388 6.66 389
Mortgage-backed securities....... 657 6.85 10,452 6.68 11,519 6.23 383 7.05 23,011 6.47 23,159
------ ---- ---------- ---- ------- ---- ------ ---- ------- ---- ------
Total investment securities $ 682 6.87% $ 32,723 6.27% $11,636 6.24% $ 383 7.05% $45,424 6.28% $45,547
====== ===== ========= ==== ======== ==== ======= ==== ======= ==== =======
</TABLE>
63
<PAGE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization
and prepayment of loan principal, maturities of securities, short-term
investments, funds provided from operations and borrowings.
Deposits. The Bank offers a variety of deposit accounts having a range
of interest rates and terms. The Bank's deposits consist of savings accounts,
school savings accounts (the largest "Save For America" school savings program
in the U.S., a volunteer program in which students are given the opportunity to
open and maintain a savings account while at school in order to teach wise money
management), money market accounts, demand deposit accounts and time deposits
currently ranging in terms from three months to five years. The Bank only
solicits deposits from its primary market area and does not currently solicit
brokered deposits. However, in the past, the Bank has solicited brokered
deposits and at June 30, 1998, the Bank had $992,000 in brokered deposits. The
Bank relies primarily on competitive pricing policies, advertising and customer
service to attract and retain its deposits. At June 30, 1998, the Bank's
deposits totaled $450.0 million, of which $413.4 million were interest-bearing
deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management, liquidity and profitability objectives. Based on its
experience, the Bank believes that its savings, school savings, money market and
demand deposit accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain time deposits and the rates paid on
these deposits has been and will continue to be significantly affected by market
conditions.
The following table sets forth the distribution and deposit activity of
the Bank's deposit accounts for the periods indicated.
<TABLE>
<CAPTION>
School Money Demand Time Total Number
Savings Savings Market Deposits Deposits Total of Accounts
---------- -------------- ----------- ----------- ----------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance as of June 30, 1995 $127,333 $ 6,813 $ 18,966 $ 33,432 $212,419 $398,963 74,668
Net deposits (withdrawals). (2,094) 3,499 (2,886) 5,001 (15,575) (12,055)
Interest credited.......... 3,722 310 487 250 12,862 17,631
---------- ---------- ----------- ---------- -------- --------
Balance as of June 30, 1996 128,961 10,622 16,567 38,683 209,706 404,539 79,283
Net deposits (withdrawals). (8,780) 2,698 (1,565) 6,887 7,990 7,230
Interest credited.......... 3,700 589 448 274 12,610 17,621
---------- ----------- ----------- ---------- -------- --------
Balance as of June 30, 1997 123,881 13,909 15,450 45,844 230,306 429,390 86,741
Net deposits (withdrawals). (1,898) 2,558 5,653 7,806 (12,778) 1,341
Interest credited.......... 3,629 788 569 303 13,521 18,810
---------- ----------- ----------- ---------- -------- --------
Balance as of June 30, 1998 $125,612 $17,255 $ 21,672 $ 53,953 $231,049 $449,541 89,370
======== ======= ========== ========= ======== ========
</TABLE>
64
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by the Bank as of the dates indicated.
<TABLE>
<CAPTION>
Balance as of
June 30,
1998 1997 1996
----------------------------- ------------------------------- ------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings accounts (3.0%)............... $ 125,612 27.94% $ 123,881 28.85% $ 126,951 31.38%
School savings accounts (5.5%)........ 17,255 3.84 13,909 3.24 10,622 2.63
Money market accounts (2.75% to 3.93%) 21,672 4.82 15,450 3.60 16,567 4.10
Demand deposits (0% to 1.75%)......... 53,953 12.00 45,844 10.68 40,693 10.06
Time deposits:
2.00-2.99%............................ -- -- -- -- 5 0.00
3.00-3.99%............................ 2 0.00 14 0.00 3,470 0.86
4.00-4.99%............................ 4,105 0.91 10,325 2.40 47,062 11.63
5.00-5.99%............................ 190,539 42.39 166,966 38.88 81,589 20.17
6.00-6.99%............................ 17,664 3.93 25,244 5.88 47,513 11.74
7.00-7.99%............................ 18,709 4.16 27,727 6.46 30,067 7.43
8.00-8.99%............................ 30 0.01 30 0.01 -- --
------------- ------- ----------- ------- ----------- ---------
Total time deposits......... 231,049 51.40 230,306 53.63 209,706 51.83
------------- ------- ----------- ------- ----------- --------
Total deposits........................ $ 449,541 100.00% $ 429,390 100.00% $ 404,539 100.00%
============ ====== =========== ====== =========== ======
</TABLE>
65
<PAGE>
The following table shows rate and maturity information for the Bank's
time deposits as of June 30, 1998.
<TABLE>
<CAPTION>
Amount Due
12 months 12 months 12 months 12 months 12 months
ended ended ended ended ended
June 30, 1999 June 30, 2000 June 30, 2001 June 30, 2002 June 30, 2003 Thereafter Total
--------------- --------------- --------------- --------------- ---------------- ---------------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
3.00-3.99%.... $ --- $ --- $ --- $ --- $ 2 $ --- $ 2
4.00-4.99%.... 4,080 --- --- --- --- 25 4,105
5.00-5.99%.... 140,476 32,594 6,540 3,073 7,856 --- 190,539
6.00-6.99%.... 8,284 5,681 1,308 1,865 526 --- 17,664
7.00-7.99%.... 6,680 11,768 135 126 --- --- 18,709
8.00-8.99%.... 30 --- --- --- --- --- 30
----------- --------------- ------------- ------------- -------------- --------------- ---------
Total.. $ 159,550 $ 50,043 $ 7,983 $ 5,064 $ 8,384 $ 25 $ 231,049
=========== ============ ============= ============= ============== =============== ==========
</TABLE>
The following table indicates the amount of the Bank's time deposits by
the time remaining until maturity as of June 30, 1998.
<TABLE>
<CAPTION>
Maturity
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
--------------- --------------- --------------- -------------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Time deposits less than $100,000 $ 38,586 $ 45,097 $ 54,798 $ 61,440 $ 199,921
Time deposits $100,000 or more 5,204 7,791 8,074 10,059 31,128(1)
------------ ------------ ------------ ------------ ---------
Total time deposits $ 43,790 $ 52,888 $ 62,872 $ 71,499 $ 231,049
============ ============ ============ ============ =========
- ----------------
<FN>
(1) Substantially all time deposits of $100,000 or more are maintained at
negotiated rates.
</FN>
</TABLE>
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's practice has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread or when the
Bank needs additional funds to satisfy loan demand.
Cohoes' borrowings historically have consisted primarily of advances
from the FHLB of New York and securities sold under agreements to repurchase.
FHLB advances can be made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The Bank currently
maintains available lines of credit and is currently authorized to borrow up to
$49.2 million on lines of credit with the FHLB of New York. At June 30, 1998,
the Bank had outstanding $19.9 million in other borrowings from the FHLB of New
York. See Note 12 of the Notes to Consolidated Financial Statements.
66
<PAGE>
The following table sets forth the maximum month-end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
June 30,
---------------------------------------------
1998 1997 1996
---------------- --------------- -----------
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances.......................... $ 19,983 $ 16,145 $ 7,100
Securities sold under
agreements to repurchase.......... --- --- 6,054
Other borrowings....................... --- 12 59
Average Balance:
FHLB advances.......................... $ 5,467 $ 2,390 $ 1,955
Securities sold under
agreements to repurchase........ --- --- 2,700
Other borrowings....................... --- 2 39
</TABLE>
The following table sets forth the amount and rate of the Bank's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------
1998 1997 1996
------------------- ------------------- --------------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances........................................ $ 19,897 $ -- $ 2,100
Other borrowings..................................... -- -- 16
--------------- ----------- ----------------
Total borrowings................................ $ 19,897 $ -- $ 2,116
============ ========== =============
Weighted average interest rate of FHLB advances...... 6.07% 5.56% 5.78%
==== ==== ====
Weighted average interest rate of securities sold under
agreements to repurchase........................ -- -- 6.67%
======== ======== ====
Weighted average interest rate of other borrowings... -- 9.50% 9.50%
======== ==== ====
</TABLE>
67
<PAGE>
Subsidiary and Other Activities
The Bank maintains three wholly-owned subsidiaries: CSB Financial
Services, Inc., CSB Funding, Inc. and CSB Services Agency, Inc. CSB Financial
Services, Inc. earns commission income through the sale of securities, mutual
funds, annuities and other insurance products. During the fiscal year ended June
30, 1998, CSB Financial Services had revenues of $348,000 and net income of
$16,000. As of June 30, 1998, CSB Funding, Inc. was inactive.
CSB Services Agency, Inc. owns a 50 percent interest in Community Bank
Insurance Brokers of New York, which is a joint venture formed for the purpose
of selling property and casualty insurance to the Bank's customers and to the
general public. The joint venture was formed in July 1998. The joint venture has
entered into a service agreement with the insurance agency which owns the other
50% joint venture interest in Community Bank Insurance Brokers of New York. Such
agency will provide administrative services and support directly to the joint
venture.
Competition
Cohoes faces strong competition, both in originating real estate and
other loans and in attracting deposits. Competition in originating real estate
loans comes primarily from other savings institutions, commercial banks, credit
unions and mortgage bankers making loans secured by real estate located in the
Bank's primary market area. Other savings institutions, commercial banks, credit
unions and finance companies provide vigorous competition in consumer lending.
The Bank attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from mutual funds and
other savings institutions, commercial banks and credit unions located in the
same communities. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges. Automated
teller machine facilities are also available.
Employees
At June 30, 1998, the Bank had 169 full-time employees and 53 part-time
employees. The Bank's employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.
Properties
The Bank conducts its business at its main office and 16 other banking
offices. The following table sets forth information relating to each of the
Bank's offices as of June 30, 1998. The net book value of the Bank's premises
and equipment (including land, building and leasehold improvements and
furniture, fixtures and equipment) at June 30, 1998 was $7.3 million. See Note 9
of the Notes to Consolidated Financial Statements.
68
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Net Book Value
Original Total of Property or
Leased Year Date of Approximate Leasehold
or Leased or Leased Square Improvements at
Locations Owned Acquired Expiration Footage June 30, 1998
- ------------------------------- ------------ ----------------- --------------- ---------------- ------------------
(In thousands)
Cohoes Loan Center Owned 1992 N/A 10,500 $ 683
50 Mohawk Street
Cohoes, NY 12047
Annex Owned 1981 N/A 3,723 174
60 Remsen Street
Cohoes, NY 12047
Operation Center Owned 1987 N/A 11,190 332
244 North Mohawk Street
Cohoes, NY 12047
Community Outreach Center Leased 1995 01/16/99 200 ---
Urban League Headquarters
95 Livingston Avenue
Albany, NY
Building Adjacent Latham Office Owned 1986 N/A 3,024 80
Storage Facility
771 New Loudon Road
Latham, NY 12110
Branch Offices:
Main Office Owned 1924 N/A 15,223 332
75 Remsen Street
Cohoes, NY 12047
Cohoes/I-787 Office Owned 1976 N/A 988 141
New Courtland Street
Cohoes, NY 12047
Latham Office Owned 1967 N/A 9,041 533
Corner of Pine & Route 9
Latham, NY 12110
Clifton Park Office Owned 1972 N/A 5,297 334
525 Visher Ferry Road
Clifton Park, NY 12065
Delmar Office Owned 1994 N/A 4,768 1,476
197 Delaware Avenue
Delmar, NY 12182
Lansingburgh Office Owned 1976 N/A 3,216 270
820 Second Avenue
Troy, NY 12182
Loudonville Office Leased 1996 07/31/01 4,000 2
475 Albany-Shaker Road
Loudonville, NY 12211
Guilderland Office Leased 1995 10/31/05 3,500(1) 1
1973 Western Avenue
Albany, NY 12203
(1) 3,500 square feet of which 1,265 square feet is subleased by ^ a third
party.
69
<PAGE>
PROPERTIES (Continued)
Supermarket Branches:
Glenville Leased 1993 10/31/03 323 $ 72
290 Saratoga Road
Scotia, NY 12302
Rotterdam Leased 1993 03/31/03 350 82
1879 Altamont Avenue
Schenectady, NY 12303
Colonie Leased 1993 09/30/03 336 77
1892 central Avenue
Colonie, NY 12205
Westgate Leased 1995 04/30/00 565 80
911 Central Avenue
Albany, NY 12206
Brunswick Leased 1996 10/31/01 304 83
716 Hoosick Road
Brunswick, NY 12180
Bethlehem Leased 1997 05/31/02 312 76
1395 New Scotland Road
Slingerlands, NY 12159
Malta Leased 1996 05/31/01 524 123
1 Kendall Way
Malta, NY 12020
Niskyuna Leased 1996 06/30/01 544 123
2333 Nott Street East
Niskayuna, NY 12309
Queensbury (1) Leased 1998 05/31/03 360 1
677 Upper Glen Street
Queensbury, NY 12804
- --------------------
<FN>
(1) Opened in July, 1998.
</FN>
</TABLE>
Legal Proceedings
The Bank is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the Bank in the
proceedings, that the resolution of these proceedings should not have a material
effect on the Bank's results of operations.
70
<PAGE>
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Holding Company and the Bank. The description of the
laws and regulations hereunder, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
The Holding Company
General. Upon consummation of the Conversion, the Holding Company will
become subject to regulation as a savings and loan holding company under the
HOLA, instead of being subject to regulation as a bank holding company under the
Bank Holding Company Act of 1956 because the Bank has made an election under
Section 10(1) of HOLA to be treated as a "savings association" for purposes of
Section 10(e) of HOLA. As a result, the Holding Company will be required to
register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements relating to savings and loan holding
companies. The Holding Company will also be required to file certain reports
with, and otherwise comply with the rules and regulations of, the NYBB and the
SEC. As a subsidiary of a savings and loan holding company, the Bank will be
subject to certain restrictions in its dealings with the Holding Company and
affiliates thereof.
Activities Restrictions. Upon consummation of the Conversion, the Bank
will be the sole savings association subsidiary of the Holding Company. There
are generally no restrictions on the activities of a savings and loan holding
company which holds only one subsidiary savings institution. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, he may impose such restrictions as are
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the QTL test, as discussed under
"--Qualified Thrift Lender Test," then such unitary holding company also shall
become subject to the activities restrictions applicable to multiple savings and
loan holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "--Qualified Thrift
Lender Test."
If the Holding Company were to acquire control of another savings
institution, other than through Merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, as set forth below, the activities of the
Holding Company and any of its subsidiaries (other than the Bank or other
subsidiary savings institutions) would thereafter be subject to further
restrictions. Among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof any business activity other than: (i)
furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the FRB as permissible for
bank holding companies. Those activities described in clause (vii) above also
must be approved by the Director of the OTS prior to being engaged in by a
multiple savings and loan holding company.
Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended. A savings bank subsidiary of a savings and loan
71
<PAGE>
holding company that does not comply with the QTL test must comply with the
following restrictions on its operations: (i) the institution may not engage in
any new activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank, (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to meet the QTL test, it must
cease any activity and divest any investment not permissible for a national bank
and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
The QTL test set forth in the HOLA requires that qualified thrift
investments ("QTLs") represent 65% of portfolio assets of the savings
institution and its consolidated subsidiaries. Portfolio assets are defined as
total assets less intangibles, property used by a savings association in its
business and liquidity investments in an amount not exceeding 20% of assets.
Generally, QTLs are residential housing related assets. The 1996 amendments to
allow small business loans, credit card loans, student loans and loans for
personal, family and household purposes to be included without limitation as
qualified investments. At June 30, 1998, approximately 82.5% of the Bank's
assets were invested in QTLs, which was in excess of the percentage required to
qualify the Bank under the QTL test in effect at that time.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Holding Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution 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 contain an aggregate limit on all 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 substantially the same, or,
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22 (h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At June 30, 1998, the Bank was in compliance with the
above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director of the OTS, (i) control of any other savings
institution or savings and loan holding company or substantially all the assets
thereof or (ii) more than 5% of the voting shares of a savings institution or
holding company thereof which is not a subsidiary. Except with the prior
approval of the Director of the OTS, no director or officer of a savings and
loan holding company or person owning or controlling by proxy or otherwise more
than 25% of such company's stock, may acquire control of any savings
institution, other than a subsidiary savings institution, or of any other
savings and loan holding company.
The Director of the OTS may only approve acquisitions resulting in the
formation of a multiple savings and loan holding company which controls savings
institutions in more than one state if (i) the multiple savings and loan holding
company involved controls a savings institution which operated a home or branch
office located in the state of the institution to be acquired as of March 5,
1987; (ii) the acquiror is authorized to acquire control of the savings
72
<PAGE>
institution pursuant,,to the emergency acquisition provisions of the FDIA; or
(iii) the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by the state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state chartered savings institutions).
Federal Securities Laws. The Holding Company has filed with the SEC a
registration statement under the Securities Act, for the registration of the
Holding Company Common Stock to be issued pursuant to the Conversion. Upon
completion of the Conversion, the Holding Company Common Stock will be
registered with the SEC under Section 12(g) of the Securities Exchange Act of
1934, as amended. The Holding Company will then be subject to the proxy and
tender offer rules, insider trading reporting requirements and restrictions, and
certain other requirements under the Exchange Act, including periodic reports
and quarterly and annual financial data.
The registration under the Securities Act of shares of the Holding
Company Common Stock to be issued in the Conversion does not cover the resale of
such shares. Shares of Holding Company Common Stock purchased by persons who are
not affiliates of the Holding Company may be sold without registration. Shares
purchased by an affiliate of the Holding Company will be subject to the resale
restrictions of Rule 144 under the Securities Act. If the Holding Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Holding Company who complies with the other
conditions of Rule 144 (including those that require the affiliate's sale to be
aggregated with those of certain other persons) would be able to sell in the
public market, without registration, a number of shares not to exceed, in any
three-month period, the greater of (i) 1% of the outstanding shares of the
Holding Company or (ii) the average weekly volume of trading in such shares
during the preceding four calendar weeks.
The Bank
General. The Bank is subject to extensive regulation and examination by
the Department, as its chartering authority, and by the FDIC, as the insurer of
its deposits, and, upon Conversion, will be subject to certain requirements
established by the OTS as a result of the Holding Company's savings and loan
holding company status. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. The Bank must file reports with the NYBB and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as establishing
branches and Mergers with, or acquisitions of, other depository institutions.
There are periodic examinations by the Department and the FDIC to test the
Bank's compliance with various regulatory requirements, to look into the
condition of the Bank and to assure that it is being operated in a safe and
sound manner. This regulation and supervision establishes a comprehensive
framework of activities in which an institution can engage and is intended
primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the Department, the FDIC or as a result of
the enactment of legislation, could have a material adverse impact on the
Holding Company, the Bank and their operations.
Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite I under the
Uniform Financial Institutions Rating System. Leverage or core capital is
defined as the sum of common stockholders' equity (including retained earnings),
noncumulative perpetual preferred stock and related surplus, and minority
interests in consolidated subsidiaries, minus all intangible assets other than
certain qualifying supervisory goodwill and certain mortgage servicing rights.
73
<PAGE>
The FDIC also requires that savings banks meet a risk-based capital
standard. The risk-based capital standard for savings banks requires the
maintenance of total capital (which is defined as Tier 1 capital and
supplementary (Tier 2) capital) to risk-weighted assets of 8%. In determining
the amount of risk-weighted assets, all assets, plus certain off-balance sheet
assets, are multiplied by a risk-weight of 0% to 100%, based on the risks the
FDIC believes are inherent in the type of asset or item. The components of Tier
I capital are equivalent to those discussed above under the 3% leverage capital
standard. The components of supplementary capital include certain perpetual
preferred stock, certain mandatory convertible securities, certain subordinated
debt and intermediate preferred stock and general allowances for loan and lease
losses. Allowance for loan and lease losses includable in supplementary capital
is limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of
capital counted toward supplementary capital cannot exceed 100% of core capital.
At June 30, 1998 the Bank met each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking
agencies, adopted a regulation providing that the agencies will take account of
the exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level of
other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies recently issued a joint policy statement providing guidance on interest
rate risk management, including a discussion of the critical factors affecting
the agencies' evaluation of interest rate risk in connection with capital
adequacy. The agencies have determined not to proceed with a previously issued
proposal to develop a supervisory framework for measuring interest rate risk and
an explicit capital component for interest rate risk.
See "Regulatory Capital Requirements" for information with respect to
the Bank's historical leverage and risk-based capital at June 30, 1998 and pro
forma after giving effect to the issuance of shares in the Offerings.
Activities and Investments of New York-Chartered Savings Banks. The
Bank derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and the regulations of the
Department, as limited by FDIC regulations and other federal laws and
regulations. See "--Activities and Investments of Insured State--Chartered
Banks." These New York laws and regulations authorize savings banks, including
the Bank, to 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. Under the
statutory authority for investing in equity securities, a savings bank may
directly invest up to 7.5% of its assets in certain corporate stock and may also
invest up to 7.5% of its assets in certain mutual fund securities. Investment in
stock of a single corporation is limited to the lesser of 2% of the outstanding
stock of such corporation or 1% of the savings bank's assets, except as set
forth below. Such equity securities must meet certain tests of financial
performance. A savings bank's lending powers are not subject to percentage of
asset limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" authority, make investments not
otherwise permitted under the New York State Banking Law. This authority permits
investments in otherwise impermissible investments of up to 1% of the savings
bank's assets in any single investment, subject to certain restrictions and to
an aggregate limit for all such investments of up to 5% of assets. Additionally,
in lieu of investing in such securities in accordance with the reliance upon the
specific investment authority set forth in the New York State Banking Law,
savings banks are authorized to elect to invest under a "prudent person"
standard in a wider range of debt and equity securities as compared to the types
of investments permissible under such specific investment authority. However, in
the event a savings bank elects to utilize the "prudent person" standard, it
will be unable to avail itself of the other provisions of the New York State
Banking Law and regulations which set forth specific investment authority. A New
York chartered stock savings bank may also exercise trust powers upon approval
of the NYBB.
Under recently enacted legislation, the Department has been granted the
authority to maintain the power of state-chartered banks reciprocal with those
of a national bank. Under the terms of the legislation, the Department is
granted such authority for only one year unless legislation is adopted within
such period which extends the effective period of such power. However, any
regulations adopted by the Department pursuant to the authority granted by such
legislation would be effective regardless of whether legislation is enacted
extending the effective period.
New York-chartered savings banks may also invest in subsidiaries under
their service corporation investment power. A savings bank may use this power to
invest in corporations that engage in various activities authorized for
74
<PAGE>
savings banks, plus any additional activities which may be authorized by the
NYBB. Investment by a savings bank in the stock, capital notes and debentures of
its service corporations is limited to 3% of the bank's assets, and such
investments, together with the bank's loans to its service corporations, may not
exceed 10% of the savings bank's assets.
With certain limited exceptions, a New York-chartered savings bank may
not make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the bank's net worth. The Bank currently complies
with all applicable loans-to-one-borrower limitations.
Activities and Investments of FDIC-Insured State-Chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an
FDIC-insured state-chartered bank may not directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
Under the New York State Banking Law, the Superintendent may issue an
order to a New York-chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Superintendent that
any director, trustee or officer of any banking organization has violated any
law, or has continued unauthorized or unsafe practices in conducting the
business of the banking organization after having been notified by the
Superintendent to discontinue such practices, such director, trustee or officer
may be removed from office by the Superintendent after notice and an opportunity
to be heard. The Bank does not know of any past or current practice, condition
or violation that might lead to any proceeding by the Department against the
Bank or any of its directors or officers. The Superintendent also may take
possession of a banking organization under specified statutory criteria.
Prompt Corrective Action. Section 38 of the FDIA provides the federal
banking regulators with broad power to take "prompt corrective action" to
resolve the problems of undercapitalized institutions. The extent of the
regulators' powers depends on whether the institution in question is "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Under regulations adopted by
the federal banking regulators, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a
Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio
of 4.0% or more (3.0% under certain circumstances) and does not meet the
definition of "well capitalized," (iii) "undercapitalized" if it has a total
risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital
ratio that is less than 4.0% or a Tier I leverage capital ratio that is less
than 4.0% (3.0% under certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I
leverage capital ratio that is less than 3.0%, and (v) "critically
undercapitalized" if it has a ratio of tangible equity to total assets that is
equal to or less than 2.0%. The
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regulations also provide that a federal banking regulator may, after notice and
an opportunity for a hearing, reclassify a "well capitalized" institution as
"adequately capitalized" and may require an "adequately capitalized" institution
or an "undercapitalized" institution to comply with supervisory actions as if it
were in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with an appropriate federal banking
regulator within 45 days of the date that the institution receives notice or is
deemed to have notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Immediately upon becoming
undercapitalized, an institution becomes subject to statutory provisions which,
among other things, set forth various mandatory and discretionary restrictions
on the operations of such an institution.
At June 30, 1998, the Bank had capital levels which qualified it as a
"well capitalized" institution.
FDIC Insurance Premiums. The Bank is a member of the BIF administered
by the FDIC. As insurer, the FDIC is authorized to conduct examinations of, and
to require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Brokered Deposits. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii) an "adequately
capitalized insured depository institution" may not accept, renew or roll over
any brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an "undercapitalized insured depository
institution" may not (x) accept, renew or roll over any brokered deposit or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. The Bank had $992,000 in brokered deposits
outstanding at June 30, 1998. However, it is not currently soliciting brokered
deposits.
Community Investment and Consumer Protection Laws. In connection with
its lending activities, the Bank is subject to a variety of federal laws
designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the federal Home Mortgage
Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act,
Equal Credit Opportunity Act, Fair Credit Reporting Act and CRA.
The CRA requires insured institutions to define the communities that
they serve, identify the credit needs of those communities and adopt and
implement a "Community Reinvestment Act Statement" pursuant to which they offer
credit products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the Bank,
the FDIC) must conduct regular CRA examinations of insured financial
institutions and assign to them a CRA rating of "outstanding," "satisfactory,"
"needs improvement" or "unsatisfactory." The Bank's current federal CRA rating
is "satisfactory."
The Bank is also subject to provisions of the New York State Banking
Law which impose continuing and affirmative obligations upon banking
institutions organized in New York State to serve the credit needs of its local
community ("NYCRA"), which are similar to those imposed by the CRA. Pursuant to
the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA
reports with the Department. The NYCRA requires the
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Department to make an annual written assessment of a bank's compliance with the
NYCRA, utilizing a four-tiered rating system, and make such assessment available
to the public. The NYCRA also requires the Department to consider a bank's NYCRA
rating when reviewing a bank's application to engage in certain transactions,
including Mergers, asset purchases and the establishment of branch offices or
automated teller machines, and provides that such assessment may serve as a
basis for the denial of any such application. The Bank's latest NYCRA rating,
received from the Department was "oustanding."
Limitations on Dividends. The Holding Company is a legal entity
separate and distinct from the Bank. The Holding Company's principal source of
revenue consists of dividends from the Bank. The payment of dividends by the
Bank is subject to various regulatory requirements including a requirement, as a
result of the Holding Company's savings and loan holding company status, that
the Bank notify the Director not less than 30 days in advance of any proposed
declaration by its directors of a dividend.
Under New York State Banking Law, a New York-chartered stock savings
bank may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Department is required if the total
of all dividends declared in a calendar year would exceed the total of its net
profits for that year combined with its retained net profits of the preceding
two years, subject to certain adjustments.
Miscellaneous. The Bank is subject to certain restrictions on loans to
the Holding Company or its non-bank subsidiaries, on investments in the stock or
securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on
behalf of the Holding Company or its non-bank subsidiaries. The Bank also is
subject to certain restrictions on most types of transactions with the Holding
Company or its non-bank subsidiaries, requiring that the terms of such
transactions be substantially equivalent to terms of similar transactions with
non-affiliated firms.
FHLB System. The Bank is a member of the FHLB of New York, which is one
of 12 regional FHLBs that administers the home financing credit function of
savings institutions. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB. The Bank had $19.9 million of FHLB
advances at June 30, 1998.
As a FHLB member, the Bank is required to purchase and maintain stock
in the FHLB of New York in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of its advances from the FHLB of
New York, whichever is greater. At June 30, 1998, the Bank had approximately
$3.6 million in FHLB stock, which resulted in its compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily checking
accounts, including NOW and Super NOW accounts) and non-personal time deposits.
As of June 30, 1998, the Bank was in compliance with applicable requirements.
However, because required reserves must be maintained in the form of vault cash
or a non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce an institution's earning assets.
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TAXATION
Federal Taxation
General. The Holding Company and the Bank will be subject to federal
income taxation in the same general manner as other corporations with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Bank. The
Bank's federal income tax returns have been audited or closed without audit by
the Internal Revenue Service through December 31, 1994.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending June 30 for filing its consolidated federal income
tax returns. The 1996 Act eliminated the use of the reserve method of accounting
for bad debt reserves by savings institutions, effective for taxable years
beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of June 30, 1998 is approximately $1.5
million.
As discussed more fully below, the Bank and subsidiaries file combined
New York State Franchise tax returns. The basis of the determination of the tax
is the greater of a tax on entire net income (or on alternative entire net
income) or a tax computed on taxable assets. However, for state purposes, New
York State enacted legislation in 1996, which among other things, decoupled the
Federal and New York State tax laws regarding thrift bad debt deductions and
permits the continued use of the bad debt reserve method under section 593 of
the Code. Thus, provided the Bank continues to satisfy certain definitional
tests and other conditions, for New York State income tax purposes, the Bank is
permitted to continue to use the special reserve method for bad debt deductions.
The deductible annual addition to the state reserve may be computed using a
specific formula based on the Bank's loss history ("Experience Method") or a
statutory percentage equal to 32% of the Bank's New York State taxable income
("Percentage Method").
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions, dividend distributions in
excess of historical earnings and profits or cease to maintain a bank charter.
At June 30, 1998 the Bank's total federal base-year reserve was
approximately $3.7 million. These reserves reflect the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an AMT at a rate of 20% on a base of
regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI"). The AMT is payable to the extent such AMTI is in
excess of an exemption amount and regular income tax. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
Net Operating Loss Carryovers. For the years beginning after August 5,
1997, a financial institution may carry back net operating losses to the
preceding two taxable years and forward to the succeeding 20 taxable years. At
June 30, 1998, the Bank had no net operating loss carryforwards for federal
income tax purposes.
Corporate Dividends-Received Deduction. The Holding Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate
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dividends-received deduction is 80% in the case of dividends received from
corporations with which a corporate recipient does not file a consolidated tax
return, and corporations which own less than 20% of the stock of a corporation
distributing a dividend may deduct only 70% of dividends received or accrued on
their behalf.
State and Local Taxation
New York State Taxation. The Holding Company and the Bank will report
income on a combined basis utilizing a fiscal year. New York State Franchise Tax
on corporations is imposed in an amount equal to the greater of (a) 9% of
"entire net income" allocable to New York State (b) 3% of "alternative entire
net income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Holding Company is exempt from Delaware corporate income
tax but is required to file an annual report with and pay an annual franchise
tax to the State of Delaware. The tax is imposed as a percentage of the capital
base of the Holding Company with an annual maximum of $150,000.
MANAGEMENT OF THE HOLDING COMPANY
Directors and Executive Officers
The Board of Directors of the Holding Company currently consists of
eleven members, each of whom is also a trustee of the Bank. As discussed below,
upon consummation of the Conversion, the current trustees of the Bank will
continue to be directors of the stock-chartered Bank. See "Management of the
Bank -- Trustees." Each director of the Holding Company has served as such since
the Holding Company's incorporation in September 1998. Directors of the Holding
Company will serve three-year staggered terms so that one-third of the directors
will be elected at each annual meeting of stockholders. One class of directors,
consisting of Duncan S. Mac Affer, Arthur E. Bowen, Walter H. Speidel, and Harry
L. Robinson has a term of office expiring at the Holding Company's first Annual
Meeting of Stockholders, a second class, consisting of R. Douglas Paton, J.
Timothy O'Hearn, Chester C. DeLaMater, and Peter G. Casabonne has a term of
office expiring at the Holding Company's second Annual Meeting of Stockholders,
and a third class, consisting of Michael L. Crotty, Donald A. Wilson, and
Frederick G. Field, Jr., has a term expiring at the Holding Company's third
Annual Meeting of Stockholders. For biographical information regarding each
director of the Holding Company, see "Management of the Bank -- Trustees."
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are Harry L. Robinson, President and Chief
Executive Officer and Richard A. Ahl, Executive Vice President, Chief Financial
Officer and Secretary. It is not anticipated that the executive officers of the
Holding Company will receive any remuneration in their capacity as Holding
Company executive officers. For information regarding compensation of trustees
and executive officers of the Bank, see "Management of the Bank--Meetings and
Committees of the Board of Trustees of the Bank" and "--Executive Compensation."
Indemnification
The certificate of incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
officer held such position at the request of the Holding Company. Delaware law
requires that such director, officer, employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably believed
to be not opposed to the best interests of the Holding Company and, with respect
to any criminal action or proceeding, did not have reasonable cause to believe
his conduct was unlawful.
The certificate of incorporation of the Holding Company and Delaware
law also provide that the indemnification provisions of such certificate and the
statute are not exclusive of any other right which a person seeking
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indemnification may have or later acquire under any statute, or provision of the
certificate of incorporation, bylaws of the Holding Company, agreement, vote of
stockholders or disinterested directors or otherwise.
These provisions may have the effect of deterring stockholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action.
In addition, the certificate of incorporation of the Holding Company
and Delaware law also provide that the Holding Company may maintain insurance,
at its expense, to protect itself and any director, officer, employee or agent
of the Holding Company or another corporation, partnership, joint venture, trust
or other enterprise against any expense, liability or loss, whether or not the
Holding Company has the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law. The Holding
Company intends to obtain such insurance.
MANAGEMENT OF THE BANK
Trustees
Board of Trustees of the Bank. Prior to the Conversion, the direction
and control of the Bank, as a mutual savings bank, was vested in its Board of
Trustees. Upon Conversion of the Bank to stock form, each of the trustees of the
Bank will continue to serve as directors of the converted Bank. The Board of
Trustees of the Bank currently consists of eleven members. Each Trustee of the
Bank has served as such at least since January, 1992, except for Frederick G.
Field, Jr., who was appointed in September, 1995. The trustees serve until their
72nd birthday. Because the Holding Company will own all of the issued and
outstanding shares of capital stock of the Bank after the Conversion, the
directors of the Holding Company will elect the directors of the Bank.
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The following table sets forth certain information regarding the
trustees of the Bank.
<TABLE>
<S> <C> <C> <C>
Director
Name Position(s) Held With the Bank Age(1) Since
---- ------------------------------ ------ -----
Duncan S. Mac Affer Trustee 63 1964
Arthur E. Bowen Trustee 59 1966
Walter H. Speidel Trustee 70 1970
Harry L. Robinson President, Chief Executive Officer and Trustee 58 1973
R. Douglas Paton Trustee 62 1980
J. Timothy O'Hearn Trustee 57 1983
Chester C. DeLaMater Trustee 58 1983
Peter G. Casabonne Trustee 66 1985
Michael L. Crotty Trustee 52 1986
Donald A. Wilson Trustee 54 1991
Frederick G. Field, Jr. Trustee 66 1995
<FN>
(1) At June 30, 1998.
</FN>
</TABLE>
The business experience of each trustee of the Bank for at least the
past five years is set forth below.
Duncan S. Mac Affer. Mr. Mac Affer is a licensed attorney practicing in
the State of New York. He is currently a Village Justice in the Village of
Menands, New York and recently retired after serving as counsel to the New York
Senate Finance Committee.
Arthur E. Bowen. Mr. Bowen is the President and Funeral Director with
Bowen Funeral Home, Inc.
Walter H. Speidel. Mr. Speidel is a retired past President of Cohoes
Savings Bank ^.
Harry L. Robinson. Mr. Robinson is a licensed attorney. He is, also,
President and Chief Executive Officer of Cohoes Savings Bank ^.
R. Douglas Paton. Mr. Paton is a retired Stockbroker.
J. Timothy O'Hearn. Mr. O'Hearn is President of the Century House,
Inc., a restaurant, food catering and lodging company.
Chester C. DeLaMater. Mr. DeLaMater is a retired Executive Vice
President and Secretary of Cohoes Savings Bank ^.
Peter G. Casabonne. Mr. Casabonne is a Managing Partner of Fuller
Realty, Inc., a company which leases manufacturing and office space.
Michael L. Crotty. Mr. Crotty is President of Capitol Equipment, Inc.,
which is a seller of heavy construction and recycling equipment.
Donald A. Wilson. Mr. Wilson, a Certified Public Accountant, is
President of Wilson & Stark CPA, PC.
Frederick G. Field, Jr. Mr. Field is a retired Supervisor of the Town
of Colonie. He is currently President of Capitol Hill Management, Inc., a
company providing lobbying and management services to associations.
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Executive Officers Who Are Not Directors. Each of the executive
officers of the Bank will retain his or her office in the converted Bank.
Officers are elected annually by the Board of Trustees of the Bank. The business
experience of the executive officers who are not also trustees is set forth
below.
Richard A. Ahl, age 50. Mr. Ahl is currently serving as Executive Vice
President and Chief Financial Officer. Mr. Ahl joined the Bank in 1996. Mr. Ahl
is a CPA with 20 years of financial and banking experience.
Albert J. Picchi, age 36. Mr. Picchi is currently serving as Vice
President and Senior Loan Officer. Mr. Picchi joined the Bank in January of
1994. Mr. Picchi has 14 years of experience in the financial services industry.
Meetings and Committees of the Board of Trustees of the Bank
The Bank's Board of Trustees meets on a monthly basis. The Board of
Trustees met 13 times during fiscal 1998. During fiscal 1998, no trustee of the
Bank attended fewer than 75% of the aggregate of the total number of Board
meetings and the total number of meetings held by the committees of the Board of
Trustee on which he or she served.
The Bank has standing Executive, Loan Review, Nominating, Salary,
Trustee Qualification and Examining Committees.
The Executive Committee provides oversight of Board-related matters
in-between regularly scheduled Board Meetings. In addition, the Committee has
the authority to make investments, acquire or sell real estate and to take any
other action not otherwise reserved for the Board of Trustees. The Executive
Committee is comprised of five Trustees, which membership rotates each month.
This committee did not meet during fiscal 1998.
The Loan Review Committee is comprised of two trustees which rotates
each month and Harry L. Robinson. This Committee oversees and reviews real
estate loans between $500,001 and $749,000, and commercial business loans
between $200,001 and $300,000.
The Nominating Committee proposes nominations for Chairman and Vice
Chairman of the Board, Officers, Trustee Emeriti and the appointment of the
Bank's legal counsel. This committee is comprised of three trustees serving for
a three year term, meeting once each year. The current members of the committee
are Donald A. Wilson (Chairman), Frederick G. Field, Jr., and Duncan S. Mac
Affer.
The Salary Committee is comprised of three trustees serving for a three
year term meeting once a quarter to review compensation and benefit practices of
the Bank to ensure internal and external market competitiveness. The current
members of the committee are J. Timothy O'Hearn (Chairman), Chester C.
DeLaMater, and Peter G. Casabonne.
The Trustee Qualification Committee is comprised of the three senior
Trustees meeting as necessary to review candidates for the vacancies on the
Board. The current members of the committee are Duncan S. Mac Affer (Chairman),
Arthur E. Bowen, and Walter H. Speidel.
The Examining Committee is comprised of three trustees serving for a
three year term, meeting once a quarter to provide oversight to the Bank's
Internal Audit Department and for the review of the Bank's annual audit report
prepared by the Bank's independent auditors. The current members of the
committee are Peter G. Casabonne (Chairman), Michael L. Crotty, and Donald A.
Wilson.
Trustee Compensation
Trustees of the Bank are paid a monthly fee for each board meeting
attended of $2,625. Trustees receive $500 for each committee meeting attended.
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Trustees Emeritus
Under the Bank's Bylaws, a retiring Trustee may, with the approval of
the Board of Trustees, serve as a Trustee Emeritus of the Bank. A Trustee
Emeritus is entitled to attend all meetings of the Board of Trustees,
participate in all discussions and receive the same fees as a Trustee. Trustees
Emeriti are not, however, entitled to vote or meet as a separate body. Robert L.
Knoop and Charles R. Crotty currently serve as Trustees Emeritus of the Bank.
Executive Compensation
The following table sets forth information concerning the compensation
paid to the Bank's Chief Executive Officer and the Bank's only other executive
officer whose salary and bonus for fiscal 1998 exceeded $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards
Other Annual Restricted Stock Options All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Award ($)(1) (#)(1) Compensation($)
<S> <C> <C> <C> <C> <C> <C> <C>
Harry L. Robinson, President and 1998 $295,072(2) $59,063(2) $--- N/A N/A $17,243(3)
Chief Executive Officer
Richard A. Ahl, Executive Vice 1998 146,224(2) 31,250(2) --- N/A N/A 4,212(3)
President, Chief Financial Officer
and Secretary
<FN>
(1) As a mutual institution, the Bank does not have any stock options or
restricted stock plans.
(2) $27,323 and $21,220 was deferred under the Bank's deferred salary
arrangement for Mr. Robinson and Mr. Ahl, respectively. Both Mr. Robinson
and Mr. Ahl elected to have their entire bonuses deferred.
(3) Includes 401(k) Savings and Profit-Sharing Plan contributions of $6,043 and
$11,200, respectively, for Mr. Robinson and $2,849 and $1,363 respectively,
for Mr. Ahl.
</FN>
</TABLE>
Employment Agreements
Upon the Conversion, the Bank intends to enter into employment agreements
with Harry L. Robinson, Richard A. Ahl and Albert J. Picchi of the Bank
(individually, the "Executive") and the Holding Company intends to enter into
employment agreements with Harry L. Robinson and Richard A. Ahl. The employment
agreements are intended to ensure that the Bank and the Holding Company will be
able to maintain a stable and competent management base after the Conversion.
The continued success of the Bank and the Holding Company depends to a
significant degree on the skills and competence of the above referenced
officers.
The employment agreements provide for either three-year or two-year terms
for each Executive. The terms of the employment agreements shall be extended on
a daily basis at the Holding Company and annually at the Bank, subject to an
annual prior performance review by the Board of Directors, unless written notice
of non-renewal is given by the Board of Directors. The employment agreements
provide that the executive's base salary will be reviewed annually. The base
salary which will be effective for such Employment Agreement for Harry L.
Robinson and Richard A. Ahl will be $400,000 and $200,000, respectively. In
addition to the base salary, the employment agreements provide for, among other
things, participation in stock benefits plans and other fringe benefits
applicable to executive personnel. The agreements provide for termination by the
Bank or the Holding Company for cause, as defined in the employment agreements,
at any time. In the event the Bank or the Holding Company chooses to terminate
the executive's employment for reasons other than for cause, or in the event of
the executive's resignation from the Bank and the Holding Company upon; (i)
failure to re-elect the executive to his current offices; (ii) a material change
in the executive's functions, duties or responsibilities; (iii) a reduction in
the benefits and perquisites being provided to the executive under the
Employment Agreement; (iv) liquidation or dissolution of the Bank or the Holding
Company; or (v) a breach of the agreement by the Bank or the Holding Company,
the executive or, in the event of death, his beneficiary would be entitled to
receive an amount equal to the remaining base salary payments due to the
executive for the remaining term of the Employment Agreement and the
contributions that would have been made on the executive's
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behalf to any employee benefit plans of the Bank and the Holding Company during
the remaining term of the agreement. The Bank and the Holding Company would also
continue and pay for the executive's life, health, dental and disability
coverage for the remaining term of the Agreement. Upon any termination of the
executive, other than following a change in control, the executive is subject to
a one year non-competition agreement.
Under the employment agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Holding Company, the executive
or, in the event of the executive's death, his beneficiary, would be entitled to
the payment of base salary, plan contributions and other forms of compensation
to which the executive is entitled for the remaining term of the Employment
Agreement, plus a severance payment equal to the greater of: (i) the payments
due for the remaining term of the agreement; or (ii) three times the average of
the five preceding taxable years' annual compensation. The Bank and the Holding
Company would also continue the executive's life, health, and disability
coverage for thirty-six months in the case of Messrs. Robinson and Ahl and
twenty-four months in the case of Mr. Picchi. Under the employment agreements, a
voluntary termination following a change in control means the executive's
voluntary resignation following any demotion, loss of title, office authority or
responsibility, a reduction in compensation or benefits or relocation.
Notwithstanding that both the Bank and Holding Company employment agreements
provide for a severance payment in the event of a change in control, the
executive would only be entitled to receive a severance payment under one
agreement.
Payments to the executive under the Bank's Employment Agreement will be
guaranteed by the Holding Company in the event that payments or benefits are not
paid by the Bank. Payment under the Holding Company's Employment Agreement would
be made by the Holding Company. The Holding Company's Employment Agreement also
provides that the Holding Company will compensate the executive for excise taxes
imposed on any "excess parachute payments," as defined under section 280G of the
Code, made thereunder, and any additional income and excise taxes imposed as a
result of such compensation. All reasonable costs and legal fees paid or
incurred by the executive pursuant to any dispute or question of interpretation
relating to the employment agreements shall be paid by the Bank or Holding
Company, respectively, if the executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement. The employment agreements also
provide that the Bank and the Holding Company shall indemnify the executive to
the fullest extent allowable under New York and Delaware law, respectively.
Assuming a change in control of the Bank or the Holding Company occurred
effective June 30, 1998, the total amount of payments due under the Agreements,
based solely on cash compensation paid to the officers who will receive
employment agreements over the past five fiscal years and excluding any benefits
under any employee benefit plan which may be payable, would be approximately
$3.0 million.
Change in Control Agreements
Upon Conversion, the Bank intends to enter into one-year Change in Control
agreements with Officers Kathleen Kelleher, Tammy L. Kimble, Johanna O. Robbins
and John G. Sturn of the Bank, none of whom will be covered by employment
contracts. Commencing on the first anniversary date and continuing on each
anniversary thereafter, the Bank Change in Control agreements may be renewed by
the Board of Directors of the Bank for an additional year. The Bank's Change in
Control agreements will provide that in the event voluntary or involuntary
termination follows a change in control of the Holding Company or the Bank, the
officer would be entitled to receive a severance payment equal to the officer's
current annual compensation. The Bank would also continue and pay for the
officer's life, health and disability coverage for twelve months following
termination. Under the Change in Control agreements, a voluntary termination
following a change in control means the executive's voluntary resignation
following any demotion, loss of title, office authority or responsibility, a
reduction in compensation or benefits or relocation. In the event of a change in
control of the Holding Company or the Bank, the total payments that would be due
under the Change in Control agreements, based solely on the current annual
compensation paid to the officers covered by the Change in Control agreements
and excluding any benefits under any employee benefit plan which may be payable,
would be approximately $250,000.
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Employee Severance Compensation Plan
The Bank's Board of Directors intends to, upon Conversion, establish the
Severance Plan which will provide eligible employees selected by the Board of
Directors with severance pay benefits in the event of a change in control of the
Bank or the Holding Company following Conversion. Management personnel with
employment agreements or Change in Control agreements are not eligible to
participate in the severance plan. Generally, employees are eligible to
participate in the severance plan if they have completed at least one year of
service with the Bank. The Severance Plan vests in each participant a
contractual right to the benefits such participant is entitled to thereunder.
Under the severance plan, in the event of a change in control of the Bank or the
Holding Company, eligible employees who are terminated from or terminate their
employment within one year (for reasons specified under the severance plan),
will be entitled to receive a severance payment. If the participant, whose
employment has terminated, has completed at least one year of service, the
participant will be entitled to a cash severance payment equal to two weeks of
annual compensation for each year of service up to a maximum of six months of
annual compensation. Such payments may tend to discourage takeover attempts by
increasing costs to be incurred by the Bank in the event of a takeover. In the
event the provisions of the severance plan are triggered, the total amount of
payments that would be due thereunder, based solely upon current salary levels,
would be approximately $202,000. However, it is management's belief that
substantially all of the Bank's employees would be retained in their current
positions in the event of a change in control, and that any amount payable under
the severance plan would be considerably less than the total amount that could
possibly be paid under the severance plan.
Independent Compensation Expert
Pursuant to NYBB regulations, an independent compensation expert must
review the total compensation for the executive officers and trustees of the
Bank as a whole and on an individual basis and determine whether such
compensation is reasonable and proper in comparison to the compensation provided
to executive officers, directors or trustees of similar publicly-traded
financial institutions. William M. Mercer, Incorporated has conducted such
review on behalf of the Bank and determined that, based upon published
professional survey data of similarly situated publicly-traded financial
institutions operating in the relevant markets, with respect to the total cash
compensation for executive officers and total remuneration for trustees of the
Bank, such compensation, viewed as a whole and on an individual basis, is
reasonable and proper in comparison to the compensation provided to similarly
situated publicly-traded financial institutions, and that, with respect to the
amount of shares of Holding Company Common Stock to be reserved under the ESOP,
and expected to be reserved under the RRP and the Stock Option and Incentive
Plan, as a whole, such amounts reserved for granting are reasonable in
comparison to similar publicly-traded financial institutions.
Benefit Plans
General. The Bank currently provides health care benefits to its employees,
including medical, dental and life insurance, subject to certain deductibles and
copayments by employees.
401(k) Savings and Profit-Sharing Plan. The Bank has a qualified,
tax-exempt savings and profit-sharing plan with a cash or deferred feature
qualifying under Section 401(k) of the Code (the "401(k) Plan"). All salaried
employees who have attained age 21 and completed one year of employment, during
which they worked at least 1,000 hours, are eligible to participate.
Participants are permitted to make salary reduction contributions to the
401(k) Plan of between 2% to 15% of the participant's annual salary. Each
participant's salary reduction contribution is matched by the Bank in an amount
equal to 50% of the participant's before-tax contribution up to a maximum
contribution by the Bank of 3% of such participant's annual salary for the Plan
Year. All participant contributions and earnings are fully and immediately
vested. All matching contributions are vested at a rate of 20% per year over a
five year period commencing after one year of employment with the Bank. However,
in the event of retirement, permanent disability or death, a participant will
automatically become 100% vested in the value of all matching contributions and
earnings thereon, regardless of the number of years of employment with the Bank.
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<PAGE>
Participants may invest amounts contributed to their 401(k) Plan accounts
in one or more investment options available under the 401(k) Plan in multiples
of 10%. Changes in investment allocations among the funds are permitted on a
continuous basis pursuant to procedures established by the Plan Administrator.
Each participant receives a quarterly statement which provides information
regarding, among other things, the market value of his investments and
contributions made to the 401(k) Plan on his behalf. Participants are permitted
to borrow against their account balance in the 401(k) Plan. For the year ended
June 30, 1998, the Bank's contributions to the 401(k) Savings and Profit-Sharing
Plan on behalf of Messrs. Robinson and Ahl were $17,243 and $4,212,
respectively.
Employee Stock Ownership Plan. The Board of Trustees of the Bank and the
Board of Directors of the Holding Company have approved the adoption of an ESOP
for the benefit of eligible employees of the Bank. The ESOP is designed to meet
the requirements of an employee stock ownership plan as described at Section
4975(e)(7) of the Code and Section 407(d)(6) of ERISA, and, as such, the ESOP is
empowered to borrow in order to finance purchases of the Holding Company Common
Stock.
It is anticipated that the ESOP will be initially funded with a loan from
the Holding Company and administered by ^ RSI Retirement Trust. The proceeds
from this loan are expected to be used by the ESOP to purchase 8% of the Holding
Company Common Stock issued in the Conversion, including shares issued to the
Foundation. After the Conversion, as a qualified employee pension plan under
Section 401(a) of the Code, the ESOP will be in the form of a stock bonus plan
and will provide for contributions, predominantly in the form of either Holding
Company Common Stock or cash, which will be used within a reasonable period
after the date of contributions primarily to purchase the Holding Company Common
Stock. The maximum tax-deductible contribution by the Bank in any year is an
amount equal to the maximum amount that may be deducted by the Bank under
Section 404 of the Code, subject to reduction based on contributions to other
tax-qualified employee plans. Additionally, the Bank will not make contributions
if such contributions would cause the Bank to violate its regulatory capital
requirements. The assets of the ESOP will be invested primarily in Holding
Company Common Stock. The Bank will receive a tax deduction equal to the amount
it contributes to the ESOP.
From time to time the ESOP may purchase additional shares of Holding
Company Common Stock for the benefit of plan participants through purchases of
outstanding shares in the market, upon the original issuance of additional
shares by the Holding Company or upon the sale of shares held in treasury by the
Holding Company. Such purchases, which are not currently contemplated, would be
subject to then-applicable laws, regulations and market conditions.
All employees of the Bank are eligible to participate in the ESOP after
they attain age 21 and complete on year of service with the Bank. Employees will
be credited for years of service to the Bank prior to the adoption of the ESOP
for participation and vesting purposes. The Bank's contribution to the ESOP will
be allocated among participants on the basis of compensation. Each participant's
account will be credited with cash and shares of Holding Company Common Stock
based upon compensation earned during the year with respect to which the
contribution is made. A participant will become vested in his or her ESOP
account at a rate of 20% per year and after completing five years of service a
participant will be 100% vested in his or her ESOP account. ESOP participants
are entitled to receive distributions from their ESOP accounts only upon
termination of service. Distribution will be made in cash and in whole shares of
Holding Company Common Stock. Fractional shares will be paid in cash.
Participants will not incur a tax liability until a distribution is made. Since
the ESOP shares are allocated to eligible employees of the Bank, any unallocated
shares will be voted in a manner calculated to most accurately reflect the
instructions it has received from participants regarding the allocated shares so
long as such vote is in accordance with the provisions of ERISA.
Participating employees are entitled to instruct the trustee of the ESOP as
to how to vote the shares held in their account. ESOP shares that have not yet
been allocated to participating employees are voted by the trustee in the same
proportion as those shares allocated to and voted by participating employees.
The trustee, who has dispositive power over the shares in the Plan, will not be
affiliated with the Holding Company or the Bank. The ESOP may be amended by the
Board of Directors of the Holding Company, except that no amendment may be made
which would reduce the interest of any participant in the ESOP trust fund or
divert any of the assets of the ESOP trust fund to purposes other than the
benefit of participants or their beneficiaries.
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<PAGE>
Stock Option and Incentive Plan. Among the benefits to the Bank and the
Holding Company anticipated from the Conversion is the ability to attract and
retain directors and key personnel through stock option and other stock-related
incentive programs. A Stock Option and Incentive Plan is intended to be adopted
by the Board of Directors of the Holding Company and then submitted to the
Holding Company's stockholders for their approval (at a meeting to be held no
earlier than six months following the Conversion).
The Holding Company anticipates reserving an amount equal to 10% of the
shares of Holding Company Common Stock issued in the Conversion, including
shares issued to the Foundation (or 829,150 shares based upon the issuance of
8,291,500 shares at the maximum of the estimated valuation range), for issuance
under the Stock Option and Incentive Plan. If the Holding Company implements an
option plan within one year following completion of the Conversion, NYBB
regulations provide that no individual officer or employee of the Bank may
receive more than 25% of the options granted under the plan and non-employee
directors may not receive more than 5% individually, or 30% in the aggregate, of
the options granted under the plan. NYBB and FDIC regulations also provide that
the exercise price of any options granted under any such plan implemented after
the Conversion must equal or exceed the market price of the Holding Company
Common Stock as of the date of grant. Additionally, OTS regulations, as applied
by the FDIC, provide that with respect to any stock option plan adopted within
one year after Conversion, the vesting or the exercisability of any options
granted under such a plan may not be accelerated except upon death or
disability.
It is anticipated that the Stock Option and Incentive Plan will allow for
the granting of: (i) stock options for employees intended to qualify as
incentive stock options under Section 422 of the Code ("Incentive Stock
Options"), and (ii) options for all plan participants that do not qualify as
incentive stock options ("Non-Statutory Stock Options"). All such awards will be
granted at no cost to the recipient. Unless sooner terminated, the Stock Option
and Incentive Plan will remain in effect for a period of fifteen years from the
later of adoption by the Board of Directors or approval by the Holding Company's
stockholders. Options granted pursuant to the Stock Option and Incentive Plan
remain exercisable for a ten year period.
The Stock Option and Incentive Plan will be administered by a committee
(the "Compensation Committee") the members of which are each "non-employee
directors," as defined in the SEC's regulations, and "outside directors," as
defined under Section 162(m) of the Code and the regulations thereunder. The
Compensation Committee will determine which directors, officers and employees
may receive options, whether such options will qualify as Incentive Stock
Options, the number of shares subject to each option, the exercise price of each
option, the manner of exercise of the options and the time when such options
will become exercisable.
Options granted pursuant to the Stock Option and Incentive Plan will remain
exercisable for the lesser of (a) three years following such termination of
service or (b) until the expiration of the Option by its terms, following the
date on which a participant ceases to perform services for the Bank or the
Holding Company, except in the event of death or disability, in which case
options would accelerate and become fully vested and remain exercisable for up
to one year thereafter, or such longer period as determined by the Compensation
Committee. However, any Incentive Stock Option exercised more than three months
following the date on which an employee ceased to perform services as an
employee, other than termination due to death or disability, would not be
treated for tax purposes as an Incentive Stock Option. It is intended that the
Stock Option Plan would provide that the Compensation Committee, if requested by
the optionee, could elect, in exchange for vested options, to pay the optionee,
or beneficiary in the event of death, the amount by which the fair market value
of the Holding Company Common Stock exceeds the exercise price of the options on
the date of the employee's termination of employment.
Recognition and Retention Plan. Following consummation of the Conversion,
the Board of Directors of the Holding Company intends to adopt a RRP for
directors, officers and employees. The objective of the RRP will be to enable
the Holding Company to provide directors, officers and employees with a
proprietary interest in the Holding Company as an incentive to contribute to its
success. Awards made pursuant to the RRP will be granted to eligible
participants based on their position and responsibilities to the Holding Company
or the Bank, the value of their services to the Holding Company and the Bank,
length of service and other factors the compensation committee may deem relevant
at the time such awards are made. The Holding Company intends to present the RRP
to stockholders for their approval at a meeting of stockholders which, pursuant
to applicable NYBB and FDIC regulations, may be held no earlier than six months
subsequent to completion of the Conversion.
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<PAGE>
The RRP will be administered by the Compensation Committee of the Board of
Directors. The Holding Company will contribute funds to the RRP to enable it to
acquire in the open market or from authorized but unissued shares, following
stockholder ratification of such plan, an amount of stock equal to 4% of the
shares of Holding Company Common Stock issued in the Conversion, including
shares issued to the Foundation (representing 331,660 shares in the aggregate at
the maximum of the estimated valuation range, having a value of $3,316,600 based
on the Offering Price per share of $10.00). Although no specific award
determinations have been made, the Holding Company anticipates that it will
provide stock awards at no cost to participants, the directors, executive
officers and employees of the Holding Company or the Bank or their affiliates to
the extent permitted by applicable regulations. NYBB regulations provide that,
to the extent the Holding Company implements the RRP within one year after
Conversion, no individual employee may receive more than 25% of the shares of
any plan and non-employee directors may not receive more than 5% of any plan
individually or 30% in the aggregate for all directors. Additionally, OTS
regulations, as applied by the FDIC, provide that Awards granted under the RRP
may not be accelerated except upon death or disability for plans adopted within
one year after Conversion.
Under the terms of the proposed RRP, awards ("Awards") can be granted to
key employees in the form of shares of Holding Company Common Stock held by the
RRP. Awards are non-transferable and non-assignable. Recipients will earn (i.e.,
become vested in), in equal installments over a five year period, the shares of
Holding Company Common Stock covered by the Award.
Benefit Restoration Plan. The Holding Company also maintains a
non-qualified deferred compensation plan, known as the Benefit Restoration Plan.
The Benefit Restoration Plan provides certain officers and highly compensated
executives of the Holding Company and the Bank with supplemental retirement
income when such amounts cannot be paid from the tax-qualified 401(k) Plan or
ESOP. Participants in the Benefit Restoration Plan receive a benefit equal to
the amount they would have received under the 401(k) Plan and the ESOP, but for
reductions in such benefits imposed by operation of Sections 401(a)(17), 401(m),
401(k)(3), 402(g) and 415 of the Code. In addition, the Benefit Restoration Plan
is intended to make up benefits lost under the ESOP allocation procedures to
certain Participants named by the Compensation Committee who retire prior to the
complete repayment of the ESOP loan. At the retirement of a Participant, the
restored ESOP benefits under the Benefit Restoration Plan are determined by
first: (i) projecting the number of shares that would have been allocated to the
Participant under the ESOP if they had been employed throughout the period of
the ESOP loan (measured from the Participant's first date of ESOP
participation); and (ii) first reducing the number determined by (i) above by
the number of shares actually allocated to the Participant's account under the
ESOP; and second, by multiplying the number of shares that represent the
difference between such figures by the average fair market value of the Common
Stock over the preceding five years. Benefit Restoration Plan Participant's
benefits are payable upon the retirement or other termination of service of the
Participant in the form of a lump sum. Payment of a deceased Participant's
benefits will be made to his or her designated beneficiary.
Certain Transactions
The Bank follows a policy of granting loans to the Bank's employees and
residential loans and mortgages to officers. The loans to executive officers and
trustees are made in the ordinary course of business and on the same terms and
conditions as those of comparable transactions prevailing at the time, in
accordance with the Bank's underwriting guidelines and do not involve more than
the normal risk of collectibility or present other unfavorable features. All
loans to executive officers cannot exceed $25,000 or 5% of the Bank's capital
and unimpaired surplus, whichever is greater, unless a majority of the Board of
Trustees approves the credit in advance and the individual requesting the credit
abstains from voting. Under the Bank's policy the Bank will not make preferred
rate loans to executive officers, directors, or employees. All loans by the Bank
to its directors and executive officers are subject to regulations restricting
loans and other transactions with affiliated persons of the Bank. Federal law
currently requires that all loans to directors and executive officers be made on
terms and conditions comparable to those for similar transactions with
non-affiliates. At June 30, 1998 there were no loans outstanding to any trustee
or executive officer of the Bank.
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<PAGE>
Proposed Purchases by Executive Officers and Trustees
The following table sets forth the number of shares of Common Stock that
the executive officers and trustees, and their associates, propose to purchase
in the Offerings, assuming shares of Common Stock are issued at $10.00 per share
at the minimum ($59,500,000) and maximum ($80,500,000) of the Estimated
Valuation Range and that sufficient shares will be available to satisfy their
orders. The table also sets forth the total expected beneficial ownership of
Common Stock as to all trustees and executive officers as a group.
<TABLE>
<CAPTION>
At the Minimum of the At the Maximum of the
Estimated Valuation Range(1) Estimated Valuation Range(1)
-----------------------------------------------------------------
Number of As a Percent of Number of As a Percent of
Name Amount Shares Shares Offered Shares Shares Offered
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Duncan S. Mac Affer........ ^ $175,000 17,500 0.3% 17,500 0.2%
Arthur E. Bowen............ 180,000 18,000 0.3 18,000 0.2
Walter H. Speidel.......... 200,000 20,000 0.3 20,000 ^ 0.3
Harry L. Robinson.......... 500,000 50,000 0.8 50,000 0.6
Donald A. Wilson........... 75,000 7,500 0.1 7,500 0.1
Frederick G. Field, Jr..... 80,000 8,000 0.1 8,000 0.1
R. Douglas Paton........... ^ 200,000 20,000 0.3 20,000 0.3
J. Timothy O'Hearn......... 250,000 25,000 0.4 25,000 0.3
Chester C. DeLaMater....... 250,000 25,000 0.4 25,000 0.3
Peter G. Casabonne......... ^ 100,000 10,000 0.2 10,000 0.1
Michael L. Crotty.......... ^ 50,000 5,000 0.1 5,000 0.1
Richard A. Ahl............. ^ 400,000 40,000 0.7 40,000 0.5
^ Albert J. Picchi......... 150,000 15,000 0.3 15,000 0.2
------------ --------- ---------
.....
All directors and executive
officers as a group (13 persons) ^ $2,610,000 261,000 4.4% 261,000 3.2%
============ ======== ==== ======== ==========
<FN>
(1) Includes proposed subscriptions, if any, by associates. Does not include
subscription orders by the ESOP. Intended purchases by the ESOP are
expected to be 8% of the shares issued in the Conversion, including shares
issued to the Foundation. Also does not include shares to be contributed to
the Foundation equal to 3% of the Holding Company Common Stock sold or
178,500 and 241,500 shares at the minimum and the maximum, respectively of
the Estimated Valuation Range, Holding Company Common Stock which may be
awarded under the RRP to be adopted equal to 4% of the Holding Company
Common Stock issued in the Conversion, including shares issued to the
Foundation (or 245,140 shares and 331,660 shares at the minimum and the
maximum, respectively, of the Estimated Valuation Range), and Holding
Company Common Stock which may be purchased pursuant to options which may
be granted under the Stock Option and Incentive Plan equal to 10% of the
number of shares of Common stock issued in the Conversion, including shares
issued to the Foundation (or 612,850 shares or 829,150 shares at the
minimum and the maximum, respectively, of the Estimated Valuation Range.)
</FN>
</TABLE>
The trustees and executive officers of the Bank are purchasing in the
aggregate approximately ^ 3.2% of the shares of the Holding Company Common Stock
at the maximum of the Estimated Valuation Range. In addition, the ESOP intends
to purchase 8% of the Holding Company Common Stock to be issued in the
Conversion, including shares to be issued to the Foundation. Additionally, if,
the proposed RRP and Stock Option and Incentive Plan are implemented, the
Holding Company expects to acquire 4% of the Holding Company Common Stock issued
in the Conversion, including shares to be issued to the Foundation, on behalf of
the RRP, and expects to issue an amount equal to 10% of the Holding Company
Common Stock issued in the Conversion, including shares to be issued to the
Foundation, under the Stock Option Plan to directors, executive officers and
employees. As a result, assuming the RRP and Stock Option Plan are implemented,
the directors, executive officers and employees have the potential to control
the voting of approximately 25% of the Holding Company Common Stock, on a fully
diluted basis at the maximum of the Estimated Valuation Range, thereby enabling
them to prevent the approval of transactions requiring the approval of at least
80% of the Holding Company's outstanding shares of voting stock.
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THE CONVERSION
THE BOARD OF TRUSTEES OF THE BANK AND THE SUPERINTENDENT OF BANKS OF
THE STATE OF NEW YORK HAVE APPROVED THE PLAN OF CONVERSION, SUBJECT TO APPROVAL
BY THE BANK'S DEPOSITORS ENTITLED TO VOTE ON THE PLAN AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS. SUCH APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE SUPERINTENDENT.
General
On May 21, 1998, the Bank's Board of Trustees unanimously adopted the
Plan of Conversion pursuant to which the Bank will be converted from a New York
mutual savings bank to a New York stock savings bank. It is currently intended
that all of the outstanding capital stock issued by the Bank pursuant to the
Plan will be held by the Holding Company, which is incorporated under Delaware
law. The Plan was approved by the Superintendent, and the Bank has received a
notice of intent not to object to the Plan from the FDIC, subject to, among
other things, approval of the Plan by the Bank's voting depositors. A special
meeting of depositors has been called for this purpose to be held on ^ December
21, 1998.
The Holding Company has received approval from the OTS to become a
savings and loan holding company and to acquire all of the capital stock of the
Bank to be issued in the Conversion. The Holding Company plans to retain 50% of
the net proceeds from the sale of the Conversion Shares and to use the remaining
net proceeds to purchase all of the then issued and outstanding capital stock of
the Bank. The Conversion will be effected only upon completion of the sale of
all of the shares of Holding Company Common Stock to be issued pursuant to the
Plan.
The Plan provides that the Board of Trustees of the Bank may, at any
time prior to the issuance of the Holding Company Common Stock and for any
reason, decide not to use the holding company form of organization. Such reasons
may include possible delays resulting from overlapping regulatory processing or
policies which could adversely affect the Bank's or the Holding Company's
ability to consummate the Conversion and transact its business as contemplated
herein and in accordance with the Bank's operating policies. In the event such a
decision is made, the Bank will withdraw the Holding Company's registration
statement from the SEC and take steps necessary to complete the Conversion
without the Holding Company, including filing any necessary documents with the
Department and the FDIC. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Bank determines
not to complete the Conversion, if permitted by the Department, the Bank will
issue and sell the common stock of the Bank and subscribers will be notified of
the elimination of a holding company and will be solicited (i.e., be permitted
to affirm their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their funds will be promptly refunded with interest at the Bank's passbook rate
of interest; or be permitted to modify or rescind their subscriptions), and
notified of the time period within which the subscriber must affirmatively
notify the Bank of such subscriber's intention to affirm, modify or rescind such
subscriber's subscription. The following description of the Plan assumes that a
holding company form of organization will be used in the Conversion. In the
event that a holding company form of organization is not used, all other
pertinent terms of the Plan as described below will apply to the Conversion of
the Bank from the mutual to stock form of organization and the sale of the
Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a
mutual savings bank to a capital stock savings bank and (ii) the Holding Company
will offer shares of Holding Company Common Stock for sale in the Subscription
Offering to the Bank's Eligible Account Holders, Employee Plans, including the
ESOP and Supplemental Eligible Account Holders. The Plan also provides that
shares not subscribed for in the Subscription Offering may be offered in a
Community Offering to certain members of the general public. It is anticipated
that all shares not subscribed for in the Subscription and Community Offerings
will be offered for sale by the Holding Company to the general public in a
Syndicated Community Offering. The Holding Company and the Bank have reserved
the right to accept or reject, in whole or in part, any orders to purchase
shares of the Holding Company Common Stock received in the Community Offering or
in the Syndicated Community Offering. See "-Community Offering" and "-
Syndicated Community Offering."
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The aggregate price of the shares of Holding Company Common Stock to be
issued in the Conversion within the Estimated Valuation Range, currently
estimated to be between $59,500,000 and $80,500,000 is based upon an independent
appraisal of the estimated pro forma market value of the Holding Company Common
Stock prepared by RP Financial, a consulting firm experienced in the valuation
and appraisal of savings institutions. All shares of Holding Company Common
Stock to be issued and sold in the Conversion will be sold at the same price.
The independent appraisal will be affirmed or, if necessary, updated at the
completion of the Offerings. See "- Stock Pricing" for additional information as
to the determination of the estimated pro forma market value of the Holding
Company Common Stock.
The following is a brief summary of pertinent aspects of the Plan. The
summary is qualified in its entirety by reference to the provisions of the Plan.
A copy of the Plan is available from the Bank upon written request and is
available for inspection at the offices of the Bank and at the office of the
Superintendent. The Plan is also filed as an Exhibit to the Registration
Statement of which this Prospectus is a part, copies of which may be obtained
from the SEC.
Purposes of Conversion
The Bank, as a New York mutual savings bank, does not have stockholders
and has no authority to issue capital stock. By converting to the capital stock
form of organization, the Bank will be structured in the form used by commercial
banks, other business entities and a growing number of savings institutions. The
Conversion will be important to the future growth and performance of the Bank by
providing a larger capital base on which the Bank may operate, enhanced future
access to capital markets, enhanced ability to diversify into other financial
services related activities and enhanced ability to render services to the
public.
The holding company form of organization, if used, would provide
additional flexibility to diversify the Bank's business activities through
newly-formed subsidiaries, or through acquisitions of or Mergers with both
mutual and stock institutions, as well as other companies. Although there are no
current arrangements, understandings or agreements, written or oral, regarding
any such opportunities, the Holding Company will be in a position after the
Conversion, subject to regulatory limitations and the Holding Company's
financial position, to take advantage of any such opportunities that may arise.
While there are benefits associated with the holding company form of
organization, such form of organization may involve additional costs associated
with its maintenance and regulation as a savings and loan holding company, such
as additional administrative expenses, taxes and regulatory filings or
examination fees.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Bank had Tier I Leverage Capital of $53.3 million, or 10.13% of
assets, at June 30, 1998. Assuming that $78,572,400 of net proceeds are realized
from the sale of Holding Company Common Stock (being the maximum of the
Estimated Valuation Range established by the Board of Directors based on the
Valuation Range which has been estimated by RP Financial to be from a minimum of
$59,500,000 to a maximum of $80,500,000 (see "Pro Forma Data" for the basis of
this assumption)) and assuming that $39,286,200 of the net proceeds are used by
the Holding Company to purchase the capital stock of the Bank, the Bank's Tier I
Leverage capital ratio, on a pro forma basis, will increase to 15.35% after the
Conversion. The investment of the net proceeds from the sale of the Holding
Company Common Stock will provide the Bank with additional income to further
enhance its capital position. The additional capital may also assist the Bank in
offering new programs and expanded services to its customers.
After completion of the Conversion, the unissued common and preferred
stock authorized by the Holding Company's Certificate of Incorporation will
permit the Holding Company, subject to market conditions and regulatory
approval, to raise additional equity capital through further sales of securities
and to issue securities in connection with possible acquisitions. At the present
time, the Holding Company has no plans with respect to additional offerings of
securities, other than the issuance of additional shares to the Foundation or
upon exercise of stock options granted pursuant to the Stock Option and
Incentive Plan or the possible issuance of authorized but unissued shares
pursuant to the RRP. Following the Conversion, the Holding Company will also be
able to use stock-related incentive programs to attract and retain executive and
other personnel for itself and its subsidiaries. See "Management of the Bank
- -Executive Compensation."
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Effects of Conversion
General. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the equity of
the institution based upon the balance in such depositor's account, which
interest may only be realized in the event of a liquidation of the institution.
However, this ownership interest is tied to the depositor's account and has no
tangible market value separate from such deposit account. Any depositor who
opens a deposit account obtains a pro rata ownership interest in the equity of
the institution without any additional payment beyond the amount of the deposit.
A depositor who reduces or closes such an account receives the balance in the
account but receives nothing for such depositor's ownership interest in the
equity of the institution, which is lost to the extent that the balance in the
account is reduced.
Consequently, depositors of a mutual savings bank have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings bank is liquidated. In such event,
the depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of, depositors is
thereafter represented exclusively by their liquidation rights. See "--
Liquidation Rights." Such common stock is separate and apart from deposit
accounts and cannot be and is not insured by the FDIC or any other governmental
agency. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable, and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
Continuity. While the Conversion is being accomplished, and after the
consummation of the Conversion, the normal business of the Bank of accepting
deposits and making loans will continue without interruption. The Bank will
continue to be subject to regulation by the Superintendent and the FDIC. After
Conversion, the Bank will continue to provide services for depositors and
borrowers under current policies by its present management and staff.
The trustees serving the Bank immediately before the Conversion will
serve as directors of the Bank after the Conversion. The directors of the
Holding Company will consist of all of the individuals currently serving on the
Board of Trustees of the Bank. It is anticipated that all officers of the Bank
serving immediately before the Conversion will retain their positions after the
Conversion. See "Management of the Holding Company" and "Management of the
Bank."
Deposit Accounts and Loans. Under the Plan, each depositor in the Bank
and at the time of Conversion will automatically continue as a depositor after
the Conversion, and each such deposit account will remain the same with respect
to deposit balance, interest rate and other terms, except to the extent affected
by withdrawals made to purchase Holding Company Common Stock in the Conversion.
See "-- Procedure for Purchasing Shares in Subscription and Community
Offerings." Each such account will be insured by the FDIC to the same extent as
before the Conversion (i.e., up to $100,000 per depositor). Depositors will
continue to hold their existing certificates of deposit, passbooks and other
evidences of their accounts.
Furthermore, no loan outstanding from the Bank will be affected by the
Conversion, and the amount, interest rate, maturity and security for each loan
will remain as they were contractually fixed prior to the Conversion.
Voting Rights. In its current mutual form, voting rights and control of
the Bank are vested exclusively in the Board of Trustees. After the Conversion,
direction of the Bank will be under the control of the Board of Directors of the
Bank. The Holding Company, as the holder of all of the outstanding capital stock
of the Bank, will have exclusive voting rights with respect to any matters
concerning the Bank requiring stockholder approval, including the election of
directors of the Bank.
After the Conversion, subject to the rights of the holders of preferred
stock that may be issued in the future, the holders of the Holding Company
Common Stock will have exclusive voting rights with respect to any matters
concerning the Holding Company. Each holder of Holding Company Common Stock
will, subject to the restrictions
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and limitations set forth in the Holding Company's Certificate of Incorporation
discussed below, be entitled to vote on any matters to be considered by the
Holding Company's stockholders, including the election of directors of the
Holding Company.
Liquidation Rights. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor would receive such
depositor's pro rata share of any assets of the Bank remaining after payment of
claims of all creditors (including the claims of all depositors to the
withdrawal value of their accounts). Each depositor's pro rata share of such
remaining assets would be in the same proportion as the value of such
depositor's deposit account was to the total value of all deposit accounts in
the Bank at the time of liquidation. After the Conversion, each depositor, in
the event of a complete liquidation, would have a claim as a creditor of the
same general priority as the claims of all other general creditors of the Bank.
However, except as described below, such depositor's claim would be solely in
the amount of the balance in such depositor's deposit account plus accrued
interest. Such depositor would not have an interest in the value or assets of
the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" (which is a memorandum account
only) for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders in an amount equal to the surplus and reserves of the Bank as of
the date of its latest balance sheet contained in the final Prospectus used in
connection with the Conversion. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if such account holder were to continue to maintain
such account holder's deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank,
whether or not such Eligible Account Holder or Supplemental Eligible Account
Holder purchased Holding Company Common Stock in the Conversion. Each Eligible
Account Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account, including
passbook accounts, demand accounts, money market deposit accounts and time
deposits, with an aggregate balance of $100 or more held in the Bank on March
31, 1997 (with respect to an Eligible Account Holder) and September 30, 1998
(with respect to a Supplemental Eligible Account Holder) (each a "Qualifying
Deposit"). Each Eligible Account Holder and Supplemental Eligible Account Holder
will have a pro rata interest in the total liquidation account for such account
holder's deposit accounts based on the proportion that the aggregate balance of
such person's Qualifying Deposits on the Eligibility Record Date or Supplemental
Eligibility Record Date, as applicable, bore to the total amount of all
Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible
Account Holders.
If, however, on any annual closing date (i.e., the anniversary of the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable) of the Bank, commencing on or after the effective date of the
Conversion, the amount in any deposit account is less than the amount in such
deposit account on March 31, 1997 (with respect to an Eligible Account Holder),
or September 30, 1998 (with respect to a Supplemental Eligible Account Holder),
or any other annual closing date, then the interest in the liquidation account
relating to such deposit account would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. For purposes of the liquidation account, time deposit
accounts shall be deemed to be closed upon maturity regardless of renewal. In
addition, no interest in the liquidation account would ever be increased despite
any subsequent increase in the related deposit account. Any assets remaining
after the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to the Holding
Company as the sole stockholder of the Bank.
Tax Aspects. Consummation of the Conversion is expressly conditioned
upon the receipt by the Bank of either a favorable ruling from the IRS and New
York taxing authorities or opinions of counsel with respect to federal and New
York income taxation, to the effect that the Conversion will not be a taxable
transaction to the Holding Company, the Bank, Eligible Account Holders or
Supplemental Eligible Account Holders, except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Silver, Freedman & Taff, L.L.P., based on customary certificates delivered by
management of the Holding Company and the Bank, that for federal income tax
purposes, among other matters: (i) the Bank's change in form from mutual to
stock ownership will constitute a reorganization under section 368(a)(1)(F) of
the Code, (ii) neither the Bank nor the Holding Company will recognize any gain
or loss as a result of the Conversion; (iii) no gain or loss will be recognized
by the Bank or the Holding Company upon the purchase of the Bank's capital
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stock by the Holding Company or by the Holding Company upon the purchase of its
Holding Company Common Stock in the Conversion; (iv) no gain or loss will be
recognized by Eligible Account Holders or Supplemental Eligible Accounts Holders
upon the issuance to them of deposit accounts in the Bank in its stock form plus
their interests in the liquidation account in exchange for their deposit
accounts in the Bank; (v) the tax basis of the depositors' deposit accounts in
the Bank immediately after the Conversion will be the same as the basis of their
deposit accounts immediately prior to the Conversion; (vi) the tax basis of each
Eligible Account Holder's and each Supplemental Eligible Account Holders
interest in the liquidation account will be zero; (vii) no gain or loss will be
recognized by Eligible Account Holders or Supplemental Eligible Account Holders
upon the distribution to them of non-transferable subscription rights to
purchase shares of the Holding Company Common Stock, provided, that the amount
to be paid for the Holding Company Common Stock is equal to the fair market
value of such stock; and (viii) the tax basis to the stockholders of the Holding
Company Common Stock purchased in the Conversion pursuant to the subscription
rights will be the amount paid therefor and the holding period for the shares of
Holding Company Common Stock purchased by such persons will begin on the date on
which their subscription rights are exercised.
^ Wertime, Reis and Van Ullen, P.C. has also opined, subject to the
limitations and qualifications in its opinion, that the Conversion will not be a
taxable transaction to the Holding Company or to the Bank for New York income
and franchise tax purposes or to Eligible Account Holders or to Supplemental
Eligible Account Holders for New York income tax purposes. The opinions of
Silver, Freedman & Taff, L.L.P. and ^ Wertime, Reis and Van Ullen, P.C. have
been filed as exhibits to the Registration Statement of which this Prospectus is
a part.
Unlike private rulings, opinions of counsel or other professionals are
not binding on the IRS or the New York taxing authorities and the IRS or the New
York taxing authorities could disagree with conclusions reached therein. In the
event of such disagreement, there can be no assurance that the IRS or the New
York taxing authorities would not prevail in a judicial or administrative
proceeding.
Certain portions of both the federal and the state tax opinions are
based upon the letter of RP Financial that subscription rights issued in
connection with the Conversion will have no value. In the letter of RP
Financial, which opinion is not binding on the IRS or the New York taxing
authorities, the subscription rights do not have any value based on the fact
that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the Holding Company Common Stock at a price equal to its estimated
fair market value, which will be the same price as the Purchase Price for the
unsubscribed shares of Holding Company Common Stock. If the subscription rights
granted to Eligible Account Holders and Supplemental Eligible Account Holders
are deemed to have an ascertainable value, such Eligible Account Holders and
Supplemental Eligible Account Holders could be taxed upon the receipt or
exercise of the subscription rights in an amount equal to such value, and the
Bank could recognize gain on such distribution. Eligible Account Holders and
Supplemental Eligible Account Holders are encouraged to consult with their own
tax advisors as to the tax consequences in the event that such subscription
rights are deemed to have an ascertainable value.
Establishment of Cohoes Savings Foundation
General. In furtherance of the Bank's commitment to its local
community, the Plan of Conversion provides for the establishment of a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Holding Company will incorporate the Foundation under Delaware law as a
non-stock corporation and will fund the Foundation with Holding Company Common
Stock, as further described below. The Holding Company and the Bank believe that
the funding of the Foundation with Holding Company Common Stock is a means to
establish a common bond between the Bank and its community, enabling the Bank's
community to share in the potential growth and success of the Holding Company
over the long term. By further enhancing the Bank's visibility and reputation in
its local community, the Bank believes that the Foundation will enhance the
long-term value of the Bank's community banking franchise. The Foundation will
be dedicated to charitable purposes within the Bank's local community, including
community development activities.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and community
development activities within the Bank's local community. The Bank received a
"satisfactory" CRA rating in its last CRA examination. The Bank intends to
continue to emphasize community lending and community development
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activities following the Conversion. However, such activities are not the Bank's
sole corporate purpose. The Foundation will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not presently available to the Bank. In this
regard, the Board of Trustees believes the establishment of a charitable
foundation is consistent with the Bank's commitment to community service. The
Board further believes that the funding of the Foundation with Holding Company
Common Stock is a means of enabling the Bank's community to share in the
potential growth and success of the Holding Company long after completion of the
Conversion. The Foundation will accomplish that goal by providing for continued
ties between the Foundation and the Bank, thereby forming a partnership with the
Bank's community. The establishment of the Foundation will also enable the
Holding Company and the Bank to develop a unified charitable donation strategy
and will centralize the responsibility for administration and allocation of
corporate charitable funds. Charitable foundations have been formed by other
financial institutions for this purpose, among others.
Although the Board of Trustees of the Bank and the Board of Directors
of the Holding Company have carefully considered each of the above factors, the
establishment of a charitable foundation in connection with a mutual to stock
Conversion is a relatively new concept that has been implemented by only a few
other converting institutions. Accordingly, certain persons may raise challenges
as to the validity of the establishment of the Foundation that, if not resolved
promptly, could delay the consummation of the Conversion or result in the
elimination of the Foundation.
Structure of the Foundation. The Foundation was incorporated under
Delaware law as a non-stock corporation. The Foundation's Certificate of
Incorporation provides that it is organized exclusively for charitable purposes,
including community development, as set forth in Section 501(c)(3) of the Code.
The Foundation's Certificate of Incorporation further provides that no part of
the net earnings of the Foundation will inure to the benefit of, or be
distributable to its directors, officers or members. The Board of Directors of
the Foundation will consist of four individuals who are officers or trustees of
the Bank, and two individuals who are civic and community leaders within the
Bank's local community. A Nominating Committee of such Board, which is to be
comprised of a minimum of three members of the Board, will nominate individuals
eligible for election to the Board of Directors. The members of the Foundation,
who are comprised of its Board members, will elect the directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee. Only
persons serving as directors of the Foundation qualify as members of the
Foundation, with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms.
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a non-profit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The directors of the Foundation
will also be responsible for directing the activities of the Foundation,
including the management of the Holding Company Common Stock held by the
Foundation. However, as a condition to receiving the non-objection of the FDIC
to the Bank's Conversion and the approval of the Conversion by the
Superintendent, the Foundation will commit in writing to the FDIC and the
Superintendent that all shares of Holding Company Common Stock held by the
Foundation will be voted in the same ratio as all other shares of the Holding
Company Common Stock on all proposals considered by stockholders of the Holding
Company; provided, however, that, consistent with the condition, the FDIC and
the Superintendent shall waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (i) cause a
violation of the law of the State of Delaware; (ii) cause the Foundation to lose
its tax-exempt status, or cause the IRS to deny the Foundation's request for a
determination that it is an exempt organization or otherwise have a material and
adverse tax consequence on the Foundation; or (iii) cause the Foundation to be
subject to an excise tax under Section 4941 of the Code. In order for the FDIC
and the Superintendent to waive such voting restriction, the Holding Company's
or the Foundation's legal counsel must render an opinion satisfactory to the
FDIC and the Superintendent that compliance with the voting restriction would
have an effect described in clauses (i), (ii) or (iii) above. Under those
circumstances, the FDIC and the Superintendent shall grant a waiver of the
voting requirement upon submission of such legal opinion(s) by the Holding
Company or the Foundation that are satisfactory to the FDIC and the
Superintendent. In the event that the FDIC and the Superintendent were to waive
such voting requirement, the directors would direct the voting of the Holding
Company Common Stock held by the Foundation.
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However, the Superintendent may, in the case of a waiver, impose additional
conditions regarding the composition of the Board of Directors. As of the date
hereof, no event has occurred which would require the Holding Company to seek a
waiver of the voting restriction.
The Foundation's place of business will be located at the Bank's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the staff of the Holding Company and the Bank. The
Board of Directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. In this regard, the Bank
has provided the FDIC with a commitment that, to the extent applicable, the Bank
will comply with the affiliate restrictions set forth in Sections 23A and 23B of
the Federal Reserve Act with respect to any transactions between the Bank and
the Foundation.
The Holding Company intends to capitalize the Foundation with Holding
Company Common Stock in an amount equal to 3% of the total amount of Holding
Company Common Stock to be sold in connection with the Conversion. At the
minimum, midpoint and maximum of the Estimated Valuation Range, the contribution
to the Foundation would equal 178,500, 210,000 and 241,500 shares, which would
have a market value of $1.8 million, $2.1 million and $2.4 million,
respectively, assuming the Purchase Price of $10.00 per share. The Holding
Company and the Bank determined to fund the Foundation with Holding Company
Common Stock rather than cash because it desired to form a bond with its
community in a manner that would allow the community to share in the potential
growth and success of the Holding Company and the Bank over the long term. The
funding of the Foundation with stock also provides the Foundation with a
potentially larger endowment than if the Holding Company contributed cash to the
Foundation since, as a stockholder, the Foundation will share in the potential
growth and success of the Holding Company. As such, the contribution of stock to
the Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Holding Company, if it were not making
the stock donation, would have to contribute to the Foundation in future years
in order to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may
be paid on the Holding Company Common Stock in the future, and subject to
applicable federal and state laws, loans collateralized by the Holding Company
Common Stock or from the proceeds of the sale of any of the Holding Company
Common Stock in the open market from time to time as may be permitted to provide
the Foundation with additional liquidity. As a private foundation under Section
501(c)(3) of the Code, the Foundation will be required to distribute annually in
grants or donations, a minimum of 5% of the average fair market value of its net
investment assets. One of the conditions imposed on the gift of Holding Company
Common Stock by the Holding Company is that the amount of Holding Company Common
Stock that may be sold by the Foundation in any one year shall not exceed 5% of
the average market value of the assets held by the Foundation, except where the
Board of Directors of the Foundation determines that the failure to sell an
amount of common stock greater than such amount would result in a long-term
reduction of the value of the Foundation's assets and as such would jeopardize
the Foundation's capacity to carry out its charitable purposes. Upon completion
of the Conversion and the contribution of shares to the Foundation immediately
following the Conversion, the Holding Company would have 6,128,500, 7,210,000and
8,291,500 shares issued and outstanding at the minimum, midpoint and maximum of
the Estimated Valuation Range. Because the Holding Company will have an
increased number of shares outstanding, the voting and ownership interests of
stockholders in the Holding Company's common stock would be diluted by 2.9%, as
compared to their interests in the Holding Company if the Foundation were not
established. For additional discussion of the dilutive effect of the
contribution of Holding Company Common Stock to the Foundation, see "Pro Forma
Data."
Tax Considerations. The Holding Company and the Bank have received an
opinion of Silver, Freedman & Taff, L.L.P. that an organization created for the
above purposes would qualify as an organization exempt from taxation under
Section 501(c)(3) of the Code, and would likely be classified as a private
foundation. The Foundation will submit an application to the IRS to be
recognized as an exempt organization. If the Foundation files such an
application within 15 months from the date of its organization, and if the IRS
approves the application, the effective date of the Foundation's status as a
Section 501(c)(3) organization will be retroactive to the date of its
organization. Silver, Freedman & Taff, L.L.P., however, has not rendered any
advice on the condition to the contribution to be agreed to by the Foundation
which requires that all shares of Holding Company Common Stock held by the
Foundation must be voted in the same ratio as all other outstanding shares of
Holding Company Common Stock on all proposals considered by stockholders of the
Holding Company. Consistent with this condition, in the event that the Holding
Company or the
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Foundation receives an opinion of its legal counsel that compliance with this
voting restriction would have the effect of causing the Foundation to lose its
tax-exempt status or otherwise have a material and adverse tax consequence on
the Foundation, or subject the Foundation to an excise tax for "self-dealing"
under Section 4941 of the Code, the Holding Company would request a waiver from
the FDIC and the Superintendent of such voting restriction upon submission by
the Holding Company or the Foundation of a legal opinion(s) to that effect
satisfactory to the FDIC and the Superintendent. However, no assurance can be
given that such waiver would be granted. See "- Regulatory Conditions Imposed on
the Foundation."
Under the Code, the Holding Company is entitled to a deduction for
charitable contributions in an amount not exceeding 10% of its taxable income
(computed without regard to the contributions) for the year of the contribution,
and any contributions in excess of the deductible amount may be carried forward
and deducted in the Holding Company's five succeeding taxable years, subject, in
each such year, to the 10% of taxable income limitation. The Holding Company and
the Bank believe that the Conversion presents a unique opportunity to establish
and fund a charitable foundation given the substantial amount of additional
capital being raised in the Conversion. In making such a determination, the
Holding Company and the Bank considered the dilutive impact of the contribution
of Holding Company Common Stock to the Foundation on the amount of Holding
Company Common Stock available to be offered for sale in the Conversion. Based
on such consideration, the Holding Company and Bank believe that the
contribution to the Foundation in excess of the 10% annual limitation is
justified given the Bank's capital position and its earnings, the substantial
additional capital being raised in the Conversion and the potential benefits of
the Foundation to the Bank's community. In this regard assuming the sale of the
Holding Company Common Stock at the maximum of the Estimated Valuation Range,
the Holding Company would have pro forma consolidated capital of $87.1 million
or 15.1% of pro forma consolidated assets and the Bank's pro forma leverage and
risk-based capital ratios would be 11.01% and 21.20%, respectively. See
"Regulation - The Bank - Capital Requirements," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No Stock Contribution."
Thus, the amount of the contribution will not adversely impact the financial
condition of the Holding Company and the Bank, and the Holding Company and the
Bank therefore believe that the amount of the charitable contribution is
reasonable and will not raise safety and soundness concerns.
The Holding Company and the Bank have received the opinion of Silver,
Freedman & Taff, L.L.P. that the Holding Company's contribution of its own stock
to the Foundation would not constitute an act of self-dealing, and that the
Holding Company will be entitled to a deduction in the amount of the fair market
value of the stock at the time of the contribution, subject to the 10% of
taxable income limitation. As discussed above, the Holding Company will be able
to carry forward and deduct any portion of the contribution in excess of such
10% limitation for five years following the year of the contribution. If the
Holding Company and the Foundation had been established in the fiscal year ended
June 30, 1998, the Holding Company would have been entitled to a charitable
contribution deduction in its taxable year ended December 31, 1998 of
approximately $674,000 and would have been able to carry forward and deduct
approximately $1.7 million over its next succeeding five taxable years (based on
the Bank's estimated pre-tax income for 1998 and a contribution in 1998 of
Holding Company Common Stock equal to $2.4 million). Assuming the close of the
Offering at the maximum of the Estimated Valuation Range, the Holding Company
estimates that the entire amount of the contribution should be deductible over a
six-year period. Neither the Holding Company nor the Bank expect to make any
further contributions to the Foundation within the first five years following
the initial contribution. After that time, the Holding Company and the Bank may
consider future contributions to the Foundation. Any such decisions would be
based on an assessment of, among other factors, the financial condition of the
Holding Company and the Bank at that time, the interests of stockholders and
depositors of the Holding Company and the Bank, and the financial condition and
operations of the Foundation.
Although the Holding Company and the Bank have received the opinion of
Silver, Freedman & Taff, L.L.P. that the Holding Company is entitled to a
deduction for the charitable contribution, there can be no assurances that the
IRS will recognize the Foundation as an organization exempt from taxation under
section 501(c)(3) of the Code or that the deduction will be permitted. If the
IRS successfully maintains that the Foundation is not so exempt or that the
deduction is not permitted, the Holding Company's tax benefit related to the
contribution to the Foundation would be expensed without tax benefit, resulting
in a reduction in earnings in the year in which the IRS makes such a
determination. See "Risk Factors - Establishment of the Charitable Foundation."
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In general, the income of a private foundation is exempt from federal
and state taxation. However, investment income, such as interest, dividends and
capital gains, will be subject to a federal excise tax of 2.0%. The Foundation
will be required to make an annual filing with the IRS within four and one-half
months after the close of the Foundation's taxable year to maintain its
tax-exempt status. The Foundation will also be required to publish a notice that
the annual information return will be available for public inspection for a
period of 180 days after the date of such public notice. The information return
for a private foundation must include, among other things, an itemized list of
all grants made or approved, showing the amount of each grant, the recipient,
any relationship between a grant recipient and the Foundation's managers, and a
concise statement of the purpose of each grant. The Foundation will also be
required to file an annual report with the Charities Bureau of the Office of the
Attorney General of the State of New York.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions to be agreed to by the
Foundation in writing as a condition to receiving the FDIC's nonobjection of the
Bank's Conversion and the approval of the Conversion by the Superintendent: (i)
the Foundation will be subject to examination by the FDIC and the
Superintendent; (ii) the Foundation must comply with supervisory directives
imposed by the FDIC and the Superintendent; (iii) the Foundation will operate in
accordance with written policies adopted by its Board of Directors, including a
conflict of interest policy; and (iv) any shares of Holding Company Common Stock
held by the Foundation must be voted in the same ratio as all other outstanding
shares of Holding Company Common Stock on all proposals considered by
stockholders of the Holding Company; provided, however that, consistent with
this condition, the FDIC and the Superintendent shall waive this voting
restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware;
(b) would cause the Foundation to lose its tax-exempt status or otherwise have a
material and adverse tax consequence on the Foundation; or (c) would cause the
Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the FDIC and the Superintendent to waive such voting restriction, the
Holding Company's or the Foundation's legal counsel must render an opinion
satisfactory to FDIC and the Superintendent that compliance with the voting
restriction would have the effect described in clauses (a), (b) or (c) above.
Under those circumstances, the FDIC and the Superintendent shall grant a waiver
of the voting restriction upon submission of such opinion(s) by the Holding
Company or the Foundation which are satisfactory to the FDIC and the
Superintendent. There can be no assurances that a legal opinion addressing these
issues will be rendered, or if rendered, that the FDIC and the Superintendent
will grant an unconditional waiver of the voting restriction. If the
Superintendent waives the voting restriction, the Department may (1) impose a
condition that a certain portion of the members of the Foundation's Board of
Directors shall be persons who are not directors, officers or employees of the
Bank or the Holding Company or any affiliate thereof or (2) impose such other
condition relating to control of the Holding Company Common Stock held by the
Foundation as determined by the Department to be appropriate. In no event will
the voting restriction survive the sale of shares of the Holding Company Common
Stock held by the Foundation.
Required Approvals for the Conversion
Various approvals of the Superintendent and the FDIC are required in
order to consummate the Conversion. The Superintendent and the FDIC have
approved the Plan of Conversion, subject to approval by the Bank's voting
depositors. In addition, consummation of the Conversion is subject to OTS
approval of the Holding Company's holding company application to acquire all of
the Bank common stock. Applications for these approvals have been filed and are
currently pending.
Pursuant to Department and FDIC regulation, the Plan of Conversion must
be approved by at least a majority of the total number of votes eligible to be
cast by the Bank's voting depositors and by at least seventy-five percent (75%)
in amount of deposit liabilities of Voting Depositors represented in person or
by proxy at the special meeting to be held on ^ December 21, 1998 (the "Special
Meeting").
The Holding Company is required to make certain filings with state
securities regulatory authorities in connection with the issuance of Holding
Company Common Stock in the Conversion.
Certain Restrictions on Purchase or Transfer of Shares After the Conversion
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All Conversion Shares owned by any director or executive officer of the
Holding Company and/or the Bank will be subject to a restriction that the shares
not be sold for a period of one year following the Conversion, except in the
event of the death of such director or executive officer or pursuant to a Merger
or similar transaction approved by the Department and the FDIC. Each certificate
for restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Holding
Company Common Stock issued at a later date within this one year period as a
stock dividend, stock split or otherwise with respect to such restricted stock
will be subject to the same restrictions.
Purchases of Holding Company Common Stock by directors, executive
officers and their associates during the three-year period following completion
of the Conversion may be made only through a broker or dealer registered with
the SEC, except with the prior written approval of the Department and the FDIC.
This restriction does not apply, however, to negotiated transactions involving
more than 1% of the outstanding Holding Company Common Stock or to certain
purchases of stock pursuant to an employee stock benefit plan.
Pursuant to FDIC regulations, the Holding Company will generally be
prohibited from repurchasing any shares of the Holding Company Common Stock
within one year following the consummation of the Conversion, although the FDIC
under its current policies may approve a request to repurchase shares of Holding
Company Common Stock following the six-month anniversary of the Conversion.
During the second and third years following consummation of the Conversion, the
Holding Company may not repurchase any shares of its Holding Company Common
Stock other than pursuant to (i) an offer to all stockholders on a pro rata
basis which is approved by the FDIC; (ii) the repurchase of qualifying shares of
a director, if any; (iii) purchases in the open market by a tax-qualified or
non-tax-qualified employee stock benefit plan in an amount reasonable and
appropriate to fund the plan; or (iv) purchases that are part of an open-market
stock repurchase program not involving more than 5% of its outstanding capital
stock during a 12-month period, if the repurchases do not cause the Bank to
become undercapitalized and the Bank provides to the FDIC written notice
containing a full description of the program to be undertaken and such program
is not disapproved by the FDIC. The FDIC may permit stock repurchases in excess
of such amounts prior to the third anniversary of the Conversion if exceptional
circumstances are shown to exist. In addition, under proposed regulations of the
NYBB, the Holding Company will generally be prohibited from repurchasing any
shares of the Holding Company Common Stock within one year following the
consummation of the Conversion, although the Superintendent may approve a
request to repurchase shares of Holding Company Common Stock within the first
year following Conversion. During the second and third years following
consummation of the Conversion, the Holding Company may repurchase up to 5% of
its outstanding common stock during a 12-month period. The Holding Company may
repurchase in excess of 5% during a 12-month period with the prior permission of
the Superintendent.
Liquidation Rights
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor of the Bank would receive his pro rata share
of any assets of the Bank remaining after payment of claims of all creditors
including the claims of all depositors to the withdrawal value of their
accounts. Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his or her deposit account was to the total
value of all deposit accounts in the Bank at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation of the Bank,
would have a claim as a creditor of the same general priority as the claims of
all other general creditors of the Bank. However, except as described below, his
or her claim would be solely in the amount of the balance in his deposit account
plus accrued interest. He or she would not have an interest in the value or
assets of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "Liquidation Account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the Bank's net worth as of the date of its latest statement of financial
condition contained in the final prospectus utilized in the Conversion. This
liquidation account is a memorandum account only. As of June 30, 1998, the
initial balance of the liquidation account would be approximately $53.3 million.
Each Eligible Account Holder and Supplemental Eligible Account Holder, if he or
she were to continue to maintain his or her deposit account at the Bank, would
be entitled, upon a complete liquidation of the Bank after the Conversion, to an
interest in the liquidation account prior to any payment to the Holding Company
as the sole stockholder of the Bank. Each Eligible Account Holder and
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Supplemental Eligible Account Holder would have an initial interest in such
liquidation account for each deposit account, including passbook accounts, NOW
accounts, money market deposit accounts, and certificates of deposit, held in
the Bank at the close of business on March 31, 1997 or September 30, 1998, as
the case may be. Each Eligible Account Holder and Supplemental Eligible Account
Holder will have a pro rata interest in the total liquidation account for each
of his or her deposit accounts based on the proportion that the balance of each
such deposit account on the March 31, 1997 Eligibility Record Date (or the
September 30, 1998 Supplemental Eligibility Record Date, as the case may be)
bore to the balance of all deposit accounts in the Bank on such dates.
If, however, on any June 30 annual closing date of the Bank, commencing
June 30, 1999, the amount in any deposit account is less than the amount in such
deposit account on March 31, 1997 or September 30, 1998, as the case may be, or
any other annual closing date, then the interest in the liquidation account
relating to such deposit account would be reduced by the proportion of any such
reduction, and such interest will cease to exist if such deposit account is
closed. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related deposit account. Any
assets remaining after the claims of general creditors (including the claims of
all depositors to the withdrawal value of their accounts) and the above
liquidation rights of the Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to the Holding Company as the
sole stockholder of the Bank.
THE OFFERING
Stock Pricing
The Plan of Conversion requires that the purchase price of the Holding
Company Common Stock must be based on the appraised pro forma market value of
the Holding Company Common Stock, as determined on the basis of an independent
valuation. The Bank and the Holding Company have retained RP Financial to make
such valuation. For its services in making such appraisal, RP Financial will
receive a fee of $47,500, plus out-of-pocket expenses. The Bank and the Holding
Company have agreed to indemnify RP Financial and its employees and affiliates
against certain losses (including any losses in connection with claims under the
federal securities laws) arising out of its services as appraiser, except where
RP Financial's liability results from its negligence or bad faith.
An appraisal has been made by RP Financial in reliance upon the
information contained in this Prospectus, including the financial statements. RP
Financial also considered the following factors, among others: the present and
projected operating results and financial condition of the Holding Company and
the Bank, and the economic and demographic conditions in the Bank's existing
market area; certain historical, financial and other information relating to the
Bank; a comparative evaluation of the operating and financial statistics of the
Bank with those of other similarly situated publicly-traded savings associations
and savings institutions located in the Bank's market area and the State of New
York; the aggregate size of the offering of the Holding Company Common Stock;
the impact of the Conversion on the Bank's equity and earnings potential; the
proposed dividend policy of the Holding Company and the Bank; and the trading
market for securities of comparable institutions and general conditions in the
market for such securities.
On the basis of the foregoing, RP Financial has advised the Holding
Company and the Bank that, in its opinion, dated as of September 4, 1998, and as
updated as of October 23, 1998, the estimated pro forma market value of the
Holding Company Common Stock ranged from a minimum of $59,500,000 to a maximum
of $80,500,000 with a midpoint of $70,000,000. The Board of Trustees of the Bank
held a meeting to review and discuss the appraisal report prepared by RP
Financial. A representative of RP Financial participated in the meeting to
explain the contents of the appraisal report. In connection with its review of
the reasonableness and adequacy of such appraisal consistent with NYBB and FDIC
regulations and policies, the Board of Trustees reviewed the methodology that RP
Financial employed to determine the pro forma market value of the Holding
Company Common Stock and the appropriateness of the assumptions that RP
Financial used in determining this value.
Based upon the Valuation Range and the Purchase Price of $10.00 per
share for the Holding Company Common Stock established by the Board of Trustees,
the Board of Trustees has established the Estimated Valuation Range of
$59,500,000 to $80,500,000, with a midpoint of $70,000,000, and the Holding
Company expects to issue between 5,950,000 and 8,050,000 shares of Holding
Company Common Stock. The Estimated Valuation Range may
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be amended with the approval of the Superintendent and FDIC (if required), if
necessitated by subsequent developments in the financial condition of the
Holding Company or the Bank or market conditions generally.
The valuation prepared by RP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the financial statements
and other information provided by the Bank, nor did RP Financial value
independently the assets or liabilities of the Bank. The valuation considers the
Bank as a going concern and should not be considered as an indication of the
liquidation value of the Bank. Moreover, because such valuation is necessarily
based upon estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing such shares in the Conversion will thereafter be able to sell such
shares at prices at or above the Purchase Price or in the range of the foregoing
valuation of the pro forma market value thereof.
Following commencement of the Subscription Offering or Community
Offering, if any, the maximum of the Estimated Valuation Range may be increased
up to 15% and the number of shares of Holding Company Common Stock to be issued
in the Conversion may be increased to 9,257,500 shares due to regulatory
considerations, changes in the market and general financial and economic
conditions, without the resolicitation of subscribers. See "-- Limitations on
Common Stock Purchases" as to the method of distribution and allocation of
additional shares that may be issued in the event of an increase in the
Estimated Valuation Range to fill unfilled orders in the Subscription and
Community Offerings.
No sale of shares of Holding Company Common Stock may be consummated
unless, prior to such consummation, RP Financial confirms to the Bank, Holding
Company, Superintendent and FDIC that, to the best of its knowledge, nothing of
a material nature has occurred which, taking into account all relevant factors,
would cause RP Financial to conclude that the value of the Holding Company
Common Stock at the price so determined is incompatible with its estimate of the
pro forma market value of the Holding Company Common Stock at the conclusion of
the Subscription Offering and Community Offering, if any.
If, based on RP Financial's estimate, the pro forma market value of the
Holding Company Common Stock, as of the date that RP Financial so confirms, is
not more than 15% above the maximum and not less than the minimum of the
Estimated Valuation Range then, (1) with the approval of the Superintendent, if
required, and the FDIC, the number of shares of Holding Company Common Stock to
be issued in the Conversion may be increased or decreased, pro rata to the
increase or decrease in value, without resolicitation of subscriptions, to no
more than 9,257,500 shares or no less than 5,950,000 shares, and (2) all shares
purchased in the Subscription and Community Offerings will be purchased for the
Purchase Price of $10.00 per share. If the number of shares issued in the
Conversion is increased due to an increase of up to 15% in the Estimated
Valuation Range to reflect changes in market or financial conditions, persons
who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for an adjusted maximum number of shares, except for
the Employee Plans which will be able to subscribe for such adjusted amount up
to their 10% subscription. See "- Limitations on Common Stock Purchases."
If the pro forma market value of the Holding Company Common Stock is
either more than 15% above the maximum of the Estimated Valuation Range or less
than the minimum of the Estimated Valuation Range, the Bank and the Holding
Company, after consulting with the Superintendent and the FDIC, may terminate
the Plan and return all funds promptly with interest at the Bank's passbook rate
of interest on payments made by check, draft or money order, extend or hold new
Subscription and Community Offerings, establish a new Estimated Valuation Range,
commence a resolicitation of subscribers or take such other actions as permitted
by the Superintendent and the FDIC in order to complete the Conversion. In the
event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period of time, all funds will be promptly returned
to investors as described above. A resolicitation, if any, following the
conclusion of the Subscription and Community Offerings would not exceed 45 days
unless such resolicitation is further extended by the Superintendent and the
FDIC for periods of up to 60 days not to extend beyond ^ December 21, 2000.
If all shares of Holding Company Common Stock are not sold through the
Subscription and Community Offerings, then the Bank and the Holding Company
expect to offer the remaining shares in a Syndicated Community Offering, which
would occur as soon as practicable following the close of the Subscription
Offering or Community
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Offering, if any, but may commence during the Subscription Offering and
Community Offering, if any, subject to the prior rights of subscribers. All
shares of Holding Company Common Stock will be sold at the same price per share
in the Syndicated Community Offering as in the Subscription and Community
Offerings. See "--Syndicated Community Offering."
No sale of shares of Holding Company Common Stock may be consummated
unless, prior to such consummation, RP Financial confirms to the Bank, the
Holding Company, Superintendent and the FDIC that, to the best of its knowledge,
nothing of a material nature has occurred which, taking into account all
relevant factors, including those which would be involved in a cancellation of
the Syndicated Community Offering, would cause RP Financial to conclude that the
aggregate value of the Holding Company Common Stock at the Purchase Price is
incompatible with its estimate of the pro forma market value of the Holding
Company Common Stock of the Holding Company at the time of the Syndicated
Community Offering. Any change which would result in an aggregate purchase price
which is below, or more than 15% above, the Estimated Valuation Range would be
subject to Superintendent and FDIC approval. If such confirmation is not
received, the Bank may extend the Conversion, extend, reopen or commence new
Subscription and Community Offerings or a Syndicated Community Offering,
establish a new Estimated Valuation Range and commence a resolicitation of all
subscribers with the approval of the Superintendent and FDIC or take such other
actions as permitted by the Superintendent and FDIC in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change so as to cause the aggregate purchase price of the
shares to be below the minimum of the Estimated Valuation Range or more than 15%
above the maximum of such range, and the Holding Company and the Bank determine
to continue the Conversion, subscribers will be resolicited (i.e., be permitted
to continue their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their subscription funds will be promptly refunded with interest at
the Bank's passbook rate of interest, or be permitted to decrease or cancel
their subscriptions). Any change in the Estimated Valuation Range must be
approved by the Superintendent and FDIC. A resolicitation, if any, following the
conclusion of the Subscription Offering or the Community Offering would not
exceed 45 days, or if following the Syndicated Community Offering, 60 days,
unless further extended by the Superintendent for periods up to 60 days not to
extend beyond ^ December 21, 2000. If such resolicitation is not effected, the
Bank will return with interest all funds promptly at the Bank's passbook rate of
interest on payments made by check, savings bank draft or money order.
Copies of the appraisal report of RP Financial, including any
amendments thereto, and the detailed memoran dum of the appraiser setting forth
the method and assumptions for such appraisal are available for inspection at
the offices of the Bank and the other locations specified under "Additional
Information."
Number of Shares to be Issued
Depending upon market or financial conditions following the
commencement of the Subscription Offering and Community Offering, if any, the
total number of shares to be issued in the Conversion may be increased or
decreased without a resolicitation of subscribers; provided, that the product of
the total number of shares times the price per share is not below the minimum or
more than 15% above the maximum of the Estimated Valuation Range, and the total
number of shares to be issued in the Conversion is not less than 5,950,000 or
greater than 8,050,000 (or 9,257,500 if the Estimated Valuation Range is
increased by 15%).
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Valuation Range or more than 15% above the maximum of such range, if the Plan is
not terminated by the Holding Company and the Bank after consultation with the
Superintendent and FDIC, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Valuation Range must
be approved by the Superintendent and FDIC. If the number of shares issued in
the Conversion is increased due to an increase of up to 15% in the Estimated
Valuation Range to reflect changes in market or financial conditions, persons
who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for an adjusted maximum number of shares, except for
the Employee Plans, which will be able to subscribe for such adjusted amount up
to their 10% subscription. See "-- Limitations on Common Stock Purchases."
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An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Holding Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease in
the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Holding Company's pro forma net earnings
and stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholders' equity on an aggregate basis. For a presentation of
the effects of such changes see "Pro Forma Data."
To fund the Foundation, the number of shares to be issued and
outstanding as a result of the sale of Holding Company Common Stock in the
Conversion will be increased by a number of shares equal to 3% of the Holding
Company Common Stock sold in the Conversion. Assuming the sale of shares in the
Offerings at the maximum of the Estimated Valuation Range, the Holding Company
will contribute 241,500 shares of its Holding Company Common Stock from
authorized but unissued shares to the Foundation immediately following the
completion of the Conversion. In that event, the Holding Company will have total
shares of Holding Company Common Stock outstanding of 8,291,500 shares. Funding
the Foundation with authorized but unissued shares will have the effect of
diluting the ownership and voting interests of persons purchasing shares in the
Conversion by 2.9% since a greater number of shares will be outstanding upon
completion of the Conversion than would be if the Foundation were not
established. See "Pro Forma Data."
Subscription Offering and Subscription Rights
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Holding Company Common Stock have been granted under the Plan of
Conversion to the following persons in the following order of descending
priority: (1) depositors whose deposits in qualifying accounts in the Bank
totaled $100 or more on March 31, 1997 ("Eligible Account Holders"); (2) the
Employee Plans, including the ESOP; and (3) depositors whose deposits in
qualifying accounts in the Bank totaled $100 or more on September 30, 1998,
other than (i) those depositors who would otherwise qualify as Eligible Account
Holders or (ii) trustees or executive officers of the Bank or their Associates,
(as defined herein) ("Supplemental Eligible Account Holders"). All subscriptions
received will be subject to the availability of Holding Company Common Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion and as described below under "- Limitations
on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, non-transferable subscription
rights to subscribe for Holding Company Common Stock in the Subscription
Offering up to the greatest of (i) the amount permitted to be purchased in the
Community Offering, which amount is currently $250,000 of the Holding Company
Common Stock offered, (ii) one-tenth of one percent (0.10%) of the total
offering of shares of Holding Company Common Stock or (iii) fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Holding Company Common Stock to be issued by a
fraction the numerator of which is the amount of the Eligible Account Holder's
qualifying deposit and the denominator of which is the total amount of
qualifying deposits of all Eligible Account Holders ^($416,952,196.89), in each
case on the Eligibility Record Date, subject to the overall maximum and minimum
purchase limitations and exclusive of an increase in the shares issued pursuant
to an increase in the Estimated Valuation Range of up to 15%.
See "- Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights
for a number of shares in excess of the total number of shares eligible for
subscription, the shares will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make such
Eligible Account Holder's total allocation equal to the lesser of 100 shares or
the number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all remaining Eligible Account Holders whose subscriptions remain unfilled.
To ensure a proper allocation of stock, each Eligible Account Holder
must list on his or her stock order form all accounts in which such Eligible
Account Holder has an ownership interest. Failure to list an account could
result in fewer shares being allocated than if all accounts had been disclosed.
The subscription rights of Eligible Account
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Holders who are also trustees or executive officers of the Bank or their
Associates will be subordinated to the subscription rights of other Eligible
Account Holders to the extent attributable to increased deposits in the one-year
period preceding the Eligibility Record Date.
Priority 2: The Employee Plans. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by Eligible Account
Holders, the Employee Plans, including the ESOP, will receive, without payment
therefor, second priority, non-transferable subscription rights to purchase up
to 10% of the Holding Company Common Stock to be issued in the Conversion,
including shares to be issued to the Foundation, subject to the purchase
limitations set forth in the Plan of Conversion and as described below under "-
Limitations on Common Stock Purchases." As an Employee Plan, the ESOP intends to
purchase 8% of the shares to be issued in the Conversion, or 490,280 shares and
663,320 shares, based on the issuance of 6,128,500 shares and 8,291,500 shares,
respectively, at the minimum and the maximum of the Estimated Valuation Range,
including the shares of Holding Company Common Stock to be issued to the
Foundation. Subscriptions by the ESOP will not be aggregated with shares of
Holding Company Common Stock purchased directly by or which are otherwise
attributable to any other participants in the Subscription and Community
Offerings, including subscriptions of any of the Bank's trustees, officers,
employees or associates thereof. See "Management of the Bank--Benefit
Plans--Employee Stock Ownership Plan."
Priority 3.- Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of the subscriptions by
the Eligible Account Holders and Employee Plans, Supplemental Eligible Account
Holders will receive, without payment therefor, third priority, non-transferable
subscription rights to subscribe for Holding Company Common Stock in the
Subscription Offering up to the greatest of (i) the amount permitted to be
subscribed for in the Community Offering, which amount is currently $250,000 of
the Holding Company Common Stock offered, (ii) one-tenth of one, percent (0.10%)
of the total offering of shares of Holding Company Common Stock or (iii) fifteen
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Holding Company Common Stock to be
issued by a fraction of which the numerator is the amount of the Supplemental
Eligible Account Holder's qualifying deposit and the denominator is the total
amount of qualifying deposits of all Supplemental Eligible Account Holders
^($441,998,632.09) in each case on the Supplemental Eligibility Record Date,
subject to the overall maximum and minimum purchase limitations and exclusive of
an increase in the shares issued pursuant to an increase in the Estimated
Valuation Range of up to 15%. See "--Limitations on Common Stock Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares in excess of the total number of
shares eligible for subscription, the shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make such Supplemental Eligible
Account Holder's total allocation equal to the lesser of 100 shares or the
number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Supplemental Eligible Account Holders
whose subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all remaining Supplemental Eligible Account Holders whose subscriptions
remain unfilled.
To ensure a proper allocation of stock, each Supplemental Eligible
Account Holder must list on his or her stock order form all accounts in which
such Supplemental Eligible Account Holder has an ownership interest. Failure to
list an account could result in fewer shares being allocated than if all
accounts had been disclosed.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at 12:00 noon, Eastern time, on ^ December 16, 1998, unless
extended for an initial period of up to 45 days by the Bank or an additional 60
day periods with the approval of the Superintendent and if necessary, the FDIC.
Subscription rights which have not been exercised prior to the Expiration Date
will become void.
The Bank will not execute orders until all shares of Holding Company
Common Stock have been subscribed for or otherwise sold. If all shares have not
been subscribed for or sold within 45 days after the Subscription Expiration
Date, unless such period is extended with the consent of the Superintendent, all
funds delivered to the Bank pursuant to the Subscription Offering will be
returned with interest promptly to the subscribers and all withdrawal
authorizations will be canceled. If an extension beyond the 45-day period
following the Subscription Expiration Date is granted, the Bank will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their
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subscriptions. Each such extension may not exceed 60 days, and such extensions,
in the aggregate, may not last beyond ^ December 21, 2000.
Persons in Non-qualified States or Foreign Countries. The Holding
Company and the Bank will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the Plan reside. However, the Bank and the Holding Company
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country.
Community Offering
Upon completion of the Subscription Offering, to the extent that shares
remain available for purchase after satisfaction of all subscriptions of the
Eligible Account Holders, the Employee Plans and the Supplemental Eligible
Account Holders, the Bank will offer shares pursuant to the Plan in the
Community Offering to certain members of the general public to whom a copy of
this prospectus has been delivered, with a preference given to those natural
persons residing in the Local Community, the geographic area encompassing
counties in which the Bank has offices, subject to the right of the Holding
Company and the Bank to accept or reject any such orders, in whole or in part,
in its sole discretion. The Community Offering, if any, shall commence upon the
completion of the Subscription Offering and shall terminate seven days after the
close of the Subscription Offering unless extended by the Bank and the Holding
Company, with the approval of the Superintendent and the FDIC, if necessary.
Such persons, together with associates of and persons acting in concert with
such persons, may purchase up to $250,000 of Holding Company Common Stock
subject to the maximum purchase limitation. See "- Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% or decreased
to less than $250,000 of Holding Company Common Stock at the discretion of the
Holding Company and the Bank. The opportunity to subscribe for shares of Holding
Company Common Stock in the Community Offering category is subject to the right
of the Bank and the Holding Company, in their sole discretion, to accept or
reject any such orders in whole or in part either at the time of receipt of an
order or as soon as practicable following the Expiration Date. However, no such
rejection will be in contravention of any applicable law or regulation. If the
Holding Company or the Bank rejects a subscription in part, the subscriber will
not have the right to cancel the remainder of his or her subscription.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of subscribers in the Community Offering after
completion of the Subscription and Community Offerings, such stock will be
allocated first to each subscriber whose order is accepted by the Bank, in an
amount equal to 2% of the shares offered in the Conversion.
Syndicated Community Offering
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Holding Company Common Stock not purchased in the Subscription
Offering or the Community Offering, if any, will be offered for sale to the
general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers to be formed and managed by KBW acting as agent of the
Holding Company. There are no known agreements between KBW and any broker-dealer
in connection with a possible Syndicated Community Offering. The Holding Company
and the Bank have reserved the right to reject orders in whole or in part in
their sole discretion in the Syndicated Community Offering. However, no such
rejection will be in contravention of any applicable law or regulation. If the
Holding Company or the Bank rejects an order in part, the subscriber will not
have the right to cancel the remainder of his or her subscription. Neither KBW
nor any registered broker-dealer shall have any obligation to take or purchase
any shares of the Holding Company Common Stock in the Syndicated Community
Offering; however, KBW has agreed to use its best efforts in the sale of shares
in the Syndicated Community Offering.
The price at which Holding Company Common Stock is sold in the
Syndicated Community Offering will be determined as described above under "-
Stock Pricing." Subject to overall purchase limitations, no person, together
with any associate or group of persons acting in concert, will be permitted to
subscribe in the Syndicated Community Offering for more than 1% of the Holding
Company Common Stock offered in the Conversion; provided, however, that shares
of Holding Company Common Stock purchased in the Community Offering by any
persons, together with associates of or persons acting in concert with such
persons, will be aggregated with purchases in the Syndicated
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Community Offering and be subject to a maximum purchase limitation of 1% of the
Holding Company Common Stock offered.
Payments made in the form of a check, bank draft, money order or in
cash will earn interest at the Bank's passbook rate of interest from the date
such payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his or her shares with funds held by or deposited with a
selected dealer. If an order form is executed and forwarded to the selected
dealer or if the selected dealer is authorized to execute the order form on
behalf of a purchaser, the selected dealer is required to forward the order form
and funds to the Bank for deposit in a segregated account on or before noon of
the business day following receipt of the order form or execution of the order
form by the selected dealer. Alternatively, selected dealers may solicit
indications of interest from their customers to place orders for shares. Such
selected dealers shall subsequently contact their customers who indicated an
interest and seek their confirmation as to their intent to purchase. Those
indicating an intent to purchase shall execute order forms and forward them to
their selected dealer or authorize the selected dealer to execute such forms.
The selected dealer will acknowledge receipt of the order to its customer in
writing on the following business day and will debit such customer's account on
the third business day after the customer has confirmed his or her intent to
purchase ("debit date") and on or before noon of the next business day following
the debit date, will send order forms and funds to the Bank for deposit in a
segregated account. Although purchasers' funds are not required to be in their
accounts with selected dealers until the debit date, in the event that such
alternative procedure is employed once a confirmation of an intent to purchase
has been received by the selected dealer, the purchaser has no right to rescind
his or her order.
Certificates representing shares of Holding Company Common Stock
purchased, together with any refund due, will be mailed to purchasers at the
address specified in the order form, as soon as practicable following
consummation of the sale of the Holding Company Common Stock. Any certificates
returned as undeliverable will be disposed of in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Holding
Company with the approval of the Superintendent and FDIC. Such extensions may
not be beyond ^ December 21, 2000. See "- Stock Pricing" above for a discussion
of rights of subscribers, if any, in the event an extension is granted.
Marketing and Underwriting Arrangements
The Bank and the Holding Company have engaged KBW as a financial and
marketing advisor in connection with the offering of the Holding Company Common
Stock and KBW has agreed to use its best efforts to assist the Holding Company
with the solicitation of subscriptions and purchase orders for shares of Holding
Company Common Stock in the Offerings. Based upon negotiations between the Bank
and the Holding Company, KBW will receive a fee for services provided in
connection with the Offerings equal to 1.20% of the aggregate Purchase Price of
Holding Company Common Stock sold in the Offerings. No fees will be paid to KBW
with respect to any shares of Holding Company Common Stock purchased by any
trustee, director, executive officer or employee of the Bank or the Holding
Company or members of their immediate families or any employee benefit plan of
the Holding Company or the Bank. In the event of a Syndicated Community
Offering, KBW will negotiate with the Holding Company for the receipt of an
additional fee to be remitted to selected dealers under one or more selected
dealer agreements to be entered into by KBW with certain dealers; provided,
however, that the aggregate fees payable to KBW and any selected dealers in
connection with any Syndicated Community Offering will not exceed 5.5% of the
aggregate Purchase Price of the Holding Company Common Stock sold in the
Syndicated Community Offering. Fees to KBW and to any other broker-dealer may be
deemed to be underwriting fees and KBW and such broker-dealer may be deemed to
be underwriters. KBW will also be reimbursed for its reasonable out-of pocket
expenses, including legal fees and expenses, up to a maximum of $75,000.
Notwithstanding the foregoing, in the event the Offerings are not consummated or
KBW ceases, under certain circumstances after the subscription solicitation
activities are commenced, to provide assistance to the Holding Company, KBW will
be entitled to reimbursement for its reasonable out-of-pocket expenses as
described above. The Holding Company and the Bank have agreed to indemnify KBW
for costs and expenses in
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connection with certain claims or liabilities related to or arising out of the
services to be provided by KBW pursuant to its engagement by the Bank and the
Holding Company as financial advisor in connection with the Conversion,
including certain liabilities under the Securities Act. Total marketing fees to
KBW are estimated to be ^ $595,000 and $826,000 at the minimum and the maximum
of the Estimated Valuation Range, respectively. See "Pro Forma Data" for the
assumptions used to arrive at these estimates.
Directors, trustees and executive officers of the Holding Company and
the Bank may participate in the solicitation of offers to purchase Holding
Company Common Stock. Questions of prospective purchasers will be directed to
executive officers or registered representatives. Other employees of the Bank
may participate in the Offerings in ministerial capacities or provide clerical
work in effecting a sales transaction. Such other employees have been instructed
not to solicit offers to purchase Holding Company Common Stock or provide advice
regarding the purchase of Holding Company Common Stock. The Holding Company will
rely on Rule 3a4-1 under the Exchange Act, and sales of Holding Company Common
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, trustees, directors and employees to participate in the sale of
Holding Company Common Stock. No officer, director or employee of the Holding
Company or the Bank will be compensated in connection with his or her
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Holding Company Common Stock.
Procedure for Purchasing Shares in Subscription and Community Offerings
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the respective expiration dates for the Offerings, in accordance with
Rule 15c2-8 of the Exchange Act, no Prospectus will be mailed later than five
days prior to such date or hand delivered any later than two days prior to such
date. Execution of the stock order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order forms will only be distributed with a
Prospectus and a certification form requiring each prospective investor to
acknowledge, among other things, that the shares of Holding Company Common Stock
are not insured by the Bank, the FDIC or any other governmental agency and that
such prospective investor has received a copy of this Prospectus, which, among
other things, describes the risks involved in the investment in the Holding
Company Common Stock.
To purchase shares in the Subscription Offering and, if a Community
Offering is held, the Community Offering, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from the Bank's deposit account (which may be given
by completing the appropriate blanks in the stock order form), must be received
by the Bank at its office by 12:00 noon, Eastern time, on the Expiration Date,
in the case of the Subscription Offering, or 7 days after the close of the
Subscription Offering, in the case of the Community Offering. Stock order forms
which are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Holding Company and Bank are not obligated to
accept orders submitted on photocopied or facsimile order forms and will not
accept order forms unaccompanied by an executed certification form. The Holding
Company and the Bank have the power to waive or permit the correction of
incomplete or improperly executed forms, but do not represent that they will do
so. Once received, an executed order form may not be modified, amended or
rescinded without the consent of the Bank unless the Conversion has not been
completed within 45 days after the end of the Subscription and Community
Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders and Supplemental
Eligible Account Holders are properly identified as to their stock purchase
priorities, depositors must list all accounts on the stock order form giving all
names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in
person to the office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. No wire transfers will be accepted. Interest will be paid on payments made
by cash, check, cashier's check or money order at the Bank's passbook rate of
interest from the date payment is received until the completion or termination
of the Conversion. If payment is made by authorization of withdrawal from
deposit accounts, the funds authorized to be withdrawn from a deposit account
will continue to accrue interest at the contractual rates until completion or
termination of the Conversion, but a hold will be placed on such funds, thereby
making them unavailable to the depositor until completion or termination of the
Conversion. Notwithstanding the foregoing, the Holding Company shall have the
right,
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in its sole discretion, to permit institutional investors to submit irrevocable
orders together with a legally binding commitment for payment and to thereafter
pay for the shares of Holding Company Common Stock for which they subscribe in
the Community Offering at any time prior to 48 hours before the completion of
the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from such subscriber's deposit account, the Bank will do so as of
the effective date of the Conversion. The Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will be converted into a passbook
account and will earn interest at the passbook rate. Upon completion of the
Conversion, funds withdrawn from depositors' accounts for stock purchases will
no longer be insured by the FDIC.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes but, rather, may pay for such shares of Holding Company
Common Stock subscribed for at the Purchase Price upon consummation of the
Offerings; provided, that there is in force from the time of its subscription
until such time, a loan commitment acceptable to the Holding Company from an
unrelated financial institution or the Holding Company to lend to the ESOP, at
such time, the aggregate Purchase Price of the shares for which it subscribed.
The Holding Company intends to provide such a loan to the ESOP.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of Holding Company Common Stock in the Subscription and
Community Offerings. Persons with IRAs maintained at the Bank must have their
accounts transferred to an unaffiliated institution or broker to purchase shares
of Holding Company Common Stock in the Subscription and Community Offerings. In
addition, the provisions of ERISA and IRS regulations require that officers,
trustees and ten percent stockholders who use self-directed IRA funds to
purchase shares of Holding Company Common Stock in the Subscription and
Community Offerings make such purchases for the exclusive benefit of the IRAs.
Certificates representing shares of Holding Company Common Stock
purchased will be mailed to purchasers at the last address of such persons
appearing on the records of the Bank, or to such other address specified in
properly completed order forms, as soon as practicable following consummation of
the sale of all shares of Holding Company Common Stock. Any certificates
returned as undeliverable will be disposed of in accordance with applicable law.
Restrictions on Transfer of Subscription Rights
Prior to the completion of the Conversion, the NYBB Conversion
regulations prohibit any person with subscription rights (i.e., the Eligible
Account Holders, the Employee Plans and the Supplemental Eligible Account
Holders) from transferring or entering into any agreement or understanding to
transfer the legal or beneficial ownership of the subscription rights issued
under the Plan or the shares of Holding Company Common Stock to be issued upon
their exercise. Certificates representing shares of Holding Company Common Stock
purchased in the Subscription Offering must be registered in the name of the
Eligible Account Holder, Supplemental Eligible Account Holder, as the case may
be. Joint registrations will be allowed only if the qualifying deposit account
is so registered. Such rights may be exercised only by the person to whom they
are granted and only for such person's account. Each person exercising such
subscription rights will be required to certify that such person is purchasing
shares solely for such person's own account and that such person has no
agreement or understanding regarding the sale or transfer of such shares. The
regulations also prohibit any person from offering or making an announcement of
an offer or an intent to make an offer to purchase such subscription rights or
shares of Holding Company Common Stock prior to the completion of the
Conversion.
The Bank and the Holding Company will pursue any and all legal and
equitable remedies (including forfeiture) in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve the transfer of such rights.
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Limitations on Holding Company Common Stock Purchases
The Plan includes the following limitations on the number of shares of
Holding Company Common Stock which may be purchased in the Conversion:
(1) No subscription for fewer than 25 shares will be accepted;
(2) Each Eligible Account Holder may subscribe for and purchase Holding
Company Common Stock in the Subscription Offering in an amount up to the
greatest of (a) the amount permitted to be purchased in the Community Offering,
currently $250,000 of the Holding Company Common Stock offered, (b) one-tenth of
one percent (0.10%) of the total offering of shares of Holding Company Common
Stock or (c) fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Holding Company Common
Stock to be issued in the Conversion by a fraction the numerator of which is the
amount of the qualifying deposit of the Eligible Account Holder and the
denominator of which is the total amount of qualifying deposits of all Eligible
Account Holders in each case on the Eligibility Record Date, subject to the
overall limitation in (8) below and exclusive of an increase in the total number
of shares issued due to an increase in the Estimated Valuation Range of up to
15%;
(3) The Employee Plans are permitted to purchase up to 10% of the
shares of Holding Company Common Stock issued in the Conversion and as an
Employee Plan, the ESOP intends to purchase 8% of the shares of Holding Company
Common Stock issued in the Conversion, in each case, including shares to be
issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase Holding Company Common Stock in the Subscription Offering in an amount
up to the greatest of (a) the amount permitted to be purchased in the Community
Offering, currently $250,000 of the Holding Company Common Stock offered, (b)
one-tenth of one percent (0.10%) of the total offering of shares of Holding
Company Common Stock or (c) fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Holding
Company Common Stock to be issued in the Conversion by a fraction the numerator
of which is the amount of the qualifying deposit of the Supplemental Eligible
Account Holder and the denominator of which is the total amount of qualifying
deposits of all Supplemental Eligible Account Holders in each case on the
Supplemental Eligibility Record Date, subject to the overall limitation in (8)
below and exclusive of an increase in the total number of shares issued due to
an increase in the Estimated Valuation Range of up to 15%;
(5) Persons purchasing shares of Holding Company Common Stock in the
Community Offering, together with associates of and groups of persons acting in
concert with such persons, may purchase Holding Company Common Stock in the
Community Offering in an amount up to $250,000 of the Holding Company Common
Stock offered in the Conversion subject to the overall limitation in (8) below;
(6) Persons purchasing shares of Holding Company Common Stock in the
Syndicated Community Offering, together with associates of and persons acting in
concert with such persons, may purchase Holding Company Common Stock in the
Syndicated Offering in an amount up to $250,000 of the shares of Holding Company
Common Stock offered in the Conversion subject to the overall limitation in (8)
below; provided, that shares of Holding Company Common Stock purchased in the
Community Offering by any persons, together with associates of and persons
acting in concert with such persons, will be aggregated with purchases by such
persons in the Syndicated Community Offering in applying the $250,000 purchase
limitation;
(7) Eligible Account Holders, Supplemental Eligible Account Holders and
certain members of the general public may purchase stock in the Community
Offering and Syndicated Community Offering subject to the purchase limitations
described in (6) and (7) above; provided, that, except for the Employee Plans,
the maximum number of shares of Holding Company Common Stock subscribed for or
purchased in all categories of the Conversion by any person, together with
associates of and groups of persons acting in concert with such persons, shall
not exceed 1.0% of the shares of Holding Company Common Stock offered for sale
in the Conversion; and
(8) The ^ trustees and officers of the Bank and their associates in the
aggregate, excluding purchases by the Employee Plans, may purchase up to 25% of
shares offered for sale in the Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the depositors
of the Bank, both the individual amount permitted to be subscribed for and
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the overall maximum purchase limitation may be increased to up to a maximum of
5% of the shares offered for sale in the Offering at the sole discretion of the
Holding Company and the Bank. It is currently anticipated that the overall
maximum purchase limitation may be increased if, after a Community Offering, the
Holding Company has not received subscriptions for an aggregate amount equal to
at least the minimum of the Estimated Valuation Range. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Holding Company and the Bank may be,
given the opportunity to increase their subscriptions up to the then applicable
limit. Requests to purchase additional shares of Holding Company Common Stock
under this provision will be determined by the Board of Directors of the Holding
Company and the Board of Trustees of the Bank and, if approved, allocated on a
pro rata basis giving priority in accordance with the priority rights set forth
in the Plan and described herein.
The overall maximum purchase limitation may not be reduced to less than
1.0%; the individual amount permitted to be subscribed for in the Offerings,
however, may be reduced by the Bank to less than $250,000 of the Holding Company
Common Stock offered. An individual Eligible Account Holder or Supplemental
Eligible Account Holder may not purchase individually in the Subscription
Offering the overall maximum purchase limitation of 1.0% of the shares offered
for sale, but may make such purchase, together with associates of and persons
acting in concert with such person, by also purchasing in other available
categories of the Conversion, subject to availability of shares and the maximum
overall purchase limitation for purchases in the Conversion.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Estimated Valuation Range of up to 15%
("Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) in the event that there is an
oversubscription by Eligible Account Holders, to fill unfilled subscriptions of
Eligible Account Holders; (ii) to fill the Employee Plans' subscription of up to
8% of the Adjusted Maximum number of shares; (iii) in the event that there is an
oversubscription by Supplemental Eligible Account Holders, to fill unfilled
subscriptions of Supplemental Eligible Account Holders; and (iv) to fill
unfilled subscriptions in the Community Offering, each to the extent possible.
The term "Associate" of a person is defined to mean: (i) any
corporation or organization (other than the Holding Company, the Bank or a
majority-owned subsidiary of the Bank) of which such person is an officer,
partner or is directly or indirectly, either alone or with one or more members
of his or her immediate family, the beneficial owner of 10% or more of any class
of equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, except that the term "Associate" does not
include any employee stock benefit plan maintained by the Holding Company or the
Bank in which a person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity, and except that, for purposes of
aggregating total shares that may be acquired or held by officers and ^ trustees
and their Associates, the term "Associate" does not include any tax-qualified
employee stock benefit plan; and (iii) any relative or spouse of such person, or
any relative of such spouse, who has the same home as such person or who is a
director or officer of the Holding Company or the Bank. Trustees, directors and
officers are not treated as associates of each other solely by virtue of holding
such positions. For a further discussion of limitations on purchases of a
converting institution's stock at the time of Conversion and subsequent to
Conversion, see "- Certain Restrictions on Purchase or Transfer of Shares After
Conversion," "Management of the Bank - ^ Proposed Purchases by Executive
Officers and ^ Trustees" and "Restrictions on Acquisition of the Holding Company
and the Bank."
Interpretation, Amendment and Termination
All interpretations of the Plan by the Board of the Bank will be final,
subject to the authority of the Superintendent and FDIC. The Plan provides that,
if deemed necessary or desirable by the Board of Trustees of the Bank, the Plan
may be substantively amended prior to the solicitation of proxies from
depositors by a vote of the Board of Trustees; amendment of the Plan thereafter
requires the approval of the Superintendent and FDIC. The Plan will terminate if
the sale of all shares of stock being offered pursuant to the Plan is not
completed prior to 24 months after the date of the approval of the Plan by the
Superintendent unless a longer time period is permitted by governing laws and
regulations. The Plan may be terminated by a vote of the Board of Trustees of
the Bank at any time prior to the Special Meeting, and thereafter by such a vote
with the approval of the Superintendent and FDIC.
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RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK
General
The Bank's Plan of Conversion provides for the Conversion of the Bank
from the mutual to the stock form of organization and, in connection therewith,
a Restated Organization Certificate and Bylaws to be adopted by depositors of
the Bank. The Plan also provides for the concurrent formation of a holding
company, which form of organization may or may not be utilized at the option of
the Board of Trustees of the Bank. See "The Conversion - General." In the event
that the holding company form of organization is utilized, as described below,
certain provisions in the Holding Company's Certificate of Incorporation and
Bylaws and in its management remuneration plans and agreements entered into in
connection with the Conversion, together with provisions of the DGCL, may have
anti-takeover effects. In the event that the holding company form of
organization is not utilized, the Bank's Restated Organization Certificate and
Bylaws and management remuneration plans and agreements entered into in
connection with the Conversion may have anti-takeover effects as described
below. In addition, regulatory restrictions may make it difficult for persons or
companies to acquire control of either the Holding Company or the Bank.
Restrictions in the Holding Company's Certificate of Incorporation and Bylaws
The following discussion is a general summary of certain provisions of
the Holding Company's Certificate of Incorporation and Bylaws and certain other
statutory and regulatory provisions relating to stock ownership and transfers,
the Board of Directors and business combinations, that might have a potential
"anti-takeover" effect. The Certificate of Incorporation and Bylaws of the
Holding Company are filed as exhibits to the Registration Statement, of which
this Prospectus is a part, and the descriptions herein of such documents are
qualified in their entirety by reference to such documents. A number of
provisions of the Holding Company's Certificate of Incorporation and Bylaws deal
with matters of corporate governance and certain rights of stockholders. These
provisions might have the effect of discouraging future takeover attempts which
are not approved by the Board of Directors but which individual Holding Company
stockholders may deem to be in their best interests or in which stockholders may
receive substantial premiums for their shares over then current market prices.
As a result, stockholders who might desire to participate in such transactions
may not have an opportunity to do so. Such provisions will also render the
removal of the current Board of Directors or management of the Holding Company
more difficult. The following description of certain of the provisions of the
Certificate of Incorporation and Bylaws of the Holding Company is necessarily
general and reference should be made in each case to such Certificate of
Incorporation and Bylaws, which are incorporated herein by reference. See
"Additional Information" as to how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Holding Company provides that any record owner of any outstanding Holding
Company Common Stock which is beneficially owned, directly or indirectly, by a
person who beneficially owns in excess of 10% of the then outstanding shares of
Holding Company Common Stock ("Limit") shall be entitled or permitted to only
one one-hundredth (1 /100) of a vote with respect of each share held in excess
of the Limit. Beneficial ownership of shares includes shares beneficially owned
by such person or any of his affiliates, shares which such person or his
affiliates have the right to acquire upon the exercise of Conversion rights or
options and shares as to which such person and his affiliates have or share
investment or voting power, but shall not include shares beneficially owned by
the ESOP or shares that are subject to a revocable proxy and that are not
otherwise beneficially owned or deemed by the Holding Company to be beneficially
owned by such person and his affiliates. The Certificate of Incorporation
further provides that this provision limiting voting rights may only be amended
upon (i) the approval of the Board of Directors, and (ii) the affirmative vote
of the holders of a majority of the total votes eligible to be cast by the
holders of all outstanding shares of capital stock entitled to vote thereon and
(iii) by the affirmative vote of either (1) not less than a majority of the
authorized number of directors and, if one or more Interested Stockholders
exist, by not less than a majority of the Disinterested Directors (as defined in
the Certificate of Incorporation) or (2) the holders of not less than two-thirds
of the total votes eligible to be cast by the holders of all outstanding shares
of the capital stock of the Holding Company entitled to vote thereon and, if the
amendment is proposed by or on behalf of an Interested Stockholder or a director
who is an Affiliate or Associate of an Interested Stockholder, by the
affirmative vote of the holders of not less than a majority of the total votes
eligible to be cast by holders of all outstanding shares entitled to vote
thereon not beneficially owned by an Interested Stockholder or an Affiliate or
Associate thereof.
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Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the total number of members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The Holding Company's Certificate of Incorporation and Bylaws
provide that the size of the Board shall be determined by a majority of the
directors but shall not be less than seven nor more than 20. The Certificate of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a stockholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Holding Company. The Certificate of
Incorporation of the Holding Company provides that a director may be removed
from the Board of Directors prior to the expiration of his term only for cause,
upon the affirmative vote of at least 80% of the outstanding shares of voting
stock. In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Holding Company may
be called only by resolution of at least three-fourths of the Board of Directors
then in office or by the Chairman, if one has been elected by the Board, or the
Chief Executive Officer of the Holding Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Holding Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of thirty million (30,000,000) shares of capital stock, consisting of
twenty-five million (25,000,000) shares of Holding Company Common Stock and five
million (5,000,000) shares of preferred stock ("Preferred Stock"). The shares of
Holding Company Common Stock and Preferred Stock were authorized in an amount
greater than that to be issued in the Conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and employee stock options. However, these additional authorized shares
may also be used by the Board of Directors, consistent with its fiduciary duty,
to deter future attempts to gain control of the Holding Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, Conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post-tender offer Merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Holding Company's Board of Directors
currently has no plans for the issuance of additional shares, other than the
issuance of additional shares pursuant to the terms of the RRP and upon exercise
of stock options to be issued pursuant to the terms of the Stock Option Plan,
all of which, if implemented prior to the first anniversary of the Conversion,
will be presented to stockholders for approval at a meeting of stockholders to
be held no earlier than six months after completion of the Conversion.
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Holding Company's outstanding shares of
voting stock, together with the affirmative vote of at least 50% of the Holding
Company's outstanding shares of voting stock not beneficially owned by an
Interested Stockholder (as defined below) to approve certain "Business
Combinations," as defined therein, and related transactions. Under Delaware law,
absent this provision, Business Combinations, including Mergers, consolidations
and sales of all or substantially all of the assets of a corporation must,
subject to certain exceptions, be approved by the vote of the holders of only a
majority of the outstanding shares of Holding Company Common Stock and any other
affected class of stock. Under the Certificate of Incorporation, at least 80%
approval of stockholders is required in connection with any transaction
involving an Interested Stockholder except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
stockholders a fair price in consideration for their shares
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in which case, if a stockholder vote is required, approval of only a majority of
the outstanding shares of voting stock would be sufficient. The term "Interested
Stockholder" is defined to include any individual, corporation, partnership or
other entity (other than the Holding Company or its subsidiary or any employee
benefit plan maintained by the Holding Company or its subsidiary) which owns
beneficially or controls, directly or indirectly, 10% or more of the outstanding
shares of voting stock of the Holding Company. This provision of the Certificate
of Incorporation applies to any "Business Combination," which is defined to
include (i) any Merger or consolidation of the Holding Company or any of its
subsidiaries with or into any Interested Stockholder or Affiliate (as defined in
the Certificate of Incorporation) of an Interested Stockholder-, (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Stockholder or Affiliate of 5% or more of the assets of the Holding
Company or combined assets of the Holding Company and its subsidiary; (iii) the
issuance or transfer to any Interested Stockholder or its Affiliate by the
Holding Company (or any subsidiary) of any securities of the Holding Company
other than on a pro rata basis to all stockholders; (iv) the adoption of any
plan for the liquidation or dissolution of the Holding Company proposed by or on
behalf of any Interested Stockholder or Affiliate thereof, (v) any
reclassification of securities, recapitalization, Merger or consolidation of the
Holding Company which has the effect of increasing the proportionate share of
Holding Company Common Stock or any class of equity or convertible securities of
the Holding Company owned directly or indirectly by an Interested Stockholder or
Affiliate thereof-, and (vi) the acquisition by the Holding Company or its
subsidiary of any securities of an Interested Stockholder or its Affiliates or
Associates.
The trustees and executive officers of the Bank are purchasing in the
aggregate approximately ^ 3.2% of the shares of the Holding Company Common Stock
at the maximum of the Estimated Valuation Range. In addition, the ESOP intends
to purchase 8% of the Holding Company Common Stock to be issued in the
Conversion, including shares to be issued to the Foundation. Additionally, if,
the proposed RRP and Stock Options Plan are implemented, the Holding Company
expects to acquire 4% of the Holding Company Common Stock issued in the
Conversion, including shares to be issued to the Foundation, on behalf of the
RRP and expects to issue an amount equal to 10% of the Holding Company Common
Stock issued in the Conversion, including shares to be issued to the Foundation,
under the Stock Option Plan to directors, executive officers and employees. As a
result, assuming the RRP and Stock Option Plan are implemented, the directors,
executive officers and employees have the potential to control the voting of
approximately 25% of the Holding Company Common Stock, on a fully diluted basis
at the maximum of the Estimated Valuation Range, thereby enabling them to
prevent the approval of the transactions requiring the approval of at least 80%
of the Holding Company's outstanding shares of voting stock described herein
above.
Amendment of Certificate of Incorporation and Bylaws. The Certificate
of Incorporation provides that certain provisions of the Certificate of
Incorporation may not be altered, amended, repealed or rescinded without the
affirmative vote of either (1) not less than a majority of the authorized number
of directors and, if one or more Interested Stockholders exist, by not less than
a majority of the Disinterested Directors (as defined in the Certificate of
Incorporation) or (2) the holders of not less than two-thirds of the total votes
eligible to be cast by the holders of all outstanding shares of the capital
stock of the Holding Company entitled to vote thereon and, if the alteration,
amendment, repeal, or rescission is proposed by or on behalf of an Interested
Stockholder or a director who is an Affiliate or Associate of an Interested
Stockholder, by the affirmative vote of the holders of not less than a majority
of the total votes eligible to be cast by holders of all outstanding shares
entitled to vote thereon not beneficially owned by an Interested Stockholder or
an Affiliate or Associate thereof. Amendment of the provision relating to
business combinations must also be approved by either (i) a majority of the
Disinterested Directors, or (ii) the affirmative vote of not less than eighty
percent (80%) of the total number of votes eligible to be cast by the holders of
all outstanding shares of the Voting Stock, voting together as a single class,
together with the affirmative vote of not less than fifty percent (50%) of the
total number of votes eligible to be cast by the holders of all outstanding
shares of the Voting Stock not beneficially owned by any Interested Stockholder
or Affiliate or Associate thereof, voting together as a single class.
Furthermore, the Holding Company's Certificate of Incorporation provides that
provisions of the Bylaws that contain supermajority voting requirements may not
be altered, amended, repealed or rescinded without a vote of the Board or
holders of capital stock entitled to vote thereon that is not less than the
supermajority specified in such provision. Absent these provisions, the DGCL
provides that a corporation's certificate of incorporation and bylaws may be
amended by the holders of a majority of the corporation's outstanding capital
stock. The Certificate of Incorporation also provides that the Board of
Directors is authorized to make, alter, amend, rescind or repeal any of the
Holding Company's bylaws in accordance with the terms thereof, regardless of
whether the Bylaw was initially adopted by the stockholders. However, this
authorization neither divests the stockholders of their right, nor limits their
power to adopt, amend, rescind or repeal any Bylaw under the DGCL. These
provisions could have the effect of discouraging a tender
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offer or other takeover attempt where the ability to make fundamental changes
through Bylaw amendments is an important element of the takeover strategy of the
acquiror.
Certain By-Law Provisions. The Bylaws of the Holding Company also
require a stockholder who intends to nominate a candidate for election to the
Board of Directors, or to raise new business at an annual stockholder meeting to
give approximately ^ 60 days notice in advance of the anniversary of the prior
year's annual stockholders' meeting to the Secretary of the Holding Company. The
notice provision requires a stockholder who desires to raise new business to
provide certain information to the Holding Company concerning the nature of the
new business, the stockholder and the stockholder's interest in the business
matter. Similarly, a stockholder wishing to nominate any person for election as
a director must provide the Holding Company with certain information concerning
the nominee and the proposing stockholder.
Anti-Takeover Effects of the Holding Company's Certificate of Incorporation and
Bylaws and Certain Benefit Plans Adopted in the Conversion
The provisions described above are intended to reduce the Holding
Company's vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and approved by members of its Board of
Directors. The provisions of the employment agreements, the ESOP, the RRP and
the Stock Option and Incentive Plan to be established may also discourage
takeover attempts by increasing the costs to be incurred by the Bank and the
Holding Company in the event of a takeover. See "Management of the
Bank--employment agreements," and "- Benefits - Employee Stock Ownership,"
"Benefits - Stock Option Plan" and "- Benefits - RRP."
The Board of Directors believes that the provisions of the Certificate
of Incorporation, Bylaws and management remuneration plans to be established are
in the best interests of the Holding Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Holding Company and its
stockholders to encourage potential acquirers to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts, It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a Merger
or other transaction at a price that reflects the true value of the Holding
Company and that otherwise is in the best interests of all stockholders.
Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the DGCL ("Section 203"), is
intended to discourage certain takeover practices by impeding the ability of a
hostile acquiror to engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(a "DGCL Interested Stockholder") may not consummate a Merger or other business
combination transaction with such corporation at any time during the three-year
period following the date such "Person" became a DGCL Interested Stockholder.
The term "business combination" is defined broadly to cover a wide range of
corporate transactions including Mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
a DGCL Interested Stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming a DGCL Interested Stockholder; (ii) any business combination involving
a person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became a DGCL Interested Stockholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the DGCL Interested Stockholder; and (iv) certain
business combinations that are proposed after the corporation had received other
acquisition proposals and which are approved or not opposed by a majority of
certain continuing members of the Board of Directors. A corporation may
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exempt itself from the requirement of the statute by adopting an amendment to
its Certificate of Incorporation or Bylaws electing not to be governed by
Section 203 of the DGCL. At the present time, the Board of Directors does not
intend to propose any such amendment.
Restrictions in the Bank's Restated Organization Certificate and Bylaws
Although the Board of Trustees of the Bank is not aware of any effort
that might be made to obtain control of the Bank after the Conversion, the Board
of ^ Trustees believes that it is appropriate to adopt certain provisions
permitted by the Banking Law and the Conversion regulations of the NYBB to
protect the interests of the converted Bank and its stockholders from any
hostile takeover. Such provisions may, indirectly, inhibit a change in control
of the Holding Company, as the Bank's sole stockholder. See "Risk Factors -
Certain Anti-Takeover Provisions."
In the event that the Holding Company is not formed and the
subscription rights are deemed to be subscriptions to purchase the common stock
of the Bank, the provisions contained in the Restated Organization Certificate
and Bylaws of the Bank, to be effective on the effective date of the Conversion,
will govern corporate procedure and certain rights of stockholders. The
anti-takeover effects of such provisions are generally similar to those
described above for the Holding Company, except that the issuance of any
additional capital stock of the Bank would require the prior approval of the
NYBB, and the consent of the holders of two-thirds of the outstanding shares of
capital stock of the Bank would be required prior to effecting a Merger of, or
certain acquisitions of assets by, the Bank.
Limitation on Voting Rights. The Bank's Restated Organization
Certificate will contain a provision whereby the acquisition of or offer to
acquire beneficial ownership of more than 10% of the issued and outstanding
shares of any class of equity securities of the Bank by any person (i.e., any
individual, corporation, group acting in concert, trust, partnership, joint
stock company or similar organization), either directly or indirectly, will be
prohibited for a period of three years following the date of completion of the
Conversion. Any stock in excess of 10% acquired in violation of this provision
will not be counted as outstanding for voting purposes. This limitation shall
not apply to (a) any offer or sale with a view towards public resale made
exclusively by the Bank to any underwriter acting on behalf of the Bank in
connection with a public offering of the common stock of the Bank; (b) any
corporation formed by the Bank in connection with its Conversion from mutual to
stock form to acquire all of the shares of stock of the Bank to be issued in
connection with such Conversion; or (c) any reclassification of securities
(including any reverse stock split), or recapitalization of the Bank, or any
Merger or consolidation of the Bank with any of its subsidiaries or any other
transaction or reorganization (including a transaction in which the Bank shall
form a holding company) that does not have the effect, directly or indirectly,
of changing the beneficial ownership interests of the Bank's stockholders, other
than pursuant to the exercise of any appraisal rights.
In the event that holders of revocable proxies for more than 10% of the
shares of the Holding Company Common Stock seek, among other things, to elect
one-third or more of the Holding Company's Board of Directors, to cause the
Holding Company's stockholders to approve the acquisition or corporate
reorganization of the Holding Company or to exert a continuing influence on a
material aspect of the business operations of the Holding Company, which actions
could indirectly result in a change in control of the Bank, the Board of
Directors of the Bank will be able to assert this provision of the Bank's
Restated Organization Certificate against such holders. Although the Board of
Directors of the Bank is not currently able to determine when and if it would
assert this provision of the Bank's Restated Organization Certificate, the
Bank's Board of Directors, in exercising its fiduciary duty, may assert this
provision if it were deemed to be in the best interests of the Bank, the Holding
Company and its stockholders. It is unclear, however, whether this provision, if
asserted, would be successful against such persons in a proxy contest which
could result in a change in control of the Bank indirectly through a change in
control of the Holding Company.
Board of Directors. The Board of Directors of the Bank is divided into
three classes, each of which shall contain approximately one-third of the total
number of members of the Board of Directors. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The staggered terms of the Bank's Board of Directors could
have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board since only one-third of the
Board is elected each year. The purpose of these provisions is to assure
stability and continuity of management of the Bank in the years immediately
following the Conversion. In addition, stockholders will not be permitted to
cumulate their votes in the election of directors. The Restated Organization
Certificate and Bylaws of the Bank provide that any director, or the entire
Board of Directors,
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may be removed at any time, but only for cause and only by the affirmative vote
of at least 80% of the outstanding shares of voting stock. The Restated
Organization Certificate and Bylaws of the Bank also provide that any vacancy
occurring in the Board of Directors, including any vacancy created by an
increase in the number of directors, shall be filled by the stockholders of the
Bank, except that vacancies not exceeding one-third of the entire Board of
Directors may be filled by the affirmative vote of a majority of the directors
then holding office.
Preferred Stock. Although the Bank has no arrangements, understandings
or plans at the present time, the Board of Directors believes that the
availability of unissued shares of Preferred Stock will provide the Bank with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs which may arise. In the event of a proposed
Merger, tender offer or other attempt to gain control of the Bank of which
management does not approve, it might be possible for the Bank's Board of
Directors to authorize the issuance of one or more series of Preferred Stock
with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Bank's Board of
Directors does not intend to issue any Preferred Stock except on terms which the
Board deems to be in the best interests of the Bank and its then existing
stockholders.
Stockholder Vote Required for Certain Business Combinations. The Bank's
Restated Organization Certificate contains provisions requiring a higher
stockholder vote for certain business combinations, which provisions are
substantially identical to those contained in the Holding Company's Certificate
of Incorporation. See "- Restrictions in the Holding Company's Certificate of
Incorporation and Bylaws - Stockholder Vote Required to Approve Business
Combinations with Principal Stockholders."
Evaluation of Offers. The Restated Organization Certificate of the Bank
also provides that the Board of Directors of the Bank, when evaluating any offer
to the Bank or to the stockholders of the Bank from another party relating to a
change or potential change in control of the Bank, including, without
limitation, any offer to (a) purchase for cash or exchange any securities or
property for any outstanding equity securities of the Bank, (b) merge or
consolidate the Bank with another corporation or (c) purchase or otherwise
acquire all or substantially all of the properties and assets of the Bank,
shall, in connection with the exercise of its judgment in determining what is in
the best interest of the Bank and its stockholders, give due consideration not
only to the price or other consideration being offered, but also to all other
relevant factors including, without limitation, (1) both the long-term and the
short-term interests of the Bank and its stockholders and (2) the effects that
the Bank's actions may have in the short-term or in the long-term upon any of
the following: (i) the prospects for potential growth, development, productivity
and profitability of the Bank; (ii) the Bank's current employees; (iii) the
Bank's retired employees and other beneficiaries receiving or entitled to
receive retirement, welfare or similar benefits from or pursuant to any plan
sponsored, or agreement entered into, by the Bank; (iv) the Bank's customers and
creditors; and (v) the ability of the Bank to provide, as a going concern,
goods, services, employment opportunities and employment benefits and otherwise
to contribute to the communities in which is does business. By having these
standards in the Restated Organization Certificate, the Board of Directors of
the Bank may be in a stronger position to oppose such a transaction if the Board
concludes that the transaction would not be in the best interests of the Bank,
even if the price offered is significantly greater than the then market price of
any equity security of the Bank.
Amendment of Restated Organization Certificate and Bylaws. The Bank's
Restated Organization Certificate provides that certain provisions of the
Restated Organization Certificate may not be altered, amended, repealed or
rescinded without the affirmative vote of either (i) not less than a majority of
the authorized number of directors and, if one or more Interested Stockholders
exist, by not less than a majority of the Disinterested Directors, or (ii) the
holders of not less than two-thirds of the total votes eligible to be cast by
the holders of all outstanding shares of capital stock entitled to vote thereon
and, if the alteration, amendment, repeal or rescission is proposed by or on
behalf of an Interested Stockholder or a director who is an Affiliate or
Associate of an Interested Stockholder, the holders of not less than a majority
of the total votes eligible to be cast by holders of all outstanding shares of
capital stock entitled to vote thereon not beneficially owned by an Interested
Stockholder or an Affiliate or Associate thereof.
In addition, provisions of the Bylaws of the Bank that contain
supermajority voting requirements may not be altered, amended, repealed or
rescinded without a vote of the Board or holders of capital stock entitled to
vote thereon that is not less than the supermajority specified in such
provision.
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Regulatory Restrictions
New York State Banking Board Conversion Regulations. NYBB regulations
prohibit any person, prior to the completion of the Conversion, from
transferring, or from entering into any agreement or understanding to transfer,
to the account of another, legal or beneficial ownership of the subscription
rights issued under the Plan of Conversion or the Holding Company Common Stock
to be issued upon their exercise. The NYBB regulations also prohibit any person,
prior to the completion of the Conversion, from offering, or making an
announcement of an offer or intent to make an offer, to purchase such
subscription rights or Holding Company Common Stock. See "The Conversion -
Restrictions on Transfer of Subscription Rights and Shares." For one year
following the Conversion, NYBB regulations prohibit any person from acquiring or
making an offer to acquire more than 10% of the stock of any converted savings
institution, except with the prior approval of the Superintendent.
OTS Regulations. In addition, any proposal to acquire 10% of any class
of equity security of the Holding Company generally would be subject to approval
by the OTS under the Change in Bank Control Act (the "CBCA") and the HOLA. The
OTS requires all persons seeking control of a savings institution, either
directly or indirectly through its holding company, to obtain regulatory
approval prior to offering to obtain control. Federal law generally provides
that no "person," acting directly or indirectly or through or in concert with
one or more other persons, may acquire directly or indirectly "control," as that
term is defined in OTS regulations, of an OTS-regulated savings and loan holding
company without giving at least 60 days' written notice to the OTS and providing
the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions
of control may be disapproved if it is determined, among other things, that (i)
the acquisition would substantially lessen competition; (ii) the financial
condition of the acquiring person might jeopardize the financial stability of
the savings institution or prejudice the interests of its depositors; or (iii)
the competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it wold not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
Such change in control restrictions on the acquisition of the holding company
stock are not limited to a set time period but will apply for as long as the
CBCA is in effect. Persons holding revocable or irrevocable proxies may be
deemed to be beneficial owners of such securities under OTS regulations and
therefore prohibited from voting all or the portion of such proxies in excess of
10% aggregate beneficial ownership limit. Such regulatory restrictions may
prevent or inhibit proxy contests for control of the Holding Company or the Bank
which have not received prior regulatory approval. Acquisitions of control of a
savings bank are subject to the approval of the FDIC under the CBCA. However,
transactions involving the Holding Company for which OTS approval must be sought
under HOLA are exempted from this requirement.
New York State Bank Holding Company Regulation. Under New York Banking
Law, the prior approval of the NYBB is required before: (1) any action is taken
that causes any company to become a bank holding company; (2) any action is
taken that causes any banking institution to become or be merged or consolidated
with a subsidiary of a bank holding company; (3) any bank holding company
acquires direct or indirect ownership or control of more than 5% of the voting
stock of a banking institution; (4) any bank holding company or subsidiary
thereof acquires all or substantially all of the assets of a banking
institution; or (5) any action is taken that causes any bank holding company to
merge or consolidate with another bank holding company. See "Regulation --
Holding Company Regulation -- New York State Holding Company Regulation."
Accordingly, the prior approval of the NYBB would be required before any bank
holding company, as defined in the banking law, could acquire 5% of more of the
common stock of the Holding Company
New York State Change in Control Regulation. Prior approval of the NYBB
is also required before any action is taken that causes any company to acquire
direct or indirect control of a banking institution. Control is presumed to
exist if any company directly or indirectly owns, controls or holds with power
to vote 10% or more of the voting stock of a banking institution or of any
company that owns, controls or holds with power to vote 10% or more of the
voting stock of a banking institution. Accordingly, prior approval of the NYBB
would be required before any company could acquire 10% or more of the Holding
Company Common Stock.
Federal Reserve Board Regulations. In the event the Bank does not
qualify to be QTL and does not elect to be treated as a "savings association"
under Section 10 of HOLA, attempts to acquire control of the Bank become subject
to regulations of the Federal Reserve Board under the CBCA.
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DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue twenty-five million
(25,000,000) shares of Holding Company Common Stock having a par value of $.0l
per share and five million (5,000,000) shares of Preferred Stock having a par
value of $.0l per share. In connection with the Conversion, the Holding Company
currently expects to issue 8,050,000 shares of Holding Company Common Stock (or
9,257,500 in the event of an increase of 15% in the Estimated Valuation Range)
and does not expect to issue any shares of Preferred Stock. Except as discussed
above in "Restrictions on Acquisition of the Holding Company and the Bank," each
share of the Holding Company Common Stock will have the same relative rights as,
and will be identical in all respects with, each other share of Holding Company
Common Stock. Upon payment of the Purchase Price for the Holding Company Common
Stock, in accordance with the Plan, all such stock will be duly authorized,
fully paid and non-assessable. The Holding Company Common Stock will represent
non-withdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC.
Holding Company Common Stock
Dividends. The Holding Company can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation. See "Dividend
Policy" and "Regulation and Supervi sion." The holders of Holding Company Common
Stock will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Holding Company out of funds legally
available therefor. If the Holding Company issues Preferred Stock, the holders
thereof may have a priority over the holders of the Holding Company Common Stock
with respect to dividends.
Voting Rights. Upon Conversion, the holders of Holding Company Common
Stock will possess exclusive voting rights in the Holding Company. They will
elect the Holding Company's Board of Directors and act on such other matters as
are required to be presented to them under Delaware law or the Holding Company's
Certificate of Incorporation or as are otherwise presented to them by the Board
of Directors. Except as discussed in "Restrictions on Acquisition of the Holding
Company and the Bank," each holder of Holding Company Common Stock will be
entitled to one vote per share and will not have any right to cumulate votes in
the election of directors. If the Holding Company issues Preferred Stock,
holders of the Preferred Stock may also possess voting rights. Certain matters
require an 80% or two-thirds stockholder vote. See "Restrictions on Acquisition
of the Holding Company and the Bank."
As a New York mutual savings bank, corporate powers and control of the
Bank are vested in its Board of Trustees, who elect the officers of the Bank and
who fill any vacancies on the Board of Trustees as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the owners
of the shares of capital stock of the Bank, which owner will be the Holding
Company, and voted at the direction of the Holding Company's Board of Directors.
Consequently, the holders of the Holding Company Common Stock will not have
direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Holding Company, as holder of the Bank's capital stock, would
be entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account, which is a memorandum account only, to Eligible Account Holders and
Supplemental Eligible Account Holders (see "The Conversion - Effects of
Conversion - Liquidation Rights"), all assets of the Bank available for
distribution in cash or in kind. In the event of liquidation, dissolution or
winding up of the Holding Company, the holders of its Holding Company Common
Stock would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, all of the assets of the Holding Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Holding Company Common Stock in the
event of the liquidation or dissolution of the Holding Company.
Preemptive Rights. Holders of the Holding Company Common Stock will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Holding Company Common Stock is not subject to redemption.
118
<PAGE>
Preferred Stock
None of the shares of the Holding Company's authorized Preferred Stock
will be issued in the Conversion. Such stock may be issued with such preferences
and designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and Conversion rights which could dilute the
voting strength of the holders of the Holding Company Common Stock and may
assist management in impeding an unsolicited takeover or attempted change in
control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
General
The Restated Organization Certificate of the Bank, to be effective upon
the Conversion, authorizes the issuance of capital stock consisting of
twenty-five million (25,000,000) shares of common stock, par value $.0l per
share, and five million (5,000,000) shares of preferred stock, par value $.01
per share, which preferred stock may be issued in series and classes having such
rights, preferences, privileges and restrictions as the Board of Directors may
determine. Except as discussed above in "Restrictions on Acquisition of the
Holding Company and the Bank," each share of common stock of the Bank will have
the same relative rights as, and will be identical in all respects with, each
other share of common stock. After the Conversion, the Board of Directors will
be authorized to approve the issuance of Holding Company Common Stock up to the
amount authorized by the Restated Organization Certificate without the approval
of the Bank's stockholders, except to the extent that such approval is required
by governing law. All of the issued and outstanding common stock of the Bank
will be held by the Holding Company as the Bank's sole stockholder. The capital
stock of the Bank will represent non-withdrawable capital, will not be an
account of an insurable type, and will not be insured by the FDIC.
Bank Common Stock
Dividends. The holders of the Bank's common stock (the Holding Company
upon consummation of the Conversion) will be entitled to receive and to share
equally in such dividends as may be declared by the Board of Directors of the
Bank out of funds legally available therefor. See "Dividend Policy" for certain
restrictions on the payment of dividends and "Federal and State Taxation -
Federal Taxation" for a discussion of the consequences of the payment of cash
dividends from income appropriated to bad debt reserves.
Voting Rights. Immediately after the Conversion, the holders of the
Bank's common stock (the Holding Company upon consummation of the Conversion)
will possess exclusive voting rights in the Bank. Each holder of shares of
common stock will be entitled to one vote for each share held. Cumulation of
votes will not be permitted. See "Restrictions on Acquisition of the Holding
Company and the Bank - Anti-Takeover Effects of the Holding Company's Articles
of Incorporation and Bylaws and Management Remuneration Plans Adopted in
Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of its common stock (the Holding Company upon
consummation of the Conversion) will be entitled to receive, after payment of
all debts and liabilities of the Bank (including all deposit accounts and
accrued interest thereon), and distribution of the balance in the special
liquidation account, which is a memorandum account only, to Eligible Account
Holders and Supplemental Eligible Account Holders (see "The Conversion - Effects
of Conversion - Liquidation Rights"), all assets of the Bank available for
distribution in cash or in kind. If preferred stock is issued subsequent to the
Conversion, the holders thereof may also have priority over the holders of
common stock in the event of liquidation or dissolution.
Preemptive Rights and Redemption. Holders of the common stock of the
Bank (the Holding Company upon consummation of the Conversion) will not be
entitled to preemptive rights with respect to any shares of the Bank which may
be issued. The common stock will not be subject to redemption. Upon receipt by
the Bank of the full specified purchase price therefor, the common stock will be
fully paid and non-assessable.
119
<PAGE>
Preferred Stock
None of the shares of the Bank's authorized preferred stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and Conversion rights.
EXPERTS
The consolidated financial statements of the Bank as of June 30, 1998
and 1997 and for each of the years in the three-year period ended June 30, 1998,
included in this Prospectus have been audited by Arthur Andersen LLP independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
RP Financial has consented to the publication herein of the summary of
its report to the Bank and Holding Company setting forth its opinion as to the
estimated pro forma market value of the Holding Company Common Stock upon
Conversion and its opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Holding Company Common Stock and the federal income
tax consequences of the Conversion will be passed upon for the Bank and the
Holding Company by Silver, Freedman & Taff, L.L.P., Washington, D.C., special
counsel to the Bank and the Holding Company. The New York State income tax
consequences of the Conversion will be passed upon for the Bank and the Holding
Company by Wertime, Ries and Van Ullen, P.C. Certain legal matters will be
passed upon for KBW by Serchuk & Zelermyer, White Plains, New York.
120
<PAGE>
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement
under the Securities Act with respect to the Holding Company Common Stock
offered hereby. As permitted by the rules and regulations of the SEC, this
Prospectus does not contain all the information set forth in the registration
statement. Such information, including the Conversion Valuation Appraisal
Report, which is an exhibit to the Registration Statement, can be examined
without charge at the public reference facilities of the SEC located at 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can be
obtained from the SEC at prescribed rates. In addition, the SEC maintains a web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including the Holding Company. The Conversion Valuation Appraisal
Report may also be inspected by Eligible Account Holders and Supplemental
Eligible Account Holders at the offices of the Bank during normal business
hours. Copies of the appraisal may also be requested by Eligible Account Holders
or Supplemental Eligible Account Holders; provided, however, that such Eligible
Account Holders or Supplemental Eligible Account Holders shall be responsible
for all costs associated with the copying and transmittal of such appraisal.
This Prospectus contains a description of the material terms and features of all
material contracts, reports or exhibits to the registration statement required
to be described; however, the statements contained in this Prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are, of necessity, brief descriptions thereof and are not
necessarily complete; each such statement is qualified by reference to such
contract or document.
The Bank has filed an application for approval of conversion with the
Superintendent and the FDIC. Pursuant to the rules and regulations of the
Superintendent, this Prospectus omits certain information contained in that
application. The application may be examined at the principal office of the
Superintendent, Two Rector Street, New York, New York, 10006.
The Holding Company has filed with the OTS an Application to Form a
Holding Company. This prospectus omits certain information contained in such
Application. Such Application may be inspected at the offices of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552.
In connection with the Conversion, the Holding Company will register
its Holding Company Common Stock with the SEC under Section 12(g) of the
Exchange Act, and, upon such registration, the Holding Company and the holders
of its stock will become subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Exchange Act. Under the Plan, the Holding
Company has undertaken that it will not terminate such registration for a period
of at least three years following the Conversion. In the event that the Bank
amends the Plan to eliminate the concurrent formation of the Holding Company as
part of the Conversion, the Bank will register its stock with the FDIC under
Section 12(g) of the Exchange Act and, upon such registration, the Bank and the
holders of its stock will become subject to the same obligations and
restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the
Holding Company and the Restated Organization Certificate and Bylaws of the Bank
are available without charge from the Bank. See "Restrictions on Acquisition of
the Holding Company and the Bank," "Description of Capital Stock of the Holding
Company" and "Description of Capital Stock of the Bank." The Bank's principal
office is located at 75 Remsen Street, Cohoes, New York 12047-2892, and its
telephone number is (518) 233-6500.
121
<PAGE>
COHOES SAVINGS BANK AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................................ F-1
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1998 AND 1997 .......................................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS
IN THE THREE-YEAR PERIOD ENDED JUNE 30, 1998 ..........................
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS AND UNDIVIDED PROFITS
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED JUNE 30, 1998 .... F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS
IN THE THREE-YEAR PERIOD ENDED JUNE 30, 1998 .......................... F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .............................. F-6
NOTE: All schedules are omitted because the required information
applicable is included in the consolidated financial statements or
related notes.
The financial statements of Cohoes Bancorp, Inc. have been omitted
because the Company has not yet issued any stock, has no assets, no
liabilities and has not conducted any business other than of an
organizational nature.
122
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Examining Committee of
the Board of Trustees of
Cohoes Savings Bank:
We have audited the accompanying consolidated statements of financial condition
of Cohoes Savings Bank and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, changes in surplus and undivided
profits and cash flows for each of the years in the three-year period ended June
30, 1998. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cohoes Savings Bank and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1998, in conformity with generally accepted accounting principles.
New York, New York
August 12, 1998
F-1
<PAGE>
COHOES SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
(000's omitted)
ASSETS 1998 1997
- ------ ---- ----
CASH AND CASH EQUIVALENTS:
Cash and due from banks ................................ $ 8,653 $ 10,795
Federal funds sold ..................................... 5,000 5,770
Interest-bearing deposits with banks ................... 576 99
-------- --------
Total cash and cash equivalents ................... 14,229 16,664
MORTGAGE LOANS HELD FOR SALE ............................. 38 175
SECURITIES AVAILABLE FOR SALE, amortized cost of $48,701
and $35,621 at June 30, 1998 and 1997,
respectively (Note 5) .................................. 48,720 35,475
INVESTMENT SECURITIES, approximate fair value of $45,547
and $25,186 at June 30, 1998 and 1997,
respectively (Note 6) .................................. 45,424 25,273
NET LOANS RECEIVABLE (Note 7) ............................ 412,759 398,530
ACCRUED INTEREST RECEIVABLE (Note 8) ..................... 3,482 3,210
BANK PREMISES AND EQUIPMENT (Note 9) ..................... 7,303 7,657
OTHER REAL ESTATE OWNED .................................. 509 1,874
MORTGAGE SERVICING RIGHTS (Note 10) ...................... 1,042 1,146
OTHER ASSETS ............................................. 2,210 1,696
-------- --------
Total assets ...................................... $535,716 $491,700
======== ========
LIABILITIES, SURPLUS AND UNDIVIDED PROFITS
LIABILITIES:
Due to depositors (Note 11) ............................ $449,541 $429,390
Mortgagors' escrow deposits ............................ 8,994 9,062
Borrowings (Note 12) ................................... 19,897 --
Other liabilities ...................................... 4,002 4,156
-------- --------
Total liabilities ................................. 482,434 442,608
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 16) .........
SURPLUS AND UNDIVIDED PROFITS (Note 14):
Surplus ................................................ 10,378 10,378
Undivided profits ...................................... 42,892 38,805
Net unrealized gain (loss) on securities available
for sale, net of income taxes ........................ 12 (91)
-------- --------
Total surplus and undivided profits .............. 53,282 49,092
-------- --------
Total liabilities, surplus and undivided profits . $535,716 $491,700
======== ========
The accompanying notes are an integral part of these statements.
F-2
<PAGE>
COHOES SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS AND UNDIVIDED PROFITS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(000's omitted)
<TABLE>
<CAPTION>
Net Unrealized
Gain (Loss) on
Securities
Available for
Undivided Sale, Net of
Surplus Profits Income Taxes Total
------- ------- ------------ -----
<S> <C> <C> <C> <C>
BALANCE, June 30, 1995 ........................ $ 10,378 $ 29,767 $ (15) $ 40,130
Change in unrealized gain (loss) on
securities available for sale, net
of income taxes ........................ -- -- (234) (234)
Net income for the year ended June 30, 1996 -- 4,395 -- 4,395
-------- -------- -------- --------
BALANCE, June 30, 1996 ........................ 10,378 34,162 (249) 44,291
Change in unrealized gain (loss) on
securities available for sale, net
of income taxes ........................ -- -- 158 158
Net income for the year ended June 30, 1997 -- 4,643 -- 4,643
-------- -------- -------- --------
BALANCE, June 30, 1997 ........................ 10,378 38,805 (91) 49,092
Change in unrealized gain (loss) on
securities available for sale, net
of income taxes ........................ -- -- 103 103
Net income for the year ended June 30, 1998 -- 4,087 -- 4,087
-------- -------- -------- --------
BALANCE, June 30, 1998 ........................ $ 10,378 $ 42,892 $ 12 $ 53,282
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
COHOES SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(000's omitted)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 4,087 $ 4,643 $ 4,395
------------- ------------- -------------
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation .................................................. 1,117 1,101 1,015
Amortization of purchased and originated mortgage servicing
rights .................................................... 185 169 165
Provision for loan losses ..................................... 1,400 1,325 490
Provision for real estate owned losses ........................ - - 153
Provision for deferred tax (benefit) expense .................. (317) 1 (252)
Net gain on investment securities redeemed .................... - (3) -
Net (gain) loss on securities available for sale redeemed ..... 1 (37) (10)
Net premium amortization of investment securities ............. 33 49 69
Net premium (discount) amortization of securities available
for sale .................................................. 4 (16) (14)
Net gain on sale of mortgage loans ............................ (81) (106) 20
Proceeds from sale of loans held for sale ..................... 8,304 7,265 24,379
Loans originated for sale ..................................... (8,087) (6,745) (24,719)
Increase in interest receivable ............................... (272) (87) (311)
(Increase) decrease in other assets, net of deferred tax
(benefit) expense ......................................... (197) (547) 1,310
Increase (decrease) in other liabilities ...................... (154) 856 (1,479)
Net loss on sale/writedowns of other real estate owned ........ 644 55 31
------------- ------------- -------------
Total adjustments ................................... 2,580 3,280 847
------------- ------------- -------------
Net cash provided by operating activities ........... 6,667 7,923 5,242
------------- ------------- -------------
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities ..................... $ 1,000 $ 3,559 $ 113
Proceeds from investment securities called .......................... 12,000 3,065 3,669
Purchase of investment securities ................................... (40,591) (10,194) (14,774)
Proceeds from the maturity of securities available for sale ......... 550 - 2,000
Proceeds from securities available for sale called .................. 23,100 - 1,000
Proceeds from the sale of securities available for sale ............. 60 287 10,024
Purchase of securities available for sale ........................... (42,305) (18,552) (8,512)
Proceeds from principal reduction in investment securities .......... 7,408 4,219 6,242
Proceeds from principal reduction in securities available for sale .. 5,448 3,887 3,588
Net loans made to customers ......................................... (16,723) (8,418) (15,893)
Originated mortgage servicing rights ................................ (81) (104) -
Proceeds from sale of other real estate owned ....................... 1,815 1,239 380
Capital expenditures ................................................ (763) (1,827) (704)
------------- ------------- -------------
Net cash used in investing activities ............... (49,082) (22,839) (12,867)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in mortgagors' escrow deposits ......................... (68) (71) (276)
Net increase (decrease) in borrowings ............................... 19,897 (2,100) (3,954)
Net increase in deposits ............................................ 20,151 24,851 5,576
------------- ------------- -------------
Net cash provided by financing activities ........... 39,980 22,680 1,346
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents ..................................... (2,435) 7,764 (6,279)
CASH AND CASH EQUIVALENTS, beginning of year ............................ 16,664 8,900 15,179
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year .................................. $ 14,229 $ 16,664 $ 8,900
============= ============= =============
ADDITIONAL DISCLOSURE RELATIVE TO CASH FLOWS:
Interest paid .................................................... $ 19,235 $ 17,664 $ 17,819
Taxes paid ....................................................... 2,780 3,113 2,457
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Transfer of loans to other real estate owned ..................... $ 1,094 $ 2,677 $ 635
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
COHOES SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
(000's omitted)
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of Cohoes Savings Bank and
subsidiaries (the "Bank") conform, in all material respects, to generally
accepted accounting principles and to general practice within the savings bank
industry. The Bank utilizes the accrual method of accounting for financial
reporting purposes.
Principles of Consolidation
The consolidated financial statements include the accounts of the Bank, its
wholly owned financial services subsidiary and its wholly owned insurance
subsidiary. Intercompany accounts and transactions have been eliminated.
Use of Estimates
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported assets and liabilities
as of the date of the consolidated statements of financial condition. The same
is true of revenues and expenses reported for the period. Actual results could
differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of other real estate acquired in connection with foreclosures. In
connection with the determination of the allowance for loan losses and the
valuation of other real estate owned, management obtains appraisals for
significant properties.
Investment Securities and Securities
Available for Sale
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," management
determines the appropriate classification of securities, including
mortgage-backed securities, at the time of purchase. If management has the
positive intent and ability to hold debt securities to maturity, they are
classified as investment securities held to maturity and are stated at amortized
cost. If securities are purchased for the purpose of selling them in the near
term, they are classified as trading securities and are reported at fair value
with unrealized holding 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 surplus and undivided profits.
Gains and losses on disposition of all investment securities are based on the
adjusted cost of the specific security sold. At June 30, 1998 and 1997, the Bank
did not hold any securities considered to be trading securities.
F-6
<PAGE>
Unrealized losses on securities which reflect a decline in value which is other
than temporary, if any, are charged to income and reported as a component of
"net (loss) gain on securities transactions" in the consolidated statements of
operations.
The cost of securities is adjusted for amortization of premium and accretion of
discount, which is calculated on an effective interest method.
Loans Receivable and Loan Fees
Loans receivable are reported at the principal amount outstanding, net of
unearned discount, net deferred loan fees and an allowance for possible loan
losses. Discounts on loans are accreted to income using a method which
approximates the level yield interest method. Interest income on loans is not
recognized when considered doubtful of collection by management.
The Bank accounts for fees and costs associated with loan originations in
accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating and Acquiring Loans and Initial Direct Costs of
Leases." Fees received from loan originations and certain related costs are
deferred and are amortized into income so as to provide for a level-yield of
interest on the underlying loans.
Allowance for Loan Losses
A substantial portion of the Bank's loans are secured by real estate located in
the Albany, New York area and the Metropolitan New York City area. In addition,
a substantial portion of the other real estate owned is located in those same
markets. Accordingly, the ultimate collectibility of a substantial portion of
the Bank's loan portfolio and the recovery of a substantial portion of the
carrying amount of other real estate owned are dependent upon market conditions
in these market areas.
Management believes that the allowance for loan losses is adequate and that
other real estate owned is recorded at its fair value less an estimated cost to
sell these properties. While management uses available information to recognize
losses on loans and other real estate owned, future additions to the allowance
or write-downs of other real estate owned may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
loan losses and other real estate owned. Such agencies may require the Bank to
recognize additions to the allowance or write down other real estate owned based
on their judgments about information available to them at the time of their
examination, which may not be currently available to management.
The allowance for loan losses is established through a provision for loan losses
charged to operations. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
losses on existing loans that may become uncollectible, based on evaluations of
the collectibility of loans and prior loan loss experience. Management's
evaluation of the adequacy of the allowance for loan losses is performed on a
periodic basis and takes into consideration such factors as the historical loan
loss experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect borrowers' ability to pay.
F-7
<PAGE>
SFAS No. 114 defines an impaired loan as a loan for which it is probable, based
on current information, that the lender will not collect all amounts due under
the contractual terms of the loan agreement. The Bank applies the impairment
criteria to all loans, except for large groups of smaller balance homogenous
loans that are collectively evaluated for impairment, such as residential
mortgages and consumer installment loans. Income recognition and charge-off
policies were not changed as a result of this statement.
Mortgage Loans Held for Sale
Management determines the appropriate classification of mortgage loans at the
time that rate lock agreements are entered into with the customer. If management
has the intent and the Bank has the ability at the time of rate lock to hold the
loans to maturity, they are classified as mortgage loans and carried at the
amount of unpaid principal, net of deferred fees, reduced by the allowance for
loan losses. Mortgage loans not intended to be held to maturity are classified
as "held for sale" and carried at the lower of aggregate cost or fair value as
determined by outstanding commitments from investors or current market prices
for loans with no commitments.
Loan servicing revenues and expenses are recognized when service fees are earned
and expenses are incurred. The mortgage loans being serviced are not included in
these consolidated financial statements as they are not assets of the Bank.
Purchased mortgage servicing rights represent the costs of acquiring the rights
to service mortgage loans originated by other institutions; such costs are
capitalized and amortized into servicing fee income over the estimated period of
net servicing income, adjusted for significant prepayments and payoffs of the
underlying serviced loans.
Gains or losses on sales of mortgage loans held for sale are recognized based
upon the difference between the selling price and the carrying value of the
related mortgage loans sold. Such gains and losses are increased or decreased by
the amount of excess servicing fees recorded, if any. Net deferred origination
fees are recognized at the time of sale in the gain or loss determination. Gains
and losses are decreased or increased for commissions and legal fees on loan
closings, and direct employee costs related to loan originations. These costs
amounted to $36, $34 and $104, for the years ended June 30, 1998, 1997 and 1996,
respectively.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets.
Other Real Estate Owned
Other real estate owned includes foreclosed real estate properties. Other real
estate owned is recorded at the lower of cost or the fair value of the asset
acquired less an estimate of the costs to sell the asset. Fair value of other
real estate owned is generally determined through independent appraisals. At the
time of foreclosure, the excess, if any, of the loan value over the estimated
fair value of the asset received less costs to sell, is charged to the allowance
for loan losses. Subsequent declines in the fair value of such assets, or
increases in the estimated costs to sell the properties and net operating
expenses of such assets, are charged directly to other noninterest expense. At
June 30, 1998 and 1997, these properties consisted of residential and commercial
mortgage properties located in the Albany, New York area.
F-8
<PAGE>
Income Taxes
For federal income and New York State franchise tax purposes, the Bank utilizes
the accrual basis method of accounting.
The Bank utilizes the asset and liability method of accounting for income taxes
required under SFAS No. 109, "Accounting for Income Taxes." Under the asset and
liability method of SFAS No. 109, deferred tax assets are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. To the extent that current available evidence about the
future raises doubt about the realization of a deferred tax asset, a valuation
allowance must be established. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Statutory Transfer of Surplus
A required quarterly transfer of 10% of net income is to be made to the surplus
fund in accordance with New York State Banking Regulations. No transfer is
required if net worth as a percent of deposits exceeds 10% at the end of each
quarter.
Financial Instruments
In the normal course of business, the Bank is a party to certain financial
instruments with off-balance sheet risk such as commitments to extend credit,
unused lines of credit and letters of credit. The Bank's policy is to record
such instruments when funded.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash and cash
equivalents consist of cash, due from banks, federal funds sold and
interest-bearing deposits with banks.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130 "Reporting Comprehensive Income." This statement is effective for fiscal
years beginning after December 31, 1997 and restatement of financial statements
or information for earlier periods provided for comparative purposes is
required. The provisions of this statement will not affect the Bank's results of
operations or financial condition.
F-9
<PAGE>
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures About
Pensions and Other Postretirement Benefits." SFAS No. 132 supersedes the
disclosure requirements for pension and other postretirement plans as set forth
in SFAS No. 87 "Employers' Accounting for Pension," SFAS No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132 does not address
measurement or recognition for pension and other postretirement benefit plans.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available, in which case the
notes to the financial statements shall include all available information and a
description of the information not available.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. SFAS No. 133 will
not impact the Bank's accounting or disclosures.
Reclassifications
Amounts in the prior year's consolidated financial statements are reclassified
whenever necessary to conform with the current year's presentation.
2. CONVERSION TO STOCK FORM OF OWNERSHIP
On May 21,1998, the Board of Trustees adopted a Plan of Conversion ("Plan") to
convert the Bank from a New York mutual savings bank to a New York stock savings
bank and to become a wholly owned subsidiary of a new Delaware corporation
("Company") to be organized at the direction of the Bank. Pursuant to the Plan,
the Company will issue and offer for sale shares of its common stock and use up
to 50% of the net proceeds of such sale to acquire all of the capital stock of
the Bank. The proposed transaction is subject to the approval of the
Superintendent of Banks of New York State and of the Federal Deposit Insurance
Corporation, as well as to a vote of the Bank's voting depositors. In addition,
the Company will file a registration statement with the Securities and Exchange
Commission ("SEC") with respect to the offering of its common stock and will
seek the permission of the Office of Thrift Supervision ("OTS") to acquire the
stock of the Bank to be issued upon the Bank's conversion.
At the time of conversion, the Bank will establish a liquidation account in an
amount equal to the retained income of the Bank as of the date of the most
recent financial statements contained in the final conversion prospectus. The
liquidation account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements, the
amount required for the liquidation account, or if such declaration and payment
would otherwise violate regulatory requirements.
F-10
<PAGE>
Pursuant to the Plan, the Company intends to establish a Charitable Foundation,
Employee Stock Ownership Plan (ESOP), Stock Option Plan, Recognition and
Retention Plan and Employment and Retention Agreements as discussed below.
The Company proposes to fund the Charitable Foundation by contributing to the
Charitable Foundation, immediately following the conversion, a number of shares
of authorized but unissued shares of the Common Stock equal to approximately 3%
of Common Stock sold in the Offering. Such contribution, once made, will not be
recoverable by the Company or the Bank. The Company will recognize the full
expense equal to the fair value of the stock, in the amount of the contribution
in the quarter in which it occurs. Such expense will reduce earnings and have a
material impact on the Company's and the Bank's earnings for such quarter and
for the year.
The Company plans to set up an ESOP, a tax-qualified benefit plan for officers
and employees of the Company and the Bank. It is anticipated that an amount
equal to 8% of the shares of Common Stock sold in the Offering (including shares
issued to the Foundation) will be purchased by the ESOP with funds loaned by the
Company. The Company and the Bank intend to make annual contributions to the
ESOP in an amount equal to the principal and interest requirement of the debt.
Following consummation of the conversion, the Company intends to adopt a Stock
Option Plan and a Recognition and Retention Plan, pursuant to which the Company
intends to reserve a number of shares of Common Stock equal to an aggregate of
10% and 4%, respectively, of the Common Stock issued in the conversion for
issuance pursuant to stock options and stock appreciation rights and stock. The
Stock Option Plan and Recognition and Retention Plan will not be implemented
prior to receipt of stockholder approval of the Plan.
Upon consummation of the conversion, the Company and the Bank intend to enter
into employment agreements with certain senior management personnel and change
in control agreements with other key employees.
Conversion costs will be deferred and reduce the proceeds from the shares sold
in the conversion. If the conversion is not completed, all costs will be charged
as an expense. As of June 30, 1998, approximately $59 conversion costs had been
incurred.
The conversion will not affect the terms of any loans held by borrowers of the
Bank or the balances, interest rates, federal deposit insurance or maturities of
deposit accounts at the Bank.
3. SUBSEQUENT EVENT - MERGER
On July 31, 1998, Cohoes Savings Bank and SFS Bancorp, Inc. ("SFS"), parent of
Schenectady Federal Savings Bank, executed an Agreement and Plan of Merger
pursuant to which SFS will merge into a newly formed holding company of the Bank
to be organized in connection with the Bank's conversion from a mutual to a
stock institution. Under the terms of the agreement, each share of SFS will be
exchanged for a number of shares of common stock of the holding company equal to
the lesser of $26.50 divided by the initial public offering price of the holding
company common stock or $35.00 divided by the average closing price of that
stock for the first ten trading days. The transaction is expected to constitute
a tax-free reorganization under the Internal Revenue Code, so that shareholders
of SFS who receive holding company common stock will not recognize gain or loss
in connection with the exchange. This merger will be accounted for as a
pooling-of-interest transaction. Refer to footnote 18 for updated unaudited
information.
F-11
<PAGE>
Consummation of the merger is subject to the approval of the shareholders of
SFS, the conversion of the Bank and the receipt of all required regulatory
approvals. The transaction is anticipated to close in the fourth quarter of
1998.
4. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of June 30, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the following
table:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total capital (to risk weighted
assets) $ 56,803 17.1% $ 26,601 greater than 8.0% $ 33,251 greater than 10.0%
Tier 1 Capital (to risk weighted
assets) 53,270 16.0 13,300 greater than 4.0 19,951 greater than 6.0
Tier 1 Capital (to average assets) 53,270 10.6 20,063 greater than 4.0 25,079 greater than 5.0
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1997:
Total capital (to risk weighted
assets) $ 52,288 16.4% $ 25,519 greater than 8.0% $ 31,898 greater than 10.0%
Tier 1 Capital (to risk weighted
assets) 49,183 15.4 12,759 greater than 4.0 19,139 greater than 6.0
Tier 1 Capital (to average assets) 49,183 10.1 19,455 greater than 4.0 24,319 greater than 5.0
</TABLE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1996:
Total capital (to risk weighted
assets) $ 47,789 15.1% $ 25,310 greater than 8.0% $ 31,637 greater than 10.0%
Tier 1 Capital (to risk weighted
assets) 44,540 14.1 12,655 greater than 4.0 18,982 greater than 6.0
Tier 1 Capital (to average assets) 44,540 9.7 13,842 greater than 3.0 23,070 greater than 5.0
</TABLE>
5. SECURITIES AVAILABLE FOR SALE
The amortized cost of securities available for sale and their related estimated
fair values at June 30, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government and agencies ......... $ 23,296 $ - $ (59) $ 23,237
Other obligations .................... 271 5 - 276
Mortgage-backed securities ........... 16,855 91 - 16,946
Collateralized mortgage obligations .. 4,019 8 (24) 4,003
------------- ------------- ------------- -------------
Total debt securities ...... 44,441 104 (83) 44,462
Equity securities .................... 4,260 - (2) 4,258
------------- ------------- ------------- -------------
Total securities available
for sale ................ $ 48,701 $ 104 $ (85) $ 48,720
============= ============= ============= =============
</TABLE>
F-13
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
<S> <C> <C> <C> <C>
Debt securities:
U.S. Government and agencies ......... $ 18,551 $ 9 $ (123) $ 18,437
Other obligations .................... 488 7 (2) 493
Mortgage-backed securities ........... 6,724 38 - 6,762
Collateralized mortgage obligations .. 6,377 14 (89) 6,302
------------- ------------- ------------- -------------
Total debt securities ...... 32,140 68 (214) 31,994
Equity securities .................... 3,481 - - 3,481
------------- ------------- ------------- -------------
Total securities available
for sale ................. $ 35,621 $ 68 $ (214) $ 35,475
============= ============= ============= =============
</TABLE>
The equity investment securities at June 30, 1998 and 1997 consist primarily of
common stock of the Federal Home Loan Bank of New York. These securities are
nonmarketable and are, therefore, stated at cost.
A summary of maturities of debt securities available for sale at June 30, 1998
is as follows:
Estimated Fair
Amortized Cost Value
-------------- -----
Within one year ...................... $ 179 $ 178
From one to five years ............... 42,654 42,669
After five years to ten years ........ 1,608 1,615
After ten years ...................... - -
------------- -------------
$ 44,441 $ 44,462
============= =============
During the years ended June 30, 1998 and 1997, there were no sales of debt
securities available for sale. During the year ended June 30, 1996, proceeds of
sales of debt securities available for sale totaled $10,024. Gross gains of $34
and gross losses of $24 were realized on those sales.
6. INVESTMENT SECURITIES
The carrying values of securities held for investment and their related
estimated fair values at June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agencies ...... $ 22,025 $ 6 $ (32) $ 21,999
Other obligations ................. 388 1 - 389
Mortgage-backed securities ........ 23,011 153 (5) 23,159
------------- ------------- ------------- -------------
Total investment securities $ 45,424 $ 160 $ (37) $ 45,547
============= ============= ============= =============
</TABLE>
F-14
<PAGE>
<TABLE>
<CAPTION>
June 30, 1997
------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
<S> <C> <C> <C> <C>
Investment securities:
U.S. Government and agencies ...... $ 6,049 $ 3 $ (52) $ 6,000
Other obligations ................. 848 - (2) 846
Mortgage-backed securities ........ 18,376 53 (89) 18,340
-------------- -------------- ----------- --------------
Total investment securities $ 25,273 $ 56 $ (143) $ 25,186
=============== ============== =========== ==============
</TABLE>
A summary of maturities of debt securities held for investment at June 30, 1998
is as follows:
Estimated Fair
Amortized Cost Value
-------------- --------------
Within one year ................... $ 682 $ 687
From one to five years ............ 32,723 32,801
After five years to ten years ..... 11,636 11,672
After ten years ................... 383 387
-------------- --------------
$ 45,424 $ 45,547
============== ==============
There were no sales of securities held for investment during the three years
ended June 30, 1998.
7. NET LOANS RECEIVABLE
A summary of loans at June 30, 1998 and 1997 is as follows:
1998 1997
---- ----
Mortgage loans on real estate:
Residential adjustable rate loans . $ 170,010 $ 222,255
Commercial real estate ............ 93,229 93,979
Residential fixed rate loans ...... 87,715 20,470
FHA and VA insured loans .......... 674 895
----------- -----------
351,628 337,599
----------- -----------
Other loans:
Conventional second mortgages ... 15,093 14,069
Home equity lines of credit ...... 21,976 25,205
Commercial business loans ........ 14,991 12,096
Home improvement loans ........... 547 662
Auto loans ....................... 9,783 9,290
Credit card loans ................ 1,655 2,152
Personal loans, secured and unsecured 409 576
Other loans ...................... 228 200
------------ ------------
64,682 64,250
------------ ------------
Less:
Deferred loan origination fees and costs (18) (214)
Allowance for loan losses ......... (3,533) (3,105)
------------ ------------
Net loans ............... $ 412,759 $ 398,530
============ ============
F-15
<PAGE>
Changes in the allowance for loan losses for the years ended June 30, 1998 and
1997 were as follows:
1998 1997 1996
---- ---- ----
Allowance for loan losses at
beginning of year ................ $ 3,105 $ 3,249 $ 3,133
Provision charged to operations .. 1,400 1,325 490
Loans charged-off, net ........... (972) (1,469) (374)
-------- -------- --------
Allowance for loan losses at year-end $ 3,533 $ 3,105 $ 3,249
======== ======== ========
The following table sets forth the information with regard to nonperforming
mortgage loans at June 30, 1998 and 1997:
1998 1997
---- ----
Loans on nonaccrual status and in the process
of foreclosure ............................... $ 2,545 $ 3,382
Loans on nonaccrual status but not in the process
of foreclosure ............................... 997 1,063
Loans past due 90 days or more and still
accruing interest ............................ - -
Loans restructured as to payment terms and/or
interest rates ............................... 1,929 1,906
---------- ----------
Total nonperforming mortgage loans .. $ 5,471 $ 6,351
========== ==========
The following table sets forth the information with regard to nonperforming
other loans at June 30, 1998 and 1997:
1998 1997
---- ----
Nonaccrual loans .................................. $ 121 $ 295
Loans past due 90 days or more and still
accruing interest ........................... 57 42
Loans restructured as to payment terms and/or
interest rates .............................. - -
--------- --------
Total nonperforming other loans ..... $ 178 $ 337
======== ========
Accumulated interest income on nonaccrual loans of approximately $214, $262 and
$441 was not recognized as income in the years ended June 30, 1998, 1997 and
1996, respectively. There are no commitments to extend further credit on
nonperforming loans.
F-16
<PAGE>
As of June 30, 1998 and 1997, the Bank's recorded investment in impaired loans
and the related valuation allowance calculated under SFAS No. 114 are as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------- --------------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Valuation allowance required $ 1,638 $ 344 $ 1,261 $ 198
Valuation allowance not required 630 - 645 -
-------------- -------------- -------------- -------------
$ 2,268 $ 344 $ 1,906 $ 198
============== ============== ============== ==============
</TABLE>
This allowance is included in the allowance for loan losses on the consolidated
statements of financial condition.
The average recorded investment in impaired loans for the years ended June 30,
1998 and 1997 was approximately $2,087 and $1,979, respectively.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining investment is doubtful in which case payments
received are recorded as reductions of principal. The Bank recognized interest
of $215, $185 and $189 on impaired loans for the years ended June 30, 1998, 1997
and 1996, respectively. Accumulated interest income on impaired loans of
approximately $15, $18 and $19 was not recognized as income in the years ended
June 30, 1998, 1997 and 1996, respectively.
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at June 30, 1998 and 1997:
1998 1997
---- ----
Loans ................................ $ 2,531 $ 2,558
Investment securities and securities
available for sale ............ 951 652
------------ ------------
$ 3,482 $ 3,210
============ ============
9. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following at June 30, 1998 and 1997:
1998 1997
---- ----
Land ................................... $ 1,529 $ 1,529
Building and leasehold improvements .... 6,553 6,335
Furniture, fixtures and equipment ...... 6,284 5,736
-------------- --------------
14,366 13,600
Less- Accumulated depreciation ......... (7,063) (5,943)
-------------- --------------
$ 7,303 $ 7,657
============== ==============
F-17
<PAGE>
Amount charged to depreciation expense was $1,117, $1,101 and $1,015 for the
years ended June 30, 1998, 1997 and 1996, respectively.
10. MORTGAGE SERVICING RIGHTS
The following is a summary of the mortgage servicing rights activity during the
years ended June 30, 1998 and 1997: 1998 1997 1996
Balance, beginning of year .................... $ 1,146 $ 1,211 $ 1,376
Mortgage servicing rights originated from
unrelated third parties ................ 81 104 -
Amortization of mortgage servicing rights
included as a reduction of servicing fee
income in the consolidated statements of
operations ............................. (185) (169) (165)
-------- -------- --------
Balance, end of year .......................... $ 1,042 $ 1,146 $ 1,211
======== ======== ========
Serviced Loans
The total loans serviced by the Bank for unrelated third parties were
approximately $233.1 million, $256.9 million and $288.2 million at June 30,
1998, 1997 and 1996, respectively.
11. DUE TO DEPOSITORS
Due to depositors account balances as of June 30, 1998 and 1997 are summarized
as follows:
Range of
Interest Rate 1998 1997
------------- ---- ----
Savings accounts 3.0%-5.5% $ 142,867 $ 137,790
Money market accounts 2.8-3.9 21,672 15,450
----------------- -----------------
164,539 153,240
Time deposits 3.8-8.5 231,049 230,306
Commercial deposits 0.0-1.8 15,957 11,250
Demand accounts 0.0-1.8 37,996 34,594
----------------- -----------------
$ 449,541 $ 429,390
================= =================
Time deposits over $100,000 amounted to approximately $31.1 million and $35.2
million at June 30, 1998 and 1997, respectively.
F-18
<PAGE>
The approximate amount of contractual maturities of time deposits for the years
subsequent to June 30, 1998 is as follows:
Years ending June 30:
1999 ........................ $ 159,550
2000 ........................ 50,043
2001 ........................ 7,983
2002 ........................ 5,064
2003 and thereafter ......... 8,409
-----------
$ 231,049
Interest expense on deposits for the years ended June 30, 1998, 1997 and 1996,
is summarized as follows:
1998 1997 1996
---- ---- ----
Savings accounts ...... $ 4,459 $ 4,359 $ 4,177
Money market accounts . 569 447 488
Time deposits ......... 13,484 12,487 12,830
Demand accounts ....... 304 275 246
--------------- --------------- ---------------
$ 18,816 $ 17,568 $ 17,741
=============== =============== ===============
12. BORROWINGS
Information concerning borrowings, which primarily consist of Federal Home Loan
Bank ("FHLB") advances, for the years ended June 30, 1998, 1997 and 1996 is
summarized as follows:
1998 1997 1996
---- ---- ----
Average balance during the year $ 5,467 $ 2,392 $ 4,682
Average interest rate during the year 6.07% 5.56% 6.34%
Maximum month-end balance during the year $ 19,983 $ 16,157 $ 13,213
Interest expense on borrowings $ 332 $ 133 $ 297
FHLB advances are made at fixed rates with remaining maturities of approximately
ten years as of June 30, 1998.
FHLB advances are collateralized by all FHLB stock owned by the Bank in addition
to a blanket pledge of eligible assets in an amount required to be maintained so
that the estimated fair value of such eligible assets exceeds, at all times,
110% of the outstanding advances.
13. EMPLOYEE BENEFITS
401(k) Retirement Savings Plan
The Bank sponsors a 401(k) Retirement Savings Plan which is available to all
full-time employees who have been employed by the Bank for a minimum of one year
and are at least 21 years of age. The Plan allows employees to defer up to 15%
of their salary on a pretax basis through contributions to the Retirement
Savings Plan. The Bank matches 50% of employee contributions up to a maximum of
6% of the amount deferred by the employee. The maximum contribution an employee
may make which is subject to matching by the Bank is set annually by the Board
of Trustees.
F-19
<PAGE>
Employees may also make additional voluntary after-tax contributions to the
Plan, which are not matched by the Bank, up to an additional 10% of the
employee's salary. Total 401(k) Plan expenses for the years ended June 30, 1998,
1997 and 1996 were approximately $378, $319 and $285, respectively.
Postretirement Medical and Life
Insurance Benefits
The Bank provides postretirement medical and life insurance benefits for
full-time employees. All employees who meet the criteria for either normal or
early retirement and have at least 10 years of service are eligible. Retired
employees are required to contribute toward the cost of coverage as established
by the Bank, based on medical and life insurance costs.
Benefit and premium payments are made when they are due and are not funded in
advance.
The Bank's estimated accrued postretirement obligation at June 30, 1998 and 1997
is as follows:
1998 1997
---- ----
Accrued postretirement obligation:
Retired employees .................................. $ 530 $ 532
Fully eligible active employees .................... 72 67
Other active employees ............................. 114 96
-------- --------
716 695
Unrecognized net gain from actual experience different from
assumed, amortized over 12.3 years ................. 281 327
-------- --------
Total accrued postretirement obligation .. $ 997 $ 1,022
======== ========
Net periodic postretirement benefit cost included the following components:
1998 1997 1996
---- ---- ----
Service cost ............................ $ 12 $ 10 $ 19
Interest cost ........................... 49 48 64
Amortization of net gain from actual
experience different from assumed ... (61) (58) (17)
--------- --------- ---------
$ - $ - $ 66
======== ========= =========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% as of June 30, 1998 and 1997 and
7.75% as of June 30, 1996. For measurement purposes, the assumed health care
cost trend rate of 10% decreases gradually until an ultimate trend rate of 5.5%
is reached over 10 years. In accordance with the terms of the Postretirement
Medical Benefit Plan, once costs are 150% of the 1993 level, additional
increases become the responsibility of the retiree.
F-20
<PAGE>
The health care cost trend rate assumption has a significant effect on the
amount of obligation and expense reported. To illustrate, increasing the health
care trend rate by one percent each year would increase the accumulated
postretirement benefit obligation as of June 30, 1998 and 1997 by approximately
$2 and $2, respectively, and would have no material effect on the net periodic
postretirement benefit cost for the three years ended June 30, 1998.
14. SURPLUS AND UNDIVIDED PROFITS
In accordance with State of New York Banking Law, surplus is subject to certain
restrictions, including a prohibition of its use for payment of dividends,
except with the approval of the Superintendent of Banks.
The balance in surplus includes approximately $5.2 million at December 31, 1997,
the latest date from which this calculation is available, which has been
designated as a reserve for bad debts under federal income tax regulations and
has resulted in income tax deductions in prior years. Any use of this amount
other than as provided for in those regulations would result in taxable income
at the then current rate.
15. INCOME TAX EXPENSE
The components of the income tax expense (benefit) are as follows:
1998 1997 1996
Current tax expense:
Federal .................... $ 2,450 $ 2,440 $ 2,601
State ...................... 517 531 533
Deferred tax expense (benefit) . (317) 1 (252)
------------ ------------ ------------
$ 2,650 $ 2,972 $ 2,882
============ ============ ============
The provision for income taxes differs from that computed at the federal
statutory rate as follows:
1998 1997 1996
---- ---- ----
Tax at federal statutory rate ...... $ 2,291 $ 2,589 $ 2,474
State taxes, net of federal benefit. 341 350 352
Other, net ......................... 18 33 56
----------- ----------- -----------
Total income tax expense ... $ 2,650 $ 2,972 $ 2,882
=========== =========== ===========
Effective rate ..................... 39.34% 39.03% 39.60%
===== ===== =====
F-21
<PAGE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1998 and
1997 are presented below:
1998 1997
---- ----
Deferred tax assets:
Differences in reporting the provision for loan losses $ 1,519 $ 1,335
Differences in reporting certain accrued expenses .... 789 771
Other ................................................ 297 167
--------- ---------
Total gross deferred tax assets ............ 2,605 2,273
--------- ---------
Deferred tax liabilities:
Differences in reporting the provision for loan losses 385 513
Deferred net loan origination fees ................... 218 92
Differences in reporting depreciation ................ 107 117
Differences in reporting certain accrued expenses .... 296 269
Other ................................................ 4 4
--------- ---------
Total gross deferred tax liabilities ....... 1,010 995
--------- ---------
Net deferred tax asset at end of year ...... 1,595 1,278
Net deferred tax asset at beginning of year .............. 1,278 1,279
--------- ---------
Deferred tax expense (benefit) for the year $ (317) $ 1
========= =========
The total deferred tax asset as of June 30, 1998 and 1997 is considered by the
Bank to be more likely than not realizable based upon the historical level of
taxable income in the prior years as well as the time period during which the
items giving rise to the deferred tax assets are expected to turn around.
In addition to the deferred tax assets and liabilities described above, the Bank
also has a deferred tax liability of approximately $19 and a deferred tax asset
of approximately $146 at June 30, 1998 and 1997, respectively, related to the
net unrealized gain (loss) on securities available for sale.
Under Section 593 of the Internal Revenue Code, thrift institutions such as the
Bank which met certain definitional tests, primarily relating to their assets
and the nature of their business, were permitted to establish a tax reserve for
bad debts and to make annual additions thereto, which additions may, within
specified limitations, be deducted in arriving at their taxable income. The
Bank's deduction with respect to "qualifying loans," which are generally loans
secured by certain interests in real property, could have been computed using an
amount based on the Bank's actual loss experience (the "Experience Method"), or
a percentage equal to 8% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications and
reduced by the amount of any permitted addition to the nonqualifying reserve.
Similar deductions or additions to the Bank's bad debt reserve are permitted
under the New York State Bank Franchise Tax; however, for purposes of these
taxes, the effective allowable percentage under the PTI Method is approximately
32% rather than 8%.
Effective January 1, 1997, Section 593 was amended, and the Bank is unable to
make additions to its tax bad debt reserve, is permitted to deduct bad debts
only as they occur and is additionally required to recapture (that is, take into
taxable income) over a multiyear period, beginning with the Bank's taxable year
beginning on January 1, 1997, the excess of the balance of its bad debt reserves
as of December 31, 1995 over the balance of such reserves as of December 31,
1987, or over a lesser amount if the Bank's loan portfolio has decreased since
December 31, 1987. Such recapture requirements would be deferred for each of the
two successive taxable years beginning January 1, 1997, in which the Bank
originates a minimum amount of certain residential loans based upon the average
of the principal amounts of such loans originated by the Bank during its six
taxable years preceding January 1, 1997. This amendment has no impact on the
Bank's results of operations for federal income tax purposes. The New York State
tax law has been amended to prevent a similar recapture of the Bank's bad debt
reserve, and to permit continued future use of the bad debt reserve method for
purposes of determining the Bank's New York State tax liability.
F-22
<PAGE>
In addition, the Bank has accumulated bad debt reserves for tax purposes of $3.7
million under Section 593 through December 31, 1987 for which no deferred taxes
have been provided. Under the tax laws as amended, the event that would result
in taxation of these reserves is the failure of the Bank to maintain a specified
qualifying-assets ratio or meet other thrift definition tests for New York State
tax purposes.
16. COMMITMENTS AND CONTINGENT LIABILITIES
Off-Balance Sheet Financing and
Concentrations of Credit
The Bank is a party to certain financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include the Bank's commitments to extend credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the consolidated statements of financial condition.
The contract amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the commitments to extend credit is represented by the contractual
notional amount of those instruments. The Bank uses the same credit policies in
making commitments as it does for on-balance sheet instruments.
Unless otherwise noted, the Bank does not require collateral or other security
to support financial instruments with credit risk.
Contract amounts of financial instruments that represent credit risk as of June
30, 1998 and 1997 at fixed and variable interest rates are as follows:
<TABLE>
<CAPTION>
1998
--------------------------------------------
Fixed Variable Total
----- -------- -----
<S> <C> <C> <C>
Financial instruments whose contract amounts represent
credit risk (including unused lines of credit and
unadvanced funds):
Commercial business loans ......................... $ - $ 14,897 $ 14,897
Conventional mortgages ............................ 11,971 1,338 13,309
Commercial mortgage loans ......................... - 11,991 11,991
Construction loans ................................ - 890 890
Credit card loans ................................. - 2,996 2,996
Consumer loans .................................... 203 12,886 13,089
------------- ------------- -------------
$ 12,174 $ 44,998 $ 57,172
============= ============= =============
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
1997
--------------------------------------------------
Fixed Variable Total
----- -------- -----
<S> <C> <C> <C>
Financial instruments whose contract amounts represent
credit risk (including unused lines of credit and
unadvanced funds):
Commercial business loans ......................... $ - $ 10,172 $ 10,172
Conventional mortgages ............................ 1,531 4,315 5,846
Commercial mortgage loans ......................... - 4,622 4,622
Construction loans ................................ - 830 830
Credit card loans ................................. - 3,300 3,300
Consumer loans .................................... 393 12,438 12,831
---------------- ------------- -------------
$ 1,924 $ 35,677 $ 37,601
============= ============= =============
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since certain commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral, if any,
required by the Bank upon the extension of credit is based on management's
credit evaluation of the customer. Mortgage and construction loan commitments
are secured by a first lien on real estate.
Commitments to extend credit may be written on a fixed rate basis, thus exposing
the Bank to interest rate risk, given the possibility that market rates may
change between commitment and actual extension of credit.
Certain mortgage loans are written on an adjustable basis and include interest
rate caps which limit annual and lifetime increases in the interest rates on
such loans. Generally, adjustable rate mortgages have an annual rate increase
cap of 2% and lifetime rate increase cap of 4.5% to 6.75%. These caps expose the
Bank to interest rate risk should market rates increase above these limits. As
of June 30, 1998 and 1997, $221.0 million and $262.4 million, respectively, of
mortgage loans had interest rate caps.
The Bank generally enters into rate lock agreements at the time that loan
applications are made. These rate lock agreements fix the interest rate at which
the loan, if ultimately made, will be originated. Such agreements may exist with
borrowers with whom commitments to extend credit have been made, as well as with
individuals who have not yet received a commitment. At June 30, 1998 and 1997,
the Bank had rate lock agreements related to commitments to extend credit as
well as uncommitted loan applications amounting to approximately $841 and $900,
respectively.
In order to reduce the interest rate risk associated with these items as well as
its portfolio of loans held for sale, the Bank enters into agreements to sell
loans in the secondary market to unrelated investors. At June 30, 1998 and 1997,
the Bank has $0 and $175, respectively, of commitments to sell loans to
unrelated investors.
Concentrations of Credit
The Bank primarily grants consumer and residential loans to customers located in
the New York State counties of Albany, Rensselaer, Schenectady and Saratoga.
Although the Bank has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts are dependent upon the real estate and
construction-related sectors of the economy.
F-24
<PAGE>
Borrowing Arrangements
The Bank has lines of credit available with a correspondent bank totaling
approximately $49.2 million. These lines of credit expire on October 28, 1998.
As of June 30, 1998, there was no outstanding balances on these lines.
Leases
The Bank leases certain branches, equipment and automobiles under various
noncancelable operating leases. The future minimum payments by year and the
aggregate, under all significant noncancelable operating leases with initial or
remaining terms of one year or more, are as follows:
Operating
Leases
------
Year ending June 30:
1999 ........................... $ 395
2000 ........................... 413
2001 ........................... 341
2002 ........................... 248
2003 and thereafter ............ 127
-----------
$ 1,524
===========
Total lease expense was approximately $383, $298 and $176 for the years ended
June 30, 1998, 1997 and 1996, respectively.
Contingent Liabilities
In the ordinary course of business, there are various legal proceedings pending
against the Bank. Based on consultation with outside counsel, management
considers that the aggregate exposure, if any, arising from such litigation
would not have a material adverse effect on the Bank's statement of financial
condition.
17. DISCLOSURES ABOUT THE FAIR
VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About the Fair Value of Financial Instruments,"
requires that the Bank disclose estimated fair values for financial instruments.
Fair value estimates, methods and assumptions are set forth below.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Bank's entire holdings of a particular financial
instrument. The fair value estimates of a significant portion of the Bank's
financial instruments were based on judgments regarding future expected net cash
flow, current economic conditions, risk characteristics of various financial
instruments and other factors. These
F-25
<PAGE>
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimate of fair value
under SFAS No. 107.
Short-Term Financial Instruments
The fair value of certain financial instruments is estimated to approximate
their carrying values because the remaining term to maturity of the financial
instruments is less than 90 days or the financial instrument reprices in 90 days
or less. Such financial instruments include cash and due from banks, federal
funds sold, interest-bearing deposits with banks and accrued interest
receivable.
Securities Available for Sale
and Investment Securities
Fair values are based upon market prices. If a quoted market price is not
available for a particular security, the fair value is determined by reference
to quoted market prices for securities with similar characteristics.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, including residential real
estate, commercial real estate and other consumer loans.
The estimated fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
respective loan portfolio.
Estimated fair value for nonperforming loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market information and specific borrower
information.
Management has made estimates of fair value discount rates that it believes to
be reasonable. However, because there is no market for many of these financial
instruments, management has no basis to determine whether the estimated fair
value would be indicative of the value negotiated in an actual sale.
Loans Held for Sale
The estimated fair value of loans held for sale is calculated by either using
quoted market rates or, in the case where a firm commitment has been made to
sell the loan, the firm committed price was used. At June 30, 1998 and 1997, the
estimated fair value of loans held for sale approximated their book value.
F-26
<PAGE>
Deposit Liabilities
The estimated fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and money market accounts, is
regarded to be the amount payable on demand as of June 30, 1998 and 1997. The
estimated fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities. The fair value estimates
for deposits do not include the benefit that results from the low-cost funding
provided by the deposit liabilities as compared to the cost of borrowing funds
in the market.
Borrowings
The estimated fair value of FHLB borrowings is based on the discounted value of
their contractual cash flows. The discount rate used in the present value
computation is estimated by comparison to the current interest rates charged by
the FHLB for advances of similar remaining maturities.
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as of
June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- -----------------------------------
Estimated Fair Estimated Fair
Carrying Value Value Carrying Value Value
-------------- ----- -------------- -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents ............ $ 14,229 $ 14,229 $ 16,664 $ 16,664
Mortgage loans held for sale ......... 38 38 175 175
Securities available for sale ........ 48,720 48,720 35,475 35,475
Investment securities ................ 45,424 45,547 25,273 25,186
Loans ................................ 416,292 425,774 401,635 401,855
Less- Allowance for loan losses ... (3,533) - (3,105) -
--------------- --------------- --------------- --------------
Net loans receivable ....... 412,759 425,774 398,530 401,855
--------------- --------------- --------------- ---------------
Accrued interest receivable .............. 3,482 3,482 3,210 3,210
</TABLE>
F-27
<PAGE>
<TABLE>
<CAPTION>
1998 1997
---------------------------------- -----------------------------------
Estimated Fair Estimated Fair
Carrying Value Value Carrying Value Value
-------------- ----- -------------- -----
<S> <C> <C> <C> <C>
Financial liabilities:
Due to depositors-
Demand, savings and money market
accounts ........................ $ 218,492 $ 218,492 $ 199,084 $ 199,084
Time deposits ...................... 231,049 246,220 230,306 231,081
Mortgagors' escrow deposits ........ 8,994 8,994 9,062 9,062
Borrowings ......................... 19,897 18,858 - -
</TABLE>
Commitments to Extend Credit,
Unused Lines of Credit
and Standby Letters of Credit
The fair value of commitments to extend credit, unused lines of credit and
standby letters of credit is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For fixed
rate commitments to extend credit and unused lines of credit, fair value also
considers the difference between current levels of interest rates and the
committed rates. Based upon the estimated fair value of commitments to extend
credit and unused lines of credit, there are no significant unrealized gains or
losses associated with these financial instruments.
18. MERGER TERMINATION (UNAUDITED)
On October 23, 1998, Cohoes Savings Bank and SFS terminated the merger. In
connection with the termination Cohoes Savings Bank paid an agreed-upon breakup
fee of $2.0 million.
F-28
<PAGE>
<TABLE>
<S> <C>
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having
been authorized by the Holding Company or the Bank. This Prospectus ^ 8,050,000
Shares does not constitute an offer to sell or a solicitation of an offer to buy
any of the securities offered hereby to any person in any jurisdiction in which
such offer or solicitation is not authorized or in which the person making such
offer or solicitation is not qualified to do so, or to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction. Neither the
delivery of this Prospectus nor any sale hereunder shall under any circumstances
create any implication that there has been no change COHOES BANCORP, INC. in the
affairs of the Holding Company or the Bank since any of the dates (Proposed
Holding Company for Cohoes Savings Bank) as of which information is furnished
herein or since the date hereof.
TABLE OF CONTENTS
Page
Glossary......................................................ii
Summary........................................................1
Selected Consolidated Financial and COMMON STOCK
Other Data of Cohoes Savings Bank...........................7
Recent Financial Data..........................................8
Management's Discussion of Recent Financial Data..............11
Risk Factors..................................................13
Cohoes Bancorp, Inc...........................................20
Cohoes Savings Bank...........................................21 ______________
Use of Proceeds...............................................22
Dividends.....................................................23 PROSPECTUS
Market for Common Stock.......................................23 ______________
Regulatory Capital............................................24
Capitalization................................................25
Pro Forma Data................................................26
Comparison of Valuation and Pro Forma Information
With No Foundation.........................................29
Management's Discussion and Analysis of Financial
Condition and Results of Operations of Cohoes Savings......32
Business of the Holding Company...............................47
Business of the Bank..........................................47
Regulation....................................................71
Taxation......................................................78
Management of the Holding Company.............................79
Management of the Bank........................................80 ^ KEEFE, BRUYETTE & ^ WOODS, INC.
The Conversion................................................90
The Offering.................................................100
Restrictions on Acquisitions of the Holding Company
and the Bank..............................................111
Description of Capital Stock of the Holding Company..........118
Description of Capital Stock of the Bank.....................119
Experts......................................................120
Legal and Tax Opinions.......................................120
Additional Information.......................................121
Index to Consolidated Financial Statements...................122
Until the later of ^ December 15, 1998 or 25 days after
commencement of the offering of Holding Company ^ November 12, 1998
Common Stock, all dealers effecting transactions in the registered securities,
whether or not participating in this distribution, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
================================================================ ============================================
</TABLE>
