UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to Commission file number 000-25027 COHOES BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 14-1807865 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification No.) 75 Remsen Street, Cohoes, New York 12047 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (518) 233-6500 Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 per share (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained herein, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the closing sales price of such stock as of September 1, 2000, was approximately $116,621,258. (The exclusion from such amount of the market value of the shares owned by any person shall not be deemed an admission by the Registrant that such person is an affiliate of the registrant.) As of September 1, 2000, there were 7,912,705 shares issued and outstanding of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the fiscal year ended June 30, 2000 are incorporated into Part II, Item 5-8 of this Form 10-K. Portions of the Proxy Statement for the 2000 Annual Meeting of Stockholders are incorporated into Part III, Items 10-13 of this Form 10-K. PART I Item 1. Description of Business General The Company. Cohoes Bancorp, Inc. (the "Company") was formed at the direction of Cohoes Savings Bank (the "Bank" or "Cohoes") in September 1998 for the purpose of becoming a savings and loan holding company and owning all of the outstanding stock of the Bank, in connection with the mutual to stock conversion of the Bank. The Company is incorporated under the laws of the State of Delaware. The Company is authorized to do 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 and applicable federal banking laws and regulations. The business of the Company consists only of the business of the Bank. References in this document to the Company also includes the Bank unless the context otherwise requires. The holding company structure, however, provides the 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 Company is in a position, subject to regulatory restrictions, to take advantage of favorable acquisition opportunities that may arise. The assets of the Company consist of the stock of the Bank, a note evidencing the Company's loan to its Employee Stock Ownership Plan (the "ESOP") and the investments of the net proceeds from the sale of its stock retained by the Company. Activities of the Company may also be funded through sales of additional securities, through borrowings, through dividends from the Bank and through income generated by other activities of the Company. At this time, there are no plans regarding such other activities. The executive office of the Company is located at 75 Remsen Street, Cohoes, New York 12047-2892. Its telephone number at that address is (518) 233-6500. The Bank. The Bank serves the financial needs of communities in its market area through its main office and 20 other full-service branch offices located throughout the Bank's primary market area. Its deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC"). At June 30, 2000, the Bank had total assets of $726.3 million, deposits of $494.9 million and total equity of $98.3 million (or 13.53% of total assets). The Company'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 Company originates its loans primarily in the Company's market area and to a lesser extent, it has in the past originated multi-family and commercial real estate loans secured by properties in New York City. However, depending upon market conditions and as a result of the somewhat depressed economy in the Company's primary market area, the Company may explore lending opportunities outside its primary market area in the future. At June 30, 2000, $353.3 million, or 58.4%, of the Company's total loan portfolio consisted of residential mortgage loans. The Company also invests in U.S. government agency, corporate debt securities and other permissible investments. 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. Lending Activities General. The Company 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 Company's general practice is to originate fixed and adjustable rate mortgage loans (ARM) 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 Company 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 Company retains all adjustable-rate mortgage loans in its portfolio. The Company 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 Company'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 Company's present customers, walk-in customers and referrals from real estate agents, brokers and builders. The Company also has established relationships with certain mortgage brokers that take applications for residential mortgage loans (under the Company's underwriting guidelines) on behalf of the Company. During fiscal 2000, $9.4 million of the Company's loans were originated through mortgage brokers. At June 30, 2000, the Company's loan portfolio totaled approximately $605.4 million. The Company 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. Loan applications are initially considered and approved at various levels of authority, depending on the type and amount of the loan. Company employees with lending authority are designated, and their lending limit authority defined, by the Board of Directors. The approval of the Bank's Board of Directors is required for any loans over $500,000. Pursuant to the Company's lending policy, certain senior officers may approve loans up to $500,000. The Company 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. The aggregate amount of commercial non-mortgage loans that the Company 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, 2000, the Company's loans-to-one-borrower limit for non-mortgage loans was approximately $14.7 million. On the same date, the Company had no borrowers with outstanding balances in excess of this amount. At June 30, 2000, the Company's largest lending relationship consisted of eleven loans to a group of borrowers secured by medical office space and retail facilities totaling $11.1 million. The next largest lending relationship consisted of seven loans to a group of borrowers secured by mobile home parks and a car wash facility totaling $7.0 million. The third largest lending relationship consisted of two loans totaling $6.5 million secured by a warehouse facility. The fourth largest lending relationship consisted of four loans totaling $4.9 million secured by an office building and furniture, fixtures and equipment. The fifth largest lending relationship consisted of five loans totaling $4.8 million secured by office buildings, retail plazas, and a self-storage facility. As of June 30, 2000, all of the loans involved in the five relationships discussed above were performing in accordance with their respective terms. The types of loans that the Company may originate are subject to federal and state laws and regulations. Interest rates charged by the Company 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 Board of Governors of the Federal Reserve System ("FRB"), and tax policies. The following table sets forth the composition of the Company's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated. June 30, ------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 --------------------- -------------------- ------------------- ------------------- ---------------- % of % of % of % of % of Amount Total Amount Total Amount Total Amount Total Amount Total ------- ----- ------- ----- ------- ----- ------- ----- ------ ----- (Dollars in Thousands) Real estate loans: One- to four-family real estate $353,349 58.40% $320,721 61.12% $258,399 62.07% $243,620 60.62% $234,900 59.06% Multi-family and commercial real estate 172,596 28.53 138,288 26.35 93,229 22.39 93,979 23.39 96,623 24.29 ------- ------ ------- ----- ------- ------ ------- ----- ------- ------ Total real estate loans 525,945 86.93 459,009 87.47 351,628 84.46 337,599 84.01 331,523 83.35 ------- ------ ------- ----- ------- ------ ------- ----- ------- ------ Consumer loans: Home equity lines of credit 19,692 3.25 20,090 3.83 21,976 5.28 25,205 6.27 27,342 6.87 Conventional second mortgages 11,853 1.96 12,724 2.42 15,093 3.63 14,069 3.50 11,111 2.79 Automobile loans 8,610 1.42 9,658 1.84 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 1,626 .27 1,244 .24 1,184 0.28 1,438 0.36 1,776 0.45 ------- ------ ------- ----- ------- ------ ------- ------ ------- ------ Total consumer loans 41,781 6.90 43,716 8.33 49,691 11.94 52,154 12.98 52,978 13.32 Commercial business loans 37,316 6.17 22,054 4.20 14,991 3.60 12,096 3.01 13,250 3.33 ------- ------ ------- ------ ------- ------ ------- ----- ------- ------ Total loans 605,042 100.00% 524,779 100.00% 416,310 100.00% 401,849 100.00% 397,751 100.00% ======= ====== ======= ====== ======= ====== ======= ====== ======= ====== Less: Net deferred loan origination fees and costs 384 251 (18) (214) (532) Allowance for loan losses (5,013) (4,025) (3,533) (3,105) (3,249) ------- ------- ------- ------- ------- Total loans, net $600,413 $521,005 $412,759 $398,530 $393,970 ======= ======= ======= ======= ======= The following table shows the composition of the Company's loan portfolio by fixed- and adjustable-rate at the dates indicated. June 30, ---------------------------------------------------------------------------------- 2000 1999 1998 ---------------------- ---------------------- ---------------------- Amount Percent Amount Percent Amount Percent ------ ------- ------ ------- ------ ------- (Dollars in Thousands) Fixed-Rate Loans Real estate: One- to four-family real estate $203,831 33.69% $186,302 35.50% $ 88,389 21.23% Multi-family and commercial real estate 100,139 16.55 72,858 13.88 42,274 10.15 ------- ------ ------- ------ ------- ------ Total real estate loans 303,970 50.24 259,160 49.38 130,663 31.38 Consumer: Home equity lines of credit -- -- -- -- -- -- Conventional second mortgages 11,853 1.96 12,724 2.42 15,093 3.63 Automobile loans 8,610 1.42 9,658 1.84 9,783 2.35 Credit cards -- -- -- -- 1,655 0.40 Other consumer loans 1,626 .27 1,244 .24 1,184 0.28 ------- ------ ------- ------ ------- ------ Total consumer loans 22,089 3.65 23,626 4.50 27,715 6.66 Commercial business loans 15,761 2.60 9,795 1.87 5,651 1.36 ------- ------ ------- ------ ------- ------ Total fixed-rate loans 341,820 56.49 292,581 55.75 164,029 39.40 Adjustable-Rate Loans Real estate: One- to four-family real estate 149,518 24.71 134,419 25.61 170,010 40.84 Multi-family and commercial real estate 72,457 11.98 65,430 12.47 50,955 12.24 ------- ------ ------- ------ ------- ------ Total real estate loans 221,975 36.69 199,849 38.08 220,965 53.08 Consumer: Home equity lines of credit 19,692 3.26 20,090 3.83 21,976 5.28 Conventional second mortgages -- -- -- -- -- -- Automobile loans -- -- -- -- -- -- Credit cards -- -- -- -- -- -- Other consumer loans -- -- -- -- -- -- ------- ------ ------- ------ ------- ------ Total consumer loans 19,692 3.26 20,090 3.83 21,976 5.28 Commercial business loans 21,555 3.56 12,259 2.34 9,340 2.24 ------- ------ ------- ------ ------- ----- Total adjustable-rate loans 263,222 43.51 232,198 44.25 252,281 60.60 ------- ------ ------- ------ ------- ------ Total loans 605,042 100.00% 524,779 100.00% 416,310 100.00% ====== ====== ====== Less: Net deferred loan origination fees and costs 384 251 (18) Allowance for loan losses (5,013) (4,025) (3,533) ------- ------- ------- Total loans receivable, net $600,413 $521,005 $412,759 ======= ======= ======= The following table illustrates the contractual maturity of the Company's loan portfolio at June 30, 2000. 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. Real Estate Consumer Loans Loans Total -------------------- ---------------------------------------------------- ------------------ Home One- to Multi- Commercial equity Conventional Other Weighted four- family business lines of second Automobile Credit consumer average family commercial loans credit mortgages loans cards loans Amount rate ------- ---------- ---------- -------- ------------ ---------- ------ -------- ------ -------- (Dollars in Thousands) Amounts Due: 0 months to 1 year $ 27 $ 13,297 $11,516 $ -- $ 93 $ 372 $ -- $ 58 $ 25,363 8.40% After 1 year: 1 to 2 years 57 6,247 3,149 -- 881 1,480 -- 195 12,009 8.18 2 to 3 years 195 5,163 1,292 -- 1,095 3,210 -- 546 11,501 8.67 3 to 5 years 1,077 15,484 13,185 -- 2,419 3,500 -- 134 35,799 8.10 5 to 10 years 14,13 112,973 6,731 431 5,716 48 -- 410 140,448 7.91 10 to 15 years 70,420 11,181 387 1,896 1,648 -- -- 29 85,561 7.20 Over 15 years 267,434 8,251 1,056 17,365 1 -- -- 254 294,361 7.78 ------- ------- ------ ------ ------ ----- --- ----- ------- ---- Total due after 1 year 353,322 159,299 25,800 19,692 11,760 8,238 -- 1,568 579,679 7.77 ------- ------- ------ ------ ------ ----- --- ----- ------- ---- Total amount due $353,349 $172,596 $37,316 $19,692 $11,853 $8,610 $ -- $1,626 $605,042 7.80 ======= ======= ====== ====== ====== ===== === ===== ======= ==== Less: Net deferred loan origination fees and costs 384 Allowance for loan losses (5,013) ------- Total loans receivable, net $600,413 ======= The following table sets forth the dollar amounts in each loan category at June 30, 2000 that are contractually due after June 30, 2001, and whether such loans have fixed or adjustable interest rates. Due after June 30, 2001 ---------------------------------------------------- Fixed Adjustable Total -------- ---------- --------- (In Thousands) Residential real estate $203,446 $149,876 $353,322 Commercial real estate 86,773 72,526 159,299 ------- ------- ------- Total real estate loans 290,219 222,402 512,621 Commercial business loans 14,699 11,101 25,800 Consumer loans Home equity lines of credit -- 19,692 19,692 Conventional second mortgages 11,760 -- 11,760 Automobile loans 8,238 -- 8,238 Credit cards -- -- -- Other consumer loans 1,568 -- 1,568 ------- ------- ------- Total consumer loans 21,566 19,692 41,258 ------- ------- ------- Total loans $326,484 $253,195 $579,679 ======= ======= ======= Residential Real Estate Lending The Company's residential real estate loans consist of primarily one- to four-family, owner occupied mortgage loans. At June 30, 2000, $353.3 million, or 58.4% of the Company's total loans consisted of one- to four-family residential first mortgage loans. At June 30, 2000, approximately $203.8 million or 33.7% of the Company's 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. The Company does not originate fixed-rate loans for terms longer than 30 years. The Company's fixed-rate one- to four-family residential mortgage loans are priced competitively with the market. Accordingly, the Company attempts to distinguish itself from its competitors based on quality of service. The Company generally underwrites its fixed-rate one- to four-family residential first mortgage loans using Fannie Mae guidelines. Until December 1997, the Company sold substantially all fixed-rate residential mortgage loans it originated in the secondary market, but generally continued to service the loans it sold. Currently, the Company generally holds for investment all adjustable and fixed-rate one- to four-family residential first mortgage loans it originates, but it may recommence selling loans in the future depending on its lending objectives, funding requirements and market conditions. In underwriting one- to four-family residential first mortgage loans, the Company 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 the Company are appraised by independent fee appraisers approved by the Bank's Board of Directors. The Company 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 Company currently offers one-, five- and seven-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 plus a spread. These loans provide for up to a 2.0% periodic interest rate cap and a lifetime interest rate cap up to 6.75% over the initial rate. As a consequence of using caps, the interest rates on these loans may not be as rate sensitive as the Company'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 Company 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, 2000, the Company had not experienced higher default rates on these loans relative to its other loans. The Company'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 Company generally contain a "due on sale" clause allowing the Company to declare the unpaid principal balance due and payable upon the sale of the security property. The Company 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, the Company 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%, the Company generally requires that the borrower obtain private mortgage insurance in amounts intended to reduce the Company's exposure to 80% or less of the lower of the appraised value or the purchase price of the property securing the loan. In addition, on occasion the Company will make a loan for the construction of the borrower's primary residence. At June 30, 2000 the Company had $1.8 million in loans outstanding for the construction of the borrower's residence. Multi-Family and Commercial Real Estate Lending The Company 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 Company's primary market area. At June 30, 2000, the Company had $172.6 million of multi-family and commercial real estate loans, representing 28.5% of the Company's total loan portfolio. As of June 30, 2000, $16.7 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. The Company's current lending guidelines generally require that (i) the property securing a multi-family or commercial real estate loan generate net cash flows of at least 120% of debt service after the payment of all operating expenses, excluding depreciation, and (ii) a loan-to-value ratio of 80% or less. As a result of a decline in the value of some properties in the Company's primary market area and due to economic conditions, the current loan-to-value ratio of some commercial real estate loans in the Company's portfolio may exceed the initial loan-to-value 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 Company 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 Company 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 Company are performed by independent fee appraisers approved by the Board of Directors. 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 Company 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 personal loans. Substantially all of the Company's consumer loans are originated on property located or for customers residing in the Company's primary market area. At June 30, 2000, the Company's consumer loan portfolio totaled $41.8 million, or 6.9% of the Company's total loan portfolio. The Company'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. Company 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 lines of credit float with the Wall Street Journal 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 Company's home equity lines of credit are generally 25 years. As of June 30, 2000, the Company had $19.7 million, or 3.3% of the Company's total loan portfolio outstanding, in home equity lines of credit, with an additional $14.6 million of unused home equity lines of credit, and $11.9 million, or 2.0% of the Company's total loan portfolio, in second mortgages. The underwriting standards employed by the Company 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 Company'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 Company 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, 2000, the Company had $8.6 million of automobile loans. The Company 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 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 Company 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, 2000, commercial business loans comprised $37.3 million, or 6.2% of the Company's total loan portfolio. Most of the Company'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 Company has a small number of 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 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 Company'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 Company's 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 Company's current credit analysis. The Company generally obtains personal guarantees on its commercial business loans. Nonetheless, such loans are believed to carry higher credit risk than more traditional savings Company 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 Company's staff of salaried and commissioned loan personnel, as well as through established relationships with certain mortgage brokers. The Company currently originates substantially all its mortgage loans to conform with the underwriting standards of Fannie Mae. As such, these loans are saleable to the secondary market. While the Company 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 Company sold substantially all its fixed-rate loans to the secondary market with servicing retained. Currently, the Company generally retains its fixed-rate and adjustable-rate real estate loans in its portfolio. At June 30, 2000, the Company serviced approximately $167.0 million of loans for others. During the year ended June 30, 2000, the Company originated $168.0 million of loans, compared to $245.4 million in fiscal 1999. In periods of economic uncertainty, the Company'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 income. The following table shows the loan origination and repayment activities of the Company for the periods indicated. Year Ended June 30, ------------------------------------------------------ 2000 1999 1998 -------- -------- -------- (In Thousands) Loans at beginning of period $524,779 $416,310 $401,849 Originations by type: Real estate loans: One- to four-family 66,536 108,610 107,991 Multi-family and commercial real estate 69,664 99,473 33,171 ------- ------- ------- Total real estate loans 136,200 208,083 141,162 Consumer loans: Home equity lines of credit 4,900 3,819 8,243 Conventional second mortgages 3,365 3,374 5,918 Automobile loans 4,615 5,747 6,766 Credit cards -- 2,674 2,561 Other consumer loans 795 571 822 ------- ------- ------- Total consumer loans 13,675 16,185 24,310 Commercial business loans 18,123 21,114 15,195 ------- ------- ------- Total loans originated 167,998 245,382 180,667 Less: Principal repayments 82,485 133,231 155,969 Loan sales 3,399 861 8,105 Charge-offs 692 994 1,038 Transfers to ORE 1,159 1,827 1,094 ------- ------- ------- Total loan reductions 87,735 136,913 166,206 ------- ------- ------- Net loan activity 80,263 108,469 14,461 ------- ------- ------- Loans at end of period $605,042 $524,779 $416,310 ======= ======= ======= Asset Quality Delinquency Procedures. When a borrower fails to make a required payment on a one- to four-family residential mortgage loan, the Company 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 Company 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 Company 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 Company. If the Company is in fact the successful bidder at the foreclosure sale, upon receipt of a deed to the property, the Company 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 Company 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, 2000, in dollar amounts and as a percentage of the Company'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. June 30, 2000 ---------------------------------------------------------------------------------------- 60-89 90 days or Total loans delinquent 60 days more 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) Real estate loans: One- to four-family real estate 6 $342 .10% $21 $2,250 .64% $27 $2,592 .74% Multi-family and commercial real estate 2 115 .07 5 861 .50 7 976 .57 -- --- -- ----- -- ----- Total real estate loans 8 457 .09 26 3,111 .59 34 3,568 .68 Consumer loans: Home equity lines of credit -- -- -- 4 164 .83 4 164 .83 Conventional second mortgages 2 61 .52 3 33 .28 5 94 .80 Automobile loans 2 7 .08 2 14 .16 4 21 .24 Other consumer loans 2 1 .06 5 6 .37 7 7 .43 -- --- -- ----- -- ----- Total consumer loans 6 69 .17 14 217 .52 20 286 .69 Commercial business loans -- -- -- -- -- -- -- -- -- -- --- -- ----- -- ----- Total delinquent loans 14 526 .09% 40 3,328 .55% 54 3,854 .64% == === === == ===== === == ===== === Non-Performing Assets. The table below sets forth the amounts and categories of the Company's 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. June 30, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in Thousands) Non-accrual loans: One- to four-family real estate $2,250 $2,674 $2,635 $2,835 $1,852 Multi-family and commercial real estate 861 823 1,246 3,438 1,364 Conventional second mortgages 33 9 35 62 48 Consumer loans 184 212 105 380 245 Commercial business loans -- 62 65 217 -- ----- ----- ----- ----- ----- Total non-accrual loans 3,328 4,321 3,663 4,740 5,583 Loans contractually past due 90 days or more and still accruing interest: Consumer loans -- -- 57 42 158 ----- ----- ----- ----- ----- Total loans 90 days or more past due and still accruing interest -- -- 57 42 158 Troubled debt restructurings 715 672 1,929 1,906 2,052 ----- ----- ----- ----- ----- Total non-performing loans 4,043 4,993 5,649 6,688 7,793 Real estate owned (ORE) 561 724 509 1,874 421 ----- ----- ----- ----- ----- Total non-performing assets $4,604 $5,717 $6,158 $8,562 $8,214 ===== ===== ===== ===== ===== Allowance for loan losses $5,013 $4,025 $3,533 $3,105 $3,249 ===== ===== ===== ===== ===== Coverage of non-performing loans 123.99 % 80.61% 62.54% 46.43% 41.69% ===== ===== ===== ===== ===== Total non-performing loans as a percentage of total loans .67 % .95% 1.36% 1.66% 1.96% ===== ===== ===== ===== ===== Total non-performing loans as a percentage of total assets .56 % .77% 1.05% 1.36% 1.68% ===== ===== ===== ===== ===== Non-Accruing Loans. At June 30, 2000, the Company had approximately $3.3 million in non-accruing loans, which constituted .5% of the Company'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, 2000, accumulated interest income on nonaccrual loans of approximately $432,000 was not recognized as income. Accruing Loans Contractually Past Due 90 Days or More. As of June 30, 2000, the Company had no accruing loans contractually past due 90 days or more. Troubled Debt Restructurings. As of June 30, 2000, the Company had approximately $715,000 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, 2000, the Company had approximately $561,000 of ORE. At that date, ORE consisted of 14 residential properties located in the Company's primary market area. Real estate and other assets acquired by the Company 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, 2000, there was approximately $64,000 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 Company'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 Company's allowance for loan losses. Such agencies may require the Company 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, 2000, the Company had a total allowance for loan losses of $5.0 million, representing 123.99% of total non-performing loans. The following table sets forth an analysis of the Company's allowance for loan losses at the dates and for the periods indicated. At or for the fiscal year ended June 30, ----------------------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (Dollars in Thousands) Allowance for loan losses, beginning period $4,025 $3,533 $3,105 $3,249 $3,133 Charged-off loans: Real estate loans One- to four-family real estate 198 270 432 619 128 Multi-family and commercial real estate 69 487 93 343 21 ----- ----- ----- ----- ----- Total real estate loan 267 757 525 962 149 charge-offs Commercial business loan charge-offs 367 -- 218 105 4 Consumer loans Home equity lines of credit -- -- 84 39 18 Conventional second mortgages 6 24 16 1 -- Automobile loans 15 23 121 55 23 Credit cards 2 144 212 353 132 Other consumer loans 35 46 41 56 75 ----- ----- ----- ----- ----- Total consumer loan charge-offs 58 237 474 504 248 ----- ----- ----- ----- ----- Total charged-off loans 692 994 1,217 1,571 401 Recoveries on loans previously charged-off: One- to four-family real estate 33 132 78 28 4 Multi-family and commercial real estate -- 53 93 40 13 ----- ----- ----- ----- ----- Total real estate loan recoveries 33 185 171 68 17 Commercial business loan recoveries -- 1 35 -- 1 Consumer loans Home equity lines of credit -- 19 -- 4 -- Conventional second mortgages -- -- -- -- 3 Automobile loans 1 4 8 5 -- Credit cards 38 30 23 16 4 Other consumer loans 8 12 8 9 2 ----- ----- ----- ----- ----- Total consumer loan recoveries 47 65 39 34 9 ----- ----- ----- ----- ----- Total recoveries 80 251 245 102 27 ----- ----- ----- ----- ----- Net loans charged-off (612) (743) (972) (1,469) (374) Provision for loan losses 1,600 1,235 1,400 1,325 490 ----- ----- ----- ----- ----- Allowance for loan losses, end of period $5,013 $4,025 $3,533 $3,105 $3,249 ===== ===== ===== ===== ===== Net charged-off loans to average loans 0.11% 0.16% 0.24% 0.37% 0.10% ===== ===== ===== ===== ===== Allowance for loan losses to total loans 0.83% 0.77% 0.85% 0.77% 0.82% ===== ===== ===== ===== ===== Allowance for loan losses to nonperforming loans 123.99% 80.61% 62.54% 46.43% 41.69% ===== ===== ===== ===== ===== Net charged-off loans to allowance for loan losses 12.21% 18.46% 27.51% 47.31% 11.51% ===== ===== ===== ===== ===== Recoveries to charged-offs 11.56% 25.25% 20.13% 6.49% 6.73% ===== ===== ===== ===== ===== 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 Company. 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. June 30, --------------------------------------------------------------------------------------------- 2000 1999 1998 ------------------------------ ------------------------------ ----------------------------- 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) Real estate loans One- to four-family real estate $ 905 18.05% 58.40% $ 708 17.59% 61.12% $ 649 18.37% 62.07% Multi-family and commercial real estate 3,172 63.28 28.53 1,686 41.89 26.35 1,438 40.70 22.39 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total real estate loans 4,077 81.33 86.93 2,394 59.48 87.47 2,087 59.07 84.46 Consumer loans Home equity lines of credit 49 .98 3.25 29 .72 3.83 41 1.16 5.28 Conventional second mortgages 17 .33 1.96 19 .47 2.42 26 0.74 3.63 Automobile loans 51 1.02 1.42 69 1.71 1.84 74 2.09 2.35 Credit cards -- -- -- -- -- -- 154 4.36 0.40 Other consumer loans 49 .98 .27 51 1.27 .24 45 1.27 0.28 ----- ----- ----- ----- ----- ----- ----- ----- ----- Total consumer loans 166 3.31 6.90 168 4.17 8.33 340 9.62 11.94 Commercial business loans 643 12.83 6.17 220 5.47 4.20 164 4.64 3.60 Unallocated 127 2.53 -- 1,243 30.88 -- 942 26.67 -- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total $5,013 100.00% 100.00% $4,025 100.00% 100.00% $3,533 100.00% 100.00% ===== ====== ====== ===== ====== ====== ===== ====== ====== June 30, -------------------------------------------------------------- 1997 1996 ------------------------------ ------------------------------ 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) Real estate loans One- to four-family real estate $ 493 15.88% 60.62% $ 591 18.19% 59.06% Multi-family and commercial real estate 1,339 43.12 23.39 1,848 56.88 24.29 ----- ----- ----- ----- ----- ----- Total real estate loans 1,832 59.00 84.01 2,439 75.07 83.35 Consumer loans Home equity lines of credit 24 0.77 6.27 158 4.86 6.87 Conventional second mortgages 22 0.71 3.50 9 0.28 2.79 Automobile loans 35 1.13 2.31 40 1.23 2.51 Credit cards 132 4.25 0.54 183 5.63 0.70 Other consumer loans 56 1.80 0.36 102 3.14 0.45 ----- ----- ----- ----- ----- ----- Total consumer loans 269 8.66 12.98 492 15.14 13.32 Commercial business loans 215 6.93 3.01 227 6.99 3.33 Unallocated 789 25.41 -- 91 2.80 -- Total $3,105 100.00% 100.00% $3,249 100.00% 100.00% ===== ====== ====== ===== ====== ====== Investment Activities The Company is generally authorized to invest available funds in whatever investments the Board of Directors deems appropriate. The Bank, as a New York State chartered savings bank, may invest assets only in those investments, which the New York Banking Law permits. 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 Company is to invest funds among various categories of investments and maturities based upon the Company'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 Company's asset/liability management policies. To date, the Company'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, 2000, the weighted average term to maturity or repricing of the security portfolio was 4.7 years. This did not take into account securities, which may be called prior to their contractual maturity or repricing. 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 and are classified as investment securities. 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 Company has not held any securities considered to be trading securities. The following table sets forth the composition of the Company's securities available for sale and investment securities at the dates indicated. June 30, --------------------------------------------------------------------------------- 2000 1999 1998 ------------------------ ------------------------ --------------------- Carrying % of Carrying % of Carrying % of Value Total Value Total Value Total -------- ----- -------- ----- -------- ----- (Dollars in Thousands) Securities available for sale, at fair value: Debt securities US Government and agency obligations $14,543 36.29% $15,747 35.20% $23,237 47.69% Other obligations 377 .94 379 0.85 276 0.57 Mortgage-backed securities 16,930 42.24 20,917 46.74 16,946 34.78 Collateralized mortgage obligations 720 1.80 1,399 3.13 4,003 8.22 ------ ------ ------ ------ ------ ------ Total debt securities 32,570 81.27 38,442 85.92 44,462 91.26 Equity securities 7,504 18.73 6,300 14.08 4,258 8.74 ------ ------ ------ ------ ------ ------ Total securities available for sale $40,074 100.00% $44,742 100.00% $48,720 100.00% ====== ====== ====== ====== ====== ====== Investment securities at amortized cost: US Government and agency obligations $29,985 54.39% $27,505 50.51% $22,025 48.49% Other obligations 2,002 3.63 2,148 3.94 388 0.85 Mortgage-backed securities 19,950 36.19 24,802 45.55 23,011 50.66 Industrial and financial 3,192 5.79 -- -- -- -- ------ ------ ------ ------ ------ ------ Total investment securities $55,129 100.00% $54,455 100.00% $45.424 100.00% ====== ====== ====== ====== ====== ====== Investment securities at fair value $53,741 $53,721 $45,547 ====== ====== ====== The following table sets forth information regarding the scheduled maturities, amortized cost, and weighted average yields for the Company's securities portfolios at June 30, 2000 by contractual maturity. The table does not take into consideration the effects of scheduled repayments or possible prepayments. At June 30, 2000 ----------------------------------------------------------------------------------------------------- Less than 1 1 to 5 5 to 10 Over 10 Total 1 year years years years 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) Securities available for sale: US Government and agency obligations $1,999 6.08% $12,994 5.96% $ -- --% $ -- --% $14,993 5.97% $14,543 Other obligations -- -- 178 3.70 200 6.60 -- -- 378 5.23 377 Mortgage-backed securities -- -- 8,506 6.35 -- -- 8,962 6.45 17,468 6.40 16,930 Collateralized mortgage obligations -- -- -- -- 424 6.45 313 4.85 737 5.77 720 Other equity securities -- -- -- -- -- -- 2,487 5.07 2,487 5.07 2,552 ------ ---- ------ ---- ----- ---- ------ ---- ------ ---- ------ Subtotal 1,999 6.08 21,678 6.09 624 6.50 11,762 6.12 36,063 6.10 35,122 ------ ---- ------ ---- ----- ---- ------ ---- ------ ---- ------ FHLB stock -- -- -- -- -- -- 4,952 7.00 4,952 7.00 4,952 ====== ==== ====== ==== ===== ==== ====== ==== ====== ==== ====== Total securities available for sale $1,999 6.08 $21,678 6.09 $ 624 6.50 $16,714 6.38 $41,015 6.21 $40,074 Investment securities: US Government and agency obligations $3,995 5.83 $25,990 5.94 $ -- -- $ -- -- $29,985 5.92 $29,220 Other obligations 2,002 6.03 -- -- -- -- -- -- 2,002 6.03 1,985 Mortgage-backed securities 952 6.11 10,124 6.51 115 8.41 8,759 6.42 19,950 6.46 19,344 Industrial and financial -- -- -- -- 2,351 4.58 841 6.98 3,192 5.21 3,192 ------ ---- ------ ---- ----- ---- ------ ---- ------ ---- ------ Total investment securities $6,949 5.93% $36,114 6.10% $2,466 4.76% $ 9,600 6.47% $55,129 6.08% $53,741 ===== ==== ====== ==== ====== ==== ====== ==== ====== ==== ====== Sources of Funds General. The Company'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 Company offers a variety of deposit accounts having a range of interest rates and terms. The Company's deposits consist of savings accounts, school savings accounts (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 Company only solicits deposits from its primary market area and does not currently solicit brokered deposits. However, in the past, the Company has solicited brokered deposits. At June 30, 2000, the Company had no brokered deposits. The Company relies primarily on competitive pricing policies, advertising and customer service to attract and retain its deposits. At June 30, 2000, the Company's deposits totaled $494.9 million, of which $453.9 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 Company has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Company has become more susceptible to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. The Company manages the pricing of its deposits in keeping with its asset/liability management, liquidity and profitability objectives. Based on its experience, the Company believes that its savings, school savings, money market and demand deposit accounts are relatively stable sources of deposits. However, the ability of the Company 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 Company's deposit accounts for the periods indicated. Total Number School Money Demand Time of Savings Savings Market Deposits Deposits Total Accounts --------- ------- ------- -------- -------- -------- -------- (Dollars in Thousands) 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 Net deposits (withdrawals) 5,409 (1,180) 970 11,510 (37,644) (20,935) Interest credited 3,454 1,213 687 353 11,810 17,517 ------- ------- ------ ------- -------- -------- Balance as of June 30, 1999 134,475 17,288 23,329 65,816 205,215 446,123 88,891 Net deposits (withdrawals) (5,260) (488) (1,677) 7,005 31,359 30,978 Interest credited 3,807 695 252 1,131 11,928 17,814 --------- ------- ------- ------- -------- -------- Balance as of June 30, 2000 $133,022 $17,495 $21,904 $73,952 $248,502 $494,875 94,403 ======== ======= ======= ======= ======== ======== ====== The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by the Company as of the dates indicated. Balance as of June 30, -------------------------------------------------------------------- 2000 1999 1998 --------------------- -------------------- -------------------- Percent Percent Percent Amount of Total Amount of Total Amount of Total ----- -------- ------ -------- (Dollars in Thousands) Savings accounts (3.0%) $133,022 26.88% $134,475 30.14% $125,612 27.94% School savings accounts (5.5%) 17,495 3.54 17,288 3.88 17,255 3.84 Money market accounts (2.75% to 3.93%) 21,904 4.43 23,329 5.23 21,672 4.82 Demand deposits (0% to 1.75%) 73,952 14.95 65,816 14.75 53,953 12.00 Time deposits: 1.00-1.99% 482 .10 500 .11 - - 2.00-2.99% 1,650 .33 1,123 .25 - - 3.00-3.99% 1,768 .36 17,218 3.86 2 - 4.00-4.99% 45,300 9.15 78,798 17.66 4,105 0.91 5.00-5.99% 123,844 25.02 86,433 19.37 190,539 42.39 6.00-6.99% 75,139 15.18 9,090 2.04 17,664 3.93 7.00-7.99% 319 .06 12,053 2.70 18,709 4.16 8.00-8.99% - - - - 30 0.01 -------- ------ -------- ------ -------- ------ Total time deposits 248,502 50.20 205,215 46.00 231,049 51.40 -------- ------ -------- ------ -------- ------ Total deposits $494,875 100.00% $446,123 100.00% $449,541 100.00% ======== ====== ======== ====== ======== ====== The following table shows rate and maturity information for the Company's time deposits as of June 30, 2000. Amount Due 12 months 12 months 12 months 12 months 12 months ending ending ending ending ending June 30, 2001 June 30, 2002 June 30, 2003 June 30, 2004 June 30, 2005 Thereafter Total ------------- ------------- ------------- ------------- ------------- ----------- ----- (In Thousands) Interest Rate 1.00-1.99% $ 482 $ - $ - $ - $ - $ - $ 482 2.00-2.99% 1,648 2 - - - - 1,650 3.00-3.99% 1,768 - - - - - 1,768 4.00-4.99% 37,121 3,037 3,509 1,633 - - 45,300 5.00-5.99% 93,888 12,733 8,051 5,837 3,335 - 123,844 6.00-6.99% 56,390 16,204 679 3 1,797 66 75,139 7.00-7.99% 155 145 - - 19 - 319 8.00-8.99% - - - - - - - -------- ------- ------- ------ ------ ------ -------- Total $191,452 $32,121 $12,239 $7,473 $5,151 $ 66 $248,502 ======== ======= ====== ====== ====== ====== ======== The following table indicates the amount of the Company's time deposits by the time remaining until maturity as of June 30, 2000. Maturity -------------------------------------------------------- Over Over 3 Months 3 to 6 6 to 12 Over or Less Months Months 12 Months Total --------- ------ ------ --------- ----- (In Thousands) Time deposits less than $100,000 $54,904 $34,232 $71,061 $50,791 $210,988 Time deposits $100,000 or more 10,436 7,865 12,954 6,258 37,514 ------- ------- ------- ------- -------- Total time deposits $65,340 $42,097 $84,015 $57,049 $248,502 ======= ======= ======= ======= ======== Borrowings. Although deposits are the Company's primary source of funds, the Company'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 Company needs additional funds to satisfy loan demand. The Company's borrowings historically have consisted primarily of advances from the FHLB of New York. FHLB advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. The Company currently maintains available lines of credit and is currently authorized to borrow up to $65.0 million on lines of credit with the FHLB of New York. At June 30, 2000, the Company had outstanding $96.2 million in other borrowings from the FHLB of New York. The following table sets forth the maximum month-end balance and average balance of FHLB advances and other borrowings for the periods indicated. Year Ended June 30, ------------------------------- 2000 1999 1998 ------- ------- ------- (In Thousands) Maximum Balance: FHLB advances $96,201 $52,038 $19,983 Average Balance: FHLB advances $81,927 $43,270 $ 5,467 The following table sets forth the amount and rate of the Company's borrowings at the dates indicated. June 30, --------------------------------------- 2000 1999 1998 ------- ------- ------- (Dollars in Thousands) FHLB advances $96,201 $49,045 $19,897 Total borrowings $96,201 $49,045 $19,897 ======= ======= ======= Weighted average interest rate of FHLB advances 5.80% 5.73% 6.07% ==== ==== ==== Subsidiary and Other Activities The Bank maintains four wholly-owned subsidiaries: CSB Financial Services, Inc., CSB Funding, Inc., CSB Services Agency, Inc. and Cohoes Realty, Incorporated. 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, 2000, CSB Financial Services had revenues of approximately $394,000 and net income of approximately $24,000. As of June 30, 2000, CSB Funding, Inc. was inactive with no reported income. CSB Services Agency, Inc. owns an 84.5% interest in CSB Security Insurance Agency, formerly Community Bank Insurance Brokers of New York, LLC 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. In January 2000, the joint venture acquired two other area agencies, Security Insurance Group and the Carpenter & Milnarik Agency. During the fiscal year ended June 30, 2000, the joint venture reported revenues of approximately $509,000 and a net loss of approximately $161,000. Cohoes Realty, Incorporated is a real estate investment trust formed in 1999 to enhance liquidity, portfolio yields and capital growth. The Bank funded Cohoes Realty, Incorporated with approximately $105.0 million of earning assets consisting of commercial real estate loans and debt securities. Interest income earned on the assets held by Cohoes Realty, Incorporated will be passed through to the Bank in the form of dividends. Cohoes Realty, Incorporated sold a limited amount of preferred stock with a fixed rate of return to directors, officers and employees of the Bank and their family members in order to satisfy Internal Revenue Code requirements to qualify as a real estate investment trust. Competition The Company 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 Company's primary market area. Other savings institutions, commercial banks, credit unions and finance companies provide vigorous competition in consumer lending. The Company 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 Company 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, 2000, the Company had 180 full-time employees and 30 part-time employees. The Company's employees are not represented by any collective bargaining group. Management considers its employee relations to be good. REGULATION The Company General. The Company is subject to regulation as a savings and loan holding company under the HOLA. The Company is registered with the Office of Thrift Supervision ("OTS") and is subject to OTS regulations, examinations, supervision and reporting requirements relating to savings and loan holding companies. The Company is also required to file certain reports with, and otherwise comply with the rules and regulations of, the New York Banking Board ("NYBB") and the Securities and Exchange Commission ("SEC"). As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Company and affiliates thereof. Activities Restrictions. The Bank is the sole savings association subsidiary of the 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. If the Company were to acquire control of another savings institution, other than through merger or other business combination with the Bank, the 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 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 Director 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 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 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, 2000, approximately 67.6% 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 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, 2000, 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 acquirer is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act ("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 Company's Common Stock has been registered with the SEC under Section 12(g) of the Securities Exchange Act of 1934, as amended. The Company is 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 Company's Common Stock does not cover the resale of such shares. Shares of Company Common Stock purchased by persons who are not affiliates of the Company may be sold without registration. Shares purchased by an affiliate of the Company are subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the 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 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 New York State Banking Department (the "Department"), as its chartering authority, and by the FDIC, as the insurer of its deposits, and is subject to certain requirements established by the OTS as a result of the 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 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, are not 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. 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, 2000 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. 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. 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. The Bank has not sought approval to exercise trust powers. 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 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 unimpaired capital and surplus. 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 New York Superintendent of Banks (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 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, 2000, the Bank had capital levels, which qualified it as a "well capitalized" institution. FDIC Insurance Premiums. The Bank is a member of the Bank Insurance Fund 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 no brokered deposits outstanding at June 30, 2000 and 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 the Community Reinvestment Act (the "CRA"). The CRA requires that the FDIC assess the Bank's record of meeting the credit needs of its entire community, including low and moderate income neighborhoods. The FDIC must also take that record into account when evaluating certain applications made by the Bank. The FDIC assigns the Bank 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 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 "outstanding." Limitations on Dividends. The Company is a legal entity separate and distinct from the Bank. The 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 Company's savings and loan holding company status, that the Bank notify the OTS 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 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 Company or its non-bank subsidiaries. The Bank also is subject to certain restrictions on most types of transactions with the 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 $96.2 million of FHLB advances at June 30, 2000. 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, 2000, the Bank had approximately $5.0 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, 2000, 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, this reserve requirement may reduce the Bank's earning assets. Federal Taxation General. The 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 Company 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. Bad Debt Reserves. In 1996, federal tax laws were amended to eliminate certain methods formerly used by the Bank to calculate tax deductions for bad debts. The new law also requires the Bank to gradually recapture certain excess bad debt deductions taken from 1988 through 1995. The total remaining amount required to be recaptured at June 30, 2000 was approximately $377,000. The effect of the recapture of this entire amount has already been reflected on the Company's financial statements. Also in 1996, New York State tax laws were amended to retain the method of calculating tax bad debt deductions, which were eliminated that year for federal tax purposes. Thus, for state income tax purposes, the Bank can calculate its tax bad debt deduction based upon either its historical loss experience or 32% of its New York State taxable income, so long as the Bank continues to satisfy certain definitional tests. 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, 2000, 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 alternative minimum tax ("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, 2000, the Bank had no net operating loss carryforwards for federal income tax purposes. Corporate Dividends-Received Deduction. The 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 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 Company and the Bank 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 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 Company with an annual maximum of $150,000. Item 2. Description of Properties The Company conducts business at its main office and 20 other banking offices. The following table sets forth information relating to each of the Company's offices as of June 30, 2000. The net book value of the Company's premises and equipment (including land, building and leasehold improvements and furniture, fixtures and equipment) at June 30, 2000 was $7.6 million. Net book value of property or Original Total leasehold Leased year Date of approximate improvements at or leased or lease square June 30, 2000 Locations owned acquired expiration footage (In thousands) ------ -------- ---------- -------- -------------- Cohoes Loan Center Owned 1992 N/A 10,500 $ 642 50 Mohawk Street Cohoes, NY 12047 Annex Owned 1981 N/A 3,723 159 60 Remsen Street Cohoes, NY 12047 Operation Center Owned 1987 N/A 11,190 322 244 North Mohawk Street Cohoes, NY 12047 Community Outreach Center Leased 1995 Month to 200 - Urban League Headquarters Month 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 15,223 432 75 Remsen Street Cohoes, NY 12047 Cohoes/I-787 Office Owned 1976 N/A 988 128 New Courtland Street Cohoes, NY 12047 Latham Office Owned 1967 N/A 9,041 450 Corner of Pine & Route 9 Latham, NY 12110 Clifton Park Office Owned 1972 N/A 5,297 286 525 Vischer Ferry Road Clifton Park, NY 12065 Delmar Office Owned 1994 N/A 4,768 1,440 197 Delaware Avenue Delmar, NY 12182 Lansingburgh Office Owned 1976 N/A 3,216 247 820 Second Avenue Troy, NY 12182 Loudonville Office Leased 1996 07/31/01 4,000 5 475 Albany-Shaker Road Loudonville, NY 12211 Guilderland Office Leased 1995 10/31/05 3,500 - 1973 Western Avenue Albany, NY 12203 Branch Offices (Continued) Schaghticoke Leased 1999 03/31/04 900 $ 91 Route 40 and 67 Schaghticoke, NY 12154 Halfmoon Leased 1999 10/31/19 3,814 55 1532 Route 9 Clifton Park, NY 12065 Albany Leased 1999 7/31/09 4,063 81 30 South Pearl St. Albany, NY 12207 Supermarket Branches: Glenville Leased 1993 10/31/03 323 75 290 Saratoga Road Scotia, NY 12302 Rotterdam Leased 1993 03/31/03 350 71 1879 Altamont Avenue Schenectady, NY 12303 Colonie Leased 1993 09/30/03 336 77 1892 Central Avenue Colonie, NY 12205 Westgate Leased 1995 04/30/05 565 63 911 Central Avenue Albany, NY 12206 Brunswick Leased 1996 10/31/01 304 44 716 Hoosick Road Brunswick, NY 12180 Bethlehem Leased 1997 05/31/02 312 40 1395 New Scotland Road Slingerlands, NY 12159 Malta Leased 1996 05/31/01 524 95 1 Kendall Way Malta, NY 12020 Niskayuna Leased 1996 06/30/01 544 96 2333 Nott Street East Niskayuna, NY 12309 Queensbury Leased 1998 05/31/03 360 72 677 Upper Glen Street Queensbury, NY 12804 Catskill Leased 1999 03/31/04 304 109 320 West Bridge Street Catskill, NY 12414 Item 3. Legal Proceedings The Company 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 Company in the proceedings, that the resolution of these proceedings should not have a material effect on the Company's consolidated financial condition or results of operations. Item 4. Submission of Matters to a Vote of Security Holders No matter was submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the quarter ended June 30, 2000. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Information contained under the caption "Common Stock" in the 2000 Annual Report to Stockholders included as Exhibit 13 hereto is herein incorporated by reference. Item 6. Selected Financial Data Information contained under the caption "Financial Highlights" in the 2000 Annual Report to Stockholders included as Exhibit 13 hereto is herein incorporated by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation Information contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 2000 Annual Report to Stockholders included as Exhibit 13 hereto is herein incorporated by reference. Item 7A. Quantitative and Qualitative Disclosure About Market Risk Information contained under the caption "Market Risk and Asset/Liability Management" in the 2000 Annual Report to Stockholders included as Exhibit 13 hereto is herein incorporated by reference. Item 8. Financial Statements The following information appearing in the Company's Annual Report to Stockholders for the year ended June 30, 2000, which is included as Exhibit 13 hereto is incorporated by reference in this Annual Report on Form 10-K. Annual Report Section incorporated herein by reference Report of Independent Public Accountants Consolidated Statements of Financial Condition as of June 30, 2000 and 1999 Consolidated Statements of Operations for the Years Ended June 30, 2000, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended June 30, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the Years Ended June 30, 2000, 1999 and 1998 Notes to Consolidated Financial Statements With the exception of the information expressly incorporated herein by reference, the Company's Annual Report to Stockholders for the year ended June 30, 2000, is not deemed filed as part of this Annual Report on Form 10-K. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act Directors Information concerning directors of the Company is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days of June 30, 2000. Executive Officers Information concerning executive officers of the Company is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days of June 30, 2000. Compliance with Section 16(a) Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of a registered class of the Company's equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended June 30, 2000, all Section 16(a) filing requirements applicable to its officers, directors and greater than 10 percent beneficial owners were complied with. Item 11. Executive Compensation Information concerning executive compensation is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days of June 30, 2000. Item 12. Security Ownership of Certain Beneficial Owners and Management Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days of June 30, 2000. Item 13. Certain Relationships and Related Transactions Information concerning certain relationships and related transactions is incorporated herein by reference from the definitive Proxy Statement for the Annual Meeting of Stockholders to be filed with the Commission within 120 days of June 30, 2000. Item 14. Exhibits and Reports on Form 8-K (a) Exhibits See Index to Exhibits (b) Reports on Form 8-K There was one report on Form 8-K filed during the quarter ended June 30, 2000. 1) a) Report dated May 5, 2000 b) Item 5 - Reporting the signing of an Agreement and Plan of Merger between Hudson River Bancorp, Inc. and Cohoes Bancorp, Inc. dated April 25, 2000. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COHOES BANCORP, INC. Date: September 28, 2000 By: /s/ Harry L. Robinson ------------------------ -------------------------------- Harry L. Robinson (Duly Authorized Representative) In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Harry L. Robinson By: /s/ Richard A. Ahl Harry L. Robinson, Director, President Richard A. Ahl, Executive Vice and Chief Executive Officer President, Chief Financial Officer (Principal Executive and Operating and Secretary Officer) (Chief Financial and Accounting Officer) Date: September 28, 2000 Date: September 28, 2000 ------------------------------------- ----------------------------------- By: /s/ Arthur E. Bowen By: /s/ Peter G. Casabonne Arthur E. Bowen, Director Peter G. Casabonne, Director Date: September 28, 2000 Date: September 28,2000__________ ------------------------------------- ----------------------------------- By: /s/ Michael L. Crotty By: /s/ Chester C. DeLaMater Michael L. Crotty, Director Chester C. DeLaMater, Director Date: September 28,2000 Date: September 28, 2000 ------------------------------------- ----------------------------------- By: /s/ Frederick G. Field, Jr. By: /s/ Duncan S. Mac Affer Frederick G. Field, Jr., Director Duncan S. Mac Affer, Director Date: September 28, 2000 Date: September 28, 2000 ------------------------------------- ----------------------------------- By: /s/ J. Timothy O'Hearn By: /s/ R. Douglas Paton J. Timothy O'Hearn, Director R. Douglas Paton, Director Date: September 28, 2000 Date: September 28, 2000 ------------------------------------- ----------------------------------- By: /s/ Walter H. Speidel By: /s/ Donald A. Wilson Walter H. Speidel, Director Donald A. Wilson, Director Date: September 28, 2000 Date: September 28, 2000 ------------------------------------- ----------------------------------- INDEX TO EXHIBITS Regulation Reference to S-K Prior Filing or Exhibit Exhibit Number Number Document Attached Hereto 3(i) Certificate of Incorporation <F1> 3(ii) Bylaws <F3> 4 Instruments defining the rights of security holders, <F2> including debentures 10.1 Employment Agreement between Cohoes Savings Bank and Harry <F3> L. Robinson 10.2 Schedule of Employment Agreement with Cohoes Savings Bank <F3> Employment Agreement between Cohoes Savings Bank and Albert 10.3 J. Picchi <F3> Employment Agreement between Cohoes Bancorp, Inc. and Harry 10.4 L. Robinson <F3> Schedule of Employment Agreement with Cohoes Bancorp, Inc. 10.5 Change-In-Control Severance Agreement between Cohoes Savings <F3> Bank and Johanna O. Robbins 10.6 Schedule of Change-In-Control Severance Agreements with <F3> Cohoes Savings Bank 10.7 <F3> 10.8 Cohoes Savings Bank Employee Severance Compensation Plan <F1> Employee Stock Ownership Plan 10.9 Cohoes Savings Bank 401(k) Savings Plan <F1> 10.10 Benefit Restoration Plan <F2> 10.11 Stock Option and Incentive Plan <F1> 10.12 Recognition and Retention Plan <F1> 10.13 <F1> 13 Annual Report to Stockholders 13 21 Subsidiaries of Registrant 21 23 Consents of Experts 23 27 Financial Data Schedule 27 - ---------------- <FN> <F1> Filed as exhibits to the Company's Form S-1 registration statement filed on September 16, 1998 (File No. 333-63539) of the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. <F2> Filed as exhibits to the Company's Pre-effective Amendment No. One to Form S-1 filed on October 30, 1998 (File No. 333-63539) of the Securities Act of 1933. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. <F3> Filed as exhibits to the Company's Form 10-K for the fiscal year ended June 30, 1999, filed on September 24, 1999. All of such previously filed documents are hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B. </FN> EXHIBIT 13 ANNUAL REPORT TO STOCKHOLDERS 2000 Annual Report COHOES BANCORP INC. Contents Financial Highlights ................................................... 2 Letter to Shareholders ................................................. 3 Management's Discussion and Analysis ................................... 5 Report of Independent Public Accountants ............................... 15 Consolidated Statements of Financial Condition ......................... 16 Consolidated Statements of Operations .................................. 17 Consolidated Statements of Changes In Stockholders' Equity ................................................ 18 Consolidated Statements of Cash Flows .................................. 20 Notes to Consolidated Financial Statements ............................. 22 Corporate Information .................................................. 48 Board of Directors and Officers ........................................ 49 FINANCIAL HIGHLIGHTS Selected Consolidated Financial and other data At June 30, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- Selected Consolidated Financial Data: (In thousands) Total assets $ 727,014 $ 650,470 $ 535,716 $ 491,700 $ 463,363 Cash and cash equivalents 12,658 11,114 14,229 16,664 8,900 Loans, net 600,413 521,005 412,759 398,530 393,970 Investment securities 55,129 54,455 45,424 25,273 25,969 Securities available-for-sale 40,074 44,742 48,720 35,475 20,886 Deposits 494,875 446,123 449,541 429,390 404,539 Borrowings 96,201 49,045 19,897 - 2,116 Stockholders' equity 121,306 139,430 53,282 49,092 44,290 Real estate owned 561 724 509 1,874 421 Nonperforming loans 4,043 4,993 5,649 6,688 7,793 For the Fiscal Year Ended June 30, -------------------------------------------------------------- 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- Selected Operating Data: (Dollars in thousands) Interest income $ 49,685 $ 43,038 $ 38,423 $ 36,285 $ 35,383 Interest expense 22,540 20,334 19,262 17,821 18,164 ---------- ---------- ---------- ---------- ---------- Net interest income 27,145 22,704 19,161 18,464 17,219 Provision for loan losses 1,600 1,235 1,400 1,325 490 ---------- ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 25,545 21,469 17,761 17,139 16,729 Noninterest income 2,381 2,916 2,743 2,790 2,467 Noninterest expense 18,655 20,443 13,767 12,314 11,919 ---------- ---------- ---------- ---------- ---------- Income before income taxes 9,271 3,942 6,737 7,615 7,277 Income taxes 3,392 1,511 2,650 2,972 2,882 ---------- ---------- ---------- ---------- ---------- Net income $ 5,879 $ 2,431 $ 4,087 $ 4,643 $ 4,395 ---------- ---------- ---------- ---------- ---------- Selected Operating Ratios and Other Data: Performance Ratios: Yield on average interest-earning assets 7.42% 7.42% 7.96% 8.04% 7.98% Rate paid on average interest-bearing liabilities 4.02% 4.06% 4.33% 4.27% 4.42% Net interest rate spread 3.40% 3.36% 3.63% 3.77% 3.56% Net interest income after provision for loan losses to noninterest expense 136.93% 105.02% 129.01% 139.18% 140.36% Noninterest expense as a percent of average assets 2.69% 3.40% 2.75% 2.62% 2.59% Return on average assets 0.85% 0.40% 0.82% 0.99% 0.95% Return on average equity 4.62% 2.53% 7.88% 9.87% 10.28% Ratio of average equity to average assets 18.35% 15.95% 10.35% 10.03% 9.28% Efficiency ratio 63.18% 79.79% 62.85% 57.94% 60.55% Dividend payout ratio 35.14% 16.22% N/A N/A N/A Book value per share $ 15.33 $ 14.62 N/A N/A N/A Asset Quality Ratios: Nonperforming loans as a percent of total loans 0.67% 0.95% 1.36% 1.66% 1.96% Nonperforming assets as a percent of total assets 0.63% 0.88% 1.15% 1.74% 1.77% Allowance for loan losses as a percent of total loans 0.83% 0.77% 0.85% 0.77% 0.82% Allowance for loan losses as a percent of nonperforming loans 123.99% 80.62% 62.54% 46.43% 41.69% Net loans charged-off to average loans 0.11% 0.16% 0.24% 0.37% 0.10% LETTER TO SHAREHOLDERS Dear Fellow Shareholder: Our Bank achieved record growth for the fiscal year 2000, while continuing to focus on increasing shareholder value and introducing new products and services to make banking more convenient. Our historically strong earnings growth continued in the fiscal year ended June 30, 2000, with net income increasing 142%, to $5.9 million. (Net income for the previous fiscal year was impacted by two non-recurring charges, reflecting the Company's contribution of stock to establish the Cohoes Savings Foundation and in non-recurring expenses associated with a planned acquisition of another bank.) This significant rise in earnings was in spite of a one-time, $950,000 charge to earnings associated with The Commons, LLC, a subsidiary of the Urban League of Northeastern New York, a project for which the Bank committed funding as part of its continuing efforts to support development in low to moderate income communities. Net interest income was $27.1 million, 19.6% higher than the $22.7 million earned in fiscal year 1999. Net interest margin was 4.05%, compared to 3.92% for the prior fiscal year. Assets grew by $76.5 million, to $727.0 million, an 11.8% increase. Our strong earnings trend is a result of our commitment to new product development, quality asset growth, aggressive expansion into new communities and a focus on prudent fiscal management. We successfully grew net loans by $79.4 million, to $600.4 million, a 15.2% increase, largely due to significant growth in residential mortgages, commercial real estate lending and business financing. Our focus on careful lending practices resulted in a decrease in non-performing loans of over 19%, to $4.0 million. The allowance for loan losses as a percent of non-performing loans rose to 123.99% as of June 30, 2000 from 80.62% the previous year. The Board of Directors, management and staff, nearly all of whom are stockholders, are focused on increasing shareholder value. As of fiscal year end 2000, the book value of the Bank's stock rose to $15.33 per share and earnings per share for fiscal 2000 rose to $.74 cents per share. To make the yield on our stock as attractive as possible, it is our goal to continue paying out 30% to 40% of our earnings in dividends. We are currently paying $.07 per share per quarter, up from $.06 per quarter last year. To improve the return on stockholders' equity we continued our policy of repurchasing shares of our stock, putting 1.6 million of our outstanding shares in treasury stock as of year-end 2000. Weighted average shares outstanding for the fiscal year were 7,998,610, 9.1% less than the previous year, primarily as a result of the repurchase program. In an endeavor to accelerate our growth and increase noninterest income, we purchased two local insurance agencies, which we then blended into our newly named CSB Security Insurance Agency, LLC. With these acquisitions we became one of the 20 largest insurance agencies in our market, based on premiums paid. Our customers may now buy homeowners, auto, and various forms of business insurance from licensed insurance salespeople. Customers can also buy stock, bonds, and other investment products through our other subsidiary, CSB Financial Services, Inc., which continued its dramatic growth. Assets under management increased 52%, to $52.8 million at June 30, 2000, from $34.6 million the previous year. Cost containment was a key focus, and was achieved through various measures, including changing to more cost efficient vendors. Our subsidiaries are essential to our continued growth and we have implemented aggressive plans to maximize both of these important segments of our business. In 1999 we continued our commitment to adding more branch offices by opening our 21st branch in Halfmoon. Since 1995 we have more than doubled the size of our retail branch system to make it easier for customers to bank with us while extending our brand into new markets. Due to our dramatic growth, our branch system is young, offering tremendous potential to increase market share. We will continue our emphasis on cost efficiency, as exemplified by our introduction of document imaging for loans, which both reduced costs and increased efficiency. We also centralized consumer underwriting functions, saving costs and enhancing the lending process while maintaining the same level of customer service. This year we will introduce a more cost efficient, paperless loan origination system. The past year saw improvements in operational support and customer service as part of our commitment to stay on the cutting edge of technology. We dramatically enhanced our electronic delivery capability when we introduced Internet Banking to our product mix, which allowed us to offer on-line cash management, bill payment services and on-line check viewing. With Internet Banking, customers are also now able to pre-qualify for mortgages and car loans. Our School Banking Club, among the largest of its type in the nation with 29,000 children saving at 132 participating schools, continues to grow. The Club is designed to encourage children to start saving at an early age. Club members can save right at their school through parent volunteers who then deposit the funds at a nearby Bank branch office. We also continue to leverage the fine reputation of the School Banking Club to assist in our efforts to support the St. Jude Children's Research Hospital. We raised over $25,000 for the hospital through various fund raising events, including a walkathon, silent auction, telethon and a raffle. Y2K, while proving to be a non-event, was a serious concern and our preparation resulted in a smooth transition to the new millennium. Our efforts, including our ongoing initiatives to educate our customers about Y2K preparations, drew the attention of CBS Evening News. We take our responsibilities as an outstanding corporate citizen very seriously, and in 1999 once again honored our commitment to the communities we serve by donating $132,000 to 86 organizations, through the Cohoes Savings Foundation. Our continued success depends on our not being content with the status quo, but rather to quickly recognize and seize opportunities. Such was the case with our proposed merger with Hudson River Bank and Trust Company, which was approved by holders of 47.52% of our outstanding stock, just short of the 50% required for approval, while 32.49% voted against or abstained. We were gratified that we received more votes in favor of the merger than those against, or that abstained. We thank all of our shareholders who voted, especially those who supported our proposed merger. As it was with the proposed merger, our underlying business philosophy continues to be the enhancement of shareholder value. We are fortunate to have the support and guidance of a dedicated Board of Directors and an energized staff working tirelessly to achieve our goal of enhancing shareholder value and providing superior returns. Very truly yours, /s/ Harry L. Robinson Harry L. Robinson President and Chief Executive Officer MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Cohoes Bancorp, Inc. ("Company"), headquartered in Cohoes, New York is a savings and loan holding company incorporated in September 1998 under the laws of the State of Delaware. The Company was organized at the direction of Cohoes Savings Bank ("Bank") for the purpose of acquiring all of the common stock of the Bank issued in connection with the conversion of the Bank from mutual to stock form ("Conversion"). On December 31, 1998, the Bank completed its Conversion, and the Company sold 9,257,500 shares of its common stock at a price of $10.00 per share in a subscription offering ("Offering") to certain depositors of the Bank. In connection with the Conversion and Offering, the Company established the Cohoes Savings Foundation, Inc. ("Foundation") and made a charitable contribution of 277,725 shares of the Company's common stock to the Foundation, which resulted in a one-time charge relating to the funding of the Foundation of $2.8 million ($1.7 million net of tax). The net proceeds from the Offering amounted to $90.4 million, and the Company contributed 50% of the net proceeds from the Offering to the Bank in exchange for all of the issued and outstanding shares of common stock of the Bank. The Company had no significant assets or operations prior to December 31, 1998. Per share data is reported for the periods since the Conversion. Presently, the only significant assets of the Company are the capital stock of the Bank, the Company's loan to the Employee Stock Ownership Plan of the Company and the investments of the net proceeds from the Offering retained by the Company. The Company is subject to the financial reporting requirements of the Securities Exchange Act of 1934, as amended. 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. FINANCIAL CONDITION Comparison of June 30, 2000 and June 30, 1999 Total assets at June 30, 2000 stood at $727.0 million, up $76.5 million, or 11.8%, from $650.5 million at June 30, 1999. The increase was concentrated in the loan portfolio which increased $80.4 million, reaching $605.4 million at June 30, 2000. The Company funded the growth in loans with an increase of $47.2 million in borrowings from $49.0 million on June 30, 1999 to $96.2 million at June 30, 2000 and an increase of $48.8 million in deposits from $446.1 million on June 30, 1999 to $494.9 million at June 30, 2000. These increases as well as fluctuations in other asset and liability categories are discussed below. Loans. The Company was able to originate a large volume of loans by offering competitive pricing and quality service at a time when economic conditions were favorable to the origination of commercial real estate and commercial business loans. Low market interest rates also stimulated residential sales and refinances which provided an environment conducive to the origination of residential mortgage loans. The additional capital raised in the Conversion, which is not an interest-sensitive liability, also allowed the Company to retain in portfolio a higher volume of fixed-rate loans which might have otherwise been sold on the secondary market due to interest rate sensitivity concerns. Total one to four family real estate loans increased $32.6 million, or 10.2% from June 30, 1999 to June 30, 2000. Commercial real estate loans increased $34.3 million during the same period, from $138.3 million to $172.6 million. At June 30, 2000, commercial real estate loans represented 28.5% of total loans, up from 26.4% at June 30, 1999. Commercial business loans increased $15.3 million during fiscal 2000 to $37.3 million from $22.1 million. Commercial business loans are generally 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 increased from $4.0 million at June 30, 1999 to $5.0 million at June 30, 2000, an increase of $1.0 million. This increase was primarily driven by the 15.3% increase in the total loan portfolio rather than by an increase in problem loans, as nonperforming loans declined from $5.0 million to $4.0 million during the year. The increase was caused by the net effect of a $1.6 million provision for loan losses for the year ended June 30, 2000 offset by $612,000 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 multiple factors, such as the size and general composition of the loan portfolio, historical delinquency and charge-off rates, and an assessment of significant loans, with particular emphasis on nonperforming and delinquent loans that management believes warrant special attention. At June 30, 2000, the allowance for loan losses provided coverage of 124.0% of total non-performing loans, up from 80.6% at June 30, 1999. 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. Securities Available for Sale and Investment Securities. The balance of securities available for sale decreased from $44.7 million at June 30, 1999 to $40.1 million as of June 30, 2000. Investment securities classified as held to maturity increased from $54.5 million to $55.1 million during the same period. The combined level of securities is consistent with the need to maintain an appropriate level of security investments as part of the overall asset portfolio. Premises and Equipment. Premises and equipment decreased from $7.8 million at June 30, 1999 to $7.6 million at June 30, 2000. This decrease was a result of depreciation totaling $1.3 million offset by $1.1 million in capital expenditures. Other Real Estate Owned. Other real estate owned decreased from $724,000 at June 30, 1999 to $561,000 at June 30, 2000, a decrease of approximately $163,000. The decrease was part of the normal process of collecting delinquent mortgage loans and selling the foreclosed properties. Deposits. Total deposits increased $48.8 million, or 10.9%, from $446.1 million at June 30, 1999 to $494.9 million at June 30, 2000. Of this total increase, time deposits increased $43.3 million (21.1%) and commercial deposits and demand accounts increased $8.1 million (12.4%). These increases were partially offset by a decrease of $2.7 million (1.5%) in savings accounts and money market accounts. The decrease in savings and money market deposits and the increase in time deposits was a result of the movement of short term funds to higher yielding time deposits offset by the Company's decision to focus on core deposit growth to control the cost of funds and improve the stability of the Company's deposit liability base. Borrowings. Borrowings, comprised primarily of Federal Home Loan Bank advances, increased $47.2 million, or 96.3%, from $49.0 million at June 30, 1999 to $96.2 million at June 30, 2000. This increase was primarily the result of additional Federal Home Loan Bank advances used to fund loan demand. Analysis of Net Interest Income Average Balance Sheets. The following table sets forth certain information relating to the Company for the years ended June 30, 2000, 1999 and 1998. The yields and costs were derived by dividing interest income or expense by the average balance of assets or liabilities, respectively, for the periods shown. The yields include deferred fees and discounts which are considered yield adjustments. Year Ended June 30, -------------------------------------------------------------------------------------------- 2000 1999 1998 ----------------------------- ----------------------------- ----------------------------- Average Interest Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate (Dollars in thousands) Interest-earning assets: Loans receivable <F1> $ 566,978 $ 43,511 7.67% $ 463,331 $ 36,256 7.83% $ 404,781 $ 33,573 8.29% Securities available for sale 37,220 2,289 6.15% 37,927 2,298 6.06% 30,336 1,933 6.37% Investments securities 57,595 3,394 5.89% 50,442 3,024 6.00% 30,372 1,926 6.34% Federal funds sold 2,885 164 5.68% 23,839 1,182 4.96% 13,321 739 5.55% FHLB stock 4,701 321 6.83% 3,680 253 6.88% 3,479 249 7.16% Other interest-earning assets 182 6 3.30% 480 25 5.21% 184 3 1.63% --------- -------- --------- -------- --------- -------- Total interest-earning assets 669,561 49,685 7.42% 579,699 43,038 7.42% 482,473 38,423 7.96% -------- -------- -------- Non-earning assets 24,280 22,202 18,714 --------- --------- --------- Total assets $ 693,841 $ 601,901 $ 501,187 ========= ========= ========= Interest-bearing liabilities: Savings accounts 133,847 3,739 2.79% 128,774 3,849 2.99% 120,959 3,623 3.00% School savings accounts 16,826 719 4.27% 17,152 818 4.77% 15,112 837 5.54% Money market accounts 24,755 860 3.47% 20,594 686 3.33% 18,163 569 3.13% Demand deposits 69,191 440 0.64% 60,384 353 0.58% 47,075 304 0.65% Time deposits 226,094 11,898 5.26% 215,801 11,810 5.47% 230,794 13,483 5.84% Escrow accounts 7,716 133 1.72% 14,469 339 2.34% 7,065 114 1.61% Borrowings 81,927 4,751 5.80% 43,204 2,479 5.74% 5,467 332 6.07% --------- -------- --------- -------- --------- -------- Total interest-bearing liabilities 560,356 22,540 4.02% 500,378 20,334 4.06% 444,635 19,262 4.33% -------- -------- -------- Other liabilities 6,192 5,513 4,677 Stockholders' equity 127,293 96,010 51,875 --------- --------- --------- Total liabilities and stockholders' equity $ 693,841 $ 601,901 $ 501,187 ========= ========= ========= Net interest income $ 27,145 $ 22,704 $ 19,161 ======== ======== ======== Net interest rate spread 3.40% 3.36% 3.63% ==== ==== ==== Net earning assets $ 109,205 $ 79,321 $ 37,838 ========= ========= ========= Net yield on average interest-earning assets 4.05% 3.92% 3.97% ==== ==== ==== Average interest-earning assets to average interest bearing liabilities 1.19X 1.16X 1.09X ========= ========= ========= <FN> <F1> Average balances are derived principally from average daily balances and include nonaccruing loans. </FN> Rate/Volume Analysis. The following table presents the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate), (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume) and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate. Year Ended June 30, 2000 Year Ended June 30,1999 Compared to Compared to Year Ended June 30, 1999 Year Ended June 30, 1998 -------------------------------- -------------------------------- Increase (Decrease) Increase (Decrease) Due To Total Due To Total ------------------- Increase ------------------- Increase Volume Rate (Decrease) Volume Rate (Decrease) (Dollars in thousands) Interest and dividend income from: Loans receivable $ 7,966 $ (711) $ 7,255 $ 4,659 $(1,976) $ 2,683 Securities available for sale (43) 34 (9) 464 (99) 365 Investment securities 422 (52) 370 1,209 (111) 1,098 Federal funds sold (1,169) 151 (1,018) 529 (86) 443 FHLB stock 70 (2) 68 14 (10) 4 Other interest-earning assets (12) (7) (19) 9 13 22 ------- ------- ------- ------- ------- ------- Total interest and dividend income 7,234 (587) 6,647 6,884 (2,269) 4,615 ------- ------- ------- ------- ------- ------- Interest expense from: Savings accounts 148 (258) (110) 234 (8) 226 School savings accounts (15) (84) (99) 105 (124) (19) Money market accounts 144 30 174 79 38 117 Demand deposits 54 33 87 80 (31) 49 Time deposits 551 (463) 88 (848) (825) (1,673) Escrow accounts (132) (74) (206) 157 68 225 Borrowings 2,245 27 2,272 2,166 (19) 2,147 ------- ------- ------- ------- ------- ------- Total interest expense 2,995 (789) 2,206 1,973 (901) 1,072 ------- ------- ------- ------- ------- ------- Net interest income $ 4,239 $ 202 $ 4,441 $ 4,911 $(1,368) $ 3,543 ======= ======= ======= ======= ======= ======= RESULTS OF OPERATIONS Comparison of Year Ended June 30, 2000 and Year Ended June 30, 1999 For the fiscal year ended June 30, 2000 the Company realized net income of $5.9 million, as compared to $2.4 million for the fiscal year ended June 30, 1999. Noninterest expense decreased $1.8 million and net interest income increased $4.4 million for the fiscal year ended June 30, 2000 as compared to fiscal 1999. These increases in net income were partially offset by a reduction in noninterest income of $535,000 and an increase in income tax expense of $1.9 million for the fiscal year ended June 30, 2000 as compared to the fiscal year ended June 30, 1999. Net Interest Income. Net interest income for the fiscal year ended June 30, 2000 was $27.1 million, up $4.4 million from fiscal 1999. The increase was primarily the result of the increase of $89.9 million in the balance of average earning assets from $579.7 million for the fiscal year ended June 30, 1999 to $669.6 million for fiscal 2000. Interest-bearing liabilities also increased during fiscal year 2000, up $60.0 million. The net impact of these volume increases resulted in an increase in net interest income of $4.2 million. The volume increases were offset by a reduction of $202,000 in net interest income due to rate. The Company's net interest margin for the fiscal year ended June 30, 2000 was 4.05%, up 13 basis points from 3.92% for the fiscal year ended June 30, 1999. The yield on average earning assets remained constant at 7.42%, while the rate paid on average interest-bearing liabilities decreased from 4.06% to 4.02%. This resulted in an increase in the spread of 4 basis points from 3.36% for fiscal 1999 compared to 3.40% for fiscal 2000. Interest Income. Interest income for the fiscal year ended June 30, 2000 was $49.7 million, up from $43.0 million for fiscal 1999. The largest component of interest income is interest on loans. Interest on loans increased from $36.3 million for the fiscal year ended June 30, 1999 to $43.5 million for the fiscal year ended June 30, 2000. This increase of $7.3 million or 20.0% is the result of an increase in the average balance of loans offset by a decrease in the average yield earned. The average balance of loans increased $103.6 million or 22.4% to $567.0 million, while the yield on loans decreased 16 basis points from 7.83% to 7.67%. The increase in interest on loans was supplemented by an increase in interest on investment securities. Interest income on this category of earning assets increased $370,000. The average balance of investment securities increased $7.2 million or 14.3% during the fiscal year ended June 30, 2000 to $57.6 million, resulting in a $422,000 increase in interest income due to volume. The average balance of federal funds decreased from $23.8 million in the fiscal year ended June 30, 1999 to $2.9 million in the fiscal year ended June 30, 2000. The decrease in the volume of federal funds resulted in a $1.2 million decrease in interest income in the fiscal year ended June 30, 2000 as compared to the fiscal year ended June 30, 1999. Interest Expense. Interest expense increased during the fiscal year ended June 30, 2000 to $22.5 million, up from $20.3 million for fiscal 1999. The majority of the Company's interest expense is from interest-bearing deposits. The largest category of interest-bearing deposits is time deposits. Interest on time deposits for the fiscal year ended June 30, 2000 was $11.9 million, up $88,000 from the $11.8 million for the fiscal year ended June 30, 1999. This slight increase is the result of an increase of $10.3 million in the average balance of time deposits partially offset by a decrease of 21 basis points in the rates paid on these deposits from 5.47% for the fiscal year ended June 30, 1999 to 5.26% for the fiscal year ended June 30, 2000. Interest on school savings accounts decreased $99,000, from $818,000 for the fiscal year ended June 30, 1999 to $719,000 for the fiscal year ended June 30, 2000, substantially all of which was the result of a decrease in the rate paid on school savings accounts of 50 basis points. Interest on money market accounts increased $174,000, from $686,000 for the fiscal year ended June 30, 1999 to $860,000 for the fiscal year ended June 30, 2000. The increase is attributed to an increase in the average balance of money market accounts of $4.2 million as well as an increase of 14 basis points in the rates paid on these money market accounts, from 3.33% to 3.47%. Interest on borrowings for the fiscal ended June 30, 2000 was $4.8 million, due to a $38.7 million increase in the average balance of borrowings. Interest on escrow accounts decreased $206,000, from $339,000 for the fiscal ended June 30, 1999 to $133,000 for the fiscal year ended June 30, 2000. The decrease is attributed to a decrease in the average balance of escrow accounts of $6.8 million as well as a decrease of 62 basis points in the rates paid on these escrow accounts, from 2.34% to 1.72%. The average balance of escrow accounts decreased because stock subscriptions received during the quarter ended December 31,1998 were classified as escrow accounts until the Conversion was consummated and the funds were either used to purchase the Company's common stock or returned to the subscriber in the case of an over subscription. The remaining escrow accounts are primarily mortgage escrow deposits which have lower rates than the rates paid on the stock subscriptions hence the decline in the average rate paid on escrow accounts. Provision for Loan Losses. The provision for loan losses increased from $1.2 million for the fiscal year ended June 30, 1999 to $1.6 million for the fiscal year ended June 30, 2000. Although the net loans charged off remained constant for the fiscal year ended June 30, 2000 compared to fiscal 1999, the increase in the provision is attributed to the increase in the outstanding loan balance from $525.0 million on June 30, 1999 to $605.4 million on June 30, 2000. Noninterest Income. Noninterest income for the fiscal year ended June 30, 2000 was $2.4 million, down from $2.9 million for the fiscal year ended June 30, 1999. This reduction is almost entirely due to the $950,000 charge off of the Bank's investment in The Commons, LLC taken in December 1999. This reduction was partially offset by increased recoveries on ORE properties of $306,000 for the fiscal year ended June 30, 2000 as compared to fiscal 1999. Service charges on deposits increased slightly to $892,000 for the fiscal year ended June 30, 2000, from $779,000 for the fiscal year ended June 30, 1999. This increase is primarily attributable to the increase in deposit accounts from June 30, 1999 to June 30, 2000. Loan servicing revenue declined $89,000 from $376,000 for the fiscal year ended June 30, 1999 to $287,000 for the fiscal year ended June 30, 2000. The decline relates to a reduction in the balance of loans serviced for others. Noninterest Expense. Noninterest expense decreased $1.8 million to $18.7million for the fiscal year ended June 30, 2000, down from $20.4 million for the fiscal year ended June 30, 1999. Merger expenses associated with the terminated merger with SFS Bancorp, Inc. of $2.1 million and the contribution of $2.8 million to the Cohoes Savings Foundation, Inc. account, in fiscal 1999, for the largest portion of the decrease in noninterest expense for the fiscal year ended June 30, 2000 compared to the last fiscal year. Merger expenses in fiscal 2000 relate to the costs incurred as of June 30, 2000 associated with the merger of equal transaction with Hudson River Bancorp, Inc. This reduction was partially offset by an increase in compensation and benefits of $2.5 million, of which $832,000 was due to the recognition and retention plan approved on July 2, 1999 and an increase of $90,000 in the contribution to the Company's Employee Stock Ownership Plan. Commission and incentive payments increased $251,000 for the fiscal year ended June 30, 2000 compared to fiscal 1999. The remaining increase in compensation and benefits of $1.3 million is primarily attributable to annual and merit increases for employees, the additional staff cost of four new branches, and increases in benefit costs. The increase in occupancy expense of $251,000 for the fiscal year ended June 30, 2000 compared to the last fiscal year is primarily attributable to the opening of four new branch locations during the calendar year of 1999. Income Tax Expense. Income tax expense increased $1.9 million from $1.5 million for the fiscal year ended June 30, 1999 to $3.4 million for the fiscal year ended June 30, 2000. The increase is primarily the result of increased income before income tax expense partially offset by the establishment of a Real Estate Investment Trust (REIT) in April 1999. Comparison of Year Ended June 30, 1999 and Year Ended June 30, 1998 Net income for the year ended June 30, 1999 was $2.4 million, down from $4.1 million for the year ended June 30, 1998. Noninterest expense increased $6.6 million as compared to the previous year. This increase was partially offset by increases in net interest income of $3.5 million and noninterest income of $173,000 and decreases in the provision for loan losses of $165,000 and income tax expense of $1.2 million the year ended June 30, 1999 as compared to the previous year. Net Interest Income. Net interest income for the year ended June 30, 1999 was $22.7 million, up $3.5 million from the year ended June 30,1998. The increase was partially the result of the increase of $97.2 million in average earning assets from $482.5 million for the year ended June 30, 1998 to $579.7 million for the same period in 1999. Interest-bearing liabilities also increased during the same period, up $55.8 million. The net impact of these volume increases resulted in an increase in net interest income of $4.9 million. The increase in net interest income was also attributable to changes in the yield on average earning assets and rate paid on average interest-bearing liabilities. The yield on average earning assets decreased from 7.96% to 7.42%, while the rate paid on average interest-bearing liabilities decreased from 4.33% to 4.06%. The Bank's net interest margin for the year ended June 30, 1999 was 3.92%, down 5 basis points from 3.97% for the year ended June 30, 1998. Interest Income. Interest income for the year ended June 30, 1999 was $43.0 million, up from $38.4 million for the comparable period in 1998. The largest component of interest income is interest on loans. Interest on loans increased from $33.6 million for the year ended June 30, 1998 to $36.3 million for the year ended June 30, 1999. This increase of $2.7 million or 8.0% is primarily the result of a $58.5 million or 14.4% increase in the average balance of loans to $463.3 million, while the yield on loans decreased 46 basis points from 8.29% to 7.83%. The increase in interest on loans was complemented by increases in interest on securities available for sale and investment securities. Interest income on securities available for sale increased $365,000 and the interest income on investments increased $1.1 million. Substantially all of the increases in interest income on securities available for sale and investment securities are attributed to higher volume. The average balance of securities available for sale increased from $30.3 million for the year ended June 30, 1998 to $37.9 million for the year ended June 30, 1999. This 25.0% increase in volume resulted in an increase in interest income of $464,000. The average balance of investment securities increased 66.1% from $30.4 million in fiscal 1998 to $50.4 million in fiscal 1999, resulting in a $1.2 million increase in interest income due to volume. 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 increased during the year ended June 30, 1999 to $20.3 million, up from $19.3 million for the comparable period in 1998. 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, 1999 was $11.8 million, down $1.7 million from the $13.5 million in 1998. This decrease is the result of a decrease of 37 basis points in the rates paid on these deposits from 5.84% in 1998 to 5.47% in 1999 and a decrease in the average balance of time deposits of $15.0 million or 6.5%. Interest expense on savings accounts increased $226,000 from fiscal 1998 to 1999, primarily attributable to an increase in the average balance of savings accounts of $7.8 million. Interest on school savings accounts decreased $19,000, from $837,000 for the year ended June 30, 1998 to $818,000 for the year ended June 30, 1999. This decrease is primarily the result of a decrease of 77 basis points in the rates paid on these deposits from 5.54% in fiscal 1998 to 4.77% in fiscal 1999, partially offset by an increase in the average balance of these deposits of $2.1 million. Interest on escrow accounts for the year ended June 30, 1999 was $339,000, up $225,000 from $114,000 in 1998. This increase is the result of an increase of 73 basis points in the rates paid on these deposits from 1.61% in 1998 to 2.34% in 1999 and an increase in the average balance of escrow accounts of $7.4 million due to the Conversion. Interest on borrowings for the year ended June 30, 1999 was $2.5 million, up from $332,000 in 1998. Most of this increase was attributable to an increase in the average balance of borrowings, from $5.5 million in fiscal 1998 to $43.2 million in fiscal 1999. Fluctuations in interest expense on other categories of interest-bearing liabilities were not significant. Provision for Loan Losses. The provision for loan losses decreased from $1.4 million in the year ended June 30, 1998 to $1.2 million in the year ended June 30, 1999. This decrease is primarily the result of decreases in net charge-offs from $972,000 for the year ended June 30, 1998 to $743,000 for the year ended June 30, 1999. Noninterest Income. Total noninterest income increased $173,000 for the year ended June 30, 1999 as compared to the same period in 1998. Income from service charges on deposits increased only slightly to $779,000 for the year ended June 30, 1999, from $746,000 for the year ended June 30, 1998. Loan servicing revenue decreased $119,000 from $495,000 in the year ended June 30, 1998 to $376,000 in the year ended June 30, 1999. The decline relates to a reduction in the balance of loans serviced for others. Net gain on the sale of loans decreased from $81,000 for the year ended June 30, 1998 to $6,000 for the year ended June 30, 1999. Other noninterest income increased from $1.4 million for the year ended June 30, 1998 to $1.8 million for the year ended June 30, 1999. This increase was the result of increases in ATM fees, loan prepayment and assignment fees and rents collected on OREO properties. Noninterest Expense. Total noninterest expense increased $6.6 million to $20.4 million for the year ended June 30, 1999, up from $13.8 million for the year ended June 30, 1998. The break-up fee paid to SFS Bancorp, Inc. of $2.0 million, the contribution of $2.8 million to the Cohoes Savings Foundation, Inc., the increase in compensation and benefits of $1.3 million, occupancy of $247,000 and other noninterest expense of $401,000 were the primary contributors to the overall increase. The break-up fee was paid as a result of the termination of the merger agreement with SFS Bancorp, Inc. The contribution to the Cohoes Savings Foundation, Inc. was associated with the Company's Conversion. The increase in compensation and benefits was attributable to the establishment of the Company's Employee Stock Ownership Plan in connection with the Company's Conversion and annual merit increases. Occupancy increased as a result of the opening of two new branch locations. The increase in other noninterest expense was attributable to an increase in professional service fees associated with being a public company, increases in ORE expense, merger related expense, Y2K expense and a general increase in other operating expenses. The remaining categories of noninterest expense did not experience significant fluctuation. Income Tax Expense. Income tax expense decreased from $2.7 million for the year ended June 30, 1998 to $1.5 million for the comparable period in 1999. The decrease is the result of less income before income tax expense, $3.9 million in fiscal 1999 as compared to $6.7 million in fiscal 1998. 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 Company's liquidity position on a daily basis and evaluates its ability to meet depositor withdrawals or make new loans or investments. The Company's liquid assets include cash and cash equivalents, investment securities that mature within one year, and securities available for sale. The Company's cash inflows result primarily from loan repayments, maturities, calls and paydowns of securities, new deposits, and to a lesser extent, drawing upon the Company's credit lines with the Federal Home Loan Bank of New York. The Company'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 Company attempts to provide stable and flexible sources of funding through the management of its liabilities, including core deposit products offered through its branch network as well as with limited use of borrowings. Management believes that the level of the Company'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 Company. 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. The Bank's total equity was $98.0 million at June 30, 2000, 13.5% of total assets on that date. As of June 30, 2000, the Bank exceeded all of the capital requirements of the FDIC. The Bank's regulatory capital ratios at June 30, 2000 were as follows: Tier I (leverage) capital, 14.1%; Tier I risk-based capital, 20.3%; and Total risk-based capital, 21.3%. The regulatory capital minimum requirements to be considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively. 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 earning assets. When interest-bearing liabilities mature or reprice more quickly than 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 Directors. 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. 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, 2000, 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 $ 27,011 $ (577) -2.09% +150 27,204 (384) -1.39% +100 27,363 (225) -0.81% +50 27,490 (98) -0.35% 0 27,588 - 0.00% -50 27,767 179 0.65% -100 27,856 268 0.97% -150 27,860 272 0.99% -200 27,788 201 0.73% Assumed Change Net in Interest Rates Interest Dollar Percent (Basis Points) Income Change Change +200 $ 113,989 $ (20,206) -15.06% +150 119,940 (14,255) -10.62% +100 125,192 (9,003) -6.71% +50 129,924 (4,271) -3.18% 0 134,195 - 0.00% -50 137,549 3,354 2.50% -100 139,549 5,616 4.19% -150 141,304 7,109 5.30% -200 142,303 8,108 6.04% 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. 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 Directors, and management continually evaluates the usefulness of such instruments in managing interest rate risk. FORWARD-LOOKING STATEMENTS In this Annual Report, and in other public information that the company makes available, the Company may, when discussing the future, use words like "will probably result," "are expected to," "may cause," "is anticipated," "estimate," "project," or similar words. These words represent forward-looking statements. In addition, certain disclosures and information about financial institutions and their holding companies, such as an analysis of the adequacy of the allowance for loan losses or an analysis of the interest rate sensitivity of the Company's assets and liabilities, are based upon attempts to predict future events and circumstances and also represent forward-looking statements. Many factors could cause the Company's actual future results and future experience to be different from what is described in the Company's forward-looking statements. For example, adverse changes in economic conditions could cause an increase in loan delinquencies, a decrease in property values, or a change in the housing turnover rate. Changes in market interest rates or changes in the speed at which market interest rates change could cause a reduction in the Company's interest rate spread or an increase in loan delinquencies. Changes in laws and regulations affecting the financial service industry could increase expenses or reduce operating flexibility. Changes in consumer preferences could affect the Company's ability to generate deposits or originate loans. These and other future conditions could all have a material effect on our financial condition or results of operations. Please do not rely heavily on any forward-looking statements. They speak only as of the date made and they are not guarantees of what will happen in the future. Remember that various factors, including those described above and others, could affect the Company's financial performance and could cause the Company's actual results or circumstances for future periods to be materially different from what the Company anticipates or projects in its forward-looking statements. IMPACT ON INFLATION AND CHANGING PRICES The Company's consolidated financial statements are prepared in accordance with generally accepted accounting principles which require the measurement of financial condition and operating results in terms of historical dollars without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increasing cost of the Company's operations. Unlike most industrial companies, nearly all assets and liabilities of the Company are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. In addition, interest rates do not necessarily move in the direction, or to the same extent as the price of goods and services. IMPACT OF NEW ACCOUNTING STANDARDS See "Note 1 Summary of Significant Accounting Policies" in the Consolidated Financial Statements. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Cohoes Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition of Cohoes Bancorp, Inc. and subsidiary as of June 30, 2000 and 1999, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended June 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 Bancorp, Inc. and subsidiary as of June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen New York, New York August 17, 2000 COHOES BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION JUNE 30, 2000 AND 1999 (000's omitted, except share data) ASSETS 2000 1999 --------- --------- ASSETS: Cash and due from banks $ 12,531 $ 8,886 Federal funds sold - 1,870 Interest-bearing deposits with banks 127 358 --------- --------- Total cash and cash equivalents 12,658 11,114 Mortgage loans held for sale - 339 Securities available for sale, at fair value 40,074 44,742 Investment securities, at amortized cost (approximate fair value of 55,129 54,455 $53,741 and $53,721) Net loans receivable 600,413 521,005 Accrued interest receivable 4,355 3,776 Premises and equipment 7,597 7,801 Other real estate owned 561 724 Mortgage servicing rights 652 840 Other assets 5,575 5,674 --------- --------- Total assets $ 727,014 $ 650,470 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: Due to depositors $ 494,875 $ 446,123 Mortgagors' escrow deposits 9,729 10,787 Borrowings 96,201 49,045 Other liabilities 4,903 5,085 --------- --------- Total liabilities 605,708 511,040 --------- --------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 15) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued - - Common stock, $.01 par value; 25,000,000 shares authorized; 9,535,225 95 95 shares issued Additional paid-in capital 92,968 93,004 Retained earnings--subject to restrictions 58,652 55,173 Treasury stock, at cost (1,622,970 shares) (17,639) - Unallocated common stock held by ESOP (7,961) (8,598) Unearned RRP shares (4,161) - Accumulated other comprehensive loss, net of tax (648) (244) --------- --------- Total stockholders' equity 121,306 139,430 --------- --------- Total liabilities and stockholders' equity $ 727,014 $ 650,470 ========= ========= The accompanying notes are an integral part of these statements. COHOES BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (000's omitted, except per share data) 2000 1999 1998 ------------- ------------- ------------- INTEREST INCOME: Interest and fees on loans $ 43,511 $ 36,256 $ 33,573 Securities available for sale 2,289 2,298 1,933 Investment securities 3,394 3,024 1,926 FHLB stock dividends 321 253 249 Federal funds sold 164 1,182 739 Interest-bearing deposits 6 25 3 ------------- ------------- ------------- Total interest income 49,685 43,038 38,423 ------------- ------------- ------------- INTEREST EXPENSE: Deposits 17,656 17,516 18,816 Mortgagors' escrow deposits 133 339 114 Borrowings 4,751 2,479 332 ------------- ------------- ------------- Total interest expense 22,540 20,334 19,262 ------------- ------------- ------------- Net interest income 27,145 22,704 19,161 PROVISION FOR LOAN LOSSES 1,600 1,235 1,400 ------------- ------------- ------------- Net interest income after provision for loan losses 25,545 21,469 17,761 ------------- ------------- ------------- NONINTEREST INCOME: Service charges on deposits 892 779 746 Loan servicing revenue 287 376 495 Net gain on sale of mortgage loans 36 6 81 Recovery on other real estate owned 308 2 22 Provision for equity investment (950) - - Other 1,808 1,753 1,399 ------------- ------------- ------------- Total noninterest income 2,381 2,916 2,743 ------------- ------------- ------------- NONINTEREST EXPENSE: Compensation and benefits 11,027 8,571 7,322 Occupancy 3,184 2,933 2,686 Deposit insurance and assessments 99 63 65 Advertising 458 434 430 Contribution to the Cohoes Savings Foundation, Inc. - 2,777 - Merger expenses 313 2,101 - Other 3,574 3,564 3,264 ------------- ------------- ------------- Total noninterest expense 18,655 20,443 13,767 ------------- ------------- ------------- Income before provision for income taxes 9,271 3,942 6,737 PROVISION FOR INCOME TAXES 3,392 1,511 2,650 ------------- ------------- ------------- Net income $ 5,879 $ 2,431 $ 4,087 ============= ============= ============= EARNINGS PER SHARE SINCE CONVERSION: Basic $ .74 $ .37 N/A Diluted $ .74 $ .37 N/A The accompanying notes are an integral part of these statements. COHOES BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (000's omitted) Unallo- cated Accumulated common Additional other com- stock Unearned Compre- Common Paid in Retained Treasury prehensive held by RRP hensive stock capital earnings stock income, net ESOP shares Total income Balance at June 30, 1997 $ - $ - $ 49,183 $ - $ (91) $ - $ - $ 49,092 Net income for the year ended June 30, 1998 - - 4,087 - - - - 4,087 $ 4,087 Change in unrealized gain on securities available for sale, net of tax - - - - 103 - - 103 103 ----- -------- -------- --------- -------- ------- -------- --------- -------- Balance, June 30, 1998/ Comprehensive income - - 53,270 - 12 - - 53,282 $ 4,190 ======== Net income for the year ended June 30, 1999 - - 2,431 - - - - 2,431 $ 2,431 Issuance of 9,257,500 shares of $.01 par value common stock in initial public offering, net of conversion related expenses 92 90,258 - - - - - 90,350 Issuance of 277,725 shares of $.01 par value common stock to the Cohoes Savings Foundation, Inc. 3 2,774 - - - - - 2,777 Cash dividends paid - - (528) - - - - (528) Public market purchases of 762,818 shares of Cohoes Bancorp, Inc. common stock by ESOP - - - - - (9,137) - (9,137) ESOP shares allocated and committed to be released - (28) - - - 539 - 511 Change in unrealized loss on securities available for sale, net of tax - - - - (256) - - (256) (256) ----- -------- -------- --------- -------- ------- -------- --------- -------- Balance, June 30, 1999/ Comprehensive income 95 93,004 55,173 - (244) (8,598) - 139,430 $ 2,175 ======== Net income for the year ended June 30, 2000 - - 5,879 - - - - 5,879 $ 5,879 ESOP shares allocated and committed to be released - (36) - - - 637 - 601 Cash dividends paid - - (2,083) - - - - (2,083) Public market purchase of 1,967,942 shares of Cohoes Bancorp, Inc. common stock - - - (22,117) - - - (22,117) Granting of 347,122 shares of restricted stock under RRP - - (317) 4,505 - - (4,188) - Forfeited 2,150 RRP shares - - - (27) - - 27 - Change in unrealized loss on securities available for sale, net - - - - (404) - - (404) (404) ----- -------- -------- --------- -------- ------- -------- --------- -------- Balance, June 30, 2000 $ 95 $ 92,968 $ 58,652 $ (17,639) $ (648) $(7,961) $ (4,161) $ 121,306 $ 5,475 ===== ======== ======== ========= ======== ======= ======== ========= ======== The accompanying notes are an integral part of these statements. COHOES BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2000, 1999 AND 1998 (000's omitted) 2000 1999 1998 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,879 $ 2,431 $ 4,087 ------------- ------------- ------------- Adjustments to reconcile net income to net cash provided by operating activities- Charitable contribution to the Cohoes Savings Foundation, Inc. - 2,777 - Depreciation 1,322 1,296 1,117 Amortization of purchased and originated mortgage servicing rights 188 203 185 Provision for loan losses 1,600 1,235 1,400 ESOP compensation expense 601 511 - Provision for deferred tax benefit (583) (1,028) (317) Net loss (gain) on securities available for sale redeemed 8 (2) 1 Net premium amortization of investment securities 29 45 33 Net (discount) premium amortization of securities available for sale (1) (7) 4 Net gain on sale of mortgage loans (36) (6) (81) Proceeds from sale of loans held for sale 3,774 867 8,304 Loans originated for sale (3,399) (1,162) (8,087) Increase in interest receivable (579) (294) (272) Decrease (increase) in other assets, net of deferred tax benefit 682 (2,436) (197) (Decrease) increase in other liabilities (182) 1,083 (154) Net loss on sale/write-downs of other real estate owned 148 151 644 ------------- ------------- ------------- Total adjustments 3,572 3,233 2,580 ------------- ------------- ------------- Net cash provided by operating activities 9,451 5,664 6,667 ------------- ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investment securities called/matured $ 2,500 $ 20,025 $ 13,000 Purchase of investment securities (4,998) (37,609) (40,591) Proceeds from securities available for sale called/matured - 26,300 23,650 Proceeds from the sale of securities available for sale 1,595 - 60 Purchase of securities available for sale (1,459) (30,600) (42,305) Proceeds from principal reduction in investment securities 5,149 8,508 7,408 Proceeds from principal reduction in securities available for sale 4,121 8,031 5,448 Net loans made to customers (85,521) (111,308) (16,723) Originated mortgage servicing rights - (1) (81) Proceeds from sale of other real estate owned 1,174 1,461 1,815 Capital expenditures (1,118) (1,794) (763) -------------- ------------- ------------- Net cash used in investing activities (78,557) (116,987) (49,082) -------------- ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (decrease) increase in mortgagors' escrow deposits (1,058) 1,793 (68) Net increase in borrowings 47,156 29,148 19,897 Net increase (decrease) in deposits 48,752 (3,418) 20,151 Net proceeds from the issuance of common stock - 90,350 - Cash dividends paid (2,083) (528) - Purchase of treasury shares (22,117) - - Purchase of shares for ESOP - (9,137) - -------------- ------------- ------------- Net cash provided by financing activities 70,650 108,208 39,980 -------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents 1,544 (3,115) (2,435) CASH AND CASH EQUIVALENTS, beginning of year 11,114 14,229 16,664 ------------- ------------- ------------- CASH AND CASH EQUIVALENTS, end of year $ 12,658 $ 11,114 $ 14,229 ============= ============= ============= ADDITIONAL DISCLOSURE RELATIVE TO CASH FLOWS: Interest paid $ 22,490 $ 20,171 $ 19,235 Taxes paid 4,050 1,893 2,780 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Transfer of loans to other real estate owned $ 1,159 $ 1,827 $ 1,094 SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Granting of restricted stock under RRP $ 4,188 $ - $ - The accompanying notes are an integral part of these statements. COHOES BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000, 1999 AND 1998 (000's omitted, except share data) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements of Cohoes Bancorp, Inc. (the "Company") and subsidiary conform, in all material respects, to generally accepted accounting principles and to general practice within the savings bank industry. The Company utilizes the accrual method of accounting for financial reporting purposes. As more fully discussed in Note 2, Cohoes Bancorp, Inc., a Delaware corporation, was organized by the Bank for the purpose of acquiring all of the capital stock of the Bank pursuant to the conversion of the Bank from a New York mutual savings bank to a New York stock savings bank. The Company is subject to the financial reporting requirements of the Securities and Exchange Act of 1934, as amended. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Cohoes Savings Bank (the "Bank"). All significant intercompany accounts and transactions are eliminated in consolidation. 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 stockholders' equity. Gains and losses on disposition of all investment securities are based on the adjusted cost of the specific security sold. At June 30, 2000 and 1999, the Bank did not hold any securities considered to be trading securities. 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 "other noninterest income" 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 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 is secured by real estate located in the Albany, New York area. In addition, a substantial portion of the other real estate owned is located in this market. 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 this market area. 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. 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. 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 $17, $6 and $45, for the years ended June 30, 2000, 1999 and 1998, respectively. Premises and Equipment 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, 2000 and 1999, these properties consisted of residential and commercial mortgage properties located in the Albany, New York area. Income Taxes For Federal income and New York State franchise tax purposes, the Company utilizes the accrual basis method of accounting. The Company 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. 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. Earnings Per Share On December 31, 1998, Cohoes Bancorp, Inc. completed its initial stock offering of 9,257,500 shares of common stock. Concurrent with the offering, approximately 8% of the shares issued (762,818) were purchased by the Cohoes Bancorp, Inc. Employee Stock Ownership Plan ("ESOP") using the proceeds of a loan from the Company to the ESOP. As of June 30, 2000, 98,126 shares have been released or committed to be released from the ESOP trust for allocation to ESOP participants. Consequently, the remaining 664,692 shares have not yet been released and under AICPA Statement of Position 93-6, these shares will not be considered outstanding for purposes of calculating per share amounts. Earnings per share are not presented for periods prior to the initial public offering as the Bank was a mutual savings bank, and had no stock outstanding. The following is a reconciliation of the numerator and denominator for the basic and diluted earnings per share (EPS) calculations for the year ended June 30, 2000 and 1999. 2000 1999 (since conversion) ------------------------------------------- ----------------------------------------- Weighted Weighted Average Average Net income Shares Per share Net income Shares Per share (numerator) (denominator) Amount (numerator) (denominator) Amount ------------- -------------- ----------- ------------ -------------- ---------- Basic EPS $ 5,879 7,998,610 $ 0.74 $ 3,286 8,797,601 $ 0.37 =========== ========== Dilutive effect of potential Common shares related to stock based compensation plans - - - - ------------- -------------- ----------- ------------ -------------- ---------- $ 5,879 7,998,610 $ 0.74 $ 3,286 8,797,601 $ 0.37 ============= ============== =========== ============ ============== ========== Employee Benefits The Company follows the provisions of the AICPA's Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans." SOP 93-6 requires that compensation expense be recognized in an amount equal to the shares allocated by the ESOP multiplied by the average fair value of the common stock during the year. The difference between the average fair value and the weighted average per share cost of shares allocated by the ESOP is recorded as an adjustment to additional paid-in-capital. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures About Pension and Other Postretirement Benefits." SFAS No. 132 only addresses disclosure and does not change any of the measurement or recognition provisions provided for in previously issued accounting standards. The Company adopted SFAS No. 132 in fiscal 1999. Comprehensive Income Comprehensive income includes net income and all other changes in equity during a period except those resulting from investments by owners and distributions to owners. Other comprehensive income includes revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but excluded from net income. Comprehensive income and accumulated other comprehensive income are reported net of related income taxes. Accumulated other comprehensive income for the Company consists solely of unrealized holding gains or losses on available-for-sale securities. New Accounting Pronouncements 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 and for hedging activities. In June 1999, the FASB issued SFAS No. 137, "Deferral of the Effective Date of SFAS No. 133". This statement defers the adoption of SFAS No. 133 by one year. As the Company does not engage in derivatives trading, this statement will not have a material effect on the Company's financial statements. Reclassifications Amounts in the prior year's consolidated financial statements are reclassified whenever necessary to conform with the current year's presentation. 2. ORGANIZATION/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 to be organized at the direction of the Bank. The Company is regulated by the Office of Thrift Supervision ("OTS"). The Company completed its initial public offering on December 31, 1998 and issued 9,257,500 shares of common stock resulting in proceeds of $90.4 million, net of expenses totaling $2.2 million. The Company used $45.2 million or 50% of the net proceeds to purchase all of the outstanding stock of the Bank. The Company also loaned $9.1 million to the ESOP which purchased 762,818 shares of the Company's stock in the initial public offering. As part of the Plan of Conversion, the Company formed the Cohoes Savings Foundation, Inc. and donated 277,725 shares of the Company valued at approximately $2.8 million. The Company recorded a contribution expense charge and a corresponding deferred tax benefit of $1.1 million for this donation. The formation of this private charitable foundation is to further the Bank's commitment to the communities that it serves. Additionally, the Bank established, in accordance with the requirements of the OTS, a liquidation account for $54.5 million which was equal to its capital as of the date of the latest consolidated statement of financial condition (September 30, 1998) appearing in the IPO prospectus. The liquidation account is reduced as and to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases in deposits do not restore an eligible account holder's interest in the liquidation account. In the unlikely event of a complete liquidation of the Bank, each eligible account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying balances for accounts then held. In addition to the restriction described above, 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 or if such declaration and payment would otherwise violate regulatory requirements. During fiscal 2000, the Company paid cash dividends totaling $2,083. 3. MERGER TERMINATIONS On July 31, 1998, the Bank and SFS Bancorp, Inc. ("SFS"), parent of Schenectady Federal Savings Bank, executed an Agreement and Plan of Merger. On October 23, 1998, the proposed merger was terminated. In connection with the termination, the Bank paid an agreed-upon breakup fee of $2.0 million to SFS. On April 25, 2000, the Company and Hudson River Bancorp, Inc. ("HRBT"), parent of Hudson River Bank and Trust, executed an Agreement and Plan of Merger. On August 17, 2000, the proposed merger was not approved by the shareholders of the Company. In connection with stock option agreements dated April 25, 2000, each of HRBT and the Company has granted the other a conditioned option to purchase up to 19.9% of the outstanding shares of its common stock at a fixed price equal to the closing sales price of the common stock on April 24, 2000. The initial triggering event, as defined, has occurred under each of these agreements. However, neither option can be exercised until a subsequent triggering event, as defined, also occurs, and no subsequent triggering event has occurred. 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, 2000, that the Bank meets all capital adequacy requirements to which it is subject. As of June 30, 2000, 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 and the Company's actual capital amounts and ratios are presented in the following tables: To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Bank Actual Purposes Action Provisions - ---- ---------------------- ---------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio As of June 30, 2000: Total capital (to risk weighted assets) $ 102,963 21.3% $ 38,500 >8.0% $ 48,125 >10.0% Tier 1 Capital (to risk weighted assets) 97,950 20.3 19,250 >4.0 28,875 >6.0 Tier 1 Capital (to average assets) 97,950 14.1 27,865 >4.0 34,831 >5.0 Consolidated Actual --------------------- Amount Ratio As of June 30, 2000: Total capital (to risk weighted assets) $126,319 26.2% Tier 1 Capital (to risk weighted assets) 121,306 25.2 Tier 1 Capital (to average assets) 121,306 17.5 To Be Well Capitalized For Capital Adequacy Under Prompt Corrective Bank Actual Purposes Action Provisions - ---- ---------------------- ---------------------- ----------------------- Amount Ratio Amount Ratio Amount Ratio As of June 30, 1999: Total capital (to risk weighted assets) $ 97,254 23.4% $ 33,271 >8.0% $ 41,589 >10.0% Tier 1 Capital (to risk weighted assets) 93,229 22.4 16,636 >4.0 24,953 >6.0 Tier 1 Capital (to average assets) 93,229 15.5 24,076 >4.0 30,095 >5.0 Consolidated Actual --------------------- Amount Ratio As of June 30, 1999: Total capital (to risk weighted assets) $143,455 34.4% Tier 1 Capital (to risk weighted assets) 139,430 33.5 Tier 1 Capital (to average assets) 139,430 23.2 5. SECURITIES AVAILABLE FOR SALE The amortized cost of securities available for sale and their related estimated fair values at June 30, 2000 and 1999, are as follows: June 30, 2000 ------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------------- ------------- ------------- ------------- Debt securities: U.S. Government and agencies $ 14,993 $ - $ (450) $ 14,543 Other obligations 378 5 (6) 377 Mortgage-backed securities 17,468 - (538) 16,930 Collateralized mortgage obligations 737 - (17) 720 ------------- ------------- ------------- ------------- Total debt securities 33,576 5 (1,011) 32,570 Equity securities 7,439 65 - 7,504 ------------- ------------- ------------- ------------- Total securities available for sale $ 41,015 $ 70 $ (1,011) $ 40,074 ============= ============= ============= ============= June 30, 1999 ------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ------------- ------------- ------------- ------------- Debt securities: U.S. Government and agencies $ 15,991 $ 1 $ (245) $ 15,747 Other obligations 379 5 (5) 379 Mortgage-backed securities 21,142 32 (257) 20,917 Collateralized mortgage obligations 1,411 1 (13) 1,399 ------------- ------------- ------------- ------------- Total debt securities 38,923 39 (520) 38,442 Equity securities 6,212 89 (1) 6,300 ------------- ------------- ------------- ------------- Total securities available for sale $ 45,135 $ 128 $ (521) $ 44,742 ============= ============= ============= ============= The equity investment securities at June 30, 2000 and 1999 consist primarily of common stock of the Federal Home Loan Bank of New York. A summary of maturities of debt securities available for sale at June 30, 2000 is as follows: Amortized Cost Estimated Fair Value ------------- ------------- Within one year $ 1,999 $ 1,982 From one to five years 21,678 21,059 After five years to ten years 624 617 After ten years 9,275 8,912 ------------- ------------- Total debt securities available for sale $ 33,576 $ 32,570 ============= ============= During the three years ended June 30, 2000, there were no sales of debt securities available for sale. 6. INVESTMENT SECURITIES The amortized cost of securities held for investment and their related estimated fair values at June 30, 2000 and 1999 are as follows: June 30, 2000 ----------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value -------------- -------------- ------------ ------------- Investment securities: U.S. Government and agencies $ 29,985 $ 4 $ (769) $ 29,220 Other obligations 5,194 - (17) 5,177 Mortgage-backed securities 19,950 1 (607) 19,344 -------------- -------------- ------------ ------------- Total investment securities $ 55,129 $ 5 $ (1,393) $ 53,741 ============== ============== ============ ============= June 30, 1999 ------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value -------------- ------------- ------------- ------------- Investment securities: U.S. Government and agencies $ 27,505 $ - $ (457) $ 27,048 Other obligations 2,148 1 (4) 2,145 Mortgage-backed securities 24,802 47 (321) 24,528 -------------- ------------- ------------- ------------- Total investment securities $ 54,455 $ 48 $ (782) $ 53,721 ============== ============= ============= ============= A summary of maturities of debt securities held for investment at June 30, 2000 is as follows: Amortized Cost Estimated Fair Value -------------- -------------- Within one year $ 6,949 $ 6,909 From one to five years 36,114 35,127 After five years to ten years 2,466 2,468 After ten years 9,600 9,237 -------------- -------------- Total debt securities held for investment $ 55,129 $ 53,741 ============== ============== There were no sales of securities held for investment during the three years ended June 30, 2000. 7. NET LOANS RECEIVABLE A summary of loans at June 30, 2000 and 1999 is as follows: 2000 1999 ---------------- ---------------- Mortgage loans on real estate: Residential adjustable rate loans $ 149,518 $ 134,419 Commercial real estate 172,596 138,288 Residential fixed rate loans 203,406 185,769 FHA and VA insured loans 425 533 ---------------- ---------------- Total mortgage loans 525,945 459,009 ---------------- ---------------- Other loans: Conventional second mortgages 11,853 12,724 Home equity lines of credit 19,692 20,090 Commercial business loans 37,316 22,054 Home improvement loans 390 349 Auto loans 8,610 9,658 Personal loans, secured and unsecured 769 565 Other loans 467 330 ---------------- ---------------- Total other loans 79,097 65,770 ---------------- ---------------- Less: Deferred loan origination fees and costs 384 251 Allowance for loan losses (5,013) (4,025) ---------------- ---------------- Net loans $ 600,413 $ 521,005 ================ ================ Changes in the allowance for loan losses for the three years ended June 30 were as follows: 2000 1999 1998 --------------- --------------- --------------- Balance, beginning of year $ 4,025 $ 3,533 $ 3,105 Provision charged to operations 1,600 1,235 1,400 Loans charged-off, net (612) (743) (972) --------------- --------------- --------------- Balance, end of year $ 5,013 $ 4,025 $ 3,533 =============== =============== =============== The following table sets forth the information with regard to nonperforming loans at June 30, 2000 and 1999: 2000 1999 ------------- ------------- Loans on nonaccrual status and in the process of foreclosure $ 1,837 $ 3,548 Loans on nonaccrual status but not in the process of foreclosure 1,491 773 Loans past due 90 days or more and still accruing interest - - Loans restructured as to payment terms and/or interest rates 715 672 ------------- ------------- Total nonperforming loans $ 4,043 $ 4,993 ============= ============= Accumulated interest income on nonaccrual loans of approximately $432, $381 and $214 was not recognized as income in the years ended June 30, 2000, 1999 and 1998, respectively. There are no commitments to extend further credit on nonperforming loans. As of June 30, 2000 and 1999, the Bank's recorded investment in impaired loans and the related valuation allowance calculated under SFAS No. 114 are as follows: 2000 1999 ------------------------------- ------------------------------- Recorded Valuation Recorded Valuation Investment Allowance Investment Allowance -------------- -------------- -------------- ------------- Valuation allowance required $ 715 $ 113 $ 672 $ 73 Valuation allowance not required - - - - -------------- -------------- -------------- ------------- $ 715 $ 113 $ 672 $ 73 ============== ============== ============== ============= 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, 2000 and 1999 was approximately $695 and $1.8 million, 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 $62, $198 and $215 on impaired loans for the years ended June 30, 2000, 1999 and 1998, respectively. Accumulated interest income on impaired loans of approximately $12, $9 and $15 was not recognized as income in the years ended June 30, 2000, 1999 and 1998, respectively. 8. ACCRUED INTEREST RECEIVABLE Accrued interest receivable consists of the following at June 30, 2000 and 1999: 2000 1999 ------------ ------------ Loans $ 3,405 $ 2,827 Investment securities and securities available for sale 950 949 ------------ ------------ $ 4,355 $ 3,776 ============ ============ 9. PREMISES AND EQUIPMENT Premises and equipment consist of the following at June 30, 2000 and 1999: 2000 1999 -------------- -------------- Land $ 1,707 $ 1,707 Building and leasehold improvements 7,275 7,060 Furniture, fixtures and equipment 8,280 7,390 -------------- -------------- 17,262 16,157 Less- Accumulated depreciation (9,665) (8,356) --------------- -------------- $ 7,597 $ 7,801 ============== ============== Amount charged to depreciation expense was $1.3 million, $1.3 million and $1.1 million for the years ended June 30, 2000, 1999 and 1998, respectively. 10. MORTGAGE SERVICING RIGHTS The following is a summary of the mortgage servicing rights activity during the years ended June 30, 2000, 1999 and 1998: 2000 1999 1998 ------------ ------------ ------------ Balance, beginning of year $ 840 $ 1,042 $ 1,146 Mortgage servicing rights originated from unrelated third parties - 1 81 Amortization of mortgage servicing rights included as a reduction of servicing fee income in the consolidated statements of operations (188) (203) (185) ------------ ------------ ------------ Balance, end of year $ 652 $ 840 $ 1,042 ============ ============ ============ Serviced Loans The total loans serviced by the Bank for unrelated third parties were approximately $167.0 million, $189.7 million and $233.1 million at June 30, 2000, 1999 and 1998, respectively. 11. DUE TO DEPOSITORS Due to depositors account balances as of June 30, 2000 and 1999 are summarized as follows: Range of Interest Rate 2000 1999 ------------- ----------------- ----------------- Savings accounts 2.0% - 4.9% $ 150,517 $ 151,763 Money market accounts 2.8 - 6.5 21,904 23,329 ----------------- ----------------- 172,421 175,092 Time deposits 1.5 - 7.8 248,502 205,215 Commercial deposits 0.0 - 4.2 22,226 19,271 Demand accounts 0.0 - 1.5 51,726 46,545 ----------------- ----------------- $ 494,875 $ 446,123 ================= ================= Time deposits over $100,000 amounted to approximately $37.5 million and $27.8 million at June 30, 2000 and 1999, respectively. The approximate amount of contractual maturities of time deposits for the years subsequent to June 30, 2000 is as follows: Years ending June 30: 2001 $ 191,452 2002 32,121 2003 12,239 2004 7,473 2005 and thereafter 5,217 ----------- $ 248,502 =========== Interest expense on deposits for the years ended June 30, 2000, 1999 and 1998 is summarized as follows: 2000 1999 1998 --------------- --------------- --------------- Savings accounts $ 4,458 $ 4,667 $ 4,459 Money market accounts 860 686 569 Time deposits 11,898 11,810 13,484 Demand accounts 440 353 304 --------------- --------------- --------------- Total interest expense on deposits $ 17,656 $ 17,516 $ 18,816 =============== =============== =============== 12. BORROWINGS Information concerning borrowings, which primarily consist of Federal Home Loan Bank ("FHLB") advances, for the years ended June 30, 2000, 1999 and 1998 is summarized as follows: 2000 1999 1998 ----------- ----------- ----------- Average balance during the year $ 81,927 $ 43,270 $ 5,467 Average interest rate during the year 5.80% 5.73% 6.07% Maximum month-end balance during the year $ 96,201 $ 52,038 $ 19,983 Interest expense on borrowings $ 4,751 $ 2,479 $ 332 FHLB advances are made at fixed rates with remaining maturities of approximately 5 years as of June 30, 2000. 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 Directors. 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, 2000, 1999 and 1998 were approximately $474, $399 and $378, 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 following table sets forth the status of the postretirement benefit obligation: 2000 1999 ------------ ------------ Benefit obligation at beginning of year $ 969 $ 716 Service cost 13 13 Interest cost 65 65 Benefits paid (61) (61) Actuarial (gains)/losses - 236 ------------ ------------ Benefit obligation at end of year $ 986 $ 969 ============ ============ Funded status $ (986) $ (969) Unrecognized net (gain)/losses from actual experience different from assumed (39) (45) ------------ ------------ Accrued postretirement benefit cost $ (1,025) $ (1,014) ============ ============ Net periodic postretirement benefit cost included the following components: 2000 1999 1998 ----------- ----------- ----------- Service cost $ 13 $ 13 $ 12 Interest cost 65 65 49 Amortization of net gain from actual experience different from assumed - - (61) ----------- ----------- ----------- Net periodic benefit cost $ 78 $ 78 $ - =========== =========== =========== The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7% as of June 30, 2000 and 1999 and 7.25% as of June 30, 1998. For measurement purposes, the assumed health care cost trend rate of 9.5% decreases gradually until an ultimate trend rate of 5.5% is reached over 8 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. The health care cost trend rate assumption may have a significant effect on the amount of obligation and expense reported. Increasing the health care trend rate by one percent each year would have no material effect on the net periodic postretirement benefit cost for the three years ended June 30, 2000. Employee Stock Ownership Plan The Company has established an ESOP for eligible employees. Generally full-time employees of the Company or the Bank who are at least age 21 and have been credited with at least 1,000 hours during a twelve-month period are eligible to participate. The ESOP borrowed $9.1 million at an interest rate of 7.25% from the Company and used the funds to purchase 762,818 shares of the Company's common stock in the public trading market. The loan is being repaid principally from the Bank's discretionary contributions to the ESOP over a 15-year period. At June 30, 2000, the loan had an outstanding balance of $8.4 million. Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is paid. Contributions to the ESOP and shares released from the loan collateral in an amount proportional to the repayment of the ESOP loan are allocated among participants on the basis of compensation, as described in the plan, in the year of allocation. Benefits generally become 100% vested after 5 years of vesting service and are immediately vested on death, retirement or disability. In addition, in the event of a change in control, as defined in the plan, any unvested portion of benefits shall vest immediately. Forfeitures are added to the employer contributions to the Plan and allocated to other participants. As of June 30, 2000, 71,538 shares had been specifically allocated, 26,588 shares were committed to be released and 664,692 shares remain unallocated. The fair value of the unallocated ESOP shares was $9.1 million at June 30, 2000. In accordance with SOP 93-6, the Company recorded compensation expense of $601 and $511 for the years ended June 30, 2000 and 1999, respectively, which is equal to the shares specifically allocated and committed to be released by the ESOP multiplied by the average estimated fair value of common stock. Recognition and Retention Plan The Company maintains the RRP. The RRP acquired an aggregate of 347,122 shares of the Company's common stock in open market purchases, which have been awarded to eligible directors, director emeritus, officers and employees of the Company. During the fiscal year, 2,150 shares from this plan were forfeited. As of June 30, 2000, 344,972 shares were unvested. Such awards represent deferred compensation and have been accounted for as a reduction of stockholders' equity. Awards generally vest at a rate of 20% per year, commencing one year from the date of award. Awards become 100% vested upon termination of service due to death or disability. The Company recorded expense for the RRP of $832 in the year ended June 30, 2000, which is included in salary and employee benefits in the consolidated statements of income. Stock Option Plan The Company maintains the Stock Option Plan and under the Stock Option Plan, stock options (which generally expire ten years from the date of grant) have been granted to eligible employees, directors, director emeritus and officers of the Company and the Bank. Each option entitles the holder to purchase one share of the Company's common stock at an exercise price equal to the fair market value of the stock at the date of grant. Options generally become exercisable at a rate of 20% per year, commencing one year from the date of grant. However, all options become 100% exercisable upon termination of service due to death or disability. The following table presents options granted, exercised or expired: Year Ended June 30, 2000 ------------------------ Option price Shares per share ------- --------- Balance, beginning of year - - Options granted 865,555 $ 12.0625 Options exercised - - Options expired or terminated 5,000 $ 12.0625 ------- --------- Balance, at end of year 860,555 $ 12.0625 ======= ========= No options are currently exercisable at June 30, 2000. The fair value of each option was estimated on the date granted using the Black-Scholes option pricing model. The fair value of the options granted in fiscal 2000 was $3.34. The following weighted averages were used in fiscal 2000: risk free interest rate of 5.93%; expected dividend yield of 1.98%; expected life of five years; and expected volatility of 26.09%. The Company accounts for the Stock Option Plan under APB No. 25, under which no compensation cost has been recognized. Had compensation cost for the Stock Option Plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: Year Ended June 30, 2000 ------------------- Net Income: As Reported $ 5,879 Pro Forma $ 5,304 Basic EPS: As Reported $ .74 Pro Forma $ .66 Benefit Restoration Plan The Bank adopted the Benefit Restoration Plan of Cohoes Savings Bank ("BRP") ,in connection with the Conversion, to provide certain designated employees with the benefits that would be due to such employees under the other benefit plans if such benefits were not limited under the Internal Revenue Code. Expense related to the BRP included in the consolidated statement of income for the year ended June 30, 2000 and 1999 was $123 and $17, respectively. 14. INCOME TAXES The components of the income tax expense (benefit) are as follows: 2000 1999 1998 ----------- ------------ ------------ Current tax expense: Federal $ 3,525 $ 2,155 $ 2,450 State 450 384 517 Deferred tax expense (benefit) (583) (1,028) (317) ----------- ------------ ------------ $ 3,392 $ 1,511 $ 2,650 =========== ============ ============ The provision for income taxes differs from that computed at the federal statutory rate as follows: 2000 1999 1998 ------------- ------------- ------------- Tax at federal statutory rate $ 3,152 $ 1,341 $ 2,291 State taxes, net of federal benefit 297 253 341 Other, net (57) (83) 18 ------------- ------------- ------------- Total income tax expense $ 3,392 $ 1,511 $ 2,650 ============= ============= ============= Effective rate 36.59% 38.33% 39.34% ============= ============= ============= The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at June 30, 2000 and 1999 are presented below: 2000 1999 -------------- -------------- Deferred tax assets: Differences in reporting the provision for loan losses $ 2,080 $ 1,731 Differences in reporting certain accrued expenses 1,176 862 Contribution carryforward 246 762 Capital loss carryforward 395 - Other 78 146 -------------- -------------- Total gross deferred tax assets 3,975 3,501 -------------- -------------- Deferred tax liabilities: Differences in reporting the provision for loan losses 128 257 Deferred net loan origination fees 265 240 Differences in reporting certain accrued expenses 373 381 Other 3 - -------------- -------------- Total gross deferred tax liabilities 769 878 -------------- -------------- Net deferred tax asset at end of year 3,206 2,623 Net deferred tax asset at beginning of year 2,623 1,595 -------------- -------------- Deferred tax benefit for the year $ (583) $ (1,028) ============== ============== The total deferred tax asset as of June 30, 2000 and 1999 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 asset of approximately $399 and $150 at June 30, 2000 and 1999, respectively, related to the net unrealized 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. 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. 15. 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, 2000 at fixed and variable interest rates are as follows: 2000 ------------------------------------------------- Fixed Variable Total ------------- ------------- ------------- Financial instruments whose contract amounts represent credit risk (including unused lines of credit and unadvanced funds): Commercial business loans $ 2,041 $ 32,439 $ 34,480 Conventional mortgages 7,376 14,888 22,264 Commercial mortgage loans 5,433 11,859 17,292 Construction loans - 1,442 1,442 Consumer loans 3,067 14,844 17,911 ------------- ------------- ------------- $ 17,917 $ 75,472 $ 93,389 ============= ============= ============= 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, 2000 $222.0 million 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. 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, 2000, the Bank has no 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, Saratoga, Warren, Washington and Greene. 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. Borrowing Arrangements The Bank has lines of credit available with a correspondent bank totaling approximately $65.0 million. These lines of credit expire on October 28, 2000. As of June 30, 2000, there were outstanding balances of $18.1 million 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: 2001 $ 592 2002 409 2003 363 2004 269 2005 and thereafter 118 --------- Total $ 1,751 ========= Total lease expense was approximately $624, $441 and $383 for the years ended June 30, 2000, 1999 and 1998, respectively. Contingent Liabilities In the ordinary course of business, there are various legal proceedings pending against the Company. 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 Company's consolidated statement of financial condition. 16. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures About the Fair Value of Financial Instruments," requires that the Company 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 Company's entire holdings of a particular financial instrument. The fair value estimates of a significant portion of the Company'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 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. The estimated fair value of loans held for sale approximated their book value. 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. 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, 2000 and 1999 are as follows: 2000 1999 --------------------------------- ---------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------------- --------------- --------------- --------------- Financial assets: Cash and cash equivalents $ 12,658 $ 12,658 $ 11,114 $ 11,114 Mortgage loans held for sale - - 339 339 Securities available for sale 40,074 40,074 44,742 44,742 Investment securities 55,129 53,741 54,455 53,721 Loans $ 605,426 $ 591,894 $ 525,030 $ 491,167 Less- Allowance for loan losses (5,013) - (4,025) - --------------- --------------- --------------- --------------- Net loans receivable $ 600,413 $ 591,894 $ 521,005 $ 491,167 =============== =============== =============== =============== Accrued interest receivable $ 4,355 $ 4,355 $ 3,776 $ 3,776 2000 1999 --------------------------------- ---------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value --------------- --------------- --------------- --------------- Financial liabilities: Due to depositors- Demand, savings and money market $ 246,373 $ 246,373 $ 240,908 $ 240,908 accounts Time deposits 248,502 248,017 205,215 206,811 Mortgagors' escrow deposits 9,729 9,729 10,787 10,787 Borrowings 96,201 100,943 49,045 50,804 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. 17. COHOES BANCORP, INC. - PARENT COMPANY ONLY FINANCIAL STATEMENTS The following condensed statement of financial condition as of June 30, 2000 and 1999 and condensed statements of operations and cash flows for the year ended June 30, 2000 and for the period from December 31, 1998 through June 30, 1999 should be read in conjunction with the consolidated financial statements and the notes thereto. Condensed Statement of Financial Condition June 30, 2000 and 1999 (000's omitted) 2000 1999 --------- --------- Assets: Checking account with subsidiary $ 40 $ 28 Securities available for sale 531 - Investment in subsidiary 98,292 92,985 Loan receivable from ESOP 8,307 8,742 Loan receivable from subsidiary 13,500 35,700 Other assets 641 2,125 --------- --------- Total assets $ 121,311 $ 139,580 ========= ========= Liabilities: Other liabilities $ 5 $ 150 Stockholders' equity: Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued - - Common stock, $.01 par value; 25,000,000 shares authorized; 9,535,225 shares issued 95 95 Additional paid-in capital 92,968 93,004 Retained earnings subject to restrictions 58,652 55,173 Treasury stock, at cost (1,622,970 shares) (17,639) - Unallocated common stock held by ESOP (7,961) (8,598) Unearned RRP shares (4,161) - Accumulated other comprehensive loss, net of tax (648) (244) --------- --------- Total stockholders' equity $ 121,306 $ 139,430 --------- --------- Total liabilities and stockholders' equity $ 121,311 $ 139,580 ========= ========= Condensed Statement of Operations For the Period Ended June 30, 2000 and 1999 (000's omitted) 2000 1999 -------------- -------------- Interest and dividend income $ 1,965 $ 1,371 Interest expense - - -------------- -------------- Net interest income 1,965 1,371 Noninterest income - - Noninterest expenses: Contribution to Cohoes Savings Foundation, Inc. - 2,777 Professional fees 189 56 Merger expenses 313 - Other noninterest expense 219 144 -------------- -------------- Total noninterest expense 721 2,977 Net income (loss) before income tax 1,244 (1,606) Income tax expense (benefit) 512 (627) -------------- -------------- Net income before undistributed earnings of subsidiary bank 732 (979) Equity in undistributed earnings of subsidiary 5,147 3,410 -------------- -------------- Net income $ 5,879 $ 2,431 ============== ============== Condensed Statement of Cash Flows For the Period Ended June 30, 2000 and 1999 (000's omitted) 2000 1999 -------------- -------------- Cash flows from operating activities: Net income $ 5,879 $ 2,431 -------------- -------------- Adjustments to reconcile net loss to net cash used in operating Activities- Charitable contribution to the Cohoes Savings Foundation, Inc. - 2,777 Provision for deferred tax benefit (expense) 494 (708) Decrease (increase) in other assets 967 (1,417) (Decrease) increase in other liabilities (145) 150 Undistributed earnings of subsidiary bank (5,147) (3,410) -------------- -------------- Total adjustments (3,831) (2,608) -------------- -------------- Net cash used by operating activities 2,048 (177) Cash flows from investing activities: Investment in common stock of subsidiary - (45,175) Purchase of securities available for sale (471) - Loan repayments from/(made to) subsidiary 22,200 (35,700) Loan repayments from/(made to) ESOP 435 (8,742) -------------- -------------- Net cash used in investing activities 22,164 (89,617) Cash flows from financing activities: Net proceeds from issuance of common stock in initial public Offering - 90,350 Purchase of treasury stock (22,117) - Cash dividends paid (2,083) (528) -------------- -------------- Net cash provided by financing activities (24,200) 29,822 -------------- -------------- Net increase in cash 12 28 Cash, beginning of year 28 - -------------- -------------- Cash, end of year $ 40 $ 28 ============== ============== 18. QUARTERLY FINANCIAL DATA (UNAUDITED) Selected unaudited quarterly financial data for the years ended June 30, 2000 and 1999 is presented below: Fourth Quarter Third Quarter Second Quarter First Quarter -------------- ------------- -------------- ------------- 2000: Interest income $ 13,057 $ 12,602 $ 12,273 $ 11,753 Interest expense 6,097 5,820 5,509 5,114 -------------- ------------- -------------- ------------- Net interest income 6,960 6,782 6,764 6,639 Provision for loan losses 350 300 610 340 Noninterest income 905 912 (98) 662 Noninterest expense 5,150 4,794 4,399 4,311 -------------- ------------- -------------- ------------- Income before income tax expense 2,365 2,600 1,657 2,650 Income tax expense 876 945 567 1,005 -------------- ------------- -------------- ------------- Net income $ 1,489 $ 1,655 $ 1,090 $ 1,645 ============== ============= ============== ============= Earnings per share - Basic .21 .21 .13 .19 Diluted .21 .21 .13 .19 1999: Interest income $ 11,209 $ 11,157 $ 10,556 $ 10,116 Interest expense 4,803 4,786 5,536 5,209 -------------- ------------- -------------- ------------- Net interest income 6,406 6,371 5,020 4,907 Provision for loan losses 450 425 180 180 Noninterest income 740 701 797 678 Noninterest expense 4,038 3,984 8,628 3,793 -------------- ------------- -------------- ------------- Income (loss) before income tax expense 2,658 2,663 (2,991) 1,612 Income tax expense (benefit) 992 1,043 (1,153) 629 -------------- ------------- -------------- ------------- Net income (loss) $ 1,666 $ 1,620 $ (1,838) $ 983 ============== ============= ============== ============= Earnings per share since conversion- Basic .19 .18 N/A N/A Diluted .19 .18 N/A N/A CORPORATE INFORMATION ================================================================== Corporate Offices Cohoes Bancorp, Inc. 75 Remsen St. Cohoes, New York 12047 (518) 233-6500 Form 10-K For the 2000 fiscal year, Cohoes Bancorp, Inc. has filed an Annual Report on Form 10-K. Shareholders wishing a copy may obtain one free of charge by writing: Richard A. Ahl Executive Vice President, Secretary & CFO Cohoes Bancorp, Inc. 75 Remsen St. Cohoes, New York 12047 Transfer Agent and Registrar American Stock Transfer & Trust Company 40 Wall Street New York, New York 10005 Independent Public Accountants Arthur Andersen LLP 1345 Avenue of the Americas New York, New York 10105 Special Counsel Elias, Matz, Tiernan & Herrick LLP 12th Floor 734 15th Street, N.W. Washington, D.C. 20005 Common Stock The common stock of Cohoes Bancorp, Inc. trades on the Nasdaq stock market under the symbol "COHB." At September 1, 2000, there were approximately 4,600 holders of record and approximately 2,200 beneficial shareholders. Cohoes Bancorp, Inc. common stock was issued at $10.00 per share in connection with the Company's initial public offering completed on December 31, 1998. The following table shows the range of high and low sale prices for each quarterly period since the Company's common stock began trading in January 1999, as well as the dividends declared each quarter. Dividends Fiscal 1999 High Low Declared - ----------- ------ ------- --------- Third Quarter $13.00 $ 10.38 N/A Fourth Quarter $12.00 $ 9.25 $0.06 Fiscal 2000 - ----------- First Quarter $13.13 $ 11.56 $0.06 Second Quarter $12.63 $ 9.38 $0.06 Third Quarter $10.31 $ 9.38 $0.07 Fourth Quarter $14.69 $ 9.69 $0.07 During fiscal 2000, the Company declared dividends totaling $2.1 million or $.26 per share on its common stock. Dividend payment decisions are made with consideration of a variety of factors including earnings, financial condition, market considerations and regulatory restrictions. Restrictions on dividend payments are described in Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report. BOARD OF DIRECTORS AND OFFICERS COHOES BANCORP, INC. BOARD OF DIRECTORS Duncan S. MacAffer Chairman, Cohoes Bancorp, Inc.; Attorney Arthur E. Bowen President, Bowen Funeral Home, Inc. Walter H. Speidel Retired President & CEO, Cohoes Savings Bank Harry L. Robinson President & CEO, Cohoes Bancorp, Inc. R. Douglas Paton Retired stockbroker; independent financial consultant J. Timothy O'Hearn President, Century House, Inc. Chester C. DeLaMater Retired Executive Vice President & Secretary, Cohoes Savings Bank Peter G. Casabonne Managing Partner, Fuller Realty, Inc. Michael L. Crotty President, Capitol Equipment, Inc. Donald A. Wilson President, Wilson & Stark CPA, PC. Frederick G. Field Jr. Retired Supervisor Town of Colonie Directors of Cohoes Bancorp, Inc. also serve as Directors of Cohoes Savings Bank DIRECTOR EMERITUS Charles R. Crotty OFFICERS Harry L. Robinson, President & CEO Richard A. Ahl, Executive Vice President, Secretary & CFO COHOES SAVINGS BANK OFFICERS Harry L. Robinson, President & CEO Richard A. Ahl, Executive Vice President, Secretary & CFO Albert J. Picchi, Senior Vice President Johanna O. Robbins, Treasurer Kathleen Kelleher, Operations Officer Tammy L. Kimble, Director of Human Resources John G. Sturn, Director of Retail Banking Lisa A. Malone, Director of Lending EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT State of Percent of Incorporation or Parent Subsidiary Ownership Organization Cohoes Bancorp, Inc. Cohoes Savings Bank 100% New York Cohoes Savings Bank CSB Financial Services, Inc. 100% New York Cohoes Savings Bank CSB Funding, Inc. 100% New York Cohoes Savings Bank CSB Services Agency, Inc. 100% New York Cohoes Savings Bank Cohoes Realty, Incorporated 100% New York CSB Services Agency, Inc. CSB Security Insurance Agency 84% New York EXHIBIT 23 CONSENTS OF EXPERTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in the following Registration Statements: o Form S-8 No. 333-70903, pertaining to the Cohoes Savings Bank 401(k) Savings Plan in RSI Retirement Trust o Form S-8 No. 333-87569, pertaining to the 1999 Recognition and Retention Plan o Form S-8 No. 333-87571, pertaining to the 1999 Stock Option and Incentive Plan of our report dated August 17, 2000 with respect to the consolidated financial statements of Cohoes Bancorp, Inc. incorporated by reference in the Annual Report on Form 10-K for the fiscal year ended June 30, 2000 and to all references to our Firm included in such Registration Statements. /s/ Arthur Andersen LLP New York, New York September 27, 2000 EXHIBIT 27 FINANCIAL DATA SCHEDULE