UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 1999 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: 00025027 COHOES BANCORP, INC. (Exact name of registrant as specified in its charter) Delaware 14-1807865 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 75 Remsen Street, Cohoes, New York 12047 (Address of principal executive offices) (Zip Code) (518)233-6500 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No As of November 1,1999, there were 9,024,177 shares of the registrant's common stock outstanding. FORM 10-Q Cohoes Bancorp, Inc. INDEX Page PART 1 - FINANCIAL INFORMATION Number Item 1. Financial Statements Consolidated Statements of Financial Condition at September 30, 1999 and June 30, 1999 3 Consolidated Statements of Income for the three months ended September 30, 1999 and 1998 4 Consolidated Statements of Changes in Stockholders' Equity for the three months ended September 30, 1999 and 1998 5 Consolidated Statements of Cash Flows for the three months ended September 30, 1999 and 1998 6 Notes to Consolidated Interim Financial Statements 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings 19 Item 2. Changes in Securities and Use of Proceeds 19 Item 3. Defaults Upon Senior Securities 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K 19 Signature Page 20 PART I - FINANCIAL INFORMATION Item 1. Financial Statements COHOES BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited) September 30, June 30, 1999 1999 (In thousands) ASSETS: CASH AND CASH EQUIVALENTS: Cash and due from banks $ 9,977 $ 8,886 Federal funds sold - 1,870 Interest-bearing deposits with banks 95 358 Total cash and cash equivalents 10,072 11,114 MORTGAGE LOANS HELD FOR SALE 526 339 SECURITIES AVAILABLE FOR SALE 42,354 44,742 INVESTMENT SECURITIES, approximate fair value of $56,625 and $53,721 57,491 54,455 NET LOANS RECEIVABLE 547,773 521,005 ACCRUED INTEREST RECEIVABLE 3,911 3,776 BANK PREMISES AND EQUIPMENT 7,881 7,801 OTHER REAL ESTATE OWNED 1,208 724 MORTGAGE SERVICING RIGHTS 791 840 OTHER ASSETS 5,159 5,674 Total assets $677,166 $650,470 LIABILITIES AND STOCKHOLDERS' EQUITY: LIABILITIES: Due to depositors $454,320 $446,123 Mortgagors' escrow deposits 4,971 10,787 Borrowings 83,659 49,045 Other liabilities 4,676 5,085 Total liabilities 547,626 511,040 Commitments and contingent liabilities STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value; 5,000,000 share authorized; none issued - - Common stock, $.01 par value; 25,000,000 shares authorized; 9,535,225 shares issued at September 30, 1999 and June 30, 1999 95 95 Additional paid-in capital 93,011 93,004 Retained earnings-subject to restrictions 56,305 55,173 Treasury stock, at cost (511,048 shares at September 30, 1999) - (6,578) Unallocated common stock held by ESOP (8,439) (8,598) Unearned RRP shares - (4,505) Accumulated other comprehensive loss, net (349) (244) Total stockholders' equity 129,540 139,430 Total liabilities and stockholders' equity $677,166 $650,470 See accompanying notes to consolidated interim financial statements. COHOES BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the three months ended September 30, 1999 1998 (In thousands, except per share amounts) INTEREST INCOME: Loan receivable $10,212 $ 8,590 Securities available for sale 600 705 Investment securities 865 707 FHLB stock 72 64 Federal funds sold 2 41 Bank deposits 2 9 Total interest income 11,753 10,116 INTEREST EXPENSE: Deposits 4,145 4,796 Mortgagors' escrow deposits 45 39 Borrowings 924 374 Total interest expense 5,114 5,209 Net interest income 6,639 4,907 Provision for loan losses 340 180 Net interest income after provision for loan losses 6,299 4,727 NONINTEREST INCOME: Service charges on deposits 203 198 Loan servicing revenue 76 105 Net gain on sale of mortgage loans 2 6 Other 381 369 Total noninterest income 662 678 NONINTEREST EXPENSE: Compensation and benefits 2,601 2,012 Occupancy 764 796 FDIC deposit insurance premium 17 12 Advertising 123 75 Other 806 898 Total noninterest expense 4,311 3,793 Income before income tax expense 2,650 1,612 Income tax expense 1,005 629 NET INCOME $ 1,645 $ 983 Net income per share Basic $ .19 $ N/A Diluted $ .19 $ N/A See accompanying notes to consolidated interim financial statements. COHOES BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited) (In thousands) Unallocated Accumulated common Com- Additional other com- stock Unearned prehen- Common paid in Retained Treasury prehensive held by RRP sive stock capital earnings stock loss, net ESOP shares Total income Three Months Ended September 30, 1999 Balance at June 30, 1999 $95 $93,004 $55,173 $ - $(244) $(8,598) $ - $139,430 Net Income, July 1, 1999 September 30, 1999 - - 1,645 - - - - 1,645 $1,645 ESOP shares committed to be released - 7 - - - 159 - 166 Cash dividends paid - - (513) - - - - (513) Public market purchase of 857,170 shares of Cohoes Bancorp, Inc. common stock - - - (11,083) - - - (11,083) Granting of restricted stock under RRP - - - 4,505 - - (4,505) - Change in unrealized loss on securities available for sale, - - - - (105) - - (105) (105) net Balance, September 30, 1999 $95 $93,011 $56,305 $ (6,578) $(349) $(8,439) $(4,505) $129,540 $1,540 See accompanying notes to conolidated interim financial statements. COHOES BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the three months ended September 30, 1999 1998 (In thousands) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,645 $ 983 Adjustments to reconcile net income to net cash provided by operating activities- Depreciation 328 327 Amortization of purchased and originated mortgage servicing rights 49 49 Provision for loan losses 340 180 ESOP compensation expense 166 - Net (gain) loss on securities available for sale (1) - Net premium (discount) amortization of investment securities 10 22 Net premium (discount) amortization of securities available for sale - (4) Net gain on sale of mortgage loans (2) (6) Proceeds from sale of loans held for sale 877 378 Loans originated for sale (1,062) (334) (Increase) decrease in interest receivable (135) 57 Increase in other assets 515 (687) Increase (decrease) in other liabilities (409) 166 Net loss on sale of other real estate owned 34 68 Total adjustments 710 216 Net cash provided by operating activities 2,355 1,199 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investment securities called/matured 500 2,000 Purchase of investment securities (2,014) (3,991) Proceeds from the maturity of securities available for sale - - Proceeds from securities available for sale called - 15,300 Proceeds from the sale of securities available for sale 1,391 - Purchase of securities available for sale (678) (9,004) Proceeds from principal reduction in investment securities 1,829 2,213 Proceeds from principal reduction in securities available for sale 1,570 1,330 Net loans made to customers (31,155) (16,860) Originated mortgage servicing rights - - Proceeds from sale of other real estate owned 169 48 Capital expenditures (408) (243) Net cash used in investing activities (28,796) (9,207) CASH FLOWS FROM FINANCING ACTIVITIES: Net decrease in mortgagors' escrow deposits (5,816) (4,795) Net Increase in borrowings 34,614 19,792 Net increase (decrease) in deposits 8,197 (893) Purchase of treasury shares (11,083) - Cash dividends paid (513) - Net cash provided by financing activities 25,399 14,104 Net increase (decrease) in cash and cash equivalents (1,042) 6,096 CASH AND CASH EQUIVALENTS, beginning of period 11,114 14,229 CASH AND CASH EQUIVALENTS, end of period $ 10,072 $20,325 ADDITIONAL DISCLOSURE RELATIVE TO CASH FLOWS: Interest paid $ 5,277 $ 5,223 Taxes paid 1,040 540 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Transfer of loans to other real estate owned $ 687 $ 410 See accompanying notes to consolidated interim financial statements. COHOES BANCORP, INC. NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS 1. Basis of Presentation Cohoes Bancorp, Inc. ("Company") was incorporated under Delaware law in September 1998 as a savings and loan holding company to purchase 100% of the common stock of the Cohoes Savings Bank ("Bank"). On December 31, 1998, Cohoes Bancorp, Inc. completed its initial public offering of 9,257,500 shares of common stock in connection with the conversion of the Bank from a mutual form institution to a stock savings bank (the "Conversion"). Concurrently with the Conversion, Cohoes Bancorp, Inc. acquired all of the Bank's common stock. The consolidated financial statements included herein reflect all normal recurring adjustments which are, in the opinion of management, necessary to present a fair statement of the results for the interim periods presented. The results of operations for the three months ended September 30, 1999 are not necessarily indicative of the results of operations that may be expected for the entire year ending June 30, 2000. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. These consolidated financial statements should be read in conjunction with the Company's 1999 Annual Report on Form 10K. 2. 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 September 30, 1999, 18,363 shares have been released and 39,880 have been committed to be released from the ESOP trust for allocation to ESOP participants. Consequently, the remaining 704,573 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 three months ended September 30, 1999. Weighted Average Net income shares Per share (numerator) (denominator) amount (In thousands, except per share amounts) Basic EPS $1,645 8,562,120 $ 0.19 Dilutive effect of potential common shares related to stock based compensation plans - 29,579 $1,645 8,591,699 $ 0.19 3. Comprehensive Income The Company adopted Statement of Financial Accounting Standards No.130 "Reporting Comprehensive Income" ("SFAS N0. 130") in 1998. All comparative financial statements provided for earlier periods have been reclassified to reflect application of the provisions of this Statement. 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. 4. Loan Portfolio Composition The following table sets forth the composition of the loan portfolio in dollar amounts and percentage of the portfolio at the dates indicated. September 30,1999 June 30, 1999 Amount % of Total Amount % of Total (Dollars in thousands) Real estate loans: One-to-four family real estate $329,284 59.67% $320,721 61.12% Multi-family and commercial real estate 150,403 27.26 138,288 26.35 Total real estate loans 479,687 86.93 459,009 87.47 Consumer loans: Home equity lines of credit 19,629 3.56 20,090 3.83 Conventional second mortgages 12,101 2.19 12,724 2.42 Automobile loans 9,708 1.76 9,658 1.84 Other consumer loans 1,508 0.27 1,244 0.24 Total consumer loans 42,946 7.78 43,716 8.33 Commercial business loans 29,187 5.29 22,054 4.20 Total loans 551,820 100.00% 524,779 100.00% Less: Net deferred loan origination fees and costs 286 251 Allowance for loan losses (4,333) (4,025) Net loans receivable $547,773 $521,005 5. Non-Performing Assets The following table sets forth information regarding non-accrual loans, other past due loans, troubled debt restructurings and other real estate owned at the dates indicated. September 30, June 30, 1999 1999 (Dollars in thousands) Non-accrual loans: One-to-four family real estate $ 1,967 $2,674 Multi-family and commercial real estate 1,300 1,364 Conventional second mortgages 31 9 Consumer loans 190 212 Commercial business loans 62 62 Total non-accrual loans 3,550 4,321 Loans contractually past due 90 days or more and still accruing interest: Consumer loans - - Total loans 90 days or more and still accruing interest - - Troubled debt restructurings 651 672 Total non-performing loans 4,201 4,993 Other real estate owned (ORE) 1,208 724 Total non-performing assets $ 5,409 $5,717 Allowance for loan losses $ 4,333 $4,025 Coverage of non-performing loans 103.14% 80.62% Total non-performing loans as a percentage of total loans .76% .95% Total non-performing loans as a percentage of total assets .62% .77% 6. Allowance for Loan Losses The following table sets forth the activity in the allowance for loan losses at the dates and for the periods indicated. At or for the three months ended September 30, 1999 1998 (In thousands) Allowance for loan losses, beginning period $4,025 $3,533 Charge-off loans: Real estate loans One-to-four family real estate 45 50 Multi-family and commercial real estate - - Total real estate loan charge-offs 45 50 Commercial business loans charge-offs - - Consumer loans Home equity lines of credit - - Conventional second mortgages - - Automobile loans - 5 Credit cards - 61 Other consumer loans 5 10 Total consumer loan charge-offs 5 76 Total charged-offs loans 50 126 Recoveries on loans previously charged-off: Real estate loans One-to-four family real estate 7 21 Multi-family and commercial real estate - - Total real estate loan recoveries 7 21 Commercial business loan recoveries - 1 Consumer loans Home equity lines of credit - - Conventional second mortgages - - Automobile loans - - Credit cards 9 9 Other consumer loans 2 2 Total consumer loan recoveries 11 11 Total recoveries 18 33 Net loans charged-off 32 93 Provision for loan losses 340 180 Allowance for loan losses, end of period $4,333 $3,620 Item 2. 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 period since 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. Financial Condition For the three month period ending September 30, 1999, total assets of the company increased $26.7 million, or 4.1%, from $650.5 million at June 30, 1999 to $677.2 million at September 30, 1999. This increase in total assets was primarily attributable to a $26.8 million, or 5.1%, increase in net loans receivable which increased from $521.0 at June 30, 1999 to $547.8 million at September 30, 1999. The increase in the loan portfolio was primarily the result of an increase in commercial mortgage and commercial business loan closings during the quarter. The commercial mortgage portfolio increased $12.1 million, or 8.7% and commercial business loans increased $7.1 million, or 32.1%. Deposits increased $8.2 million, or 1.8%, from $446.1 million at June 30, 1999, to $454.3 million at September 30, 1999. This increase was primarily attributable to the deposit growth in newly opened branches. Borrowings, comprised primarily of Federal Home Loan Bank advances, increased $34.6 million, or 70.6%, from $49.0 million at June 30, 1999 to $83.7 million at September 30, 1999. This increase was primarily the result of additional Federal Home Loan Bank advances used to fund loan growth. Total stockholder's equity decreased $9.9 million, or 7.1%, from $139.4 million at June 30, 1999 to $129.5 million at September 30, 1999. The decrease was primarily attributable to the purchase of treasury stock of $11.1 million. The book value per share at September 30,1999 was $14.35. Average Balance Sheets. The following table set forth certain information relating to the Company for the three months ended September 30, 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 origination fees and costs which are considered yield adjustments. Three Months Ended September 30, 1999 1998 Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Interest-earning assets Loans receivable $540,186 $10,212 7.50% $424,261 $ 8,590 8.03% Securities available for sale 39,212 600 6.07 43,941 705 6.37 Investments securities 57,668 865 5.95 47,767 707 5.87 Federal funds sold 171 2 4.64 3,027 41 5.37 FHLB stock 4,065 72 7.03 3,552 64 7.15 Other interest-earning assets 195 2 4.07 583 9 6.12 Total interest-earning assets 641,497 11,753 7.27 523,131 10,116 7.67 Non-earning assets 23,821 19,107 Total assets $665,318 $542,238 Interest-bearing liabilities Savings accounts $136,667 1,003 2.91 $128,438 959 2.96 School savings accounts 17,044 182 4.24 17,673 246 5.52 Money market accounts 26,714 234 3.48 19,561 171 3.47 Demand deposits 65,679 103 0.62 53,834 85 0.63 Time deposits 204,752 2,623 5.08 229,496 3,335 5.77 Escrow accounts 9,765 45 1.83 8,618 39 1.80 Borrowings 65,656 924 5.58 25,010 374 5.93 Total interest-bearing 526,277 5,114 3.86 482,630 5,209 4.28 liabilities Other liabilities 6,274 5,481 Stockholders' equity 132,767 54,127 Total liabilities and stockholders' equity $665,318 $542,238 Net interest income $ 6,639 $ 4,907 Net interest rate spread 3.41% 3.39% Net earning assets $115,220 $ 40,501 Net yield on average interest-earning assets 4.11% 3.72% Average interest-earning assets to average interest-bearing 1.22X 1.08X liabilities 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. Three Months Ended September 30,1999 Compared to Three Months Ended September 30,1998 Increase (Decrease) Due To Total Increase Volume Rate (Decrease) (Dollars in thousands) Interest and dividend income from: Loans receivable $4,942 $(3,320) $1,622 Securities available for sale (73) (32) (105) Investment securities 148 10 158 Federal funds sold (34) (5) (39) FHLB stock 15 (7) 8 Other interest-earning assets (5) (2) (7) Total interest and dividend income 4,993 (3,356) 1,637 Interest expense for: Savings accounts 137 (93) 44 School savings accounts (8) (56) (64) Money market accounts 63 - 63 Demand deposits 22 (4) 18 Time deposits (339) (373) (712) Escrow accounts 5 1 6 Borrowings 699 (149) 550 Total interest expense 579 (674) (95) Net interest income $4,493 $(2,761) $1,732 Comparison of Operating Results for the Three Months Ended September 30, 1999 and 1998 For the three months ended September 30, 1999 the Company reported net income of $1.6 million, as compared to net income of $983,000 for the three months ended September 30, 1998. Net interest income increased $1.7 million for the three months ended September 30, 1999 as compared to the same period last year. This increase was in part offset by an increase in the provision for loan losses of $160,000, an increase in noninterest expense of $518,000 and an increase in income tax expense of $376,000. Net Interest Income. Net interest income for the three months ended September 30, 1999 was $6.6 million, up $1.7 million from the same period last year. The increase was primarily the result of the increase of $118.4 million in average earning assets from $523.1 million for the three months ended September 30, 1998 to $641.5 million for the same period this year. Interest-bearing liabilities also increased during the same period, up $43.6 million. The net impact of these volume increases account for nearly the entire increase in net interest income. The increase in interest rate spread of 2 basis points accounted for the remaining increase in net interest income. The yield on average earning assets decreased from 7.67% to 7.27%, while the rate paid on average interest-bearing liabilities decreased from 4.28% to 3.86%. The Company's net interest margin for the three months ended September 30, 1999 was 4.11%, up 39 basis points from 3.72% for the same period last year. Interest Income. Interest income for the three months ended September 30, 1999 was $11.8 million, up from $10.1 million for the comparable period in 1998. The largest component of interest income is interest on loans. Interest on loans increased from $8.6 million for the three months ended September 30, 1998 to $10.2 million for the three months ended September 30, 1999. This increase of $1.6 million is the result of an increase in the average balance of loans partially offset by a decrease in the average yield earned. The average balance of loans increased $115.9 million to $540.2 million, while the yield on loans decreased 53 basis points from 8.03% to 7.50%. The increase in interest on loans was supplemented by increases in interest on investment securities. Interest income on this category of earning assets increased $158,000. The average balance of securities available for sale increased from $47.8 million for the quarter ended September 30, 1998 to $57.7 million for the quarter ended September 30, 1999. The average balance of securities available for sale decreased from $43.9 million in the quarter ended September 30, 1998 to $39.2 million in the quarter ended September 30, 1999, resulting in a $73,000 decrease in interest income due to volume. The average balance of federal funds sold decreased from $3.0 million in the quarter ended September 30, 1998 to $171,000 in the quarter ended September 30, 1999. The decrease in the volume of federal funds sold resulted in a $34,000 decrease in interest income in the quarter ended September 30, 1999 as compared to the quarter ended September 30, 1998. The changes in yield on securities available for sale, federal funds sold and FHLB stock reduced interest income by $44,000. Interest Expense. Interest expense decreased during the quarter ended September 30, 1999 to $5.1 million, down from $5.2 million for the comparable period in 1998. Substantially all of the Company's interest expense is from the Company's interest-bearing deposits. The largest category of interest-bearing deposits is time deposits. Interest on time deposits for the quarter ended September 30, 1999 was $2.6 million, down $712,000 from the $3.3 million for the quarter ended September 30, 1998. This decrease is the result of a decrease in the average balance of time deposits, from $229.5 million for the quarter ended September 30, 1998 to $204.8 million for the quarter ended September 30, 1999 and a decrease of 69 basis points in the rates paid on these deposits from 5.77% for the quarter ended September 30, 1998 to 5.08% for the same period in 1999. Interest expense on savings accounts increased $44,000 for the quarter ended September 30, 1999 as compared to the same period in the prior year. This increase is almost entirely attributable to an increase in the average balance of savings accounts of $8.2 million. Interest on school savings accounts decreased $64,000, from $246,000 for the quarter ended September 30, 1998 to $182,000 for the quarter ended September 30, 1999, due primarily to a decrease of 128 basis points in the average rate paid on school savings accounts from 5.52% to 4.24%. Interest on money market accounts increased $63,000, from $171,000 for the quarter ended September 30, 1998 to $234,000 for the quarter ended September 30, 1999. The increase is attributed to an increase in the average balance of money market accounts of $7.2 million. Interest on borrowings increased $550,000, from $374,000 for the quarter ended September 30, 1998 to $924,000 for the quarter ended September 30, 1999. The increase is primarily due to a $40.6 million increase in the average balance of borrowings. Provision for Loan Losses. The provision for loan losses increased from $180,000 for the quarter ended September 30, 1998 to $340,000 for the quarter ended September 30, 1999. The increase in the provision is attributed to an increase in the balance of loans outstanding. Noninterest Income. Total noninterest income for the quarter ended September 30, 1999 was $662,000, down $16,000 from the $678,000 for the quarter ended September 30, 1998. Service charges on deposits increased slightly to $203,000 for the quarter ended September 30, 1999, from $198,000 for the quarter ended September 30, 1998. Loan servicing revenue declined $29,000 from $105,000 for the quarter ended September 30, 1998 to $76,000 for the quarter ended September 30, 1999. The decline relates to a reduction in the balance of loans serviced for others. Other noninterest income increased $12,000 primarily as a result of the increased volume of ATM surcharges. Noninterest Expense. Total noninterest expense increased $518,000 to $4.3 million for the quarter ended September 30, 1999, up from $3.8 million for the comparable period in 1998. The increase in compensation and benefits of $589,000 was the primary contributor to the overall increase. The increase in compensation and benefits is primarily attributable to the establishment of the Company's Employee Stock Ownership Plan, establishment of the Recognition and Retention Plan, increase of personnel due to the addition of three new branches and annual merit increases. This increase is partially offset by a decrease in other noninterest expense of $92,000. This decrease is due to a decrease of ORE expense of $59,000 and a $30,000 reduction in foreclosure expense. Income Tax Expense. Income tax expense increased from $629,000 for the quarter ended September 30, 1998 to $1.0 million for the comparable period in 1999. The increase is primarily the result of increased income before income tax expense. 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 it 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 its portfolio of securities available for sale. The Company's cash inflows result primarily from loan repayments, maturities, calls and pay downs 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 remain a "well capitalized" institution in accordance with regulatory standards. The Bank's total equity was $91.8 million at September 30, 1999, 14.0% of total assets on that date. As of September 30, 1999, the Bank exceeded all of the capital requirements of the FDIC. The Bank's regulatory capital ratios at September 30, 1999 were as follows: Tier I (leverage) capital, 13.9%; Tier I risk-based capital, 21.5%; and Total risk-based capital, 22.4%. The regulatory capital minimum requirements to be considered well capitalized are 5.0%, 6.0%, and 10.0%, respectively. Impact of the Year 2000 General. The year 2000 ("Y2K") issue confronting the Bank and its suppliers, customers, customers' suppliers and competitors centers on the inability of computer systems to recognize the year 2000. Many existing computer programs and systems originally were programmed with six digit dates that provided only two digits to identify the calendar year in the date field. With the impending new millennium, these programs and computers will recognize "00" as the year 1900 rather than the year 2000. Financial institution regulators recently have increased their focus upon Y2K compliance issues and have issued guidance concerning the responsibilities of senior management and directors. The Federal Financial Institutions Examination Council ("FFIEC") has issued several interagency statements on Y2K Project Management Awareness. These statements require financial institutions to, among other things, examine the Y2K implications of their reliance on vendors and with respect to data exchange and the potential impact of the Y2K issue on their customers, suppliers and borrowers. These statements also require each federally regulated financial institution to survey its exposure, measure risk and prepare a plan to address the Y2K issue. In addition, the federal banking regulators have issued safety and soundness guidelines to be followed by insured depository institutions, such as the Bank, to assure resolution of any Y2K problems. The federal banking agencies have asserted that Y2K testing and certification is a key safety and soundness issue in conjunction with regulatory examinations and, thus, that an institution's failure to address appropriately the Y2K issue could result in supervisory action, including the reduction of the institution's supervisory ratings, the denial of applications for approval of mergers or acquisitions or the imposition of civil money penalties. Risk. Like most financial institutions service providers, the Bank and its operations may be significantly affected by the Y2K issue due to its dependence on technology and date-sensitive data. Computer software and hardware and other equipment, both within and outside the Bank's direct control and third parties with whom the Bank electronically or operationally interfaces (including without limitation its customers and third party vendors) are likely to be affected. If computer systems are not modified in order to be able to identify the year 2000, many computer applications could fail or create erroneous results. As a result, many calculations which rely on date field information, such as interest, payment or due dates and other operating functions, could generate results which are significantly misstated, and the Bank could experience an inability to process transactions, prepare statements or engage in similar normal business activities. Likewise, under certain circumstances, a failure to adequately address the Y2K issue could adversely affect the viability of the Bank's suppliers and creditors and the creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K issue could result in a significant adverse impact on the Bank's operations and, in turn, its financial condition and results of operations. State of Readiness. During November 1997, the Bank formulated its plan to address the Y2K issue. Since that time, the Bank has taken the following steps: * Established senior management advisory and review responsibilities; * Completed a Bank-wide inventory of applications and system software; * Built an internal tracking database for application and vendor software; * Developed compliance plans and schedules for all lines of business; * Initiated vendor compliance verification; * Begun awareness and education activities for employees through existing internal communication channels; and * Developed a process to respond to customer inquiries as well as help educate customers on the Y2K issue. The following paragraphs summarize the phases of the Bank's Y2K plan: Awareness Phase. The Bank formally established a Y2K plan headed by a senior manager, and a project team was assembled for management of the Y2K project. The project team created a plan of action that includes milestones, budget estimates, strategies, and methodologies to track and report the status of the project. Members of the project team also attended conferences and information sharing sessions to gain more insight into the Y2K issue and potential strategies for addressing it. This phase is substantially complete. Assessment Phase. The Bank's strategies were further developed with respect to how the objectives of the Y2K plan would be achieved, and a Y2K business risk assessment was made to quantify the extent of the Bank's Y2K exposure. A corporate inventory (which is periodically updated as new technology is acquired and as systems progress through subsequent phases) was developed to identify and monitor Y2K readiness for information systems (hardware, software, utilities and vendors) as well as environmental systems (security systems, facilities, etc.). Systems were prioritized based on business impact and available alternatives. Mission critical systems supplied by vendors were researched to determine Y2K readiness. If Y2K-ready versions were not available, the Bank began identifying functional replacements, which were either upgradable or currently Y2K-ready, and a formal plan was developed to repair, upgrade or replace all mission critical systems. This phase is substantially complete. Beginning in October 1998, all unsecured credits greater than $100,000 were sent a questionnaire developed by the Bank's credit administration staff to evaluate Y2K exposure. The Bank also contacted its most significant borrowers informing them of the Y2K issue. Because the Bank's loan portfolio is primarily real estate-based and is diversified with regard to individual borrowers and types of businesses, and the Bank's primary market area is not significantly dependent on one employer or industry, the Bank does not expect any significant or prolonged Y2K-related difficulties that will affect net earnings or cash flow. As part of the current credit approval process, all new and renewed loans are evaluated for Y2K risk. Renovation Phase. The Bank's corporate inventory revealed that Y2K upgrades were available for all vendor supplied mission critical systems, and all these Y2K-ready versions have been delivered and placed into production. The upgrades include the automated teller machines, the voice response unit, network equipment, and the Bank's voice mail system. Validation Phase. The validation phase is designed to test the ability of hardware and software to accurately process date sensitive data. As of March 31, 1999, the Bank completed the validation testing of its mission critical systems. The remainder of the validation phase, including testing with our service providers and supply vendors, was completed as of June 30, 1999. To date, the validation testing indicates that the mission critical systems are Y2K-ready. Implementation Phase. After passing the validation phase, the modified or upgraded versions of hardware/ software have been placed into production. As of March 31, 1999, the Bank has been operating all mission critical systems with Y2K compliant versions. Any remaining systems requiring Y2K upgrades were remedied by June 30, 1999. Contingency Plans. During the assessment phase, the Bank began to develop back-up or contingency plans for each of its mission critical systems. Since virtually all of the Bank's mission critical systems are dependent upon third party vendors or service providers, the contingency plan included the option of selecting new vendors or service provider if Y2K-ready products could not be delivered by our current suppliers. To date, it has not been necessary to exercise this option. In addition, the Bank is preparing and testing contingency plans in the event of power outages or telecommunication disruptions. These plans include backup generators, reversion to manual procedures, and the use of paper reports until the problems are corrected. Cost. The Y2K related costs have been expensed as incurred. Management believes that additional Y2K costs will not be material. Customer Education. In October 1998, the Bank sent out a FDIC Y2K brochure with all statement mailings, explaining the Y2K problem and reassuring customers that FDIC insurance coverage guarantees the safety of their deposit accounts. All Bank employees have attended special Y2K classes and there is an ongoing awareness campaign to encourage Y2K dialogue with customers. A statement mailer with an updated status of our system testing was distributed during the month of May. Y2K messages will be displayed on ATM screens, transaction receipts and monthly statements throughout the remainder of 1999. In June of 1999, the Bank hosted a Y2K informational seminar. In addition to newspaper advertising and branch signs, the Bank publicized the event by calling hundreds of customers. On September 15, 1999 the Bank co-sponsored a Community Conversation in conjunction with the President's Council on Year 2000 Conversion. Item 3. Quantitative And Qualitative Disclosures About Market Risk Not applicable PART II - OTHER INFORMATION Item 1. Legal Proceedings Not Applicable. Item 2. Changes in Securities and Use of Proceeds Not Applicable. Item 3. Defaults Upon Senior Securities Not Applicable. Item 4. Submission of Matters to a Vote of Security Holders (a) A special meeting of stockholders of the registrant was held on July 2, 1999. (b) The meeting did not involve the election of directors (c) The two matters voted on at the meeting were the ratification of the adoption of the registrant's 1999 Stock Option and Incentive Plan and the ratification of the adoption of the registrant's 1999 Recognition and Retention Plan. The results of the vote on these matters is as follows: Stock Option and Incentive Plan: Recognition and Retention Plan: For: 4,915,413 votes For: 4,877,956 votes Against: 618,289 votes Against: 658,834 votes Abstentions: 53,844 votes Abstentions: 53,182 votes Broker non-votes: 2,426 votes Broker non-votes: None votes (d) None Item 5. Other Information Not Applicable. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 27. Financial Data Schedules (submitted only with filing in electronic format) (b) Reports on Form 8-K There was one report on Form 8-K filed during the quarter ended September 30,1999: 1) a) Report dated July 21, 1999 b) Item 5 - Reporting the issuance of a press release announcing the earnings for the fourth quarter and fiscal year ended June 30, 1999 and the annual meeting date. c) Selected consolidated financial information was included in the press release. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Cohoes Bancorp, Inc. (Registrant) Date: November 9,1999 By: /s/ Harry L. Robinson Harry L. Robinson President and Chief Executive Officer Date: November 9, 1999 By: /s/ Richard A. Ahl Richard A. Ahl Executive Vice President, Chief Financial Officer and Secretary