As filed with the Securities and Exchange Commission on September 16, 1998
Registration No. 333-__________
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COHOES BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 6035 Applied For
(State or other (Primary Standard I.R.S. Employer
jurisdiction of incoporation Industrial Classification Identification
or organization) Code Number) No.)
75 Remsen Street, Cohoes, New York 12047 (518) 233-6575
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Harry L. Robinson
President and Chief Executive Officer
Cohoes Bancorp, Inc.
75 Remsen Street
Cohoes, New York 12047 (518) 233-6575
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Please send copies of all communications to:
Robert L. Freedman, P.C.
Martin L. Meyrowitz, P.C.
Beth A. Freedman, Esq.
James M. Larkins, III, Esq.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability partnership including professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005
(202) 414-6100
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
Title of Each Class Amount to be Proposed Maximum Offering Proposed Aggregate Maximum Amount of
Securities to be Registered Registered Price Per Share (2) Offering Price Registration Fee
- --------------------------- ------------ ------------------------- ------------------ -----------------
Common Stock, $.01 par value (1) 12,778,790 shares $10.00 $127,787,900 $37,698
- ----------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Includes shares to be issued to the Cohoes Savings Bank Foundation.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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Explanatory Note
The following pages constitute the preliminary proxy statement of SFS
Bancorp, Inc. ("SFS"). Such proxy statement will "wrap around" the prospectus of
Cohoes Bancorp, Inc. enclosed in this Registration Statement.
[SFS BANCORP, INC. LOGO]
251-263 State Street
Schenectady, New York 12305
(518) 395-2300
September 16, 1998
[SFS BANCORP, INC. letterhead]
November __, 1998
Dear Fellow Stockholder:
We cordially invite you to attend a special meeting of the stockholders of
SFS Bancorp, Inc. ("SFS"). The meeting is to be held at the main office of the
Company located at 251-263 State Street, Schenectady, New York, on _________,
December __, 1998, at 10:00 a.m., Eastern Time.
We have called the meeting to seek your approval of a Merger Agreement
which provides for SFS to be merged with Cohoes Bancorp, Inc. ("Cohoes
Bancorp"), which is the proposed holding company for Cohoes Savings Bank, a New
York-chartered savings bank. Immediately following completion of the Merger of
SFS into Cohoes Bancorp, SFS' subsidiary Schenectady Federal Savings Bank will
be merged into Cohoes Savings Bank.
Upon completion of the Merger, each share of SFS common stock will be
converted into a number of shares of Cohoes Bancorp common stock equal to the
lesser of (a) $26.50 divided by the initial public offering price of the Cohoes
Bancorp common stock, or (b) $35.00 divided by the average closing price of the
Cohoes Bancorp common stock for the first ten trading days on which such stock
is traded. Cash will be paid in lieu of fractional shares. The investment
banking firm of Charles Webb & Company, a Division of Keefe, Bruyette & Woods,
Inc. has advised your Board of Directors that in its opinion dated November __,
1998, the exchange ratio is fair to the holders of SFS common stock from a
financial point of view.
Completion of the Merger is subject to certain conditions, including
receipt of bank regulatory approvals and approval of the Merger Agreement by the
affirmative vote of a majority of the outstanding shares of common stock of SFS.
We urge you to read the attached Proxy Statement/Prospectus carefully. It
describes the Merger Agreement in detail and includes a copy of the Merger
Agreement as Appendix I.
Your Board of Directors has unanimously approved the Merger Agreement and
unanimously recommends that you vote"FOR" approval of the Merger Agreement.
It is very important that your shares be represented at the special
meeting. Whether or not you plan to attend, please complete, date and sign the
enclosed proxy card and return it promptly in the postage-paid envelope we have
provided.
On behalf of your Board of Directors,
Joseph H. Giaquinto, Chairman of the Board,
President and Chief Executive Officer
SFS BANCORP, INC.
251-263 State Street
Schenectady, New York 12305
(518) 395-2300
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be Held on December __, 1998
Notice is hereby given that a Special Meeting of Stockholders (the
"Meeting") of SFS Bancorp, Inc. ("SFS") is scheduled to be held at 10:00 a.m.,
Eastern Time, on December __, 1998, at the main office of SFS located at 251-263
State Street, Schenectady, New York.
A proxy card and a Proxy Statement/Prospectus for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The adoption of the Agreement and Plan of Merger, dated as of July
31, 1998, between Cohoes Savings Bank ("Cohoes Savings") and SFS, a copy of
which is included in the accompanying Proxy Statement/Prospectus as
Appendix I and incorporated by reference herein, and the transactions
contemplated thereby, including the merger of SFS with and into Cohoes
Bancorp, Inc. (the "Company"), the proposed holding company for Cohoes
Savings, pursuant to which each share of SFS common stock outstanding at
the time of the merger (except for treasury shares and certain shares held
by the Company or Cohoes Savings) will be converted into a number of shares
of Company common stock equal to the lesser of (a) $26.50 divided by the
initial public offering price of Company common stock (or 2.65 shares
assuming an initial public offering price of $10.00 per share), or (b)
$35.00 divided by the average closing price of Company common stock for the
first ten trading days on which such stock is traded, in each case with
cash paid in lieu of fractional share interests; and
2. Such other matters as may properly come before the Meeting or any
adjournments or postponements thereof. The Board of Directors is not aware
of any other business to come before the Meeting.
Any action may be taken on any of the foregoing proposals at the Meeting on
the date specified, or on any dates to which the Meeting may be adjourned or
postponed. Stockholders of record at the close of business on __________, 1998
are the stockholders entitled to vote at the Meeting and any adjournments or
postponements thereof.
You are requested to complete, sign and date the enclosed proxy card, which
is solicited on behalf of the Board of Directors, and to mail it promptly in the
enclosed postage-paid envelope. The proxy card will not be used if you attend
and vote at the Meeting in person. If you are a stockholder whose shares are not
registered in your name, you will need additional documentation from the holder
of record of your shares to vote in person at the Meeting. The prompt return of
proxies will save SFS the expense of further requests for proxies.
By Order of the Board of Directors
Joseph H. Giaquinto
Chairman of the Board, President
and Chief Executive Officer
Schenectady, New York
November __, 1998
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT.
PROXY STATEMENT PROSPECTUS
OF OF
SFS BANCORP, INC. COHOES BANCORP, INC
FOR THE SPECIAL MEETING Up to 3,202,451 Shares of Common Stock,
OF STOCKHOLDERS par value $.01 per share
to be Held on (to be issued pursuant to
December __, 1998 the Merger described herein)
This Proxy Statement/Prospectus relates to the proposed merger (the
"Merger") of SFS Bancorp, Inc., a Delaware corporation ("SFS"), with and into
Cohoes Bancorp, Inc., a Delaware corporation (the "Company"), the proposed
holding company for Cohoes Savings Bank, a New York-chartered savings bank
("Cohoes Savings"), as contemplated by the Agreement and Plan of Merger, dated
as of July 31, 1998 (the "Merger Agreement"), between Cohoes Savings and SFS.
The Merger Agreement is included as Appendix I hereto and is incorporated by
reference herein.
This Proxy Statement/Prospectus is being furnished to the holders of shares
of common stock, par value $.01 per share, of SFS ("SFS Common Stock") in
connection with the solicitation of proxies by the Board of Directors of SFS
(the "SFS Board") for use at a Special Meeting of Stockholders (the "Meeting"),
scheduled to be held at 10:00 a.m., Eastern Time, on December __, 1998, at the
main office of SFS located at 251-263 State Street, Schenectady, New York, and
at any and all adjournments and postponements thereof.
This Proxy Statement/Prospectus also constitutes a prospectus of the
Company with respect to up to 3,202,451 shares of common stock, par value $.01
per share, of the Company ("Company Common Stock") to be issued upon
consummation of the Merger pursuant to the terms of the Merger Agreement. The
Prospectus of the Company is a part of this Proxy Statement/Prospectus (see
"Table of Contents") and is referred to herein as the "Prospectus."
At the Meeting, the holders of SFS Common Stock will consider and vote upon
a proposal to adopt the Merger Agreement and the transactions contemplated
thereby.
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of SFS Common Stock issued and outstanding immediately
prior to the Merger (except for treasury shares and certain shares held by the
Company or Cohoes Savings) will be converted into the right to receive a number
of shares (the "Exchange Ratio") of Company Common Stock equal to the lesser of
(a) $26.50 divided by the initial public offering price for the shares of
Company Common Stock to be issued in connection with the conversion of Cohoes
Savings from mutual to stock form and the organization of the Company as the
holding company for Cohoes Savings (the "Conversion"), or (b) $35.00 divided by
the average closing price of the Company Common Stock for the first ten trading
days on which such stock is traded on The Nasdaq Stock Market following
consummation of the Conversion ("Average Closing Price"). Each share of SFS
Common Stock will be converted into 2.65 shares of Company Common Stock in the
Merger based on the initial public offering price of $10.00 per share, subject
to downward adjustment if the initial public offering price is $10.00 per share
and the Average Closing Price of the Company Common Stock exceeds $13.21. Cash
will be paid in lieu of fractional share interests. Because the Company has
never publicly issued any capital stock, there can be no assurance that an
active and liquid trading market for the Company Common Stock will develop upon
the Conversion and Merger or that the Company Common Stock will trade above its
initial public offering price. SFS' financial advisor has rendered an opinion to
the effect that as of November __,1998 the Exchange Ratio is fair from a
financial point of view to the stockholders of SFS. The Merger is subject to
certain conditions, including the approval of the stockholders of SFS and
consummation of the Conversion. For additional information regarding the Merger
Agreement and the terms of the Merger, see "The Merger."
This Proxy Statement/Prospectus, and the accompanying notice and form of
proxy, are first being mailed to stockholders of SFS on or about November __,
1998.
The date of this Proxy Statement/Prospectus is November __, 1998.
i
AVAILABLE INFORMATION
SFS is subject to the information requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") and, in accordance therewith, files
reports, proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). Such reports, proxy statements and other information
filed by SFS can be obtained, upon payment of prescribed fees, from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549. In addition, such information can be inspected and copied
at the public reference facilities of the SEC located at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices located at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511 and 7 World Trade Center, 13th Floor, New York, New York 10048. The
SEC maintains a web site that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
SEC (such as SFS). The address of the SEC's web site is http://www.sec.gov. In
addition, the SFS Common Stock is quoted on The Nasdaq Stock Market, and certain
materials regarding SFS can be inspected at the offices of the National
Association of Securities Dealers, Inc. (the "NASD"), 1735 K Street, N.W.,
Washington, D.C. 20006.
All information contained in this Proxy Statement/Prospectus with respect
to the Company and Cohoes Savings and its subsidiaries has been supplied by the
Company and Cohoes Savings, and all information with respect to SFS and its
subsidiaries has been supplied by SFS.
The Company has filed with the SEC a Registration Statement on Form S-1
under the Securities Act of 1933, as amended (the "Securities Act") (together
with all amendments and supplements thereto, the "Registration Statement"), with
respect to the securities being offered by this document (this "Proxy
Statement/Prospectus," sometimes referred to as this "Proxy Statement"). As
permitted by the rules and regulations of the SEC, this Proxy
Statement/Prospectus omits certain information, exhibits and undertakings
contained in the Registration Statement. For further information with respect to
the Company and the securities offered hereby, reference is made to the
Registration Statement, including the exhibits thereto.
Statements contained in this Proxy Statement/Prospectus as to the contents
of any document referred to herein are not necessarily complete, and in each
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement or such other document, each such statement being
qualified in all respects by such reference.
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SEC NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY OTHER GOVERNMENTAL AGENCY.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN WHAT IS INCLUDED IN THIS DOCUMENT. IF SUCH INFORMATION
OR REPRESENTATION IS GIVEN OR MADE, IT MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
ii
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY, ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT WOULD BE UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS DOCUMENT AT ANY TIME, NOR ANY DISTRIBUTION OF
SHARES OF COMPANY COMMON STOCK, SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
Page
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AVAILABLE INFORMATION..................................................... ii
TABLE OF CONTENTS......................................................... iii
SUMMARY................................................................... 1
The Parties to the Merger............................................... 1
SFS Bancorp, Inc. and Schenectady Federal Savings Bank................ 1
Cohoes Bancorp, Inc. and Cohoes Savings Bank.......................... 2
The Special Meeting..................................................... 3
Meeting Date; Record Date............................................. 3
Matters to Be Considered.............................................. 3
Vote Required......................................................... 3
Security Ownership.................................................... 3
The Merger.............................................................. 3
General............................................................... 3
Reasons for the Merger; Recommendation of the Board of Directors...... 4
Merger Consideration.................................................. 4
Opinion of Charles Webb............................................... 4
Treatment of SFS Stock Options........................................ 4
Effective Time and Closing Date....................................... 5
Interests of Certain Persons in the Merger............................ 5
Representations and Warranties........................................ 5
Conditions to the Merger.............................................. 5
Conduct of Business Prior to the Closing Date......................... 6
Required Approvals.................................................... 6
Waiver and Amendment.................................................. 6
Termination........................................................... 6
Certain Federal Income Tax Consequences of the Merger................. 7
Accounting Treatment.................................................. 7
No Dissenters' Rights of Appraisal.................................... 7
Expenses of the Merger................................................ 7
Management After the Merger........................................... 7
Effects of the Merger on Rights of Stockholders....................... 7
Nasdaq Listing........................................................ 8
iii
Page
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SFS BANCORP, INC. STOCK PRICES AND DIVIDEND INFORMATION................... 8
THE SPECIAL MEETING....................................................... 9
Place, Time and Date.................................................. 9
Matters to Be Considered.............................................. 9
Record Date; Vote Required............................................ 10
Beneficial Ownership of SFS Common Stock.............................. 10
Proxies............................................................... 13
THE MERGER................................................................ 14
General............................................................... 14
Background of the Merger.............................................. 14
Reasons for the Merger; Recommendation of the Board of Directors...... 16
Merger Consideration.................................................. 16
Opinion of Charles Webb............................................... 17
Treatment of SFS Stock Options........................................ 20
Effective Time and Closing Date....................................... 20
Interests of Certain Persons in the Merger............................ 21
Delivery of Certificates.............................................. 22
Representations and Warranties........................................ 22
Conditions to the Merger.............................................. 23
Conduct of Business Prior to the Closing Date......................... 23
Required Approvals.................................................... 23
Waiver and Amendment.................................................. 24
Termination........................................................... 24
Certain Federal Income Tax Consequences of the Merger................. 25
Accounting Treatment.................................................. 27
No Dissenters' Rights of Appraisal.................................... 27
Expenses of the Merger................................................ 27
Management after the Merger........................................... 27
COMPARISON OF RIGHTS OF STOCKHOLDERS OF SFS BANCORP, INC.
AND COHOES BANCORP, INC................................................. 28
Introduction.......................................................... 28
Capital Stock......................................................... 28
Special Meetings of Stockholders...................................... 28
Advance Notice Requirements for Nominations of Directors and
Presentation of New Business at Annual Meetings of Stockholders..... 29
Number and Term of Directors.......................................... 30
Removal of Directors.................................................. 30
Business Combinations with Certain Persons............................ 30
Amendment of Certificate of Incorporation and Bylaws.................. 31
Control Share Acquisitions............................................ 31
Evaluation of Offers.................................................. 31
Prevention of Greenmail............................................... 31
INDEPENDENT ACCOUNTANTS................................................... 32
STOCKHOLDER MATTERS....................................................... 32
OTHER MATTERS............................................................. 32
iv
Page
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APPENDICES
I. Agreement and Plan of Merger (omitting schedules and exhibits)
II. Fairness Opinion of Charles Webb & Company
PROSPECTUS
SUMMARY................................................................... 1
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF COHOES SAVINGS BANK..... 7
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF SFS BANCORP, INC........ 8
SELECTED PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL
DATA OF THE HOLDING COMPANY............................................. 10
RISK FACTORS.............................................................. 11
COHOES BANCORP, INC....................................................... 17
COHOES SAVINGS BANK....................................................... 17
USE OF PROCEEDS........................................................... 18
DIVIDENDS................................................................. 19
MARKET FOR COMMON STOCK................................................... 20
REGULATORY CAPITAL........................................................ 21
CAPITALIZATION............................................................ 23
PRO FORMA UNAUDITED FINANCIAL INFORMATION................................. 25
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH NO
FOUNDATION BUT WITH MERGER.............................................. 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF COHOES SAVINGS................................. 37
BUSINESS OF THE HOLDING COMPANY........................................... 52
BUSINESS OF THE BANK...................................................... 52
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF SFS BANCORP, INC . ........................ 76
BUSINESS OF SFS BANCORP, INC..............................................
REGULATION................................................................
TAXATION..................................................................
MANAGEMENT OF THE HOLDING COMPANY.........................................
MANAGEMENT OF THE BANK....................................................
THE CONVERSION AND THE MERGER.............................................
THE OFFERING .............................................................
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK...........
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY.......................
DESCRIPTION OF CAPITAL STOCK OF THE BANK..................................
EXPERTS...................................................................
LEGAL AND TAX OPINIONS....................................................
ADDITIONAL INFORMATION....................................................
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................
v
SUMMARY
The following is a brief summary of certain information contained elsewhere
or incorporated by reference in this Proxy Statement/Prospectus. Certain
capitalized terms used in this summary are defined elsewhere in this Proxy
Statement/Prospectus. This summary is not intended to be a complete description
of all material facts regarding SFS, the Company and Cohoes Savings and the
matters to be considered at the Meeting and is qualified in its entirety by, and
reference is made to, the more detailed information contained elsewhere in this
Proxy Statement/Prospectus and the accompanying Appendices.
The Parties to the Merger
SFS Bancorp, Inc. and Schenectady Federal Savings Bank
SFS is a Delaware corporation which was organized in 1995 to become the
holding company for Schenectady Federal Savings Bank ("Schenectady Federal").
SFS owns all of the outstanding stock of Schenectady Federal. Schenectady
Federal is principally engaged in the business of attracting deposits from the
general public and using such deposits, together with funds generated from
operations, to originate one-to four-family residential mortgage, home equity
and, to a much lesser extent, consumer and other loans in its market area.
Schenectady Federal also invests in mortgage-backed securities, investment
securities (consisting primarily of U.S. government and agency obligations) and
other permissible investments.
Schenectady Federal is a community-oriented financial institution offering
a variety of financial services to meet the needs of the communities it serves.
Schenectady Federal conducts business in Schenectady County through its main
office located at 251-263 State Street in Schenectady, New York and three branch
offices located in the Hannaford Plaza in Glenville, New York and in the
Bellevue and Upper Union Street areas of Schenectady, New York. Schenectady
County is part of the four-county Capital District Region which also includes
the counties of Albany, Rensselaer and Saratoga. Schenectady Federal's primary
market area for deposits consists of communities within Schenectady County,
while the Bank's primary market area for lending extends to Albany, Rensselaer
and Saratoga Counties and, to a lesser extent, Warren County.
Schenectady Federal is a federally chartered stock savings bank and its
operations are regulated by the Office of Thrift Supervision (the "OTS"). At
June 30, 1998, SFS had total assets of $178.1 million, total deposits of $152.9
million and total stockholders' equity of $21.9 million. Schenectady Federal is
a member of the Federal Home Loan Bank ("FHLB") System and a stockholder in the
FHLB of New York. Schenectady Federal is also a member of the Savings
Association Insurance Fund ("SAIF"), and its deposit accounts are insured up to
applicable limits by the Federal Deposit Insurance Corporation ("FDIC").
The executive offices of SFS and Schenectady Federal are located at 251-263
State Street, Schenectady, New York 12305, and its telephone number is (518)
395-2300.
For additional information concerning SFS and Schenectady Federal, see the
following sections of the Prospectus: "Summary", "Selected Consolidated
Financial and Other Data of SFS Bancorp, Inc.," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of SFS Bancorp, Inc.,"
"Business of SFS Bancorp, Inc.," and "Index to Consolidated Financial
Statements."
1
Cohoes Bancorp, Inc. and Cohoes Savings Bank
Cohoes Bancorp, Inc. is a Delaware corporation organized in September 1998
to be the holding company for Cohoes Savings. The Company will purchase all of
the capital stock of Cohoes Savings to be issued in the Conversion in exchange
for 50% of the Conversion proceeds (net of Conversion expenses and the loan to
be made to the Company's Employee Stock Ownership Plan (the "Company ESOP")) and
will retain the remaining net proceeds as its initial capitalization.
Immediately following the Conversion, the only significant assets of the Company
will be the capital stock of Cohoes Savings, a note evidencing the Company's
loan to the Company ESOP, and the remainder of the net Conversion proceeds
retained by the Company. The business and management of the Company initially
will consist primarily of the business and management of Cohoes Savings.
The Company's executive office is located at the executive office of Cohoes
Savings at 75 Remsen Street, Cohoes, New York 12047-2892, and its telephone
number is (518) 233-6500.
Cohoes Savings is a New York-chartered, federally-insured mutual savings
bank conducting business through 15 full service banking offices and one public
accommodation office located throughout Albany, Columbia, Saratoga, Schenectady
and Rensselaer Counties in New York. At June 30, 1998, Cohoes Savings had total
assets of $535.7 million, deposits of $449.5 million and total equity of $53.3
million.
Cohoes Savings has been, and intends to continue to be, an independent,
community oriented financial institution. Cohoes Savings' 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. Cohoes Savings originates its loans in the Bank's primary market
area and has, in the past, originated multi-family and commercial loans in New
York City. At June 30, 1998, $258.4 million or 62.1% of the Bank's total loan
portfolio consisted of residential mortgage loans. The Bank also invests in
government agency and corporate debt securities and other permissible
investments.
Cohoes Savings is subject to examination and comprehensive regulation by
the New York State Banking Department ("NYSBD"), which is its chartering
authority and primary regulator. Cohoes Savings is also regulated by the FDIC,
the administrator of the SAIF. Cohoes Savings is also subject to certain reserve
requirements established by the Board of Governors of the Federal Reserve System
("FRB") and is a member of the FHLB of New York, which is one of the 12 regional
banks comprising the FHLB System.
For additional information concerning the Company and Cohoes Savings, see
the following sections of the Prospectus: "Summary," "Selected Consolidated
Financial and Other Data of Cohoes Savings Bank," "Selected Pro Forma Unaudited
Consolidated Financial Data of the Holding Company," "Risk Factors," "Cohoes
Bancorp, Inc," "Cohoes Savings Bank," "Dividends," "Market for Common Stock,"
"Regulatory Capital," "Capitalization," "Pro Forma Unaudited Financial
Information," "Comparison of Valuation and Pro Forma Information With No
Foundation But With Merger," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Cohoes Savings," "Business of the Holding
Company," "Business of the Bank," "Regulation," "Taxation," "Management of the
Holding Company," "Management of the Bank," "Restrictions on Acquisition of the
Holding Company and the Bank," "Description of Capital Stock of the Holding
Company," "Description of Capital Stock of the Bank," "Additional Information"
and "Index to Consolidated Financial Statements."
2
The Special Meeting
Meeting Date; Record Date
The Meeting is scheduled to be held at 10:00 a.m., Eastern Time, on
December __, 1998, and any and all adjournments or postponements thereof. Only
holders of record of SFS Common Stock at the close of business on __________,
1998 (the "Record Date") are entitled to notice of and to vote at the Meeting.
See "The Special Meeting--Place, Time and Date" and "Record Date; Vote
Required."
Matters to Be Considered
At the Meeting, holders of shares of SFS Common Stock will vote on a
proposal to adopt the Merger Agreement and the transactions contemplated
thereby. SFS stockholders also may consider and vote upon such other matters as
are properly brought before the Meeting. See "The Special Meeting--Matters to Be
Considered."
Vote Required
The affirmative vote of the holders of at least a majority of the
outstanding shares of SFS Common Stock entitled to vote at the Meeting is
required for adoption of the Merger Agreement. As of the Record Date, there were
1,208,472 shares of SFS Common Stock entitled to be voted at the Meeting.
Adoption of the Merger Agreement by the stockholders of SFS is a condition to,
and required for, consummation of the Merger but not the Conversion. See "The
Special Meeting--Record Date; Vote Required."
Security Ownership
As of the Record Date, the directors and executive officers of SFS and
their affiliates beneficially owned in the aggregate 74,623 shares (excluding
stock options), or 6.2% of the outstanding shares of SFS Common Stock entitled
to vote at the Meeting. As of the Record Date, the trustees and executive
officers of Cohoes Savings and their affiliates beneficially owned ____ shares
of SFS Common Stock. See "The Special Meeting--Record Date; Vote Required."
The Merger
The following summary is qualified in its entirety by reference to the full
text of the Merger Agreement, which is attached hereto as Appendix I and
incorporated by reference herein.
General
The stockholders of SFS are being asked to consider and vote upon a
proposal to adopt the Merger Agreement, pursuant to which SFS will be merged
with and into the Company, with the Company being the surviving entity. The name
of the surviving entity following consummation of the Merger will be "Cohoes
Bancorp, Inc." See "The Merger--General."
3
Reasons for the Merger; Recommendation of the Board of Directors
The Board of Directors of SFS (the "SFS Board") has unanimously adopted the
Merger Agreement and approved the transactions contemplated thereby and has
determined that the Merger is in the best interests of SFS and its stockholders.
The SFS Board therefore recommends that stockholders vote FOR the adoption of
the Merger Agreement at the Meeting.
For a discussion of the factors considered by the SFS Board in reaching its
decision to adopt the Merger Agreement and approve the transactions contemplated
thereby, see "The Merger--Background of the Merger" and "--Reasons for the
Merger; Recommendation of the Board of Directors."
Merger Consideration
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of SFS Common Stock issued and outstanding immediately
prior to the Merger (except for treasury shares and certain shares held by the
Company or Cohoes Savings) will be converted into the right to receive a number
of shares of Company Common Stock (the "Exchange Ratio" and the "Merger
Consideration," respectively) equal to the lesser of (a) $26.50 divided by the
initial public offering price for the shares of Company Common Stock to be
issued in connection with the Conversion, or (b) $35.00 divided by the Average
Closing Price of the Company Common Stock. Assuming an initial public offering
price of $10.00 per share, each share of SFS Common Stock would be converted
into 2.65 shares of Company Common Stock in the Merger, subject to downward
adjustment if the Average Closing Price exceeds $13.21 per share. See "The
Merger--Merger Consideration."
Opinion of Charles Webb
SFS has retained Charles Webb & Company, a Division of Keefe, Bruyette &
Woods, Inc. ("Charles Webb" or "Webb"), as its financial advisor in connection
with the transactions contemplated by the Merger Agreement to evaluate the
financial terms of the Merger. See "The Merger--Background of the Merger" and
"--Reasons for the Merger; Recommendation of the Board of Directors."
Charles Webb has delivered a written opinion that as of November __, 1998
the Merger Consideration is fair from a financial point of view to the holders
of SFS Common Stock. A copy of Charles Webb's opinion is attached to this Proxy
Statement/Prospectus as Appendix II and is incorporated by reference herein.
See "The Merger--Opinion of Charles Webb."
Treatment of SFS Stock Options
If any of the stock options granted under SFS' Amended and Restated Stock
Option and Incentive Plan remain outstanding immediately prior to consummation
of the Conversion and Merger, they will be converted into options to purchase
Company Common Stock, with the number of shares subject to the option and the
exercise price per share to be adjusted based upon the Exchange Ratio. See "The
Merger--Treatment of SFS Stock Options."
4
Effective Time and Closing Date
The Merger shall become effective at the time and on the date of the filing
of a certificate of merger with the Secretary of State of the State of Delaware
(the "Certificate of Merger"), unless a later date and time is specified as the
effective time in such Certificate of Merger (the "Effective Time"). The
Effective Time will occur simultaneously with, or immediately after, the
consummation of the Conversion. A closing (the "Closing") shall take place
immediately prior to the Effective Time at 10:00 a.m., Eastern Time, following
the satisfaction or waiver, to the extent permitted, of the conditions to the
consummation of the Merger specified in Article VI of the Merger Agreement
(other than the delivery of certificates, opinions and other instruments and
documents to be delivered at the Closing) (the "Closing Date"), at such place
and at such time as the parties may mutually agree upon. See "The
Merger--Effective Time and Closing Date."
Interests of Certain Persons in the Merger
Upon consummation of the Conversion and the Merger, the Company and Cohoes
Savings will appoint Joseph H. Giaquinto, President, Chief Executive Officer and
the Chairman of the Board of SFS and Schenectady Federal, to their respective
Boards of Directors, and the Company will nominate Mr. Giaquinto to be elected
to a three-year term at the next annual meeting of the Company's stockholders.
The remaining directors and certain officers of Schenectady Federal as of the
Effective Time will be appointed to an advisory board of the Company for a
three-year term (four years, with respect to the appointment of David J.
Jurczynski). Upon consummation of the Merger, all unvested stock options and
restricted stock awards held by the directors and officers of SFS will continue
to vest in accordance with their terms for as long as the holders of such
options and awards are either a director, advisory director or employee of the
Company and/or Cohoes Savings. In addition, provisions of certain employment
agreements and Supplemental Executive Retirement Agreements with officers of SFS
will result in cash payments aggregating approximately $___ million to certain
of SFS' officers, including $________ to Mr. Giaquinto. The Company has also
agreed to indemnify the directors, officers and employees of SFS and each of its
subsidiaries for a period of six years after the Effective Time to the fullest
extent which SFS or any SFS subsidiary would have been permitted to do so and to
provide liability insurance to SFS' directors and officers for a period of six
years after the Effective Time. See "The Merger--Interests of Certain Persons in
the Merger."
Representations and Warranties
The Merger Agreement contains representations and warranties of SFS and
Cohoes Savings which are customary in merger transactions. See "The
Merger--Representations and Warranties."
Conditions to the Merger
The respective obligations of the parties to consummate the Merger are
subject to the satisfaction or waiver of certain conditions specified in the
Merger Agreement including, among other things, the receipt of all necessary
regulatory, stockholder and member approvals, the compliance with or
satisfaction of all representations, warranties, covenants and conditions set
forth therein, the absence of any order, decree or injunction enjoining or
prohibiting consummation of either the Conversion or the Merger, the receipt by
the parties of tax opinions with respect to certain federal income tax
consequences of the Merger, and the receipt by the parties of letters from KPMG
Peat Marwick LLP and Arthur Andersen that the Merger shall be accounted for as a
pooling of interests. There can be no assurance that the conditions to the
consummation of the Merger will be satisfied or waived. See "The
Merger--Conditions to the Merger."
5
Conduct of Business Prior to the Closing Date
Each of Cohoes Savings and SFS has agreed to conduct its business prior to
the Effective Time in accordance with certain guidelines set forth in the Merger
Agreement. See "The Merger--Conduct of Business Prior to the Closing Date."
Required Approvals
Various approvals of the FDIC, the NYSBD and the OTS are required in order
to consummate the Conversion and the Merger. Applications for these approvals
have been filed and are currently pending. There can be no assurance that the
requisite approvals will be received in a timely manner, in which event the
consummation of the Conversion and the Merger may be delayed. In the event the
Conversion and the Merger are not consummated on or before March 1999, the
Merger Agreement may be terminated by either Cohoes Savings or SFS, except that
Cohoes Savings may not terminate prior to April 15, 1999 if all conditions have
been satisfied or waived as of March 31, 1999 but for the expiration of
statutory waiting periods. There can be no assurance as to the receipt or timing
of such approvals. See "The Merger--Required Approvals."
Waiver and Amendment
Prior to the Effective Time, Cohoes Savings and SFS may extend the time for
performance of any obligations under the Merger Agreement, waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement and waive compliance with any covenant, agreement or, to the extent
permitted by law, any condition of the Merger Agreement, provided that any such
waiver after the SFS stockholders have adopted the Merger Agreement shall not
modify the amount or form of consideration to be provided to the SFS
stockholders or otherwise materially adversely affect such stockholders without
the approval of the affected stockholders.
The Merger Agreement may be amended or supplemented at any time by mutual
agreement of Cohoes Savings and SFS, provided that any such amendment or
supplement after the SFS stockholders have adopted the Merger Agreement is
subject to the proviso in the preceding paragraph. See "The Merger--Waiver and
Amendment."
Termination
The Merger Agreement may be terminated prior to the Effective Time by: (i)
Cohoes Savings or SFS in the event of (a) the failure of SFS stockholders to
approve the Merger Agreement, (b) the failure of Cohoes Savings' members to
approve the Conversion, (c) a material failure to perform or comply by the other
party with any covenant or undertaking, which failure has not been timely cured
after notice, or (d) any material inaccuracy or omission in the representations
or warranties of the other party which has not been timely cured after notice;
(ii) Cohoes Savings or SFS if any approval of a governmental authority required
to permit consummation of the transactions shall have been denied or any
governmental authority of competent jurisdiction shall have issued a final
unappealable order prohibiting consummation of the transactions contemplated by
the Merger Agreement; (iii) Cohoes Savings or SFS in the event that the Merger
is not consummated by March 31, 1999, except that Cohoes Savings may not
terminate prior to April 15, 1999 if all conditions have been satisfied or
waived as of March 31, 1999 but for the expiration of statutory waiting periods;
and (iv) Cohoes Savings in the event that there has occurred a "Purchase Event"
(as defined in the Merger Agreement). See "The Merger--Termination."
6
Certain Federal Income Tax Consequences of the Merger
It is a condition to the obligations of Cohoes Savings and SFS to
consummate the Merger that Cohoes Savings and SFS shall have received an opinion
of Arthur Andersen to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code"), and that no gain or loss will be recognized as
a result of the Merger by any SFS stockholder upon receipt solely of Company
Common Stock in the Merger (except with respect to cash received by an SFS
stockholder in lieu of a fractional share of Company Common Stock). SFS
stockholders are urged to consult their tax advisors concerning the specific tax
consequences to them of the Merger, including the applicability and effect of
various state, local and foreign tax laws. See "The Merger--Certain Federal
Income Tax Consequences of the Merger" and "--Conditions to the Merger."
Accounting Treatment
The Merger will be accounted for as a "pooling of interests" in accordance
with generally accepted accounting principles. A condition to the consummation
of the Merger is the receipt by the Company and SFS of letters from the
Company's and SFS' independent accountants to the effect that the Merger
qualifies for pooling of interests accounting treatment. See "The
Merger--Accounting Treatment."
No Dissenters' Rights of Appraisal
Under the Delaware General Corporation Law (the "DGCL"), holders of SFS
Common Stock are not entitled to dissenters' rights of appraisal in connection
with the Merger. See "The Merger--Dissenters' Rights of Appraisal."
Expenses of the Merger
The Merger Agreement provides, in general, that Cohoes Savings and SFS
shall each bear and pay all their respective costs and expenses incurred by them
in connection with the transactions contemplated by the Merger Agreement,
including fees and expenses of their respective financial consultants,
investment bankers, accountants and counsel. If the Merger Agreement is
terminated under certain specified circumstances, Cohoes Savings is obligated to
pay SFS a break-up fee of up to $2 million, and if a Purchase Event (as defined)
occurs, then SFS must pay Cohoes Savings a fee of $2 million. See "The
Merger--Expenses of the Merger."
Management After the Merger
The members of the Board of Directors of the Company and Joseph H.
Giaquinto, currently a director of SFS, shall be the members of the Board of
Directors of the Company immediately after the Effective Time. See "The
Merger--Interests of Certain Persons in the Merger" and "--Management After the
Merger."
Effects of the Merger on Rights of Stockholders
As a result of the Merger, holders of SFS Common Stock who receive shares
of Company Common Stock in the Merger will become stockholders of the Company.
For a comparison of the corporate certificates of incorporation and bylaws of
the Company and SFS governing the rights of the Company and SFS stockholders,
see "Comparison of Rights of Stockholders of SFS Bancorp, Inc. and Cohoes
Bancorp, Inc."
7
Nasdaq Listing
The SFS Common Stock currently is quoted on The Nasdaq Stock Market
National Market under the symbol "SFED." It is a condition to consummation of
the Merger that the shares of Company Common Stock to be issued to the
stockholders of SFS in the Merger shall have been approved for listing on The
Nasdaq National Market. See "The Merger--Conditions to the Merger."
SFS BANCORP, INC. STOCK PRICES AND DIVIDEND INFORMATION
The SFS Common Stock is quoted on The Nasdaq National Market under the
symbol "SFED." The Company and Cohoes Savings have never issued capital stock.
The Company has applied to have the Company Common Stock, to be issued in
connection with the Conversion and Merger, quoted on The Nasdaq National Market.
The following table sets forth the reported high and low sales prices of
shares of SFS Common Stock as reported on The Nasdaq National Market and the
quarterly cash dividends per share declared, for the periods indicated. The
stock prices do not include retail mark-ups, markdowns or commissions.
SFS Common Stock
-------------------------------------
High Low Dividends
------- ------- ---------
1996 Calendar Year
- ------------------
First Quarter .......................... $13.00 $11.50 $ --
Second Quarter ......................... 13.00 11.75 --
Third Quarter .......................... 14.25 12.00 .06
Fourth Quarter ......................... 16.25 13.50 .06
1997 Calendar Year
- ------------------
First Quarter .......................... 18.125 14.75 .06
Second Quarter ......................... 17.50 16.00 .07
Third Quarter .......................... 23.25 16.875 .07
Fourth Quarter ......................... 28.00 21.50 .07
1998 Calendar Year
- ------------------
First Quarter .......................... 27.50 20.75 .08
Second Quarter ......................... 26.25 21.00 .08
Third Quarter (through _____, 1998) .... 29.00 19.75 .08
The last reported sales prices per share of SFS Common Stock on (i) July
31, 1998, the last full trading day preceding public announcement of the signing
of the Merger Agreement and (ii) November __, 1998, the last practicable date
prior to the mailing of this Proxy Statement/Prospectus, were $20.00 and $_____
per share, respectively.
8
As of ______, 1998, the 1,208,472 outstanding shares of SFS Common Stock
were held by approximately ___ record owners.
Assuming an initial public offering price of $10.00 per share for the
Company Common Stock in the Conversion, the number of shares of Company Common
Stock to be received for each share of SFS Common Stock will be 2.65, unless the
Average Closing Price of the Company Common Stock for the first ten trading days
following the Conversion is greater than $13.21 per share, in which case the
Exchange Ratio would be reduced to $35.00 divided by such Average Closing Price.
Accordingly, any increase in the market value of Company Common Stock subsequent
to the Conversion will increase the market value of the Company Common Stock
received in the Merger, up to an Average Closing Price of $13.21 per share of
Company Common Stock. A decrease in the market value of Company Common Stock
will have the opposite effect. The market value of the Merger Consideration at
the time of the Merger will depend upon the market value of a share of Company
Common Stock at such time. There can be no assurance that the Company Common
Stock will trade above the initial public offering price subsequent to the
Conversion.
The Company currently has no plans to pay dividends. However, the Board of
Directors of the Company may consider a policy of paying dividends on the
Company Common Stock in the future, subject to statutory and regulatory
requirements. See also "Dividends" in the Prospectus. Dividends, when and if
paid, will be subject to determination and declaration by the Company's Board of
Directors at its discretion. The Board will take into account the Company's
consolidated financial condition, Cohoes Savings' regulatory capital
requirements, tax considerations, industry standards, economic conditions,
regulatory restrictions, general business practices and other factors. The
Company also has no plans to make a return of capital distribution. In the event
the Company intends to declare a return of capital distribution within three
years following the Conversion, it must first obtain the prior written approval
of the FDIC.
The Company will be subject to Delaware law which limits dividends to an
amount equal to the excess of a corporation's net assets over paid-in capital
or, if there is no excess, to its net profits for the current and immediately
preceding fiscal years.
THE SPECIAL MEETING
Place, Time and Date
The Meeting is scheduled to be held at 10:00 a.m., Eastern Time, on
December __, 1998, at the main office of the Company located at 251-263 State
Street, Schenectady, New York. This Proxy Statement/Prospectus is being sent to
holders of record, and certain beneficial owners, of SFS Common Stock as of the
Record Date, and accompanies a form of proxy which is being solicited by the SFS
Board of Directors for use at the Meeting and at any and all adjournments or
postponements thereof.
Matters to Be Considered
At the Meeting, holders of shares of SFS Common Stock as of the Record Date
will vote upon the proposal to adopt the Merger Agreement and the transactions
contemplated thereby. See "The Merger." Holders of SFS Common Stock also may
consider and vote upon such other matters as are properly brought before the
Meeting. As of the date hereof, the SFS Board knows of no business that will be
presented for consideration at the Meeting, other than the matters described in
this Proxy Statement/Prospectus.
9
Record Date; Vote Required
The SFS Board has fixed the close of business on __________, 1998 as the
date for determining holders of SFS Common Stock who are entitled to notice of
and to vote at the Meeting. Only holders of record of SFS Common Stock at the
close of business on the Record Date will be entitled to notice of and to vote
at the Meeting. As of the Record Date, there were 1,208,472 shares of SFS Common
Stock outstanding and entitled to vote at the Meeting.
Each holder of record of shares of SFS Common Stock on the Record Date will
be entitled to cast one vote per share on each proposal at the Meeting. Such
vote may be exercised in person or by properly executed proxy. The presence, in
person or by properly executed proxy, of the holders of a majority of the
outstanding shares of SFS Common Stock entitled to vote at the Meeting is
necessary to constitute a quorum. Abstentions and broker non-votes will be
treated as shares present at the Meeting for purposes of determining the
presence of a quorum.
The affirmative vote of the holders of at least a majority of the
outstanding shares of SFS Common Stock entitled to vote at the Meeting is
required for adoption of the Merger Agreement. As a result, abstentions and
broker non-votes will have the same effect as votes against the adoption of the
Merger Agreement.
Approval of the Merger proposal by the stockholders of SFS is a condition
to, and required for, consummation of the Merger but not consummation of the
Conversion. See "The Merger--Conditions to the Merger."
Beneficial Ownership of SFS Common Stock
As of the Record Date, the directors and executive officers of SFS and
their affiliates beneficially owned in the aggregate 74,623 shares of SFS Common
Stock (excluding 41,114 shares underlying stock options held by them, which
shares may not be voted at the Meeting), or 6.2% of the currently outstanding
shares (9.3% assuming the exercise of the stock options held by directors and
executive officers), of SFS Common Stock entitled to vote at the Meeting. The
directors and executive officers of SFS have indicated their intention to vote
such shares for the Merger proposal at the Meeting. As of the Record Date,
Cohoes Savings and its subsidiaries did not own any shares of SFS Common Stock,
and the trustees and executive officers of Cohoes Savings and their affiliates
beneficially owned _____ shares or ____% of the outstanding SFS Common Stock.
The following table sets forth, as of _____ __, 1998, certain information
as to the ownership of SFS Common Stock by (i) those persons who were known by
management to be beneficial owners of more than 5% of the SFS Common Stock, (ii)
each director of SFS, and (iii) all directors and executive officers of SFS and
Schenectady Federal as a group.
10
Shares Percent
Beneficially of
Name of Beneficial Owner Owned(1)(2)(3) Class
- ------------------------------------------------------- -------------- -------
Wellington Management Company, LLP(4) ................. 135,600 11.2%
75 State Street
Boston, Massachusetts 02109
First Financial Fund, Inc. ("FFF")(5) ................. 125,600 10.4
One Seaport Plaza-25th Floor
New York, New York 10022
First Manhattan Co.(6) ................................ 105,378 8.7
437 Madison Avenue
New York, New York 10022
John Hancock Advisers, Inc.(7) ........................ 74,000 6.1
John Hancock Mutual Life Insurance Company
John Hancock Subsidiaries, Inc.
The Berkeley Financial Group
101 Huntington Avenue
Boston, Massachusetts 02199
Kennedy Capital Management, Inc.(8) ................... 63,200 5.2
425 N. New Ballas Road, Suite 181
St. Louis, Missouri 63141
Tontine Financial Partners, L.P.(9) ................... 107,100 8.9
Tontine Management, L.L.C.
Tontine Overseas Associates, L.L.C.
Jeffrey L. Gendell
SFS Bancorp, Inc. Employee Stock Ownership Plan(10) ... 119,600 9.9
251-263 State Street
Schenectady, New York 12305
Directors and Executive Officers:
Joseph H. Giaquinto ................................. 34,152 2.8
John F. Assini, M.D. ................................ 14,186 1.2
Gerald I. Klein ..................................... 14,208 1.2
Robert A. Schlansker ................................ 16,393 1.4
Richard D. Ammian ................................... 16,736 1.4
Directors and executive officers of SFS and
Schenectady Federal as a group (8 persons) .......... 115,737 8.7
(Footnotes on the next page)
11
- ----------
(1) Based upon information furnished by the respective entities or persons,
including filings under the Exchange Act. Pursuant to rules promulgated
under the Exchange Act, a person is deemed to beneficially own shares of
SFS Common Stock if he or she directly or indirectly has or shares (i)
voting power, which includes the power to vote or to direct the voting of
the shares, or (ii) investment power, which includes the power to dispose
or direct the disposition of the shares. Unless otherwise indicated, the
named beneficial owner has sole voting power and sole investment power with
respect to the indicated shares.
(2) Under applicable regulations, a person is deemed to have beneficial
ownership of any shares of SFS Common Stock which may be acquired within 60
days of the Record Date pursuant to the exercise of outstanding stock
options. Shares of SFS Common Stock which are subject to stock options are
deemed to be outstanding for the purpose of computing the percentage of
outstanding SFS Common Stock owned by such person or group but not deemed
outstanding for the purpose of computing the percentage of SFS Common Stock
owned by any other person or group. The amounts set forth in the table
include shares which may be received upon the exercise of stock options
within 60 days of the Record Date based on their original vesting schedule
as follows: for each of Messrs. Assini, Klein and Schlansker, 2,990 shares;
for Mr. Ammian, 7,476 shares; for Mr. Giaquinto, 14,950 shares; and for all
directors and executive officers as a group, 41,114 shares. In addition,
Messrs. Assini, Klein and Schlansker each hold unvested options to purchase
4,485 shares of SFS Common Stock, Messrs. Ammian and Giaquinto hold
unvested options for 11,211 and 22,425 shares, respectively, and all
directors and executive officers as a group hold unvested options for
71,010 shares.
(3) Excludes restricted shares granted pursuant to SFS' Amended and Restated
Recognition and Retention Plan ("RRP") as follows: for each of Messrs.
Assini, Klein and Schlansker, 1,794 shares; for Mr. Ammian 4,485 shares;
for Mr. Giaquinto, 8,970 shares; and for all directors and executive
officers as a group, 28,405 shares.
(4) Wellington Management Company reported sole voting and dispositive power
over 0 shares, shared voting power over 10,000 shares and dispositive power
over 135,600 shares.
(5) FFF reported sole voting power over 125,600 shares and shared dispositive
power over 125,600 shares.
(6) First Manhattan Company reported sole voting and dispositive power over
97,558 shares and shared voting and dispositive power over 7,820 shares.
(7) John Hancock Advisers, Inc. reported sole voting and dispositive power over
all 74,000 shares. John Hancock Mutual Life Insurance Company, John Hancock
Subsidiaries, Inc., and The Berkely Financial Group (the parent companies
of John Hancock Advisers, Inc.) reported indirect beneficial ownership of
these shares.
(8) Kennedy Capital Management, Inc. reported sole voting power over 20,000
shares, shared voting power over 0 shares, sole dispositive power over
63,200 shares and shared dispositive power over 0 shares.
12
(9) Tontine Financial Partners, L.P. reported shared voting and shared
dispositive power over 87,800 shares. Tontine Management, L.L.C. reported
shared voting and shared dispositive power over 87,800 shares. Tontine
Overseas Associates, L.L.C. reported shared voting and shared dispositive
power over 9,500 shares. Jeffrey L. Gendell reported sole voting and sole
dispositive power over 9,800 shares and shared voting and shared
dispositive power over 97,300 shares.
(10) The amount reported represents shares held by SFS' Employee Stock Ownership
Plan ("SFS ESOP"), 35,880 of which have been allocated to accounts of
participants as of the Record Date (___________, 1998). The amounts
reported for Messrs. Giaquinto, Schlansker and Ammian include 4,534, 2,189
and 2,649 shares of SFS Common Stock, respectively, allocated to their
respective accounts under the ESOP. First Bankers Trust Company, N.A.,
Quincy, Illinois, the trustee of the SFS ESOP, may be deemed to
beneficially own the shares held by the SFS ESOP which have not been
allocated to accounts of participants.
Proxies
Shares of SFS Common Stock represented by properly executed proxies
received prior to or at the Meeting will, unless such proxies have been revoked,
be voted at the Meeting and any adjournments or postponements thereof in
accordance with the instructions indicated in the proxies. If no instructions
are indicated on a properly executed proxy, the shares will be voted FOR the
adoption of the Merger Agreement.
Any proxy given pursuant to this solicitation or otherwise may be revoked
by the person giving it at any time before it is voted by delivering to Richard
D. Ammian, Secretary of SFS, at 251-263 State Street, Schenectady, New York
12305 or at the Meeting on or before the taking of the vote at the Meeting, a
written notice of revocation bearing a later date than the proxy or a later
dated proxy relating to the same shares of SFS Common Stock or by attending the
Meeting and voting in person. Attendance at the Meeting will not in itself
constitute the revocation of a proxy.
If any other matters are properly presented at the Meeting for
consideration, the persons named in the proxy or acting thereunder will have
discretion to vote on such matters in accordance with their best judgment. As of
the date hereof, the SFS Board knows of no such other matters.
In addition to solicitation by mail, directors, officers and employees of
SFS, who will not be specifically compensated for such services, may solicit
proxies from the stockholders of SFS, personally or by telephone, telegram or
other forms of communication. Brokerage houses, nominees, fiduciaries and other
custodians will be requested to forward soliciting materials to beneficial
owners and will be reimbursed for their reasonable expenses incurred in sending
proxy material to beneficial owners. SFS will bear its own expenses in
connection with the solicitation of proxies for the Meeting.
HOLDERS OF SFS COMMON STOCK ARE REQUESTED TO COMPLETE, DATE AND SIGN THE
ACCOMPANYING FORM OF PROXY AND TO RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PAID ENVELOPE.
HOLDERS OF SFS COMMON STOCK SHOULD NOT FORWARD STOCK CERTIFICATES WITH
THEIR PROXY CARDS.
13
THE MERGER
The information in this Proxy Statement/Prospectus concerning the terms of
the Merger is qualified in its entirety by reference to the full text of the
Merger Agreement, which is attached hereto as Appendix I and incorporated by
reference herein. All stockholders are urged to read the Merger Agreement in its
entirety.
General
Pursuant to the Merger Agreement, SFS will be merged with and into the
Company, with the Company being the surviving entity. The name of the surviving
entity following consummation of the Merger will be "Cohoes Bancorp, Inc." As
soon as possible after the conditions to consummation of the Merger described
below have been satisfied or waived, and unless the Merger Agreement has been
terminated as provided below, SFS and the Company will file a Certificate of
Merger with the Secretary of State of the State of Delaware. The Merger will
become effective at the time and on the date of the filing of the Certificate of
Merger with the Secretary of State of Delaware, unless a later date and time is
specified as the Effective Time in such Certificate of Merger. Immediately after
the Merger, Schenectady Federal will merge with and into Cohoes Savings with
Cohoes Savings being the survivor thereof.
Upon consummation of the Merger, the stockholders of SFS shall be entitled
to receive the Merger Consideration in consideration for their shares of SFS
Common Stock held and thereupon shall cease to be stockholders of SFS, and the
separate existence and corporate organization of SFS shall cease. The Company
shall succeed to all the rights and property of SFS. The members of the Board of
Directors of the Company and Joseph H. Giaquinto, currently the President and
Chairman of the Board of SFS and Schenectady Federal, shall be the members of
the Boards of Directors of the Company and Cohoes Savings immediately after the
Effective Time. See also "--Interests of Certain Persons in the Merger" and "The
Conversion and the Merger--General" in the Prospectus.
Background of the Merger
In January 1998, following a presentation to the Board of Directors of SFS
by Charles Webb, the Board engaged Charles Webb to assist SFS in evaluating a
possible sale or merger of SFS as a means to enhance stockholder value. During
February 1998, Charles Webb assisted in the preparation of confidential
marketing materials with respect to SFS.
In late February and early March 1998, Charles Webb contacted 15 financial
institutions or their holding companies to determine their initial interest in
SFS. The confidential marketing materials were sent to seven of those companies
after they executed a confidentiality agreement. The companies were initially
instructed to provide their preliminary indications of interest to Charles Webb
by March 27, 1998.
One bank holding company provided a preliminary proposal by March 27, 1998,
which was reviewed by the Board of Directors of SFS on April 3, 1998. The SFS
Board authorized further negotiations with the bank holding company and also
requested Charles Webb to contact additional institutions.
During April and May 1998, Charles Webb contacted five additional financial
institutions or their holding companies, of which two (including Cohoes Savings)
signed confidentiality agreements. The bank holding company conducted due
diligence in late April and early May and submitted a revised proposal in late
May. Cohoes Savings also expressed interest in late May and submitted a
preliminary proposal in early June.
14
The Board of Directors reviewed the two proposals on June 10, 1998 via a
telephonic conference call. The Board further reviewed the two proposals at a
meeting on June 12, 1998. At that time, the proposal from Cohoes Savings was for
2.2 shares of Company Common Stock for each share of SFS Common Stock (assuming
an initial public offering price of $10.00 per share for the Company Common
Stock). The initial proposal from Cohoes Savings was comparable in value to the
proposal from the bank holding company only if one assumed that the market price
of the Company Common Stock would significantly increase above the initial
public offering price for such stock immediately following consummation of the
Conversion. Because the Board of Directors of SFS was unwilling to fully rely
upon such assumption, the Board authorized management and Charles Webb to
proceed with negotiations toward a definitive agreement with the bank holding
company.
Over the next several weeks, SFS and its representatives reviewed and
revised several drafts of a definitive agreement with the bank holding company.
On July 8, 1998, the Board of Directors of SFS met to discuss a number of issues
which remained unresolved, including issues relating to the exchange ratio. When
negotiations with the bank holding company subsequently stalled, Cohoes Savings
was again contacted to determine whether its preliminary price indication could
be increased.
The SFS Board was updated on the status of the negotiations at a meeting on
July 15, 1998. Because the negotiations with the bank holding company had
stalled, and because Cohoes Savings increased its offer, the SFS Board decided
to terminate the negotiations with the bank holding company and to pursue
negotiations with Cohoes Savings.
SFS and Cohoes Savings then conducted a further due diligence review of
each other, and the management of SFS negotiated the terms of a definitive
agreement with the assistance of SFS' legal counsel and investment banker. On
July 22, 1998, the Board of Directors of SFS reviewed and accepted management's
due diligence report regarding Cohoes Savings. The directors were also provided
with drafts of the definitive agreement.
On July 31, 1998, the SFS Board reviewed the proposed definitive Merger
Agreement with SFS' legal counsel and Charles Webb. The Board of Directors
considered all factors deemed relevant, including the Exchange Ratio of 2.65
shares of Company Common Stock for each share of SFS Common Stock (assuming the
initial public offering price of the Company Common Stock is $10.00 per share).
The Board of Directors also noted that if the market price of the Company Common
Stock increases over the initial public offering price for such stock, then the
stockholders of SFS would realize the full benefit of such appreciation, unless
the Average Closing Price for the first ten trading days exceeds $13.21 per
share (assuming an initial public offering price of $10.00 per share), in which
case the Exchange Ratio would be reduced to the quotient (calculated to the
nearest one-thousandth) determined by dividing $35.00 by the Average Closing
Price. The SFS Board also considered and relied upon Charles Webb's opinion that
the Exchange Ratio is fair to the stockholders of SFS from a financial point of
view. The Board of Directors determined that the proposed Merger is in the best
interests of SFS and its stockholders, and the Board unanimously approved the
Merger Agreement. SFS and Cohoes Savings publicly announced the Merger after the
close of trading on July 31, 1998.
15
Reason for the Merger; Recommendation of the Board of Directors
SFS' Board of Directors believes that the terms of the Merger Agreement,
which are the product of arm's length negotiations between representatives of
Cohoes Savings and SFS, are in the best interests of SFS and its stockholders.
In the course of reaching its determination, SFS' Board of Directors considered
a number of factors. Without assigning any relative or specific weights, these
factors included, among other things:
(a) The value of Company Common Stock to be received by SFS'
stockholders in light of the Exchange Ratio of 2.65 shares of Company
Common Stock for each share of SFS Common Stock (assuming an initial public
offering price of $10.00 per share), as well as the ability of SFS'
stockholders to receive the shares of Company Common Stock based on the
initial public offering price of such shares and to potentially realize
appreciation in the value of such shares (any appreciation in the first ten
trading days is capped at 32% for the SFS stockholders). SFS' Board of
Directors determined the value of this Exchange Ratio to significantly
exceed the potential value of SFS shares on a stand-alone basis under
business strategies which could be reasonably implemented by SFS.
(b) The similarity of philosophy and vision between SFS and Cohoes
Savings.
(c) The geographic complementarity of the areas served by SFS and
Cohoes Savings, and the synergies to be obtained by a combined
organization.
(d) The continued consolidation and increasing competition in the
banking and financial services industries.
(e) The advice of SFS' management and financial advisors.
(f) The opinion of Charles Webb that the Merger Consideration to be
received by the holders of SFS Common Stock pursuant to the Merger
Agreement is fair to SFS stockholders from a financial point of view.
See also "The Conversion and the Merger--Purposes of the Conversion and the
Merger" in the Prospectus.
THE SFS BOARD BELIEVES THAT THE MERGER IS IN THE BEST INTEREST OF SFS
STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT SFS STOCKHOLDERS VOTE "FOR"
ADOPTION OF THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY.
Merger Consideration
Subject to the terms, conditions and procedures set forth in the Merger
Agreement, each share of SFS Common Stock issued and outstanding immediately
prior to the Merger (other than treasury shares and certain shares held by the
Company or Cohoes Savings) will be converted into the right to receive a number
of shares of Company Common Stock equal to the lesser of (a) $26.50 divided by
the initial public offering price for the shares of Company Common Stock to be
issued in connection with the Conversion, or (b) $35.00 divided by the Average
Closing Price of the Company Common Stock for the first ten trading days on
which such stock is traded, as reported by The Nasdaq Stock Market. Assuming an
initial public offering price of $10.00, each share of SFS Common Stock would be
converted into 2.65 shares of Company Common Stock in the Merger, unless the
Average Closing Price of the Company Common Stock for the first ten trading days
following the Conversion is greater than $13.21, in which case the Exchange
Ratio would be reduced to $35.00 divided by such Average Closing Price. The
Exchange Ratio was determined through arm's-length negotiations between Cohoes
Savings and SFS, which was advised during such negotiations by Charles Webb, its
financial advisor.
16
Each share of Company Common Stock issued and outstanding at the Effective
Time will remain outstanding and unchanged as a result of the Merger. No
fractional shares of Company Common Stock will be issued in the Merger, and SFS
stockholders who otherwise would be entitled to receive a fractional share of
Company Common Stock will receive a cash payment in lieu thereof. See also
"Summary--The Merger" in the Prospectus.
Opinion of Charles Webb
In January 1998, Webb was retained by SFS to evaluate SFS' strategic
alternatives as part of a stockholder enhancement program and to evaluate any
specific proposals that might be received regarding an acquisition of SFS. Webb,
as part of its investment banking business, is regularly engaged in the
evaluation of business and securities in connection with mergers and
acquisitions, negotiated underwritings, and distributions of listed and unlisted
securities. Webb is familiar with the market for common stocks of publicly
traded banks, thrifts and bank and thrift holding companies. The SFS Board
selected Webb on the basis of the firm's reputation and its experience and
expertise in transactions similar to the Merger and its prior work for and
relationship with SFS.
Pursuant to its engagement, Webb was asked to render an opinion as to the
fairness, from a financial point of view, of the Merger Consideration to the
stockholders of SFS. Webb delivered a fairness opinion to the SFS Board dated as
of July 31, 1998, and rendered an additional updated opinion dated November __,
1998 (the "Opinion") , that the consideration is fair, from a financial point of
view, to the stockholders of SFS. No limitations were imposed by the SFS Board
upon Webb with respect to the investigations made or procedures followed by it
in rendering its Opinion. Webb has consented to the inclusion herein of the
summary of its Opinion to the SFS Board and to the reference to the entire
Opinion attached hereto as Appendix II.
The full text of the Opinion of Webb, updated as of the date of this Proxy
Statement/Prospectus, which sets forth certain assumptions made, matters
considered and limitations on the reviews undertaken, is attached as Appendix II
to this Proxy Statement/Prospectus and should be read in its entirety. The
summary of the Opinion of Webb set forth in this Proxy Statement/Prospectus is
qualified in its entirety by reference to the Opinion. Such Opinion does not
constitute a recommendation by Webb to any SFS stockholder as to how such
stockholder should vote with respect to the Merger.
In rendering its Opinion, Webb (i) reviewed the financial and business data
supplied to it by SFS, including SFS' Annual Reports for the years ended
December 31, 1996 and 1997 and the Proxy Statements relating to the 1996, 1997,
and 1998 annual stockholders meetings; (ii) unaudited quarterly results for the
quarters ended March 31, 1998, September 30, 1997, June 30, 1997 and March 31,
1997; (iii) discussed with senior management and the Boards of Directors of SFS
and its wholly-owned subsidiary, Schenectady Federal, the current position and
prospective outlook for SFS; (iv) considered historical quotations for the SFS
Common Stock; (v) reviewed the financial and stock market data of other
financial institutions, particularly in the Mid-Atlantic region of the United
States, and the financial and structural terms of several other recent
transactions involving mergers and acquisitions of financial institutions or
proposed changes of control of comparably situated companies; and (vi) reviewed
certain other information which it deemed relevant. In addition, Webb considered
certain financial data and other information provided by Cohoes Savings as well
as discussions with the senior management of Cohoes Savings.
17
In rendering its Opinion, Webb assumed and relied upon the accuracy and
completeness of the financial information provided to it by SFS and Cohoes
Savings and obtained by it from public sources. In its review, with the consent
of the SFS Board, Webb did not undertake any independent appraisal or evaluation
of the assets and liabilities of SFS or Cohoes Savings, or of the potential or
contingent liabilities of SFS or Cohoes Savings. With respect to the financial
information, including forecasts from SFS, Webb assumed ( with SFS' consent)
that such information had been reasonably prepared reflecting the best currently
available estimates and judgment of SFS' management. Webb also assumed that no
restrictions or conditions would be imposed by regulatory authorities that would
have a material adverse effect on the contemplated benefits of the Merger to SFS
or the ability to consummate the Merger.
Webb's review of comparable transactions included the compilation of
pending or recently completed acquisitions of savings institutions. The results
of the analysis are summarized below along five industry accepted ratios. The
information in the following table summarizes the material information analyzed
by Webb with respect to the Merger. The summary does not purport to be a
complete description of the analysis performed by Webb in rendering its Opinion.
Selecting portions of Webb's analysis or isolating certain aspects of the
comparable transactions without considering all analyses and factors could
create an incomplete or potentially misleading view of the evaluation process.
Webb's review of comparable transactions included the compilation of
pending or recently completed acquisitions of savings institutions sorted into
five groups. The groups were identified with characteristics similar to SFS and
complied as follows: (i) all thrift acquisitions since June 30, 1997; (ii) all
thrift acquisitions with a total transaction value between $5 million and $50
million ("Comparable Transaction Value"); (iii) all acquisitions since June 30,
1997 with the selling thrift having equity to total assets of between 10.0% and
16.0% ("Comparable Equity Ratio"); (iv) all thrift acquisitions since June 30,
1997 with the selling thrift having assets between $70 million and $270 million
("Comparable Asset Size"); and (v) all thrift acquisitions since June 30, 1997
located in the Mid-Atlantic region ("Comparable Regional Deals"). The results of
the analysis are summarized below:
18
Price to
------------------------------------- CoreDep
TangBook LTMEPS(c) Deposits Assets Premium
(%) (x) (%) (%) (%)
-------- --------- -------- ------ -------
Consideration - $26.50 per share(a) 145.4 26.5 22.7 19.5 8.3
Consideration - $35.00 per share(b) 194.6 35 30.3 26.1 16
Recent Transactions Number Median for all deals since June 30, 1997
- ------------------- ------ ----------------------------------------------
Completed 105 191.3 23.1 18.1 24.8 13.2
Pending 58 204.6 25.0 21.7 28.5 16.9
Comparable Transaction Value
- ----------------------------
Completed 37 165.0 25.6 17.8 23.3 8.6
Pending 22 160.2 22.0 18.2 21.4 10.8
Comparable Equity Ratio
- -----------------------
Completed 21 175.2 24.4 21.8 27.2 13.5
Pending 12 188.1 24.8 25.0 34.4 18.6
Comparable Asset Size
- ---------------------
Completed 21 175.2 24.4 21.8 27.2 13.5
Pending 12 188.1 24.8 25.0 34.4 18.6
Comparable Regional Deals
- -------------------------
Completed 15 214.3 21.4 17.7 25.0 13.4
Pending 16 203.6 26.6 25.0 31.5 19.5
- ----------
(a) Based on holders of SFS Common Stock receiving $26.50 per share.
(b) Based on holders of SFS Common Stock receiving $35.00 per share.
(c) Last twelve months (LTM) ending June 30, 1998 earnings per share were
$1.00.
19
In preparing its analysis, Webb made numerous assumptions with respect to
industry performance, business and economic conditions and other matters, many
of which are beyond the control of Webb and SFS. The analyses performed by Webb
are not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses and do not
purport to be appraisals or reflect the prices at which a business may be sold.
SFS engaged Webb to, among other things, assist SFS in determining
appropriate and desirable values that could be realized in a merger, prepare a
summary of recent merger and acquisition trends in the financial services
industry, advise SFS as to the structure and form of any proposed merger, and
render an opinion as to the fairness of the consideration to be paid in any
proposed merger. SFS agreed to pay Webb a fee of $50,000 for delivery of a
fairness opinion, which fee was paid as of the date of this Proxy
Statement/Prospectus. Further, SFS agreed to pay Webb a success fee of 1.00% of
the transaction value less the fee paid for the fairness opinion. Such success
fee shall be paid upon consummation of the Merger. Based upon the range of
$26.50 to $35.00 per share for SFS stockholders, the transaction value would be
between approximately $27.5 million and $36.4 million. SFS agreed to reimburse
Webb for its reasonable out-of-pocket expenses, not to exceed $7,500. SFS has
further agreed to indemnify Webb and its affiliates, and their respective
directors, officers and employees and each such other person controlling Webb or
any of its affiliates from and against certain claims and liabilities. Webb is
also acting as underwriter on a best-efforts basis in the mutual to stock
conversion transaction for the Company and Cohoes Savings. Webb will not be
involved in establishing the valuation range of the offering. Webb will be paid
a fee equal to 1.20% of the aggregate purchase price of the Company Common Stock
sold in the Conversion (excluding shares purchased by trustees, directors,
executive officers or employees of the Company or Cohoes Savings or members of
their immediate families or any employee benefit plan of the Company or Cohoes
Savings). See "The Offering--Marketing and Underwriting Arrangements" in the
Prospectus.
Treatment of SFS Stock Options
If any of the stock options ("SFS Options") granted under SFS' Amended and
Restated Stock Option and Incentive Plan ("SFS Option Plan") remain outstanding
immediately prior to consummation of the Conversion and Merger, they will be
converted into options to purchase Company Common Stock, with the number of
shares subject to the option and the exercise price per share to be adjusted
based upon the Exchange Ratio. The number of shares of Company Common Stock
subject to each converted SFS Option shall be equal to the number of shares of
SFS Common Stock subject to such SFS Option immediately prior to the Effective
Time multiplied by the Exchange Ratio, provided that any fractional shares of
Company Common Stock resulting from such multiplication shall be rounded to the
nearest share, and the per share exercise price under each converted SFS Option
shall be adjusted by dividing the per share exercise price under each such SFS
Option by the Exchange Ratio, provided that such exercise price shall be rounded
up to the next cent. Notwithstanding the preceding sentence, each SFS Option
which is an "incentive stock option" shall be adjusted as required by Section
424 of the Code, and the regulations promulgated thereunder, so as not to
constitute a modification, extension or renewal of the option within the meaning
of Section 424(h) of the Code.
Effective Time and Closing Date
The Merger shall become effective at the time and on the date of the filing
of the Certificate of Merger with the Secretary of State of the State of
Delaware, unless a later date and time is specified as the effective time in
such Certificate of Merger. The Effective Time will occur simultaneously with,
or immediately after, the consummation of the Conversion. The Closing shall take
place immediately prior to the Effective Time at 10.00 a.m., Eastern Time,
following the satisfaction or waiver, to the extent permitted, of the conditions
to the consummation of the Merger specified in Article VI of the Merger
Agreement (other than the delivery of certificates, opinions and other
instruments and documents to be delivered at the Closing), at such place and at
such time as the parties may mutually agree upon. See also "The Conversion and
the Merger--Closing Date of the Merger; Termination and Amendment" in the
Prospectus.
20
Interests of Certain Persons in the Merger
Upon consummation of the Conversion and the Merger, the Company and Cohoes
Savings will appoint Joseph H. Giaquinto, President, Chief Executive Officer and
the Chairman of the Board of SFS and Schenectady Federal, to their respective
Boards of Directors, and the Company will nominate Mr. Giaquinto to be elected
to a three-year term at the next annual meeting of the Company's stockholders.
The remaining directors and certain officers of Schenectady Federal as of the
Effective Time will be appointed to an advisory board of the Company for a
three-year term (four years, with respect to the appointment of David J.
Jurczynski).
As of _______, 1998, there were an aggregate of 125,579 stock options to
purchase SFS Common Stock outstanding under SFS' Stock Option Plan. Of these
stock options, 46,496 are currently exercisable. If any of the SFS Options
remain outstanding immediately prior to consummation of the Merger, they will be
converted into options to purchase Company Common Stock, with the number of
shares subject to the option and the exercise price per share to be adjusted
based upon the Exchange Ratio so that the aggregate exercise price remains
unchanged, and with the duration of the option remaining unchanged. See "--
Treatment of SFS Stock Options." SFS Options which have not vested as of the
Effective Time will continue to vest in accordance with their terms for as long
as the holders of the options are either a director, advisory director or
employee of the Company and/or Cohoes Savings. See "The Special Meeting -
Beneficial Ownership of SFS Common Stock" for the amount of unvested stock
options held by the directors and executive officers of SFS.
As of September ___, 1998, an aggregate of 32,530 shares of SFS Common
Stock have been awarded to the directors and officers of SFS pursuant to the
Recognition and Retention Plan and have not yet vested. Upon consummation of the
Merger, all unvested awards will be converted into Company Common Stock based
upon the Exchange Ratio and will continue to vest in accordance with their terms
for as long as the holders of the awards are either a director, advisory
director or employee of the Company and/or Cohoes Savings. See "Summary - The
Special Meeting - Security Ownership" for the amount of unvested awards.
As of September 30, 1998, the SFS ESOP held 83,720 shares of SFS Common
Stock which had not yet been allocated to participants and which were pledged as
collateral for the remaining $837,200 loan to the SFS ESOP. The ESOP is expected
to be terminated in accordance with its terms six months following consummation
of the Merger, at which time the loan will be repaid and the remaining
unallocated shares will be allocated to the participants.
Pursuant to the Merger Agreement, Cohoes Savings has agreed to retain
employees of SFS and Schenectady Federal after the Effective Time, provided that
the Company and Cohoes Savings shall not have any obligation to continue the
employment of such persons. The Merger Agreement provides that officers and
employees of SFS and Cohoes Savings who become employees of Cohoes Savings after
the Merger will be entitled to participate in Cohoes Savings' employee benefit
plans maintained generally for the benefit of its employees. Cohoes Savings
shall treat SFS' employees who become employees of Cohoes Savings as new
employees, but shall amend its employee benefit plans to provide credit, for
purposes of vesting and eligibility to participate for service with SFS to the
extent that such service was recognized for similar purposes under SFS' plans.
In addition, the provisions of certain employment agreements and Supplemental
Executive Retirement Agreements with officers of SFS will result in cash
payments aggregating approximately $________ million to certain of SFS'
officers, including $_______ to Mr. Giaquinto. See also "The Conversion and the
Merger--Interests of Certain Persons in the Merger" in the Prospectus.
21
In the Merger Agreement, the Company has agreed to indemnify the directors,
officers and employees of SFS and each of its subsidiaries for a period of six
years after the Effective Time to the fullest extent which SFS or any SFS
subsidiary would have been permitted to do so under its respective Certificate
of Incorporation, Charter or Bylaws. In addition, all limitations of liability
existing in favor of such individuals in the Certificate of Incorporation,
Charter or Bylaws of SFS or any SFS subsidiary, arising out of matters existing
or occurring at or prior to the Effective Time, shall survive the Merger and
shall continue in full force and effect. The Company has also agreed to maintain
SFS' existing directors' and officers' liability insurance policy (or purchase
another policy providing substantially the same coverage) for a period of six
years following the Effective Time, subject to certain limits on the cost to the
Company.
Delivery of Certificates
After consummation of the Conversion and the Merger, each holder of a
certificate or certificates theretofore evidencing issued and outstanding shares
of SFS Common Stock, upon surrender of the same to an agent, duly appointed by
the Company, which is anticipated to be the transfer agent for Company Common
Stock (the "Exchange Agent"), shall be entitled to receive in exchange therefore
a certificate or certificates representing the number of full shares of Company
Common Stock for which the shares of SFS Common Stock theretofore represented by
the certificate or certificates so surrendered shall have been converted based
on the Exchange Ratio. The Exchange Agent shall, after expiration of the ten
trading day period required to determine the Exchange Ratio, promptly mail to
each such holder of record of an outstanding certificate which immediately prior
to the consummation of the Conversion and the Merger evidenced shares of SFS
Common Stock, and which is to be exchanged for Company Common Stock based on the
Exchange Ratio as provided in the Merger Agreement, a form of letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to such certificate shall pass, only upon delivery of such
certificate to the Exchange Agent) advising such holder of the terms of the
exchange effected by the Conversion and the Merger and of the procedure for
surrendering to the Exchange Agent such certificate in exchange for a
certificate or certificates evidencing Company Common Stock. The stockholders of
SFS should not forward SFS Common Stock certificates to the Company or the
Exchange Agent until they have received the transmittal letter. See also "The
Conversion and the Merger--Delivery of Certificates" in the Prospectus.
Representations and Warranties
The Merger Agreement contains representations and warranties of SFS and
Cohoes Savings which are customary in merger transactions, including, but not
limited to, representations and warranties concerning: (i) the organization and
capitalization of SFS and Cohoes Savings and their respective subsidiaries; (ii)
the due authorization, execution, delivery and enforceability of the Merger
Agreement; (iii) the consents or approvals required, and the lack of conflicts
or violations under applicable certificates of incorporation, charters, bylaws,
instruments and laws, with respect to the transactions contemplated by the
Merger Agreement; (iv) the absence of material adverse changes; (v) the
documents filed by the parties with the SEC and other regulatory agencies; (vi)
the conduct of business in the ordinary course and absence of certain changes;
(vii) the financial statements of the respective parties; (viii) compliance with
laws by the respective parties; and (ix) the allowance for loan losses and real
estate owned. The representations and warranties of Cohoes Savings and SFS will
not survive beyond the Effective Time if the Merger is consummated, and, if the
Merger Agreement is terminated without consummation of the Merger, there will be
no liability on the part of any party except that no party shall be relieved
from any liability arising out of a willful breach of any covenant, undertaking,
representation or warranty in the Merger Agreement and except as described under
"-- Termination" and "-- Expenses of the Merger." See also "The Conversion and
the Merger--Representations and Warranties" in the Prospectus.
22
Conditions to the Merger
The respective obligations of the parties to consummate the Merger are
subject to the satisfaction or waiver of certain conditions specified in the
Merger Agreement including, among other things, the receipt of all necessary
regulatory, stockholder and member approvals, the compliance with or
satisfaction of all representations, warranties, covenants and conditions set
forth therein, the absence of any order, decree or injunction enjoining or
prohibiting consummation of either the Conversion or the Merger, the receipt by
the parties of tax opinions with respect to certain federal income tax
consequences of the Merger and the receipt by the parties of a letter from their
respective independent accountants that the Merger shall be accounted for as a
pooling of interests. There can be no assurance that the conditions to
consummation of the Merger will be satisfied or waived. See also "The Conversion
and the Merger--Conditions to the Merger" in the Prospectus.
Conduct of Business Prior to the Closing Date
Under the terms of the Merger Agreement, Cohoes Savings and SFS shall, and
shall cause each of their respective subsidiaries to, conduct its businesses and
engage in transactions only in the ordinary course and consistent with past
practice or to the extent otherwise contemplated under the Merger Agreement,
except with the prior written consent of Cohoes Savings or SFS, as the case may
be. SFS also shall use its reasonable efforts to (i) preserve its business
organization and that of its subsidiaries intact, (ii) keep available to itself
and Cohoes Savings the present services of its employees and those of its
subsidiaries, and (iii) preserve for itself and Cohoes Savings the goodwill of
its customers and those of its subsidiaries and others with whom business
relationships exist.
In addition, under the terms of the Merger Agreement, SFS has agreed that,
except as otherwise approved by Cohoes Savings in writing or as permitted,
contemplated or required by the Merger Agreement, it will not, nor will it
permit any of its subsidiaries to, engage in certain activities. See "The
Conversion and the Merger--Conduct of Business Prior to the Merger Closing Date"
in the Prospectus.
Required Approvals
Various approvals of the NYSBD and the FDIC are required in order to
consummate the Conversion and the Merger. The NYSBD and the FDIC have approved
the Plan of Conversion, subject to approval by Cohoes Savings' voting
depositors. In addition, consummation of the Conversion and the Merger is
subject to OTS approval of the Company's holding company application to acquire
all the SFS Common Stock and all of Cohoes Savings common stock and the
applications under the Home Owners' Loan Act, the Bank Merger Act and the New
York State Banking laws, with respect to the merger of Schenectady Federal with
and into Cohoes Savings with Cohoes Savings being the surviving entity.
Applications for these approvals have been filed and are currently pending.
There can be no assurances that the requisite regulatory approvals will be
received in a timely manner, in which event the consummation of the Conversion
and the Merger may be delayed. In the event the Conversion and the Merger are
not consummated on or before March 31, 1999, the Merger Agreement may be
terminated by either Cohoes Savings or SFS, provided that this right to
terminate shall not be available to Cohoes Savings until April 15, 1999 if as of
March 31, 1999 all of the conditions precedent have been satisfied or waived
other than the condition precedent that all statutory waiting periods shall have
expired. There can be no assurance as to the receipt or timing of such
approvals.
23
It is a condition to the consummation of the Merger that the regulatory
approvals be obtained without any condition or requirement that, individually or
in the aggregate, would so materially reduce the economic or business benefits
of the transactions contemplated by the Merger Agreement to Cohoes Savings that
had such condition or requirement been known, Cohoes Savings, in its reasonable
judgment, would not have entered into the Merger Agreement. There can be no
assurance that any such approvals will not contain terms, conditions or
requirements which cause such approvals to fail to satisfy such condition to the
consummation of the Merger. In addition, the Conversion must be approved by the
members of Cohoes Savings and the Merger Agreement approved by the stockholders
of SFS. See also "The Conversion and the Merger--Required Approvals for the
Conversion and the Merger" in the Prospectus.
Waiver and Amendment
Prior to the Effective Time, Cohoes Savings and SFS may extend the time for
performance of any obligations under the Merger Agreement, waive any
inaccuracies in the representations and warranties contained in the Merger
Agreement and waive compliance with any covenant, agreement or, to the extent
permitted by law, any condition of the Merger Agreement, provided that any such
waiver after the SFS stockholders have adopted the Merger Agreement shall not
modify the amount or form of consideration to be provided to the SFS
stockholders or otherwise materially adversely affect such stockholders without
the approval of the affected stockholders.
The Merger Agreement may be amended or supplemented at any time by mutual
agreement of Cohoes Savings and SFS, provided that any such amendment or
supplement after the SFS stockholders have adopted the Merger Agreement is
subject to the proviso in the preceding paragraph. See also "The Conversion and
the Merger--[Closing Date of the Merger]; Termination and Amendment" in the
Prospectus.
Termination
The Merger Agreement may be terminated prior to the Effective Time by: (a)
the mutual written consent of the parties; (b) by Cohoes Savings or SFS if (i)
the other party has in any material respect breached the Merger Agreement, and
such breach has not been timely cured after notice; (ii) any necessary
governmental approval is denied, unless such denial is due to a breach of the
party seeking to terminate; (iii) if a final, nonappealable order prohibits any
transaction contemplated by the Merger Agreement; (iv) the shareholders of SFS
do not approve the Merger Agreement or the depositors of Cohoes Savings do not
approve the Plan of Conversion, unless the failure of such approval is due to a
breach of the party seeking to terminate; or (v) the Effective Time has not
occurred by March 31, 1999 (or in certain circumstances, April 15, 1999 for
Cohoes Savings) unless the failure of such occurrence is due to a breach of the
party seeking to terminate; or (c) by Cohoes Savings if a "Purchase Event" (as
defined in the Merger Agreement) has occurred.
24
In the event of the termination of the Merger Agreement, the Merger
Agreement shall thereafter become void and have no effect, and there shall be no
liability on the part of any party to the Merger Agreement or their respective
officers and directors, except that (i) certain provisions regarding
confidential information and expenses shall survive and remain in full force and
effect; (ii) a breaching party shall not be relieved of liability for any
willful breach giving rise to such termination; and (iii) certain provisions
relating to expenses and termination fees shall survive and remain in full force
and effect. Cohoes Savings shall pay to SFS a termination fee of $2.0 million
unless (i) Cohoes Savings terminates in response to a breach or Purchase Event
by SFS; (ii) the termination is due to failure to receive any required
governmental approval, failure to receive the approval of Cohoes Savings'
depositors, or failure of the Effective Time to occur by March 31, 1999; (iii)
SFS shareholders do not approve the Merger Agreement; (iv) the Merger Agreement
is terminated because certain closing conditions cannot be satisfied; or (v) SFS
exercises a right of termination before March 31, 1999. If termination is due to
failure to receive the approval of Cohoes Savings' depositors, or failure of the
Effective Time to occur by March 31, 1999, Cohoes Savings shall pay to SFS the
reasonable and verifiable expenses incurred by SFS in connection with the Merger
Agreement. If termination is due to (i) failure to receive any required
governmental approval or (ii) all other conditions are satisfied, but the
required pooling of interest letters cannot be obtained due to an act or
omission of Cohoes Savings, the Company or a Cohoes Savings affiliate, Cohoes
Savings will pay to SFS a break up fee of $1.0 million. SFS shall pay to Cohoes
Savings a fee of $2.0 million upon the occurrence of a Purchase Event prior to a
Fee Termination Event (as defined below).
A "Fee Termination Event" shall be the first to occur of the following: (i)
the Effective Date, (ii) termination of the Merger Agreement in accordance with
the terms thereof prior to the occurrence of a Purchase Event (other than a
termination of the Merger Agreement by Cohoes Savings as a result of a willful
breach of any representation warranty, covenant or agreement of SFS or
Schenectady Federal), or (iii) 12 months following termination of the Merger
Agreement by Cohoes Savings unless a Purchase Event shall have occurred prior
thereto.
See also "The Conversion and the Merger--[Closing Date of the Merger];
Termination and Amendment" in the Prospectus.
Certain Federal Income Tax Consequences of the Merger
Set forth below is a discussion of federal income tax consequences of the
Merger to the Company and SFS and SFS stockholders who are citizens or residents
of the United States. The following discussion does not purport to be a complete
analysis or listing of all potential tax effects relevant to a decision whether
to vote in favor of the adoption of the Merger Agreement and the transactions
contemplated thereby. Further, the discussion does not address the tax
consequences that may be relevant to a particular SFS stockholder subject to
special treatment under certain federal income tax laws, such as dealers in
securities, banks, insurance companies, tax-exempt organizations, non-United
States persons and stockholders who acquired their shares as compensation, nor
any consequences arising under the laws of any state, locality or foreign
jurisdiction. The discussion is based upon the Code, Treasury regulations
thereunder and administrative rulings and court decisions as of the date hereof.
All of the foregoing are subject to change and any such change could affect the
continuing validity of this discussion.
25
HOLDERS OF SFS COMMON STOCK ARE URGED TO CONSULT THEIR TAX ADVISERS AS TO
THE PARTICULAR EFFECT OF THEIR OWN PARTICULAR FACTS AND CIRCUMSTANCES ON THE
FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO THEM, AND ALSO TO THE EFFECT OF
ANY STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
Under current federal income tax law, and based upon assumptions and
representations of the Company and SFS, and assuming that the Merger is
consummated in the manner set forth in the Merger Agreement, it is anticipated
that the following federal income tax consequences would result:
(i) the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code,
(ii) no gain or loss will be recognized by any SFS stockholder upon
the exchange of SFS Common Stock solely for Company Common Stock in the
Merger (except in connection with the receipt of cash in lieu of a
fractional share of Company Common Stock, as discussed below);
(iii) the aggregate tax basis of the Company Common Stock received by
each stockholder of SFS who exchanges SFS Common Stock for Company Common
Stock in the Merger will be the same as the aggregate tax basis of the SFS
Common Stock surrendered in exchange therefor (subject to any adjustments
required as the result of receipt of cash in lieu of a fractional share of
Company Common Stock);
(iv) the holding period of the shares of Company Common Stock received
by an SFS stockholder in the Merger will include the holding period of the
SFS Common Stock surrendered in exchange therefor (provided that such
shares of SFS Common Stock were held as a capital asset by such stockholder
at the Effective Time); and
(v) cash received in the Merger by an SFS stockholder in lieu of a
fractional share interest of Company Common Stock will be treated as having
been received as a distribution in full payment in exchange for the
fractional share interest of Company Common Stock which such stockholder
would otherwise be entitled to receive, and will qualify as capital gain or
loss (assuming the Company Common Stock surrendered in exchange therefor
was held as a capital asset by such stockholder at the Effective Time).
Based upon representations to be made by the Company and SFS, Cohoes
Savings and SFS must receive as a condition to closing an opinion of Arthur
Andersen, the independent auditors for Cohoes Savings, that the Merger will
constitute a reorganization within the meaning of Section 368(a) of the Code and
will have the effects set forth in subparagraphs (ii)-(iv) above. The opinion
will be subject to various assumptions and qualifications, including that the
Merger is consummated in the manner and in accordance with the terms of the
Merger Agreement. The opinion will be based entirely upon the Code, regulations
then in effect or proposed thereunder, current administrative rulings and
practice and judicial authority, all of which would be subject to change,
possibly with retroactive effect. Consummation of the Merger is conditioned upon
the receipt by the Company and SFS, respectively, of such opinion. See
"--Conditions to the Merger."
No ruling has been or will be requested from the Internal Revenue Service
("IRS"), including any ruling as to federal income tax consequences of the
Merger to the Company or SFS stockholders. Unlike a ruling from the IRS, an
opinion of independent certified accountants is not binding on the IRS. There
can be no assurance that the IRS will not take a position contrary to the
positions reflected in such opinion or that such opinion would be upheld by the
courts if challenged. See also "The Conversion and the Merger--Tax Aspects" in
the Prospectus.
26
Accounting Treatment
Consummation of the Merger is conditioned upon the receipt by Cohoes
Savings and SFS of a letter from their respective independent accountants to the
effect that the Merger qualifies for pooling of interests accounting treatment.
Under the pooling of interests method of accounting, the historical cost basis
of the assets and liabilities of the Company and SFS will be combined at the
Closing Date and carried forward at their previously recorded amounts, and the
stockholders' equity accounts of SFS and the Company will also be combined. The
consolidated income and other financial statements of the Company issued after
consummation of the Merger will be restated retroactively to reflect the
consolidated operations of the Company and SFS as if the Conversion and the
Merger had taken place prior to the periods covered by such financial
statements. See also "--Conditions to the Merger" and "The Conversion and the
Merger--Accounting Treatment" in the Prospectus.
In the past, SFS had made certain repurchases of shares of SFS Common
Stock. SFS has made no repurchases since October 22, 1997 and, pursuant to the
terms of the Merger Agreement, will not make any repurchases prior to
consummation of the Merger. In addition, regulations of the FDIC restrict the
Company's ability to implement any repurchases of stock subsequent to the
Conversion and Merger. Any repurchase program implemented by the Company
subsequent to the Conversion and Merger also will be limited as necessary to
preserve pooling-of-interests accounting treatment of the Merger.
No Dissenters' Rights of Appraisal
Under Delaware law, holders of SFS Common Stock have no dissenters' rights
of appraisal in connection with the Merger.
Expenses of the Merger
The Merger Agreement provides, in general, that Cohoes Savings and SFS
shall each bear and pay all their respective costs and expenses incurred by it
in connection with the transactions contemplated by the Merger Agreement,
including fees and expenses of their respective financial consultants,
investment bankers, accountants and counsel. If the Merger Agreement is
terminated under certain specified circumstances, Cohoes Savings is obligated to
pay SFS a break-up fee of up to $2 million, and if a Purchase Event (as defined)
occurs, then SFS must pay Cohoes Savings a fee of $2 million. See " --
Termination." See also "The Conversion and the Merger--Expenses of the Merger"
in the Prospectus.
Management after the Merger
Upon consummation of the Conversion and the Merger, the Company and Cohoes
Savings will appoint Joseph H. Giaquinto, President, Chief Executive Officer and
Chairman of the Board of SFS and Schenectady Federal, to their respective Boards
of Directors. See also "The Conversion and the Merger --Interests of Certain
Persons in the Merger" and "Management of the Company" in the Prospectus.
27
COMPARISON OF RIGHTS OF STOCKHOLDERS OF
SFS BANCORP, INC. AND COHOES BANCORP, INC.
Introduction
Upon the consummation of the Merger, holders of SFS Common Stock, whose
rights are presently governed by Delaware law and SFS' certificate of
incorporation and bylaws (the "SFS Certificate" and "SFS Bylaws," respectively)
and, indirectly, Schenectady Federal's charter and bylaws, will become
stockholders of the Company, also a Delaware corporation. Accordingly, their
rights will be governed by the DGCL and the certificate of incorporation and
bylaws of the Company (the "Company Certificate" and " Company Bylaws,"
respectively) and, indirectly, Cohoes Savings' charter and bylaws. Certain
differences arise from the differences between the SFS Certificate and Bylaws
and the Company Certificate and Bylaws and between the charter and bylaws of
Schenectady Federal and Cohoes Savings. The following discussion summarizes
material differences affecting the rights of stockholders but is not intended to
be a complete statement of all differences and is qualified in its entirety by
reference to the DGCL, the Company Certificate and Bylaws, the SFS Certificate
and Bylaws and the respective charters and bylaws of Schenectady Federal and
Cohoes Savings.
Each SFS stockholder should carefully consider these differences in
connection with the decision to vote for or against the adoption of the Merger
Agreement. See also "Restrictions on Acquisitions of the Holding Company and the
Bank" in the Prospectus.
Capital Stock
The SFS Certificate authorizes the issuance of 2,500,000 shares of common
stock, par value $.01 per share, and 500,000 shares of serial preferred stock,
par value $.01 per share, and provides that the SFS Board may issue any
authorized shares from time to time and may fix the rights and preferences of
the serial preferred stock, all without stockholder action. As of the Record
Date, there were 1,208,472 shares of SFS Common Stock and no shares of SFS
preferred stock issued and outstanding.
The Company Certificate authorizes the issuance of 40,000,000 shares of
common stock, par value $.01 per share, and 5,000,000 shares of serial preferred
stock, par value $.01 per share, and provides that the Company's Board of
Directors (the "Company Board") may issue any authorized shares from time to
time and may fix the rights and preferences of the serial preferred stock, all
without stockholder action. The Company, which has never issued capital stock,
is offering up to __________ shares of Company Common Stock in connection with
the Conversion and the Merger.
Special Meetings of Stockholders
The SFS Certificate and SFS Bylaws provide that special meetings of
stockholders of SFS may be called only by the SFS Board, upon a resolution
adopted by a majority of the total number of directors that SFS would have if
there were no vacancies on the Board. The Company Certificate and the Company
Bylaws also provide that special meetings of stockholders of the Company may be
called only by a majority of the total number of directors that the Company
would have if there were no vacancies on the Board.
28
Advance Notice Requirements for Nominations of Directors and Presentation of New
Business at Annual Meetings of Stockholders
The SFS Bylaws provide that if a stockholder of SFS desires to make
nominations for the election of directors, SFS must receive written notice of
such nominations that meets certain formal requirements not less than 30 days
prior to the meeting for the election of directors; provided, however, if less
than 40 days notice of the date of the meeting is given to stockholders or
disclosed publicly by SFS, notice by the stockholder must be received not later
than the tenth day following the date such notice of the meeting was mailed. The
notice shall include (i) all information with respect to each nominee required
under the Exchange Act to be disclosed in proxy solicitation materials,
including a signed consent to being named in the proxy statement and to serve as
a director if elected, (ii) the name and address, as they appear on SFS' books,
of the stockholder proposing to make the nomination, and (iii) the class and
number of shares of SFS' capital stock that are beneficially owned by such
stockholder. In addition, the SFS Bylaws provide that any stockholder desiring
to make a proposal for new business at the annual meeting of stockholders must
submit a written statement of the proposal which must be received by the
secretary of SFS at least 60 days prior to the anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than 20 days or delayed more than 60 days
from such anniversary date, notice must be delivered not later than the close of
business on the later of the sixtieth day prior to such annual meeting on the
tenth day following the day on which notice of the date of the annual meeting
was mailed or public announcement of the date of such meeting is first made. The
stockholder's notice must include (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (ii) the name and address, as they appear
on SFS' books, of the stockholder who proposed such business, (iii) the class
and number of shares of SFS' capital stock that are beneficially owned by such
stockholder and (iv) any material interest of such stockholder in such business.
If a stockholder fails to comply with these advance notice requirements, no
action will be taken on the proposal at the meeting.
The Company's Bylaws provide that if a stockholder of the Company desires
to make nominations for the election of directors, the Company must receive
written notice of such nominations that meets certain formal requirements not
less than 60 days prior to the meeting for the election of directors; provided,
however, if less than 70 days notice of the date of the meeting is given to
stockholders or disclosed publicly by the Company, notice by the stockholder
must be received not later than the earlier of the tenth day following the date
on which such notice of the meeting was mailed or the date public announcement
of the date of such meeting was first made. The notice shall include (i) all
information with respect to each nominee required under the Exchange Act to be
disclosed in proxy solicitation materials, including a signed consent to being
named in the proxy statement and to serve as a director if elected, (ii) the
name and address, as they appear on the Company's books, of the stockholder
proposing to make the nomination and (iii) the class and number of shares of the
Company's capital stock that are beneficially owned by such stockholder. In
addition, the Company's Bylaws provide that any stockholder desiring to make a
proposal for new business at the annual meeting of stockholders must submit a
written statement of the proposal which must be received by the secretary of the
Company at least 60 days prior to the anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is advanced by more than 20 days or delayed more than 60 days from such
anniversary date, notice must be delivered not later than the close of business
on the later of the sixtieth day prior to such annual meeting on the tenth day
following the day on which notice of the date of the annual meeting was mailed
or public announcement of the date of such meeting is first made. The
stockholder's notice must include (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for conducting
such business at the annual meeting, (ii) the name and address, as they appear
on the Company's books, of the stockholder who proposed such business, (iii) the
class and number of shares of the Company's capital stock that are beneficially
owned by such stockholder and (iv) any material interest of such stockholder in
such business. If a stockholder fails to comply with these advance notice
requirements, no action will be taken on the proposal at the meeting.
29
Number and Term of Directors
Both the SFS Certificate and the Company Certificate provide that the
number of directors shall be fixed from time to time exclusively by the
respective Board pursuant to a resolution adopted by a majority of the
respective Board.
The SFS Certificate and SFS Bylaws and the Company Certificate and the
Company Bylaws require the Boards of Directors of SFS and the Company,
respectively, to be divided into three classes as nearly equal in number as
possible and that the members of each class shall be elected for a term of three
years and until their successors are elected and qualified, with one class being
elected annually.
Removal of Directors
The DGCL provides that directors serving on a classified board may be
removed only for cause unless the corporation's charter provides otherwise. The
SFS Certificate and the Company Certificate provide that any individual director
or directors may be removed, but only for cause, by an affirmative vote of the
holders of at least 80% of the outstanding shares entitled to vote generally in
an election of directors.
Business Combinations with Certain Persons
The SFS Certificate provides that the affirmative vote of 80% of the total
outstanding shares of voting stock of SFS is required to approve any of the
following transactions, each of which is deemed a "Business Combination" under
the SFS Certificate: (i) any merger or consolidation of SFS or any subsidiary
with an Interested Stockholder (generally any person or entity controlling more
than 10% of the outstanding shares of voting stock of SFS) or an affiliate
thereof, (ii) any sale, lease, exchange, mortgage, pledge, transfer or other
disposition to or with an Interested Stockholder or an affiliate thereof of any
assets of SFS having an aggregate fair market value equal to or in excess of 25
% or more of the combined assets of SFS and its subsidiaries; (iii) the issuance
or transfer by SFS or any subsidiary to any Interested Stockholder or affiliate
thereof in exchange for cash, securities or other property having an aggregate
fair market value equal to or in excess of 25% of the combined assets of SFS and
its subsidiaries; (iv) the adoption of any plan or proposal for the liquidation
or dissolution of SFS proposed by or on behalf of any Interested Stockholder or
any affiliate thereof; or (v) any reclassification of securities, or
recapitalization of SFS, or any merger or consolidation with any of its
subsidiaries or any other transaction which has the effect of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of SFS or any subsidiary which is directly or indirectly
owned by any Interested Stockholder or any affiliate thereof. The supermajority
voting provision is inapplicable, however, if (i) with respect to any Business
Combination that does not involve any cash or other consideration being received
by the stockholders of SFS solely in their capacity as stockholders of SFS, such
Business Combination shall have been approved by a majority of the disinterested
directors of SFS, or (ii) in the case of any other Business Combination (A) such
Business Combination shall have been approved by a majority of the disinterested
directors of SFS or (B) certain fair price criteria set forth in the SFS
Certificate are met.
30
The Company Certificate has identical provisions with respect to business
combinations involving Interested Stockholders.
Amendment of Certificate of Incorporation and Bylaws
The DGCL provides that the certificate of incorporation of a Delaware
corporation may be amended only if first approved by the corporation's board of
directors and thereafter by a majority of the outstanding stock entitled to vote
thereon, and, if applicable, a majority of each class of shares entitled to vote
thereon as a class. The SFS Certificate requires the affirmative vote of the
holders of at least 80% of the total votes eligible to be cast by SFS
stockholders for approval of any amendment of provisions set forth in the SFS
Certificate governing (i) the vote of shares of SFS Common Stock held by one
person in excess of 10% of the outstanding shares, (ii) action without a meeting
of stockholders, (iii) call of special meetings of stockholders, (iv) amendment
of the SFS Certificate, (v) SFS' internal affairs, (vi) amendment of the SFS
Bylaws, (vii) certain business combinations with principal stockholders, (viii)
purchases of SFS capital stock from certain interested persons, and (ix)
indemnification.
The provisions of the Company Certificate with respect to the amendment
thereof are identical.
The SFS Certificate provides that the SFS Bylaws may be amended or repealed
by either the affirmative vote of at least a majority of the SFS Board or by the
affirmative vote of the holders of at least 80% of the stock entitled to vote
generally in the election of directors. The provision of the Company Certificate
with respect to this matter are the same.
Control Share Acquisitions
The SFS Certificate provides that in no event shall any record owner of any
outstanding SFS Common Stock which is beneficially owned, directly or
indirectly, by a person who beneficially owns more than 10% of the outstanding
shares of SFS Common Stock (the "Limit"), be entitled or permitted to any vote
in respect of the shares held in excess of the Limit.
The Company Certificate has an identical provision.
Evaluation of Offers
The SFS Certificate provides that the SFS Board, when evaluating any offer
of another person to (i) make a tender or exchange offer for any SFS equity
security, (ii) merge or consolidate SFS with another corporation, or (iii)
acquire substantially all of the assets of SFS, may, in connection with
determining what is in the best interest of SFS and its stockholders, give due
consideration to all relevant factors, including, without limitation, the effect
on present and future customers and employees as well as the communities in
which SFS operates.
The Company Certificate has a substantially identical provision.
Prevention of Greenmail
The "anti-greenmail" provisions of the SFS Certificate require the approval
of the holders of at least 80% of the outstanding shares of voting stock of SFS
not owned by an Interested Person (generally any person or entity that directly
or indirectly is the beneficial owner of 5% or more of the outstanding shares of
voting stock of SFS) for any direct or indirect purchase or other acquisition of
the voting stock owned by such Interested Person. Such provisions, however, are
inapplicable to (i) self tender offers, (ii) purchases pursuant to an open
market repurchase program approved by the disinterested members of the SFS
Board, and (iii) purchases approved by a majority of the SFS Board, including a
majority of the disinterested directors, and made at a price at or below the
then current market price per share of the voting stock of SFS.
The Company Certificate has identical provisions.
31
INDEPENDENT ACCOUNTANTS
A representative of KPMG Peat Marwick LLP is expected to attend the Meeting
to respond to appropriate questions and will have an opportunity to make a
statement if he so desires.
STOCKHOLDER MATTERS
SFS will hold a 1999 Annual Meeting of Stockholders only if the Merger is
not consummated before the time of such meeting, which meeting is presently
expected to be held in April of 1999.
In order to be eligible for inclusion in SFS' proxy materials for the 1999
Annual Meeting of Stockholders, any stockholder proposal to take action at such
meeting must be received at the executive office of SFS, 251-263 State Street,
Schenectady, New York 12305, no later than November 17, 1998. Any such proposal
shall be subject to the requirements of the proxy rules adopted under the
Exchange Act.
OTHER MATTERS
The SFS Board is not aware of any business to come before the Meeting other
than those matters described above in this Proxy Statement/Prospectus. However,
if any other matter should properly come before the Meeting, it is intended that
holders of the proxies will act in accordance with their best judgment.
32
AGREEMENT AND PLAN OF MERGER
INCLUDED AS EXHIBIT 2.2
TO THE REGISTRATION STATEMENT
July 31, 1998
Board of Directors
SFS Bancorp, Inc.
251-263 State Street
Schenectady, NY 12305-1889
Dear Gentlemen:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to the stockholders of
SFS Bancorp, Inc. ("SFED" or the "Company"), of the consideration to be received
by such stockholders in the merger (the "Merger") between the Company and Cohoes
Savings Bank, ("CSB"). We have not been requested to opine as to, and our
opinion does not in any manner address, the Company's underlying business
decision to proceed with or effect the Merger.
Pursuant to the Agreement and Plan of Merger, dated July 31,1998, by and among
the Company and CSB (the "Agreement"), at the Effective Time of the Merger, CSB
will acquire all of the Company's issued and outstanding shares of common stock.
The holders of the Company's common stock will receive in exchange for each
share of Company common stock, shares of CSB common stock based on an Exchange
Ratio of CSB common stock for each share of Company common stock pursuant to
Section 2.3 of the Agreement. In addition, the holders of unexercised and
outstanding options awarded pursuant to the Company's Stock Option Plan will
receive merger consideration as described in Section 2.6 of the Agreement. The
complete terms of the proposed transaction are described in the Agreement, and
this summary is qualified in its entirety by reference thereto.
Charles Webb & Company, a Division of Keefe, Bruyette & Woods, Inc., as part of
its investment banking business, is regularly engaged in the evaluation of
businesses and securities in connection with mergers and acquisitions,
negotiated underwritings, and distributions of listed and unlisted securities.
We are familiar with the market for common stocks of publicly traded banks,
savings institutions and bank and savings institution holding companies.
In connection with this opinion we reviewed certain financial and other business
data supplied to us by the Company including (i) Annual Reports, Proxy
Statements and Form 10-Ks for the years ended December 31, 1996 and 1997, (ii)
Form 10-Q for the quarter ended March 31, 1998, and other information we deemed
relevant. We discussed with senior management and the boards of directors of the
Company and its wholly owned subsidiary, Schenectady Federal Savings Bank, the
current position and prospective outlook for the Company. We considered
historical quotations and the prices of recorded transactions in the Company's
common stock since its initial public offering. We reviewed financial and stock
market data of other savings institutions, particularly in the midwestern region
of the United States,
Board of Directors
SFS Bancorp, Inc.
July 31, 1998
Page 2
and the financial and structural terms of several other recent transactions
involving mergers and acquisitions of savings institutions or proposed changes
of control of comparably situated companies.
For CSB, we reviewed the audited financial statements for the fiscal years ended
June 30, 1997, and 1996, and 1995, and certain other information deemed
relevant. We also discussed with senior management of CSB, the current position
and prospective outlook for CSB.
For purposes of this opinion we have relied, without independent verification,
on the accuracy and completeness of the material furnished to us by the Company
and CSB and the material otherwise made available to us, including information
from published sources, and we have not made any independent effort to verify
such data. With respect to the financial information, including forecasts and
asset valuations we received from the Company, we assumed (with your consent)
that they had been reasonably prepared reflecting the best currently available
estimates and judgment of the Company's management. In addition, we have not
made or obtained any independent appraisals or evaluations of the assets or
liabilities, and potential and/or contingent liabilities of the Company or CSB.
We have further relied on the assurances of management of the Company and CSB
that they are not aware of any facts that would make such information inaccurate
or misleading. We express no opinion on matters of a legal, regulatory, tax or
accounting nature or the ability of the Merger, as set forth in the Agreement,
to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining the
necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the Merger to the Company or the ability to consummate the Merger. Our
opinion is based on the market, economic and other relevant considerations as
they exist and can be evaluated on the date hereof.
Consistent with the engagement letter with you, we have acted as financial
advisor to the Company in connection with the Merger and will receive a fee for
such services, a majority of which is contingent upon the consummation of the
Merger. In addition, the Company has agreed to indemnify us for certain
liabilities arising out of our engagement by the Company in connection with the
Merger.
Board of Directors
SFS Bancorp, Inc.
July 31, 1998
Page 3
Based upon and subject to the foregoing, as outlined in the foregoing paragraphs
and based on such other matters as we considered relevant, it is our opinion
that as of the date hereof, the consideration to be received by the stockholders
of the Company in the Merger is fair, from a financial point of view, to the
stockholders of the Company.
This opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent, although this opinion
may be included in its entirety in the proxy statement of the Company used to
solicit stockholder approval of the Merger. It is understood that this letter is
directed to the Board of Directors of the Company in its consideration of the
Agreement, and is not intended to be and does not constitute a recommendation to
any stockholder as to how such stockholder should vote with respect to the
Merger.
Very truly yours,
/s/Charles Webb & Company,
Charles Webb & Company,
a Division of Keefe, Bruyette, & Woods, Inc.
PROSPECTUS
[Logo]
COHOES BANCORP, INC.
(Proposed Holding Company for Cohoes Savings Bank)
Minimum of 9,152,451 and Maximum of 11,252,451 Shares of Common Stock,
Consisting of a Minimum of 5,950,000 and Maximum of 8,050,000 Shares of
Conversion Stock and up to a Maximum of 3,202,451 Exchange Shares
Cohoes Savings Bank is converting from the mutual to the stock form of
organization. As part of the conversion, Cohoes Savings Bank will become a
wholly owned subsidiary of Cohoes Bancorp, Inc. Cohoes Bancorp, Inc. was formed
in September, 1998 and upon consummation of the conversion will own all of the
shares of Cohoes Savings Bank. The common stock of Cohoes Bancorp, Inc. is being
offered for sale to the public in accordance with a plan of conversion which
must be approved by the Superintendent of Banks of the State of New York, the
Federal Deposit Insurance Corporation and by a majority of the votes eligible to
be cast by voting depositors of Cohoes Savings Bank.
Terms of the Offering
An independent appraiser has estimated the pro forma market value of Cohoes
Savings Bank, on a converted basis, to be between $59,500,000 and $80,500,000.
Based on this estimate, Cohoes Bancorp, Inc. will offer between 5,950,000 shares
and 8,050,000 shares to depositors, trustees and officers of Cohoes Savings
Bank, the Employee Stock Ownership Plan and the public. In addition, Cohoes
Bancorp, Inc. intends to issue a number of shares equal to 3% of the shares sold
in the conversion to a charitable foundation. Cohoes Bancorp, Inc. may increase
the number of shares offered up to 9,257,500 shares, subject to regulatory
approval. Based on these estimates, we are making the following offering of
shares of common stock:
Adjusted
Minimum Midpoint Maximum Maximum
------- -------- ------- -------
Per Share Price............................. $10.00 $10.00 $10.00 $10.00
Number of Shares............................ 5,950,000 7,000,000 8,050,000 9,257,500
Underwriting Commission and Other Expenses.. $ 1,595,000 $ 1,711,000 $ 1,826,000 $ 1,959,000
Net Proceeds to Cohoes Bancorp, Inc......... $57,905,000 $68,289,000 $76,674,000 $90,616,000
Net Proceeds Per Share...................... $9.73 $9.76 $9.77 $9.79
Please refer to Risk Factors beginning on page ___ of this document.
These securities are not deposits or accounts and are not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
Neither the Securities and Exchange Commission, the Superintendent of Banks of
the State of New York, the New York State Banking Department, the Federal
Deposit Insurance Corporation, nor any state securities regulator has approved
or disapproved these securities or determined if this prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
For information on how to subscribe for common stock, call the Stock Information
Center at (518) _____-_________.
Other Related Matters
On July 31, 1998, Cohoes Savings Bank agreed to acquire SFS Bancorp, Inc. in a
merger. In addition to the shares to be issued in the Conversion, it is
anticipated that the merger will result in an aggregate of approximately 3.2
million shares of Cohoes Bancorp, Inc. common stock being issued in exchange for
the shares of SFS Bancorp, Inc., the savings and loan holding company for
Schenectady Federal Savings Bank, its wholly-owned subsidiary (assuming no
outstanding stock options are exercised). The merger is expected to occur
immediately after the conversion of Cohoes Savings Bank, but the conversion is
not contingent upon the merger being completed.
KEEFE, BRUYETTE & WOODS, INC.
--------------------
The date of this Prospectus is ___________________, 1998
[INSERT MAP]
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. To understand the
stock offering and the merger fully, you should read this entire document
carefully, including the financial statements and the notes to the financial
statements of the Parties. References in this document to "Cohoes Savings", the
"Bank", "we", "us", and "our" refer to Cohoes Savings Bank either in its present
form or as a stock savings bank following the Conversion. In certain
circumstances where appropriate, "we," "us," or "our" refer collectively to
Cohoes Savings Bank and Cohoes Bancorp, Inc. References in this document to the
"Holding Company" refer to Cohoes Bancorp, Inc. All information contained in
this Prospectus with respect to the Holding Company, the Bank and its
subsidiaries has been supplied by the Holding Company and the Bank, and all
information with respect to SFS, Schenectady Federal and its subsidiaries has
been supplied by SFS.
The Holding Company:
Cohoes Bancorp, Inc.
75 Remsen Street
Cohoes, New York 12047-2892
Cohoes Bancorp, Inc. is not an operating company and has not engaged in
any significant business to date. It was formed in September 1998 as a
Delaware-chartered corporation to be the holding company for the Bank. The
holding company structure will provide greater flexibility in terms of
operations, expansion and diversification. See page ____.
The Bank:
Cohoes Savings Bank
75 Remsen Street
Cohoes, New York 12047-2892
Cohoes Savings Bank was established in Cohoes, New York in 1851. We are
a community and customer oriented New York chartered mutual savings bank serving
primarily the Cohoes, New York and surrounding area through 16 full service
banking offices located throughout Albany, Saratoga, Schenectady and Rensselaer
Counties, and a portion of Warren County in New York. We provide financial
services to individuals, families and small businesses. Historically, we have
emphasized residential mortgage lending, primarily originating one- to
four-family mortgage loans. Our deposits are insured up to the applicable limits
by the Federal Deposit Insurance Corporation. At June 30, 1998, we had total
assets of $535.7 million, deposits of $449.5 million, and total equity of $53.3
million. See "Cohoes Savings Bank" on pages ____ to _____.
Financial and operational highlights of the Bank include the following:
o Focus on Residential lending. A cornerstone of our lending program has
long been one- to four-family residential lending. We believe that, in
comparison to many other types of assets, one- to four-family
residential loans carry acceptable yields and credit risk. In addition,
such loans create strong ties to consumers which can be utilized to
market other financial products. At June 30, 1998, we had $258.4 million
(or 62.1% of total loans) of one- to four-family residential loans and
$22.0 million of home equity lines of credit. See "Business of Cohoes
Savings Bank - Lending Activities." In recent years, in order to
increase the yield on interest-earning assets and to increase the amount
of our interest rate sensitive assets, we have increased originations of
multi-family and commercial real estate loans which have adjustable
rates and/or shorter terms to maturity than one- to four-family
residential real estate loans. See "Risk Factors - Risks Associated with
Multi-Family and Commercial Real Estate Loans."
o Interest Rate Sensitivity. We, like virtually all financial
institutions, are vulnerable to changes in interest rates. In managing
our asset/liability mix, we may, at times, place more emphasis on
enhancing our short-term net interest margin than on limiting interest
rate risk. At June 30, 1998, based upon certain assumptions utilized by
us in assessing interest rate risk, the value of our net portfolio
equity would have declined by 7.7% and 14.8% if there would have been
instantaneous increases in interest rates of 100 and 200 basis points,
respectively. See "Risk Factors - Interest Rate Risk Exposure" and
"Management's Discussion and Analysis of Financial Condition and Results
of Operations of Cohoes Savings Bank - Asset/Liability Management."
o Asset Quality. Our ratio of non-performing assets to total assets was
1.15% and our ratio of non-performing loans to total loans was 1.36% at
June 30, 1998. Reflecting our focus on residential lending, our ratio of
net charge-offs to average total loans was .24%, .37%, .10%, .06% and
.01% for fiscal years 1998, 1997, 1996, 1995, and 1994, respectively. At
June 30, 1998, our ratio of allowance for loan losses to total loans was
.85% and our ratio of allowance for loan losses to total non-performing
loans was 62.54%. See "Business Delinquencies and Non-Performing
Assets."
o Commitment to Growth. We believe that in order to remain an independent
community-based financial institution in the rapidly changing financial
services industry, we must be competitive. In order to remain
competitive, we are committed to growing the Bank through acquisitions
like the Merger and through other facets of our business, including
insurance services, which can increase noninterest income for us. See
"Business of Cohoes Savings Bank - Subsidiary and Other Activities."
During fiscal 1998, we experienced a 4.7% increase in deposit accounts.
In addition, we experienced a $14.5 million increase in loans
receivable. See "Business of Cohoes Savings Bank - Lending."
The Stock Offering
We are offering between 5,950,000 and 8,050,000 shares of common stock
at $10.00 per share in the Conversion. We may increase the offering to 9,257,500
shares without further notice to you. Any increase over 9,257,500 shares would
require the approval of the Superintendent and the FDIC. You may not change or
cancel any stock order previously delivered to us as a result of an increase in
the offering within these limits. Completion of the Conversion is not contingent
on the Merger.
Stock Purchase Priorities. The shares of Holding Company Common Stock
will be offered on the basis of priorities. Our depositors and the ESOP
established by us will receive subscription rights to purchase shares of common
stock. Any remaining shares not subscribed for may be offered in a direct
community offering or a public offering. See "The Conversion and the Merger -
Offering of Holding Company Common Stock" on pages _____ to ____.
Prohibition on Transfer of Subscription Rights. You may not sell or
assign your subscription rights. Any transfer of subscription rights is
prohibited by law and may result in the forfeiture of your subscription rights.
Stock Pricing and Number of Shares to be Issued. We set the purchase
price per share of the common stock at $10.00. This is the price most commonly
used in recent years in stock offerings involving Conversions of mutual savings
institutions. The number or range of shares of common stock to be issued in the
offering is based on an independent appraisal of the pro forma market value of
the common stock by RP Financial, an appraisal firm experienced in appraisals of
savings institutions. RP Financial has estimated that as of September 4, 1998,
the estimated valuation range of Holding Company Common Stock was between
$59,500,000 and $80,500,000 (with a midpoint of $70,000,000). The Estimated
Valuation Range represents our estimated market value after giving effect to the
sale of the common stock in this offering and the issuance of a number of shares
equal to 3% of the shares issued in the Conversion to the Foundation. Based on
this valuation and the $10.00 per share price, the number of shares of common
stock that we will issue in the offering will range from between 5,950,000
shares and 8,050,000 shares. The establishment of, and contribution to, the
Cohoes Savings Foundation had the effect of reducing our market valuation. See
"Risk Factors - the Expense and Dilutive Effect of the Stock Contribution to the
Charitable Foundation" on pages ___ and ___ and "Comparison of Valuation and Pro
Forma Information With No Foundation but With Merger" on pages ___ to ___.
The appraisal was based both upon our financial condition and results
of operations and upon the effect of the additional capital we will raise in
this Offering. The independent appraisal will be updated before we complete the
Conversion. Changes in market and financial conditions and demand for the common
stock may cause the estimated valuation range to increase by up to 15%, to up to
$92,575,000. If this occurs, the maximum number of shares that can be sold in
this offering can increase to up to 9,257,500 shares (plus the 277,725 shares to
be issued to the Cohoes Savings Foundation). If the Estimated Valuation Range is
either below $59,500,000 or above $92,575,000, then you
2
will be notified and will have the opportunity to modify or cancel your order.
See "The Conversion and the Merger Stock Pricing and Number of Shares to be
Issued" on pages ____ to ____.
The independent valuation prepared by RP Financial is not a
recommendation as to the advisability of purchasing the Holding Company Common
Stock. Accordingly, you should not buy the Holding Company Common Stock based
solely on the independent valuation.
Termination of the Offering. The subscription offering will terminate
at ___:____ __.m., Cohoes, New York time, on ________________, 1998. Any direct
community offering or public offering may terminate at any time without notice,
but no later than ________________, 1998, without approval by the Superintendent
of Banks of the New York State Banking Department and the FDIC. If the offering
is not completed by _____________________, 1998, all subscribers will be
notified and will be given the opportunity to cancel or modify their order.
Benefits to Management and Employees from the Offering. Our employees
will participate in the offering through individual purchases and through
purchases of stock through our employee stock ownership plan, which is a type of
retirement plan. We also intend to implement a RRP and a Stock Option and
Incentive Plan, which may benefit the officers, employees and directors. If we
adopt the RRP, such individuals will be awarded stock at no cost to them. The
RRP and Stock Option and Incentive Plan may not be adopted until at least six
months after the Conversion and are subject to stockholder approval. We also
intend to enter into employment agreements with certain executive officers
following completion of the offering. See "Management of the Bank - Benefit
Plans" on pages ___ to ___.
The Charitable Foundation. To further our commitment to the local
community, we intend to establish the Foundation as part of the Conversion. We
will make a contribution to the Foundation, in the form of common stock, in a
total amount equal to a number of shares equal to 3% of the shares issued in the
Conversion. The Foundation will be dedicated exclusively to supporting
charitable causes and community development in the Bank's primary market area.
Due to the issuance of shares of common stock to the Foundation, persons
purchasing shares in the offering will have their ownership and voting interest
in the Holding Company diluted by 2.9%. We will incur an expense equal to the
full amount of the contribution to the Cohoes Savings Foundation, offset in part
by a tax benefit, during the quarter in which the contribution is made. Such
expense will reduce our earnings. See "Risk Factors - The Expense and Dilutive
Effect of the Stock Contribution to the Charitable Foundation" on pages ___ and
___, "Pro Forma Data" on pages ___ to ___ and "The Conversion and the Merger -
Stock Contribution to the Charitable Foundation" on pages ___ to ___.
Use of the Proceeds Raised from the Sale of Holding Company Common
Stock in the Offering. We will use the net proceeds received from the offering
as follows. The percentages used are estimates.
o 50% will be used to buy all of the capital stock of the Bank.
o 8% will be loaned to the employee stock ownership plan to fund its
purchase of common stock.
o 42% will be retained and initially be placed in short-term investments,
which may later be used as a possible source of funds for stock
repurchases, the payment of dividends to stockholders, and for other
general corporate purposes.
The proceeds received by the Bank will increase our capital and will be
available for expansion of our retail banking franchise through future lending
and investment, in addition to general corporate purposes. See "Use of Proceeds"
on pages ____ and ____.
The Merger
On July 31, 1998, we entered into a merger agreement with SFS which
provides for SFS and its wholly owned subsidiary, Schenectady Federal, to be
acquired by us. SFS stockholders will receive a number of shares of Holding
Company Common Stock equal to the lesser of: (i) 2.65; or (ii) the quotient
determined by dividing $35.00 by the Average Closing Price, which is the average
of the daily last sales price of Holding Company Common Stock as reported on The
Nasdaq Stock Market for the first ten trading days on which Holding Company
Common Stock is traded, for each SFS share they own just before the Merger. In
addition, each outstanding option to purchase SFS
3
Common Stock will be exchanged for an option to acquire our stock on the same
basis. We estimate that the total number of exchange shares to be issued in
connection with the Merger will be approximately 3.2 million shares (based on
the maximum exchange ratio of 2.65 shares of Holding Company Common Stock for
each share of SFS Common Stock outstanding). As part of the Merger, Schenectady
Federal will be merged with and into us and we will be the surviving savings
bank.
Consummation of the Merger is subject to, among other things: (i)
receipt of all necessary approvals and consents from regulators or governmental
entities, including approval of the plan of Conversion and the Merger by the
Superintendent and the FDIC; (ii) the approval of the merger agreement by the
requisite vote of the stockholders of SFS; (iii) approval of the Conversion and
the Merger by our voting depositors, (iv) consummation of the Conversion; and
(v) the satisfaction or waiver of certain other conditions. The merger agreement
will be presented to SFS stockholders for their approval at a special meeting
called for _____________, 1998. In addition, we have applied for all necessary
regulatory approvals in order to consummate the Merger. The Merger is expected
to be completed immediately after the consummation of the Conversion.
The Merger will enable us to expand our banking services in communities
where we currently only have a limited presence. Completion of the Merger is
expected to increase our deposit base, our loan portfolio and the number of our
full service banking centers.
SFS Bancorp, Inc. is a Delaware corporation which was organized in 1995
by Schenectady Federal for the purpose of becoming its savings and loan holding
company. Schenectady Federal is principally engaged in the business of
attracting deposits from the general public and using such deposits, together
with funds generated from operations and borrowings, to originate one- to
four-family residential loans. Schenectady Federal also originates consumer,
construction, multi-family and commercial/non-residential loans. In addition,
Schenectady Federal also invests in mortgage-backed securities, investment
securities and short-term liquid assets. Schenectady Federal's deposit and
lending market area encompasses Schenectady and Albany Counties in New York.
Schenectady Federal's operations are regulated by the OTS. Schenectady
Federal is a member of the FHLB and a stockholder in the FHLB of New York.
Schenectady Federal is also a member of the SAIF and its deposit accounts are
insured up to applicable limits by the FDIC.
The executive offices of SFS are located at 251-263 State Street,
Schenectady, New York 12305, and its telephone number is (518) 395-2300.
The Holding Company and the Bank Following the Conversion and the Merger
Assuming the Conversion and the Merger had been consummated as of June
30, 1998, we would have had, on a pro forma basis at the maximum of the
estimated valuation range, total consolidated assets of $783.5 million, total
consolidated liabilities of $643.4 million, including $602.4 million of
deposits, and total consolidated stockholders' equity of $140.1 million. See
"Pro Forma Unaudited Financial Information." In addition, at June 30, 1998, the
Bank would have had, on a pro forma basis at the maximum of the estimated
valuation range, leverage capital of $99.9 million or 13.5% of adjusted total
assets and risk-based capital of $104.3 million or 23.9% of total risk-weighted
assets, respectively. See "Regulatory Capital."
The Bank and Schenectady Federal currently serve contiguous market
areas. We currently operate primarily in Albany, Saratoga, Schenectady, and
Rensselaer Counties, New York, and a portion of Warren County in New York, while
Schenectady Federal operates in Albany and Schenectady Counties, New York. We
believe that the Merger will enhance our ability to offer full service banking
throughout the suburbs of Albany. In addition, we believe that the expansion of
our office network will help our asset growth through an expanded market area in
which to offer our loans and other products.
Upon completion of the Conversion and the Merger, we will be a well
capitalized, independent community- oriented financial institution with 20 full
service branch offices in addition to our public accommodation office, which is
expected to become a full service branch office in October, 1998. Our business
strategy will be to operate as a
4
community oriented financial institution dedicated to meeting the borrowing and
savings needs of our customers while providing superior service. We will seek to
implement this strategy by (i) increasing our origination of loans in our market
area and emphasizing retail banking, including the origination of single-family
residential mortgage loans and consumer loans; (ii) continuing to expand our
insurance and investments activities, which provide alternative sources of
income to our traditional banking activities; (iii) maintaining asset quality;
(iv) maintaining a high level of capital; and (v) continuing our pattern of
controlled growth.
Assuming the Conversion and the Merger had been consummated as of June
30, 1998, our net loan portfolio would have amounted to, on a pro forma basis at
the maximum of the estimated valuation range, $554.0 million or 70.7% of total
assets. Of our pro forma total loans at such date, $372.5 million or 66.7% would
consist of single-family residential loans, $99.3 million or 17.8% would consist
of multi-family and commercial real estate loans, $71.5 million or 12.8% would
consist of consumer loans and $15.1 million or 2.7% would consist of commercial
business loans. In addition, our total deposits would have amounted to $602.4
million. Moreover, we would have had $7.7 million of non-performing assets or
0.98% of total assets. For additional information with respect to our pro forma
consolidated financial condition and results of operations, see "Selected Pro
Forma Unaudited Consolidated Financial Data of the Holding Company" and "Pro
Forma Unaudited Financial Information" on pages _____ to _____.
Our board of directors currently consists of eleven members. Upon
completion of the Conversion and the Merger, Joseph H. Giaquinto, Chairman of
the Board, President and Chief Executive Officer of SFS, will be appointed to
the boards of directors of the Holding Company and the Bank. The remaining
directors and certain officers of Schenectady Federal will be appointed to an
advisory board of the Holding Company for up to four-year terms commencing upon
the completion of the Merger.
As a New York chartered savings bank, we will continue to be subject to
comprehensive regulation and examination by the Department, as our chartering
authority and primary regulator, and by the FDIC, which administers the Bank
Insurance Fund, which will insure our deposits to the maximum extent permitted
by law. We will be a member of the FHLB of New York, which is one of the 12
regional banks which comprise the FHLB System. We will be further subject to
regulations of the FRB governing reserves required to be maintained against
deposits and certain other matters. The Holding Company will be a registered
savings and loan holding company and will be subject to examination and
regulation by both the OTS and the Department and subject to various reporting
and other requirements of the SEC. Our principal executive offices following
consummation of the Conversion and the Merger will be located at 75 Remsen
Street, Cohoes, New York, 12047, and our telephone number will be (518)
233-6500.
Dividends
Cohoes Bancorp, Inc. intends to pay dividends in the future. However,
the amount and timing of such payments has yet to be determined. The
determination to pay a dividend is dependent upon a number of factors, including
(i) the amount of the net proceeds retained by the Holding Company in the
Conversion, (ii) investment opportunities available, (iii) capital requirements,
(iv) regulatory limitations, (v) results of operations and financial condition,
(vi) tax considerations, and (vii) general economic conditions. See "Dividends"
on pages ___ and ___.
Market for the Common Stock
We anticipate the Holding Company Common Stock to be traded on The
Nasdaq National Market System under the symbol "________". It is possible that
an active and liquid trading market, however, may not develop or be maintained.
Investors should have a long-term investment intent. Persons purchasing shares
may not be able to sell their shares when they desire or sell them at a price
equal to or above $10.00. KBW has informed us that it has agreed to make a
market in the common stock. KBW will, however, not be subject to any obligation
with respect to such efforts. See "Market for the Common Stock" on page ____.
5
Prospectus Delivery and Procedures for Common Stock
To ensure that each person or entity is properly identified as to such
party's stock purchase priorities, such party must list all deposit accounts on
the order form accompanying this prospectus, giving all names on each account
and the account numbers at the applicable date. The failure to provide accurate
and complete account information on the order form may result in a reduction or
elimination of your order.
Only orders submitted on original order forms will be accepted for
processing. Photocopies or facsimile copies of order forms or the form of
certification will not be accepted. Payment by cash, check, money order, bank
draft or withdrawal from an existing account at the Bank must accompany your
order form. No wire transfers will be accepted. See "The Conversion and the
Merger - Method of Payment for Subscriptions" on pages ___ to ___.
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the respective expiration dates for the Offering, in accordance with
Rule 15c2-8 of the Exchange Act, as amended, no Prospectus will be mailed later
than five days prior to such date or hand delivered any later than two days
prior to such date. Execution of the stock order form will confirm receipt or
delivery in accordance with Rule 15c2-8. Stock order forms will only be
distributed with a Prospectus and a certification form requiring each
prospective investor to acknowledge, among other things, that the shares of
Holding Company Common Stock are not insured by the Bank, the FDIC or any other
governmental agency and that such prospective investor has received a copy of
this Prospectus, which, among other things, describes the risks involved in the
investment in the Holding Company Common Stock.
Important Risks in Owning the Holding Company's Common Stock
Before you decide to purchase stock in the offering, you should read
the "Risk Factors" section on pages ____ to ____ of this document, in addition
to the other sections of this Prospectus. The Holding Company Common Stock is
subject to investment risk, including the possible loss of the principal of your
investment.
6
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF COHOES SAVINGS BANK
The summary information presented below under "Selected Consolidated
Financial Data" and "Selected Operating Data" for, and as of the end of, each of
the years ended June 30 is derived from the Bank's audited financial statements.
The following information is only a summary and you should read it along with
our financial statements and notes beginning on page F-1.
At June 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Selected Consolidated Financial Data:
Total assets................................. $ 535,716 $ 491,700 $ 463,363 $ 459,336 $ 403,334
Cash and cash equivalents.................... 14,229 16,664 8,900 15,179 15,235
Loans, net ................................. 412,759 398,530 393,970 379,088 313,419
Investment securities........................ 45,424 25,273 25,969 40,052 48,825
Securities available-for-sale................ 48,720 35,475 20,886 10,433 13,776
Deposits..................................... 449,541 429,390 404,539 398,963 346,459
FHLB borrowings.............................. 19,897 -- 2,116 6,117 105
Total equity................................. 53,282 49,092 44,290 40,130 36,276
Real estate owned............................ 509 1,874 421 396 437
Nonperforming loans.......................... 5,649 6,688 7,793 5,063 4,892
For the Fiscal Year Ended June 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Selected Operating Data:
Total interest income........................ $ 38,423 $ 36,285 $ 35,383 $ 32,100 $ 27,560
Interest expense............................. 19,262 17,821 18,164 15,405 12,388
------ ------ ------ ------ ------
Net interest income..................... 19,161 18,464 17,219 16,695 15,172
Provision for loan losses.................... 1,400 1,325 490 330 750
----- ----- ------ ------ ------
Net interest income after provision
for loan losses........................ 7,761 17,139 16,729 16,365 14,422
Noninterest income
Net gain (loss) on sale of mortgage
loans.................................. 81 106 (20) (102) 226
Other................................... 2,662 2,684 2,487 2,293 2,050
Noninterest expense.......................... 13,767 12,314 11,919 12,152 11,114
--------- --------- --------- --------- ---------
Income before income taxes................... 6,737 7,615 7,277 6,404 5,584
Income taxes................................. 2,650 2,972 2,882 2,565 2,194
---------- ---------- ---------- ---------- ----------
Net income.............................. $ 4,087 $ 4,643 $ 4,395 $ 3,839 $ 3,390
========= ========= ========= ========= =========
Selected Operating Ratios and Other Data:
Performance Ratios:
Average yield on interest-earning assets..... 7.96% 8.04% 7.98% 7.76% 7.38%
Average rate paid on interest-bearing
liabilities................................ 4.33 4.27 4.42 3.99 3.57
Average interest rate spread................. 3.63 3.77 3.56 3.77 3.81
Net interest margin (1)...................... 3.97 4.09 3.89 4.04 4.06
Net interest income after provision for
loan losses to noninterest expense.......... 129.01 139.18 140.36 134.67 129.76
Noninterest expense as a percent of average
assets..................................... 2.75 2.62 2.59 2.82 2.86
Return on average assets (2)................. 0.82 0.99 0.95 0.89 0.87
Return on average equity (3)................. 7.88 9.87 10.28 9.95 9.85
Ratio of average equity to average assets.... 10.35 10.03 9.28 8.95 8.85
Efficiency ratio (4)......................... 62.85 57.94 60.55 64.34 63.70
Asset Quality Ratios:
Nonperforming loans as a percent of total
loans...................................... 1.36 1.66 1.96 1.32 1.54
Nonperforming assets as a percent of total
assets..................................... 1.15 1.74 1.77 1.19 1.32
Allowance for loan losses as a percent of
total loans................................ 0.85 0.77 0.82 0.82 0.95
Allowance for loan losses as a percent of
nonperforming loans..................... 62.54 46.43 41.69 61.88 61.55
Net loans charged-off to average loans....... 0.24 0.37 0.10 0.06 0.01
Branch Locations:
Traditional.................................. 7 7 6 5 4
Supermarket.................................. 9(6) 8 4 4 3
Public accommodation (5)..................... 1 1 1 1 1
(Footnotes on following page)
- ------------
(1) Net interest income as a percentage of average interest-earning assets.
(2) Ratio of net earnings to average total assets.
(3) Ratio of net earnings to average total equity.
(4) The Efficiency Ratio is computed by dividing noninterest expense by the sum
of net interest income and noninterest income.
(5) The public accommodation office is expected to become a full service branch
office on October 1, 1998.
(6) The Queensbury branch location opened for business in July, 1998.
7
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF SFS BANCORP, INC.
December 31,
June 30, ---------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
(In Thousands)
Selected Financial Condition Data
Total assets........................ $178,093 $174,428 $164,888 $166,529 $150,837 $146,260
Cash and cash equivalents........... 6,580 2,176 2,896 10,453 6,468 3,481
Securities available for sale....... 8,062 4,067 1,990 7,976 7,776 --
Investment securities:
Mortgage-backed securities....... 13,708 16,966 20,434 24,418 21,991 25,397
Debt securities.................. 3,202 12,013 15,746 18,658 16,902 20,842
FHLB stock.......................... 1,338 1,338 1,215 1,117 1,123 1,092
Loans receivable, net............... 141,222 133,786 118,455 100,921 93,703 92,601
Real estate owned................... 151 111 178 200 204 128
Deposits............................ 152,879 150,469 140,616 139,671 138,299 134,653
Advance payments by borrowers
for taxes and insurance.......... 1,861 1,281 1,160 1,402 1,270 1,129
Stockholders' equity................ 21,915 21,431 21,671 24,261 10,046 9,642
Six Months Ended
-------------------- Year Ended December 31,
June 30, June 30, -----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
(In Thousands)
Selected Operations Data
Total interest income ...... $ 6,391 $ 6,047 $ 12,368 $ 11,867 $ 11,523 $ 9,849 $ 9,774
Total interest expense ..... 3,460 3,188 6,623 6,187 6,236 5,077 5,275
-------- -------- -------- -------- -------- -------- --------
Net interest income ..... 2,931 2,859 5,745 5,680 5,287 4,772 4,499
Provision for loan losses .. 60 60 120 120 370 120 440
-------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses 2,871 2,799 5,625 5,560 4,917 4,652 4,059
Noninterest income ......... 226 168 504 403 321 170 599
Noninterest expense ........ 2,131 2,150 4,369 5,239 4,027 4,096 4,239
-------- -------- -------- -------- -------- -------- --------
Income before taxes ........ 966 817 1,760 724 1,211 726 419
Income tax expense (benefit) 399 324 692 (106) 356 215 13
-------- -------- -------- -------- -------- -------- --------
Net income ................. $ 567 $ 493 $ 1,068 $ 830 $ 855 $ 511 $ 406
======== ======== ======== ======== ======== ======== ========
8
SELECTED CONSOLIDATED FINANCIAL INFORMATION OF SFS BANCORP, INC., continued
Six Months Ended
----------------- Year Ended December 31,
June 30, June 30, ---------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Selected Financial Ratios and Other Data
Performance Ratios:
Return on assets (ratio of net income
to average total assets ........... 0.65% 0.59% 0.63% 0.50% 0.53% 0.34% 0.28%
Net interest rate spread ............ 2.95 3.02 2.96 2.95 2.93 3.06 2.96
Net interest margin ................. 3.46 3.52 3.46 3.51 3.36 3.26 3.15
Ratio of noninterest expense to
average total assets .............. 2.44 2.56 2.56 3.17 2.51 2.74 2.90
Ratio of net interest income to
noninterest expense ............... 137.51 133.04 131.49 108.41 131.29 116.50 106.13
Return on equity (ratio of net income
to average equity) ................ 5.34 4.62 5.04 3.73 5.07 5.31 4.33
Liquidity ratio at end of period .... 21.54 23.25 19.72 22.58 32.45 19.57 12.99
Efficiency ratio .................... 67.50 71.30 69.92 86.13 71.81 82.88 83.15
Asset Quality Ratios:
Non-performing assets to total
assets, at end of period .......... 0.85 0.68 0.84 0.61 0.62 1.93 1.80
Allowance for loan losses to non- ... 63.16
performing loans, at period end ... 66.08 55.78 77.07 68.18 31.79 32.02
Allowance for loan losses to total
loans ............................. 0.60 0.58 0.58 0.54 0.56 0.91 0.86
Allowance for loan losses to total
assets ............................ 0.48 0.42 0.45 0.39 0.34 0.57 0.55
Number of full service offices ...... 4 4 4 3 3 3 3
9
SELECTED PRO FORMA UNAUDITED CONSOLIDATED
FINANCIAL DATA OF THE HOLDING COMPANY
(Dollars in Thousands, Except Per Share Data)
The following presents certain pro forma unaudited consolidated
financial data with respect to the Holding Company and its subsidiaries. The
financial information for each period presented below gives effect to the
consummation of the Conversion and the Merger, including the sale of the Holding
Company Common Stock sold in the Conversion (the "Conversion Shares"), the
issuance of Holding Company Common Stock issued in the Merger (the "Exchange
Shares") and the contribution of shares of Holding Company Common Stock to the
Foundation and excludes the anticipated expenses associated with the Holding
Company's ESOP and RRP. Data from the pro forma statement of condition assumes
that these transactions occurred at the date indicated. Data from the pro forma
statement of income assumes that these transactions occurred at the beginning of
each of the periods presented. It is also assumed that 8,050,000 Conversion
Shares are sold in the Offering at a price of $10.00 per share, resulting in
gross proceeds of $80.5 million (the maximum of the Estimated Valuation Range),
that 3,202,451 Exchange Shares are issued (based on the maximum exchange ratio
of 2.65 shares of Holding Company Common Stock for each share of SFS Common
Stock outstanding) and that 241,500 shares of Holding Company Common Stock are
contributed to the Foundation (based on the issuance of shares at the maximum of
the Estimated Valuation Range). For additional assumptions used in calculating
the pro forma data, see "Pro Forma Unaudited Financial Information."
In accordance with GAAP, the Merger will be accounted for using the
pooling-of-interests method. Under the pooling-of-interests method of
accounting, the recorded assets and liabilities of the Parties will be carried
forward at their recorded amounts, and the results of operations of the combined
Parties will include the results of operations of the Holding Company and SFS
for the entire year in which the Merger occurs and, as restated, for prior
periods. Such accounting treatment requires satisfaction of certain conditions,
including the condition that "affiliates" of the Parties may not dispose of
shares of Holding Company Common Stock prior to the publication of financial
results covering at least 30 days of post-closing combined operations of the
Parties. See "Pro Forma Unaudited Financial Information" and "Use of Proceeds."
The following unaudited selected pro forma consolidated financial data
should be read in conjunction with the consolidated financial statements and
related notes included in this Prospectus.
At or For the Twelve Months
Ended June 30,
------------------------------
1998 1997 1996
---- ---- ----
Financial Condition:
Total assets ..............................$713,809 $664,549 $627,729
Loans receivable, net ..................... 553,981 522,698 504,690
Investment securities held to maturity .... 62,334 57,820 64,203
Investment securities available for sale .. 58,120 42,844 26,070
Deposits .................................. 602,420 577,391 543,926
Total borrowings .......................... 19,897 -- 2,116
Total stockholders' equity ................ 75,197 70,646 66,577
Results of Operations(1):
Net interest income .......................$ 24,978 $ 24,152 $ 22,924
Provision for losses on loans ............. 1,520 1,445 760
Net interest income after provision for
losses on loans ......................... 23,458 22,707 22,164
Noninterest income ........................ 3,224 3,168 2,744
Noninterest expense ....................... 18,036 17,478 16,136
Income before taxes ....................... 8,646 8,397 8,772
Net income ................................ 5,229 5,383 5,536
Diluted earnings per share ................ 0.44 0.47 0.49
Basic earnings per share .................. 0.44 0.48 0.50
Selected Ratios:
Performance ratios:
Return on average assets(2) ......... 0.77% 0.85% 0.88%
Return on average equity(2) ......... 7.15% 7.87% 8.37%
Asset quality ratios (period end):
Allowance for losses on loans to
total loans ....................... 0.79% 0.73% 0.76%
Non-performing assets as a percent
of total assets(3) ................ 1.07% 1.47% 1.49%
Allowance for losses on loans to non-
performing assets(3) .............. 57.28% 39.26% 41.31%
(Footnotes on following page)
- ------------
(1) Does not reflect any cost savings or other benefits of the Conversion and
the Merger.
(2) These ratios are based on average daily balances during the indicated
periods and do not reflect an increase in averages relating to the
anticipated proceeds from the Offerings.
(3) Nonperforming assets consist of non-accrual loans, accruing loans more than
90 days past due and real estate acquired through foreclosure or by
deed-in-lieu thereof and restructured loans which are performing in
accordance with current terms.
10
RISK FACTORS
In addition to other information in this document, you should consider
carefully the following risk factors in evaluating an investment in our common
stock.
Decreased Return on Average Equity and Increased Expenses Immediately After
Conversion
As a result of the Conversion, our equity will increase substantially.
Expenses are expected to increase due to the costs associated with our employee
stock ownership plan, our restricted stock plan, and being a public company.
Because of the increases in our equity and expenses, our return on equity may
decrease as compared to our performance in previous years. A lower return on
equity could limit the trading price potential of the Holding Company Common
Stock. See "Use of Proceeds" and "Pro Forma Data."
In addition, we intend to initially invest the additional capital being
raised through the offering into shorter-term, lower-yielding assets (i.e.,
federal funds sold) and gradually reinvest the additional capital into
longer-term, higher- yielding loans and mortgage-backed securities as
opportunities arise. Until the additional capital can be effectively reinvested,
our return on equity is expected to decrease from the Bank's historic levels.
Risks Related to the Merger
In recent years, the Bank has not acquired or merged with another
financial institution. The future growth of the Bank and the Holding Company
will depend, in part, on the success of the Merger which will, in turn, depend
on a number of factors, including: the Bank's ability to integrate the
Schenectady Federal branches into the current operations of the Bank; the Bank's
ability to limit the outflow of deposits held by customers in the Schenectady
Federal branches; the Bank's ability to control the non-interest expense from
the Merger in a manner that enables the Bank to improve its overall operating
efficiencies; and the Bank's ability to retain and integrate the appropriate
personnel of Schenectady Federal into the operations of the Bank. No assurance
can be given that the Bank will be able to integrate Schenectady Federal
successfully, that the Bank will be able to achieve results in the future
similar to those achieved by the Bank in the past, or that the Bank will be able
to manage its growth resulting from the Merger effectively. See "Pro Forma
Unaudited Financial Information."
Dilutive Effect of Issuance of Additional Shares
The merger agreement provides that each share of SFS Common Stock
outstanding as of the Effective Time shall be converted into the right to
receive a number of shares of Holding Company Common Stock equal to the lesser
of : (i) the quotient determined by dividing $26.50 by the Initial Public
Offering price or (ii) the quotient determined by dividing $35.00 by the Average
Closing Price. In addition, each SFS Option outstanding at the Effective Time,
whether or not exercisable, shall be converted into the right to acquire shares
of Holding Company Common Stock equal to the number of shares of SFS Common
Stock subject to the SFS options multiplied by the Exchange Ratio. Based upon
the number of shares of SFS Common Stock outstanding as of June 30, 1998, the
Holding Company estimates that the total number of Exchange Shares to be issued
in connection with the Merger will be 3,202,451, excluding any adjustment for
fractional shares or the exercise of any options to acquire shares of SFS Common
Stock. Giving effect to the contribution of 241,500 shares of Holding Company
Common Stock to the Foundation, based on the issuance of shares at the maximum
of the Estimated Valuation Range, and assuming the exercise of all the vested
SFS Options, the Merger will dilute the voting interest of subscribers in the
Offering by approximately 31.9% (assuming 8,050,000 Conversion Shares are sold
at the maximum of the Estimated Valuation Range).
If a RRP is approved by stockholders of the Holding Company, the RRP
intends to acquire an amount of Holding Company Common Stock equal to 4% of the
Conversion Shares sold in the Conversion and including shares issued to the
Foundation. If such shares are acquired at a per share price equal to the
purchase price, the cost of such shares would be $3.3 million, assuming the
number of Conversion Shares sold are equal to the maximum of the Estimated
Offering Range. Such shares of Holding Company Common Stock may be acquired in
the open market with funds provided by the Holding Company, if permissible, or
from authorized but unissued shares of Holding Company Common Stock. In the
event that the RRP acquires authorized but unissued shares of Holding Company
Common Stock from the Holding Company, the interests of existing stockholders
will be diluted. Assuming the issuance of 8,050,000
11
Conversion Shares and 3,202,451 Exchange Shares and the contribution of 241,500
shares of Holding Company Common Stock to the Foundation, the issuance of
authorized but unissued shares of Holding Company Common Stock to such plan in
an amount equal to 4% of the Conversion Shares sold in the Conversion would
dilute the voting interests of existing stockholders by approximately 2.8%, and
net income per share and stockholders' equity per share would be decreased by a
corresponding amount. See "Pro Forma Unaudited Financial Information -
Additional Pro Forma Data" and "Management - Benefits - Recognition and
Retention Plan."
If a Stock Option and Incentive Plan is approved by stockholders of the
Holding Company, the Holding Company intends to reserve for future issuance
pursuant to such plan a number of shares of Holding Company Common Stock equal
to an aggregate of 10% of the Conversion Shares and the contribution of shares
to the Foundation (829,150 shares, based on the issuance of the maximum
8,050,000 shares and the contribution of 241,500 shares to the Foundation). Such
shares may be authorized but previously unissued shares, treasury shares or
shares purchased by the Holding Company in the open market or from private
sources. Assuming the issuance of 8,050,000 Conversion Shares and 3,202,451
Exchange Shares and the contribution of 241,500 shares of Holding Company Common
Stock to the Foundation, if only authorized but previously unissued shares are
used under such plan, the issuance of the total number of shares available under
such plan would dilute the voting interests of existing stockholders by
approximately 6.7%, and net income per share and stockholders' equity per share
would be decreased by a corresponding amount. See "Pro Forma Unaudited Financial
Information - Additional Pro Forma Data" and "Management - Benefits."
Interest Rate Risk Exposure
The Bank's profitability is dependent to a large extent upon its net
interest income, which is the difference between its interest and dividend
income on earning assets, such as loans and investments, and its interest
expense on interest-bearing liabilities, such as deposits and borrowings.
Changes in the level of interest rates affect the amount of loans originated by
the Bank as well as the market value of the Bank's earning assets. Moreover,
increases in interest rates also can result in disintermediation, which is the
flow of funds away from savings institutions into other investments, such as
corporate securities and other investment vehicles, which generally pay higher
rates of return than savings institutions. Finally, a flattening of the "yield
curve" (i.e., a decline in the difference between long and short term interest
rates) or an inverted yield curve (i.e., where short term interest rates are
higher than long term interest rates), could adversely impact net interest
income. As a result of a decline in the yield earned on average interest-earning
assets that exceeded a decline in the rate paid on its average liabilities, the
Bank's average interest rate spread decreased from 3.77% for 1997 to 3.63% for
1998. No assurance can be given that the Bank's average interest rate spread
will not decrease further in future periods. Any such decrease in the Bank's
average interest rate spread could adversely affect the Bank's net interest
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Cohoes Savings Bank - Asset/Liability Management."
If an institution's interest-earning assets have longer effective
maturities than its interest-bearing liabilities, the yield on the institution's
interest-earning assets generally will adjust more slowly than the cost of its
interest-bearing liabilities and, as a result, the institutions' net interest
income generally would be adversely affected by material and prolonged increases
in interest rates and positively affected by comparable declines in interest
rates. The Bank attempts to reduce the vulnerability of its operations to
changes in interest rates by maintaining significant amounts of liquid assets
and assets with relatively short estimated lives. Changes in interest rates also
can affect the average life of loans and mortgage-related and other securities.
Decreases in interest rates in recent periods have resulted in increased
prepayments of loans and mortgage backed securities, as borrowers refinanced to
reduce borrowing costs. Under these circumstances, the bank is subject to
reinvestment risk to the extent that it is not able to reinvest such prepayments
at rates which are comparable to the rates on the maturing loans or securities.
See "Business of Cohoes Savings Bank Lending Activities."
Risks Related to Multi-Family and Commercial Real Estate Loans; Geographic
Concentration of Loans
The Bank originates multi-family and commercial real estate loans,
which amounted to $93.2 million (or 22.4% of the Bank's loan portfolio) as of
June 30, 1998. Multi-family and commercial real estate lending generally is
considered to involve a higher degree of risk than single-family residential
lending due to a variety of factors, including generally larger loan balances,
the dependency on successful operation of the project for repayment, loan terms
which often do not require full amortization of the loan over its term and
successfully developing and/or selling the property.
12
See "Business of Cohoes Savings Bank - Lending Activities." As of June 30, 1998,
the Bank had $823,000 of non-performing multi-family and commercial real estate
loans (excluding restructured loans which are performing under the restructured
terms).
In addition, the Bank had $25.9 million of commercial real estate loans
secured by property located in New York City as of June 30, 1998. At that date,
the entire commercial real estate loan portfolio located in New York City was
performing in accordance with its respective terms. However, no assurance can be
made that the New York City economy will continue at current levels or that such
loans will continue to perform in accordance with their terms in the future.
Competition
The Bank experiences significant competition in its local market area
in both originating real estate and other loans and attracting deposits. This
competition arises from other savings institutions as well as credit unions,
mortgage banks, commercial banks, mutual funds and national and local securities
firms. Due to their size, many competitors can achieve certain economies of
scale and as a result offer a broader range of products and services than the
Bank. The Bank attempts to mitigate the effect of such factors by emphasizing
customer service and community outreach. Such competition may limit the Bank's
growth in the future. See "Business of the Bank - Competition."
Takeover Defensive Provisions
Holding Company and Bank Governing Instruments. Certain provisions of
the Holding Company's Certificate of Incorporation and Bylaws and the Bank's
Restated Organization Certificate and Bylaws assist the Holding Company and the
Bank in maintaining its status as an independent publicly owned corporation.
However, such provisions may also block stockholders from approving a potential
takeover of the Holding Company which a majority of such stockholders believe to
be in their best interests. These provisions provide for, among other things,
limiting voting rights of beneficial owners of more than 10% of the Holding
Company Common Stock, staggered terms for directors, noncumulative voting for
directors, limits on the calling of special meetings, a fair price/supermajority
vote requirement for certain business combinations and certain notice
requirements. The 10% vote limitation would not affect the ability of an
individual who is not the beneficial owner of more than 10% of the Holding
Company Common Stock to solicit revocable proxies in a public solicitation for
proxies for a particular meeting of stockholders and to vote such proxies. Any
or all of these provisions may discourage potential proxy contests and other
takeover attempts, particularly those which have not been negotiated with the
Board of Directors. In addition, the Holding Company's certificate of
incorporation also authorizes preferred stock with terms to be established by
the Board of Directors which may rank prior to the Holding Company Common Stock
as to dividend rights, liquidation preferences, or both, may have full or
limited voting rights and may have a dilutive effect on the ownership interests
of holders of the Holding Company Common Stock. See "Restrictions on Acquisition
of the Holding Company and the Bank."
Provisions in Management Contracts and Benefit Plans. Certain
provisions contained in the proposed management contracts and benefit plans that
provide for cash payments or the vesting of benefits upon a change of control of
the Holding Company or the Bank may have an anti-takeover effect and could
discourage an acquisition of the Holding Company. See "Management of the Bank -
Employment Agreements."
Voting Control of Directors and Executive Officers. The trustees and
executive officers (13 persons) of the Bank propose to purchase an aggregate of
approximately 310,000 shares, representing approximately 5.2% of the shares
offered in the Conversion at the minimum of the Estimated Valuation Range, and
4.0% of the shares offered in the Conversion at the maximum of the Estimated
Valuation Range, exclusive of shares that may be attributable to directors and
officers through the RRP, the Stock Option and Incentive Plan and the ESOP,
which may give directors, executive officers and employees the potential to
control the voting of additional Holding Company Common Stock and including
shares issued to the Foundation. A number of shares equal to 4% of the shares of
Holding Company Common Stock issued in the Conversion, including shares issued
to the Foundation, will be available for issuance under the RRP (331,660 shares
at the maximum of the Estimated Valuation Range), and a number of shares equal
to 10% of the shares issued in the Conversion, including shares issued to the
Foundation, will be available for issuance under the Stock Option and Incentive
Plan (829,150 shares at the maximum of the Estimated Valuation Range). It is
intended that the ESOP will purchase 8% of the shares issued in the Conversion,
including shares issued to the Foundation (663,320
13
shares at the maximum of the Estimated Valuation Range). In connection with the
Conversion, the Foundation will receive 241,500 shares of Holding Company Common
Stock at the maximum of the Estimated Valuation Range which, if a waiver of the
voting restriction imposed on such Holding Company Common Stock is obtained from
the FDIC and the Superintendent, may be voted as determined by the Board of
Directors of the Foundation who will initially consist of four Directors of the
Holding Company and the Bank and two outside directors. Thus, after the
Conversion, the aggregate number of shares which may be controlled by directors
and executive officers of the Holding Company, including those to be issued to
the Foundation and those that may be issued under the Stock Option and Incentive
Plan and the RRP totaled 1,712,310 at the maximum of the Estimated Valuation
Range, or 18.8% of the total number of shares at the maximum of the Estimated
Valuation Range, including shares issued to the Foundation, on a fully diluted
basis (including shares available for issuance under the Stock Option and
Incentive Plan and RRP). Management's voting control could, together with
additional stockholder support, defeat proposals requiring 80% approval of
stockholders. As a result, this voting control may preclude takeover attempts
that certain stockholders deem to be in their best interest and tend to
perpetuate existing management. See "Restrictions on Acquisition of the Holding
Company and the Bank--Restrictions in the Holding Company's Certificate of
Incorporation and Bylaws."
Post-Conversion Compensation and Other Expense
After completion of the Conversion, the Holding Company's noninterest
expense is likely to increase as a result of the financial accounting, legal and
tax expenses usually associated with operating as a public company. See
"Regulation" and "Taxation" and "Additional Information." In addition, it is
currently anticipated that the Holding Company will record additional expense
based on the proposed RRP. See "Pro Forma Data" and "Management of the Bank -
Benefit Plans" and "-- RRP." Finally, the Holding Company will also record
additional expense as a result of the adoption of the ESOP. See "Management of
the Bank - Benefit Plans - Employee Stock Ownership Plan."
Statement of Position 93-6 "Employers' Accounting for Employee Stock
Ownership Plans" ("SOP 93-6") requires an employer to record compensation
expense in an amount equal to the fair value of shares committed to be released
to employees from an employee stock ownership plan. Assuming shares of common
stock appreciate in value over time, SOP 93-6 would increase compensation
expense relating to the ESOP to be established in connection with the
Conversion. It is not possible to determine at this time the extent of such
impact on future net income. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of New Accounting
Standards" and "Pro Forma Data."
In addition, the Holding Company will experience additional expense in
the quarter in which the Conversion is completed as a result of the shares that
are contributed by the Holding Company to the charitable foundation. See "The
Conversion and the Merger -- Establishment of The Cohoes Savings Foundation."
Absence of Active Market for the Common Stock
The Holding Company, as a newly organized company, has never issued
capital stock and, consequently, there is no established market for the Holding
Company Common Stock at this time. The Holding Company has received approval to
have its common stock listed on The Nasdaq National Market under the symbol
"________" conditioned on the consummation of the Conversion. A public trading
market having the desirable characteristics of depth, liquidity and orderliness
depends upon the existence of willing buyers and sellers at any given time, the
presence of which is dependent upon the individual decisions of buyers and
sellers over which neither the Holding Company nor any market maker has control.
Accordingly, there can be no assurance that an active and liquid trading market
for the Holding Company Common Stock will develop or that, if developed, will
continue, nor is there any assurance that purchasers of the Holding Company
Common Stock will be able to sell their shares at or above the purchase price
for Holding Company Common Stock. In the event a liquid market for the Holding
Company Common Stock does not develop or market makers for the Holding Company
Common Stock discontinue their activities, such occurrences may have an adverse
impact on the liquidity of the Holding Company Common Stock and the market value
of the Holding Company Common Stock. See "Market for Common Stock."
14
Year 2000 Compliance
As the year 2000 approaches, significant concerns have been expressed
with respect to the ability of existing computer software programs and operating
systems to function properly with respect to data containing dates in the year
2000 and thereafter. Many existing application software products were designed
to accommodate only a two digit year (e.g., 1998 is reflected as "98"). The
Bank's operating, processing and accounting operations are computer reliant and
could be affected by the Year 2000 issues. Both the Bank and Schenectady Federal
are reliant on third-party vendors for their data processing needs as well as
certain other significant functions and services (e.g., securities safekeeping
services, securities pricing data, etc.). The Bank currently is working with its
third-party vendors in order to assess their Year 2000 readiness. While no
assurance can be given that such third-party vendors will be Year 2000
compliant, management believes that such vendors are taking appropriate steps to
address the issues on a timely basis. Based on certain preliminary estimates,
the Bank believes that its expenses related to upgrading its systems and
software and Schenectady Federal's systems and software for Year 2000 issues
will not be material. While the Bank currently has no reason to believe that the
cost of addressing such issues will materially affect the Bank's products,
services or ability to compete effectively, no assurance can be made that the
Bank or the third-party vendors on which it relies will become Year 2000
compliant in a successful and timely fashion. Nevertheless, the Holding Company
does not believe that the cost of addressing the Year 2000 issues will be a
material event or uncertainty that would cause reported financial information
not to be necessarily indicative of future operating results or financial
condition, nor does it believe that the costs or the consequences of incomplete
or untimely resolution of the Year 2000 issues represent a known material event
or uncertainty that is reasonably likely to affect its future financial results,
or cause its reported financial information not to be necessarily indicative of
future operating results or future financial condition.
Risks Associated with the Establishment of the Charitable Foundation
Pursuant to the Plan of Conversion, the Holding Company and the Bank
intend to voluntarily establish a charitable foundation in connection with the
Conversion. The Foundation has been incorporated under Delaware law as a
non-stock corporation and will be funded with the Stock Contribution. The Stock
Contribution will be dilutive to the ownership and voting interests of
stockholders and will have an adverse impact on the earnings of the Holding
Company on a consolidated basis in the period the Foundation is established.
As a condition to receiving the non-objection of the FDIC to the
Conversion and the approval of the Conversion by the Superintendent, the
Foundation will commit in writing to the FDIC and the Superintendent that all
shares of Holding Company Common Stock held by the Foundation will be voted in
the same ratio as all other shares of the Holding Company Common Stock on all
proposals considered by stockholders of the Holding Company; provided, however,
that, consistent with the condition, the FDIC and the Superintendent shall waive
this voting restriction under certain circumstances if compliance with the
voting restriction would: (i) cause a violation of the laws of the State of
Delaware; (ii) cause the Foundation to lose its tax-exempt status, or cause the
IRS to deny the Foundation's request for a determination that it is an exempt
organization or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the FDIC and the Superintendent to waive
such voting restriction, the Holding Company's or the Foundation's legal counsel
must render an opinion satisfactory to FDIC and the Superintendent that
compliance with the voting restriction would have the effect described in
clauses (i), (ii) or (iii) above. Under those circumstances, the FDIC and the
Superintendent shall grant a waiver of the voting restriction upon submission of
such opinion(s) by the Holding Company or the Foundation which are satisfactory
to the FDIC and the Superintendent. There can be no assurances that a legal
opinion addressing these issues will be rendered, or if rendered, that the FDIC
and the Superintendent will grant an unconditional waiver of the voting
restriction. As of the date hereof, no event has occurred which would require
the Holding Company to seek a waiver from the FDIC and the Superintendent of the
voting restriction.
Adverse Impact on Earnings. The Stock Contribution will have an adverse
impact on the Holding Company's earnings. The Holding Company will recognize an
expense in the amount of $2.4 million ($1.4 million net of taxes) in the quarter
in which the Conversion is completed based on the issuance of shares at the
maximum of the Estimated Valuation Range, which is expected to be the second
quarter of fiscal 1999. Such expense will have a material adverse impact on the
Holding Company's earnings in the fiscal quarter and year recorded. The Holding
Company has been advised by its legal counsel that the Stock Contribution should
be tax deductible, subject to a limitation based on 10%
15
of the Holding Company's annual taxable income. If the Stock Contribution had
been made at June 30, 1998, the Bank would have reported net income of $2.7
million for the fiscal year rather than net income of $4.1 million.
In the future, the Holding Company may make additional contributions to
the Foundation, although the Holding Company has no current plans regarding the
amount or timing of any such future contributions. The amount of future
contributions, if any, will be determined based upon, among other factors, an
assessment of the Holding Company's then current financial position, operations,
and prospects and on the need for charitable activities in the Bank's market
area. Any such contributions, regardless of form, will result in an increase in
other operating expense and thus a reduction in net earnings. In addition, any
contributions of authorized but unissued shares would dilute the interests of
outstanding stockholders. However, the Holding Company currently anticipates
that any future contributions of shares by it to the Foundation will be funded
through shares repurchased in the open market.
Dilution of Stockholders' Interests. The Stock Contribution will
involve the donation of a number of shares equal to 3% of the shares of the
Holding Company Common Stock issued in the Conversion or up to 241,500 shares of
Holding Company Common Stock, or the sale of such shares for their aggregate par
value ($2,415 based on the maximum of the Estimated Valuation Range), to the
Foundation. Upon completion of the Conversion and the Stock Contribution, the
Holding Company will have 8,291,500 shares issued and outstanding at the maximum
of the Estimated Valuation Range, of which the Foundation will own 241,500
shares, or 3.0%. As a result, persons purchasing shares in the Conversion will
have their share ownership and voting interest in the Holding Company diluted by
2.9%. See "Pro Forma Data."
Possible Nondeductibility of the Stock Contribution. It is expected
that the IRS will rule that the Foundation is exempt from federal income tax
under Section 501(a) of the Code as an organization described in Section
501(c)(3) of the Code. As such, the Holding Company will be entitled to a
deduction in the amount of the Stock Contribution, subject to an annual
limitation based on 10% of the Holding Company's annual taxable income. The
Holding Company, however, would be able to carry forward any unused portion of
the deduction for five years following the Stock Contribution for Federal and
New York income tax purposes. Based on present information, the Holding Company
currently estimates that the Stock Contribution should be fully deductible for
Federal and New York income tax purposes. However, no assurances can be given
that the Holding Company will have sufficient pre-tax income over the five-year
period following the year in which the Stock Contribution is made to utilize
fully the carryover related to the excess contribution.
Potential Change in Valuation and Capital if the Stock Contribution is
Not Made. The Stock Contribution was taken into account by RP Financial in
determining the estimated pro forma market value of the Holding Company. The
aggregate price of the shares of Holding Company Common Stock being offered in
the Offering is based upon the Appraisal. The pro forma aggregate price of the
shares being offered for sale in the Conversion is currently estimated to be
between $59.5 million and $80.5 million, with a midpoint of $70.0 million.
If the Stock Contribution is not part of the Conversion, the Estimated
Valuation Range of the shares being offered is estimated to be between $62.9
million and $85.1 million. This represents an increase of $4.0 million at the
midpoint of the Estimated Valuation Range. In such event the estimated pro forma
stockholders' equity of the Holding Company would be approximately $133.8
million at the midpoint based on a pro forma price to book ratio of 79.3% and a
pro forma price to earnings ratio of 15.6x. See "Comparison of Valuation and Pro
Forma Information with No Stock Contribution."
The decrease in the amount of Holding Company Common Stock being
offered for sale as a result of the Stock Contribution will not have a
significant effect on the Holding Company's or the Bank's capital position. The
Bank's regulatory capital is significantly in excess of its regulatory capital
requirements and will further exceed such requirements following the Conversion.
See "Comparison of Valuation and Pro Forma Information with No Stock
Contribution."
Potential Anti-Takeover Effect. Upon completion of the Conversion, the
Foundation would own 2.9% of the Holding Company's outstanding shares. Such
shares will be owned solely by the Foundation; however pursuant to the terms of
the Stock Contribution as mandated by the FDIC and the Superintendent, the
shares of Holding Company Common Stock must be voted in the same proportion as
all other shares of Holding Company Common Stock on all
16
proposals considered by the Holding Company's stockholders. See "The Conversion
and the Merger - Establishment of Cohoes Savings Foundation." In the event that
the FDIC and the Superintendent were to waive this voting restriction, the
Foundation's Board of Directors would exercise sole voting power over such
shares and would no longer be subject to the voting restriction. However, the
FDIC and the Superintendent could impose additional conditions at that time on
the composition of the Board of the Foundation or which otherwise relate to
control of the Common Stock of the Holding Company held by the Foundation. See
"The Conversion and the Merger - Establishment of The Cohoes Savings
Foundation." If a waiver of the voting restriction were granted by the FDIC and
the Superintendent and no further conditions were imposed on the Foundation at
that time, management of the Holding Company and the Bank could benefit to the
extent that the Board of Directors of the Foundation determines to vote the
shares of Holding Company Common Stock held by the Foundation in favor of
proposals supported by the Holding Company and the Bank. Furthermore, when the
Foundation's shares are combined with shares purchased directly by executive
officers and directors of the Holding Company, shares issued pursuant to
proposed stock benefit plans, and shares held in the Bank's ESOP, the aggregate
of such shares could exceed 20% of the Holding Company's outstanding Common
Stock, which could enable management to defeat proposals requiring 80%
stockholder approval. Consequently, this potential voting control might preclude
takeover attempts that other stockholders deem to be in their best interest, and
might tend to perpetuate management. Since the ESOP shares are allocated to
eligible employees of the Bank, and any unallocated shares will be voted by an
independent trustee, and because awards under the proposed stock benefit plans
may be granted to employees other than executive officers and directors,
management of the Holding Company does not expect to have voting control of all
shares held or to be allocated by the ESOP or other stock benefit plans. See "--
Takeover Defensive Provisions."
There are no agreements or understandings, written or tacit, with
respect to the exercise of either direct or indirect control over the management
or policies of the Holding Company by the Foundation, including agreements
related to voting, acquisition or disposition of the Holding Company Common
Stock. Finally, as the Foundation sells its shares of Holding Company Common
Stock over time, its ownership interest and voting power in the Holding Company
is expected to decrease.
COHOES BANCORP, INC.
The Holding Company was formed at the direction of the Bank in
September 1998 for the purpose of becoming a savings and loan holding company
and owning all of the outstanding stock of the Bank issued in the Conversion.
The Holding Company is incorporated under the laws of the State of Delaware. The
Holding Company is authorized to do business in the State of New York, and
generally is authorized to engage in any activity that is permitted by the
Delaware General Corporation Law. The business of the Holding Company initially
will consist only of the business of the Bank and the business of Schenectady
Federal. The holding company structure will, however, provide the Holding
Company with greater flexibility than the Bank has to diversify its business
activities, through existing or newly formed subsidiaries, or through
acquisitions or Mergers of stock financial institutions, as well as, other
companies. Although there are no current arrangements, understandings or
agreements regarding any such activity or acquisition other than the Merger, the
Holding Company will be in a position after the Conversion, subject to
regulatory restrictions, to take advantage of any favorable acquisition
opportunities that may arise.
The assets of the Holding Company will consist initially of the stock
of the Bank, a note evidencing the Holding Company's loan to the ESOP and up to
50% of the net proceeds from the Conversion (less the amount used to fund the
ESOP loan). See "Use of Proceeds." Initially, any activities of the Holding
Company are anticipated to be funded by such retained proceeds and the income
thereon and dividends from the Bank, if any. See "Dividends" and "Regulation -
The Holding Company." Thereafter, activities of the Holding Company may also be
funded through sales of additional securities, through borrowings and through
income generated by other activities of the Holding Company. At this time, there
are no plans regarding such other activities other than the intended loan to the
ESOP to facilitate its purchase of Holding Company Common Stock in the
Conversion. See "Management of the Bank - Benefit Plans Employee Stock Ownership
Plan."
The executive office of the Holding Company is located at 75 Remsen
Street, Cohoes, New York 12047-2892. Its telephone number at that address is
(518) 233-6500.
17
COHOES SAVINGS BANK
The Bank serves the financial needs of communities in its market area
through its main office and 15 other full service branch offices and one public
accommodation office located throughout the Bank's primary market area. Its
deposits are insured up to applicable limits by the FDIC. At June 30, 1998, the
Bank had total assets of $535.7 million, deposits of $449.5 million and total
equity of $53.3 million (or 9.95% of total assets).
The Bank has been, and intends to continue to be, an independent,
community oriented financial institution. The Bank's business involves
attracting deposits from the general public and using such deposits, together
with other funds, to originate primarily residential mortgage loans, and to a
lesser extent, commercial and multi-family real estate, consumer and commercial
business loans. The Bank originates its loans primarily in the Bank's market
area and to a lesser extent, it has in the past originated multi-family and
commercial real estate loans in New York City. However, depending upon market
conditions and as a result of the somewhat depressed economy in the Bank's
primary market area, the Bank may explore lending opportunities outside its
primary market area in the future. At June 30, 1998, $258.4 million, or 62.07%,
of the Bank's total loan portfolio consisted of residential mortgage loans. See
"Business of the Bank - Lending Activities." The Bank also invests in government
agency and corporate debt securities and other permissible investments. See
"Business of the Bank - Investment Activities."
The executive office of the Bank is located at 75 Remsen Street,
Cohoes, New York 12047-2892. Its telephone number at that address is (518)
233-6500.
USE OF PROCEEDS
Although the actual net proceeds from the sale of the Conversion Shares
cannot be determined until the Conversion is completed, it is presently
anticipated that such net proceeds will be between $57.9 million and $76.7
million (or up to $90.6 million in the event of an increase in the aggregate pro
forma market value of the Holding Company Common Stock of up to 15% above the
maximum of the Estimated Valuation Range). See "Pro Forma Data" and "The
Conversion and the Merger - Stock Pricing" and "--Number of Shares to be Issued"
as to the assumptions used to arrive at such amounts.
In exchange for all of the common stock of the Bank issued in the
Conversion, the Holding Company will contribute approximately 50% of the net
proceeds from the sale of the Conversion Shares to the Bank. On an interim
basis, the proceeds will be invested by the Holding Company and the Bank in
short-term investments similar to those currently in the Bank's portfolio. The
specific types and amounts of short-term assets will be determined based on
market conditions at the time of the completion of the Conversion. In addition,
the Holding Company intends to provide the funding for the ESOP loan. Based upon
the initial purchase price of $10.00 per share, the dollar amount of the ESOP
loan would range from $4.9 million (based upon the sale of shares at the minimum
of the Estimated Valuation Range) to $6.6 million (based upon the sale of shares
at the maximum of the Estimated Valuation Range). The interest rate to be
charged by the Holding Company on the ESOP loan will be based upon the prime
rate of interest as reported in the Wall Street Journal at the time of
origination. It is anticipated that the ESOP will repay the loan through
periodic tax-deductible contributions from the Bank over a fifteen-year period.
The net proceeds received by the Bank will become part of the Bank's
general funds for use in its business and will be used to support the Bank's
existing operations, subject to applicable regulatory restrictions. Immediately
upon the completion of the Conversion, it is anticipated that the Bank will
invest such proceeds into short-term assets. Subsequently, the Bank intends to
redirect the net proceeds to the origination of loans, subject to market
conditions.
After the completion of the Conversion, the Holding Company will
redirect the net proceeds invested by it in short-term assets into a variety of
securities similar to those already held by the Bank, as well as in deposit
accounts with the Bank. Also, the Holding Company may use a portion of the
proceeds to fund the RRP, subject to stockholder approval of such plan.
Compensation expense related to the RRP will be recognized as share awards vest.
See "Pro Forma Data." Following stockholder ratification of the RRP, the RRP
will be funded either with shares purchased in the open market or with
authorized but unissued shares. Based upon the initial purchase price of $10.00
per share, the amount required to fund the RRP through open-market purchases
would range from approximately $2.5 million (based
18
upon the sale of shares at the minimum of the Estimated Valuation Range and
including shares issued to the Foundation) to approximately $3.3 million (based
upon the sale of shares at the maximum of the Estimated Valuation Range). In the
event that the per share price of the Holding Company Common Stock increases
above the $10.00 per share purchase price following completion of the Offering,
the amount necessary to fund the RRP would also increase. The use of authorized
but unissued shares to fund the RRP could dilute the holdings of stockholders
who purchase Holding Company Common Stock in the Conversion and who receive
Exchange Shares in the Merger. See "Business of the Bank - Lending Activities"
and " - Investment Activities" and "Management of the Bank - Benefit Plans -
Employee Stock Ownership Plan" and "- RRP."
The proceeds may also be utilized by the Holding Company to repurchase
(at prices which may be above or below the initial offering price) shares of the
Holding Company Common Stock through an open market repurchase program subject
to applicable regulations, although the Holding Company currently has no
specific plan to repurchase any of its stock (although the Holding Company and
the Bank do not intend to take any actions in the future which would prevent the
Merger from being accounted for as a pooling-of-interests under GAAP). In the
future, the Board of Directors of the Holding Company will make decisions on the
repurchase of the Holding Company Common Stock based on its view of the
appropriateness of the price of the Holding Company Common Stock as well as the
Holding Company's and the Bank's investment opportunities and capital needs.
The Bank may use a portion of the proceeds to fund the creation of one
or more new branch offices within its primary market area, although the Bank has
no specific plans regarding any new branch offices at this time. In addition,
the Holding Company or the Bank might consider expansion through the acquisition
of other financial services providers (or branches, deposits or assets thereof),
although there are no specific plans, negotiations or written or oral agreements
regarding any acquisitions at this time (other than the Merger).
DIVIDENDS
The Holding Company currently plans to pay dividends in the future.
However, the amount and timing of such payments has yet to be determined.
Dividends, when and if paid, will be subject to determination and declaration by
the Board of Directors at its discretion. The Board will take into account the
Holding Company's consolidated financial condition, the Bank's regulatory
capital requirements, tax considerations, industry standards, economic
conditions, regulatory restrictions, general business practices and other
factors.
It is not presently anticipated that the Holding Company will conduct
significant operations independent of those of the Bank for some time following
the Conversion. As such, the Holding Company does not expect to have any
significant source of income other than earnings on the net proceeds from the
Conversion retained by the Holding Company (which proceeds are currently
estimated to range from $57.9 million to $76.7 million based on the minimum and
the maximum of the Estimated Valuation Range, respectively) and dividends from
the Bank, if any. Consequently, the ability of the Holding Company to pay cash
dividends to its stockholders will be dependent upon such retained proceeds and
earnings thereon, and upon the ability of the Bank to pay dividends to the
Holding Company. See "Description of Capital Stock - Holding Company Capital
Stock - Dividends." The Bank, like all savings associations regulated by the
FDIC, is subject to certain restrictions on the payment of dividends based on
its net income, its capital in excess of the regulatory capital requirements and
the amount of regulatory capital required for the liquidation account to be
established in connection with the Conversion. In addition, under New York state
banking law, a New York chartered stock savings bank may declare and pay
dividends out of its net profits, unless there is an impairment of capital, but
approval of the 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. See "The Conversion and the Merger - Effects of Conversion --
Deposit Accounts and Loans" and "Regulation - The Bank -- Capital Requirements"
and "- Limitations on Dividends." Earnings allocated to the Bank's "excess" bad
debt reserves and deducted for federal income tax purposes cannot be used by the
Bank to pay cash dividends to the Holding Company without adverse tax
consequences. See "Regulation" and "Taxation."
19
MARKET FOR COMMON STOCK
The Bank, as a mutual savings bank, and the Holding Company, as a newly
organized company, have never issued capital stock. Consequently, there is not
at this time an existing market for the Holding Company Common Stock. The
Holding Company has been approved for listing of the Holding Company Common
Stock on the Nasdaq Stock Market under the symbol "_______" upon completion of
the Conversion. In order to be quoted on the Nasdaq Stock Market, among other
criteria, there must be at least three market makers for the Holding Company
Common Stock. KBW has agreed to act as a market maker for the Holding Company
Common Stock following the Conversion, and assist in securing additional market
makers to do the same. A public trading market having the desirable
characteristics of depth, liquidity and orderliness depends upon the presence in
the marketplace of both willing buyers and sellers of the Holding Company Common
Stock at any given time. Accordingly, there can be no assurance that an active
and liquid market for the Holding Company Common Stock will develop or be
maintained or that resales of the Holding Company Common Stock can be made at or
above the purchase price. See "The Conversion and the Merger Stock Pricing" and
"-- Number of Shares to be Issued."
20
REGULATORY CAPITAL
At June 30, 1998, the Bank and Schenectady Federal each exceeded all of
the regulatory capital requirements applicable to it. The table below sets forth
the historical regulatory capital of the Bank and Schenectady Federal at June
30, 1998 and the pro forma regulatory capital of the Bank after giving effect to
the Conversion and the Merger, based upon the sale of the number of shares shown
in the table. The pro forma regulatory capital amounts reflect the receipt by
the Bank of 50% of the net Conversion proceeds, minus the amounts to be loaned
to the ESOP and contributed to the RRP. The pro forma risk-based capital amounts
assume the investment of the net proceeds received by the Bank in assets which
have a risk-weight of 20% under applicable regulations, as if such net proceeds
had been received at June 30, 1998.
Pro Forma Combined for Cohoes Savings Bank at June 30, 1998 Based on
--------------------------------------------------------------------------------------------
Minimum Midpoint Maximum Maximum As Adjusted
---------------------- ---------------------- ---------------------- ----------------------
Historical at Conversion Shares Sold Conversion Shares Sold Conversion Shares Sold Conversion Shares Sold
June 30, 1998 at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share at $10.00 Per Share
-------------------- -------------------- --------------------- ------------------- ------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets(1) Amount Assets(1)
------ --------- ------ --------- ------ --------- ------ --------- ------ ---------
(Dollars in Thousands)
GAAP Capital..... $53,282 9.95% $74,880 13.32% $78,775 13.86% $82,669 14.46% $87,148 15.10%
======= ==== ======= ===== ======= ===== ======= ===== ======= =====
Leverage capital:
Actual........ $53,270 10.13% $74,868 13.56% $78,763 14.14% $82,657 14.71% $87,136 15.36%
Requirement... 21,033 4.00 22,093 4.00 22,283 4.00 22,474 4.00% 22,693 4.00
-------- ------- -------- ------ -------- ------ -------- ------ -------- ------
Excess........ $32,237 6.13% $52,775 9.56% $56,479 10.14% $60,183 10.71% $64,443 11.36%
======= ======= ======= ====== ======= ===== ======= ===== ======= =====
Risk-based
capital(3):
Actual........ $56,803 17.08% $78,401 23.21% $82,296 24.29% $86,190 25.37% $90,669 26.60%
Requirement... 26,601 8.00 27,025 8.00 27,101 8.00 27,177 8.00 27,265 8.00
-------- ------- -------- ------ -------- ------ -------- ------ -------- ------
Excess........ $30,202 9.08% $51,376 15.21% $55,194 16.29% $59,013 17.37% $63,404 18.60%
======= ======= ======= ===== ======= ===== ======= ===== ======= =====
SFS Historical at Pro Forma Combined
June 30, 1998 at June 30, 1998(2)
--------------------- ----------------------
Percent of Percent of
Amount Assets(1) Amount Assets(1)
------ ---------- ------ ----------
GAAP Capital.....
$19,618 11.01% $99,887 13.36%
Leverage capital: ======= ===== ======= =====
Actual........
Requirement... $19,612 11.01% $99,869 13.54%
7,124 4.00 11,063 1.50
Excess........ --------- ------- -------- -------
$12,488 7.01% $88,806 12.04%
Risk-based ======= ======= ======= ======
capital(3):
Actual........
Requirement... $20,467 21.20% $104,257 23.92%
7,725 8.00 34,864 8.00
Excess........ --------- ------- -------- -------
$12,742 13.20% $69,393 15.92%
======= ====== ======= ======
- --------------
(1) Adjusted total or adjusted risk-weighted assets, as appropriate. As of June
30, 1998, the adjusted total and risk-weighted assets of the Bank were
$525.8 million and $332.5 million, respectively, and the adjusted total and
risk-weighted assets of Schenectady Federal were $178.1 million and $96.6
million, respectively.
(2) Assuming the sale of 8,050,000 Conversion Shares in the Offering, which is
the maximum of the Estimated Valuation Range.
(3) Does not reflect the interest rate risk component to be added to the
risk-based capital requirements or, in the case of the core capital
requirement, the 4.0% requirement to be met in order for an institution to
be "adequately capitalized" under applicable laws and regulations. See
"Regulation - Regulatory Capital Requirements."
21
Presented below is a reconciliation of the equity capital of each of
the Bank and Schenectady Federal at June 30, 1998 as calculated in accordance
with GAAP ("GAAP Capital") to their respective capital amounts as calculated
under their respective regulatory capital requirements.
Cohoes Schenectady
Savings Federal
------- -------
(In Thousands)
GAAP Capital ................................. $ 53,282 $ 19,618
Unrealized (gain) loss on
securities available-for-sale .............. (12) (6)
-------- --------
Tangible capital ............................. 53,270 19,612
Qualifying intangible assets ................. -- --
-------- --------
Core capital ................................. 53,270 19,612
Allowance for loan losses .................... 3,533 855
-------- --------
Risk-based capital ........................... $ 56,803 $ 20,467
======== ========
22
CAPITALIZATION
The following table presents the historical capitalization of the Bank
at June 30, 1998 and the pro forma consolidated capitalization of the Holding
Company after giving effect to the Conversion and Merger, based upon the sale of
shares at the maximum of the Estimated Valuation Range and the other assumptions
set forth under "Pro Forma Unaudited Financial Information - Additional Pro
Forma Data."
The Holding Company - Pro Forma Consolidated
Based Upon Sale at $10.00 Per Share
------------------------------------------------------------------------------
9,257,500
5,950,000 7,000,000 8,050,000 Shares(1)
Cohoes Savings Shares Shares Shares (15% above Holding Company
Bank (Minimum of (Midpoint of (Maximum of Maximum of Pro Forma
Historical Range) Range) Range) Range) SFS-Historical Consoli-
dated)(2)
---------- ------ ------ ------ ------ -------------- -------------
(In Thousands)
Deposits(3) ........................... $ 449,541 $ 449,541 $ 449,541 $ 449,541 $ 449,541 $ 152,879 $ 602,420
Borrowings ............................ 19,897 19,897 19,897 19,897 19,897 -- 19,897
--------- --------- --------- --------- --------- --------- ---------
Total deposits and borrowings ......... $ 469,438 $ 469,438 $ 469,438 $ 469,438 $ 469,438 $ 152,879 $ 622,317
========= ========= ========= ========= ========= ========= =========
Stockholders' equity:
Common stock, $0.01 par value,
25,000,000 shares authorized;
shares to be issued as
reflected(4) ....................... $ -- 61 72 83 95 15 115
Additional paid-in capital ........... -- 59,629 70,317 81,006 93,298 14,411 91,311
Treasury stock(5) .................... -- -- -- -- -- (4,089) --
Retained earnings(6)(7) .............. 53,270 52,199 52,010 51,821 51,604 12,795 59,816
Net unrealized gain on available-
for-sale securities,
net of taxes ....................... 12 12 12 12 12 6 18
Less:
Common stock held or to be acquired
by the ESOP(8) ..................... -- (4,903) (5,768) (6,633) (7,628) (837) (7,470)
Common stock to be acquired by the
RRP(9) ............................. -- (2,451) (2,884) (3,317) (3,814) (386) (3,703)
--------- --------- --------- --------- --------- --------- ---------
Total stockholder's equity ............ $ 53,282 $ 104,547 $ 113,759 $ 122,972 $ 133,567 $ 21,915 $ 140,087
========= ========= ========= ========= ========= ========= =========
23
- ----------
(1) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offerings.
(2) Assuming the Conversion is completed at the maximum of the Estimated
Valuation Range.
(3) Does not reflect withdrawals from deposit accounts for the purchase of
Holding Company Common Stock in the Offerings. Such withdrawals would reduce
pro forma deposits by the amount of such withdrawals.
(4) Reflects the issuance of the Conversion Shares to be sold in the Offering
and the issuance of Exchange Shares. No effect has been given to the
issuance of additional shares of Holding Company Common Stock pursuant to
the proposed Stock Option and Incentive Plan or to the exercise of any
additional options to acquire shares of SFS Common Stock. See "Pro Forma
Unaudited Financial Information Additional Pro Forma Data" and "Management -
Benefits - Stock Option and Incentive Plan." Also reflects issuance of
additional shares of Holding Company Common Stock to the Foundation.
(5) Assumes the cancellation of SFS's treasury shares concurrent with
consummation of the Merger.
(6) The retained earnings of the Bank will be substantially restricted after the
Conversion by virtue of the liquidation account to be established in
connection with the Conversion. See "The Conversion and the Merger -
Liquidation Rights." In addition, certain distributions from the Bank's
retained earnings may be treated as being from its accumulated bad debt
reserve for tax purposes, which would cause the Bank to have additional
taxable income. See "Taxation."
(7) Pro forma stockholders' equity includes the effects of estimated one-time
charges of approximately $5.9 million, $4.8 million net of tax effect, and a
$1.8 million, $2.1 million, $2.4 million and $2.8 million expense ($1.1
million, $1.3 million, $1.5 million and $1.7 million, net of tax) relating
to the contribution of 178,500, 210,000, 245,000 and 277,725 shares of
Holding Company Common Stock to the Foundation at the minimum, midpoint,
maximum and maximum as adjusted of the valuation range. Since the estimated
charges are non-recurring, they have not been reflected in the pro forma
combined income statement and related per share calculations. The charges
are expected to be incurred shortly following the Conversion and Merger.
(8) Assumes that an amount equal to 8% of the Holding Company Common Stock sold
in the Offerings will be purchased by the ESOP, which is reflected as a
reduction of stockholders' equity. The ESOP shares will be purchased with
funds loaned to the ESOP by the Holding Company. See "Pro Forma Unaudited
Financial Information - Additional Pro Forma Data" and "Management -
Benefits - Employee Stock Ownership Plan."
(9) The Holding Company intends to adopt the RRP and to submit such plan to
stockholders at an annual or special meeting of stockholders held at least
six months following the consummation of the Conversion. If the plan is
approved by stockholders, the Holding Company intends to purchase a number
of shares of Holding Company Common Stock equal to 4% of the Holding Company
Common Stock sold in the Offering. Assumes that stockholder approval had
been obtained and that the shares have been purchased in the open market at
the purchase price. However, in the event the Holding Company issues
authorized but unissued shares of Holding Company Common Stock to the RRP in
the amount of 4% of the Holding Company Common Stock sold in the Offering
(including shares issued to the Foundation), the voting interests of
existing stockholders would be diluted approximately 2.8% (assuming the
issuance of 8,050,000 Conversion Shares and 3,202,451 Exchange Shares and
the contribution of 241,500 shares of Holding Company Common Stock to the
Foundation). The shares are reflected as a reduction of stockholders'
equity. See "Pro Form Unaudited Financial Information - Additional Pro Forma
Data" and "Management - Benefits - Recognition and Retention Plan."
24
PRO FORMA UNAUDITED FINANCIAL INFORMATION
The following Pro Forma Unaudited Consolidated Statement of Financial
Condition at June 30, 1998 and the Pro Forma Unaudited Consolidated Statements
of Income for each of the years ended June 30, 1998, 1997 and 1996 give effect
to the proposed Conversion and the Merger based on the assumptions set forth
herein. The pro forma unaudited financial statements are based on the audited
consolidated financial statements of the Bank for the years ended June 30, 1998,
1997 and 1996 and the unaudited consolidated financial statements of SFS for the
twelve months ended June 30, 1998, 1997 and 1996. The pro forma unaudited
financial statements give effect to the Conversion and the Merger using the
pooling-of-interests method of accounting.
The pro forma adjustments in the table assume the sale of 8,050,000
Conversion Shares in the Offering at a price of $10.00 per share, which is the
maximum of the Estimated Valuation Range. In addition, the pro forma adjustments
in the tables assume the issuance of 3,202,451 Exchange Shares in the Merger and
the contribution of 241,500 shares of Holding Company Common Stock to the
Foundation. The net proceeds are based upon the following assumptions: (i) all
Conversion Shares will be sold in the Subscription Offering; (ii) no fees will
be paid to KBW on shares purchased by (x) the ESOP and any other employee
benefit plan of the Holding Company or the Bank, (y) officers, directors,
employees and members of their immediate families or (z) the Foundation; (iii)
KBW will receive a fee equal to 1.20% of the aggregate purchase price for sales
in the Subscription Offering (excluding the sale of shares to the ESOP, employee
benefit plans, officers, directors and their immediate families and the
Foundation); and (iv) total expenses of the Conversion, including the marketing
fees paid to KBW, will be $1.8 million. Actual expenses may vary from those
estimated. The actual amount of Conversion Shares sold may be more or less than
the midpoint of the Estimated Valuation Range, and the number of shares sold and
the actual purchase price may be more or less than the assumptions set forth
above. For the effects of such possible changes, see "-- Additional Pro Forma
Data." In addition, the expenses of the Conversion and the Merger may vary from
those estimated, and the fees paid to KBW will vary from the amounts estimated
if a Syndicated Community Offering becomes necessary. Additionally, certain
one-time charges to operating results are expected to occur following the
Merger. These items, net of income tax effects, are shown as a reduction in
stockholders' equity in the following tables but are not shown as a reduction in
net income for the periods shown in the following tables. However, no potential
cost savings have been reflected in the following tables because an accurate
estimate has not yet been determined.
Pro forma net income has been calculated for the years ended June 30,
1998, 1997 and 1996 as if the Conversion Shares to be issued in the Offering had
been sold (and the Exchange Shares issued). Historical and pro forma per share
amounts have been calculated by dividing historical and pro forma amounts by the
indicated number of shares of Holding Company Common Stock.
The pro forma unaudited consolidated statement of financial condition
assumes the Conversion and Merger were consummated on June 30, 1998. The pro
forma unaudited consolidated statements of income assume that the Conversion and
Merger were consummated on July 1 of each indicated period.
The pro forma unaudited statements are provided for informational
purposes only. The pro forma financial information presented is not necessarily
indicative of the actual results that would have been achieved had the
Conversion and the Merger been consummated on June 30, 1998 or at the beginning
of the periods presented, and is not indicative of future results. The pro forma
unaudited financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto of the Bank and SFS
contained elsewhere in this Prospectus.
The stockholders' equity represents the combined book value of the
common stockholders' ownership of the Bank and SFS computed in accordance with
GAAP. This amount is not intended to represent fair market value nor does it
represent amounts, if any, that would be available for distribution to
stockholders in the event of liquidation. The book value for the Bank and SFS on
a historical and pro forma basis has not been changed to reflect any difference
between the carrying value of investments held to maturity or loans held in
portfolio and their market value.
25
THE UNAUDITED PRO FORMA NET INCOME AND COMMON STOCKHOLDERS' EQUITY
DERIVED FROM THE ABOVE ASSUMPTIONS ARE QUALIFIED BY THE STATEMENTS SET FORTH
UNDER THIS CAPTION AND SHOULD NOT BE CONSIDERED INDICATIVE OF THE MARKET VALUE
OF THE HOLDING COMPANY COMMON STOCK OR THE ACTUAL RESULTS OF OPERATIONS OF
COHOES SAVINGS AND SFS FOR ANY PERIOD. SUCH PRO FORMA DATA MAY BE MATERIALLY
AFFECTED BY THE ACTUAL GROSS PROCEEDS FROM THE SALE OF CONVERSION SHARES IN THE
CONVERSION AND THE ACTUAL EXPENSES INCURRED IN CONNECTION WITH THE CONVERSION
AND THE MERGER. SEE "USE OF PROCEEDS."
Pro Forma Unaudited Consolidated Statement of Financial Condition
June 30, 1998
Pro Forma Cohoes Savings Pro Forma
Cohoes Savings Conversion Bank, Merger Pro Forma
Bank Adjustments As Converted SFS Adjustments Consolidated
---- ----------- ------------ ------- ----------- ------------
(Dollars in thousands, except per share data)
Assets
Cash................................... $ 8,653 $68,724(1) $ 77,377 $ 980 $ 78,357
Interest-bearing deposits.............. 576 576 -- 576
Federal funds sold..................... 5,000 5,000 5,600 10,600
-------- -------- -------- -------
Cash and cash equivalents.............. 14,229 82,953 6,580 89,533
Investment securities available
for sale.............................. 45,168 45,168 8,062 53,230
Investment securities held to maturity. 45,424 45,424 16,910 62,334
Loans receivable, net.................. 412,797 412,797 141,222 554,019
FHLB stock, at cost.................... 3,552 3,552 1,338 4,890
Office properties and equipment........ 7,303 7,303 2,171 9,474
Accrued interest receivable............ 3,482 3,482 1,061 4,543
Real estate owned...................... 509 509 151 660
Other assets........................... 3,252 966(2) 4,218 598 4,816
-------- -------- -------- -------
Total Assets...................... $535,716 69,690 $605,401 $178,093 $783,499
======== ======== ======== =======
Liabilities and Stockholders' Equity
Liabilities:
Deposits............................... $449,541 $449,541 $152,879 $602,420
Total borrowings....................... 19,897 19,897 -- 19,897
Advances by borrowers for insurance
and taxes............................ 8,994 8,994 1,861 10,855
Other liabilities...................... 4,002 4,002 1,438 4,800 (5) 10,240
-------- -------- -------- -------
Total liabilities................. 482,434 482,434 156,178 4,800 643,412
-------- -------- -------- -------
Stockholders' Equity:
Common stock........................... -- 83(3) 83 15 17 (6) 115
Additional paid-in capital............. -- 81,006(3) 81,006 14,411 (4,106)(6) 91,311
Retained earnings partially restricted. 53,270 (1,449)(3) 51,821 12,795 (4,800)(6) 59,816
ESOP shares............................ -- (6,633)(3) (6,633) (837) (7,740)
RRP shares............................. -- (3,317)(3) (3,317) (386) (3,703)
Treasury stock......................... -- -- (4,089) 4,089 (6) --
Unrealized gain on available for sale
securities........................... 12 12 6 (4,800) 18
-------- -------- ------- --------
Total stockholders' equity........ 53,282 122,972 21,915 140,087
-------- -------- ------- --------
Total Liabilities and
Stockholders' Equity....... $535,716 69,690 $605,406 $178,093 $783,499
======== ======== ======== ========
Book value per common share................. N/A N/A $14.83 $ 6.84(4) $12.17(4)
26
- -------------
(1) Reflects gross proceeds of $80.5 million from the sale of Conversion Shares,
minus (i) estimated expenses of the Conversion equal to $1.8 million, (ii)
the purchase of $6.6 million of Conversion Shares by the ESOP funded
internally by a loan from the Holding Company and (iii) the proposed
purchase of $3.3 million of the Holding Company Common Stock by the RRP
funded internally by the Holding Company.
(2) Adjustment to record the New York state and federal tax benefits of the
contribution of 241,500 shares of Holding Company Common Stock to the
Foundation.
(3) Reflects the adjustments set forth in Notes (1) and (2) above and the
issuance of 241,500 shares of Holding Company Common Stock as a contribution
to the Foundation.
(4) Assuming a 2.65:1 Exchange Ratio. Adjusted outstanding shares of SFS used to
calculate book value per common shares are 3,202,451. For purposes of
calculating the pro forma consolidated book value per share, it is assumed
that 11,493,951 shares of Holding Company Common Stock are outstanding based
on the assumed issuance of 3,202,451 Exchange Shares, 8,050,000 Conversion
Shares and 241,500 shares issued to the Foundation.
(5) Adjustment to record the effects of estimated one-time charges of
approximately $7.5 million, $4.8 million net of tax effect and the
termination of SFS' ESOP ($1.6 million), which will be charged to earnings
as incurred. Since the estimated charges are non-recurring, they have not
ben reflected in the pro forma consolidated income statements and related
per share calculations. The charges are expected to be incurred shortly
following the Conversion and the Merger.
The estimated non-recurring charges (in thousands) consist of the following:
Merger related professional fees $ 850*
Deductible employee severance and contract costs 1,375
Non deductible employee severance and contract costs 2,250*
SFS Employee Stock Ownership Plan Termination 1,600*
SFS Pension Plan Termination 1,300
Data processing Conversion and contract termination 125
-------
7,500
Tax benefit 1,100
-------
Total estimated non-recurring charges $ 6,400
=======
----------
* Amount not tax effected as it is not deductible for federal and
state income tax purposes.
(6) Reflects the adjustments set forth in Note (5) above, plus reclassification
necessary to reflect the exchange of each share of SFS Common Stock
previously held for 2.65 shares of the Holding Company Common Stock with a
par value of $0.01 (assuming no additional exercises of options to acquired
SFS Common Stock) and the retirement of SFS shares previously held in
treasury.
27
Pro Forma Unaudited Consolidated Statements of Income
(Dollars in thousands, except per share data)
Year ended June 30, 1998
-----------------------------------
Cohoes Pro Forma
Savings SFS Consolidated
------- --- ------------
Interest income ......................... $38,423 $12,712 $51,135
Interest expense ........................ 19,262 6,895 26,157
------- ------- -------
Net interest income before
provision for losses on loans .......... 19,161 5,817 24,978
Provision for losses on loans ........... 1,400 120 1,520
------- ------- -------
Net interest income after
provision for losses on loans ........ 17,761 5,697 23,458
Noninterest income ...................... 2,743 481 3,224
Noninterest expense ..................... 13,767 4,269 18,036
------- ------- -------
Income before income taxes ........... 6,737 1,909 8,646
Income taxes ............................ 2,650 767 3,417
------- ------- -------
Net income ........................... $ 4,087 $ 1,142 $ 5,229
======= ======= =======
Diluted earnings per share(1) ........... N/A $ 0.32 $ 0.44
Basic earnings per share(2) ............. N/A $ 0.32 $ 0.44
Year ended June 30, 1997
-----------------------------------
Cohoes Pro Forma
Savings SFS Consolidated
------- ----- ------------
Interest income ......................... $36,285 $11,970 $48,255
Interest expense ........................ 17,821 6,282 24,103
------- ------- -------
Net interest income before
provision for losses on loans .......... 18,464 5,688 24,152
Provision for losses on loans ........... 1,325 120 1,445
------- ------- -------
Net interest income after
provision for losses on loans ......... 17,139 5,568 22,707
Noninterest income ...................... 2,790 378 3,168
Noninterest expense ..................... 12,314 5,164 17,478
------- ------- -------
Income before income taxes ........... 7,615 782 8,397
Income taxes ............................ 2,972 42 3,014
------- ------- -------
Net income ........................... $ 4,643 $ 740 $ 5,383
======= ======= =======
Diluted earnings per share(1) ........... N/A $ 0.24 $ 0.47
Basic earnings per share(2) ............. N/A $ 0.25 $ 0.48
(Footnotes on following page)
28
Pro Forma Unaudited Consolidated Statements of Income
(Dollars in thousands, except per share data)
Year ended June 30, 1996
----------------------------------
Cohoes Pro Forma
Savings SFS Consolidated
------- --- ------------
Interest income ......................... $35,383 $12,033 $47,416
Interest expense ........................ 18,164 6,328 24,492
------- ------- -------
Net interest income before
provision for losses on loans .......... 17,219 5,705 22,924
Provision for losses on loans ........... 490 270 760
------- ------- -------
Net interest income after
provision for losses on loans ....... 16,729 5,435 22,164
Noninterest income ...................... 2,467 277 2,744
Noninterest expense ..................... 11,919 4,217 16,136
------- ------- -------
Income before income taxes ........... 7,277 1,495 8,772
Income taxes ............................ 2,882 354 3,236
------- ------- -------
Net income ........................... $ 4,395 $ 1,141 $ 5,536
======= ======= =======
Diluted earnings per share .............. N/A $ 0.37 $ 0.49
Basic earnings per share ................ N/A $ 0.39 $ 0.50
- ----------------
(1) Historical weighted average number of shares outstanding as adjusted for the
2.65:1 Exchange Ratio used in the calculation of EPS as follows:
Historical SFS Weighted Historical SFS Weighted Adjusted SFS Weighted Adjusted SFS Weighted
Average Shares Average Shares Average Shares Average Shares
Year Ending Outstanding - Outstanding - Outstanding - Outstanding -
June 30, Basic EPS Diluted EPS Basic EPS Diluted EPS
-------- --------- ----------- --------- -----------
1998 1,344,537 1,344,537 3,563,023 3,563,023
1997 1,131,357 1,155,732 2,998,096 3,062,690
1996 1,091,033 1,151,519 2,891,237 3,051,525
(2) The weighted average number of shares outstanding used to calculate pro
forma consolidated EPS are as follows:
Pro Forma Weighted Pro Forma Weighted
Year Ending Average Shares Average Shares
June 30, Outstanding - Basic EPS Outstanding - Diluted EPS
-------- ----------------------- -------------------------
1998 11,854,523 11,854,523
1997 11,289,596 11,354,189
1996 11,182,737 11,343,025
The number of shares in this table has been computed by increasing the
weighted average number of SFS shares outstanding, adjusted for the 2.65:1
Exchange Ratio, as shown in footnote (1) above, by 8,050,000 Conversion
Shares and 241,500 shares issued to the Foundation.
29
Additional Pro Forma Data
The following tables provide unaudited pro forma data with respect to
the Holding Company's stockholders' equity, net income and related per share
amounts based upon the minimum, midpoint, maximum and 15% above the maximum of
the Estimated Valuation Range both with the Merger and without the Merger. The
actual net proceeds from the sale of the Conversion Shares cannot be determined
until the Conversion is completed. However, net proceeds are currently estimated
to be between $57.9 million and $78.7 million (or $90.6 million in the event the
Estimated Valuation Range is increased by 15%) based upon the following
assumptions: (i) all Conversion Shares will be sold in the Subscription
Offering; (ii) KBW will receive a fee equal to 1.20% of the aggregate purchase
price for sales in the Subscription Offering (excluding the sale of shares to
the ESOP, employee benefit plans, officers, directors and their immediate
families and the Foundation); (iii) the Holding Company will contribute to the
Foundation a number of shares equal to 3.0% of the shares of Holding Company
Common Stock issued in the Conversion from authorized but unissued shares; and
(iv) total expenses, including the marketing fees paid to KBW, of the Conversion
will be between $1.6 million and $1.8 million (or $2.0 million in the event the
Estimated Valuation Range is increased by 15%). Actual expenses may vary from
those estimated. It is also assumed that Conversion Shares had been sold at the
beginning of the period and the net proceeds from the Offering had been invested
at 5.37% which represents the yield on one-year U.S. Government securities at
June 30, 1998. The yield on one-year U.S. Government securities was used rather
than the arithmetic average of the average yield on total interest-earning
assets and the average rate paid on deposits, because the yields on one-year
U.S. Government securities are believed to be more reflective of market interest
rates. The effect of withdrawals from deposit accounts at the Bank for the
purchase of Conversion Shares in the Offering has not been reflected. A combined
effective federal and state income tax rate of 40.0% has been assumed for the
period, resulting in an after-tax yield of 3.22% for the year ended June 30,
1998.
The following pro forma unaudited information is based, in part, on
historical information related to the Holding Company and SFS and assumptions as
to future events. For these and other reasons, the pro forma unaudited financial
data may not be representative of the financial effects of the Conversion and
the Merger at the dates on which such transactions actually occur and should not
be taken as indicative of future results of operations. Pro forma stockholders'
equity represents the difference between the stated amount of assets and
liabilities of the Holding Company computed in accordance with GAAP.
The following tables give effect to the issuance of a number of shares
equal to 3.0% of the Common Stock of the Holding Company sold in the Conversion
from authorized but unissued shares to the Foundation concurrently with the
completion of the Conversion. The Pro Forma Data With Merger give effect to the
issuance of 3,202,451 Exchange Shares in the Merger and, as indicated in the
footnotes, certain one-time expenses expected to be incurred as a result of the
Merger. The pro forma stockholders' equity is not intended to represent the fair
market value of the Holding Company Common Stock and may be different than
amounts that would be available for distribution to stockholders in the event of
liquidation.
30
PRO FORMA DATA WITH MERGER
At or For the Year Ended June 30, 1998
-----------------------------------------------------------------------
5,950,000 7,000,000 8,050,000 9,257,500
Conversion Conversion Conversion Conversion
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 Per $10.00 Per $10.00 Per $10.00 Per Share
Share (Minimum Share (Midpoint Share (Maximum (15% above
of Range) of Range) of Range) Maximum of Range)
--------- --------- --------- -----------------
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds ...................................... $ 59,500 $ 70,000 $ 80,500 $ 92,575
Plus: Shares acquired by Foundation ................. 1,785 2,100 2,415 2,777
--------- --------- --------- ---------
Pro forma market capitalization ................ $ 61,285 $ 72,100 $ 82,915 $ 95,352
========= ========= ========= =========
Gross proceeds ...................................... $ 59,500 $ 70,000 $ 80,500 $ 92,575
Less offering expenses and commissions .............. 1,595 1,711 1,826 1,959
--------- --------- --------- ---------
Estimated net proceeds ......................... $ 57,905 $ 68,289 $ 78,674 $ 90,616
Less: Shares purchased by the ESOP .................. (4,903) (5,768) (6,633) (7,628)
Shares purchased by the RRP .................... (2,451) (2,884) (3,317) (3,814)
One-time cash Merger-related expenses(1) ....... (6,400) (6,400) (6,400) (6,400)
--------- --------- --------- ---------
Total estimated net proceeds, as adjusted(1) ........ $ 44,151 $ 53,237 $ 62,324 $ 72,774
========= ========= ========= =========
Net income(2):
Historical combined ............................ $ 5,229 $ 5,229 $ 5,229 $ 5,229
Pro forma income on net proceeds,
as adjusted .................................. 1,423 1,715 2,008 2,345
Pro forma ESOP adjustment(3) ................... (196) (231) (265) (305)
Pro forma RRP adjustment(4) .................... (294) (346) (398) (458)
--------- --------- --------- ---------
Pro forma net income ........................... $ 6,162 $ 6,367 $ 6,574 $ 6,811
========= ========= ========= =========
Diluted net income per share(2)(5):
Historical Combined ............................ $ 0.58 $ 0.52 $ 0.48 $ 0.43
Pro forma income on net proceeds,
as adjusted .................................. 0.16 0.17 0.18 0.19
Pro forma ESOP adjustment(3) ................... (0.02) (0.02) (0.02) (0.03)
Pro forma RRP adjustment(4) .................... (0.03) (0.03) (0.04) (0.04)
--------- --------- --------- ---------
Pro forma diluted net income
per share(4)(6) .............................. $ 0.69 $ 0.64 $ 0.60 $ 0.55
========= ========= ========= =========
Offering price to pro forma diluted net
income per share(5) ................................ 14.49x 15.63x 16.67x 18.18x
========= ========= ========= =========
Stockholders' equity:
Historical Combined ............................ $ 75,197 $ 75,197 $ 75,197 $ 75,197
Estimated net proceeds ......................... 57,905 68,289 78,674 90,616
Plus: Shares issued to Foundation ............. 1,785 2,100 2,415 2,777
Less: Contribution to Foundation .............. (1,785) (2,100) (2,415) (2,777)
Plus: Tax benefit of contribution
to Foundation .......................... 714 840 966 1,111
Less: Merger-related non-recurring
expenses, net of tax(1) ................. (4,800) (4,800) (4,800) (4,800)
Less: Common stock acquired by
the ESOP(3) ............................. (4,903) (5,768) (6,633) (7,628)
Common stock to be acquired
by the RRP(4) ...................... (2,451) (2,884) (3,317) (3,814)
--------- --------- --------- ---------
Pro forma stockholders' equity(4)(6)(7) ........ $ 121,662 $ 130,874 $ 140,087 $ 150,682
========= ========= ========= =========
Stockholders' equity per share(5):
Historical Combined ............................ $ 8.06 $ 7.22 $ 6.54 $ 5.90
Estimated net proceeds ......................... 6.21 6.56 6.84 7.11
Plus: Shares issued to Foundation ............. 0.19 0.20 0.21 0.22
Less: Contribution to Foundation .............. (0.19) (0.20) (0.21) (0.22)
Plus: Tax benefit of contribution
to Foundation ......................... 0.08 0.08 0.08 0.09
Less: Merger-related non-recurring
expenses, net of tax(1) ............... (0.51) (0.46) (0.42) (0.38)
Less: Common stock acquired by the
ESOP(3) ............................... (0.53) (0.55) (0.58) (0.60)
Common stock to be acquired
by the RRP(4) ...................... (0.26) (0.28) (0.29) (0.30)
--------- --------- --------- ---------
Pro forma stockholders' equity per
share(4)(6)(7) ............................... $ 13.05 $ 12.57 $ 12.17 $ 11.82
========= ========= ========= =========
Purchase price as a percentage of pro forma
stockholders' equity per share(5) ................. 76.63% 79.55% 82.17% 84.60%
========= ========= ========= =========
- --------------
(1) Estimated net proceeds, as adjusted, consist of the estimated net proceeds
from the Offering minus (i) the proceeds attributable to the purchase by the
ESOP; and (ii) the value of the shares to be purchased by the RRP, subject
to stockholder approval, after the Conversion at an assumed purchase price
of $10.00 per share; and (iii) certain one-time Merger-related cash expenses
expected to be paid concurrently with consummation of the Conversion and the
Merger. For the purposes of this presentation, one-time cash Merger-related
expenses of $7.5 million (pre-tax) which are expected to be paid upon
consummation of the Conversion and the Merger are reflected as an adjustment
to net proceeds for purposes of the pro forma net income and pro forma net
income per share information. For purposes of pro forma stockholders' equity
and pro forma stockholders' equity per share, $4.8 million of Merger-related
non-recurring expenses, net of tax are deducted.
(2) Does not give effect to the non-recurring expense that will be recognized in
1998 as a result of the establishment of the Foundation. The Holding Company
will recognize an after-tax expense for the amount of the contribution to
the Foundation which is expected to be $1.1 million, $1.3 million, $1.4
million and $1.7 million at the minimum, midpoint, maximum and maximum, as
adjusted. Assuming the contribution to the Foundation was expensed during
the year ended June 30, 1998, pro forma net earnings (loss) per share would
be $0.57, $0.51, $0.47 and $0,42, at the minimum, midpoint, maximum and
maximum, as adjusted, respectively. Per share net income data is based on
8,982,199, 9,980,063, 10,977,927 and 12,125,471 shares outstanding which
represents Conversion Shares sold in the Offering, shares contributed to the
Foundation, Exchange Shares issued in the Merger and shares to be allocated
or distributed under the ESOP and RRP for the period presented.
Additionally, SFS stock options are incorporated into earnings per share
calculations based on the treasury method.
(Footnotes continued on next page)
31
(3) It is assumed that 8.0% of the Conversion Shares sold in the Offering will
be purchased by the ESOP with funds loaned by the Holding Company. The
Holding Company and the Bank intend to make annual contributions to the ESOP
in an amount at least equal to the principal and interest requirement of the
debt. The pro forma net earnings assumes (i) that the loan to the ESOP is
payable over 15 years, with the ESOP shares having an average fair value of
$10.00 per share in accordance with SOP 93-6, entitled "Employers'
Accounting for Employee Stock Ownership Plans," of the AICPA, and (ii) the
effective tax rate was 40.0% for the period. See "Management - Benefits -
Employee Stock Ownership Plan."
(4) It is assumed that the RRP will purchase, following stockholder approval of
such plan, a number of shares of Holding Company Common Stock equal to 4.0%
of the Conversion Shares for issuance to directors, officers and employees.
Funds used by the RRP to purchase the shares initially will be contributed
to the RRP by the Holding Company. It is further assumed that the shares
were acquired by the RRP at the beginning of the period presented in open
market purchases at the purchase price and that 20.0% of the amount
contributed, net of taxes, was an amortized expense during the year ended
June 30, 1998. The issuance of authorized but unissued shares of Holding
Company Common Stock pursuant to the RRP in the amount of 4.0% of the
Conversion Shares sold in the Offering would dilute the voting interests of
existing stockholders by approximately 3.0% and under such circumstances pro
forma net earnings per share for the year ended June 30, 1998 would be
$0.68, $0.63, $0.59 and $0.55, at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, respectively, and pro
forma stockholders' equity per share at June 30, 1998 would be $12.96,
$12.50, $12.13 and $11.78 at the minimum, midpoint, maximum and 15% above
the maximum of such range, respectively. There can be no assurance that the
actual purchase price of shares purchased by or issued to the RRP will be
equal to the purchase price. See "Management - Benefits - Recognition and
Retention Plan."
(5) The diluted per share calculations are determined by adding the number of
Conversion Shares assumed to be issued in the Conversion, Exchange Shares
issued in the Merger as well as shares of Holding Company Common Stock to be
contributed to the Foundation and, for purposes of calculating earnings per
share, in accordance with SOP 93-6, subtracting 473,937 shares, 557,573
shares, 641,209 shares, and 737,391 shares, respectively, representing the
ESOP shares which have not been committed for release during the year ended
June 30, 1998. The calculation of ESOP shares released assumes that such
shares are earned and released ratably over the year, using a 15-year
amortization period. Additionally, SFS stock options are incorporated into
earnings per share calculations based on the treasury method. Thus, it is
assumed at June 30, 1998 that 8,982,199, 9,980,063, 10,977,927 and
12,125,471 shares of Holding Company Common Stock are outstanding at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. Assuming the uncommitted ESOP shares were not
subtracted from the number of shares of Holding Company Common Stock
outstanding at June 30, 1998, the offering price as a multiple of pro forma
net earnings per share would be 15.35x, 16.55x, 17.67x and 18.89x at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. For purposes of calculating pro forma
stockholders' equity per share, it is assumed that shares outstanding total
9,330,951, 10,412,451, 11,493,951 and 12,737,676 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range.
(6) No effect has been given to the issuance of additional shares of Holding
Company Common Stock pursuant to the Stock Option and Incentive Plan, which
will be adopted by the Holding Company following the Conversion and
presented for approval by stockholders at an annual or special meeting of
stockholders of the Holding Company held no earlier than six months
following the consummation of the Conversion. If the Option Plan is approved
by the stockholders, an amount equal to 10% of the Conversion Shares sold in
the Offering, including shares issued to the Foundation, or 612,850,
721,000, 829,150 and 953,522 shares at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively, will
be reserved for future issuance upon the exercise of options to be granted
under the Option Plan. The issuance of Holding Company Common Stock pursuant
to the exercise of options under the Option Plan will result in the dilution
of existing stockholders' interests. Assuming stockholder approval of the
Option Plan, that all these options were exercised at the beginning of the
period at an exercise price of $10.00 per share and that the shares to fund
the RRP are acquired thorough open market purchases at the purchase price,
pro forma diluted net earnings per share for the year ended June 30, 1998
would be $0.66, $0.62, $0.58 and $0.54 at the minimum, midpoint, maximum and
15% above the maximum of the Estimated Valuation Range, respectively, and
pro forma stockholders' equity per share at June 30, 1998 would be $12.85,
$12.40, $12.04 and $11.70 at the minimum, midpoint, maximum and 15% above
the maximum of such range, respectively. See "Management - Benefits - Stock
Option and Incentive Plan."
(7) The retained earnings of the Bank will be substantially restricted after the
Conversion by virtue of the liquidation account to be established in
connection with the Conversion. See "Dividend Policy" and "The Conversion
and the Merger - Effects of the Conversion and the Merger - Effects on
Liquidation Rights." In addition, certain distributions from the Bank's
retained earnings may be treated as begin from its accumulated bad debt
reserve for tax purposes, which would cause the Bank to have additional
taxable income. See "Taxation - Federal Taxation." Pro forma stockholders'
equity and pro forma stockholders' equity per share (i) reflect certain
nonrecurring charges, net of tax (see Note 5 to the Pro Forma Unaudited
Consolidated Statement of Financial Condition) and (ii) do not give effect
to the liquidation account or the bad debt reserves established by the Bank
for federal income tax purposes in the event of a liquidation of the Bank.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offering.
32
PRO FORMA DATA WITHOUT MERGER
At or For the Year Ended June 30, 1998
-----------------------------------------------------------------------
5,950,000 7,000,000 8,050,000 9,257,500
Conversion Conversion Conversion Conversion
Shares Sold at Shares Sold at Shares Sold at Shares Sold at
$10.00 Per $10.00 Per $10.00 Per $10.00 Per Share
Share (Minimum Share (Midpoint Share (Maximum (15% above
of Range) of Range) of Range) Maximum of Range)
--------- --------- --------- -----------------
(Dollars in Thousands, Except Per Share Amounts)
Gross proceeds ................................... $ 59,500 $ 70,000 $ 80,500 $ 92,575
Plus: Shares acquired by Foundation .............. 1,785 2,100 2,415 2,777
--------- --------- --------- ---------
Pro forma market capitalization ............. $ 61,285 $ 72,100 $ 82,915 $ 95,352
========= ========= ========= =========
Gross proceeds ................................... $ 59,500 $ 70,000 $ 80,500 $ 92,575
Less offering expenses and commissions ........... 1,595 1,711 1,826 1,959
--------- --------- --------- ---------
Estimated net proceeds ...................... $ 57,905 $ 68,289 $ 78,674 $ 90,616
Less: Shares purchased by the ESOP ............... (4,903) (5,768) (6,633) (7,628)
Shares purchased by the RRP ................. (2,451) (2,884) (3,317) (3,814)
--------- --------- --------- ---------
Total estimated net proceeds,
as adjusted(1) ................................. $ 50,551 $ 59,637 $ 68,724 $ 79,174
========= ========= ========= =========
Net income(2):
Historical combined ......................... $ 4,087 $ 4,087 $ 4,087 $ 4,087
Pro forma income on net proceeds,
as adjusted ................................ 1,629 1,922 2,214 2,551
Pro forma ESOP adjustment(3) ................ (196) (231) (265) (305)
Pro forma RRP adjustment(4) ................. (294) (346) (398) (458)
--------- --------- --------- ---------
Pro forma net income ........................ $ 5,226 $ 5,432 $ 5,638 $ 5,875
========= ========= ========= =========
Diluted net income per share(2)(5):
Historical Combined ......................... $ 0.72 $ 0.61 $ 0.53 $ 0.46
Pro forma income on net proceeds,
as adjusted ................................ 0.29 0.29 0.29 0.29
Pro forma ESOP adjustment(3) ................ (0.03) (0.03) (0.03) (0.03)
Pro forma RRP adjustment(4) ................. (0.05) (0.05) (0.05) (0.05)
--------- --------- --------- ---------
Pro forma diluted net income
per share(4)(6) ........................... $ 0.93 $ 0.82 $ 0.74 $ 0.67
========= ========= ========= =========
Offering price to pro forma diluted
net income per share(5) ........................ 10.75x 12.20x 13.51x 14.93x
========= ========= ========= =========
Stockholders' equity:
Historical Combined ......................... $ 53,282 $ 53,282 $ 53,282 $ 53,282
Estimated net proceeds ...................... 57,905 68,289 78,674 90,616
Plus: Shares issued to Foundation .......... 1,785 2,100 2,415 2,777
Less: Contribution to Foundation ........... (1,785) (2,100) (2,415) (2,777)
Plus: Tax benefit of contribution
to Foundation ....................... 714 840 966 1,111
Less: Common stock acquired by
the ESOP(3) ........................ (4,903) (5,768) (6,633) (7,628)
Common stock to be acquired
by the RRP(4) ...................... (2,451) (2,884) (3,317) (3,814)
--------- --------- --------- ---------
Pro forma stockholders' equity(4)(6)(7) ..... $ 104,547 $ 113,759 $ 122,972 $ 133,567
========= ========= ========= =========
Stockholders' equity per share(5):
Historical Combined ......................... $ 8.69 $ 7.39 $ 6.43 $ 5.59
Estimated net proceeds ...................... 9.45 9.47 9.49 9.50
Plus: Shares issued to Foundation .......... 0.29 0.29 0.29 0.29
Less: Contribution to Foundation ........... (0.29) (0.29) (0.29) (0.29)
Plus: Tax benefit of contribution
to Foundation ...................... 0.12 0.12 0.12 0.12
Less: Common stock acquired by
the ESOP(3) ........................ (0.80) (0.80) (0.80) (0.80)
Common stock to be acquired
by the RRP(4) ...................... (0.40) (0.40) (0.40) (0.40)
--------- --------- --------- ---------
Pro forma stockholders' equity
per share(4)(6)(7) ........................ $ 17.06 $ 15.78 $ 14.84 $ 14.01
========= ========= ========= =========
Purchase price as a percentage of pro forma
stockholders' equity per share(5) .............. 58.62% 63.37% 67.39% 71.38%
========= ========= ========= =========
- ----------
(1) Estimated net proceeds, as adjusted, consist of the estimated net proceeds
from the Offering minus (i) the proceeds attributable to the purchase by the
ESOP; and (ii) the value of the shares to be purchased by the RRP, subject
to stockholder approval, after the Conversion at an assumed purchase price
of $10.00 per share.
(2) Does not give effect to the non-recurring expense that will be recognized in
1998 as a result of the establishment of the Foundation. The Holding Company
will recognize an after-tax expense for the amount of the contribution to
the Foundation which is expected to be $1.1 million, $1.3 million, $1.4
million and $1.7 million at the minimum, midpoint, maximum and maximum, as
adjusted. Assuming the contribution to the Foundation was expensed during
the year ended June 30, 1998, pro forma net earnings (loss) per share would
be $0.73, $0.63, $0.55 and $0,48, at the minimum, midpoint, maximum and
maximum, as adjusted, respectively. Per share net income data is based on
5,654,563, 6,652,427, 7,650,291 and 8,797,834 shares outstanding which
represents Conversion Shares sold in the Offering, shares contributed to the
Foundation and shares to be allocated or distributed under the ESOP and RRP
for the period presented.
(Footnotes continued on next page)
33
(3) It is assumed that 8.0% of the Conversion Shares sold in the Offering will
be purchased by the ESOP with funds loaned by the Holding Company. The
Holding Company and the Bank intend to make annual contributions to the ESOP
in an amount at least equal to the principal and interest requirement of the
debt. The pro forma net earnings assumes (i) that the loan to the ESOP is
payable over 15 years, with the ESOP shares having an average fair value of
$10.00 per share in accordance with SOP 93-6, entitled "Employers'
Accounting for Employee Stock Ownership Plans," of the AICPA, and (ii) the
effective tax rate was 40.0% for the period. See "Management - Benefits -
Employee Stock Ownership Plan."
(4) It is assumed that the RRP will purchase, following stockholder approval of
such plan, a number of shares of Holding Company Common Stock equal to 4.0%
of the Conversion Shares for issuance to directors, officers and employees.
Funds used by the RRP to purchase the shares initially will be contributed
to the RRP by the Holding Company. It is further assumed that the shares
were acquired by the RRP at the beginning of the period presented in open
market purchases at the purchase price and that 20.0% of the amount
contributed, net of taxes, was an amortized expense during the year ended
June 30, 1998. The issuance of authorized but unissued shares of Holding
Company Common Stock pursuant to the RRP in the amount of 4.0% of the
Conversion Shares sold in the Offering would dilute the voting interests of
existing stockholders by approximately 3.0% and under such circumstances pro
forma net earnings per share for the year ended June 30, 1998 would be
$0.90, $0.80, $0.72 and $0.65, at the minimum, midpoint, maximum and 15%
above the maximum of the Estimated Valuation Range, respectively, and pro
forma stockholders' equity per share at June 30, 1998 would be $16.79,
$15.56, $14.15 and $13.85 at the minimum, midpoint, maximum and 15% above
the maximum of such range, respectively. There can be no assurance that the
actual purchase price of shares purchased by or issued to the RRP will be
equal to the purchase price. See "Management - Benefits - Recognition and
Retention Plan."
(5) The diluted per share calculations are determined by adding the number of
Conversion Shares assumed to be issued in the Conversion, as well as shares
of Holding Company Common Stock to be contributed to the Foundation and, for
purposes of calculating earnings per share, in accordance with SOP 93-6,
subtracting 473,937 shares, 557,573 shares, 641,209 shares, and 737,391
shares, respectively, representing the ESOP shares which have not been
committed for release during the year ended June 30, 1998. The calculation
of ESOP shares released assumes that such shares are earned and released
ratably over the year, using a 15-year amortization period. Thus, it is
assumed at June 30, 1998 that 5,654,563, 6,652,427, 7,650,291 and 8,797,8341
shares of Holding Company Common Stock are outstanding at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively. Assuming the uncommitted ESOP shares were not
subtracted from the number of shares of Holding Company Common Stock
outstanding at June 30, 1998, the offering price as a multiple of pro forma
net earnings per share would be 11.73x, 13.27x, 14.71x and 16.23x at the
minimum, midpoint, maximum and 15% above the maximum of the Estimated
Valuation Range, respectively. For purposes of calculating pro forma
stockholders' equity per share, it is assumed that shares outstanding total
6,128,500, 7,210,000, 8,291,500 and 9,535,225 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range.
(6) No effect has been given to the issuance of additional shares of Holding
Company Common Stock pursuant to the Stock Option and Incentive Plan, which
will be adopted by the Holding Company following the Conversion and
presented for approval by stockholders at an annual or special meeting of
stockholders of the Holding Company held no earlier than six months
following the consummation of the Conversion. If the Stock Option and
Incentive Plan is approved by the stockholders, an amount equal to 10% of
the Conversion Shares sold in the Offering, including shares issued to the
Foundation, or 612,850, 721,000, 829,150 and 953,522 shares at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively, will be reserved for future issuance upon the exercise
of options to be granted under the Stock Option and Incentive Plan. The
issuance of Holding Company Common Stock pursuant to the exercise of options
under the Stock Option and Incentive Plan will result in the dilution of
existing stockholders' interests. Assuming stockholder approval of the Stock
Option and Incentive Plan, that all these options were exercised at the
beginning of the period at an exercise price of $10.00 per share and that
the shares to fund the RRP are acquired thorough open market purchases at
the purchase price, pro forma diluted net earnings per share for the year
ended June 30, 1998 would be $0.87, $0.77, $0.70 and $0.63 at the minimum,
midpoint, maximum and 15% above the maximum of the Estimated Valuation
Range, respectively, and pro forma stockholders' equity per share at June
30, 1998 would be $16.42, $15.25, $14.39 and $13.64 at the minimum,
midpoint, maximum and 15% above the maximum of such range, respectively. See
"Management - Benefits - Stock Option and Incentive Plan."
(7) The retained earnings of the Bank will be substantially restricted after the
Conversion by virtue of the liquidation account to be established in
connection with the Conversion. See "Dividend Policy" and "The Conversion
and the Merger - Effects of the Conversion and the Merger - Effects on
Liquidation Rights." In addition, certain distributions from the Bank's
retained earnings may be treated as begin from its accumulated bad debt
reserve for tax purposes, which would cause the Bank to have additional
taxable income. See "Taxation - Federal Taxation." Pro forma stockholders'
equity and pro forma stockholders' equity per share (i) reflect certain
nonrecurring charges, net of tax (see Note 5 to the Pro Forma Unaudited
Consolidated Statement of Financial Condition) and (ii) do not give effect
to the liquidation account or the bad debt reserves established by the Bank
for federal income tax purposes in the event of a liquidation of the Bank.
(8) As adjusted to give effect to an increase in the number of shares which
could occur due to an increase in the Estimated Valuation Range of up to 15%
to reflect changes in market and financial conditions following the
commencement of the Offering.
34
COMPARISON OF VALUATION AND PRO FORMA INFORMATION WITH
NO FOUNDATION BUT WITH MERGER
In the event that the Foundation were not being established as part of
the Conversion and the Merger was consummated immediately after the Conversion,
RP Financial has estimated that the pro forma aggregate market capitalization of
the Holding Company would be approximately $117.1 million at the maximum, which
is approximately $2.2 million greater than the pro forma aggregate market
capitalization of the Holding Company if the Foundation is included, and would
result in an approximately $4.6 million increase in the amount of Holding
Company Common Stock offered for sale in the Conversion. The pro forma price to
book ratio and pro forma price to earnings ratio would be approximately the same
under both the current appraisal and the estimate of the value of the Holding
Company without the Foundation. Further, assuming the maximum of the Estimated
Valuation Range, pro forma stockholders' equity per share and pro forma earnings
per share would be substantially the same at $12.17 and $12.25, respectively,
and $0.60 and $0.60 respectively, with the Foundation or without the Foundation.
The pro forma price to book ratio and the pro forma price to earnings ratio are
substantially the same with and without the Foundation at the maximum at 82.17%
and 81.63%, respectively, and 16.67x and 16.67x, respectively. There is no
assurance that in the event the Foundation was not formed that the appraisal
prepared at the time would have concluded that the pro forma market value of the
Holding Company would be the same as that estimated herein. Any appraisals
prepared at that time would be based on the facts and circumstances existing at
the time, including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Valuation Range, assuming the Conversion
and the Merger were completed at June 30, 1998.
At the Maximum
At the Minimum At the Midpoint At the Maximum As Adjusted
----------------------- ---------------------- ----------------------- -----------------------
With No With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Estimated offering amount . $ 59,500 $ 62,900 $ 70,000 $ 74,000 $ 80,500 $ 85,100 $ 92,575 $ 97,865
Pro forma market
capitalization ........... 93,310 94,925 104,125 106,025 114,940 117,125 127,377 129,890
Total assets .............. 765,074 767,527 774,286 777,172 783,499 786,817 794,094 797,910
Total liabilities ......... 643,412 643,412 643,412 643,412 643,412 643,412 643,412 643,412
Pro forma stockholders'
equity ................... 121,662 124,115 130,874 133,760 140,087 143,405 150,682 154,498
Pro forma consolidated net
earnings ................ 6,162 6,251 6,367 6,472 6,574 6,695 6,811 6,950
Pro forma stockholders'
equity per share ......... 13.05 13.06 12.57 12.61 12.17 12.25 11.82 11.90
Pro forma consolidated net
earnings per share ....... 0.69 0.69 0.64 0.64 0.60 0.60 0.55 0.55
Pro forma pricing ratios:
Offering price as a
percentage of pro
forma stockholders'
equity per share ........ 76.63% 76.57% 79.55% 79.30% 82.17% 81.63% 84.60% 84.03%
Offering price to pro
forma net earnings
per share(1) ............ 14.49 14.49 15.63 15.63 16.67 16.67 18.18 18.18
Pro forma market
capitalization
to assets ............... 12.20 12.37 13.45 13.64 14.67 14.89 16.04 16.28
Pro forma financial ratios:
Return on assets(2) .... 0.81 0.81 0.84 0.85 0.84 0.85 0.86 0.87
Return on stockholders'
equity(3) ............. 5.06 5.04 4.69 4.67 4.69 4.67 4.52 4.50
Stockholders' equity to
assets ................ 15.90 16.17 17.88 18.23 17.88 18.23 18.98 19.36
(Footnotes on following page)
- -------------
(1) If the contribution to the Foundation had been expensed during the year
ended June 30, 1998, the offering price to pro forma net earnings per share
would have been 17.64x, 19.54x, 21.42x and 23.57x at the minimum, midpoint,
maximum and maximum, as adjusted, respectively.
(2) If the contribution to the Foundation had been expensed during the year
ended June 30,1998, return on assets would have been 0.67%, 0.66%, 0.65% and
0.65% at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(3) If the contribution to the Foundation had been expensed during the year
ended June 30,1998, return on stockholders' equity would have been 4.18%,
3.90%, 3.66% and 3.41% at the minimum, midpoint, maximum and maximum, as
adjusted, respectively.
35
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
WITH NO FOUNDATION AND WITHOUT MERGER
In the event that the Foundation were not being established as part of
the Conversion and the Merger did not take place, RP Financial has estimated
that the pro forma aggregate market capitalization of the Holding Company would
be approximately $85.1 million at the maximum, which is approximately $2.2
million greater than the pro forma aggregate market capitalization of the
Holding Company if the Foundation is included, and would result in an
approximately $4.6 million increase in the amount of Holding Company Common
Stock offered for sale in the Conversion. The pro forma price to book ratio and
pro forma price to earnings ratio would be approximately the same under both the
current appraisal and the estimate of the value of the Holding Company without
the Foundation. Further, assuming the maximum of the Estimated Valuation Range,
pro forma stockholders' equity per share and pro forma earnings per share would
be substantially the same at $14.84 and $14.84, respectively, and $0.74 and
$0.74 respectively, with the Foundation or without the Foundation. The pro forma
price to book ratio and the pro forma price to earnings ratio are substantially
the same with and without the Foundation at the maximum at 67.39% and 67.39%,
respectively, and 13.51x and 13.51x, respectively. There is no assurance that in
the event the Foundation was not formed that the appraisal prepared at the time
would have concluded that the pro forma market value of the Holding Company
would be the same as that estimated herein. Any appraisals prepared at that time
would be based on the facts and circumstances existing at the time, including,
among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing
ratios and financial data and ratios, at the minimum, midpoint, maximum and
maximum, as adjusted, of the Estimated Valuation Range, assuming the Conversion
and the Merger were completed at June 30, 1998.
At the Maximum
At the Minimum At the Midpoint At the Maximum As Adjusted
----------------------- ---------------------- ----------------------- -----------------------
With No With No With No With No
Foundation Foundation Foundation Foundation Foundation Foundation Foundation Foundation
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
Estimated offering amount . $ 59,500 $ 62,900 $ 70,000 $ 74,000 $ 80,500 $ 85,100 $ 92,575 $ 97,865
Pro forma market
capitalization ........... 61,285 62,900 72,100 74,000 82,915 85,100 95,352 97,865
Total assets .............. 586,981 589,434 596,193 599,079 605,406 608,724 616,001 619,817
Total liabilities ......... 482,434 482,434 482,434 482,434 482,434 482,434 482,434 482,434
Pro forma stockholders'
equity ................... 104,547 107,000 113,759 116,645 122,972 126,290 133,567 137,383
Pro forma consolidated net
earnings ................. 5,226 5,315 5,432 5,537 5,638 5,759 5,875 6,014
Pro forma stockholders'
equity per share ......... 17.06 17.01 15.78 15.76 14.84 14.84 14.01 14.03
Pro forma consolidated net
earnings per share ....... 0.93 0.92 0.82 0.82 0.74 0.74 0.67 0.67
Pro forma pricing ratios:
Offering price as a
percentage of pro forma
stockholders' equity
per share ............. 58.62% 58.79% 63.37% 63.45% 67.39% 67.39% 71.38% 71.28%
Offering price to pro
forma net earnings
per share(1) .......... 10.75% 10.87% 12.20% 12.20% 13.51% 13.51% 14.93% 14.93%
Pro forma market
capitalization to
assets ................ 10.44% 10.67% 12.09% 12.35% 13.70% 13.98% 15.48% 15.79%
Pro forma financial ratios:
Return on assets(2) .... 0.89% 0.90% 0.91% 0.92% 0.93% 0.95% 0.96% 0.97%
Return on stockholders'
equity(3) ............. 5.00% 4.97% 4.78% 4.75% 4.58% 4.56% 4.40% 4.38%
Stockholders' equity
to assets ............. 17.81% 18.15% 19.08% 19.47% 20.31% 20.75% 21.68% 22.17%
- ---------------
(1) If the contribution to the Foundation had been expensed during the year
ended June 30, 1998, the offering price to pro forma net earnings per share
would have been 13.58x, 15.90x, 18.20x and 20.81x at the minimum, midpoint,
maximum and maximum, as adjusted, respectively.
(2) If the contribution to the Foundation had been expensed during the year
ended June 30,1998, return on assets would have been 0.71%, 0.70%, 0.69% and
0.69% at the minimum, midpoint, maximum and maximum, as adjusted,
respectively.
(3) If the contribution to the Foundation had been expensed during the year
ended June 30,1998, return on stockholders' equity would have been 3.99%,
3.68%, 3.42% and 3.17% at the minimum, midpoint, maximum and maximum, as
adjusted, respectively.
36
COHOES SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(000's omitted)
1998 1997 1996
---- ---- ----
INTEREST INCOME:
Interest and fees on mortgage loans ...................... $ 28,793 $ 28,236 $ 26,587
Consumer and other loans ................................. 4,780 4,930 5,516
Investment securities and securities available for sale .. 4,108 2,847 3,096
Federal funds sold and interest-bearing deposits ......... 742 272 184
------------- ------------- -------------
Total interest income ....................... 38,423 36,285 35,383
------------- ------------- -------------
INTEREST EXPENSE:
Deposits (Note 11) ....................................... 18,816 17,568 17,741
Mortgagors' escrow deposits .............................. 114 120 126
Borrowings ............................................... 332 133 297
------------- ------------- -------------
Total interest expense ...................... 19,262 17,821 18,164
------------- ------------- -------------
Net interest income ......................... 19,161 18,464 17,219
PROVISION FOR LOAN LOSSES (Note 7) ........................... 1,400 1,325 490
------------- ------------- -------------
Net interest income after provision
for loan losses ........................... 17,761 17,139 16,729
------------- ------------- -------------
NONINTEREST INCOME:
Service charges on deposits .............................. 746 765 741
Loan servicing revenue ................................... 495 568 605
Net gain (loss) on sale of mortgage loans ................ 81 106 (20)
Other .................................................... 1,421 1,351 1,141
------------- ------------- -------------
Total noninterest income .................... 2,743 2,790 2,467
------------- ------------- -------------
NONINTEREST EXPENSE:
Compensation and benefits ................................ 7,322 6,253 6,286
Occupancy ................................................ 2,686 2,493 2,247
FDIC deposit insurance premium ........................... 65 37 33
Advertising .............................................. 430 307 291
Other .................................................... 3,264 3,224 3,062
------------- ------------- -------------
Total noninterest expense ................... 13,767 12,314 11,919
------------- ------------- -------------
Income before income tax expense ............ 6,737 7,615 7,277
INCOME TAX EXPENSE (Note 15) ................................. 2,650 2,972 2,882
------------- ------------- -------------
Net income .................................. $ 4,087 $ 4,643 $ 4,395
============= ============= =============
The accompanying notes are an integral part of these statements.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF COHOES SAVINGS
General
The Holding Company has only recently been formed and accordingly has
no results of operations at this time. As a result, the following discussion
principally reflects the operations of the Bank and its subsidiaries. The Bank's
primary market area, with 16 full-service branches and one public accommodation
office (a limited purpose convenience office) which is expected to be converted
into a branch office in October, 1998, consists of Albany, Saratoga, Schenectady
and Rensselaer counties in New York and a portion of Warren county in New York.
The Bank has been, and intends to continue to be, a community-oriented financial
institution offering a variety of financial services. The Bank's principal
business is attracting deposits from customers within its market area and
investing those funds, together with funds from operations and, to a much lesser
extent, borrowings, in primarily residential mortgage loans, including home
equity loans, and to a lesser extent, in consumer loans, commercial real estate,
construction loans and commercial business loans and government and corporate
debt securities. See "Business of the Bank - Lending Activities". The financial
condition and operating results of the Bank are dependent on its net interest
income which is the difference between the interest income earned on its assets,
primarily loans and investments, and the interest expense on its liabilities,
primarily deposits and borrowings. Net income is also affected by other
operating income, such as loan servicing income, fees on deposit related
services, gains on sales of securities, other operating expenses, such as
compensation and occupancy expenses, provisions for loan losses, and Federal and
state income taxes.
The Bank's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards and actions of
regulatory agencies. Future changes in applicable laws, regulations or
government policies may have a material impact on the Bank. Lending activities
are substantially influenced by the demand for and supply of housing,
competition among lenders, and level of interest rates and the availability of
funds. The ability to gather deposits and the cost of funds are influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments, including mutual funds and stocks.
Market Risk and Asset/Liability Management
Interest rate risk is the most significant market risk affecting the
Bank. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Bank's
business activities.
Interest rate risk is defined as an exposure to a movement in interest
rates that could have an adverse effect on the Bank's net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than
interest-earning assets. When interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period, a significant
increase in market rates of interest could adversely affect net income.
Similarly, when earning assets mature or reprice more quickly than
interest-bearing liabilities, falling interest rates could result in a decrease
in net income.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Bank's interest rate risk. Management's asset/liability
committee meets monthly to review the Bank's interest rate risk position and
profitability, and to recommend adjustments for consideration by the Board of
Trustees. Management also reviews loan and deposit pricing, and the Bank's
securities portfolio, formulates investment strategies and oversees the timing
and implementation of transactions. Notwithstanding the Bank's interest rate
risk management activities, the potential for changing interest rates is an
uncertainty that can adversely affect net income.
In adjusting the Bank's asset/liability position, the Board and
management attempt to manage the Bank's interest rate risk while enhancing net
interest margins. At times, depending on the level of general interest rates,
the relationship between long- and short-term interest rates, market conditions
and competitive factors, the Board and management may determine to increase the
Bank's interest rate risk position somewhat in order to increase its net
interest margins. The Bank's results of operations and net portfolio values
remain vulnerable to changes in interest rates and to fluctuations in the
difference between long- and short-term interest rates.
38
Consistent with the asset/liability management philosophy described
above, the Bank has taken several steps to manage its interest rate risk. First,
the Bank has structured the security portfolio to shorten the maturities of its
earning assets. The Bank's recent purchases of securities have had terms to
maturity of seven years or less. At June 30, 1998, the Bank had securities with
a carrying value of $76.2 million with contractual maturities of five years or
less. The Bank's residential real estate portfolio is composed of either one,
three or five year adjustable rate mortgages or floating-rate home equity loans,
except for approximately $103.5 million of fixed rate products. The Bank also
manages interest rate risk by emphasizing lower cost, more stable non-time
deposit accounts. In the current low rate environment, longer-term time deposits
are welcomed although not particularly popular with the Bank's customer base.
One approach used to quantify interest rate risk is the net market
value analysis. In essence, this analysis calculates the difference between the
present value of liabilities and the present value of expected cash flows from
assets and off-balance sheet contracts. A second approach is to quantify the
impact on net interest income due to changes in cash flows, interest income and
interest expense resulting from shifts in interest rates. The following tables
set forth, at June 30, 1998, an analysis of the Bank's interest rate risk as
measured by the estimated changes in net market value of its assets and
liabilities and net interest income resulting from instantaneous and sustained
parallel shifts in interest rates (+ or - 200 basis points, measured in 50 basis
point increments).
Assumed Change Net
in Interest Rates Interest Dollar Percent
(Basis Points) Income Change Change
------ ------ ------
-200 $ 19,986 $ 826 4.31%
-150 19,770 610 3.18
-100 19,244 84 0.44
-50 19,204 44 0.23
0 19,160 -- 0.00
+50 19,153 (7) (0.04)
+100 19,137 (23) (0.12)
+150 19,056 (104) (0.54)
+200 18,918 (242) (1.26)
Assumed Change Net
in Interest Rates Market Dollar Percent
(Basis Points) Value Change Change
----- ------ ------
-200 $ 99,941 $ 10,985 12.35%
-150 97,343 8,387 9.43
-100 94,643 5,687 6.39
-50 91,845 2,889 3.25
0 88,956 -- 0.00
+50 85,741 (3,215) (3.61)
+100 82,151 (6,805) (7.65)
+150 79,056 (9,900) (11.13)
+200 75,804 (13,152) (14.78)
Certain assumptions utilized by management in assessing the interest
rate risk of the Bank were employed in preparing data included in the preceding
table. These assumptions were based upon proprietary data selected by management
and are reflective of historical results or current market conditions. These
assumptions relate to interest rates, repayment rates, deposit decay rates, and
the market values of certain assets under the various interest rate scenarios.
Prepayment assumptions for mortgage-backed securities and residential
mortgage loans were based upon industry standards for prepayments. The Bank's
mortgage-backed securities and residential mortgages are the only assets or
liabilities which management assumed possess optionality for purposes of
determining market value changes.
39
Management assumed that non-maturity deposits could be maintained with
rate adjustments not directly proportionate to the change in market interest
rate. These assumptions are based upon management's analysis of its customer
base and competitive factors.
The net market value and net interest income tables presented above are
predicated upon a stable balance sheet with no growth or change in asset or
liability mix. In addition, the net market value table is based upon the present
value of discounted cash flows using management's estimates of current
replacement rates to discount the cash flows. The net interest income table is
based upon a cash flow simulation of the Bank's existing assets and liabilities.
It was also assumed that delinquency rates would not change as a result of
changes in interest rates although there can be no assurance that this will be
the case. Even if interest rates change in the designated amounts, there can be
no assurance that the Bank's assets and liabilities would perform as set forth
above. Also, a change in the US Treasury rates in the designated amounts
accompanied by a change in the shape of the Treasury yield curve would cause
changes to the net market value and net interest income other than those
indicated above.
The Bank does not currently engage in trading activities or use
derivative instruments to manage interest rate risk. Instruments such as
interest rate swaps, caps and floors may be utilized under certain interest rate
risk scenarios in order to manage interest rate risk. Such activities may be
permitted with the approval of the Board of Trustees, and management continually
evaluates the usefulness of such instruments in managing interest rate risk.
Analysis of Net Interest Income
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income is affected by the relative amounts of interest-earning assets
and interest-bearing liabilities, and the interest rates earned or paid on them.
40
The following table presents, for the periods indicated, the total
dollar amount of interest income from the average interest-earning assets and
the resultant yields earned, the total dollar amount of interest expense on
average interest-bearing liabilities and the resultant rates paid, expressed
both in dollars and percentages as well as the weighted average yields earned
and rates paid. No tax equivalent adjustments were made. All average balances
are daily average balances. Nonaccruing loans have been included in the table as
loans carrying zero yield.
Average Year Ended June 30,
Yield ---------------------------------------------------------------------------------------------
Earned/ 1998 1997 1996
Average ----------------------------- ------------------------------- ----------------------------
Rate Paid at Average Interest Average Interest Average Interest
June 30, Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
1998 Balance Paid Rate Balance Paid Rate Balance Paid Rate
---- ------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets
Loans receivable ......... 8.09% $404,781 $ 33,573 8.29% $401,262 $ 33,166 8.27% $390,273 $ 32,104 8.23%
Securities available
for sale ................ 6.18 30,336 1,933 6.37 19,330 1,253 6.48 14,350 872 6.08
Investment securities .... 6.28 30,372 1,926 6.34 22,240 1,373 6.17 31,950 1,993 6.24
Federal funds sold ....... 5.50 13,321 739 5.55 4,641 245 5.28 2,255 127 5.63
FHLB stock ............... 7.45 3,479 249 7.16 3,400 218 6.41 3,346 230 6.87
Other interest-earning
assets .................. 6.00 184 3 1.63 416 30 7.21 967 57 5.89
------- ------ ------- ------ ------- ------
Total interest-earning
assets ................. 7.72 482,473 38,423 7.96 451,289 36,285 8.04 443,141 35,383 7.98
------ ------ ------
Non-earning assets ........ 18,714 17,919 17,264
------- ------- -------
Total assets ............ $501,187 $469,208 $460,405
======== ======== ========
Interest-bearing
liabilities
Savings accounts ......... 3.00% $120,959 3,623 3.00 $123,518 3,698 2.99 $123,976 3,718 3.00
School savings accounts .. 5.50 15,112 837 5.54 11,895 661 5.56 8,271 460 5.56
Money market accounts .... 3.32 18,163 569 3.13 15,607 447 2.86 17,089 488 2.86
Demand deposits .......... 0.59 47,075 304 0.65 41,124 275 0.67 35,073 246 0.70
Time deposits ............ 5.78 230,794 13,483 5.84 215,183 12,487 5.80 214,420 12,829 5.98
Escrow accounts .......... 2.00 7,065 114 1.61 7,396 120 1.62 7,249 126 1.74
Borrowings ............... 6.05 5,467 332 6.07 2,392 133 5.56 4,694 297 6.33
------- ------ ------- ------ ------- ------
Total interest-bearing
liabilities ........... 4.28 444,635 19,262 4.33 417,115 17,821 4.27 410,772 18,164 4.42
------ ------ ------
Other liabilities ......... 4,677 5,033 6,898
Net worth ................. 51,875 47,060 42,735
------- ------- ------
Total liabilities and
net worth .............. $501,187 $469,208 $460,405
======== ======== ========
Net interest income ....... $19,161 $ 18,464 $ 17,219
======= ======== ========
Net interest rate
spread(1) ................ 3.44% 3.63% 3.77% 3.56%
==== ==== ==== ====
Net earning assets(2) ..... $ 37,838 $ 34,174 $ 32,369
======== ======== ========
Net yield on average
interest-earning
assets(3) ................ 3.97% 4.09% 3.89%
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities............... 1.09X 1.08X 1.08X
- ----------------
(1) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(2) Net earning assets represents total interest-earning assets less total
interest-bearing liabilities.
(3) Net yield on average interest-earning assets, or net interest margin,
represents net interest income as a percentage of average interest-earning
assets.
41
The following schedule presents the dollar amount of changes in
interest and dividend income and interest expense for major components of
earning assets and interest-bearing liabilities. It distinguishes between the
changes related to outstanding balances and those due to the changes in interest
rates. For each category of earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by prior-period rate) and (ii) changes in rate
(i.e., changes in rate multiplied by prior-period volume). For purposes of this
table, changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionally to the change due to volume and the change
due to rate.
Years Ended June 30, Years Ended June 30,
1998 vs. 1997 1997 vs. 1996
--------------------------------------- ---------------------------------------
Increase Increase
(Decrease) (Decrease)
Due to Total Due to Total
----------------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(In Thousands)
Interest and dividend income from:
Loans receivable................ $ 292 $ 115 $ 407 $ 908 $ 154 $ 1,062
Securities available for sale... 701 (21) 680 320 61 381
Investment securities........... 515 38 553 (600) (20) (620)
Federal Funds sold.............. 481 13 494 126 (8) 118
FHLB............................ 5 26 31 4 (16) (12)
Other interest-earning assets... (11) (16) (27) (38) 11 (27)
----------- ----------- ----------- ----------- ---------- -----------
Total interest and dividend income 1,983 155 2,138 720 182 902
--------- ---------- --------- ---------- ---------- ----------
Interest expense for:
Savings accounts................ (78) 2 (75) (14) (6) (20)
School savings accounts......... 178 (2) 176 201 -- 201
Money market accounts........... 77 44 122 (42) 1 (41)
Demand deposits................. 39 (10) 29 41 (12) 29
Time deposits................... 911 85 996 46 (385) (342)
Escrow accounts................. (5) (1) (6) 3 (9) (6)
Borrowings...................... 186 13 199 (131) (33) (164)
---------- ----------- ---------- ----------- ------------ -----------
Total interest expense 1,310 131 1,441 104 (447) (343)
---------- ----------- ---------- ----------- ----------- ------------
Net interest income............. $ 673 $ 24 $ 697 $ 616 $ 629 $ 1,245
========== =========== ========== ========== ========== =========
42
Financial Condition
Comparison of June 30, 1998 and June 30, 1997
Assets. Total assets at June 30, 1998 was $535.7 million, up $44.0
million, or 8.9% from the $491.7 million at June 30, 1997. The increase was
evenly divided with the loan portfolio, up $14.3 million, securities available
for sale up $13.2 million and investment securities up $20.1 million. This
growth in earning assets was funded by an increase in deposits from $429.4
million on June 30, 1997 to $449.5 million at June 30, 1998 and an increase in
borrowings of $19.9 million over the same period. These increases, as well as
fluctuations in other asset and liability categories, are discussed below.
Loans. The overall increase in total loans is primarily made up of
increases in one to four family real estate and commercial business loans offset
by a decrease in consumer loans. One- to four-family real estate loans increased
$14.8 million, from $243.6 million to $258.4 million. The growth in this
portfolio is primarily a result of the Bank's decision to retain in its
portfolio a limited amount of 15 to 30 year fixed rate one to four family real
estate loans at a time when adjustable rate loans are less popular. A portion of
these loans were retained and match funded using long-term FHLB advances. See
"Business of Cohoes Savings Bank -- Borrowings." Commercial business loans
increased from $12.1 million at June 30, 1997, to $15.0 million at June 30,
1998. Consumer loans decreased $2.5 million to a balance of $49.7 million at
June 30, 1998 from $52.2 million at June 30, 1997. Most of this decrease relates
to a reduction in outstanding balances on home equity lines of credit.
Allowance for Loan Losses. The allowance for loan losses increased from
$3.1 million at June 30, 1997 to $3.5 million at June 30, 1998, an increase of
$428,000. This increase is the result of the $1.4 million provision for loan
losses taken in the year ended June 30, 1998 offset by $972,000 in net
charge-offs for the same period. The adequacy of the allowance for loan losses
is evaluated quarterly by management based upon a review of significant loans,
with particular emphasis on nonperforming and delinquent loans that management
believes warrant special attention. At June 30, 1998 the allowance for loan
losses provided coverage of 62.5% of total nonperforming loans, up from 46.4% at
June 30, 1997. The balance of the allowance is maintained at a level which is,
in management's judgment, reflective of the amount of risk inherent in the loan
portfolio. See "Business of the Bank - Asset Quality - Allowance for Loan
Losses."
Securities Available for Sale and Investment Securities. The balances
of securities available for sale and investment securities (collectively
"securities") increased from $35.5 million and $25.3 million, respectively, at
June 30, 1997 to $48.7 million and $45.4 million, respectively, as of June 30,
1998. These increases were the result of the purchase of securities totaling
$82.9 million offset by paydowns, maturities and calls of securities totaling
$49.5 million and sales totaling $60,000 during the year ended June 30, 1998.
Management's intention is to continue purchasing securities with available funds
in excess of loan demand. During the year ended June 30, 1998, loan demand was
stronger than in fiscal 1997.
Bank Premises and Equipment. The balance of bank premises and equipment
decreased from $7.7 million at June 30, 1997 to $7.3 million at June 30, 1998.
This decrease was a result of approximately $763,000 in computer-related
expenditures offset by $1.1 million in depreciation.
Other Real Estate Owned. The balance of other real estate owned
decreased from $1.9 million at June 30, 1997 to $509,000 at June 30, 1998, a
decrease of approximately $1.4 million. The majority of this decrease relates to
the sale in September 1997 of the Bank's largest ORE property that had a balance
of $1.0 million at June 30, 1997.
Deposits. Total deposits increased $20.1 million, or 4.7%, from $429.4
million at June 30, 1997 to $449.5 million at June 30, 1998. Of this total
increase, time deposits increased $743,000 (.3%), savings accounts increased
$1.7 million (1.4%), school savings accounts increased $3.3 million (24.1%),
money market accounts increased $6.2 million (40.3%), and demand accounts
increased $8.1 million (17.7%).
Borrowings. The balance of borrowings increased $19.9 million all of
which was the result of new borrowings during the year ended June 30, 1998 as
the bank matched financed portfolioed fixed-rate loans with these borrowings.
43
Ten year fixed rate, fifteen year amortizing FHLB borrowings were used to fund
certain fixed rate one to four family real estate loans.
Comparison of June 30, 1997 and June 30, 1996
Assets. Total assets at June 30, 1997 stood at $491.7 million, up $28.3
million, or 6.1%, from $463.4 million at June 30, 1996. The increase was
concentrated in the loan portfolio which increased $4.6 million, ending June 30,
1997 at $398.5 million and securities available for sale which increased $14.6
million, ending June 30, 1997 at $35.5 million. This growth in loans and
securities was funded by an increase of $24.9 million in deposits from $404.5
million on June 30, 1996 to $429.4 million at June 30, 1997. These increases as
well as fluctuations in other asset and liability categories are discussed
below.
Loans. The overall increase in total loans is primarily made up of
increases in one- to four-family real estate loans, offset by decreases in the
Bank's commercial real estate and commercial business loans. Total one to four
family real estate loans increased $8.7 million, or 3.7%, which increased the
level of total residential real estate as a percentage of total loans from 59.1%
at June 30, 1996 to 60.6% at June 30, 1997. Commercial real estate loans fell
from $96.6 million at June 30, 1996 to $94.0 million at June 30, 1997. At June
30, 1997, commercial real estate loans represented 23.4% of total loans.
Commercial business loans decreased $1.2 million to a balance of $12.1 million
at June 30, 1997 from $13.3 million at June 30, 1996. Commercial business loans
are loans to businesses which are either unsecured or are secured by non-real
estate business assets.
Allowance for Loan Losses. The allowance for loan losses decreased from
$3.2 million at June 30, 1996 to $3.1 million at June 30, 1997, a decrease of
$144,000. This decrease is the result of a $1.3 million provision for loan
losses taken in the year ended June 30, 1997 offset by $1.5 million in net
charge-offs for the same period. At June 30, 1997, the allowance for loan losses
provided coverage of 46.4% of total non-performing loans, up slightly from 41.7%
at June 30, 1996. The balance of the allowance is maintained at a level which
is, in management's judgment, representative of the amount of risk inherent in
the Bank's loan portfolio. See "Business of the Bank - Asset Quality Allowance
for Loan Losses."
Securities Available for Sale and Investment Securities. The balance of
securities available for sale increased from $20.9 million at June 30, 1996 to
$35.5 million as of June 30, 1997. The balance of investment securities
decreased slightly from $26.0 million at June 30, 1996 to $25.3 million as of
June 30, 1997. The increase in securities available for sale and slight decrease
in investment securities (collectively "securities") during the year ended June
30, 1997 were driven by purchases of securities totaling $28.7 million, which
were offset by paydowns, maturities and calls of securities totaling $14.7
million and sales totaling $287,000.
Bank Premises and Equipment. The balance of Bank premises and equipment
increased from $6.9 million at June 30, 1996 to $7.7 million at June 30, 1997.
This increase was a result of expenditures totaling $1.8 million for the most
part relating to the opening of four new branch locations during the year ended
June 30, 1997 offset by $1.1 million in depreciation.
Other Real Estate Owned. The balance of other real estate owned
increased from $421,000 at June 30, 1996 to $1.9 million at June 30, 1997, an
increase of approximately $1.5 million. This increase directly relates to the
addition during the year ended June 30, 1997 of an ORE property that had a
balance of $1.0 million at June 30, 1997.
Deposits. Total deposits increased $24.9 million, or 6.2%, from $404.5
million at June 30, 1996 to $429.4 million at June 30, 1997. Of this total
increase, time deposits increased $20.6 million (9.8%), school savings accounts
increased $3.3 million (31.1%), demand accounts increased $5.1 million (12.5%),
while savings accounts decreased $3.1 million (2.4%) and money market accounts
decreased $1.1 million (6.6%).
Borrowings. Borrowings decreased $2.1 million during the year ended
June 30, 1997. There were no borrowings at June 30, 1997. This decrease was a
result of an increase in deposit balances which exceeded loan demand.
44
Operating Results
Comparison of Year Ended June 30, 1998 and Year Ended June 30, 1997
Net Income. Net income for the year ended June 30, 1998 was $4.1
million, down from $4.6 million for the year ended June 30, 1997. Noninterest
expense increased $1.5 million for the year ended June 30, 1998 as compared to
the previous year. This increase was in part offset by an increase in net
interest income of $697,000 and a reduction in income tax expense of $322,000.
Net Interest Income. Net interest income for the year ended June 30,
1998 was $19.2 million, up $697,000 from the year ended June 30,1997. The
increase was primarily the result of the increase of $31.2 million in average
earning assets from $451.3 million for the year ended June 30, 1997 to $482.5
million for the same period in 1998. Average interest-bearing liabilities also
increased $27.5 million during the same period. The net impact of these volume
increases resulted in an increase in net interest income of $673,000. The Bank's
net interest margin for the year ended June 30, 1998 was 3.97%, down 12 basis
points from 4.09% for the year ended June 30, 1997. The yield on average earning
assets decreased from 8.04% to 7.96% , while the rate paid on average
interest-bearing liabilities increased from 4.27% to 4.33%, producing a decrease
in net interest spread of 14 basis points from 3.77% during fiscal 1997 to 3.63%
during fiscal 1998.
Interest Income. Interest income for the year ended June 30, 1998 was
$38.4 million, up from $36.3 million for the comparable period in 1997. The
largest component of the Bank's interest income is interest on loans. Interest
on loans increased from $33.2 million for the year ended June 30, 1997 to $33.6
million for the year ended June 30, 1998. This increase of $407,000 is the
result of both volume increases and rate increases. The average balance of loans
increased $3.5 million to $404.8 million, while the yield on loans increased 2
basis points from 8.27% to 8.29%. The increase in interest earned on loans was
supplemented by increases in interest earned on securities available for sale,
investment securities and federal funds. Interest income on these categories of
earning assets increased $680,000, $553,000 and $494,000, respectively.
Substantially all of the increases in interest income on these assets are
attributed to increases in volume. The average balance of securities available
for sale increased from $19.3 million for the year ended June 30, 1997 to $30.3
million for the year ended June 30, 1998. This increase in volume resulted in an
increase in interest income of $701,000. The average balance of investment
securities increased from $22.2 million in 1997 to $30.4 million in 1998,
resulting in a $515,000 increase in interest income due to volume. The average
balance of federal funds increased from $4.6 million in 1997 to $13.3 million in
1998. The increase in the volume of federal funds resulted in a $481,000
increase in interest income in the year ended June 30, 1998 as compared to the
year ended June 30, 1997. The changes in rates on securities available for sale,
investment securities and federal funds, as well as the changes in volume and
rate on other categories of interest-earning assets was not significant.
Interest Expense. Interest expense increased during the year ended June
30, 1998 to $19.3 million, up from $17.8 million for the comparable period in
1997. Substantially all of the Bank's interest expense is from the Bank's
interest-bearing deposits. The largest category of interest-bearing deposits is
time deposits. Interest paid on time deposits for the year ended June 30, 1998
was $13.5 million, up $1.0 million from the $12.5 million in 1997. This increase
is the result of an increase in the average balance of time deposits, from
$215.2 million in 1997 to $230.8 million in 1998 and an increase of 4 basis
points in the rates paid on these deposits from 5.80% in 1997 to 5.84% in 1998,
primarily due to competitive market conditions. Interest expense on savings
accounts was relatively flat, decreasing $75,000 from 1997 to 1998, almost
entirely attributed to a reduction in the average balance of savings accounts of
$2.6 million as depositors sought higher yielding investment opportunities.
Interest on school savings accounts increased $176,000, from $661,000 for the
year ended June 30, 1997 to $837,000 for the year ended June 30, 1998,
substantially all of which was the result of an increase in the average balance
of school savings accounts of $3.2 million. Interest on money market accounts
increased $122,000, from $447,000 for the year ended June 30, 1997 to $569,000
for the year ended June 30, 1998. The increase is attributed to an increase in
the average balance of money market accounts of $2.6 million as well as an
increase of 27 basis points in the rates paid on these money market accounts,
from 2.86% to 3.13% in compliance with the Bank's strategy to attract money
market accounts and remain competitive in its primary market area. Interest on
borrowings for the year ended June 30, 1998 was $332,000, up from $133,000 in
1997. Most of this increase was attributable to an increase in the average
balance of borrowings, from $2.4
45
million in 1997 to $5.5 million in 1998 as the Bank attempted to match fund
fixed rate residential loans with borrowings. Fluctuations in interest expense
on other categories of interest-bearing liabilities were not significant.
Provision for Loan Losses. The provision for loan losses of $1.4
million in the year ended June 30, 1998 remained consistent with the $1.3
million provision in the year ended June 30, 1997. The amount of the provision
is attributed to the $13.3 million increase in outstanding loans tempered by the
reduction in the level of net charge-offs from $1.5 million for the year ended
June 30, 1997 to $972,000 for the year ended June 30, 1998.
Noninterest Income. Total noninterest income for the year ended June
30, 1998 was $2.7 million, relatively unchanged from the $2.8 million for the
year ended June 30, 1997. Service charges on deposits declined only slightly to
$746,000 for the year ended June 30, 1998, from $765,000 for the year ended June
30, 1997. Loan servicing revenue declined $73,000 from $568,000 for the year
ended June 30, 1997 to $495,000 for the year ended June 30, 1998. The decline
relates to a reduction in the balance of loans serviced for others due to
repayments on such loans exceeding loan sales during 1998. Fluctuations in other
noninterest income categories were not significant.
Noninterest Expense. Total noninterest expense increased $1.5 million
to $13.8 million for the year ended June 30, 1998, up from $12.3 million for the
comparable period in 1997. Increases in compensation and benefits of $1.1
million, occupancy of $193,000 and advertising of $123,000 were the primary
contributors to the overall increase. The increase in compensation and benefits
is the result of a decrease in the post-retirement benefit expense based on
revised actuarial assumptions in 1997, the recognition of a full year's salary
expense for employees at the four new branch locations opened in the year ended
June 30, 1997, an increase in the cost of health insurance benefits of $114,000
as well as general merit increases for the Bank's employees during the year
ended June 30, 1998. The increase in occupancy is directly attributed to a full
year's cost associated with the opening of the four branch locations mentioned
above. The increase in advertising is generally the result of the additional
cost of customer binders, brochures and media print for the introduction of
imaging for all demand account products during the month of June 1998. The
remaining categories of noninterest expense did not experience significant
fluctuation.
Income Tax Expense. Income tax expense decreased from $3.0 million for
the year ended June 30, 1997 to $2.7 million for the comparable period in 1998.
The reduction is primarily the result of less income before income tax expense,
$6.7 million in 1998 as compared to $7.6 million in 1997.
Comparison of Year Ended June 30, 1997 and Year Ended June 30, 1996
Net Income. Net income for the year ended June 30, 1997 was $4.6
million, up from $4.4 million for the year ended June 30, 1996. Net interest
income increased $1.2 million and noninterest income increased $323,000 for the
year ended June 30, 1997 as compared to the previous year. These increases were
in part offset by increases in the provision for loan losses of $835,000,
noninterest expense of $395,000 and income tax expense of $90,000.
Net Interest Income. Net interest income for the year ended June 30,
1997 was $18.5 million, up $1.2 million from the year ended June 30,1996. The
increase was partially the result of the increase of $8.2 million in average
earning assets from $443.1 million for the year ended June 30, 1996 to $451.3
million for the same period in 1997. Interest-bearing liabilities also increased
during the same period, up $6.3 million. The net impact of these volume
increases resulted in an increase in net interest income of $616,000. Net
interest income also increased by $629,000 due to changes in the yield on
average earning assets and rate paid on average interest-bearing liabilities.
The yield on average earning assets increased from 7.98% to 8.04%, while the
rate paid on average interest-bearing liabilities decreased from 4.42% to 4.27%.
The Bank's net interest margin for the year ended June 30, 1997 was 4.09%, up 20
basis points from 3.89% for the year ended June 30, 1996.
Interest Income. Interest income for the year ended June 30, 1997 was
$36.3 million, up from $35.4 million for the comparable period in 1996. The
largest component of interest income is interest on loans. Interest on loans
increased from $32.1 million for the year ended June 30, 1996 to $33.2 million
for the year ended June 30, 1997. This increase of $1.1 million is primarily the
result of an $11.0 million increase in the average balance of loans to $401.3
million, while the yield on loans increased 4 basis points from 8.23% to 8.27%.
The increase in interest on loans was complemented by an increase in interest on
securities available for sale, offset by a decrease in interest on investment
46
securities. Interest income on securities available for sale increased $381,000
while interest income on investments fell $620,000. Substantially all of the
increases in interest income on securities available for sale are attributed to
higher volume. The average balance of securities available for sale increased
from $14.4 million for the year ended June 30, 1996 to $19.3 million for the
year ended June 30, 1997. This increase in volume resulted in an increase in
interest income of $320,000. The average balance of investment securities
decreased from $32.0 million in 1996 to $22.2 million in 1997, resulting in a
$600,000 decrease in interest income due to volume as the Bank used liquidity to
fund increased loan demand. The changes in rates on securities available for
sale and investment securities account for the remainder of the fluctuations in
interest income on these asset categories. The changes in volume and rate on
other categories of interest-earning assets were not significant.
Interest Expense. Interest expense decreased during the year ended June
30, 1997 to $17.8 million, down from $18.2 million for the comparable period in
1996. Substantially all of the Bank's interest expense is from the Bank's
interest-bearing deposits. The largest category of interest-bearing deposits is
time deposits. Interest on time deposits for the year ended June 30, 1997 was
$12.5 million, down $342,000 from the $12.8 million in 1996. This decrease is
primarily the result of a decrease of 18 basis points in the rates paid on these
deposits from 5.98% in 1996 to 5.80% in 1997, reflecting the general decline in
market interest rates, offset by a slight increase in the average balance of
time deposits of $763,000 due to a decline in general market rates. Interest
expense on savings accounts was relatively flat, decreasing $20,000 from 1996 to
1997, primarily attributable to a reduction in the average balance of savings
accounts of $458,000. Interest on school savings accounts increased $201,000,
from $460,000 for the year ended June 30, 1996 to $661,000 for the year ended
June 30, 1997, substantially all of which was the result of an increase in the
average balance of school savings accounts of $3.6 million. Interest on
borrowings for the year ended June 30, 1997 was $133,000, down from $297,000 in
1996. Most of this decrease was attributable to a decrease in the average
balance of borrowings, from $4.7 million in 1996 to $2.4 million in 1997.
Fluctuations in interest expense on other categories of interest-bearing
liabilities were not significant.
Provision for Loan Losses. The provision for loan losses increased from
$490,000 in the year ended June 30, 1996 to $1.3 million in the year ended June
30, 1997. This increase is primarily the result of increases in net charge-offs
from $374,000 for the year ended June 30, 1996 to $1.5 million for the year
ended June 30, 1997. The increase in net charge-offs combined with the continued
growth of the loan portfolio, continued economic weaknesses in the Bank's market
area, declining real estate values securing much of the loan portfolio as well
as management's evaluation of the prospects for its market area resulted in the
increase in the provision. See "Business of the Bank - Asset Quality Allowance
for Loan Losses."
Noninterest Income. Total noninterest income increased $323,000 for the
year ended June 30, 1997 as compared to the same period in 1996. Income from
service charges on deposits increased only slightly to $765,000 for the year
ended June 30, 1997, from $741,000 for the year ended June 30, 1996. Loan
servicing revenue decreased $37,000 from $605,000 in the year ended June 30,
1996 to $568,000 in the year ended June 30, 1997. The decline relates to a
reduction in the balance of loans serviced for others. Net gain (loss) on the
sale of mortgage loans increased from a loss of $20,000 for the year ended June
30, 1996 to a gain of $106,000 for the year ended June 30, 1997. Other
noninterest income increased from $1.1 million for the year ended June 30, 1996
to $1.4 million for the year ended June 30, 1997. This increase was the result
of increases in ATM fees, loan assignment fees, rents collected on ORE
properties and gains on the sale of securities.
Noninterest Expense. Total noninterest expense increased $395,000 to
$12.3 million for the year ended June 30, 1997, up from $11.9 million for the
comparable period in 1996. The increase in occupancy of $246,000 and other
noninterest expense of $162,000 were the primary contributors to the overall
increase. The decrease in compensation and benefits resulted from general merit
increases for the Bank's employees during the year ended June 30, 1997, offset
by a decrease in the post-retirement benefit expense based on revised actuarial
assumptions. The increase in occupancy was directly attributed to the increased
lease expense associated with the opening of four new branch locations in the
year ended June 30, 1997. The increase in other noninterest expense was
generally attributed to an increase in legal fees associated with the collection
and foreclosure of delinquent loans.
47
Income Tax Expense. Income tax expense increased from $2.9 million for
the year ended June 30, 1996 to $3.0 million for the comparable period in 1997.
The increase is the result of more income before income tax expense, $7.6
million in 1997 as compared to $7.3 million in 1996.
Liquidity and Capital Resources
Liquidity. Liquidity is defined as the ability to generate sufficient
cash flow to meet all present and future funding commitments, depositor
withdrawals and operating expenses. Management monitors the Bank's liquidity
position on a daily basis and evaluates its ability to meet depositor
withdrawals or make new loans or investments. The Bank's liquid assets include
cash and cash equivalents, investment securities that mature within one year,
and its portfolio of securities available for sale. At June 30, 1998, the Bank's
liquid assets as a percentage of deposits which have no withdrawal restrictions,
time deposits which mature within one year, and short-term borrowings was 16.8%.
The Bank's cash inflows result primarily from loan repayments,
maturities, calls and paydowns of securities, new deposits, and to a lesser
extent, drawing upon the Bank's credit lines with the FHLB of New York. The
Bank's cash outflows are substantially new loan originations, securities
purchases, and deposit withdrawals. The timing of cash inflows and outflows are
closely monitored by management although changes in interest rates, economic
conditions, and competitive forces strongly impact the predictability of these
cash flows. The Bank attempts to provide stable and flexible sources of funding
through the management of its liabilities, including core deposit products
offered through its branch network as well as with limited use of borrowings.
Management believes that the level of the Bank's liquid assets combined with
daily monitoring of inflows and outflows provide adequate liquidity to fund
outstanding loan commitments, meet daily withdrawal requirements of our
depositors, and meet all other daily obligations of the Bank.
Capital. Consistent with its goals to operate a sound and profitable
financial organization, the Bank actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. Total equity was $53.3
million at June 30, 1998, 9.9% of total assets on that date. As of June 30, 1997
and 1996, total equity was $49.1 million and $44.3 million, respectively, or
10.0% and 9.6% of total assets at the respective dates. As of June 30, 1998, the
Bank exceeded all of the capital requirements of the FDIC. The Bank's regulatory
capital ratios at June 30, 1998 were as follows: Tier I (leverage) capital,
10.6%; Tier I risk-based capital, 16.0%; and Total risk-based capital, 17.1%.
The regulatory capital minimum requirements to be considered well capitalized
are 5.0%, 6.0%, and 10.0%, respectively.
Impact of the Year 2000
The Bank has conducted a comprehensive review of its computer systems
to identify applications that could be affected by the "Year 2000" issue, and
has developed an implementation plan to address the issue. The Bank's data
processing is performed primarily in-house; however, software and hardware
utilized is under maintenance agreements with third party vendors, consequently
the Bank is very dependent on those vendors to conduct its business. The Bank
has already contacted each vendor to request time tables for Year 2000
compliance and expected costs, if any, to be passed along to the Bank. To date,
the Bank has been informed that its primary service providers anticipate that
all reprogramming efforts will be completed by December 31, 1998, allowing the
Bank adequate time for testing. Certain other vendors have not yet responded;
however, the Bank will pursue other options if it appears that these vendors
will be unable to comply. Management does not expect these costs to have a
significant impact on its financial position or results of operations; however,
there can be no assurance that the vendors' systems will be Year 2000 compliant.
Consequently, the Bank could incur incremental costs to convert to another
vendor.
The risks associated with this issue go beyond the Bank's own ability
to solve Year 2000 problems. Should significant commercial customers fail to
address Year 2000 issues effectively, their ability to meet debt service
requirements could be impaired, resulting in increased credit risk and potential
increases in loan charge offs. In addition, should suppliers of critical
services fail in their efforts to become Year 2000 compliant, or if significant
third party interfaces fail to be compatible with the Bank's or fail to be Year
2000 compliant, it could have significant adverse affects on the operations and
financial results of the Bank.
48
Impact of Inflation and Changing Prices
The Bank's consolidated financial statements are prepared in accordance
with generally accepted accounting principles which require the measurement of
financial condition and operating results in terms of historical dollars without
considering the changes in the relative purchasing power of money over time due
to inflation. The impact of inflation is reflected in the increasing cost of the
Bank's operations. Unlike most industrial companies, nearly all assets and
liabilities of the Bank are monetary. As a result, interest rates have a greater
impact on the Bank's performance than do the effects of general levels of
inflation. In addition, interest rates do not necessarily move in the direction,
or to the same extent as the price of goods and services.
Impact of New Accounting Standards/ Existing Pronouncements to be Adopted by the
Holding Company
In November 1993, the AICPA issued Statement of Position 93-6 ("SOP
93-6"), "Employers' Accounting for Employee Stock Ownership Plans", which is
effective for years beginning after December 15, 1993. SOP 93-6 requires the
measure of compensation expense recorded by employers for leveraged ESOPs to be
the fair value of ESOP shares committed to be released. The Holding Company has
adopted an ESOP in connection with the Conversion, which is expected to purchase
8% of the Holding Company Common Stock issued in the Conversion, including
shares issued to the Foundation. Under SOP 93-6, the Holding Company will
recognize compensation cost equal to the average fair value of the ESOP shares
during the periods in which they become committed to be released. Employers with
internally leveraged ESOPs such as the Holding Company will not report the loan
receivable from the ESOP as an asset and will not report the ESOP debt from the
employer as a liability. The effects of SOP 93-6 on future operating results
cannot be determined at this time.
In November 1995, the FASB issued SFAS No. 123, "Accounting for Stock
Based Compensation" ("SFAS No. 123"). This statement establishes financial
accounting standards for stock-based employee compensation plans. SFAS No. 123
permits the Holding Company to choose either a new fair value based method or
the Accounting Principles Board ("APB") Opinion 25 intrinsic value based method
of accounting for its stock-based compensation arrangements. SFAS No. 123
requires pro forma disclosures of net income and earnings per share computed as
if the fair value based method had been applied in financial statements of
companies that follow accounting for such arrangements under APB Opinion 25.
SFAS No. 123 applies to all stock-based employee compensation plans in which an
employer grants shares of its stock or other equity instruments to employees
except for employee stock ownership plans. SFAS No. 123 also applies to plans in
which the employer incurs liabilities to employees in amounts based on the price
of the employer's stock, (e.g., stock option plans, stock purchase plans,
restricted stock plans, and stock appreciation rights). The Statement also
specifies the accounting for transactions in which a company issues stock
options or other equity instruments for services provided by non-employees or to
acquire goods or services from outside suppliers or vendors. The Holding Company
expects to utilize the intrinsic value based method prescribed by APB Opinion
No. 25. Accordingly, the impact of adopting this Statement will not be material
to the Holding Company's consolidated financial statements.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share".
SFAS No. 128 establishes standards for computing and presenting earnings per
share ("EPS"). This Statement supersedes APB Opinion No. 15, "Earnings per
Share" and related interpretations. SFAS No. 128 replaces the presentation of
primary EPS with the presentation of basic EPS. It also requires dual
presentation of basic and diluted EPS on the face of the income statement for
all entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Unvested restricted stock awards are considered
outstanding common shares and included in the computation of basic EPS as of the
date that they are fully vested. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. This Statement is
effective for financial statements issued for periods ending after December 15,
49
1997, including interim periods. The Holding Company will adopt this Statement
for all financial statements prepared after the Conversion.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure", which establishes standards for disclosure
about an entity's capital structure. In accordance with SFAS No. 129, companies
will be required to provide in the financial statements a complete description
of all aspects of their capital structure, including call and put features,
redemption requirements and Conversion options. The disclosures required by SFAS
No. 129 are for financial statements for periods ending after December 15, 1997.
The Holding Company will adopt this Statement for all financial statements
prepared after the Conversion
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and displaying
comprehensive income. SFAS No. 130 states that comprehensive income includes the
reported net income of an enterprise adjusted for items that are currently
accounted for as direct entries to equity, such as the mark to market adjustment
on securities available for sale, foreign currency items and minimum pension
liability adjustments. This Statement is effective for both interim and annual
periods after December 15, 1997. Management anticipates developing the required
information in accordance with this new Statement.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information". SFAS No. 131 establishes standards
for reporting by public companies about operating segments of their business.
SFAS No. 131 also establishes standards for related disclosures about products
and services, geographic areas and major customers. This Statement is effective
for periods beginning after December 15, 1997. At this time, management does not
anticipate that the adoption of this Statement will significantly impact the
Holding Company's financial reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post- retirement Benefits," which amends the disclosure
requirements of SFAS No. 87. "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Post-retirement Benefits Other Than Pensions." Statement No. 132
standardizes the disclosure requirements of Statements No. 87 and No. 106 to the
extent practicable and recommends a parallel format for presenting information
about pensions and other post-retirement benefits. This Statement is applicable
to all entities and addresses disclosure only. The Statement does not change any
of the measurement or recognition provisions provided for in Statements No. 87,
No. 88, or No. 106. The Statement is effective for fiscal years beginning after
December 15, 1997. Management anticipates providing the required disclosures in
the June 30, 1999 consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. SFAS No. 133 will
not impact the Bank's accounting or disclosures.
50
BUSINESS OF THE HOLDING COMPANY
The Holding Company, a Delaware corporation, was organized in September,
1998 at the direction of the Board of Trustees of the Bank for the purpose of
owning all of the outstanding capital stock of the Bank upon consummation of the
Conversion. Upon consummation of the Conversion, the Holding Company, as the
sole stockholder of the Bank, will be a savings and loan holding company
regulated by the OTS. See "Regulation--Holding Company Regulation."
The Holding Company is currently not an operating company. Following the
Conversion, in addition to directing, planning and coordinating the business
activities of the Bank, the Holding Company will initially invest the proceeds
of the Conversion primarily in federal funds, government and federal agency
mortgage-backed securities, other debt securities, equity securities, deposits
of or loans to the Bank or a combination thereof. In addition, the Holding
Company intends to fund the loan to the ESOP to enable the ESOP to purchase up
to 8% of the Common Stock to be issued in the Conversion, including shares
issued to the Foundation. See "Use of Proceeds." In the future, the Holding
Company may acquire or organize other operating subsidiaries, including other
financial institutions, or it may merge with or acquire other financial
institutions and financial services related companies, although there are no
current plans for any such expansion. Although, other than the Merger, there are
no current arrangements, understandings or agreements regarding any such
opportunities or transactions, the Holding Company will be in a position after
the Conversion, subject to regulatory limitations and the Holding Company's
financial position, to take advantage of any such acquisition and expansion
opportunities that may arise. Initially, the Holding Company will neither own
nor lease any property but will instead use the premises, equipment and
furniture of the Bank. The Holding Company does not currently intend to employ
any persons other than certain officers of the Bank who will not be separately
compensated by the Holding Company. The Holding Company may utilize the support
staff of the Bank from time to time, if needed. Additional employees will be
hired as appropriate to the extent the Holding Company expands its business in
the future.
BUSINESS OF THE BANK
General
The Bank is a community-oriented mutual savings bank which was chartered by
the State of New York in 1851. The principal business of the Bank consists of
attracting retail deposits from the general public and using those funds,
together with funds from operations and, to a much lesser extent, borrowings, to
originate primarily one- to four-family residential mortgage loans, including
home equity loans, and, to a lesser extent, multi-family and commercial real
estate, consumer and commercial business loans. The Bank originates its loans
primarily in its market area and, to a lesser extent, the Bank also originates
commercial real estate loans in New York City. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Bank also
invests in mortgage-backed securities, U.S. Government and agency obligations
and, to a limited extent, corporate debt securities. Revenues are derived
primarily from interest on loans and securities.
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank's deposit accounts are insured up to
applicable limits by the FDIC. The Bank only solicits deposits in its primary
market area and does not currently solicit brokered deposits. The Bank is a
member of the FHLB of New York.
Market Area
The Bank has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services to meet the needs
of the communities it serves. The Bank's primary market area is comprised of
Albany, Saratoga, Schenectady, and Rensselaer Counties, and a portion of Warren
County in New York, which are serviced through the Bank's main office and 15
other full service banking offices and one public accommodation office which the
Bank has applied to the FDIC and the Department and received approval to convert
to a full service banking office. The Bank expects to convert this office to a
full service branch office in October, 1998. The Bank's main office and seven of
its branch offices are located in Albany County. Based on the most recent
information available, the Bank had less than 10% of total bank and thrift
deposits in its market area.
51
The Bank's primary market area consists principally of suburban and rural
communities with service, wholesale/retail trade, government and manufacturing
serving as the basis of the local economy. Service jobs and governmental jobs
represent the largest type of employment in the Bank's primary market area, with
jobs in wholesale/retail trade accounting for one of the largest employment
sectors. Management believes that its market area continues to show economic
weakness with declining real estate values.
Lending Activities
General. The Bank primarily originates fixed- and adjustable-rate, one- to
four-family mortgage loans, including home equity lines of credit and second
mortgages, secured by the borrower's primary residence. The Bank's general
practice is to originate fixed and adjustable rate mortgage loans with terms to
maturity between 5 and 30 years and until December 1997, sold substantially all
its fixed rate mortgage loans on the secondary market. Currently, the Bank has
been retaining its 30-year and 15-year fixed rate mortgage loans for its
portfolio as the declining interest rate environment has made it more difficult
to originate adjustable-rate loans. The Bank retains all adjustable rate
mortgage loans in its portfolio. The Bank also originates multi-family and
commercial real estate, consumer and commercial business loans. In-market loan
originations are generated by eight on-staff loan originators, the Bank's
marketing efforts, which include print, radio and television advertising, lobby
displays and direct contact with local civic and religious organizations, as
well as by the Bank's present customers, walk-in customers and referrals from
real estate agents, brokers and builders. The Bank also has established
relationships with certain mortgage brokers that take applications for
residential mortgage loans (under Cohoes underwriting guidelines) on behalf of
Cohoes. During fiscal 1998, $5.2 million of the Bank's loans were originated
through mortgage brokers. At June 30, 1998, the Bank's loan portfolio totaled
approximately $416.3 million.
The Bank originates fixed and adjustable rate consumer loans. ARM and
consumer loans are originated in order to increase the percentage of loans with
more frequent terms to repricing or shorter maturities than long-term
fixed-rate, one-to four-family mortgage loans. See "--Loan Portfolio
Composition" and "-- One- to Four-Family Residential Real Estate Lending."
Loan applications are initially considered and approved at various levels
of authority, depending on the type and amount of the loan. Bank employees with
lending authority are designated, and their lending limit authority defined, by
the Board of Trustees. The approval of the Bank's of Trustees is required for
any loans over $500,000. Pursuant to the Bank's lending policy, certain senior
officers may approve loans up to $500,000.
The Bank is not subject to state or federal regulation limiting the
aggregate amount of mortgage loans it is permitted to make to one borrower or
affiliated groups of borrowers. New York law does require lending policies that
avoid imprudent mortgage concentrations. However, the aggregate amount of
commercial loans that the Bank is permitted to make to any one borrower or group
of related borrowers is generally limited to 15% of unimpaired capital and
surplus. At June 30, 1998, the Bank's loans-to-one-borrower limit was
approximately $8.0 million. On the same date, the Bank had no borrowers with
outstanding balances in excess of this amount.
At June 30, 1998, the Bank's largest lending relationship consisted of five
loans to a group of borrowers secured by professional buildings and warehouse
space, and totaling $3.9 million. The next largest lending relationship
consisted of six loans aggregating approximately $3.3 million primarily secured
by an office building and a self-storage facility. The third largest lending
relationship consisted of eight loans totaling approximately $3.3 million
secured by two mobile home parks and a car wash facility. The fourth largest
lending relationship consisted of four loans totaling approximately $3.2 million
secured by a participation in a shopping center and office/apartment building.
The fifth largest lending relationship consisted of eight loans totaling
approximately $2.6 million secured by an office building and commercial building
lots. As of June 30, 1998, each of the five relationships discussed above were
performing in accordance with their applicable terms.
The types of loans that the Bank may originate are subject to federal and
state laws and regulations. Interest rates charged by the Bank on loans are
affected by the demand for such loans, the supply of money available for lending
purposes and the rates offered by competitors. These factors are in turn
affected by, among other things, economic conditions, monetary policies of the
federal government, including the FRB, and tax policies.
52
The following table sets forth the composition of the Bank's loan portfolio
in dollar amounts and as a percentage of the portfolio at the dates indicated.
June 30,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------ ------------------ ------------------- ------------------ ------------------
Amount % of Total Amount % of Total Amount % of Total Amount % of Total Amount % of Total
------ ---------- ------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Real estate loans:
One- to four-family
real estate ............. $258,399 62.07% $243,620 60.62% $234,900 59.06% $227,253 59.38% $179,836 56.79%
Multi-family and
commercial real estate .. 93,229 22.39 93,979 23.39 96,623 24.29 86,659 22.65 77,642 24.52
-------- ----- -------- ------- -------- ------ -------- ------ -------- -----
Total real estate loans . 351,628 84.46 337,599 84.01 331,523 83.35 313,912 82.03 257,478 81.31
Consumer loans:
Home equity lines of
credit .................. 21,976 5.28 25,205 6.27 27,342 6.87 30,792 8.05 31,741 10.02
Conventional second
mortgages ............... 15,093 3.63 14,069 3.50 11,111 2.79 10,765 2.81 10,444 3.30
Automobile loans .......... 9,783 2.35 9,290 2.31 9,982 2.51 9,790 2.56 7,211 2.28
Credit cards .............. 1,655 0.40 2,152 0.54 2,767 0.70 3,350 0.88 3,093 0.97
Other consumer loans ...... 1,184 0.28 1,438 0.36 1,776 0.45 2,117 0.55 2,131 0.67
-------- ----- -------- ------ ------- ------ -------- ------ -------- ------
Total consumer loans .... 49,691 11.94 52,154 12.98 52,978 13.32 56,814 14.85 54,620 17.24
Commercial business loans ... 14,991 3.60 12,096 3.01 13,250 3.33 11,942 3.12 4,578 1.45
-------- ----- -------- ------ ------- ------ -------- ------ -------- ------
Total loans ............. 416,310 100.00% 401,849 100.00% 397,751 100.00% 382,668 100.00% 316,676 100.00%
====== ====== ====== ====== ======
Less:
Net deferred loan
origination fees and
costs ................... (18) (214) (532) (447) (246)
Allowance for loan
losses .................. (3,533) (3,105) (3,249) (3,133) (3,011)
-------- -------- ------- ------- --------
Total loans, net ........ $412,759 $398,530 $393,970 $379,088 $313,419
======== ======== ======== ======== ========
53
The following table shows the composition of the Bank's loan portfolio by
fixed- and adjustable-rate at the dates indicated.
June 30,
-----------------------------------------------------------
1998 1997 1996
------------------ ------------------ -----------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- ------- -------
(Dollars in Thousands)
Fixed Rate Loans
Real estate:
One- to four-family real estate ............. $ 88,389 21.23% $ 21,365 5.32% $ 15,975 4.02%
Multi-family and commercial real estate ..... 42,274 10.15 51,859 12.90 64,369 16.18
-------- ------ -------- ------ -------- ------
Total real estate loans ................... 130,663 31.38 73,224 18.22 80,344 20.20
Consumer:
Home equity lines of credit ................. -- -- -- -- -- --
Conventional second mortgages ............... 15,093 3.63 14,069 3.50 11,111 2.79
Automobile loans ............................ 9,783 2.35 9,290 2.31 9,982 2.51
Credit cards ................................ 1,655 0.40 2,152 0.54 2,767 0.70
Other consumer loans ........................ 1,184 0.28 1,438 0.36 1,776 0.45
-------- ------ -------- ------ -------- ------
Total consumer loans ...................... 27,715 6.66 26,949 6.71 25,636 6.45
Commercial business loans ..................... 5,651 1.36 3,700 0.92 3,280 0.82
-------- ------ -------- ------ -------- ------
Total fixed-rate loans .................... 164,029 39.40 103,873 25.85 109,260 27.47
Adjustable-Rate Loans
Real estate:
One- to four-family real estate ............. 170,010 40.84 222,255 55.31 218,925 55.04
Multi-family and commercial real estate ..... 50,955 12.24 42,120 10.48 32,254 8.11
-------- ------ -------- ------ -------- ------
Total real estate loans ................... 220,965 53.08 264,375 65.79 251,179 63.15
Consumer:
Home equity lines of credit ................. 21,976 5.28 25,205 6.27 27,342 6.87
Conventional second mortgages ............... -- -- -- -- -- --
Automobile loans ............................ -- -- -- -- -- --
Credit cards ................................ -- -- -- -- -- --
Other consumer loans ........................ -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Total consumer loans ...................... 21,976 5.28 25,205 6.27 27,342 6.87
Commercial business loans ..................... 9,340 2.24 8,396 2.09 9,970 2.51
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans ............... 252,281 60.60 297,976 74.15 288,491 72.53
------- ------ -------- ------ -------- ------
Total loans ............................... 416,310 100.00% 401,849 100.00% 397,751 100.00%
====== ====== ======
Less:
Net deferred loan origination fees and costs .. (18) (214) (532)
Allowance for loan losses ..................... (3,533) (3,105) (3,249)
-------- -------- --------
Total loans receivable, net ............... $412,759 $398,530 $393,970
======== ======== ========
54
The following table illustrates the contractual maturity of the Bank's loan
portfolio at June 30, 1998. Mortgages which have adjustable or renegotiable
interest rates are shown as maturing in the period in which the contract is due.
The schedule does not reflect the effects of possible prepayments or enforcement
of due-on-sale clauses.
Real Estate Loans Consumer Loans
--------------------------- ---------------------------------------------
One- to four- Multi-family Commercial Home equity Conventional Automobile
family commercial business loans lines of credit second mortgages Loans
------------- ------------ -------------- --------------- ---------------- ----------
(Dollars in Thousands)
Amounts Due:
0 months to 1 year ..... $ 14 $18,965 $ 4,975 $ -- $ 165 $ 460
After 1 year:
1 to 2 years ........... 51 7,874 2,825 -- 456 1,703
2 to 3 years ........... 84 6,488 1,380 -- 810 2,582
3 to 5 years ........... 742 5,395 3,068 -- 4,593 4,982
5 to 10 years .......... 9,401 34,418 1,578 221 7,135 26
10 to 15 years ......... 41,247 10,151 200 3,736 1,926 30
Over 15 years .......... 206,860 9,938 965 18,019 8 --
-------- ------- ------- ------- ------- ------
Total due after 1 year ... 258,385 74,264 10,016 21,976 14,928 9,323
-------- ------- ------- ------- ------- ------
Total amount due ......... $258,399 $93,229 $14,991 $21,976 $15,093 $9,783
======== ======= ======= ======= ======= ======
Less:
Net deferred loan
origination fees
and costs ............
Allowance for loan
losses ...............
Total loans
receivable, net ....
Consumer Loans Total
----------------------- ------------------
Other Weighted
consumer Average
Credit cards loans Amount Rate
------------ -------- -------- --------
(Dollars in Thousands)
Amounts Due:
0 months to 1 year ..... $1,655 $ 68 $ 26,302 8.52%
After 1 year:
1 to 2 years ........... -- 145 13,054 9.40
2 to 3 years ........... -- 224 11,568 8.78
3 to 5 years ........... -- 114 18,894 8.42
5 to 10 years .......... -- 340 53,119 8.48
10 to 15 years ......... -- 100 57,390 7.90
Over 15 years .......... -- 193 235,983 7.87
------ ------ --------
Total due after 1 year ... -- 1,116 390,008 8.06
------ ------ --------
Total amount due ......... $1,655 $1,184 416,310 8.09
====== ======
Less:
Net deferred loan
origination fees
and costs ............ (18)
Allowance for loan
losses ............... (3,533)
--------
Total loans
receivable, net .... $412,759
========
55
The following table sets forth the dollar amounts in each loan category at
June 30, 1998 that are contractually due after June 30, 1999, and whether such
loans have fixed or adjustable interest rates.
Due after June 30, 1999
----------------------------------
Fixed Adjustable Total
(In Thousands)
Residential real estate ................. $ 85,919 $172,466 $258,385
Commercial real estate .................. 26,412 47,852 74,264
-------- -------- --------
Total real estate loans ....... 112,331 220,318 332,649
Commercial business loans ............... 4,984 5,032 10,016
Consumer loans
Home equity lines of credit ........ -- 21,976 21,976
Conventional second mortgages ...... 14,928 -- 14,928
Automobile loans ................... 9,323 -- 9,323
Credit cards ....................... -- -- --
Other consumer loans ............... 1,116 -- 1,116
-------- -------- --------
Total consumer loans .......... 25,367 21,976 47,343
-------- -------- --------
Total loans ................... $142,682 $247,326 $390,008
======== ======== ========
Residential Real Estate Lending
Cohoes' residential real estate loans consist of primarily one- to
four-family, owner occupied mortgage loans. At June 30, 1998, $258.4 million, or
62.07% of Cohoes' total loans consisted of one- to four-family residential first
mortgage loans. At June 30, 1998, approximately $88.4 million or 21.23% of
Cohoes' one- to four-family residential first mortgage loans provided for fixed
rates of interest and for repayment of principal over a fixed period not to
exceed 30 years. Cohoes does not originate fixed-rate loans for terms longer
than 30 years. Cohoes' fixed-rate one- to four-family residential mortgage loans
are priced competitively with the market. Accordingly, Cohoes attempts to
distinguish itself from its competitors based on quality of service.
Cohoes generally underwrites its fixed-rate one- to four-family residential
first mortgage loans using Fannie Mae guidelines. Until December 1997, the Bank
sold substantially all fixed-rate residential mortgage loans it originated to
the secondary market, and continues to service the loans it sells. Currently,
the Bank generally holds for investment all adjustable and fixed rate one- to
four-family residential first mortgage loans it originates. In underwriting one-
to four-family residential first mortgage loans, Cohoes evaluates, among other
things, the borrower's ability to make monthly payments and the value of the
property securing the loan. Properties securing real estate loans made by Cohoes
are appraised by independent fee appraisers approved by the Bank's Board of
Trustees. Cohoes requires borrowers to obtain title insurance, and fire and
property insurance (including flood insurance, if necessary) in an amount not
less than the amount of the loan or the replacement cost of the dwelling.
The Bank currently offers one- and five-year residential ARM loans with an
interest rate that adjusts annually after the initial period, based on the
change in the corresponding term United States Treasury index. These loans
provide for up to a 2.0% periodic cap and a lifetime cap of 6.0% over the
initial rate. As a consequence of using caps, the interest rates on these loans
may not be as rate sensitive as the Bank's cost of funds. Borrowers of ARM loans
are generally qualified at the initial interest rate (however, for one-year
ARMs, borrowers are qualified at the maximum rate after the first adjustment).
The Bank offers one-year ARM loans that are convertible (from the second through
the fifth year of the loan) into fixed-rate loans with interest rates based upon
the then current market rates. ARM loans generally pose greater credit risks
than fixed-rate loans, primarily because as interest rates rise, the required
periodic payment by the borrower rises, increasing the potential for default.
However, as of June 30, 1998, the Bank had not experienced higher default rates
on these loans relative to its other loans. See "--Asset Quality-Non-Performing
Assets."
56
The Bank's one- to four-family mortgage loans do not contain prepayment
penalties and do not permit negative amortization of principal. Real estate
loans originated by the Bank generally contain a "due on sale" clause allowing
the Bank to declare the unpaid principal balance due and payable upon the sale
of the security property. The Bank has waived the due on sale clause on loans
held in its portfolio from time to time to permit assumptions of the loans by
qualified borrowers.
Generally, Cohoes does not originate residential mortgage loans where the
ratio of the loan amount to the value of the property securing the loan (i.e.,
the "loan-to-value" ratio) exceeds 95%. If the loan-to-value ratio exceeds 80%,
Cohoes generally requires that the borrower obtain private mortgage insurance in
amounts intended to reduce the Bank's exposure to 80% or less of the lower of
the appraised value or the purchase price of the property securing the loan. See
"-- Loan Origination and Sale of Loans." In addition, on occasion the Bank will
make a loan for the construction of the borrower's primary residence. At June
30, 1998 the Bank had $1.7 million in loans outstanding for the construction of
the borrower's residence.
Multi-Family and Commercial Real Estate Lending
The Bank has engaged in multi-family and commercial real estate lending
secured primarily by apartment buildings, office buildings, nursing homes, strip
shopping centers and mobile home parks located in the Bank's primary market
area. At June 30, 1998, the Bank had $93.2 million of multi-family and
commercial real estate loans, representing 22.39% of the Bank's total loan
portfolio. As of June 30, 1998, $25.8 million of this portfolio was secured by
property located in New York City.
Multi-family and commercial real estate loans generally have terms to
maturity that do not exceed 20 years. Cohoes' current lending guidelines
generally require that the property securing a loan generate net cash flows of
at least 120% of debt service after the payment of all operating expenses,
excluding depreciation, and the loan-to-value ratio not exceed 80% on loans
secured by such properties. As a result of a decline in the value of some
properties in the Bank's primary market area and due to economic conditions, the
current loan-to-value ratio of some commercial real estate loans in the Bank's
portfolio may exceed the initial loan-to-value ratio, and the current debt
service ratio may exceed the initial debt service ratio. Adjustable rate
multi-family and commercial real estate loans are generally written as ten-year
balloon loans, which adjust after five years to a margin over the five-year
United States Treasury index, and amortize over a term up to 20 years. In
underwriting commercial real estate loans, the Bank analyzes the financial
condition of the borrower, the borrower's credit history, the reliability and
predictability of the net income generated by the property securing the loan and
the value of the property itself. The Bank generally requires personal
guarantees of the borrowers in addition to the secured property as collateral
for such loans. Appraisals on properties securing commercial real estate loans
originated by the Bank are performed by independent fee appraisers approved by
the Board of Trustees.
Multi-family and commercial real estate loans generally present a higher
level of risk than loans secured by one- to four-family residences. This greater
risk is due to several factors, including the concentration of principal in a
limited number of loans and borrowers, the effect of general economic conditions
on income producing properties and the increased difficulty of evaluating and
monitoring these types of loans. Furthermore, the repayment of loans secured by
commercial real estate is typically dependent upon the successful operation of
the related real estate project. If the cash flow from the project is reduced
(for example, if leases are not obtained or renewed, or a bankruptcy court
modifies a lease term, or a major tenant is unable to fulfill its lease
obligations), the borrower's ability to repay the loan may be impaired and the
value of the property may be reduced.
Consumer Lending
The Bank offers a variety of secured and unsecured consumer loans,
including home equity lines of credit and second mortgages and, to a lesser
extent, automobile and credit card loans. Substantially all of the Bank's
consumer loans are originated on property located or for customers residing in
the Bank's primary market area. At June 30, 1998, the Bank's consumer loan
portfolio totaled $49.7 million, or 11.94% of the Bank's total loan portfolio.
57
The Bank's home equity lines of credit and second mortgages are secured by
a lien on the borrower's residence and generally do not exceed $100,000. Cohoes
uses the same underwriting standards for home equity lines of credit and second
mortgages as it uses for one- to four-family residential mortgage loans. Home
equity lines of credit and second mortgages are generally originated in amounts
which, together with all prior liens on such residence, do not exceed 80% of the
appraised value of the property securing the loan. The interest rates for home
equity loans and lines of credit float at a stated margin over the prime rate
and second mortgages generally have fixed interest rates. Home equity lines of
credit require interest and principal payments on the outstanding balance for
the term of the loan. The terms of the Bank's home equity lines of credit are
generally 25 years. As of June 30, 1998, the Bank had $22.0 million, or 5.28% of
the Bank's total loan portfolio outstanding, in home equity lines of credit,
with an additional $12.9 million of unused home equity lines of credit, and
$15.1 million, or 3.63% of the Bank's total loan portfolio, in second mortgages.
The underwriting standards employed by the Bank for consumer loans other
than home equity lines of credit and second mortgages generally include a
determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is the primary consideration,
the underwriting process also includes a comparison of the value of the property
securing the loan, if any, in relation to the proposed loan amount.
The Bank's automobile loans are originated as installment loans with a
fixed interest rate and terms of up to 60 months for new vehicles and up to 60
months for certain used vehicles. The Bank originates its automobile loans
directly and will loan up to 100% of the value of a new automobile and up to 90%
of the value of a used automobile. At June 30, 1998, Cohoes had $9.8 million of
automobile loans.
The Bank does not originate any consumer loans on an indirect basis (i.e.,
where loan contracts are purchased from retailers of goods or services which
have extended credit to their customers).
Consumer loans may entail greater credit risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by assets which may decline in value. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of high initial
loan-to-value ratios, repossession, rehabilitation and carrying costs, and the
greater likelihood of damage, loss or depreciation of the property, and thus are
more likely to be affected by adverse personal circumstances. In the case of
automobile loans, which may have loan balances in excess of the resale value of
the collateral, borrowers may abandon the collateral property making
repossession by the Bank and subsequent losses more likely. The application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on consumer loans, including automobile
loans.
Commercial Business Lending
At June 30, 1998, commercial business loans comprised $15.0 million, or
3.60% of the Bank's total loan portfolio. Most of the Bank's commercial business
loans have been extended to finance local businesses and include primarily short
term loans to finance machinery and equipment purchases, inventory and accounts
receivable. Commercial business loans also involve the extension of revolving
credit for a combination of equipment acquisitions and working capital needs.
The terms of loans extended on machinery and equipment are based on the
projected useful life of such machinery and equipment, generally not to exceed
seven years. Lines of credit generally are available to borrowers provided that
the outstanding balance is paid in full (i.e., the credit line has a zero
balance) for at least 30 days every year. All lines of credit are reviewed on an
annual basis. In the event the borrower does not meet this 30 day requirement,
the line of credit may be terminated and the outstanding balance may be
converted into a fixed term loan. The Bank has a few standby letters of credit
outstanding which are offered at competitive rates and terms and are generally
on a secured basis.
Unlike residential mortgage loans, commercial business loans are typically
made on the basis of the borrower's ability to make repayment from the cash flow
of the borrower's business. As a result, the availability of funds for the
58
repayment of commercial business loans may be substantially dependent on the
success of the business itself (which, in turn, is often dependent in part upon
general economic conditions). The Bank's commercial business loans are usually,
but not always, secured by business assets. However, the collateral securing the
loans may depreciate over time, may be difficult to appraise and may fluctuate
in value based on the success of the business.
The Bank commercial business lending policy includes credit file
documentation and analysis of the borrower's background, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of other conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
the Bank's current credit analysis. The Bank generally obtains personal
guarantees on its commercial business loans. Nonetheless, such loans are
believed to carry higher credit risk than more traditional savings bank loans.
Loan Originations and Sales
Mortgage and commercial loan originations are developed from the continuing
business with depositors and borrowers, soliciting realtors and other brokers
and walk-in customers. Residential and commercial loans are originated by the
Bank's staff of salaried and commissioned loan personnel, as well as through
established relationships with certain mortgage brokers.
While the Bank originates both fixed- and adjustable-rate loans, its
ability to originate loans is dependent upon demand for loans in the markets in
which it serves. Demand is affected by the applicable local economy and the
interest rate environment. Until December 1997, the Bank sold all its fixed-rate
loans to the secondary market, servicing retained. Currently, the Bank generally
retains its fixed-rate and adjustable-rate real estate loans in its portfolio.
At June 30, 1998, the Bank serviced approximately $233.1 million of loans for
others.
During the year ended June 30, 1998, the Bank originated $180.7 million of
loans, compared to $141.5 million in fiscal 1997.
In periods of economic uncertainty, the Bank's ability to originate large
dollar volumes of loans with acceptable underwriting characteristics may be
substantially reduced or restricted which may result in a decrease in operating
earnings.
59
The following table shows the loan origination and repayment activities of
the Bank for the periods indicated.
Year Ended June 30,
----------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Loans at beginning of period ............ $401,849 $397,751 $382,668
-------- -------- --------
Originations by type:
Real estate loans:
One- to four-family ................ 107,991 74,641 73,829
Multi-family and commercial
real estate ...................... 33,171 32,132 20,521
-------- -------- --------
Total real estate loans ...... 141,162 106,773 94,350
Consumer loans:
Home equity lines of credit ........ 8,243 9,092 10,108
Conventional second mortgages ...... 5,918 7,069 4,240
Automobile loans ................... 6,766 5,189 6,466
Credit cards ....................... 2,561 3,052 3,408
Other consumer loans ............... 822 814 1,024
-------- -------- --------
Total consumer loans ......... 24,310 25,216 25,246
Commercial business loans .......... 15,195 9,461 10,726
-------- -------- --------
Total loans originated ............. 180,667 141,450 130,322
-------- -------- --------
Less:
Principal repayments ............... 155,969 123,732 98,618
Loan sales ......................... 8,105 9,567 15,747
Charge-offs ........................ 1,038 1,376 239
Transfers to ORE ................... 1,094 2,677 635
-------- -------- --------
Total loan reductions ........... 166,206 137,352 115,239
-------- -------- --------
Net Loan Activity ....................... 14,461 4,098 15,083
-------- -------- --------
Loans at end of period .................. $416,310 $401,849 $397,751
======== ======== ========
60
Asset Quality
Delinquency Procedures. When a borrower fails to make a required payment on
a one- to four-family residential mortgage loan, the Bank attempts to cure the
deficiency by contacting the borrower. Written contacts are made after payment
is 15 days past due and, in most cases, deficiencies are cured promptly. The
Bank attempts to contact the borrower by telephone to arrange payment of the
delinquency between the 16th and the 30th day. If these efforts have not
resolved the delinquency within 45 days after the due date, a second written
notice is sent to the borrower, and on the 60th day a notice is sent to the
borrower warning that foreclosure proceedings will be commenced unless the
delinquent amount is paid. If the delinquency has not been cured within a
reasonable period of time after the foreclosure notice has been sent, the Bank
may obtain a forbearance agreement or may institute appropriate legal action to
foreclose upon the property. If foreclosed, property collateralizing the loan is
sold at a public sale and may be purchased by the Bank. If the Bank is in fact
the successful bidder at the foreclosure sale, upon receipt of a deed to the
property, the Bank generally sells the property at the earliest possible date.
Collection efforts on consumer, commercial business and multi-family and
commercial real estate loans are similar to efforts on one- to four-family
residential mortgage loans, except that collection efforts on consumer and
multi-family commercial real estate loans generally begin within 15 days after
the payment date is missed. The Bank also maintains periodic contact with
commercial loan customers and monitors and reviews the borrowers' financial
statements and compliance with debt covenants on a regular basis.
Delinquent Loans. The following table sets forth information concerning
delinquent loans as June 30, 1998, in dollar amounts and as a percentage of the
Bank's loan portfolio. The amounts presented represent the total remaining
principal balances of the related loans, rather than the actual payment amounts
which are overdue.
June 30, 1998
---------------------------------------------------------------------------------------------------
Total loans delinquent
60-89 days 90 days or more 60 days or more
----------------------------- --------------------------------- --------------------------------
Principal Percent Principal Percent Principal Percent
Number Balance of Loan Number Balance of Loan Number Balance of Loan
of Loans of Loans Category of Loans of Loans Category of Loans of Loans Category
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Real estate loans:
One- to four-family
real estate .............. 9 $ 757 0.29% 33 $2,635 1.02% 42 $3,392 1.31%
Multi-family and
commercial real estate ... 3 263 0.28 6 823 0.88 9 1,086 1.17
--- ------ --- ------ --- ------
Total real estate loans .. 12 1,020 0.29 39 3,458 0.98 51 4,478 1.27
Consumer loans:
Home equity lines
of credit ................ 1 14 0.06 1 40 0.18 2 54 0.25
Conventional second
mortgages ................ 1 41 0.27 3 35 0.23 4 76 0.50
Automobile loans ........... 3 10 0.10 6 32 0.33 9 42 0.43
Credit cards ............... 9 23 1.39 20 57 3.44 29 80 4.83
Other consumer loans ....... 2 2 0.17 8 33 2.79 10 35 2.96
--- --- --- ----- --- -----
Total consumer loans ..... 16 90 0.18 38 197 0.40 54 287 0.58
Commercial business loans ... -- -- -- 1 65 0.43 1 65 0.43
--- ------ --- ------ --- ------
Total delinquent loans ... 28 $1,110 0.27% 78 $3,720 0.89% 106 $4,830 1.16%
=== ====== ==== === ====== ==== === ====== ====
61
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets. Loans are generally placed on non-accrual
status when the loan is contractually past due 90 days or more or when the
collection of principal and/or interest in full becomes doubtful. When loans are
designated as non-accrual, all accrued but unpaid interest is reversed against
current period income and, as long as the loan remains on non-accrual status,
interest is recognized only when received, if considered appropriate by
management. ORE includes assets acquired in settlement of loans.
June 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Non-accrual loans:
One- to four-family real estate ......................... $2,635 $2,835 $1,852 $ 441 $ 891
Multi-family and commercial real estate ................. 823 1,246 3,438 1,820 1,299
Conventional second mortgages ........................... 35 62 48 35 84
Consumer loans .......................................... 105 380 245 40 17
Commercial business loans ............................... 65 217 -- -- --
------ ------ ------ ------ ------
Total non-accrual loans ....................... 3,663 4,740 5,583 2,336 2,291
Loans contractually past due 90 days or more
and still accruing interest:
Multi-family and commercial real estate ................. -- -- -- 308 317
Consumer loans .......................................... 57 42 158 67 18
------ ------ ------ ------ ------
Total loans 90 days or more past
due and still accruing interest ............. 57 42 158 375 335
Troubled debt restructurings ................................. 1,929 1,906 2,052 2,352 2,266
------ ------ ------ ------ ------
Total non-performing loans .................... 5,649 6,688 7,793 5,063 4,892
Real estate owned (ORE) ...................................... 509 1,874 421 396 437
------ ------ ------ ------ ------
Total non-performing assets ................... $6,158 $8,562 $8,214 $5,459 $5,329
====== ====== ====== ====== ======
Allowance for loan losses .................................... $3,533 $3,105 $3,249 $3,133 $3,011
====== ====== ====== ====== ======
Coverage of non-performing loans ............................. 62.54% 46.43% 41.69% 61.88% 61.55%
====== ====== ====== ====== ======
Total non-performing loans as a percentage
of total loans .............................................. 1.36% 1.66% 1.96% 1.32% 1.54%
====== ====== ====== ====== ======
Total non-performing loans as a percentage
of total assets ............................................. 1.05% 1.36% 1.68% 1.10% 1.21%
====== ====== ====== ====== ======
62
Non-Accruing Loans. At June 30, 1998, the Bank had approximately $3.7
million in non-accruing loans, which constituted 0.9% of the Bank's total loan
portfolio. As of such date, there were no non-accruing loans or aggregate
non-accruing loans-to-one-borrower in excess of $750,000.
For the year ended June 30, 1998 accumulated interest income on nonaccrual
loans of approximately $214,000 was not recognized as income.
Accruing Loans Contractually Past Due 90 Days or More. As of June 30, 1998,
the Bank had approximately $57,000 in accruing loans contractually past due 90
days or more.
Troubled Debt Restructurings. As of June 30, 1998, the Bank had
approximately $1.9 million of troubled debt restructurings (which involve
forgiving a portion of interest or principal on the loan or restructuring a loan
to a rate materially less than that of market rates). At that date, there were
no troubled debt restructurings in excess of $750,000.
ORE. As of June 30, 1998, the Bank had $509,000 of ORE. At that date, ORE
consisted of 14 residential and one commercial property located in the Bank's
primary market area. Real estate and other assets acquired by the Bank as a
result of foreclosure or by deed-in-lieu of foreclosure or repossession are
classified as ORE until sold. When property is classified as ORE, it is recorded
at the lower of cost or fair value (net of disposition costs) at that date and
any writedown resulting therefrom is charged to the allowance for loan losses.
Subsequent writedowns are charged to operating expenses. Net expense from ORE is
expensed as incurred.
Other Loans of Concern. As of June 30, 1998, there was $636,000 of other
loans not included in the table or discussed above where known information about
the possible credit or other problems of borrowers caused management to have
doubts as to the ability of the borrower to comply with present loan repayment
terms. These loans have been considered by management in conjunction with the
analysis of the adequacy of the allowance for loan losses.
Allowance for Loan Losses. The allowance for loan losses is replenished
through a provision for loan losses charged to operations. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Recoveries on loans previously
charged-off are credited to the allowance for loan losses. The allowance is an
amount that management believes will be adequate to absorb losses on existing
loans that may become uncollectible. Management's evaluation of the adequacy of
the allowance for loan losses is performed on a periodic basis and takes into
consideration such factors as the historical loan loss experience, changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that may affect
borrowers' ability to pay.
Although management believes that it uses the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in determining the level of the
allowance. Future additions to the Bank's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. In addition, regulatory agencies, as an integral part of the
examination process, periodically review the Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
upon their judgment of the information available to them at the time of their
examination. At June 30, 1998, the Bank had a total allowance for loan losses of
$3.5 million, representing 62.5% of total non-performing loans.
63
The following table sets forth an analysis of the Bank's allowance for loan
losses at the dates and for the periods indicated.
At or for the fiscal year ended June 30,
------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
Allowance for loan losses, beginning period ............. $ 3,105 $ 3,249 $ 3,133 $ 3,011 $ 2,308
Charged-off loans:
Real estate loans
One- to four-family real estate ..................... 432 619 128 79 35
Multi-family and commercial real estate ............. 93 343 21 -- --
------- ------- ------- ------- -------
Total real estate loan charge-offs ............... 525 962 149 79 35
Commercial business loans charge-offs ................. 218 105 4 -- --
Consumer loans
Home equity lines of credit ......................... 84 39 18 -- --
Conventional second mortgages ....................... 16 1 -- -- 7
Automobile loans .................................... 121 55 23 28 1
Credit cards ........................................ 212 353 132 91 1
Other consumer loans ................................ 41 56 75 37 14
------- ------- ------- ------- -------
Total consumer loan charge-offs .................. 474 504 248 156 23
------- ------- ------- ------- -------
Total charged-off loans .......................... 1,217 1,571 401 235 58
Recoveries on loans previously charged-off:
One- to four-family real estate ..................... 78 28 4 -- --
Multi-family and commercial real estate ............. 93 40 13 -- --
------- ------- ------- ------- -------
Total real estate loan recoveries ................ 171 68 17 -- --
Commercial business loan recoveries ................. 35 -- 1 -- --
Consumer loans
Home equity lines of credit ....................... -- 4 -- -- --
Conventional second mortgages ..................... -- -- 3 8 --
Automobile loans .................................. 8 5 -- 3 1
Credit cards ...................................... 23 16 4 2 --
Other consumer loans .............................. 8 9 2 14 10
------- ------- ------- ------- -------
Total consumer loan recoveries .................. 39 34 9 27 11
------- ------- ------- ------- -------
Total recoveries ................................ 245 102 27 27 11
------- ------- ------- ------- -------
Net loans charged-off ................................... (972) (1,469) (374) (208) (47)
Provision for loan losses ............................... 1,400 1,325 490 330 750
------- ------- ------- ------- -------
Allowance for loan losses, end of period ................ $ 3,533 $ 3,105 $ 3,249 $ 3,133 $ 3,011
======= ======= ======= ======= =======
Net charged-off loans to average loans .................. 0.24% 0.37% 0.10% 0.06% 0.01%
======= ======= ======= ======= =======
Allowance for loan losses to total loans ................ 0.85% 0.77% 0.82% 0.82% 0.95%
======= ======= ======= ======= =======
Allowance for loan losses to
nonperforming loans ................................... 62.54% 46.43% 41.69% 61.88% 61.55%
======= ======= ======= ======= =======
Net charged-off loans to allowance
for loan losses ................................. 27.51% 47.31% 11.51% 6.64% 1.56%
======= ======= ======= ======= =======
Recoveries to charged-offs .............................. 20.13% 6.49% 6.73% 11.49% 18.97%
======= ======= ======= ======= =======
64
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Bank. This allocation is based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is not indicative of either the specific amounts or the loan
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. The allocation to each category does not
restrict the use of the allowance to absorb losses in any category.
June 30,
----------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ ------------------------------ ------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Percent of in Each Percent of in Each Percent of in Each
Allowance Allowance Category Allowance Allowance Category Allowance Allowance Category
for Loan to Total to Total for Loan to Total to Total for Loan to Total to Total
Losses Allowance Allowance Losses Allowance Allowance Losses Allowance Allowance
--------- ---------- --------- --------- ---------- --------- --------- ---------- ---------
(Dollars in Thousands)
Real estate loans
One- to four-family real estate ... $ 649 18.37% 62.07% $ 493 15.88% 60.62% $ 591 18.19% 59.06%
Multi-family and commercial
real estate ..................... 1,438 40.70 22.39 1,339 43.12 23.39 1,848 56.88 24.29
------ ------ ------ ------ ------ ------ ------ ------ ------
Total real estate loans ....... 2,087 59.07 84.46 1,832 59.00 84.01 2,439 75.07 83.35
Consumer loans
Home equity lines of credit ....... 41 1.16 5.28 24 0.77 6.27 158 4.86 6.87
Conventional second mortgages ..... 26 0.74 3.63 22 0.71 3.50 9 0.28 2.79
Automobile loans .................. 74 2.09 2.35 35 1.13 2.31 40 1.23 2.51
Credit cards ...................... 154 4.36 0.40 132 4.25 0.54 183 5.63 0.70
Other consumer loans .............. 45 1.27 0.28 56 1.80 0.36 102 3.14 0.45
------ ------ ------ ------ ------ ------ ------ ------ ------
Total consumer loans .......... $ 340 9.62 11.94 269 8.66 12.98 492 15.14 13.32
Commercial business loans ........... 164 4.64 3.60 215 6.93 3.01 227 6.99 3.33
Unallocated ......................... 942 26.67 -- 789 25.41 -- 91 2.80 --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total ......................... $3,533 100.00% 100.00% $3,105 100.00% 100.00% $3,249 100.00% 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ======
June 30,
------------------------------------------------------------------
1995 1994
-------------------------------- --------------------------------
Percent Percent
of Loans of Loans
Percent of in Each Percent of in Each
Allowance Allowance Category Allowance Allowance Category
for Loan to Total to Total for Loan to Total to Total
Losses Allowance Allowance Losses Allowance Allowance
--------- ---------- --------- --------- ---------- ---------
(Dollars in Thousands)
Real estate loans
One- to four-family real estate ... $ 861 27.48% 59.38% $ 292 9.70% 56.78%
Multi-family and commercial
real estate ..................... 1,426 45.52 22.65 1,610 53.47 24.52
------ ------ ------ ------ ------ ------
Total real estate loans ....... 2,287 73.00 82.03 1,902 63.17 81.30
Consumer loans
Home equity lines of credit ....... -- -- 8.05 -- -- 10.02
Conventional second mortgages ..... 75 2.39 2.81 15 0.50 3.30
Automobile loans .................. 66 2.11 2.56 15 0.50 2.28
Credit cards ...................... 382 12.19 0.88 263 8.73 0.98
Other consumer loans .............. 158 5.04 0.55 71 2.36 0.67
------ ------ ------ ------ ------ ------
Total consumer loans .......... 681 21.73 14.85 364 12.09 17.25
Commercial business loans ........... 102 3.26 3.12 -- -- 1.45
Unallocated ......................... 63 2.01 -- 745 24.74 --
------ ------ ------ ------ ------ ------
Total ......................... $3,133 100.00% 100.00% $3,011 100.00% 100.00%
====== ====== ====== ====== ====== ======
65
Investment Activities
The Bank is authorized to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements and federal
funds. Subject to various restrictions, the Bank may also invest its assets in
investment grade commercial paper and corporate debt securities and mutual funds
whose assets conform to the investments that the Bank is otherwise authorized to
make directly.
Generally, the investment policy of the Bank is to invest funds among
various categories of investments and maturities based upon the Bank's need for
liquidity, to achieve the proper balance between its desire to minimize risk and
maximize yield, and, to a much lesser extent, to provide collateral for
borrowings and to fulfill the Bank's asset/liability management policies. To
date, the Bank's investment strategy has been directed toward high-quality
assets (primarily federal agency obligations and mortgage-backed securities)
with short and intermediate terms (five years or less) to maturity. At June 30,
1998, the weighted average term to maturity or repricing of the security
portfolio was 3.8 years. This did not take into account securities which may be
called prior to their contractual maturity or repricing. See Notes 5 and 6 of
the Notes to Consolidated Financial Statements for information regarding the
maturities of the Bank's investment and mortgage-backed securities.
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with unrealized holding
gains and losses reflected in current earnings. All other debt and marketable
equity securities are classified as securities available for sale and are
reported at fair value, with net unrealized gains or losses reported, net of
income taxes, as a separate component of equity. As a member of the FHLB of New
York, the Bank is required to hold stock in the FHLB of New York which is
carried at cost since there is no readily available market value. Historically,
the Bank has not held any securities considered to be trading securities.
The following table sets forth the composition of the Bank's securities
available for sale and investment securities at the dates indicated.
June 30,
--------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
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 ...... $23,237 47.69% $18,437 51.97% $ 7,302 34.96%
Other obligations ......................... 276 0.57 493 1.39 764 3.65
Mortgage-backed securities ................ 16,946 34.78 6,762 19.06 -- --
Collateralized mortgage obligations ....... 4,003 8.22 6,302 17.77 9,404 45.03
------- ------ ------- ------ ------- ------
Total debt securities ................... 44,462 91.26 31,994 90.19 17,470 83.64
Equity securities ........................... 4,258 8.74 3,481 9.81 3,416 16.36
------- ------ ------- ------ ------- ------
Total securities available for sale ..... $48,720 100.00 $35,475 100.00 $20,886 100.00
======= ====== ======= ====== ======= ======
Investment securities at amortized cost:
US Government and Agency obligations ...... $22,025 48.49 6,049 23.93 10,339 39.81
Other obligations ......................... 388 0.85 848 3.36 1,923 7.41
Mortgage-backed securities ................ 23,011 50.66 18,376 72.71 12,073 46.49
Industrial and financial .................. -- -- -- -- 1,634 6.29
------- ------ ------- ------ ------- ------
Total investment securities ............. $45,424 100.00% $25,273 100.00% $25,969 100.00%
------- ====== ------- ====== ------- ======
Investment securities at fair value ......... $45,547 $25,186 $25,520
======= ======= =======
66
The following table sets forth information regarding the scheduled
maturities, amortized cost, and weighted average yields for the Bank's
securities portfolios at June 30, 1998 by contractual maturity. The table does
not take into consideration the effects of scheduled repayments or possible
prepayments.
At June 30, 1998
----------------------------------------------------------------------------------
Less than 1 year 1 to 5 years 5 to 10 years Over 10 years
------------------- ------------------- ------------------- -------------------
Weighted Weighted Weighted Weighted
Amortized Average Amortized Average Amortized Average Amortized Average
Cost Yield Cost Yield Cost Yield Cost Yield
--------- -------- --------- -------- --------- -------- --------- --------
(Dollars in Thousands)
Securities available for sale:
US Government and Agency obligations .... $ -- --% $23,296 6.05% $ -- --% $ -- --%
Other obligations ....................... -- -- 71 5.09 200 6.60 -- --
Mortgage-backed securities .............. -- -- 16,855 6.39 -- -- -- --
Collateralized mortgage obligations ..... 179 6.91 2,432 5.85 1,408 6.65 -- --
Other equity securities ................. -- -- -- -- -- -- 708 5.63
---- ---- ------- ---- ------- ---- ------ ----
Sub-total ............................. 179 6.91 42,654 6.17 1,608 6.64 708 5.63
FHLB stock .............................. -- -- -- -- -- -- 3,552 7.45
---- ---- ------- ---- ------- ---- ------ ----
Total securities available for sale ... $179 6.91 $42,654 6.17 $ 1,608 6.64 $4,260 7.15
==== ==== ======= ==== ======= ==== ====== ====
Investment securities:
US Government and Agency obligations .... $ 25 7.38 $22,000 6.08 $ -- -- $ -- --
Other obligations ....................... -- -- 271 6.40 117 7.25 -- --
Mortgage-backed securities .............. 657 6.85 10,452 6.68 11,519 6.23 383 7.05
---- ---- ------- ---- ------- ---- ------ ----
Total investment securities ........... $682 6.87% $32,723 6.27% $11,636 6.24% $ 383 7.05%
==== ==== ======= ==== ======= ==== ====== ====
At June 30, 1998
----------------------------
Total Securities
----------------------------
Weighted
Amortized Average Fair
Cost Yield Value
--------- -------- -------
(Dollars in Thousands)
Securities available for sale:
US Government and Agency obligations .... $23,296 6.05% $23,237
Other obligations ....................... 271 6.20 276
Mortgage-backed securities .............. 16,855 6.39 16,946
Collateralized mortgage obligations ..... 4,019 6.18 4,003
Other equity securities ................. 708 5.63 706
------- ---- -------
Sub-total ............................. 45,149 6.18 45,168
FHLB stock .............................. 3,552 7.45 3,552
------- ---- -------
Total securities available for sale ... $48,701 6.27 $48,720
======= ==== =======
Investment securities:
US Government and Agency obligations .... $22,025 6.08 $21,999
Other obligations ....................... 388 6.66 389
Mortgage-backed securities .............. 23,011 6.47 23,159
------- ---- -------
Total investment securities ........... $45,424 6.28% $45,547
======= ==== =======
67
Sources of Funds
General. The Bank's primary sources of funds are deposits, amortization and
prepayment of loan principal, maturities of securities, short-term investments,
funds provided from operations and borrowings.
Deposits. The Bank offers a variety of deposit accounts having a range of
interest rates and terms. The Bank's deposits consist of savings accounts,
school savings accounts (the largest "Save For America" school savings program
in the U.S., a volunteer program in which students are given the opportunity to
open and maintain a savings account while at school in order to teach wise money
management), money market accounts, demand deposit accounts and time deposits
currently ranging in terms from three months to five years. The Bank only
solicits deposits from its primary market area and does not currently solicit
brokered deposits. The Bank relies primarily on competitive pricing policies,
advertising and customer service to attract and retain these deposits. At June
30, 1998, the Bank's deposits totaled $450.0 million, of which $413.4 million
were interest-bearing deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition. The variety of deposit accounts offered by the Bank has allowed it
to be competitive in obtaining funds and to respond with flexibility to changes
in consumer demand. The Bank has become more susceptible to short-term
fluctuations in deposit flows, as customers have become more interest rate
conscious. The Bank manages the pricing of its deposits in keeping with its
asset/liability management, liquidity and profitability objectives. Based on its
experience, the Bank believes that its savings, school savings, money market and
demand deposit accounts are relatively stable sources of deposits. However, the
ability of the Bank to attract and maintain time deposits and the rates paid on
these deposits has been and will continue to be significantly affected by market
conditions.
The following table sets forth the distribution and deposit activity of the
Bank's deposit accounts for the periods indicated.
School Money Demand Time Total Number
Savings Savings Market Deposits Deposits Total of Accounts
--------- ------- -------- -------- -------- -------- ------------
(Dollars in Thousands)
Balance as of June 30, 1995 ... $127,333 $ 6,813 $18,966 $33,432 $212,419 $398,963 74,668
Net deposits (withdrawals) .... (2,094) 3,499 (2,886) 5,001 (15,575) (12,055)
Interest credited ............. 3,722 310 487 250 12,862 17,631
-------- ------- ------- ------- -------- --------
Balance as of June 30, 1996 ... 128,961 10,622 16,567 38,683 209,706 404,539 79,283
Net deposits (withdrawals) .... (8,780) 2,698 (1,565) 6,887 7,990 7,230
Interest credited ............. 3,700 589 448 274 12,610 17,621
-------- ------- ------- ------- -------- --------
Balance as of June 30, 1997 ... 123,881 13,909 15,450 45,844 230,306 429,390 86,741
Net deposits (withdrawals) .... (1,898) 2,558 5,653 7,806 (12,778) 1,341
Interest credited ............. 3,629 788 569 303 13,521 18,810
-------- ------- ------- ------- -------- --------
Balance as of June 30, 1998 ... $125,612 $17,255 $21,672 $53,953 $231,049 $449,541 89,370
======== ======= ======= ======= ======== ========
68
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Bank as of the dates indicated.
Balance as of June 30,
---------------------------------------------------------------
1998 1997 1996
------------------- -------------------- -------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Savings accounts (3.0%) ................. $125,612 27.94% $123,881 28.85% $126,951 31.38%
School savings accounts (5.5%) .......... 17,255 3.84 13,909 3.24 10,622 2.63
Money market accounts (2.75% to 3.93%) .. 21,672 4.82 15,450 3.60 16,567 4.10
Demand deposits (0% to 1.75%) ........... 53,953 12.00 45,844 10.68 40,693 10.06
Time deposits:
2.00-2.99% ............................ -- -- -- -- 5 0.00
3.00-3.99% ............................ 2 0.00 14 0.00 3,470 0.86
4.00-4.99% ............................ 4,105 0.91 10,325 2.40 47,062 11.63
5.00-5.99% ............................ 190,539 42.39 166,966 38.88 81,589 20.17
6.00-6.99% ............................ 17,664 3.93 25,244 5.88 47,513 11.74
7.00-7.99% ............................ 18,709 4.16 27,727 6.46 30,067 7.43
8.00-8.99% ............................ 30 0.01 30 0.01 -- --
-------- ------ -------- ------ -------- ------
Total time deposits ................. 231,049 51.40 230,306 53.63 209,706 51.83
-------- ------ -------- ------ -------- ------
Total deposits .......................... $449,541 100.00% $429,390 100.00% $404,539 100.00%
======== ====== ======== ====== ======== ======
69
The following table shows rate and maturity information for the Bank's time
deposits as of June 30, 1998.
Amount Due
-----------------------------------------------------------------------------------------------
12 months 12 months 12 months 12 months 12 months
ended ended ended ended ended
June 30, 1999 June 30, 2000 June 30, 2001 June 30, 2002 June 30, 2003 Thereafter Total
------------- ------------- ------------- ------------- ------------- ---------- --------
(In Thousands)
Interest Rate
3.00-3.99% .... $ -- $ -- $ -- $ -- $ 2 $ -- $ 2
4.00-4.99% .... 4,080 -- -- -- -- 25 4,105
5.00-5.99% .... 140,476 32,594 6,540 3,073 7,856 -- 190,539
6.00-6.99% .... 8,284 5,681 1,308 1,865 526 -- 17,664
7.00-7.99% .... 6,680 11,768 135 126 -- -- 18,709
8.00-8.99% .... 30 -- -- -- -- -- 30
-------- ------- ------ ------ ------ ---- --------
Total ....... $159,550 $50,043 $7,983 $5,064 $8,384 $ 25 $231,049
======== ======= ====== ====== ====== ==== ========
The following table indicates the amount of the Bank's time deposits by the
time remaining until maturity as of June 30, 1998.
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 ..... $38,586 $45,097 $54,798 $61,440 $199,921
Time deposits $100,000 or more ....... 5,204 7,791 8,074 10,059 31,128(1)
------- ------- ------- ------- --------
Total time deposits .............. $43,790 $52,888 $62,872 $71,499 $231,049
======= ======= ======= ======= ========
- ----------
(1) Substantially all time deposits of $100,000 or more are maintained at
negotiated rates.
Borrowings. Although deposits are the Bank's primary source of funds, the
Bank's practice has been to utilize borrowings when they are a less costly
source of funds, can be invested at a positive interest rate spread or when the
Bank needs additional funds to satisfy loan demand.
Cohoes' borrowings historically have consisted primarily of advances from
the FHLB of New York and securities sold under agreements to repurchase. FHLB
advances can be made pursuant to several different credit programs, each of
which has its own interest rate and range of maturities. The Bank currently
maintains available lines of credit and is currently authorized to borrow up to
$49.2 million on lines of credit with the FHLB of New York. At June 30, 1998,
the Bank had outstanding $19.9 million in other borrowings from the FHLB of New
York. See Note 12 of the Notes to Consolidated Financial Statements.
70
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,
------------------------
1998 1997 1996
------- ------- ------
(In Thousands)
Maximum Balance:
FHLB advances ..................................... $19,983 $16,145 $7,100
Securities sold under agreements to repurchase .... -- -- 6,054
Other borrowings .................................. -- 12 59
Average Balance:
FHLB advances ..................................... $ 5,467 $ 2,390 $1,955
Securities sold under agreements to repurchase .... -- -- 2,700
Other borrowings .................................. -- 2 39
The following table sets forth the amount and rate of the Bank's borrowings
at the dates indicated.
June 30,
------------------------
1998 1997 1996
------- ------- ------
(Dollars in Thousands)
FHLB advances ....................................... $19,897 $ -- $2,100
Other borrowings .................................... -- -- 16
------- ------- ------
Total borrowings ................................ $19,897 $ -- $2,116
======= ======= ======
Weighted average interest rate of FHLB advances ..... 6.07% 5.56% 5.78%
==== ==== ====
Weighted average interest rate of securities sold
under agreements to repurchase .................... -- -- 6.67%
==== ==== ====
Weighted average interest rate of other borrowings .. -- 9.50% 9.50%
==== ==== ====
71
Subsidiary and Other Activities
The Bank maintains three wholly-owned subsidiaries: CSB Financial Services,
Inc., CSB Funding, Inc. and CSB Services Agency, Inc. CSB Financial Services,
Inc. earns commission income through the sale of securities, mutual funds,
annuities and other insurance products. During the fiscal year ended June 30,
1998, CSB Financial Services had revenues of $348,000 and net income of $16,000.
As of June 30, 1998, CSB Funding, Inc. was inactive.
CSB Services Agency, Inc. owns a 50 percent interest in Community Bank
Insurance Brokers of New York, which is a joint venture formed for the purpose
of selling property and casualty insurance to the Bank's customers and to the
general public. The joint venture was formed in July 1998. The joint venture has
entered into a service agreement with the insurance agency which owns the other
50% joint venture interest in Community Bank Insurance Brokers of New York. Such
agency will provide administrative services and support directly to the joint
venture.
Competition
Cohoes faces strong competition, both in originating real estate and other
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from other savings institutions, commercial banks, credit unions
and mortgage bankers making loans secured by real estate located in the Bank's
primary market area. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
The Bank attracts all of its deposits through its branch offices, primarily
from the communities in which those branch offices are located; therefore,
competition for those deposits is principally from mutual funds and other
savings institutions, commercial banks and credit unions located in the same
communities. The Bank competes for these deposits by offering a variety of
deposit accounts at competitive rates, convenient business hours, and convenient
branch locations with interbranch deposit and withdrawal privileges. Automated
teller machine facilities are also available.
Employees
At June 30, 1998, the Bank had 169 full-time employees and 53 part-time
employees. The Bank's employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.
Properties
The Bank conducts its business at its main office and 16 other banking
offices. The following table sets forth information relating to each of the
Bank's offices as of June 30, 1998. The net book value of the Bank's premises
and equipment (including land, building and leasehold improvements and
furniture, fixtures and equipment) at June 30, 1998 was $7.3 million. See Note 9
of the Notes to Consolidated Financial Statements.
72
Net Book Value
Original Total of Property or
Leased Year Date of Approximate Leasehold
or Leased or Leased Square Improvements at
Locations Owned Acquired Expiration Footage June 30, 1998
- ------------------------------- ------ --------- ---------- ----------- ---------------
(In thousands)
Cohoes Loan Center Owned 1992 N/A 10,500 $ 683
50 Mohawk Street
Cohoes, NY 12047
Annex Owned 1981 N/A 3,723 174
60 Remsen Street
Cohoes, NY 12047
Operation Center Owned 1987 N/A 11,190 332
244 North Mohawk Street
Cohoes, NY 12047
Community Outreach Center Leased 1995 01/16/99 200 --
Urban League Headquarters
95 Livingston Avenue
Albany, NY
Building Adjacent Latham Office Owned 1986 N/A 3,024 80
Storage Facility
771 New Loudon Road
Latham, NY 12110
Branch Offices:
Main Office Owned 1924 N/A 15,223 332
75 Remsen Street
Cohoes, NY 12047
Cohoes/I-787 Office (2) Owned 1976 N/A 988 141
New Courtland Street
Cohoes, NY 12047
Latham Office Owned 1967 N/A 9,041 533
Corner of Pine & Route 9
Latham, NY 12110
Clifton Park Office Owned 1972 N/A 5,297 334
525 Visher Ferry Road
Clifton Park, NY 12065
Delmar Office Owned 1994 N/A 4,768 1,476
197 Delaware Avenue
Delmar, NY 12182
Lansingburgh Office Owned 1976 N/A 3,216 270
820 Second Avenue
Troy, NY 12182
Loudonville Office Leased 1996 07/31/01 4,000 2
475 Albany-Shaker Road
Loudonville, NY 12211
Guilderland Office Leased 1995 10/31/05 3,500(1) 1
1973 Western Avenue
Albany, NY 12203
- ----------
(1) 3,500 square feet of which 1,265 square feet is subleased by Noreast Real
Estate.
(2) The public accommodation office is expected to become a branch office in
October, 1998.
73
PROPERTIES (Continued)
Net Book Value
Original Total of Property or
Leased Year Date of Approximate Leasehold
or Leased or Leased Square Improvements at
Locations Owned Acquired Expiration Footage June 30, 1998
- ------------------------------- ------ --------- ---------- ----------- ---------------
(In thousands)
Supermarket Branches:
Glenville Leased 1993 10/31/03 323 $ 72
290 Saratoga Road
Scotia, NY 12302
Rotterdam Leased 1993 03/31/03 350 82
1879 Altamont Avenue
Schenectady, NY 12303
Colonie Leased 1993 09/30/03 336 77
1892 central Avenue
Colonie, NY 12205
Westgate Leased 1995 04/30/00 565 80
911 Central Avenue
Albany, NY 12206
Brunswick Leased 1996 10/31/01 304 83
716 Hoosick Road
Brunswick, NY 12180
Bethlehem Leased 1997 05/31/02 312 76
1395 New Scotland Road
Slingerlands, NY 12159
Malta Leased 1996 05/31/01 524 123
1 Kendall Way
Malta, NY 12020
Niskyuna Leased 1996 06/30/01 544 123
2333 Nott Street East
Niskayuna, NY 12309
Queensbury (1) Leased 1998 05/31/03 360 1
677 Upper Glen Street
Queensbury, NY 12804
- ----------
(1) Opened in July, 1998.
Legal Proceedings
The Bank is involved as plaintiff or defendant in various legal actions
arising in the normal course of its business. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the opinion of
management, after consultation with counsel representing the Bank in the
proceedings, that the resolution of these proceedings should not have a material
effect on the Bank's results of operations.
74
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF SFS BANCORP, INC.
General
SFS is the holding company for Schenectady Federal and its subsidiary. On
June 29, 1995, Schenectady Federal completed its Conversion from a federal
mutual savings and loan association to a federal stock savings bank. On that
date, SFS issued and sold 1,495,000 shares of its common stock at $10.00 per
share in connection with the Conversion. Net proceeds to SFS were $14.2 million
after reflecting Conversion expenses of $750,000. SFS used $7.1 million of the
net proceeds to acquire all of the issued and outstanding stock of Schenectady
Federal.
Schenectady Federal operates as a thrift institution with the principal
business being the solicitation of deposits from the general public; these
deposits, together with funds generated from operations, are invested primarily
in single-family, owner occupied adjustable-rate mortgage loans. Schenectady
Federal is a member of the FHLB of New York and is subject to certain
regulations of the Board of Governors of the Federal Reserve System with respect
to reserves required to be maintained against deposits and certain other
matters. Schenectady Federal's deposit accounts are insured by the SAIF, as
administered by the FDIC, up to the maximum amount permitted by law. Schenectady
Federal is subject to regulation by the OTS and the FDIC. Schenectady Federal
conducts its business through a four branch network located in Schenectady
County situated in eastern upstate New York. Schenectady Federal's results of
operations are dependent primarily on net interest income, which is the
difference between the interest income earned on its loan and mortgage-backed
securities portfolios, investment securities and securities available for sale
portfolios and other earning assets, and its cost of funds, consisting of the
interest paid on its deposits. Schenectady Federal's operating results are also
impacted by the provision for loan losses and, to a lesser extent, by gains and
losses on the sale of its securities available for sale portfolio and other
noninterest income. Schenectady Federal's operating expenses principally consist
of employee compensation and benefits, occupancy expense and other general and
administrative expenses. Schenectady Federal's results of operations are also
significantly affected by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of the regulatory authorities.
Asset/Liability Management
The principal financial objective of SFS' interest rate risk management is
to achieve long-term profitability while limiting its exposure to fluctuating
interest rates. SFS has sought to reduce exposure of its earnings to changes in
market interest rates by managing the mismatch between assets and liability
maturities and interest rates. The principal element in achieving this objective
is to increase the interest-rate sensitivity of SFS assets by holding loans with
interest rates subject to periodic adjustment to market conditions. In addition,
SFS maintains an investment portfolio which primarily consists of securities
that mature within five years. SFS relies on retail deposits as its primary
source of funds. Management believes retail deposits, compared to brokered
deposits, limit the effects of interest rate fluctuation because they generally
represent a more stable source of funds. As part of its interest rate risk
strategy, SFS promotes transaction accounts and certificates of deposit with
terms up to five years.
75
The following table is provided by the OTS and sets forth as of December
31, 1997 SFS interest rate risk as measured by changes in its NPV (i.e. the
present value of the expected cash flow from assets, liabilities and off-balance
sheet contracts) for instantaneous and sustained parallel shifts in the yield
curve, in 100 basis point increments, up and down 400 basis points.
Change in
Interest Rate $ Amount $ Change % Change
------------- -------- -------- --------
(Basis Points) (Dollars in Thousands)
+400 $15,434 $(7,588) (33)%
+300 17,932 (5,090) (22)
+200 20,166 (2,856) (12)
+100 21,956 (1,067) (5)
0 23,022 -- --
-100 23,620 598 3
-200 24,227 1,024 5
-300 24,854 1,832 8
-400 26,008 2,986 13
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the method of analysis presented in the foregoing table. For
example, although certain assets and liabilities may have similar maturities or
periods to reprice, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of asset and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as ARM loans, have features which restrict
changes in interest rates on a short-term basis and over the life of the asset.
Further, in the event of a change in interest rates, expected rates of
prepayment on loans and early withdrawals from certificates could likely deviate
significantly from those assumed in calculating the table. It is also possible
as a result of an interest rate increase, the increased mortgage payments
required of ARM borrowers could result in an increase in delinquencies and
defaults. Accordingly, the data presented in the table above should not be
relied upon as indicative of actual results in the event of changes in interest
rates. Furthermore, the NPV presented in the table is not intended to represent
the fair market value of SFS.
Liquidity and Capital Resources
SFS most liquid assets are cash and cash equivalents and available for sale
securities. The level of these assets is dependent on SFS operating, financing
and investing activities during any given period. Cash and cash equivalents of
$2.2 million at December 31, 1997, increased $4.4 million to $6.6 million at
June 30, 1998, primarily as a result of increases in federal funds sold. SFS
primary sources of funds are deposits and principal and interest payments on its
loan and securities portfolios. While maturities and scheduled amortization of
loans and securities are, in general, a predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition.
Schenectady Federal is required to maintain minimum levels of liquid assets
as defined by OTS regulations. This requirement, which may vary at the direction
of the OTS depending on economic conditions and deposit flows, is based upon a
percentage of deposits and short-term borrowings. The required ratio of liquid
assets to deposits and short-term borrowings is currently 4%. Schenectady
Federal's liquidity ratio was 21.54% and 19.72% at June 30, 1998 and December
31, 1997, respectively.
SFS cash flows are comprised of three classifications: cash flows from
operating activities; cash flows from investing activities; and cash flows from
financing activities. Net cash flows provided by operating activities,
consisting primarily of interest and dividends received on earning assets less
interest paid on deposits, was $1.0 million and $1.1 million for the six months
ended June 30, 1998 and 1997, respectively. Net cash used by investing
activities, consisting
76
primarily of disbursements for the origination and purchase of loans and the
acquisition of securities available for sale partially offset by principal
collections on loans and mortgage-backed securities and by proceeds from the
maturity of investment securities, was $6.7 million for the six months ended
June 30, 1997. Net cash of $578,000 was provided by investing activities for the
six months ended June 30, 1998 and consisted primarily of proceeds from the
maturity, call and paydown of investment securities and mortgage-backed
securities offset by the purchase of securities available for sale and the
increase in loans receivable. Net cash provided by financing activities for the
six months ended June 30, 1998 of $2.8 million consisted primarily of net
increases in deposit accounts during the period offset by the payment of
dividends. Net cash provided by financing activities, consisting primarily of
net increases in deposit accounts during the period offset by the purchase of
treasury stock and payment of dividends, was $7.0 million for the six months
ended June 30, 1997.
During the six month period ended June 30, 1998, SFS did not repurchase any
of its shares. During the six month period ended June 30, 1997 SFS repurchased
42,475 shares. The average price of treasury shares purchased was $16.58
totaling $704,000. The average price paid of $16.58 was approximately 95.1% of
SFS book value per share of $17.44 at June 30, 1997. The OTS restricts the
number of shares which may be repurchased during the three year period following
Conversion. Generally, only 5% of shares outstanding may be repurchased annually
during the first three years following Conversion. However, the OTS has allowed
additional share repurchases of 5% annually based on extenuating facts and
circumstances. No shares have been purchased since October, 1997, and no
additional shares will be purchased prior to consummation or termination of the
Merger.
At June 30, 1998, Schenectady Federal's capital exceeded each of the
capital requirements of the OTS. At June 30, 1998, Schenectady Federal's
tangible and core capital levels were both $19.6 million (11.0% of total
adjusted assets) and its risk-based capital level was $20.5 million (20.3% of
total risk-weighted assets). The current minimum regulatory capital ratio
requirements are 1.5% for tangible capital, 3.0% for core capital and 8.0% for
risk-weighted capital.
Financial Condition
June 30, 1998 compared to December 31, 1997
Total assets increased $3.7 million (2.1%) to $178.1 million at June 30,
1998 from $174.4 million at December 31, 1997. This increase occurred as loans
receivable, net, grew $7.4 million (5.6%) to $141.2 million at June 30, 1998.
The growth in the loan portfolio consisted primarily of residential mortgage
loans. Securities available for sale increased $4.0 million (98.2%) to $8.1
million at June 30, 1998. Federal funds sold increased $5.3 million at June 30,
1998 from $300,000 at December 31, 1997 due in part to securities called late in
the second quarter of 1998. Offsetting these increases was a decrease in
investment securities of $12.1 million (41.6%) to $16.9 million.
At June 30, 1998, total liabilities were $156.2 million representing an
increase of $3.2 million (2.1%) from December 31, 1997. The increase was
primarily attributable to an increase in retail deposits. Stockholders' equity
increased $484,000 to $21.9 million at June 30, 1998 as compared to $21.4
million at December 31, 1997. Retained earnings increased by $373,000 as a
result of net income of SFS for the six month period ended June 30, 1998
partially offset by cash dividends declared.
Nonperforming assets increased $45,000 (3.1%) totaling $1.5 million at June
30, 1998. Management of Schenectady Federal does not view this increase as a
significant adverse trend. The ratio of nonperforming loans to total loans
receivable was .95% at June 30, 1998, compared with 1.00% at December 31, 1997.
The ratio of nonperforming assets to total assets was .84% at June 30, 1998 and
December 31, 1997.
December 31, 1997 compared to December 31, 1996
Total assets increased $9.5 million (5.8%) to $174.4 million at December
31, 1997 from $164.9 million at December 31, 1996. This increase consisted
primarily of an increase in loans receivable, net of $15.3 million (12.9%) to
$133.8 million at December 31, 1997 and increases in securities available for
sale, at fair value, of $2.1 million (104.4%) to $4.1 million at December 31,
1997. These increases were offset by decreases in investment securities of $7.2
million (19.9%) to $29.0 million and federal funds sold of $1.3 million (81.3%)
to $300,000 at December 31, 1997.
77
At December 31, 1997, total liabilities were $153.0 million representing an
increase of $9.8 million (6.8%) from December 31, 1996. The increase was
entirely attributable to increases in total deposits to $150.5 million as of
December 31, 1997 from $140.6 million a year earlier.
Stockholders' equity decreased $240,000 to $21.4 million at December 31,
1997 as compared to $21.7 million at December 31, 1996 primarily due to SFS
stock repurchase program. As a result of the repurchase program, SFS purchased
$1.5 million of treasury stock during 1997. Retained earnings increased by
$735,000 as a result of net income of SFS for the year ended December 31, 1997
offset by the declaration and payment of dividends of $333,000.
Nonperforming assets totaled $1.5 million and $1.0 million at December 31,
1997 and 1996, respectively. The increase in nonperforming assets resulted from
an increase in the number of loans comprising the balance combined with an
increase in the average balance of each loan. All loans classified as
nonperforming are secured by real estate with 45.0% secured by one-to-four
family residential property. Management of the Bank does not view this increase
as a significant adverse trend since subsequent to December 31, 1997, three of
the loans comprising the balance as of that date totaling $389,000 have either
paid off the entire outstanding balance or paid all past due amounts. The ratio
of nonperforming loans to loans receivable, net was 1.01% at December 31, 1997,
compared with .70% at December 31, 1996. The ratio of nonperforming assets to
total assets was .84% at December 31, 1997 compared with .61% at December 31,
1996.
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Loans Receivable, Net
A summary of loans receivable, net at June 30, 1998 and December 31, 1997
is as follows:
June 30, 1998 December 31, 1997
------------- -----------------
(In Thousands)
Loans secured by real estate:
Residential:
Conventional ................................. $109,961 $100,277
Home Equity .................................. 21,024 22,658
FHA Insured .................................. 2,470 2,772
VA Guaranteed ................................ 1,662 2,028
Commercial and multi-family .................... 6,070 6,130
-------- --------
141,187 133,865
Other loans .................................... 918 721
-------- --------
142,105 134,586
-------- --------
Less:
Unearned discount and net deferred loan fees . 28 22
Allowance for loan losses .................... 855 778
-------- --------
883 800
-------- --------
Loans receivable, net .......................... $141,222 $133,786
======== ========
The following table sets forth the information with regard to nonperforming
assets.
June 30, 1998 December 31, 1997
------------- -----------------
(In Thousands)
Loans on a non-accrual status .................. $1,161 $1,328
Loans contractually past due 90 days or more
and still accruing interest .................. 191 19
Total nonperforming loans ................... 1,352 1,347
Other real estate owned ........................ 151 111
------ ------
Total nonperforming assets .................. $1,503 $1,458
====== ======
The following table sets forth the information with regard to changes in
the allowance for loan losses.
For the six months
ended June 30,
------------------
1998 1997
---- ----
(In Thousands)
Balance, beginning of period .............................. $778 $642
Provision charged to operations ........................... 60 60
Loans charged off ......................................... (21) (2)
Recoveries on loans previously charged off ................ 38 18
---- ----
Balance, end of period .................................... $855 $718
==== ====
79
Average Balance Data, Interest Rates and Interest Differential and
Rate/Volume Analysis
The following information regarding average balances and rates earned/paid
and the rate/volume analysis is an integral component of the discussion of
operating results for the six months ended June 30, 1998, compared with the
corresponding period of the prior year.
The average balance data that follows reflects the average yield on assets
and average cost of liabilities for the periods indicated. All average balances
are daily average balances. Such yields and costs are derived by dividing income
or expenses by the average balance of assets or liabilities, respectively, for
the periods shown. The yields and costs include fees which are considered
adjustments to yields.
80
The rate/volume analysis 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 Schenectady Federal'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.
Six Months Ended June 30,
-----------------------------------------------------------------
1998 1997
------------------------------- -------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------
Interest-earning assets:
Loans receivable, net (1) ............ $137,639 $5,325 7.80% $120,551 $4,695 7.85%
Mortgage-backed securities ........... 15,682 486 6.25 19,665 622 6.38
Securities available for sale ........ 6,116 198 6.53 3,869 125 6.52
Debt securities ...................... 8,033 277 6.95 14,446 461 6.44
Other interest-earning assets
including cash equivalents ......... 2,102 56 5.37 3,901 103 5.32
FHLB stock ........................... 1,338 49 7.39 1,305 41 6.34
-------- ------ -------- ------
Total interest-earning assets .......... 170,910 6,391 7.54 163,737 6,047 7.45
Interest-bearing liabilities:
Savings accounts ..................... 36,443 544 3.01 37,160 555 3.01
Money market accounts ................ 7,492 122 3.28 6,581 111 3.40
Demand and NOW accounts (2) .......... 11,035 78 1.43 10,364 78 1.52
Certificate accounts ................. 95,793 2,703 5.69 89,910 2,433 5.46
Escrow ............................... 1,209 13 2.17 1,011 11 2.19
-------- ------ -------- ------
Total interest-bearing liabilities ..... 151,972 3,460 4.59% 145,026 3,188 4.43%
-------- ------ ---- -------- ------ ----
Net interest income .................... $2,931 $2,859
====== ======
Net interest rate spread ............... 2.95% 3.02%
==== ====
Net earning assets ..................... $ 18,938 $ 18,711
======== ========
Net yield on average
interest-earning assets .............. 3.46% 3.52%
==== ====
Average interest-earning assets to
average interest-bearing liabilities . 1.12% 1.13%
==== ====
Year Ended December 31,
-------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
Interest-earning assets:
Loans receivable, net (1) ............ $124,994 $ 9,757 7.81% $111,524 $ 8,758 7.85% $ 97,120 $ 7,800 8.03%
Mortgage-backed securities ........... 18,807 1,189 6.32 22,403 1,418 6.33 23,199 1,464 6.31
Securities available for sale ........ 4,368 286 6.55 5,169 307 5.94 7,911 492 6.22
Debt securities ...................... 13,779 896 6.50 16,698 1,059 6.34 17,227 1,041 6.04
Other interest-earning assets
including cash equivalents ......... 2,845 153 5.38 4,698 247 5.26 10,948 640 5.85
FHLB stock ........................... 1,322 87 6.58 1,204 78 6.48 1,118 86 7.69
-------- ------- -------- ------- -------- -------
Total interest-earning assets .......... 166,115 12,368 7.45 161,696 11,867 7.34 157,523 11,523 7.32
Interest-bearing liabilities:
Savings accounts ..................... 36,982 1,113 3.01 38,857 1,173 3.02 44,054 1,325 3.01
Money market accounts ................ 7,197 251 3.49 5,195 161 3.10 4,809 129 2.68
Demand and NOW accounts (2) .......... 10,660 159 1.49 10,102 148 1.47 9,090 133 1.46
Certificate accounts ................. 91,420 5,075 5.55 85,624 4,680 5.46 82,893 4,620 5.57
Escrow ............................... 1,162 25 2.15 1,155 25 2.16 1,266 29 2.29
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities ..... 147,421 6,623 4.49 140,951 6,187 4.39 142,112 6,236 4.39
-------- ------- ---- -------- ------- ---- -------- ------- ----
Net interest income .................... $ 5,745 $ 5,680 $ 5,287
======= ======= =======
Net interest rate spread ............... 2.96% 2.95% 2.93%
==== ==== ====
Net earning assets ..................... $ 18,694 $ 20,745 $ 15,411
======== ======== ========
Net yield on average
interest-earning assets .............. 3.46% 3.51% 3.36%
==== ==== ====
Average interest-earning assets to
average interest-bearing liabilities . 1.13% 1.15% 1.11%
==== ==== ====
- ----------
(1) Calculated net of deferred loan fees.
(2) Includes noninterest-bearing demand accounts.
81
Six Months Ended June 30, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996
Compared with Compared with Years Ended Compared With Years Ended
Six Months Ended June 30, 1997 December 31, 1996 December 31, 1995
------------------------------ ---------------------------- ---------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Due to Due to
------------------------------ ---------------------------- ----------------------------
Volume Rate Net Volume Rate Net Volume Rate Net
------ ---- ----- ------ ---- ----- ------ ---- -----
Interest-earning assets:
Loans receivable, net ............. $ 661 $(31) $ 630 $1,051 $(52) $ 999 $1,127 $(169) $ 958
Mortgage-backed securities ........ (124) (12) (136) (227) (2) (229) (50) 4 (46)
Securities-available for sale ..... 73 0 73 (51) 30 (21) (165) (20) (185)
Debt securities ................... (225) 41 (184) (190) 27 (163) (29) 47 18
Other interest-earning assets ..... (48) 1 (47) (100) 6 (94) (334) (59) (393)
FHLB stock ........................ 1 7 8 8 1 9 8 (16) (8)
----- ---- ----- ------ ---- ----- ------ ----- -----
Total interest-earning assets ....... $ 338 $ 6 $ 344 $ 491 $ 10 $ 501 $ 557 $(213) $ 344
===== ==== ===== ====== ==== ===== ====== ===== =====
Interest-bearing liabilities:
Savings deposits .................. $ (11) $ 0 $ (11) $ (56) $ (4) $ (60) $ (157) $ 5 $(152)
Money market accounts ............. 15 (4) 11 74 16 90 9 23 32
Demand and NOW deposits ........... 5 (5) 0 8 3 11 15 -- 15
Certificate accounts .............. 163 107 270 320 75 395 146 (86) 60
Escrow ............................ 2 0 2 0 0 0 (2) (2) (4)
----- ---- ----- ------ ---- ----- ------ ----- -----
Total interest-bearing liabilities .. $ 174 $ 98 $ 272 $ 346 $ 90 $ 436 $ 11 $ (60) $ (49)
===== ==== ===== ====== ==== ===== ====== ===== =====
Change in net interest income ....... $ 72 $ 65 $ 393
82
Comparison of Operating Results For The Six Months Ended June 30, 1998
Compared to the Six Months Ended June 30, 1997
Net Income. Net income for the six months ended June 30, 1998 was $567,000
or $.52 basic earnings per share and $.49 diluted earnings per share. This
represents an increase of $74,000 (15.0%) from the comparable period of the
prior year. The increase in net income was primarily a result of increases in
net interest income and noninterest income combined with a decrease in
noninterest expense and offset by an increase in income tax expense. The
provision for loan losses was consistent with the same period a year ago. The
annualized ROA for the first half of 1998 amounted to .65% compared with .59%
for the comparable period a year ago. The annualized ROE was 5.34% (on average
equity of $21.4 million) compared with 4.62% (on average equity of $21.3
million) a year earlier.
Net Interest Income. Interest income for the six months ended June 30, 1998
totaled $6.4 million, an increase of $344,000 (5.7%) from 1997's first half. The
primary reason for the increase was the fact that average loans, which are SFS
highest yielding assets, increased as a percentage of total interest-earning
assets from 73.6% during the first half of 1997 to 80.5% for the same period in
1998. Other factors affecting interest income were an increase in earnings on
loans which increased $630,000 (13.4%) as a result of a $17.1 million (14.2%)
increase in the average balance invested offset by a 5 basis point decrease in
average rates earned. Interest earned on mortgage-backed securities decreased
$136,000 (21.9%) as a result of the combined effect of a $4.0 million (20.3%)
decrease in the average balance invested and a 13 basis point decrease in
average rates earned. Interest income on securities available for sale increased
$73,000 (58.4%) as a result of an increase of $2.2 million (58.1%) in the
average invested balance combined with an increase of one basis point in average
rates earned. Interest income on debt securities decreased $184,000 (39.9%) as a
result of a decrease in average invested balances of $6.4 million (44.4%) offset
by an increase in rates earned of 51 basis points. Earnings on other
interest-earning assets, primarily federal funds sold, decreased $47,000 (45.6%)
as a result of a $1.8 million (46.1%) decrease in the average invested balance
offset by a five basis point increase in the average rate earned.
Interest expense for the six months ended June 30, 1998 amounted to $3.5
million, $272,000 (8.5%) greater than the corresponding period of the prior
year. The increase occurred as a result of a $6.9 million (4.8%) increase in
average interest-bearing liabilities to $152.0 million combined with an 16 basis
point increase in average rates paid to 4.59%. The mix within the deposit
structure changed as the average balances grew in certificate accounts by $5.9
million (6.5%) and in money market accounts and demand and NOW accounts by $1.6
million (9.3%). Average savings account balance declined $717,000 (1.9%). The
increase in average rates paid on certificate accounts of 23 basis points to
5.69% was a reflection of general interest rates and a competitive environment
that prevailed during the first six months of 1998 compared with 1997.
Net interest income for the six months ended June 30, 1998 totaled $2.9
million, $72,000 (2.5%) greater than the comparable period a year ago. The
interest rate spread decreased 7 basis points to 2.95% for the six months ended
June 30, 1998. The net interest margin for the six months ended June 30, 1998
was 3.46%, which was six basis points less than the comparable period a year
ago.
Provision for Loan Losses. For the six months ended June 30, 1998 and 1997,
the provision for loan losses totaled $60,000. Schenectady Federal utilizes the
provision for loan losses to maintain an allowance for loan losses that it deems
appropriate to provide for known and inherent risks in its loan portfolio. In
determining the adequacy of its allowance for loan losses, management takes into
account the current status of Schenectady Federal's loan portfolio and changes
in appraised values of collateral as well as general economic conditions. At
June 30, 1998, the allowance for loan losses amounted to $855,000 or 63.2% of
total nonperforming loans.
Noninterest Income. Noninterest income amounted to $226,000 for the six
months ended June 30, 1998 compared to $168,000 for the six months ended June
30, 1997. The increase was primarily attributable to increased sales production
in non-deposit insurance products by Schenectady Federal's subsidiary which
resulted in an increase of $25,000 (212.3%) in revenue over the same period a
year ago and an increase in other loan charges of $30,000 (55.6%) to $84,000.
83
Noninterest Expense. Noninterest expense decreased $19,000 (0.9%) to $2.1
million for the six months ended June 30, 1998, as compared with the same period
in 1997. Advertising and business promotion decreased $42,000 (68.9%) to $19,000
resulting primarily from decreased advertising in relation to the new branch
opening in the latter part of the first quarter in 1997. FDIC premiums increased
$19,000 (67.9%) to $47,000 as a result of the SAIF insurance premium refunded to
Schenectady Federal in the first quarter of 1997 which had been paid in the
fourth quarter of 1996 subsequent to the capitalization of SAIF. Other insurance
premiums decreased $8,000 (18.2%) to $36,000 as a result of reduced premiums on
certain policies put out to competitive bid prior to renewal. Professional
service fees increased $17,000 (14.0%) due in part to the amendment of certain
incentive benefit plans which were presented to stockholders in SFS 1998 annual
meeting held in the second quarter. Compensation and employee benefits, office
occupancy and equipment expense, mortgage servicing fees, data processing fees
and other noninterest expense remained relatively the same for the six months
ended June 30, 1998 and June 30, 1997.
Income Tax Expense. Income tax expense totaled $399,000 and $324,000 for
the six months ended June 30, 1998 and 1997, respectively. The increase in
income tax expense was primarily attributable to the $149,000 (18.2%) increase
in income before taxes to $966,000 for the six months ended June 30, 1998. The
effective tax rate for the six months ended June 30, 1998 was 41.3% compared to
39.7% for the same period a year ago. The increase was primarily attributable to
an increase in the nondeductible portion of the compensation expense of SFS
Employee Stock Ownership Plan.
Comparison of Operating Results for Years Ended December 31, 1997 and 1996
Net Income. SFS reported net income of $1,068,000 for the year ended
December 31, 1997, as compared to $830,000 for the year ended December 31, 1996.
As discussed below, the increase in net income of $238,000 or 28.7%, was due to
a decrease in noninterest expense of $870,000, an increase in noninterest income
of $101,000 and an increase in net interest income of $65,000. These increases
were partially offset by an increase in income tax expense of $798,000.
Interest Income. Interest income increased by $501,000, or 4.2% from $11.9
million in 1996 to $12.4 million in 1997. This increase was due to an increase
in both the balance of average interest-earning assets and the yield earned.
Average interest-earning assets increased from $161.7 million in 1996 to $166.1
million in 1997. The yield on SFS interest-earning assets increased from 7.34%
for the year ended December 31, 1996 to 7.45% for the year ended December 31,
1997 as a result of SFS ability to originate and purchase loans and therefore
affect the overall composition of interest earning assets. The yield was also
affected by the general increase in the market rates of interest.
Interest Expense. Interest expense increased by $436,000, or 7.0% to $6.6
million for the year ended December 31, 1997. The increase was a result of an
increase in the balance of average interest-bearing liabilities of $6.5 million,
or 4.6% to $147.4 million. The average rate paid for the year ended December 31,
1997 was 4.49% as compared to 4.39% in 1996. The mix within the deposit
structure changed as the average balance of certificate and money market account
balances grew a combined $7.8 million (8.6%) while savings accounts declined
$1.9 million (4.8%). The change in the deposit mix was due in part to the
opening of the new branch which had higher promotional certificate rates and to
a lesser extent the flow from savings accounts to higher paying certificate
accounts. The average rate paid was a reflection of the general interest rate
and competitive environment that prevailed during 1997 and 1996.
Net Interest Income. Net interest income increased $65,000, or 1.1% to $5.7
million in 1997 due principally to the relative increase of the loans
receivable, net portfolio in relation to total interest earning assets from 1996
to 1997. The percentage of average loans receivable, net to total average
interest earning assets increased from 69.0% in 1996 to 75.2% in 1997.
Provision For Loan Losses. The provision for loan losses amounted to
$120,000 for 1997 and 1996, respectively. When determining the level of
provision for loan losses, management considers historical charge off ratios as
well as the then current regulatory and the general economic environment. Net
charge-offs decreased from $50,000 in 1996 to a $16,000 net recovery in 1997 due
to SFS ability to collect on numerous loans previously charged off combined with
a decrease in charge offs in 1997. SFS will continue to monitor and modify its
allowance for loan losses as conditions dictate. Although SFS maintains its
allowance for loan losses at a level it considers adequate to provide
84
for potential losses in the present portfolio, there can be no assurance that
such losses will not exceed the estimated amounts or that additional provisions
for loan losses will not be required in future periods.
Noninterest Income. Total noninterest income increased by $101,000, or
25.1% from $403,000 in 1996 to $504,000 in 1997. The increase was principally
attributable to an increase of $48,000 in net gain on security transactions
combined with increases in other loan charges and Bank fees and service charges.
Noninterest Expense. Noninterest expense decreased by $870,000, or 16.6%
from $5.2 million in 1996 to $4.4 million in 1997. The decrease is primarily
attributable to the special one-time SAIF assessment in 1996 which totaled
$930,000 and an ongoing reduction in the FDIC insurance premiums subsequent to
the special assessment. Compensation and benefits increased $198,000 (7.9%) from
1996 to 1997. The increase was a result of increased retail staff due to the
opening of a new branch in March 1997, annual merit increases, and increased
employee benefits partially due to the increases in the employee stock ownership
plan expense. Office occupancy and equipment expense increased $98,000, or 18.8%
as a result of increases in depreciation, property taxes and utilities
associated with the opening of the new branch. Advertising and business
promotion, professional service fees, data processing fees, and other expense
remained relatively stable during 1997 as compared with 1996. The ratio of
noninterest expense to average assets decreased from 3.17% for 1996 to 2.56% for
1997.
Income Tax Expense. Income tax expense increased from a benefit of $106,000
in 1996 to an expense of $692,000 in 1997. The effective tax rate for 1997 was
39.3%. The income tax benefit recognized in 1996 primarily reflects a reduction
of the deferred tax asset valuation reserve which reduced the tax effect on
pre-tax income. The reduction in the deferred valuation allowance during 1996
was primarily the result of the expected realization of certain deferred items
which were previously considered uncertain. There were no comparable reductions
in the deferred tax asset valuation reserve during 1997.
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995
Net Income. SFS had net income of $830,000 for the year ended December 31,
1996, as compared to $855,000 for the year ended December 31, 1995. As discussed
below, the decrease in net income of $25,000 or 2.9%, was due to an increase in
noninterest expense of $1.2 million offset by an increase in net interest income
of $393,000, an increase in noninterest income of $82,000, a decrease in
provision for loan losses of $250,000 and a decrease in income tax expense of
$462,000.
Interest Income. Interest income increased by $344,000, or 3.0% from $11.5
million in 1995 to $11.9 million in 1996. This increase was due to the increase
in the amount of average interest-earning assets and the yield earned. Average
interest-earning assets increased from $157.5 million in 1995 to $161.7 million
in 1996 resulting from SFS ability to utilize for a full year the proceeds
received from the initial public offering. The yield on SFS interest-earning
assets increased from 7.32% for the year ended December 31, 1995 to 7.34% for
the year ended December 31, 1996 as a result of the general increase in the
market rates of interest.
Interest Expense. Interest expense decreased by $49,000, or 0.8% to $6.2
million for the year ended December 31, 1996. The decrease was a result of a
$1.2 million (0.8%) decrease in average interest-bearing liabilities to $141.0
million. The average rate paid for the years ended December 31, 1996 and 1995
was 4.39%. The mix within the deposit structure changed as the average balance
of certificate and demand and NOW account balances grew $2.8 million (3.3%) and
$1.0 million (11.1%), respectively while savings accounts declined $5.2 million
(11.8%). The average rate paid was a reflection of the general interest rate and
competitive environment that prevailed during 1996 and 1995.
Net Interest Income. Net interest income increased $393,000, or 7.4% from
$5.3 million in 1995 to $5.7 million in 1996 due to a $5.3 million increase in
average net interest-earning assets in 1996 as compared to 1995 and a 15 basis
point increase in margin. The increase in net interest-earning assets was
primarily a result of the proceeds received in the initial public offering of
SFS during 1995.
Provision For Loan Losses. The decrease of $250,000 or 67.6% in the
provision for loan losses from 1995 to 1996 reflects primarily management's
evaluation of the loan portfolio. When determining the level of provision for
85
loan losses, management considers historical charge off ratios as well as the
then current regulatory and the general economic environment. Net charge-offs
decreased from $659,000 in 1995 to $50,000 in 1996 due to SFS resolution of
certain non-performing loans in 1995. SFS will continue to monitor and modify
its allowance for loan losses as conditions dictate. Although SFS maintains its
allowance for loan losses at a level it considers adequate to provide for
potential losses, there can be no assurance that such losses will not exceed the
estimated amounts or that additional provisions for loan losses will not be
required in future periods.
Noninterest Income. Total noninterest income increased by $82,000, or 25.5%
from $321,000 in 1995 to $403,000 in 1996. Other loan charges increased $35,000
or 31.8% as a result of increased originations and other noninterest income
increased $46,000 or 97.9% as a result of increased other real estate income,
income from the Bank's service corporation and gains taken on the sale of
certain fixed assets.
Noninterest Expense. Noninterest expense increased by $1.2 million, or
30.1% from $4.0 million in 1995 to $5.2 million in 1996. The increase is
primarily attributable to the special one-time SAIF assessment which totaled
$930,000. Compensation and benefits increased $262,000 (11.6%) as a result of
annual merit increases and the establishment of the RRP partially offset by
reduced pension and retirement benefits expense. Mortgage servicing fees
decreased $22,000 (35.5%) between 1995 and 1996 as serviced loan balances
continued to decline. Professional service fees increased $53,000 (28.0%) during
1996 as compared to 1995 as a result of increased cost associated with being a
public company. Advertising and business promotion, office occupancy and
equipment expenses, other insurance premiums, data processing fees, and real
estate owned writedowns remained relatively stable during 1996 as compared with
1995. The ratio of noninterest expense to average assets increased from 2.51%
for 1995 to 3.17% for 1996.
Income Tax Expense. Income tax expense decreased from $356,000 in 1995 to a
benefit of $106,000 in 1996. The decrease is the result of decreased income
before taxes during 1996 and the reduction of the valuation allowance for
deferred tax assets during 1996. This reduction was primarily the result of the
expected realization of certain deferred items which were previously considered
to be uncertain.
Impact of New Accounting Standards
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosure about Pensions and Other
Postretirement Benefits" (Statement 132), which amends the disclosure
requirements for Statement of Financial Account Standards No. 87, "Employers'
Accounting for Pensions" (Statement 87), Statement of Financial Accounting
Standards No. 88, "Employers' Accounting for Settlement and Curtailments of
Defined Benefit Pension Plans and for Termination of Benefits" (Statement 88),
and Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions" (Statement 106). Statement 132
standardizes the disclosure requirements of Statement 87 and Statement 106 to
the extent practicable and recommends a parallel format for presenting
information about pensions and other postretirement benefits. This Statement is
applicable to all entities and addresses disclosure only. The Statement does not
change any of the measurement or recognition provisions provided for in
Statements 87, 88, or 106. The Statement is effective for fiscal years beginning
after December 15, 1997. Management anticipates providing the required
disclosures in the December 31, 1998 consolidated financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This Statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Management is currently evaluating
the impact of this Statement on SFS consolidated financial statements.
Impact of the Year 2000
SFS is aware of the issues associated with the programming code in existing
computer systems as the millennium ("Year 2000") approaches. The Year 2000
problem is pervasive and complex as virtually every computer operation will be
affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail.
86
SFS is utilizing both internal and external resources to identify, correct
or reprogram, and test its systems for Year 2000 compliance. It is anticipated
that all reprogramming efforts will be completed by December 31, 1998, allowing
adequate time for testing. To date, confirmations have been received from SFS
primary processing vendors that plans are being developed to address processing
of transactions in the year 2000. Incremental expenses related to this issue are
not, at this time, expected to be material to the performance of SFS.
The risks of this issue go beyond SFS own ability to solve the Year 2000
issues. Should suppliers of critical services fail in their efforts to become
Year 2000 compliant, or if significant third party interfaces fail to be
compatible with SFS or fail to be Year 2000 compliant, it could have significant
adverse affects on the operations and financial results of SFS. Accordingly, SFS
has begun a process of assessing and monitoring the progress of all vendors of
services and third party interfaces for compatibility and Year 2000 compliance.
Management intends to develop contingency plans for all vendors and/or
interfaces deemed to inadequately address the problems of the Year 2000.
87
BUSINESS OF SFS BANCORP, INC.
General
SFS, a Delaware corporation, was organized to act as the holding
company for Schenectady Federal upon completion of Schenectady Federal's
conversion from the mutual to the stock form of organization. SFS received
approval from the OTS to acquire all of the common stock of Schenectady Federal
to be outstanding upon completion of the Conversion. The Conversion was
completed on June 29, 1995. SFS Common Stock is quoted on the NASDAQ National
Market System under the symbol "SFED".
At June 30, 1998, SFS had total assets of $178.1 million, deposits of
$152.9 million, and stockholders' equity of $21.9 million.
The executive offices of SFS are located at 251-263 State Street,
Schenectady, New York 12305, and its telephone number at that address is (518)
395-2300.
SFS and Schenectady Federal are subject to comprehensive regulation,
examination and supervision by the OTS and by the FDIC. Schenectady Federal is a
member of the FHLB System and its deposits are backed by the full faith and
credit of the United States Government and are insured by the SAIF to the
maximum extent permitted by the FDIC. See "Regulation."
Schenectady Federal, SFS only operating subsidiary, was originally
chartered in 1889 as a state-chartered financial institution. In 1981,
Schenectady Federal converted to a federally chartered mutual savings and loan
association. Schenectady Federal's business involves attracting deposits from
the general public and using such deposits to fund one- to four-family
residential mortgage, home equity and, to a much lesser extent, consumer and
other loans in its market area. At June 30, 1998, $135.1 million, or 95.1% of
Schenectady Federal's total loan portfolio consisted of residential mortgage
loans, including home equity loans. Schenectady Federal also invests in
mortgage-backed securities, investment securities (consisting primarily of U.S.
government and agency obligations) and other permissible investments. At June
30, 1998, Schenectady Federal had $13.7 million of mortgage-backed securities,
representing 7.7% of total assets, and $11.3 million of investment securities
(including $8.1 million of securities available-for-sale, at fair value),
representing 6.3% of total assets.
Schenectady Federal has sought to enhance its net income through the
adoption of a strategy designed to maintain capital in excess of regulatory
requirements, limit loan delinquencies and manage Schenectady Federal's
vulnerability to changes in interest rates. This strategy involves (i)
emphasizing, subject to market conditions, the acquisition of adjustable rate
one- to four-family mortgage loans and fixed rate one- to four-family mortgage
loans, (ii) emphasizing the origination of home equity loans (most of which
carry floating rates of interest), (iii) maintaining a portfolio of
mortgage-backed and investment securities and other short- and medium-term
investments, and (iv) using customer service and marketing efforts to build and
maintain a substantial level of core deposits.
Schenectady Federal is a community-oriented financial institution
offering a variety of financial services to meet the needs of the communities it
serves. Schenectady Federal attracts retail deposits from the general public and
invests those funds primarily in first mortgages on owner-occupied, one-to-four
family residences, as well as in home equity loans generally secured by junior
liens on the borrower's home. To a lesser extent, Schenectady Federal also
originates consumer and other loans in its market area. See "- Lending
Activities." Schenectady Federal also invests in mortgage-backed securities,
investment securities and other permissible assets. See "- Investment
Activities."
Market Area
Schenectady Federal conducts business in Schenectady County through its
main office located at 251-263 State Street in Schenectady, New York and three
branch offices located in Hannaford Plaza in Glenville, New York and in the
Bellevue and Upper Union Street areas of Schenectady, New York. Schenectady
County is part of the four-county Capital District Region which also includes
the counties of Saratoga, Albany and Rensselaer. Schenectady Federal's primary
market area for deposits consists of communities within Schenectady County,
while Schenectady Federal's
88
primary market area for lending extends to Albany, Rensselaer and Saratoga
Counties and, to a lesser extent, Warren County.
In 1997, the population of Schenectady County was approximately
150,000, essentially unchanged from population levels in 1985. The unemployment
rate for Schenectady County was 4.2% and 4.5% in December 1997 and 1996,
respectively.
Primary industries in Schenectady Federal's market area are
manufacturing and service industries. State and local government and wholesale
and retail trade account for a noteworthy percentage of employment. Major
employers include General Electric, KAPL, Inc., a research laboratory, the
County of Schenectady, Ellis and St. Clare's Hospitals, Union College,
Schenectady International, Inc. and Golub Corporation.
Lending Activities
General. Historically, Schenectady Federal originated 30-year,
fixed-rate mortgage loans secured by one- to four-family residences. During the
1990s, in order to reduce its vulnerability to changes in interest rates,
Schenectady Federal has emphasized the acquisition, origination and retention of
mortgage loans having shorter terms to maturity or repricing such as ARMs and
home equity loans. Schenectady Federal also offers consumer loans and to a
lesser extent commercial real estate mortgage loans.
89
Loan Portfolio Composition. The following table sets forth certain
information concerning the composition of Schenectady Federal's loan portfolio
in dollar amounts and in percentages (before deductions for loans in process,
deferred fees and discounts and allowances for losses) as of the dates
indicated.
December 31,
---------------------------------------------------------------------
June 30,
1998 1997 1996 1995
------------------ -------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family.. $114,093 80.29% $105,077 78.07% $91,161 76.53% $72,219 71.14%
Multi-family......... 2,224 1.56 1,981 1.47 1,568 1.32 2,382 2.35
Commercial........... 3,846 2.71 4,149 3.08 2,964 2.49 3,762 3.70
Home equity.......... 21,024 14.79 22,658 16.84 22,904 19.23 22,723 22.38
-------- -------- -------- ------ -------- ------ -------- --------
Total real estate.. l141,187 99.35 133,865 99.46 118,597 99.57 101,086 99.57
-------- -------- -------- ------ --------- ------ -------- --------
Other Loans:
Consumer:
Deposit account.... 511 .36 573 .43 478 .40 361 .35
Education.......... 2 -- 3 -- 4 -- 22 .02
Personal........... 35 .03 33 .03 34 .03 41 .04
Automobile......... 199 .14 110 .08 -- -- -- --
Home improvement... 1 -- 2 -- 3 -- 5 .01
-------- -------- -------- ------ -------- ------ -------- --------
Total consumer loans 748 .53 721 .54 519 .43 429 .42
Commercial business loans 170 .12 -- -- 4 -- 5 .01
-------- -------- -------- ------ -------- ------ ------- --------
Total other loans.. 918 .65 721 .54 523 .43 434 .43
--------- -------- --------- ------ -------- ------ -------- --------
Total loans..... 142,105 100.00% 134,586 100.00% 119,120 100.00% 101,520 100.00%
====== ====== ====== ======
Less:
Deferred fees and
discounts........... 28 22 23 27
Allowance for losses. 855 778 642 572
--------- --------- -------- --------
Total loans receivable
net.............. $141,222 $133,786 $118,455 $100,921
======== ======== ======== ========
90
The following table shows the composition of Schenectady Federal's loan
portfolio by fixed and adjustable or floating rate at the dates indicated.
December 31,
June 30, ------------------------------------------------------------------
1998 1997 1996 1995
--------------------- ------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family.. $ 44,007 30.97% $ 31,454 23.37% $ 20,615 17.31% $ 22,797 22.45%
Multi-family......... 1,081 .76 213 .16 242 .20 1,046 1.03
Commercial........... 2,812 1.98 2,335 1.73 1,533 1.29 3,133 3.09
Home equity.......... 4,519 3.18 4,656 3.46 4,334 3.64 4,433 4.37
-------- ------- -------- ------- -------- ------- -------- ------
Total fixed-rate
real estate....... 52,419 36.89 38,658 28.72 26,724 22.44 31,409 30.94
Consumer............. 748 .52 721 .54 515 .43 407 .40
Commercial business.. -- -- -- -- 4 -- 5 .01
-------- ------- -------- ------- ------ ------- ------- ------
Total fixed-rate
loans............. 53,167 37.41 39,379 29.26 27,243 22.87 31,821 31.35
-------- ------- --------- ------- ------ ------- ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family.. 70,086 49.32 73,623 54.70 70,546 59.22 49,422 48.68
Multi-family......... 1,143 .80 1,768 1.31 1,326 1.11 1,336 1.31
Commercial........... 1,034 .73 1,814 1.35 1,431 1.20 629 .62
Home equity.......... 16,505 11.62 18,002 13.38 18,570 15.59 18,290 18.02
-------- ------- -------- ------- ------ ----- ------ ------
Total adjustable-rate
real estate loans 88,768 62.47 95,207 70.74 91,873 77.13 69,677 68.63
Consumer............. -- -- -- -- 4 -- 22 .02
Commercial business.. 170 .12 -- -- -- -- -- --
-------- -------- -------- ------- ------ ----- ------ ------
Total adjustable-rate
loans............ 88,938 62.59 95,207 70.74 91,877 77.13 69,699 68.65
-------- -------- -------- ------- ------ ----- ------ ------
Total loans.... 142,105 100.00% 134,586 100.00% 119,120 100.00% 101,520 100.00%
====== ====== ====== ======
Less:
Deferred fees and discounts 28 22 23 27
Allowance for loan losses 855 778 642 572
--------- -------- --------- ---------
Total loans receivable,
net.............. $141,222 $ 113,786 $ 118,455 $ 100,921
========= ========= ========= =========
91
The following schedule illustrates the interest rate sensitivity of
Schenectady Federal's loan portfolio at the dates indicated. Loans which have
adjustable or renegotiable interest rates are shown as maturing in the period
during which the contract is due. The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.
Real Estate
-----------------------------------------------------------
Multi-family and
One- to four-family Commercial Home Equity Consumer
------------------- ------------------- ---------------- ----------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due during years
ending June 30,
1999 $ 122 7.53% $ 799 9.84% $ 280 9.88% $497 8.68%
2000 140 8.12% -- -- 1,747 9.56% 51 8.18%
2001 369 7.94% 66 9.50% 2,585 9.32% 111 7.44%
2002 to 2003 1,762 7.56% 1,945 9.67% 3,593 9.30% 89 7.73%
2003 to 2024 41,865 7.82% 3,260 9.30% 12,819 9.88% -- --
2024 and following 69,835 7.26% -- -- -- -- -- --
-------- ------ ------- ----
$114,093 $6,070 $21,024 $748
======== ====== ======= ====
Commercial
Business Total
----------------- -----------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
(Dollars in Thousands)
Due during years
ending June 30,
1999 $150 10.00% $ 1,848 9.38%
2000 20 9.50% 1,958 9.42%
2001 -- -- 3,131 9.09%
2002 to 2003 -- -- 7,389 8.97%
2003 to 2024 -- -- 57,944 8.11%
2024 and following -- -- 69,835 7.26%
---- --------
$170 $142,105
==== ========
The total amount of loans due after June 30, 1998 which have
predetermined interest rates is $53.2 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $88.9
million.
92
Pursuant to Federal law, the aggregate amount of loans that Schenectady
Federal is permitted to make to any one borrower is generally limited to 15% of
unimpaired capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At June
30, 1998, based on the above, Schenectady Federal's loans-to-one borrower limit
was approximately $2.9 million. On the same date, Schenectady Federal had no
borrowers with outstanding balances in excess of this amount. Schenectady
Federal's largest lending relationship at June 30, 1998 was two loans to one
borrower totaling $774,000. One loan in the amount of $540,000 was on a five
building 20 unit apartment complex located in Saratoga Springs, New York. The
second loan in the amount of $234,000 was on a commercial property used in the
borrower's business in Schenectady, New York. Both loans were performing in
accordance with their terms at June 30, 1998.
Schenectady Federal's lending is subject to its written underwriting
standards and to loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations (consistent
with Schenectady Federal's appraisal policy) by Schenectady Federal's
independent appraisers. The loan applications are designed primarily to
determine the borrower's ability to repay and the more significant items on the
application are verified through use of credit reports, financial statements,
tax returns and/or confirmations.
Under Schenectady Federal's loan policy, the individual processing an
application is responsible for ensuring that all documentation is obtained prior
to the submission of the application to a loan officer for approval. In
addition, the loan officer verifies that the application meets Schenectady
Federal's underwriting guidelines described below.
All secured loans over $500,000, or unsecured loans over $100,000, must
be approved by Schenectady Federal's Board of Directors. Schenectady Federal's
Loan Committee, consisting of officers Giaquinto, Schlansker, Ammian, and
Krywinski, has authority to approve secured loans up to $500,000 and unsecured
loans up to $100,000. Any three of these individuals acting as a group can
approve a loan within the authority of the Loan Committee. Various officers of
Schenectady Federal have individual secured loan approval authority ranging from
$10,000 to $300,000. Authorization for unsecured loans ranges from $500 to
$5,000.
Generally, Schenectady Federal requires title insurance or updated
abstracts on its mortgage loans as well as fire and extended coverage casualty
insurance in amounts at least equal to the principal amount of the loan or the
value of improvements on the property, depending on the type of loan.
Schenectady Federal also requires flood insurance to protect the property
securing its interest when the property is located in a flood plain.
One- to Four-Family Residential Real Estate Lending. The cornerstone of
Schenectady Federal's lending program is the origination of loans secured by
mortgages on owner-occupied one- to four-family residences. At June 30, 1998,
$135.1 million, or 95.1% of Schenectady Federal's loan portfolio consisted of
mortgage loans (including home equity loans) on one- to four-family residences.
Substantially all of the residential loans originated by Schenectady Federal are
secured by properties located in Schenectady Federal's primary lending area.
Included in the mortgage loan portfolio at June 30, 1998, Schenectady Federal
also had $4.9 million of purchased one- to four-family loans serviced by others,
which were primarily secured by properties located outside its market area. A
majority of the mortgage loans originated by Schenectady Federal are retained
and serviced by it. No loans have been purchased by Schenectady Federal and
serviced by others since 1990.
Schenectady Federal offers conventional fixed-rate loans with terms
ranging between 10 and 30 years. The interest rate on such loans is generally
based on the FHLMC delivery rates as well as competitive factors.
In addition to fixed rate loans, Schenectady Federal offers one-year
ARMs at a margin (generally 300 basis points) over the yield on the Average
Weekly One Year U.S. Treasury Constant Maturity Index for terms of up to 30
years. The ARM loans currently offered by Schenectady Federal generally provide
for a 200 basis point annual interest rate change cap and a lifetime cap of 600
basis points over the initial rate. Schenectady Federal's loans typically do not
contain floors. Initial interest rates offered on Schenectady Federal's ARMs may
be 100 to 350 basis points below the fully indexed rate, and borrowers are
qualified at that initial rate plus 200 basis points. As a result, the risk of
default on these loans may increase as interest rates increase. See "- Asset
Quality-Non-Performing Assets." Schenectady Federal also offers five year/one
year and three year/one year ARM products where the rate is fixed for the first
five or three years. After the initial fixed term, the mortgage has the same
characteristics as a one-year ARM. Schenectady
93
Federal's ARMs do not permit negative amortization of principal, do not contain
prepayment penalties and are not convertible into fixed-rate loans. In the past,
Schenectady Federal offered one-year ARMs with a margin of 200 to 300 basis
points over a specified index and an average annual cap of 600 basis points. At
June 30, 1998, one- to four-family ARMs totaled $70.1 million, or 49.3% of
Schenectady Federal's total loan portfolio.
In underwriting one- to four-family residential real estate loans,
Schenectady Federal evaluates both the borrower's ability to make principal,
interest and escrow payments, the value of the property that will secure the
loan and debt to income ratios. Schenectady Federal originates residential
mortgage loans with loan-to-value ratios of up to 95% for owner-occupied homes.
However, private mortgage insurance is required on loans with loan-to-value
ratios greater than 80% to reduce Schenectady Federal's exposure. Schenectady
Federal generally seeks to underwrite its loans in accordance with secondary
market standards.
Schenectady Federal's residential mortgage loans customarily include
due-on-sale clauses giving Schenectady Federal the right to declare the loan
immediately due and payable in the event that, among other things, the borrower
sells or otherwise disposes of the property subject to the mortgage and the loan
is not repaid.
Schenectady Federal also originates home equity loans and lines of
credit secured by a lien on the borrower's residence. Schenectady Federal's home
equity loans are generally limited to $100,000. Schenectady Federal uses the
same underwriting standards for home equity loans as it uses for one- to
four-family residential mortgage loans. Schenectady Federal's home equity loans
are originated in amounts which, together with the amount of the first mortgage,
do not exceed 80% of the appraised value of the property securing the loan. The
interest rates for home equity loans and lines of credit float with the prime
rate or, in the case of loans (but not lines of credit), are fixed. Schenectady
Federal writes home equity loans for terms of up to 25 years. At June 30, 1998,
Schenectady Federal had $21.0 million of home equity loans and an additional
$10.4 million of additional funds committed, but undrawn, under home equity
lines of credit.
Commercial Real Estate and Multi-Family Lending. Schenectady Federal
actively originates and purchases permanent commercial real estate and
multi-family loans. At June 30, 1998, Schenectady Federal had $3.8 million in
commercial real estate loans, representing 2.7% of Schenectady Federal's total
loan portfolio, and $2.2 million in multi-family loans, or 1.6% of Schenectady
Federal's total loan portfolio.
Schenectady Federal's commercial real estate and multi-family loan
portfolio includes loans secured by motels, apartment buildings, small office
buildings, and other non-residential building properties, as well as
participation interests therein.
Schenectady Federal's permanent commercial real estate and multi-family
loans generally carried a maximum term of 25 years. These loans were generally
written in amounts of up to 75% of the lesser of the appraised value of the
property or the purchase price and had a projected debt service coverage ratio
of at least 1.2%. Multi-family real estate loans originated during the six
months ended June 30, 1998 and 1997 generally possess maturity dates of five
years.
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 effects 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 multi-family and 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), the borrower's ability to repay the loan may be impaired. At June 30,
1998, Schenectady Federal had one commercial real estate loan totaling over
$500,000 that was non-performing. See "- Asset Quality-Non-Performing Assets."
Since 1991, Schenectady Federal has focused its primary efforts on residential
lending.
Consumer Lending. Schenectady Federal originates a variety of consumer
loans, including automobile, home improvement, deposit account and other loans
for household and personal purposes. At June 30, 1998, consumer loans totaled
$748,000 or .5% of total loans outstanding.
94
Consumer loan terms vary according to the type of loan and value of
collateral, length of contract and creditworthiness of the borrower. Schenectady
Federal's consumer loans are made at fixed interest rates, with terms of up to
20 years for secured loans and on a demand basis for unsecured loans.
The underwriting standards employed by Schenectady Federal for consumer
loans include a determination of the applicant's payment history on other debts
and the ability to meet existing obligations and payments on the proposed loan.
Although creditworthiness of the applicant is of primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount. Consumer loans may entail greater
credit risk than do residential mortgage loans, particularly in the case of
consumer loans which are unsecured or are secured by rapidly depreciable assets,
such as automobiles. 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 the greater likelihood of damage, loss or
depreciation. In addition, consumer loan collections are dependent on the
borrower's continuing financial stability, and thus are more likely to be
affected by adverse personal circumstances. Furthermore, the application of
various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on such loans. Although Schenectady
Federal has, in the past, experienced losses in the consumer loan portfolio, at
June 30, 1998, there were no loans in the consumer loan portfolio which were
non-performing. During the six months ended June 30, 1998 and 1997, Schenectady
Federal recovered $11,000 and $18,000, respectively, on consumer loans
previously charged off. There can be no assurance that delinquencies will not
develop in the future.
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
Loan applications are taken in all branch offices and approved in the
main office of Schenectady Federal. Prior to 1994, most of Schenectady Federal's
originated loans were generated by Schenectady Federal's staff of salaried loan
officers. Beginning in 1994, Schenectady Federal began to originate a
significant amount of loans through local mortgage brokers which generally
retained a 100 basis point origination fee as their compensation. Also during
1994, Schenectady Federal purchased loans on a servicing released basis which
were originated by a mortgage banker for Schenectady Federal. All such loans
were originated in accordance with Schenectady Federal's normal underwriting
standards. Schenectady Federal believes that its utilization of mortgage brokers
has had a favorable impact on loan originations. However, in the event
Schenectady Federal's relationships with these mortgage brokers were terminated
in the future, loan originations and results of operations could be adversely
affected. In an effort to mitigate this risk, Schenectady Federal hired a
representative in 1997 to originate residential mortgage loans on a full
commission basis.
While Schenectady Federal originates both fixed and adjustable-rate
loans, its ability to originate loans is dependent upon the relative customer
demand for loans in its market. Demand is affected by the interest rate
environment. During 1995, 1996 and 1997, Schenectady Federal's volume of ARMs
exceeded its volume of fixed rate loans. During the six months ended June 30,
1998, Schenectady Federal's volume of fixed rate loans exceeded its volume of
ARMs.
Historically, Schenectady Federal retained most of the fixed rate one-
to four-family residential loans in its portfolio. In order to reduce its
vulnerability to changes in interest rates, commencing in 1992 through 1994,
Schenectady Federal sold most of the fixed rate residential loans it originated
or otherwise acquired with maturities in excess of 15 years, except where the
interest rate equaled or exceeded a specified rate (as designated from time to
time by management) based on its portfolio objectives and alternative investment
opportunities. When loans are sold, Schenectady Federal typically retains the
responsibility for collecting and remitting loan payments, making certain that
real estate tax payments are made on behalf of borrowers, and otherwise
servicing the loans. The servicing fee is recognized as income over the life of
the loans. At June 30, 1998, Schenectady Federal serviced $3.0 million of
mortgage loans for others. Schenectady Federal did not sell loans during fiscal
years 1995, 1996, 1997 and the six months ended June 30, 1998.
95
The following table shows the loan and mortgage-backed securities
origination, purchase, sale and repayment activities of Schenectady Federal for
the periods indicated.
Six Months Six Months Year Ended December 31,
Ended Ended ------------------------------------
June 30, 1998 June 30, 1997 1997 1996 1995
------------- ------------- ---- ---- ----
(In Thousands)
LOANS:
Originations by type:
Adjustable rate:
Real estate
One- to four-family .............. $ 4,841(1) $ 7,209(1) $ 13,186(1) $ 20,894(1) $ 8,219(1)
Home equity ...................... 2,799 2,170 5,705 5,174 5,474
Commercial ....................... -- -- 927 -- --
Non-real estate
Consumer ......................... -- -- -- -- --
-------- -------- -------- -------- --------
Total adjustable rate ......... 7,640 9,379 19,818 26,068 13,693
-------- -------- -------- -------- --------
Fixed rate:
Real estate
One- to four-family .............. 3,791(2) 9,326(2) 9,930(2) 1,606(2) 2,966(2)
Home equity ...................... 187 507 515 737 1,713
Commercial ....................... 750 427 1,318 198 --
Non-real estate
Consumer ......................... 75 140 293 16 --
-------- -------- -------- -------- --------
Total fixed rate .............. 4,803 10,400 12,056 2,557 4,679
-------- -------- -------- -------- --------
Total loans originated ..... 12,443 19,779 31,874 28,625 18,372
-------- -------- -------- -------- --------
Purchases:
Real estate
One- to four-family ................. 1,852 1,504 3,550 6,973 5,245
-------- -------- -------- -------- --------
Sales and Repayments:
Real estate
One- to four-family ................. -- -- -- -- --
Non-real estate consumer ............... -- -- -- -- --
-------- -------- -------- -------- -------
Total sales ...................... -- -- -- -- --
Principal repayments ................... 8,508 13,764 19,958 17,998 16,701
-------- -------- -------- -------- --------
Total reductions ................. 8,508 13,764 19,958 17,998 16,701
-------- -------- -------- -------- --------
Net increase(3)
$ 5,787 $ 7,519 $ 15,466 $ 17,600 $ 6,916
======== ======== ======== ======== ========
MORTGAGE-BACKED SECURITIES:
Purchases:
Mortgage-backed securities ............. $ -- $ -- $ -- $ -- $ 5,381
Principal repayments ................... 1,628 3,258 3,486 3,984 2,954
-------- -------- -------- -------- --------
Net increase (decrease) ......... $ 1,628 $ 3,258 $ (3,468) $ (3,984) $ 2,427
======== ======== ======== ======== ========
- -------------
(1) Includes $6,754, $4,603, $12,672, $19,573 and $8,138 of loans originated
through brokers in the first half of 1998 and 1997, and in 1997, 1996 and
1995, respectively.
(2) Includes $7,017, $3,482, $8,511, $162 and $1,930 of loans originated through
brokers in the first half of 1998 and 1997, and in 1997, 1996 and 1995,
respectively.
(3) Gross of deferred fees and discounts and the allowance for loan losses.
96
Asset Quality
Delinquency Procedures. When a borrower fails to make a required
payment on a loan, Schenectady Federal attempts to cure the delinquency by
contacting the borrower. A late notice is sent on all loans over 16 days
delinquent. Additional written and verbal contacts may be made with the borrower
between 30 and 60 days after the due date. If the loan is contractually
delinquent 90 days, Schenectady Federal usually sends a 30-day demand letter to
the borrower and, after the loan is contractually delinquent 120 days,
institutes appropriate action to foreclose on the property. If foreclosed, the
property is sold at auction and may be purchased by Schenectady Federal.
Delinquent consumer loans are generally handled in a similar manner. Schenectady
Federal's procedures for repossession and sale of consumer collateral are
subject to various requirements under New York consumer protection laws.
Real estate acquired by Schenectady Federal as a result of foreclosure
or by deed in lieu of foreclosure is classified as real estate owned until it is
sold. When property is acquired or expected to be acquired by foreclosure or
deed in lieu of foreclosure, it is recorded at the lower of cost or estimated
fair value, less the estimated cost of disposition. After acquisition, all costs
incurred in maintaining the property are expensed. Costs relating to the
development and improvement of the property, however, are capitalized to the
extent of fair value less disposition cost.
The following table sets forth Schenectady Federal's loan delinquencies
by type, by amount and by percentage of type at June 30, 1998.
Loans Delinquent For:
----------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
--------------------------- -------------------------------- ------------------------------
Percent Percent Percent
Of Loan Of Loan Of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family ......... 4 $ 366 .32% 10 $ 552 .48% 14 $ 918 .80%
Multi-family ................ -- -- -- 1 146 6.56 1 146 6.56
Commercial .................. -- -- -- -- -- -- -- -- --
Home equity ................. -- -- -- 3 140 .67 3 140 .67
Consumer .................... -- -- -- -- -- -- -- -- --
Commercial business ......... -- -- -- -- -- -- -- -- --
------ ------ --- ------ ------ ---- ------ ------ ----
Total .............. 4 $ 366 .26% 14 $ 838 .59% 18 $1,204 .85%
====== ====== === ====== ====== ==== ====== ====== ====
97
Classification of Assets. Federal regulations require that each savings
institution classify its assets on a regular basis. In addition, in connection
with examinations of savings institutions, OTS and FDIC examiners have authority
to identify problem assets and, if appropriate, require them to be classified.
There are three classifications for problem assets: substandard, doubtful and
loss. Substandard assets have one or more defined weaknesses and are
characterized by the distinct possibility that Schenectady Federal will sustain
some loss if the deficiencies are not corrected. Doubtful assets have the
weaknesses of substandard assets, with the additional characteristics that the
weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified loss is considered uncollectible and of
such little value that continuance as an asset on the balance sheet of the
institution is not warranted. Assets classified as substandard or doubtful
require the institution to establish prudent general allowances for loan losses.
If an asset or portion thereof is classified as loss, the institution must
either establish specific allowances for loan losses in the amount of 100% of
the portion of the asset classified loss, or charge off such amount. If an
institution does not agree with an examiner's classification of an asset, it may
appeal this determination to the District Director of the OTS. On the basis of
management's review of its assets, at June 30, 1998, Schenectady Federal had
classified a total of $1.5 million of its loans and other assets as follows:
Commercial
One- to Four- Real Estate and Consumer
Family Multi-Family and Other Total
------ ------------ --------- -----
(In Thousands)
Substandard ........... $ 759 $ 744 $ -- $1,503
Doubtful .............. -- -- -- --
Loss .................. -- -- -- --
------ ------ ----- ------
Total ...... $ 759 $ 744 $ -- $1,503
====== ====== ===== ======
Schenectady Federal's classified assets consist of the non-performing
loans and the loans and other assets of concern discussed herein. As of the date
hereof, these asset classifications are generally consistent with those of the
OTS and FDIC.
98
Non-Performing Assets. The table below sets forth the amounts and
categories of non-performing assets in Schenectady Federal's loan portfolio.
Loans are placed on non-accrual status when the collection of principal and/or
interest become doubtful. Restructured loans consist of troubled debt
restructurings (which involve forgiving a portion of interest or principal on
any loans or making loans at a rate materially less than that of market rates).
Foreclosed assets include assets acquired in settlement of loans.
December 31,
June 30, -------------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ..................................... $ 361 $ 472 $ 25 $ 54
Home equity ............................................. 140 165 18 --
Multi-family ............................................ 146 -- -- --
Commercial real estate .................................. 514 691 756 744
Consumer ................................................ -- -- 2 --
Commercial business ..................................... -- -- -- --
------ ------ ------ ------
Total ............................................. 1,161 1,328 801 798
------ ------ ------ ------
Accruing loans delinquent 90 days or more:
One- to four-family ..................................... 191 19 32 41
Home equity ............................................. -- -- -- --
Multi-family ............................................ -- -- -- --
Commercial real estate .................................. -- -- -- --
Consumer ................................................ -- -- -- --
Commercial business ..................................... -- -- -- --
------ ------ ------ ------
Total ............................................. 191 19 32 41
------ ------ ------ ------
Restructured loans:
One- to four-family ..................................... -- -- -- --
Home equity ............................................. -- -- -- --
Multi-family ............................................ -- -- -- --
Commercial real estate .................................. -- -- -- --
Consumer ................................................ -- -- -- --
Commercial business ..................................... -- -- -- --
------ ------ ------ ------
Total ............................................. -- -- -- --
------ ------ ------ ------
Foreclosed assets:
One- to four-family ..................................... 33 -- 94 --
Home equity ............................................. 34 27 -- --
Multi-family ............................................ -- -- -- 200
Commercial real estate .................................. 84 84 84 --
Consumer ................................................ -- -- -- --
Commercial business ..................................... -- -- -- --
------ ------ ------ ------
Total ............................................. 151 111 178 200
------ ------ ------ ------
Total non-performing assets ................................ $1,503 $1,458 $1,011 $1,039
====== ====== ====== ======
Total as a percentage of total assets ...................... .84% .84% .61% .62%
Total non-performing loans ................................. $1,352 $1,347 $ 833 $ 839
====== ====== ====== ======
Total as a percentage of total
loans receivable, net ............................ .96% 1.01% .70% .83%
99
For the six months ended June 30, 1998, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $55,000. The amount that was included in
interest income on such loans was $25,000.
As of June 30, 1998, Schenectady Federal's non-performing assets having
a book value of $500,000 or more included the following:
Motel loans. In 1988, Schenectady Federal purchased a participation
interest in two loans secured by three Travelers Motor Inns having an aggregate
of 315 units and located in Albany, Plattsburg and Syracuse, New York. As a
result of cash flow and other problems, the loans have been delinquent since
1992. Beginning in February 1996, Schenectady Federal began receiving adequate
protection payments in an amount established by the Bankruptcy Court. In
January, 1998, the loan secured by the Plattsburg facility was paid in full and
Schenectady Federal recovered approximately $21,000 of the amount previously
charged off. In accordance with the ruling of the Bankruptcy Court, the
remaining loan began paying at a rate of 10.5% with a term of five years. The
book value of the remaining loan balance was $514,000 as of June 30, 1998.
Other Loans of Concern. Other than the non-performing assets set forth
in the table above, as of June 30, 1998 there were no loans with respect to
which known information about the possible credit problems of the borrowers or
the cash flows of the security properties have caused management to have
concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories.
Management has considered Schenectady Federal's non-performing and "of
concern" assets in establishing its allowance for loan losses.
100
Allowance for Loan Losses. The following table sets forth an analysis
of Schenectady Federal's allowance for loan losses.
Six Months Ended Year Ended December 31,
----------------- -----------------------
June 30, June 30,
1998 1997 1997 1996 1995
---- ---- ---- ---- ----
(Dollars in Thousands)
Balance at beginning of period ...... $ 778 $ 642 $ 642 $ 572 $ 861
----- ----- ----- ----- -----
Charge-offs:
One- to four-family .............. 15 -- 16 44 88
Home equity ...................... 6 -- 7 41 --
Multi-family ..................... -- -- -- -- 419
Commercial real estate ........... -- -- -- -- 202
Consumer ......................... -- 2 3 2 9
Commercial business .............. -- -- -- -- --
----- ----- ----- ----- -----
Total ...................... 21 2 26 87 718
----- ----- ----- ----- -----
Recoveries:
One- to four-family .............. -- -- -- -- 7
Home equity ...................... -- -- -- -- --
Multi-family ..................... -- -- -- -- --
Commercial real estate ........... 27 -- -- -- --
Consumer ......................... 11 18 42 37 52
Commercial business .............. -- -- -- -- --
----- ----- ----- ----- -----
Total ...................... 38 18 42 37 59
----- ----- ----- ----- -----
Net charge-offs (recoveries) ........ (17) (16) (16) 50 659
Additions charged to operations ..... 60 60 120 120 370
----- ----- ----- ----- -----
Balance at end of period ............ $ 855 $ 718 $ 778 $ 642 $ 572
===== ===== ===== ===== =====
Ratio of net charge-offs (recoveries)
to average loans outstanding .. (.01)% (.01)% (.01)% .04% .68%
Ratio of net charge-offs (recoveries)
to non-performing loans ....... (1.26)% (1.47)% (1.19)% 6.00% 78.55%
Allowance for loan losses to
non-performing loans .......... 63.24 % 66.05 % 57.76 % 77.07% 68.18%
Allowance for loan losses to
total loans at end of period .. .60 % .60 % .58 % .54% .56%
101
The distribution of Schenectady Federal's allowance for loan losses at
the dates indicated is summarized as follows:
December 31
--------------------------------------------------------------------------------
June 30, 1998 1997 1996 1995
---------------------- -------------------------- ----------------------- --------------------
Percent Percent Percent Percent
of Loans of Loans of Loans of Loans
in Each in Each in Each in Each
Category Category Category Category
of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
One- to four-family...... $ 253 80.29% $ 239 78.03% $ 141 76.53% $ 117 71.14%
Multi-family............. 43 1.56 20 1.47 16 1.32 24 2.35
Commercial real estate... 118 2.71 143 3.12 143 2.49 104 3.70
Home equity.............. 73 14.79 68 16.84 60 19.23 34 22.38
Consumer................. 7 .53 7 .54 5 .43 4 .42
Commercial business...... 2 .12 --- -- -- -- --- .01
Unallocated.............. 359 -- 301 -- 277 -- 289 --
--------- ------- ----------- -------- --------- --------- --------- ---------
Total......... $ 855 100.00% $ 778 100.00% $ 642 100.00% $ 572 100.00%
======== ====== ========== ====== ========= ====== ======== ======
The allowance for loan losses is established through a provision for
loan losses charged to earnings based on management's evaluation of the risk
inherent in the loan portfolio. The allowance is established as 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 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.
While management believes that it uses the best information available
to determine the allowance for loan losses, unforeseen market conditions could
result in adjustments to the allowance for loan losses, and net earnings could
be significantly affected, if circumstances differ substantially from the
assumptions used in making the final determination. No portion of the reserve is
available to absorb realized losses. The amount and timing of realized losses
and future reserve allocations may vary from current estimates.
Investment Activities
Schenectady Federal utilizes investment and mortgage-backed securities
in virtually all aspects of its asset/liability management strategy. In making
investment decisions, the Investment Committee considers, among other things,
Schenectady Federal's yield and interest rate objectives, its interest rate and
credit risk position and its liquidity and cash flow.
Schenectady Federal must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Cash flow projections are
regularly reviewed and updated to assure that adequate liquidity is maintained.
Schenectady Federal's level of liquidity is a result of management's
asset/liability strategy.
Investment Securities. Federally chartered savings institutions have
the authority to invest in various types of investment securities, 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, federally chartered savings institutions may also
invest their assets in commercial paper, investment grade corporate debt
securities and mutual funds whose assets conform to the investments that a
federally chartered savings institution is otherwise authorized to make
directly.
102
To date, Schenectady Federal's investment strategy has been directed
toward high-quality assets (primarily government and agency obligations) with
varying terms to maturity. At June 30, 1998, Schenectady Federal did not own any
investment securities of a single issuer which exceeded 10% of Schenectady
Federal's equity, other than U.S.
government or federal agency obligations.
Schenectady Federal invests its liquid assets primarily in
interest-earning overnight deposits. Other investments include primarily high
grade medium-term (up to five years) U.S. Treasury and agency obligations. For
the six months ended June 30, 1998, Schenectady Federal had an average
outstanding balance of $14.1 million in investment securities (including $6.1
million of securities available for sale) with an average yield of 6.77%.
The following table sets forth the composition of Schenectady Federal's
securities portfolio at the dates indicated.
December 31, 1998
------------------------------------------------------------------
June 30, 1998 1997 1996 1995
------------------- ------------------ ------------------- ------------------
Book % of Book % of Book % of Book % of
Value Total Value Total Value Total Value Total
----- ----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Securities available for sale
(at fair value):
Federal agency obligations...... $ 8,062 44.29% $ 4,067 22.96% $ -- --% $ -- --%
Mutual funds................... -- -- -- -- 1,990 9.68 7,976 21.65
Investment securities
(at amortized cost):
U.S. government obligations.... -- -- 1,992 11.24 3,980 19.37 5,968 16.20
Federal agency obligations...... 3,130 17.20 9,945 56.13 9,481 46.13 9,692 26.30
Municipal bonds................ 72 .39 76 .43 84 .41 93 .25
Corporate bonds................ -- -- -- -- 2,201 10.71 2,905 7.88
Mutual funds................... -- -- -- -- -- -- --- --
--------- ------- -------- ----- ------- ------ -------- ------
Subtotal.................. 11,264 61.88 16,080 90.76 17,736 86.30 26,634 72.28
FHLB stock..................... 1,338 7.35 1,338 7.55 1,215 5.91 1,117 3.03
---------- ------ --------- ------ -------- ------- -------- --------
Total investment
securities and FHLB
stock.................... $12,602 69.23% $17,418 98.31% $18,951 92.21% $27,751 75.31%
======= ===== ======= ===== ======= ===== ======= =====
Average remaining life of
securities excluding
FHLB stock and mutual funds.... 4.5 years 5.1 years 3.6 years 3.2 years
Other interest-earning assets:
Federal funds sold............. 5,600 30.77 300 1.69 1,600 7.79 9,100 24.69
--------- ------- ---------- ------- --------- ------ --------- -------
Total.................... $18,202 100.00% $17,718 100.00% $20,551 100.00% $36,851 100.00%
======= ====== ======= ====== ======= ====== ======= ======
Average remaining life or term
to repricing of securities and
other interest-earning assets,
Excluding FHLB stock and
mutual funds....................... 3.0 years 5.0 years 3.3 years 2.2 years
103
The composition and maturities of the securities portfolio, excluding
FHLB stock and federal funds sold, are indicated in the following table.
June 30, 1998
-------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Securities
------ ----- ----- -------- ----------------
Book Book Book Book Book Market
Value Value Value Value Value Value
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Securities available for sale:
Federal agency obligations ....... $ -- $ 8,062 $ -- $ -- $ 8,062 $ 8,062
---- ------- ------- ------- ------- -------
Investment securities:
U.S. government securities ....... -- -- -- -- -- --
Federal agency obligations ....... -- 1,047 1,087 996 3,130 3,127
Municipal bonds .................. -- -- 72 -- 72 72
Corporate bonds .................. -- -- -- -- -- --
Collateralized mortgage obligation -- -- -- -- -- --
---- ------- ------- ------- ------- -------
Total investment securities -- 1,047 1,159 996 3,202 3,199
---- ------- ------- ------- ------- -------
Total securities .......... $ -- $ 9,109 $ 1,159 $ 996 $11,264 $11,261
==== ======= ======= ======= ======= =======
Weighted average yield .............. --% 6.46% 8.30% 8.00% 6.78%
==== ======= ======= ======= =======
Mortgage-Backed Securities. In order to supplement loan production and
achieve its asset/liability management goals, Schenectady Federal invests in
mortgage-backed securities. All of the mortgage-backed securities owned by
Schenectady Federal are issued, insured or guaranteed either directly or
indirectly by a federal agency or are rated "AA" or higher. At June 30, 1998,
Schenectady Federal had $13.7 million of mortgage-backed securities, all of
which are held for investment purposes.
Consistent with its asset/liability management strategy over the last
several years, a majority of the mortgage-backed securities acquired by
Schenectady Federal have had short or intermediate effective terms to maturity
or, to a lesser extent, adjustable interest rates. In particular, virtually all
of the mortgage-backed securities purchased by Schenectady Federal since 1992
have carried five and seven year balloon terms.
The following table sets forth the contractual maturities of
Schenectady Federal's mortgage-backed securities at June 30, 1998.
June 30, 1998
Less Than 1 to 5 5 to 10 10 to 20 Over Total Mortgage-Backed
1 Year Years Years Years 20 Years Securities
--------- ------- ------- -------- -------- ---------------------
Book Book Book Book Book Book Market
Value Value Value Value Value Value Value
----- ----- ----- ----- ----- ----- -----
(Dollars in Thousands)
Mortgage-Backed Securities
Held for Investment:
Government National Mortgage
Association .............. $ -- $ -- $ 713 $ 1,083 $ -- $ 1,796 $ 1,909
Federal National Mortgage
Association .............. -- 2,148 -- 96 1,010 3,254 3,249
Federal Home Loan Mortgage
Corporation .............. 3,135 4,057 117 204 1,145 8,658 8,635
------- ------- ------- ------- ------- ------- -------
Total mortgage-backed
securities .................. $ 3,135 $ 6,205 $ 830 $ 1,383 $ 2,155 $13,708 $13,793
======= ======= ======= ======= ======= ======= =======
Weighted average yield ........ 5.82% 5.91% 8.14% 9.08% 6.90% 6.50%
======= ======= ======= ======= ======= =======
104
Sources of Funds
General. Schenectady Federal's primary sources of funds are deposits,
payments (including prepayments) of loan principal, interest earned on loans and
securities, repayments of securities, borrowings and funds provided from
operations.
Deposits. Schenectady Federal offers a variety of deposits accounts
having a wide range of interest rates and terms. Schenectady Federal's deposits
consist of passbook, NOW, money market, noninterest-bearing checking and
certificate accounts. Schenectady Federal relies primarily on competitive
pricing policies and customer service to attract and retain these deposits.
The variety of deposit accounts offered by Schenectady Federal has
allowed it to be competitive in obtaining funds and to respond with flexibility
to changes in consumer demand. As customers have become more interest rate
conscious, Schenectady Federal has become more susceptible to short-term
fluctuations in deposit flows. Schenectady Federal manages the pricing of its
deposits in keeping with its asset/liability management, profitability and
growth objectives.
Based on its experience, Schenectady Federal believes that a
substantial portion of its passbook and NOW accounts are relatively stable
sources of deposits and has used customer service and marketing initiatives in
an effort to increase the volume of such deposits. However, the ability of
Schenectady Federal to attract and maintain these accounts (as well as
certificate accounts) has been and will be affected by market conditions.
Subsequent to the 1994 fiscal year, Schenectady Federal experienced a decline in
the balance of non-certificate accounts (much of which is believed to have
transferred into certificate accounts) as a result of continued interest rate
decreases and the rates paid on these deposits. Schenectady Federal has been and
will continue to be significantly affected by market conditions.
The following table sets forth the savings flows at Schenectady Federal
during the periods indicated.
Six Months Six Months Year Ended December 31,
Ended Ended --------------------------------------
June 30, 1998 June 30, 1997 1997 1996 1995
------------- ------------- ---- ---- ----
(Dollars in Thousands)
Opening balance .. $ 150,469 $ 140,616 $ 140,616 $ 139,671 $ 138,299
Deposits ......... 115,835 113,334 249,343 237,180 231,591
Withdrawals ...... 116,885 109,137 (246,113) (242,412) (236,426)
Interest credited 3,460 3,188 6,623 6,177 6,207
--------- --------- --------- --------- ---------
Ending balance ... $ 152,879 $ 148,001 $ 150,469 $ 140,616 $ 139,671
========= ========= ========= ========= =========
Net increase ..... $ 2,410 $ 7,385 $ 9,853 $ 945 $ 1,372
========= ========= ========= ========= =========
Percent increase . 1.60% 5.25% 7.01% .68% .99%
105
The following table sets forth the dollar amount of deposits in the
various types of deposit programs offered by Schenectady Federal at the dates
indicated.
December 31,
--------------------------------------------------------------
June 30, 1998 1997 1996 1995
------------------- ------------------ ------------------- ---------------
Percent Percent Percent Percent
Amount of Total Amount of Total Amount of Total Amount of Total
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Transaction and Savings Deposits:(1)
Noninterest-bearing
checking accounts .................... $1,407 .92% $ 2,265 1.51% $1,392 .99% $2,077 1.49%
Savings accounts 3.00% ................. 37,044 24.23 36,681 24.38 37,152 26.42 40,745 29.17
NOW accounts 1.65% ..................... 10,304 6.74 9,163 6.09 9,104 6.47 7,913 5.67
Money market accounts
2.32%-4.07% ........................... 7,199 4.71 7,619 5.06 6,074 4.32 4,237 3.03
------ ----- ------ ----- ------ ----- ------ -----
Total non-certificate
accounts .......................... 55,954 36.60 55,728 37.04 53,722 38.20 54,972 39.36
------ ----- ------ ----- ------ ----- ------ -----
Certificates of Deposit:
A3.00-3.99% ............................. -- -- -- -- -- -- 1,124 .80
B4.00-4.99% ............................. 833 .54 801 .53 23,244 16.53 2,691 1.93
C5.00-5.99% ............................. 90,665 59.31 84,451 56.12 50,815 36.14 51,996 37.23
D6.00-6.99% ............................. 5,427 3.55 9,489 6.31 12,835 9.13 28,119 20.13
E7.00-7.99% ............................. -- -- -- -- -- -- 618 .44
F8.00-8.99% ............................. -- -- -- -- -- -- 151 .11
------ ----- ------ ----- ------ ----- ------ -----
Total certificates of deposit ......... 96,925 63.40 94,741 62.96 86,894 61.80 84,699 60.64
------ ----- ------ ----- ------ ----- ------ -----
Total deposits................... $152,879 100.00% $150,469 100.00% $140,616 100.00% $139,671 100.00%
======== ====== ======== ====== ======== ====== ======== ======
- -------------------
(1) Reflects rates paid on transaction and savings deposits at June 30, 1998.
The following table shows rate and maturity information for Schenectady
Federal's certificates of deposit as of June 30, 1998.
Certificates of deposit Percent of
maturing in quarter ending: 4.00-5.99% 6.00-6.99% Total Total
--------------------------- ---------- ---------- ----- -----
September 30, 1998 ....... $20,920 $ 592 $21,512 22.19%
December 31, 1998 ........ 22,980 38 23,018 23.75
March 31, 1999 ........... 13,068 413 13,481 13.91
June 30, 1999 ............ 13,900 1,530 15,430 15.92
September 30, 1999 ....... 6,559 274 6,833 7.05
December 31, 1999 ........ 4,081 495 4,576 4.72
March 31, 2000 ........... 955 513 1,468 1.51
June 30, 2000 ............ 1,102 556 1,658 1.71
September 30, 2000 ....... 623 167 790 0.82
December 31, 2000 ........ 1,307 120 1,427 1.47
March 31, 2001 ........... 693 -- 693 0.71
June 30, 2001 ............ 645 -- 645 0.67
Thereafter ............... 4,665 729 5,394 5.57
------- ------- ------- ------
Total .................... $91,498 $ 5,427 $96,925 100.00%
======= ======= ======= ======
Percent of Total ......... 94.40% 5.60%
======= ======
106
The following table indicates the amount of Schenectady Federal's
"jumbo" and other certificates of deposit as of June 30, 1998.
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
------- ------ ------ --------- -----
(In Thousands)
Certificates of deposit
less than $100,000 .......... $18,747 $20,930 $26,575 $21,805 $88,057
Certificates of deposit
of $100,000 or more ......... 2,765 2,088 2,336 1,679 8,868
------- ------- ------- ------- -------
Total certificates of
deposit ..................... $21,512 $23,018 $28,911 $23,484 $96,925
======= ======= ======= ======= =======
Borrowings. Schenectady Federal's other available sources of funds
include advances from the FHLB of New York and other borrowings. As a member of
the FHLB of New York, Schenectady Federal is required to own capital stock in
the FHLB of New York and is authorized to apply for advances from the FHLB of
New York. Each FHLB credit program has its own interest rate, which may be fixed
or variable, and range of maturities. The FHLB of New York may prescribe the
acceptable uses for these advances, as well as limitations on the size of the
advances and repayment provisions. At June 30, 1998, Schenectady Federal had no
FHLB advances outstanding. On such date, Schenectady Federal had a collateral
pledge arrangement with the FHLB of New York pursuant to which Schenectady
Federal may borrow up to $53.4 million for liquidity purposes.
During the six months ended June 30, 1998, Schenectady Federal had
average FHLB advances and other borrowings outstanding totaling $38,000. During
the fiscal years ended December 31, 1997 and 1996, Schenectady Federal had
average FHLB advances or other borrowings outstanding totaling approximately
$16,000 and $1,000, respectively. During the fiscal year ended December 31,
1995, Schenectady Federal had no FHLB advances or other borrowings.
Competition
Schenectady Federal faces strong competition both in originating real
estate loans and in attracting deposits. Competition in originating loans comes
primarily from mortgage bankers, commercial banks, credit unions and other
savings institutions, which also make loans secured by real estate located in
Schenectady Federal's market area. Schenectady Federal competes for loans
principally on the basis of the interest rates and loan fees it charges, the
types of loans it originates and the quality of services it provides to
borrowers.
Competition for deposits is principally from money market and mutual
funds, securities firms, commercial banks, credit unions and other savings
institutions located in the same communities. The ability of Schenectady Federal
to attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk, convenient locations and other factors. Schenectady Federal
competes for these deposits by offering a variety of deposit accounts at
competitive rates, convenient business hours and a customer oriented staff.
Employees
At June 30, 1998, Schenectady Federal had a total of 53 full-time and 8
part-time employees. None of Schenectady Federal's employees are represented by
any collective bargaining. Management considers its employee relations to be
good.
Subsidiary Activities
As a federally chartered savings and loan association, Schenectady
Federal is permitted by OTS regulations to invest up to 2% of its assets in the
stock of, or loans to, service corporation subsidiaries, and may invest an
additional 1% of its assets in service corporations where such additional funds
are used for inner-city or community development
107
purposes. At June 30, 1998, Schenectady Federal's investment in its service
corporation totaled $14,000. In addition to investments in service corporations,
federal institutions are permitted to invest an unlimited amount in operating
subsidiaries engaged solely in activities which a federal savings association
may engage in directly.
At June 30, 1998, Schenectady Federal had one wholly owned service
corporation, SSLA. The corporation was formed in 1983 to sell insurance
products. In 1994, SSLA was authorized to sell mutual funds. For the six months
ended June 30, 1998, SSLA sold mutual funds totaling $580,000 and annuities
totaling $577,000. No assurance can be made that a material amount of mutual
fund and/or annuity sales will occur in the future. For the six months ended
June 30, 1998, SSLA had net income of $7,000. For the fiscal year ending
December 31, 1997, SSLA had a net loss of $9,000. For the fiscal year ending
December 31, 1996, SSLA had net income of $8,000. For the fiscal year ended
December 31, 1995, SSLA had a net loss of $10,000.
Properties
The following table sets forth information concerning the main office
and each branch office of the Bank at June 30, 1998. At June 30, 1998, the
Bank's premises had an aggregate net book value of approximately $1.62 million.
Year Owned or Net Book Value
Location Acquired Leased June 30, 1998
-------- -------- ------ -------------
(In Thousands)
Main Office:
251-263 State Street 1959 Owned $ 695
Schenectady, New York
Full Service Branches:
262 Saratoga Road 1981 Leased $ 15
Scotia, New York (expires 2006)
2526-2528 Broadway 1977 Owned $ 359
Schenectady, New York
1624 Union Street 1997 Owned $ 551
Schenectady, New York
Legal Proceedings
SFS and Schenectady Federal are 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 SFS and
Schenectady Federal in the proceedings, that the resolution of these proceedings
should not have a material effect on SFS consolidated financial position,
results of operations, or liability.
108
REGULATION
Set forth below is a brief description of certain laws and regulations
which are applicable to the Holding Company and the Bank. The description of the
laws and regulations hereunder, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
The Holding Company
General. Upon consummation of the Conversion, the Holding Company will
become subject to regulation as a savings and loan holding company under the
HOLA, instead of being subject to regulation as a bank holding company under the
Bank Holding Company Act of 1956 because the Bank has made an election under
Section 10(1) of HOLA to be treated as a "savings association" for purposes of
Section 10(e) of HOLA. As a result, the Holding Company will be required to
register with the OTS and will be subject to OTS regulations, examinations,
supervision and reporting requirements relating to savings and loan holding
companies. The Holding Company will also be required to file certain reports
with, and otherwise comply with the rules and regulations of, the NYBB and the
SEC. As a subsidiary of a savings and loan holding company, the Bank will be
subject to certain restrictions in its dealings with the Holding Company and
affiliates thereof.
Activities Restrictions. Upon consummation of the Conversion, the Bank
will be the sole savings association subsidiary of the Holding Company. There
are generally no restrictions on the activities of a savings and loan holding
company which holds only one subsidiary savings institution. However, if the
Director of the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, he may impose such restrictions as are
deemed necessary to address such risk, including limiting (i) payment of
dividends by the savings institution; (ii) transactions between the savings
institution and its affiliates; and (iii) any activities of the savings
institution that might create a serious risk that the liabilities of the holding
company and its affiliates may be imposed on the savings institution.
Notwithstanding the above rules as to permissible business activities of unitary
savings and loan holding companies, if the savings institution subsidiary of
such a holding company fails to meet the QTL test, as discussed under
"--Qualified Thrift Lender Test," then such unitary holding company also shall
become subject to the activities restrictions applicable to multiple savings and
loan holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company. See "--Qualified Thrift
Lender Test."
If the Holding Company were to acquire control of another savings
institution, other than through Merger or other business combination with the
Bank, the Holding Company would thereupon become a multiple savings and loan
holding company. Except where such acquisition is pursuant to the authority to
approve emergency thrift acquisitions and where each subsidiary savings
institution meets the QTL test, as set forth below, the activities of the
Holding Company and any of its subsidiaries (other than the Bank or other
subsidiary savings institutions) would thereafter be subject to further
restrictions. Among other things, no multiple savings and loan holding company
or subsidiary thereof which is not a savings institution shall commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof any business activity other than: (i)
furnishing or performing management services for a subsidiary savings
institution; (ii) conducting an insurance agency or escrow business; (iii)
holding, managing, or liquidating assets owned by or acquired from a subsidiary
savings institution; (iv) holding or managing properties used or occupied by a
subsidiary savings institution; (v) acting as trustee under deeds of trust; (vi)
those activities authorized by regulation as of March 5, 1987 to be engaged in
by multiple savings and loan holding companies; or (vii) unless the Director of
the OTS by regulation prohibits or limits such activities for savings and loan
holding companies, those activities authorized by the FRB as permissible for
bank holding companies. Those activities described in clause (vii) above also
must be approved by the Director of the OTS prior to being engaged in by a
multiple savings and loan holding company.
Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section
109
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 to
allow small business loans, credit card loans, student loans and loans for
personal, family and household purposes to be included without limitation as
qualified investments. At June 30, 1998, approximately 82.5% of the Bank's
assets were invested in QTLs, which was in excess of the percentage required to
qualify the Bank under the QTL test in effect at that time.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and any affiliate are governed by Sections 23A and 23B of
the Federal Reserve Act. An affiliate of a savings institution is any company or
entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent holding company of
a savings institution (such as the Holding Company) and any companies which are
controlled by such parent holding company are affiliates of the savings
institution. Generally, Sections 23A and 23B (i) limit the extent to which the
savings institution or its subsidiaries may engage in "covered transactions"
with any one affiliate to an amount equal to 10% of such institution's capital
stock and surplus, and contain an aggregate limit on all such transactions with
all affiliates to an amount equal to 20% of such capital stock and surplus and
(ii) require that all such transactions be on terms substantially the same, or,
at least as favorable, to the institution or subsidiary as those provided to a
non-affiliate. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and other similar transactions.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22 (h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At June 30, 1998, the Bank was in compliance with the
above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the Director, (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, 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 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
110
involved controls a savings institution which operated a home or branch office
located in the state of the institution to be acquired as of March 5, 1987; (ii)
the acquiror is authorized to acquire control of the savings institution
pursuant,,to the emergency acquisition provisions of the FDIA; or (iii) the
statutes of the state in which the institution to be acquired is located
specifically permit institutions to be acquired by the state-chartered
institutions or savings and loan holding companies located in the state where
the acquiring entity is located (or by a holding company that controls such
state chartered savings institutions).
Federal Securities Laws. The Holding Company has filed with the SEC a
registration statement under the Securities Act, for the registration of the
Holding Company Common Stock to be issued pursuant to the Conversion and the
Merger. Upon completion of the Conversion, the Holding Company Common Stock will
be registered with the SEC under Section 12(g) of the Securities Exchange Act of
1934, as amended. The Holding Company will then be subject to the proxy and
tender offer rules, insider trading reporting requirements and restrictions, and
certain other requirements under the Exchange Act.
The registration under the Securities Act of shares of the Holding
Company Common Stock to be issued in the Conversion and the Merger does not
cover the resale of such shares. Shares of Holding Company Common Stock
purchased by persons who are not affiliates of the Holding Company may be sold
without registration. Shares purchased by an affiliate of the Holding Company
will be subject to the resale restrictions of Rule 144 under the Securities Act.
If the Holding Company meets the current public information requirements of Rule
144 under the Securities Act, each affiliate of the Holding Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) would be
able to sell in the public market, without registration, a number of shares not
to exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Holding Company or (ii) the average weekly volume of trading in
such shares during the preceding four calendar weeks.
The Bank
General. The Bank is subject to extensive regulation and examination by
the Department, as its chartering authority, and by the FDIC, as the insurer of
its deposits, and, upon Conversion, will be subject to certain requirements
established by the OTS as a result of the Holding Company's savings and loan
holding company status. The federal and state laws and regulations which are
applicable to banks regulate, among other things, the scope of their business,
their investments, their reserves against deposits, the timing of the
availability of deposited funds and the nature and amount of and collateral for
certain loans. The Bank must file reports with the NYBB and the FDIC concerning
its activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as establishing
branches and Mergers with, or acquisitions of, other depository institutions.
There are periodic examinations by the NYBB and the FDIC to test the Bank's
compliance with various regulatory requirements. 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 NYBB, the
FDIC or as a result of the enactment of legislation, could have a material
adverse impact on the Holding Company, the Bank and their operations.
Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks
which, like the Bank, will not be members of the Federal Reserve System.
The FDIC's capital regulations establish a minimum 3.0% Tier I leverage
capital requirement for the most highly-rated state-chartered, non-member banks,
with an additional cushion of at least 100 to 200 basis points for all other
state-chartered, non-member banks, which effectively will increase the minimum
Tier I leverage ratio for such other banks to 4.0% to 5.0% or more. Under the
FDIC's regulation, the highest-rated banks are those that the FDIC determines
are not anticipating or experiencing significant growth and have well
diversified risk, including no undue interest rate risk exposure, excellent
asset quality, high liquidity, good earnings and, in general, which are
considered a strong banking organization and are rated composite I under the
Uniform Financial Institutions Rating System.
111
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, 1998 the Bank met each of its capital requirements.
In August 1995, the FDIC, along with the other federal banking
agencies, adopted a regulation providing that the agencies will take account of
the exposure of a bank's capital and economic value to changes in interest rate
risk in assessing a bank's capital adequacy. According to the agencies,
applicable considerations include the quality of the bank's interest rate risk
management process, the overall financial condition of the bank and the level of
other risks at the bank for which capital is needed. Institutions with
significant interest rate risk may be required to hold additional capital. The
agencies recently issued a joint policy statement providing guidance on interest
rate risk management, including a discussion of the critical factors affecting
the agencies' evaluation of interest rate risk in connection with capital
adequacy. The agencies have determined not to proceed with a previously issued
proposal to develop a supervisory framework for measuring interest rate risk and
an explicit capital component for interest rate risk.
See "Regulatory Capital Requirements" for information with respect to
the Bank's historical leverage and risk- based capital at June 30, 1998 and pro
forma after giving effect to the issuance of shares in the Offerings.
Activities and Investments of New York-Chartered Savings Banks. The
Bank derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and the regulations of the
Department, as limited by FDIC regulations and other federal laws and
regulations. See "--Activities and Investments of Insured State--Chartered
Banks." These New York laws and regulations authorize savings banks, including
the Bank, to invest in real estate mortgages, consumer and commercial loans,
certain types of debt securities, including certain corporate debt securities
and obligations of federal, State and local governments and agencies, certain
types of corporate equity securities and certain other assets. Under the
statutory authority for investing in equity securities, a savings bank may
directly invest up to 7.5% of its assets in certain corporate stock and may also
invest up to 7.5% of its assets in certain mutual fund securities. Investment in
stock of a single corporation is limited to the lesser of 2% of the outstanding
stock of such corporation or 1% of the savings bank's assets, except as set
forth below. Such equity securities must meet certain tests of financial
performance. A savings bank's lending powers are not subject to percentage of
asset limitations, although there are limits applicable to single borrowers. A
savings bank may also, pursuant to the "leeway" authority, make investments not
otherwise permitted under the New York State Banking Law. This authority permits
investments in otherwise impermissible investments of up to 1% of the savings
bank's assets in any single investment, subject to certain restrictions and to
an aggregate limit for all such investments of up to 5% of assets. Additionally,
in lieu of investing in such securities in accordance with the reliance upon the
specific investment authority set forth in the New York State Banking Law,
savings banks are authorized to elect to invest under a "prudent person"
standard in a wider range of debt and equity securities as compared to the types
of investments permissible under such specific investment authority. However, in
the event a savings bank elects to utilize the "prudent person" standard, it
will be unable to avail itself of the other provisions of the New York State
Banking Law and regulations which set forth specific investment authority. A New
York chartered stock savings bank may also exercise trust powers upon approval
of the Department.
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
112
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 Department.
Investment by a savings bank in the stock, capital notes and debentures of its
service corporations is limited to 3% of the bank's assets, and such
investments, together with the bank's loans to its service corporations, may not
exceed 10% of the savings bank's assets.
With certain limited exceptions, a New York-chartered savings bank may
not make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the bank's net worth. The Bank currently complies
with all applicable loans-to-one- borrower limitations.
Activities and Investments of FDIC-Insured State-Chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an
FDIC-insured state-chartered bank may not directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
Under the New York State Banking Law, the Superintendent may issue an
order to a New York-chartered banking institution to appear and explain an
apparent violation of law, to discontinue unauthorized or unsafe practices and
to keep prescribed books and accounts. Upon a finding by the Superintendent that
any director, trustee or officer of any banking organization has violated any
law, or has continued unauthorized or unsafe practices in conducting the
business of the banking organization after having been notified by the
Superintendent to discontinue such practices, such director, trustee or officer
may be removed from office by the Superintendent after notice and an opportunity
to be heard. The Bank does not know of any past or current practice, condition
or violation that might lead to any proceeding by the Department against the
Bank or any of its directors or officers. The Superintendent also may take
possession of a banking organization under specified statutory criteria.
Prompt Corrective Action. Section 38 of the FDIA provides the federal
banking regulators with broad power to take "prompt corrective action" to
resolve the problems of undercapitalized institutions. The extent of the
regulators' powers depends on whether the institution in question is "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Under regulations adopted by
the federal banking regulators, an institution shall be deemed to be (i) "well
capitalized" if it has a total risk-based capital ratio of 10.0% or more, has a
Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital
ratio of 5.0% or more and is not subject to specified requirements to meet and
maintain a specific capital level for any capital measure, (ii) "adequately
capitalized" if it has a total risk-based capital ratio of 8.0% or more, a Tier
I risk-based capital ratio of 4.0%
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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, 1998, the Bank had capital levels which qualified it as a
"well capitalized" institution.
FDIC Insurance Premiums. The Bank is a member of the BIF administered
by the FDIC. As insurer, the FDIC is authorized to conduct examinations of, and
to require reporting by, FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious threat to the FDIC.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Brokered Deposits. The FDIA restricts the use of brokered deposits by
certain depository institutions. Under the FDIA and applicable regulations, (i)
a "well capitalized insured depository institution" may solicit and accept,
renew or roll over any brokered deposit without restriction, (ii) an "adequately
capitalized insured depository institution" may not accept, renew or roll over
any brokered deposit unless it has applied for and been granted a waiver of this
prohibition by the FDIC and (iii) an "undercapitalized insured depository
institution" may not (x) accept, renew or roll over any brokered deposit or (y)
solicit deposits by offering an effective yield that exceeds by more than 75
basis points the prevailing effective yields on insured deposits of comparable
maturity in such institution's normal market area or in the market area in which
such deposits are being solicited. The Bank had $992,000 in brokered deposits
outstanding at June 30, 1998. However, it is not currently soliciting brokered
deposits.
Community Investment and Consumer Protection Laws. In connection with
its lending activities, the Bank is subject to a variety of federal laws
designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the federal Home Mortgage
Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act,
Equal Credit Opportunity Act, Fair Credit Reporting Act and CRA.
The CRA requires insured institutions to define the communities that
they serve, identify the credit needs of those communities and adopt and
implement a "Community Reinvestment Act Statement" pursuant to which they offer
credit products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the Bank,
the FDIC) must conduct regular CRA examinations of insured financial
114
institutions and assign to them a CRA rating of "outstanding," "satisfactory,"
"needs improvement" or "unsatisfactory." The Bank's current federal CRA rating
is "outstanding."
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 "satisfactory."
Limitations on Dividends. The Holding Company is a legal entity
separate and distinct from the Bank. The Holding Company's principal source of
revenue consists of dividends from the Bank. The payment of dividends by the
Bank is subject to various regulatory requirements including a requirement, as a
result of the Holding Company's savings and loan holding company status, that
the Bank notify the Director not less than 30 days in advance of any proposed
declaration by its directors of a dividend.
Under New York State Banking Law, a New York-chartered stock savings
bank may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Department is required if the total
of all dividends declared in a calendar year would exceed the total of its net
profits for that year combined with its retained net profits of the preceding
two years, subject to certain adjustments.
Miscellaneous. The Bank is subject to certain restrictions on loans to
the Holding Company or its non-bank subsidiaries, on investments in the stock or
securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on
behalf of the Holding Company or its non-bank subsidiaries. The Bank also is
subject to certain restrictions on most types of transactions with the Holding
Company or its non-bank subsidiaries, requiring that the terms of such
transactions be substantially equivalent to terms of similar transactions with
non-affiliated firms.
FHLB System. The Bank is a member of the FHLB of New York, which is one
of 12 regional FHLBs that administers the home financing credit function of
savings institutions. Each FHLB serves as a reserve or central bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures established
by the Board of Directors of the FHLB. The Bank had $19.9 million of FHLB
advances at June 30, 1998.
As a FHLB member, the Bank is required to purchase and maintain stock
in the FHLB of New York in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of its advances from the FHLB of
New York, whichever is greater. At June 30, 1998, the Bank had approximately
$3.6 million in FHLB stock, which resulted in its compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily checking
accounts, including NOW and Super NOW accounts) and non-personal time deposits.
As of June 30, 1998, the Bank was in compliance with applicable requirements.
However, because required
115
reserves must be maintained in the form of vault cash or a non-interest-bearing
account at a Federal Reserve Bank, the effect of this reserve requirement is to
reduce an institution's earning assets.
TAXATION
Federal Taxation
General. The Holding Company and the Bank will be subject to federal
income taxation in the same general manner as other corporations with some
exceptions discussed below. The following discussion of federal taxation is
intended only to summarize certain pertinent federal income tax matters and is
not a comprehensive description of the tax rules applicable to the Bank. The
Bank's federal income tax returns have been audited or closed without audit by
the Internal Revenue Service through December 31, 1994.
Method of Accounting. For federal income tax purposes, the Bank
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending June 30 for filing its consolidated federal income
tax returns. The 1996 Act eliminated the use of the reserve method of accounting
for bad debt reserves by savings institutions, effective for taxable years
beginning after 1995.
Bad Debt Reserves. Prior to the 1996 Act, the Bank was permitted to
establish a reserve for bad debts and to make annual additions to the reserve.
These additions could, within specified formula limits, be deducted in arriving
at the Bank's taxable income. As a result of the 1996 Act, the Bank must use the
specific charge off method in computing its bad debt deduction beginning with
its 1996 Federal tax return. In addition, the federal legislation requires the
recapture (over a six year period) of the excess of tax bad debt reserves at
December 31, 1995 over those established as of December 31, 1987. The amount of
such reserve subject to recapture as of June 30, 1998 is approximately $1.5
million.
As discussed more fully below, the Bank and subsidiaries file combined
New York State Franchise tax returns. The basis of the determination of the tax
is the greater of a tax on entire net income (or on alternative entire net
income) or a tax computed on taxable assets. However, for state purposes, New
York State enacted legislation in 1996, which among other things, decoupled the
Federal and New York State tax laws regarding thrift bad debt deductions and
permits the continued use of the bad debt reserve method under section 593 of
the Code. Thus, provided the Bank continues to satisfy certain definitional
tests and other conditions, for New York State income tax purposes, the Bank is
permitted to continue to use the special reserve method for bad debt deductions.
The deductible annual addition to the state reserve may be computed using a
specific formula based on the Bank's loss history ("Experience Method") or a
statutory percentage equal to 32% of the Bank's New York State taxable income
("Percentage Method").
Taxable Distributions and Recapture. Prior to the 1996 Act, bad debt
reserves created prior to January 1, 1988 were subject to recapture into taxable
income should the Bank fail to meet certain thrift asset and definitional tests.
New federal legislation eliminated these thrift related recapture rules.
However, under current law, pre-1988 reserves remain subject to recapture should
the Bank make certain non-dividend distributions, dividend distributions in
excess of historical earnings and profits or cease to maintain a bank charter.
At June 30, 1998 the Bank's total federal base-year reserve was
approximately $3.7 million. These reserves reflect the cumulative effects of
federal tax deductions by the Bank for which no Federal income tax provision has
been made.
Minimum Tax. The Code imposes an AMT at a rate of 20% on a base of
regular taxable income plus certain tax preferences ("alternative minimum
taxable income" or "AMTI"). The AMT is payable to the extent such AMTI is in
excess of an exemption amount and regular income tax. Net operating losses can
offset no more than 90% of AMTI. Certain payments of alternative minimum tax may
be used as credits against regular tax liabilities in future years. The Bank has
not been subject to the alternative minimum tax and has no such amounts
available as credits for carryover.
116
Net Operating Loss Carryovers. For the years beginning after August 5,
1997, a financial institution may carry back net operating losses to the
preceding two taxable years and forward to the succeeding 20 taxable years. At
June 30, 1998, the Bank had no net operating loss carryforwards for federal
income tax purposes.
Corporate Dividends-Received Deduction. The Holding Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends-received deduction is
80% in the case of dividends received from corporations with which a corporate
recipient does not file a consolidated tax return, and corporations which own
less than 20% of the stock of a corporation distributing a dividend may deduct
only 70% of dividends received or accrued on their behalf.
State and Local Taxation
New York State Taxation. The Holding Company and the Bank will report
income on a combined basis utilizing a fiscal year. New York State Franchise Tax
on corporations is imposed in an amount equal to the greater of (a) 9% of
"entire net income" allocable to New York State (b) 3% of "alternative entire
net income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Holding Company is exempt from Delaware corporate income
tax but is required to file an annual report with and pay an annual franchise
tax to the State of Delaware. The tax is imposed as a percentage of the capital
base of the Holding Company with an annual maximum of $150,000.
MANAGEMENT OF THE HOLDING COMPANY
Directors and Executive Officers
The Board of Directors of the Holding Company currently consists of
eleven members, each of whom is also a trustee of the Bank. As discussed below,
upon consummation of the Conversion, the current trustees of the Bank will
continue to be directors of the stock-chartered Bank. See "Management of the
Bank -- Trustees." Each director of the Holding Company has served as such since
the Holding Company's incorporation in September 1998. Directors of the Holding
Company will serve three-year staggered terms so that one-third of the directors
will be elected at each annual meeting of stockholders. One class of directors,
consisting of Duncan S. Mac Affer, Arthur E. Bowen, Walter H. Speidel, and Harry
L. Robinson has a term of office expiring at the Holding Company's first Annual
Meeting of Stockholders, a second class, consisting of R. Douglas Paton, J.
Timothy O'Hearn, Chester C. DeLaMater, and Peter G. Casabonne has a term of
office expiring at the Holding Company's second Annual Meeting of Stockholders,
and a third class, consisting of Michael L. Crotty, Donald A. Wilson, and
Frederick G. Field, Jr., has a term expiring at the Holding Company's third
Annual Meeting of Stockholders. For biographical information regarding each
director of the Holding Company, see "Management of the Bank -- Trustees."
The executive officers of the Holding Company are elected annually and
hold office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. The executive
officers of the Holding Company are Harry L. Robinson, President and Chief
Executive Officer and Richard A. Ahl, Executive Vice President, Chief Financial
Officer and Secretary. It is not anticipated that the executive officers of the
Holding Company will receive any remuneration in their capacity as Holding
Company executive officers. For information regarding compensation of trustees
and executive officers of the Bank, see "Management of the Bank-- Meetings and
Committees of the Board of Trustees of the Bank" and "--Executive Compensation."
Indemnification
The certificate of incorporation of the Holding Company provides that a
director or officer of the Holding Company shall be indemnified by the Holding
Company to the fullest extent authorized by the General Corporation Law of the
State of Delaware against all expenses, liability and loss reasonably incurred
or suffered by such person in connection with his activities as a director or
officer or as a director or officer of another company, if the director or
117
officer held such position at the request of the Holding Company. Delaware law
requires that such director, officer, employee or agent, in order to be
indemnified, must have acted in good faith and in a manner reasonably believed
to be not opposed to the best interests of the Holding Company and, with respect
to any criminal action or proceeding, did not have reasonable cause to believe
his conduct was unlawful.
The certificate of incorporation of the Holding Company and Delaware
law also provide that the indemnification provisions of such certificate and the
statute are not exclusive of any other right which a person seeking
indemnification may have or later acquire under any statute, or provision of the
certificate of incorporation, bylaws of the Holding Company, agreement, vote of
stockholders or disinterested directors or otherwise.
These provisions may have the effect of deterring stockholder
derivative actions, since the Holding Company may ultimately be responsible for
expenses for both parties to the action.
In addition, the certificate of incorporation of the Holding Company
and Delaware law also provide that the Holding Company may maintain insurance,
at its expense, to protect itself and any director, officer, employee or agent
of the Holding Company or another corporation, partnership, joint venture, trust
or other enterprise against any expense, liability or loss, whether or not the
Holding Company has the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law. The Holding
Company intends to obtain such insurance.
MANAGEMENT OF THE BANK
Trustees
Board of Trustees of the Bank. Prior to the Conversion, the direction
and control of the Bank, as a mutual savings bank, was vested in its Board of
Trustees. Upon Conversion of the Bank to stock form, each of the trustees of the
Bank will continue to serve as directors of the converted Bank. The Board of
Trustees of the Bank currently consists of eleven members. Each Trustee of the
Bank has served as such at least since January, 1992, except for Frederick G.
Field, Jr., who was appointed in September, 1995. The trustees serve until their
72nd birthday. Because the Holding Company will own all of the issued and
outstanding shares of capital stock of the Bank after the Conversion, the
directors of the Holding Company will elect the directors of the Bank.
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The following table sets forth certain information regarding the
trustees of the Bank.
Director
Name Position(s) Held With the Bank Age(1) Since
---- ------------------------------ ------ -----
Duncan S. Mac Affer Trustee 63 1964
Arthur E. Bowen Trustee 59 1966
Walter H. Speidel Trustee 70 1970
Harry L. Robinson President, Chief Executive Officer and Trustee 58 1973
R. Douglas Paton Trustee 62 1980
J. Timothy O'Hearn Trustee 57 1983
Chester C. DeLaMater Trustee 58 1983
Peter G. Casabonne Trustee 66 1985
Michael L. Crotty Trustee 52 1986
Donald A. Wilson Trustee 54 1991
Frederick G. Field, Jr. Trustee 66 1995
- ----------
(1) At June 30, 1998.
The business experience of each trustee of the Bank for at least the
past five years is set forth below.
Duncan S. Mac Affer. Mr. Mac Affer is a licensed attorney practicing in
the State of New York. He is currently a Village Justice in the Village of
Menands, New York and recently retired after serving as counsel to the New York
Senate Finance Committee.
Arthur E. Bowen. Mr. Bowen is the President and Funeral Director with
Bowen Funeral Home, Inc.
Walter H. Speidel. Mr. Speidel is a retired past President of Cohoes
Savings Bank Bank.
Harry L. Robinson. Mr. Robinson is a licensed attorney. He is, also,
President and Chief Executive Officer of Cohoes Savings Bank Bank.
R. Douglas Paton. Mr. Paton is a retired Stockbroker.
J. Timothy O'Hearn. Mr. O'Hearn is President of the Century House,
Inc., a restaurant, food catering and lodging company.
Chester C. DeLaMater. Mr. DeLaMater is a retired Executive Vice
President and Secretary of Cohoes Savings Bank Bank.
Peter G. Casabonne. Mr. Casabonne is a Managing Partner of Fuller
Realty, Inc., a company which leases manufacturing and office space.
Michael L. Crotty. Mr. Crotty is President of Capitol Equipment, Inc.,
which is a seller of heavy construction and recycling equipment.
Donald A. Wilson. Mr. Wilson, a Certified Public Accountant, is
President of Wilson & Stark CPA, PC.
Frederick G. Field, Jr. Mr. Field is a retired Supervisor of the Town
of Colonie. He is currently President of Capitol Hill Management, Inc., a
company providing lobbying and management services to associations.
119
Executive Officers Who Are Not Directors. Each of the executive
officers of the Bank will retain his or her office in the converted Bank.
Officers are elected annually by the Board of Trustees of the Bank. The business
experience of the executive officers who are not also trustees is set forth
below.
Richard A. Ahl, age 50. Mr. Ahl is currently serving as Executive Vice
President and Chief Financial Officer. Mr. Ahl joined the Bank in 1996. Mr. Ahl
is a CPA with 20 years of financial and banking experience.
Albert J. Picchi, age 36. Mr. Picchi is currently serving as Vice
President and Senior Loan Officer. Mr. Picchi joined the Bank in January of
1994. Mr. Picchi has 14 years of experience in the financial services industry.
Meetings and Committees of the Board of Trustees of the Bank
The Bank's Board of Trustees meets on a monthly basis. The Board of
Trustees met 13 times during fiscal 1998. During fiscal 1998, no trustee of the
Bank attended fewer than 75% of the aggregate of the total number of Board
meetings and the total number of meetings held by the committees of the Board of
Trustee on which he or she served.
The Bank has standing Executive, Loan Review, Nominating, Salary,
Trustee Qualification and Examining Committees.
The Executive Committee provides oversight of Board-related matters
in-between regularly scheduled Board Meetings. In addition, the Committee has
the authority to make investments, acquire or sell real estate and to take any
other action not otherwise reserved for the Board of Trustees. The Executive
Committee is comprised of five Trustees, which membership rotates each month.
This committee did not meet during fiscal 1998.
The Loan Review Committee is comprised of two trustees which rotates
each month and Harry L. Robinson. This Committee oversees and reviews real
estate loans between $500,001 and $749,000, and commercial business loans
between $200,001 and $300,000.
The Nominating Committee proposes nominations for Chairman and Vice
Chairman of the Board, Officers, Trustee Emeriti and the appointment of the
Bank's legal counsel. This committee is comprised of three trustees serving for
a three year term, meeting once each year. The current members of the committee
are Donald A. Wilson (Chairman), Frederick G. Field, Jr., and Duncan S. Mac
Affer.
The Salary Committee is comprised of three trustees serving for a three
year term meeting once a quarter to review compensation and benefit practices of
the Bank to ensure internal and external market competitiveness. The current
members of the committee are J. Timothy O'Hearn (Chairman), Chester C.
DeLaMater, and Peter G. Casabonne.
The Trustee Qualification Committee is comprised of the three senior
Trustees meeting as necessary to review candidates for the vacancies on the
Board. The current members of the committee are Duncan S. Mac Affer (Chairman),
Arthur E. Bowen, and Walter H. Speidel.
The Examining Committee is comprised of three trustees serving for a
three year term, meeting once a quarter to provide oversight to the Bank's
Internal Audit Department and for the review of the Bank's annual audit report
prepared by the Bank's independent auditors. The current members of the
committee are Peter G. Casabonne (Chairman), Michael L. Crotty, and Donald A.
Wilson.
Trustee Compensation
Trustees of the Bank are paid a monthly fee for each board meeting
attended of $2,625. Trustees receive $500 for each committee meeting attended.
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Trustees Emeritus
Under the Bank's Bylaws, a retiring Trustee may, with the approval of
the Board of Trustees, serve as a Trustee Emeritus of the Bank. A Trustee
Emeritus is entitled to attend all meetings of the Board of Trustees,
participate in all discussions and receive the same fees as a Trustee. Trustees
Emeriti are not, however, entitled to vote or meet as a separate body. Robert L.
Knoop and Charles R. Crotty currently serve as Trustees Emeritus of the Bank.
Executive Compensation
The following table sets forth information concerning the compensation
paid to the Bank's Chief Executive Officer and the Bank's only other executive
officer whose salary and bonus for fiscal 1998 exceeded $100,000.
Summary Compensation Table
- ------------------------------------------------------------------------------------------------------------------------------
Long Term Compensation
Annual Compensation Awards
-------------------------------------- --------------------------
Other Annual Restricted Stock Options All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Award ($)(1) (#)(1) Compensation($)
- -------------------------------- ---- ---------- --------- -------------- ---------------- ------- --------------
Harry L. Robinson, President and 1998 $295,072(2) $59,063(2) $--- N/A N/A $17,243(3)
Chief Executive Officer
Richard A. Ahl, Executive Vice 1998 146,224(2) 31,250(2) --- N/A N/A 4,212(3)
President, Chief Financial
Officer and Secretary
- ----------
(1) As a mutual institution, the Bank does not have any stock options or
restricted stock plans.
(2) $27,323 and $21,220 was deferred under the Bank's deferred salary
arrangement for Mr. Robinson and Mr. Ahl, respectively. Both Mr.
Robinson and Mr. Ahl elected to have their entire bonuses deferred.
(3) Includes 401(k) and profit-sharing contributions of $6,043 and $11,200,
respectively, for Mr. Robinson and $2,849 and $1,363 respectively, for
Mr. Ahl.
Employment Agreements
Upon the Conversion, the Bank intends to enter into employment agreements
with Harry L. Robinson, Richard A. Ahl and Albert J. Picchi of the Bank
(individually, the "Executive") and the Holding Company intends to enter into
employment agreements with Harry L. Robinson and Richard A. Ahl. The employment
agreements are intended to ensure that the Bank and the Holding Company will be
able to maintain a stable and competent management base after the Conversion.
The continued success of the Bank and the Holding Company depends to a
significant degree on the skills and competence of the above referenced
officers.
The employment agreements provide for either three-year or two-year terms
for each Executive. The terms of the employment agreements shall be extended on
a daily basis unless written notice of non-renewal is given by the Board of
Directors. The employment agreements provide that the executive's base salary
will be reviewed annually. The base salary which will be effective for such
Employment Agreement for Harry L. Robinson and Richard A. Ahl will be $400,000
and $200,000, respectively. In addition to the base salary, the employment
agreements provide for, among other things, participation in stock benefits
plans and other fringe benefits applicable to executive personnel. The
agreements provide for termination by the Bank or the Holding Company for cause,
as defined in the employment agreements, at any time. In the event the Bank or
the Holding Company chooses to terminate the executive's employment for reasons
other than for cause, or in the event of the executive's resignation from the
Bank and the Holding Company upon; (i) failure to re-elect the executive to his
current offices; (ii) a material change in the executive's functions, duties or
responsibilities; (iii) a reduction in the benefits and perquisites being
provided to the executive under the Employment Agreement; (iv) liquidation or
dissolution of the Bank or the Holding Company; or (v) a breach of the agreement
by the Bank or the Holding Company, the executive or, in the event of death, his
beneficiary would be entitled to receive an amount equal to the remaining base
salary payments due to the executive for the remaining term of the Employment
Agreement and the contributions that would have been made on the executive's
behalf to any employee benefit plans of the Bank and the Holding Company during
the remaining term of
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the agreement. The Bank and the Holding Company would also continue and pay for
the executive's life, health, dental and disability coverage for the remaining
term of the Agreement. Upon any termination of the executive, other than
following a change in control, the executive is subject to a one year
non-competition agreement.
Under the employment agreements, if voluntary or involuntary termination
follows a change in control of the Bank or the Holding Company, the executive
or, in the event of the executive's death, his beneficiary, would be entitled to
a severance payment equal to the greater of: (i) the payments due for the
remaining terms of the agreement; or (ii) three times the average of the five
preceding taxable years' annual compensation. The Bank and the Holding Company
would also continue the executive's life, health, and disability coverage for
thirty-six months in the case of Messrs. Robinson and Ahl and twenty-four months
in the case of Mr. Picchi. Under the employment agreements, a voluntary
termination following a change in control means the executive's voluntary
resignation following any demotion, loss of title, office authority or
responsibility, a reduction in compensation or benefits or relocation.
Notwithstanding that both the Bank and Holding Company employment agreements
provide for a severance payment in the event of a change in control, the
executive would only be entitled to receive a severance payment under one
agreement.
Payments to the executive under the Bank's Employment Agreement will be
guaranteed by the Holding Company in the event that payments or benefits are not
paid by the Bank. Payment under the Holding Company's Employment Agreement would
be made by the Holding Company. The Holding Company's Employment Agreement also
provides that the Holding Company will compensate the executive for excise taxes
imposed on any "excess parachute payments," as defined under section 280G of the
Code, made thereunder, and any additional income and excise taxes imposed as a
result of such compensation. All reasonable costs and legal fees paid or
incurred by the executive pursuant to any dispute or question of interpretation
relating to the employment agreements shall be paid by the Bank or Holding
Company, respectively, if the executive is successful on the merits pursuant to
a legal judgment, arbitration or settlement. The employment agreements also
provide that the Bank and the Holding Company shall indemnify the executive to
the fullest extent allowable under New York and Delaware law, respectively. In
the event of a change in control of the Bank or the Holding Company, the total
amount of payments due under the Agreements, based solely on cash compensation
paid to the officers who will receive employment agreements over the past five
fiscal years and excluding any benefits under any employee benefit plan which
may be payable, would be approximately $3.0 million.
Change in Control Agreements
Upon Conversion, the Bank intends to enter into one-year Change in Control
agreements with four officers of the bank, none of whom will be covered by
employment contracts. Commencing on the first anniversary date and continuing on
each anniversary thereafter, the Bank Change in Control agreements may be
renewed by the Board of Directors of the Bank for an additional year. The Bank's
Change in Control agreements will provide that in the event voluntary or
involuntary termination follows a change in control of the Holding Company or
the Bank, the officer would be entitled to receive a severance payment equal to
the officer's current annual compensation. The Bank would also continue and pay
for the officer's life, health and disability coverage for twelve months
following termination. Under the Change in Control agreements, a voluntary
termination following a change in control means the executive's voluntary
resignation following any demotion, loss of title, office authority or
responsibility, a reduction in compensation or benefits or relocation. In the
event of a change in control of the Holding Company or the Bank, the total
payments that would be due under the Change in Control agreements, based solely
on the current annual compensation paid to the officers covered by the Change in
Control agreements and excluding any benefits under any employee benefit plan
which may be payable, would be approximately $250,000.
Employee Severance Compensation Plan
The Bank's Board of Directors intends to, upon Conversion, establish the
Severance Plan which will provide eligible employees selected by the Board of
Directors with severance pay benefits in the event of a change in control of the
Bank or the Holding Company following Conversion. Management personnel with
employment agreements or Change in Control agreements are not eligible to
participate in the severance plan. Generally, employees are eligible to
participate in the severance plan if they have completed at least one year of
service with the Bank. The Severance Plan vests in each participant a
contractual right to the benefits such participant is entitled to thereunder.
Under the
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severance plan, in the event of a change in control of the Bank or the Holding
Company, eligible employees who are terminated from or terminate their
employment within one year (for reasons specified under the severance plan),
will be entitled to receive a severance payment. If the participant, whose
employment has terminated, has completed at least one year of service, the
participant will be entitled to a cash severance payment equal to two weeks of
annual compensation for each year of service up to a maximum of six months of
annual compensation. Such payments may tend to discourage takeover attempts by
increasing costs to be incurred by the Bank in the event of a takeover. In the
event the provisions of the severance plan are triggered, the total amount of
payments that would be due thereunder, based solely upon current salary levels,
would be approximately $202,000. However, it is management's belief that
substantially all of the Bank's employees would be retained in their current
positions in the event of a change in control, and that any amount payable under
the severance plan would be considerably less than the total amount that could
possibly be paid under the severance plan.
Independent Compensation Expert
Pursuant to NYBB regulations, an independent compensation expert must
review the total compensation for the executive officers and trustees of the
Bank as a whole and on an individual basis and determine whether such
compensation is reasonable and proper in comparison to the compensation provided
to executive officers, directors or trustees of similar publicly-traded
financial institutions. William M. Mercer, Incorporated has conducted such
review on behalf of the Bank and determined that, based upon published
professional survey data of similarly situated publicly-traded financial
institutions operating in the relevant markets, with respect to the total cash
compensation for executive officers and total remuneration for trustees of the
Bank, such compensation, viewed as a whole and on an individual basis, is
reasonable and proper in comparison to the compensation provided to similarly
situated publicly-traded financial institutions, and that, with respect to the
amount of shares of Holding Company Common Stock to be reserved under the ESOP,
and expected to be reserved under the RRP and the Stock Option and Incentive
Plan, as a whole, such amounts reserved for granting are reasonable in
comparison to similar publicly-traded financial institutions.
Benefit Plans
General. The Bank currently provides health care benefits to its employees,
including medical, dental and life insurance, subject to certain deductibles and
copayments by employees.
401(k) Savings and Profit-Sharing Plan. The Bank has a qualified,
tax-exempt savings and profit-sharing plan with a cash or deferred feature
qualifying under Section 401(k) of the Code (the "401(k) Plan"). All salaried
employees who have attained age 21 and completed one year of employment, during
which they worked at least 1,000 hours, are eligible to participate.
Participants are permitted to make salary reduction contributions to the
401(k) Plan of between 2% to 15% of the participant's annual salary. Each
participant's salary reduction contribution is matched by the Bank in an amount
equal to 50% of the participant's before-tax contribution up to a maximum
contribution by the Bank of 3% of such participant's annual salary for the Plan
Year. All participant contributions and earnings are fully and immediately
vested. All matching contributions are vested at a rate of 20% per year over a
five year period commencing after one year of employment with the Bank. However,
in the event of retirement, permanent disability or death, a participant will
automatically become 100% vested in the value of all matching contributions and
earnings thereon, regardless of the number of years of employment with the Bank.
Participants may invest amounts contributed to their 401(k) Plan accounts
in one or more investment options available under the 401(k) Plan in multiples
of 10%. Changes in investment directions among the funds are permitted on a
continuous basis pursuant to procedures established by the Plan Administrator.
Each participant receives a quarterly statement which provides information
regarding, among other things, the market value of his investments and
contributions made to the 401(k) Plan on his behalf. Participants are permitted
to borrow against their account balance in the 401(k) Plan. For the year ended
June 30, 1998, the Bank's contributions to the 401(k) Plan on behalf of Messrs.
Robinson and Ahl were $17,243 and $4,212, respectively.
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Employee Stock Ownership Plan. The Board of Trustees of the Bank and the
Board of Directors of the Holding Company have approved the adoption of an ESOP
for the benefit of eligible employees of the Bank. The ESOP is designed to meet
the requirements of an employee stock ownership plan as described at Section
4975(e)(7) of the Code and Section 407(d)(6) of ERISA, and, as such, the ESOP is
empowered to borrow in order to finance purchases of the Holding Company Common
Stock.
It is anticipated that the ESOP will be initially funded with a loan from
the Holding Company. The proceeds from this loan are expected to be used by the
ESOP to purchase 8% of the Holding Company Common Stock issued in the
Conversion, including shares issued to the Foundation. After the Conversion, as
a qualified employee pension plan under Section 401(a) of the Code, the ESOP
will be in the form of a stock bonus plan and will provide for contributions,
predominantly in the form of either Holding Company Common Stock or cash, which
will be used within a reasonable period after the date of contributions
primarily to purchase the Holding Company Common Stock. The maximum
tax-deductible contribution by the Bank in any year is an amount equal to the
maximum amount that may be deducted by the Bank under Section 404 of the Code,
subject to reduction based on contributions to other tax-qualified employee
plans. Additionally, the Bank will not make contributions if such contributions
would cause the Bank to violate its regulatory capital requirements. The assets
of the ESOP will be invested primarily in Holding Company Common Stock. The Bank
will receive a tax deduction equal to the amount it contributes to the ESOP.
From time to time the ESOP may purchase additional shares of Holding
Company Common Stock for the benefit of plan participants through purchases of
outstanding shares in the market, upon the original issuance of additional
shares by the Holding Company or upon the sale of shares held in treasury by the
Holding Company. Such purchases, which are not currently contemplated, would be
subject to then-applicable laws, regulations and market conditions.
All employees of the Bank are eligible to participate in the ESOP after
they attain age 21 and complete on year of service with the Bank. Employees will
be credited for years of service to the Bank prior to the adoption of the ESOP
for participation and vesting purposes. The Bank's contribution to the ESOP is
allocated among participants on the basis of compensation. Each participant's
account will be credited with cash and shares of Holding Company Common Stock
based upon compensation earned during the year with respect to which the
contribution is made. A participant will become vested in his or her ESOP
account at a rate of 20% per year and after completing five years of service a
participant will be 100% vested in his or her ESOP account. ESOP participants
are entitled to receive distributions from their ESOP accounts only upon
termination of service. Distribution will be made in cash and in whole shares of
Holding Company Common Stock. Fractional shares will be paid in cash.
Participants will not incur a tax liability until a distribution is made.
Participating employees are entitled to instruct the trustee of the ESOP as
to how to vote the shares held in their account. The trustee, who has
dispositive power over the shares in the Plan, will not be affiliated with the
Holding Company or the Bank. The ESOP may be amended by the Board of Directors
of the Holding Company, except that no amendment may be made which would reduce
the interest of any participant in the ESOP trust fund or divert any of the
assets of the ESOP trust fund to purposes other than the benefit of participants
or their beneficiaries.
Stock Option and Incentive Plan. Among the benefits to the Bank and the
Holding Company anticipated from the Conversion is the ability to attract and
retain directors and key personnel through stock option and other stock-related
incentive programs. A Stock Option and Incentive Plan is intended to be adopted
by the Board of Directors of the Holding Company and then submitted to the
Holding Company's stockholders for their approval (at a meeting to be held no
earlier than six months following the Conversion).
The Holding Company anticipates reserving an amount equal to 10% of the
shares of Holding Company Common Stock issued in the Conversion, including
shares issued to the Foundation (or 829,150 shares based upon the issuance of
8,291,500 shares), for issuance under the Stock Option and Incentive Plan. If
the Holding Company implements an option plan within one year following
completion of the Conversion, NYBB regulations provide that no individual
officer or employee of the Bank may receive more than 25% of the options granted
under the plan and non-employee directors may not receive more than 5%
individually, or 30% in the aggregate, of the options granted under the plan.
NYBB and FDIC regulations also provide that the exercise price of any options
granted under any such
124
plan implemented within one year after the Conversion must equal or exceed the
market price of the Holding Company Common Stock as of the date of grant.
Additionally, OTS regulations, as applied by the FDIC, provide that with respect
to any stock option plan adopted within one year after Conversion, the vesting
or the exercisability of any options granted under such a plan may not be
accelerated except upon death or disability.
It is anticipated that the Stock Option and Incentive Plan will allow for
the granting of: (i) stock options for employees intended to qualify as
incentive stock options under Section 422 of the Code ("Incentive Stock
Options"), (ii) options for all plan participants that do not qualify as
incentive stock options ("Non-Statutory Stock Options"); and (iii) Stock
Appreciation Rights. Unless sooner terminated, the Stock Option and Incentive
Plan will remain in effect for a period of fifteen years from the later of
adoption by the Board of Directors or approval by the Holding Company's
stockholders. Subject to applicable regulations, upon exercise of a Right the
grantee will be entitled to receive a lump sum cash payment equal to the
difference between the fair market value of shares of common stock underlying
the Right on the date of exercise and fair market value of the shares of common
stock subject to the Right on the date of grant.
The Stock Option and Incentive Plan will be administered by a committee
(the "Compensation Committee") the members of which are each "non-employee
directors," as defined in the SEC's regulations, and "outside directors," as
defined under Section 162(m) of the Code and the regulations thereunder. The
Compensation Committee will determine which directors, officers and employees
may receive options and Rights, whether such options will qualify as Incentive
Stock Options, the number of shares subject to each option or Right, the
exercise price of each option, the manner of exercise of the options and the
time when such options or Rights will become exercisable.
The Holding Company anticipates that options granted pursuant to the Stock
Option and Incentive Plan will remain exercisable for at least three months
following the date on which a participant ceases to perform services for the
Bank or the Holding Company, except in the event of death or disability, in
which case options would accelerate and become fully vested and remain
exercisable for up to one year thereafter, or such longer period as determined
by the Compensation Committee. However, any Incentive Stock Option exercised
more than three months following the date on which an employee ceased to perform
services as an employee, other than termination due to death or disability,
would not be treated for tax purposes as an Incentive Stock Option. It is
intended that the Stock Option Plan would provide that the Compensation
Committee, if requested by the optionee, could elect, in exchange for vested
options, to pay the optionee, or beneficiary in the event of death, the amount
by which the fair market value of the Holding Company Common Stock exceeds the
exercise price of the options on the date of the employee's termination of
employment.
Recognition and Retention Plan. Following consummation of the Conversion,
the Board of Directors of the Holding Company intends to adopt a RRP for
directors, officers and employees. The objective of the RRP will be to enable
the Holding Company to provide directors, officers and employees with a
proprietary interest in the Holding Company as an incentive to contribute to its
success. The Holding Company intends to present the RRP to stockholders for
their approval at a meeting of stockholders which, pursuant to applicable NYBB
and FDIC regulations, may be held no earlier than six months subsequent to
completion of the Conversion.
The RRP will be administered by the Compensation Committee of the Board of
Directors. The Holding Company will contribute funds to the RRP to enable it to
acquire in the open market or from authorized but unissued shares, following
stockholder ratification of such plan, an amount of stock equal to 4% of the
shares of Holding Company Common Stock issued in the Conversion, including
shares issued to the Foundation (representing 331,660 shares in the aggregate,
having a value of $3,316,600 based on the Offering Price per share of $10.00).
Although no specific award determinations have been made, the Holding Company
anticipates that it will provide stock awards to the directors, executive
officers and employees of the Holding Company or the Bank or their affiliates to
the extent permitted by applicable regulations. NYBB regulations provide that,
to the extent the Holding Company implements the RRP within one year after
Conversion, no individual employee may receive more than 25% of the shares of
any plan and non-employee directors may not receive more than 5% of any plan
individually or 30% in the aggregate for all directors. Additionally, OTS
regulations, as applied by the FDIC, provide that Awards granted under the RRP
may not be accelerated except upon death or disability for plans adopted within
one year after Conversion.
125
Under the terms of the proposed RRP, awards ("Awards") can be granted to
key employees in the form of shares of Holding Company Common Stock held by the
RRP. Awards are non-transferable and non-assignable. Recipients will earn (i.e.,
become vested in), over a period of time, the shares of Holding Company Common
Stock covered by the Award.
Benefit Restoration Plan. The Holding Company also maintains a
non-qualified deferred compensation plan, known as the Benefit Restoration Plan.
The Benefit Restoration Plan provides certain officers and highly compensated
executives of the Holding Company and the Bank with supplemental retirement
income when such amounts cannot be paid from the tax-qualified 401(k) Plan or
ESOP. Participants in the Benefit Restoration Plan receive a benefit equal to
the amount they would have received under the 401(k) Plan and the ESOP, but for
reductions in such benefits imposed by operation of Sections 401(a)(17), 401(m),
401(k)(3), 402(g) and 415 of the Code. In addition, the Benefit Restoration Plan
is intended to make up benefits lost under the ESOP allocation procedures to
certain Participants named by the Compensation Committee who retire prior to the
complete repayment of the ESOP loan. At the retirement of a Participant, the
restored ESOP benefits under the Benefit Restoration Plan are determined by
first: (i) projecting the number of shares that would have been allocated to the
Participant under the ESOP if they had been employed throughout the period of
the ESOP loan (measured from the Participant's first date of ESOP
participation); and (ii) first reducing the number determined by (i) above by
the number of shares actually allocated to the Participant's account under the
ESOP; and second, by multiplying the number of shares that represent the
difference between such figures by the average fair market value of the Common
Stock over the preceding five years. Benefit Restoration Plan Participant's
benefits are payable upon the retirement or other termination of service of the
Participant in the form of a lump sum. Payment of a deceased Participant's
benefits will be made to his or her designated beneficiary.
Certain Transactions
The Bank follows a policy of granting loans to the Bank's employees and
residential loans and mortgages to officers. The loans to executive officers and
trustees are made in the ordinary course of business and on the same terms and
conditions as those of comparable transactions prevailing at the time, in
accordance with the Bank's underwriting guidelines and do not involve more than
the normal risk of collectibility or present other unfavorable features. All
loans to executive officers cannot exceed $25,000 or 5% of the Bank's capital
and unimpaired surplus, whichever is greater, unless a majority of the Board of
Trustees approves the credit in advance and the individual requesting the credit
abstains from voting. Under the Bank's policy the Bank will not make preferred
rate loans to executive officers, directors, or employees. All loans by the Bank
to its directors and executive officers are subject to regulations restricting
loans and other transactions with affiliated persons of the Bank. Federal law
currently requires that all loans to directors and executive officers be made on
terms and conditions comparable to those for similar transactions with
non-affiliates. At June 30, 1998 there were no loans outstanding to any trustee
or executive officer of the Bank.
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Proposed Purchases by Executive Officers and Trustees
The following table sets forth the number of shares of Common Stock that
the executive officers and trustees, and their associates, propose to purchase
in the Offerings, assuming shares of Common Stock are issued at $10.00 per share
at the minimum ($59,500,000) and maximum ($80,500,000) of the Estimated
Valuation Range and that sufficient shares will be available to satisfy their
orders. The table also sets forth the total expected beneficial ownership of
Common Stock as to all trustees and executive officers as a group.
At the Minimum of the At the Maximum of the
Estimated Valuation Range(1) Estimated Valuation Range(1)
---------------------------- ----------------------------
Number of As a Percent of Number of As a Percent of
Name Amount Shares Shares Offered Shares Shares Offered
- ------------------------------- ---------- --------- --------------- --------- --------------
Duncan S. Mac Affer............ $ 350,000 35,000 0.6% 35,000 0.4%
Arthur E. Bowen................ 180,000 18,000 0.3 18,000 0.2
Walter H. Speidel.............. 350,000 35,000 0.6 35,000 0.4
Harry L. Robinson.............. 500,000 50,000 0.8 50,000 0.6
Donald A. Wilson............... 215,000 21,500 0.3 21,500 0.3
Frederick G. Field, Jr......... 80,000 8,000 0.1 8,000 0.1
R. Douglas Paton............... 300,000 30,000 0.5 30,000 0.4
J. Timothy O'Hearn............. 250,000 25,000 0.5 25,000 0.3
Chester C. DeLaMater........... 300,000 30,000 0.5 30,000 0.4
Peter G. Casabonne............. --- --- --- --- ---
Michael L. Crotty.............. 125,000 12,500 0.2 12,500 0.2
Richard A. Ahl................. 300,000 30,000 0.5 30,000 0.4
Albert J. Picchi............... 150,000 15,000 0.3 15,000 0.2
---------- ------- -------
All directors and executive
officers as a group (13 persons) $3,100,000 310,000 5.2% 310,000 3.8%
========== ======= ====== ======= =====
- ---------
(1) Includes proposed subscriptions, if any, by associates. Does not
include subscription orders by the ESOP. Intended purchases by the ESOP
are expected to be 8% of the shares issued in the Conversion, including
shares issued to the Foundation. Also does not include shares to be
contributed to the Foundation equal to 3% of the Holding Company Common
Stock sold or 178,500 and 241,500 shares at the minimum and the
maximum, respectively of the Estimated Valuation Range, Holding Company
Common Stock which may be awarded under the RRP to be adopted equal to
4% of the Holding Company Common Stock issued in the Conversion,
including shares issued to the Foundation (or 245,140 shares and
331,660 shares at the minimum and the maximum, respectively, of the
Estimated Valuation Range), and Holding Company Common Stock which may
be purchased pursuant to options which may be granted under the Stock
Option and Incentive Plan equal to 10% of the number of shares of
Common stock issued in the Conversion, including shares issued to the
Foundation (or 612,850 shares or 829,150 shares at the minimum and the
maximum, respectively, of the Estimated Valuation Range.)
(2) Less than .01%.
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THE CONVERSION AND THE MERGER
THE BOARD OF TRUSTEES OF THE BANK AND THE SUPERINTENDENT OF BANKS OF
THE STATE OF NEW YORK HAVE APPROVED THE PLAN OF CONVERSION, SUBJECT TO APPROVAL
BY THE BANK'S DEPOSITORS ENTITLED TO VOTE ON THE PLAN AND THE SATISFACTION OF
CERTAIN OTHER CONDITIONS. SUCH APPROVAL, HOWEVER, DOES NOT CONSTITUTE A
RECOMMENDATION OR ENDORSEMENT OF THE PLAN BY THE SUPERINTENDENT.
General
On May 21, 1998, the Bank's Board of Trustees unanimously adopted the
Plan of Conversion pursuant to which the Bank will be converted from a New York
mutual savings bank to a New York stock savings bank. It is currently intended
that all of the outstanding capital stock issued by the Bank pursuant to the
Plan will be held by the Holding Company, which is incorporated under Delaware
law. The Plan was approved by the Superintendent, and the Bank has received a
notice of intent not to object to the Plan from the FDIC, subject to, among
other things, approval of the Plan by the Bank's voting depositors. A special
meeting of depositors has been called for this purpose to be held on
_________________________, 1998.
On July 31, 1998 the Bank and SFS entered into the merger agreement
pursuant to which SFS will merge into the Holding Company. Simultaneously with
or immediately after the Conversion, SFS will merge with and into the Holding
Company with the Holding Company being the survivor thereof. Immediately
thereafter, Schenectady Federal will merge with and into the Bank with the Bank
being the survivor thereof. The Merger is governed by the merger agreement,
which was unanimously adopted by the Board of Trustees of the Bank, the Board of
Directors of SFS and upon its formation, the Board of Directors of the Holding
Company.
The Holding Company has received approval from the OTS to become a
savings and loan holding company and to acquire all of the capital stock of the
Bank to be issued in the Conversion as well as all of the SFS Common Stock. The
Holding Company plans to retain 50% of the net proceeds from the sale of the
Conversion Shares and to use the remaining net proceeds to purchase all of the
then issued and outstanding capital stock of the Bank. The Conversion will be
effected only upon completion of the sale of all of the shares of Holding
Company Common Stock to be issued pursuant to the Plan.
The Plan provides that the Board of Trustees of the Bank may, at any
time prior to the issuance of the Holding Company Common Stock and for any
reason, decide not to use the holding company form of organization. Such reasons
may include possible delays resulting from overlapping regulatory processing or
policies which could adversely affect the Bank's or the Holding Company's
ability to consummate the Conversion and transact its business as contemplated
herein and in accordance with the Bank's operating policies. In the event such a
decision is made, the Bank will withdraw the Holding Company's registration
statement from the SEC and take steps necessary to complete the Conversion
without the Holding Company, including filing any necessary documents with the
Department and the FDIC. In such event, and provided there is no regulatory
action, directive or other consideration upon which basis the Bank determines
not to complete the Conversion, if permitted by the Department, the Bank will
issue and sell the common stock of the Bank and subscribers will be notified of
the elimination of a holding company and will be solicited (i.e., be permitted
to affirm their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their funds will be promptly refunded with interest at the Bank's passbook rate
of interest; or be permitted to modify or rescind their subscriptions), and
notified of the time period within which the subscriber must affirmatively
notify the Bank of such subscriber's intention to affirm, modify or rescind such
subscriber's subscription. The following description of the Plan assumes that a
holding company form of organization will be used in the Conversion. In the
event that a holding company form of organization is not used, all other
pertinent terms of the Plan as described below will apply to the Conversion of
the Bank from the mutual to stock form of organization and the sale of the
Bank's common stock.
The Plan provides generally that (i) the Bank will convert from a
mutual savings bank to a capital stock savings bank and (ii) the Holding Company
will offer shares of Holding Company Common Stock for sale in the Subscription
Offering to the Bank's Eligible Account Holders, Employee Plans, including the
ESOP and Supplemental Eligible
128
Account Holders. The Plan also provides that shares not subscribed for in the
Subscription Offering may be offered in a Community Offering to certain members
of the general public. It is anticipated that all shares not subscribed for in
the Subscription and Community Offerings will be offered for sale by the Holding
Company to the general public in a Syndicated Community Offering. The Holding
Company and the Bank have reserved the right to accept or reject, in whole or in
part, any orders to purchase shares of the Holding Company Common Stock received
in the Community Offering or in the Syndicated Community Offering. See
"-Community Offering" and "- Syndicated Community Offering."
The aggregate price of the shares of Holding Company Common Stock to be
issued in the Conversion within the Estimated Valuation Range, currently
estimated to be between $59,500,000 and $80,500,000 is based upon an independent
appraisal of the estimated pro forma market value of the Holding Company Common
Stock prepared by RP Financial, a consulting firm experienced in the valuation
and appraisal of savings institutions. All shares of Holding Company Common
Stock to be issued and sold in the Conversion will be sold at the same price.
The independent appraisal will be affirmed or, if necessary, updated at the
completion of the Offerings. See "- Stock Pricing" for additional information as
to the determination of the estimated pro forma market value of the Holding
Company Common Stock.
The following is a brief summary of pertinent aspects of the merger
agreement and the Plan. The summary is qualified in its entirety by reference to
the provisions of the Plan and the merger agreement. A copy of the Plan is
available from the Bank upon written request and is available for inspection at
the offices of the Bank and at the office of the Superintendent. The Plan and
the merger agreement are also filed as an Exhibit to the Registration Statement
of which this Prospectus is a part, copies of which may be obtained from the
SEC.
Purposes of Conversion and the Merger
The Bank, as a New York mutual savings bank, does not have stockholders
and has no authority to issue capital stock. By converting to the capital stock
form of organization, the Bank will be structured in the form used by commercial
banks, other business entities and a growing number of savings institutions. The
Conversion will be important to the future growth and performance of the Bank by
providing a larger capital base on which the Bank may operate, enhanced future
access to capital markets, enhanced ability to diversify into other financial
services related activities and enhanced ability to render services to the
public.
The holding company form of organization, if used, would provide
additional flexibility to diversify the Bank's business activities through
newly-formed subsidiaries, or through acquisitions of or Mergers with both
mutual and stock institutions, as well as other companies. Although there are no
current arrangements, understandings or agreements, written or oral, regarding
any such opportunities except the Merger, the Holding Company will be in a
position after the Conversion, subject to regulatory limitations and the Holding
Company's financial position, to take advantage of any such opportunities that
may arise. While there are benefits associated with the holding company form of
organization, such form of organization may involve additional costs associated
with its maintenance and regulation as a savings and loan holding company, such
as additional administrative expenses, taxes and regulatory filings or
examination fees.
The potential impact of the Conversion upon the Bank's capital base is
significant. The Bank had Tier I Leverage Capital of $53.3 million, or 10.13% of
assets, at June 30, 1998. Assuming that $78,572,400 million of net proceeds are
realized from the sale of Holding Company Common Stock (being the maximum of the
Estimated Valuation Range established by the Board of Directors based on the
Valuation Range which has been estimated by RP Financial to be from a minimum of
$59,500,000 to a maximum of $80,500,000 (see "Pro Forma Data" for the basis of
this assumption)) and assuming that $39,286,200 million of the net proceeds are
used by the Holding Company to purchase the capital stock of the Bank, the
Bank's Tier I Leverage capital ratio, on a pro forma basis, will increase to
15.35% after the Conversion. The investment of the net proceeds from the sale of
the Holding Company Common Stock will provide the Bank with additional income to
further enhance its capital position. The additional capital may also assist the
Bank in offering new programs and expanded services to its customers.
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After completion of the Conversion, the unissued common and preferred
stock authorized by the Holding Company's Certificate of Incorporation will
permit the Holding Company, subject to market conditions and regulatory
approval, to raise additional equity capital through further sales of securities
and to issue securities in connection with possible acquisitions other than the
Merger. At the present time, the Holding Company has no plans with respect to
additional offerings of securities, other than the issuance of additional shares
to the Foundation or upon exercise of stock options granted pursuant to the
Stock Option and Incentive Plan or the possible issuance of authorized but
unissued shares pursuant to the RRP. Following the Conversion, the Holding
Company will also be able to use stock-related incentive programs to attract and
retain executive and other personnel for itself and its subsidiaries. See
"Management of the Bank - Executive Compensation."
The Board of Trustees of the Bank and the Boards of Directors of the
Holding Company and SFS believe that the combination of the Parties will enhance
the competitive position of the combined entities and will enable the resulting
institution to compete more effectively than either the Bank or Schenectady
Federal could on its own. The combined entity will have greater financial
resources and, as a result of the Offerings, increased capital levels. The
Holding Company's pro forma stockholders' equity will amount to 14.45% of pro
forma total assets at June 30, 1998, assuming the Conversion Shares are sold at
the maximum of the Estimated Valuation Range. The combination will result in
increased funds being available for lending purposes, greater resources for
expansion of services and better opportunities for attracting and retaining
qualified personnel.
The terms of the merger agreement were the result of arm's length
negotiations between the representatives of the Bank and SFS. Among the factors
considered by the Board of Trustees of the Bank were (i) the ability to expand
the Bank's presence in the Capital District Region (upon consummation of the
Merger, the Bank will have 21 branches in the Capital District Region); (ii)
information concerning the financial condition, results of operations, capital
levels, asset quality and prospects of the Bank and SFS; (iii) the short-term
and long-term impact the Conversion and the Merger will have on the Holding
Company's consolidated results of operations, including expanded residential,
multi-family and commercial real estate lending as well as expanded retail
banking products and services; (iv) the general structure of the transaction and
the compatibility of the respective managements and business philosophies; (v)
the enhancement of the franchise value of the Holding Company and the Bank; (vi)
the ability of the combined enterprise to compete in relevant banking and
non-banking markets; (vii) industry and economic conditions; and (viii) the
impact of the Conversion and the Merger on the depositors, employees, customers
and communities served by the Bank and SFS through the contemplated expansion of
residential, multi-family and commercial real estate lending as well as the
expansion of retail banking products and services.
The Bank and Schenectady Federal currently serve contiguous market
areas. The Bank operates in Albany, Schenectady, Saratoga, Rensselaer and a
portion of Warren County in New York while Schenectady Federal operates in
Schenectady county in New York. As a result of the Merger, the Bank will operate
21 full-service banking center offices.
In light of the foregoing, the Board of Trustees of the Bank and the
Boards of Directors of the Holding Company and SFS believe that the Conversion
and the Merger are in the best interest of the Parties and their respective
depositors and stockholders.
Effects of Conversion and the Merger
General. Each depositor in a mutual savings bank has both a deposit
account in the institution and a pro rata ownership interest in the equity of
the institution based upon the balance in such depositor's account, which
interest may only be realized in the event of a liquidation of the institution.
However, this ownership interest is tied to the depositor's account and has no
tangible market value separate from such deposit account. Any depositor who
opens a deposit account obtains a pro rata ownership interest in the equity of
the institution without any additional payment beyond the amount of the deposit.
A depositor who reduces or closes such an account receives the balance in the
account but receives nothing for such depositor's ownership interest in the
equity of the institution, which is lost to the extent that the balance in the
account is reduced.
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Consequently, depositors of a mutual savings bank have no way to
realize the value of their ownership interest, which has realizable value only
in the unlikely event that the mutual savings bank is liquidated. In such event,
the depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves after other claims, including claims of depositors
to the amounts of their deposits, are paid.
When a mutual savings bank converts to stock form, permanent
non-withdrawable capital stock is created to represent the ownership of the
institution's equity and the former pro rata ownership of, depositors is
thereafter represented exclusively by their liquidation rights. See "--
Liquidation Rights." Such common stock is separate and apart from deposit
accounts and cannot be and is not insured by the FDIC or any other governmental
agency. Certificates are issued to evidence ownership of the capital stock. The
stock certificates are transferable, and, therefore, the stock may be sold or
traded if a purchaser is available with no effect on any account the seller may
hold in the institution.
Continuity. While the Conversion is being accomplished, and after the
consummation of the Conversion, the normal business of the Bank of accepting
deposits and making loans will continue without interruption. The Bank will
continue to be subject to regulation by the Superintendent and the FDIC. After
Conversion, the Bank will continue to provide services for depositors and
borrowers under current policies by its present management and staff.
The trustees serving the Bank immediately before the Conversion will
serve as directors of the Bank after the Conversion. The directors of the
Holding Company will consist of all of the individuals currently serving on the
Board of Trustees of the Bank. It is anticipated that all officers of the Bank
serving immediately before the Conversion will retain their positions after the
Conversion. See "Management of the Holding Company" and "Management of the
Bank."
In addition, upon consummation of the Merger, Joseph H. Giaquinto,
President of SFS and Schenectady Federal, will become a director of the Holding
Company and the Bank.
Deposit Accounts and Loans. Under the Plan and the merger agreement,
each depositor in the Bank and Schenectady Federal at the time of Conversion and
the Merger will automatically continue as a depositor after the Conversion and
the Merger, and each such deposit account will remain the same with respect to
deposit balance, interest rate and other terms, except to the extent affected by
withdrawals made to purchase Holding Company Common Stock in the Conversion. See
"-- Procedure for Purchasing Shares in Subscription and Community Offerings."
Each such account will be insured by the FDIC to the same extent as before the
Conversion and the Merger (i.e., up to $100,000 per depositor). Depositors will
continue to hold their existing certificates of deposit, passbooks and other
evidences of their accounts.
Furthermore, no loan outstanding from the Bank or Schenectady Federal
will be affected by the Conversion or the Merger, and the amount, interest rate,
maturity and security for each loan will remain as they were contractually fixed
prior to the Conversion and the Merger.
Voting Rights. In its current mutual form, voting rights and control of
the Bank are vested exclusively in the Board of Trustees. After the Conversion,
direction of the Bank will be under the control of the Board of Directors of the
Bank. The Holding Company, as the holder of all of the outstanding capital stock
of the Bank, will have exclusive voting rights with respect to any matters
concerning the Bank requiring stockholder approval, including the election of
directors of the Bank.
After the Conversion, subject to the rights of the holders of preferred
stock that may be issued in the future, the holders of the Holding Company
Common Stock will have exclusive voting rights with respect to any matters
concerning the Holding Company. Each holder of Holding Company Common Stock
will, subject to the restrictions and limitations set forth in the Holding
Company's Certificate of Incorporation discussed below, be entitled to vote on
any matters to be considered by the Holding Company's stockholders, including
the election of directors of the Holding Company.
Liquidation Rights. In the unlikely event of a complete liquidation of
the Bank in its present mutual form, each depositor would receive such
depositor's pro rata share of any assets of the Bank remaining after payment of
claims of
131
all creditors (including the claims of all depositors to the withdrawal value of
their accounts). Each depositor's pro rata share of such remaining assets would
be in the same proportion as the value of such depositor's deposit account was
to the total value of all deposit accounts in the Bank at the time of
liquidation. After the Conversion, each depositor, in the event of a complete
liquidation, would have a claim as a creditor of the same general priority as
the claims of all other general creditors of the Bank. However, except as
described below, such depositor's claim would be solely in the amount of the
balance in such depositor's deposit account plus accrued interest. Such
depositor would not have an interest in the value or assets of the Bank above
that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "liquidation account" (which is a memorandum account
only) for the benefit of Eligible Account Holders and Supplemental Eligible
Account Holders in an amount equal to the surplus and reserves of the Bank as of
the date of its latest balance sheet contained in the final Prospectus used in
connection with the Conversion. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if such account holder were to continue to maintain
such account holder's deposit account at the Bank, would be entitled, on a
complete liquidation of the Bank after the Conversion, to an interest in the
liquidation account prior to any payment to the stockholders of the Bank,
whether or not such Eligible Account Holder or Supplemental Eligible Account
Holder purchased Holding Company Common Stock in the Conversion. Each Eligible
Account Holder and Supplemental Eligible Account Holder would have an initial
interest in such liquidation account for each deposit account, including
passbook accounts, demand accounts, money market deposit accounts and time
deposits, with an aggregate balance of $100 or more held in the Bank on March
31, 1997 (with respect to an Eligible Account Holder) and September 30, 1998
(with respect to a Supplemental Eligible Account Holder) (each a "Qualifying
Deposit"). Each Eligible Account Holder and Supplemental Eligible Account Holder
will have a pro rata interest in the total liquidation account for such account
holder's deposit accounts based on the proportion that the aggregate balance of
such person's Qualifying Deposits on the Eligibility Record Date or Supplemental
Eligibility Record Date, as applicable, bore to the total amount of all
Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible
Account Holders.
If, however, on any annual closing date (i.e., the anniversary of the
Eligibility Record Date or the Supplemental Eligibility Record Date, as
applicable) of the Bank, commencing on or after the effective date of the
Conversion, the amount in any deposit account is less than the amount in such
deposit account on March 31, 1997 (with respect to an Eligible Account Holder),
or September 30, 1998 (with respect to a Supplemental Eligible Account Holder),
or any other annual closing date, then the interest in the liquidation account
relating to such deposit account would be reduced from time to time by the
proportion of any such reduction, and such interest will cease to exist if such
deposit account is closed. For purposes of the liquidation account, time deposit
accounts shall be deemed to be closed upon maturity regardless of renewal. In
addition, no interest in the liquidation account would ever be increased despite
any subsequent increase in the related deposit account. Any assets remaining
after the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to the Holding
Company as the sole stockholder of the Bank.
Tax Aspects. Consummation of the Conversion is expressly conditioned
upon the receipt by the Bank of either a favorable ruling from the IRS and New
York taxing authorities or opinions of counsel with respect to federal and New
York income taxation, to the effect that the Conversion will not be a taxable
transaction to the Holding Company, the Bank, Eligible Account Holders or
Supplemental Eligible Account Holders, except as noted below.
No private ruling will be received from the IRS with respect to the
proposed Conversion. Instead, the Bank has received an opinion of its counsel,
Silver, Freedman & Taff, L.L.P., based on customary certificates delivered by
management of the Holding Company and the Bank, that for federal income tax
purposes, among other matters: (i) the Bank's change in form from mutual to
stock ownership will constitute a reorganization under section 368(a)(I)(F) of
the Code, (ii) neither the Bank nor the Holding Company will recognize any gain
or loss as a result of the Conversion; (iii) no gain or loss will be recognized
by the Bank or the Holding Company upon the purchase of the Bank's capital stock
by the Holding Company or by the Holding Company upon the purchase of its
Holding Company Common Stock in the Conversion; (iv) no gain or loss will be
recognized by Eligible Account Holders or Supplemental Eligible Accounts Holders
upon the issuance to them of deposit accounts in the Bank in its stock form plus
their interests in the liquidation account in exchange for their deposit
accounts in the Bank; (v) the tax basis of the depositors' deposit accounts in
the Bank immediately after the Conversion will be the same as the basis of their
deposit accounts
132
immediately prior to the Conversion; (vi) the tax basis of each Eligible Account
Holder's and each Supplemental Eligible Account Holders interest in the
liquidation account will be zero; (vii) no gain or loss will be recognized by
Eligible Account Holders or Supplemental Eligible Account Holders upon the
distribution to them of non-transferable subscription rights to purchase shares
of the Holding Company Common Stock, provided, that the amount to be paid for
the Holding Company Common Stock is equal to the fair market value of such
stock; and (viii) the tax basis to the stockholders of the Holding Company
Common Stock purchased in the Conversion pursuant to the subscription rights
will be the amount paid therefor and the holding period for the shares of
Holding Company Common Stock purchased by such persons will begin on the date on
which their subscription rights are exercised.
Arthur Andersen has also opined, subject to the limitations and
qualifications in its opinion, that the Conversion will not be a taxable
transaction to the Holding Company or to the Bank for New York income and
franchise tax purposes or to Eligible Account Holders or to Supplemental
Eligible Account Holders for New York income tax purposes. The opinions of
Silver, Freedman & Taff, L.L.P. and Arthur Andersen have been filed as exhibits
to the Registration Statement of which this Prospectus is a part.
Unlike private rulings, opinions of counsel or other professionals are
not binding on the IRS or the New York taxing authorities and the IRS or the New
York taxing authorities could disagree with conclusions reached therein. In the
event of such disagreement, there can be no assurance that the IRS or the New
York taxing authorities would not prevail in a judicial or administrative
proceeding.
Certain portions of both the federal and the state tax opinions are
based upon the letter of RP Financial that subscription rights issued in
connection with the Conversion will have no value. In the letter of RP
Financial, which opinion is not binding on the IRS or the New York taxing
authorities, the subscription rights do not have any value based on the fact
that such rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the Holding Company Common Stock at a price equal to its estimated
fair market value, which will be the same price as the Purchase Price for the
unsubscribed shares of Holding Company Common Stock. If the subscription rights
granted to Eligible Account Holders, Supplemental Eligible Account Holders and
Other Depositors are deemed to have an ascertainable value, such Eligible
Account Holders, Supplemental Eligible Account Holders and Other Depositors
could be taxed upon the receipt or exercise of the subscription rights in an
amount equal to such value, and the Bank could recognize gain on such
distribution. Eligible Account Holders, Supplemental Eligible Account Holders
and Other Depositors are encouraged to consult with their own tax advisors as to
the tax consequences in the event that such subscription rights are deemed to
have an ascertainable value.
In addition, it is a condition of the Merger that the Bank and SFS
shall receive the written opinion of Arthur Andersen, independent public
accountants to the Bank, to the effect that (i) for federal income tax purposes
the Merger will constitute a reorganization within the meaning of Section 368(a)
of the Code; (ii) no gain or loss will be recognized by the stockholders of SFS
who receive Holding Company Common Stock in exchange for their SFS Common Stock
in the Merger; (iii) the tax basis of a stockholder in the Holding Company
Common Stock received in the Merger in exchange for his or her SFS Common Stock
will be the same as the tax basis of SFS Common Stock surrendered in exchange
therefor; and (iv) the holding period of the shares of Holding Company Common
Stock received in the Merger will include the holding period of the shares of
SFS Common Stock surrendered therefor, provided that such SFS Common Stock was
held as a capital asset by such stockholder. The opinions of Arthur Andersen
will be based on such written representations as to factual matters from the
Bank, SFS and others.
Establishment of Cohoes Savings Bank
General. In furtherance of the Bank's commitment to its local
community, the Plan of Conversion provides for the establishment of a charitable
foundation in connection with the Conversion. The Plan provides that the Bank
and the Holding Company will incorporate the Foundation under Delaware law as a
non-stock corporation and will fund the Foundation with Holding Company Common
Stock, as further described below. The Holding Company and the Bank believe that
the funding of the Foundation with Holding Company Common Stock is a means to
establish a common bond between the Bank and its community, enabling the Bank's
community to share in the potential growth and success of the Holding Company
over the long term. By further enhancing the Bank's visibility and reputation in
its local community, the Bank believes that the Foundation will enhance the
long-term value of the Bank's community
133
banking franchise. The Foundation will be dedicated to charitable purposes
within the Bank's local community, including community development activities.
Purpose of the Foundation. The purpose of the Foundation is to provide
funding to support charitable causes and community development activities. In
recent years, the Bank has emphasized community lending and community
development activities within the Bank's local community. The Bank received a
"satisfactory" CRA rating in its last CRA examination. The Bank intends to
continue to emphasize community lending and community development activities
following the Conversion. However, such activities are not the Bank's sole
corporate purpose. The Foundation will be completely dedicated to community
activities and the promotion of charitable causes, and may be able to support
such activities in ways that are not presently available to the Bank. In this
regard, the Board of Trustees believes the establishment of a charitable
foundation is consistent with the Bank's commitment to community service. The
Board further believes that the funding of the Foundation with Holding Company
Common Stock is a means of enabling the Bank's community to share in the
potential growth and success of the Holding Company long after completion of the
Conversion. The Foundation will accomplish that goal by providing for continued
ties between the Foundation and the Bank, thereby forming a partnership with the
Bank's community. The establishment of the Foundation will also enable the
Holding Company and the Bank to develop a unified charitable donation strategy
and will centralize the responsibility for administration and allocation of
corporate charitable funds. Charitable foundations have been formed by other
financial institutions for this purpose, among others.
Although the Board of Trustees of the Bank and the Board of Directors
of the Holding Company have carefully considered each of the above factors, the
establishment of a charitable foundation in connection with a mutual to stock
Conversion is a relatively new concept that has been implemented by only a few
other converting institutions. Accordingly, certain persons may raise challenges
as to the validity of the establishment of the Foundation that, if not resolved
promptly, could delay the consummation of the Conversion or result in the
elimination of the Foundation.
Structure of the Foundation. The Foundation was incorporated under
Delaware law as a non-stock corporation. The Foundation's Certificate of
Incorporation provides that it is organized exclusively for charitable purposes,
including community development, as set forth in Section 501(c)(3) of the Code.
The Foundation's Certificate of Incorporation further provides that no part of
the net earnings of the Foundation will inure to the benefit of, or be
distributable to its directors, officers or members. The Board of Directors of
the Foundation will consist of four individuals who are officers or trustees of
the Bank, and two individuals who are civic and community leaders within the
Bank's local community. A Nominating Committee of such Board, which is to be
comprised of a minimum of three members of the Board, will nominate individuals
eligible for election to the Board of Directors. The members of the Foundation,
who are comprised of its Board members, will elect the directors at the annual
meeting of the Foundation from those nominated by the Nominating Committee. Only
persons serving as directors of the Foundation qualify as members of the
Foundation, with voting authority. Directors will be divided into three classes
with each class appointed for three-year terms.
The authority for the affairs of the Foundation will be vested in the
Board of Directors of the Foundation. The directors of the Foundation will be
responsible for establishing the policies of the Foundation with respect to
grants or donations by the Foundation, consistent with the purposes for which
the Foundation was established. Although no formal policy governing Foundation
grants exists at this time, the Foundation's Board of Directors will adopt such
a policy upon establishment of the Foundation. As directors of a non-profit
corporation, directors of the Foundation will at all times be bound by their
fiduciary duty to advance the Foundation's charitable goals, to protect the
assets of the Foundation and to act in a manner consistent with the charitable
purpose for which the Foundation is established. The directors of the Foundation
will also be responsible for directing the activities of the Foundation,
including the management of the Holding Company Common Stock held by the
Foundation. However, as a condition to receiving the non-objection of the FDIC
to the Bank's Conversion and the approval of the Conversion by the
Superintendent, the Foundation will commit in writing to the FDIC and the
Superintendent that all shares of Holding Company Common Stock held by the
Foundation will be voted in the same ratio as all other shares of the Holding
Company Common Stock on all proposals considered by stockholders of the Holding
Company; provided, however, that, consistent with the condition, the FDIC and
the Superintendent shall waive this voting restriction under certain
circumstances if compliance with the voting restriction would: (i) cause a
violation of the law of the State of Delaware; (ii) cause the Foundation to lose
its tax-exempt status, or cause the IRS to deny the Foundation's request for a
determination that it is an exempt
134
organization or otherwise have a material and adverse tax consequence on the
Foundation; or (iii) cause the Foundation to be subject to an excise tax under
Section 4941 of the Code. In order for the FDIC and the Superintendent to waive
such voting restriction, the Holding Company's or the Foundation's legal counsel
must render an opinion satisfactory to the FDIC and the Superintendent that
compliance with the voting restriction would have an effect described in clauses
(i), (ii) or (iii) above. Under those circumstances, the FDIC and the
Superintendent shall grant a waiver of the voting requirement upon submission of
such legal opinion(s) by the Holding Company or the Foundation that are
satisfactory to the FDIC and the Superintendent. In the event that the FDIC and
the Superintendent were to waive such voting requirement, the directors would
direct the voting of the Holding Company Common Stock held by the Foundation.
However, the Superintendent may, in the case of a waiver, impose additional
conditions regarding the composition of the Board of Directors. As of the date
hereof, no event has occurred which would require the Holding Company to seek a
waiver of the voting restriction.
The Foundation's place of business will be located at the Bank's
administrative offices and initially the Foundation is expected to have no
employees but will utilize the staff of the Holding Company and the Bank. The
Board of Directors of the Foundation will appoint such officers as may be
necessary to manage the operations of the Foundation. In this regard, the Bank
has provided the FDIC with a commitment that, to the extent applicable, the Bank
will comply with the affiliate restrictions set forth in Sections 23A and 23B of
the Federal Reserve Act with respect to any transactions between the Bank and
the Foundation.
The Holding Company intends to capitalize the Foundation with Holding
Company Common Stock in an amount equal to 3% of the total amount of Holding
Company Common Stock to be sold in connection with the Conversion. At the
minimum, midpoint and maximum of the Estimated Valuation Range, the contribution
to the Foundation would equal 178,500, 210,000 and 241,500 shares, which would
have a market value of $1.8 million, $2.1 million and $2.4 million,
respectively, assuming the Purchase Price of $10.00 per share. The Holding
Company and the Bank determined to fund the Foundation with Holding Company
Common Stock rather than cash because it desired to form a bond with its
community in a manner that would allow the community to share in the potential
growth and success of the Holding Company and the Bank over the long term. The
funding of the Foundation with stock also provides the Foundation with a
potentially larger endowment than if the Holding Company contributed cash to the
Foundation since, as a stockholder, the Foundation will share in the potential
growth and success of the Holding Company. As such, the contribution of stock to
the Foundation has the potential to provide a self-sustaining funding mechanism
which reduces the amount of cash that the Holding Company, if it were not making
the stock donation, would have to contribute to the Foundation in future years
in order to maintain a level amount of charitable grants and donations.
The Foundation will receive working capital from any dividends that may
be paid on the Holding Company Common Stock in the future, and subject to
applicable federal and state laws, loans collateralized by the Holding Company
Common Stock or from the proceeds of the sale of any of the Holding Company
Common Stock in the open market from time to time as may be permitted to provide
the Foundation with additional liquidity. As a private foundation under Section
501(c)(3) of the Code, the Foundation will be required to distribute annually in
grants or donations, a minimum of 5% of the average fair market value of its net
investment assets. One of the conditions imposed on the gift of Holding Company
Common Stock by the Holding Company is that the amount of Holding Company Common
Stock that may be sold by the Foundation in any one year shall not exceed 5% of
the average market value of the assets held by the Foundation, except where the
Board of Directors of the Foundation determines that the failure to sell an
amount of common stock greater than such amount would result in a long-term
reduction of the value of the Foundation's assets and as such would jeopardize
the Foundation's capacity to carry out its charitable purposes. Upon completion
of the Conversion and the contribution of shares to the Foundation immediately
following the Conversion, the Holding Company would have 6,128,500, 7,210,000and
8,291,500 shares issued and outstanding at the minimum, midpoint and maximum of
the Estimated Valuation Range. Because the Holding Company will have an
increased number of shares outstanding, the voting and ownership interests of
stockholders in the Holding Company's common stock would be diluted by 2.9%, as
compared to their interests in the Holding Company if the Foundation were not
established. For additional discussion of the dilutive effect of the
contribution of Holding Company Common Stock to the Foundation, see "Pro Forma
Data."
135
Tax Considerations. The Holding Company and the Bank have received an
opinion of Silver, Freedman & Taff, L.L.P. that an organization created for the
above purposes would qualify as an organization exempt from taxation under
Section 501(c)(3) of the Code, and would likely be classified as a private
foundation. The Foundation will submit an application to the IRS to be
recognized as an exempt organization. If the Foundation files such an
application within 15 months from the date of its organization, and if the IRS
approves the application, the effective date of the Foundation's status as a
Section 501(c)(3) organization will be retroactive to the date of its
organization. Silver, Freedman & Taff, L.L.P., however, has not rendered any
advice on the condition to the contribution to be agreed to by the Foundation
which requires that all shares of Holding Company Common Stock held by the
Foundation must be voted in the same ratio as all other outstanding shares of
Holding Company Common Stock on all proposals considered by stockholders of the
Holding Company. Consistent with this condition, in the event that the Holding
Company or the Foundation receives an opinion of its legal counsel that
compliance with this voting restriction would have the effect of causing the
Foundation to lose its tax-exempt status or otherwise have a material and
adverse tax consequence on the Foundation, or subject the Foundation to an
excise tax for "self-dealing" under Section 4941 of the Code, the Holding
Company would request a waiver from the FDIC and the Superintendent of such
voting restriction upon submission by the Holding Company or the Foundation of a
legal opinion(s) to that effect satisfactory to the FDIC and the Superintendent.
However, no assurance can be given that such waiver would be granted. See "-
Regulatory Conditions Imposed on the Foundation."
Under the Code, the Holding Company is entitled to a deduction for
charitable contributions in an amount not exceeding 10% of its taxable income
(computed without regard to the contributions) for the year of the contribution,
and any contributions in excess of the deductible amount may be carried forward
and deducted in the Holding Company's five succeeding taxable years, subject, in
each such year, to the 10% of taxable income limitation. The Holding Company and
the Bank believe that the Conversion presents a unique opportunity to establish
and fund a charitable foundation given the substantial amount of additional
capital being raised in the Conversion. In making such a determination, the
Holding Company and the Bank considered the dilutive impact of the contribution
of Holding Company Common Stock to the Foundation on the amount of Holding
Company Common Stock available to be offered for sale in the Conversion. Based
on such consideration, the Holding Company and Bank believe that the
contribution to the Foundation in excess of the 10% annual limitation is
justified given the Bank's capital position and its earnings, the substantial
additional capital being raised in the Conversion and the potential benefits of
the Foundation to the Bank's community. In this regard assuming the sale of the
Holding Company Common Stock at the maximum of the Estimated Valuation Range,
the Holding Company would have pro forma consolidated capital of $87.1 million
or 15.1% of pro forma consolidated assets and the Bank's pro forma leverage and
risk-based capital ratios would be 11.01% and 21.20%, respectively. See
"Regulation - The Bank - Capital Requirements," "Capitalization," and
"Comparison of Valuation and Pro Forma Information with No Stock Contribution."
Thus, the amount of the contribution will not adversely impact the financial
condition of the Holding Company and the Bank, and the Holding Company and the
Bank therefore believe that the amount of the charitable contribution is
reasonable and will not raise safety and soundness concerns.
The Holding Company and the Bank have received the opinion of Silver,
Freedman & Taff, L.L.P. that the Holding Company's contribution of its own stock
to the Foundation would not constitute an act of self-dealing, and that the
Holding Company will be entitled to a deduction in the amount of the fair market
value of the stock at the time of the contribution, subject to the 10% of
taxable income limitation. As discussed above, the Holding Company will be able
to carry forward and deduct any portion of the contribution in excess of such
10% limitation for five years following the year of the contribution. If the
Holding Company and the Foundation had been established in the fiscal year ended
June 30, 1998, the Holding Company would have been entitled to a charitable
contribution deduction in its taxable year ended December 31, 1998 of
approximately $674,000 and would have been able to carry forward and deduct
approximately $1.7 million over its next succeeding five taxable years (based on
the Bank's estimated pre-tax income for 1998 and a contribution in 1998 of
Holding Company Common Stock equal to $2.4 million). Assuming the close of the
Offering at the maximum of the Estimated Valuation Range, the Holding Company
estimates that the entire amount of the contribution should be deductible over a
six-year period. Neither the Holding Company nor the Bank expect to make any
further contributions to the Foundation within the first five years following
the initial contribution. After that time, the Holding Company and the Bank may
consider future contributions to the Foundation. Any such decisions would be
based on an assessment of, among other factors, the financial condition of the
Holding Company and the Bank at that time, the interests of stockholders and
depositors of the Holding Company and the Bank, and the financial condition and
operations of the Foundation.
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Although the Holding Company and the Bank have received the opinion of
Silver, Freedman & Taff, L.L.P. that the Holding Company is entitled to a
deduction for the charitable contribution, there can be no assurances that the
IRS will recognize the Foundation as an organization exempt from taxation under
section 501(c)(3) of the Code or that the deduction will be permitted. If the
IRS successfully maintains that the Foundation is not so exempt or that the
deduction is not permitted, the Holding Company's tax benefit related to the
contribution to the Foundation would be expensed without tax benefit, resulting
in a reduction in earnings in the year in which the IRS makes such a
determination. See "Risk Factors - Establishment of the Charitable Foundation."
In general, the income of a private foundation is exempt from federal
and state taxation. However, investment income, such as interest, dividends and
capital gains, will be subject to a federal excise tax of 2.0%. The Foundation
will be required to make an annual filing with the IRS within four and one-half
months after the close of the Foundation's taxable year to maintain its
tax-exempt status. The Foundation will also be required to publish a notice that
the annual information return will be available for public inspection for a
period of 180 days after the date of such public notice. The information return
for a private foundation must include, among other things, an itemized list of
all grants made or approved, showing the amount of each grant, the recipient,
any relationship between a grant recipient and the Foundation's managers, and a
concise statement of the purpose of each grant. The Foundation will also be
required to file an annual report with the Charities Bureau of the Office of the
Attorney General of the State of New York.
Regulatory Conditions Imposed on the Foundation. Establishment of the
Foundation is subject to the following conditions to be agreed to by the
Foundation in writing as a condition to receiving the FDIC's nonobjection of the
Bank's Conversion and the approval of the Conversion by the Superintendent: (i)
the Foundation will be subject to examination by the FDIC and the
Superintendent; (ii) the Foundation must comply with supervisory directives
imposed by the FDIC and the Superintendent; (iii) the Foundation will operate in
accordance with written policies adopted by its Board of Directors, including a
conflict of interest policy; and (iv) any shares of Holding Company Common Stock
held by the Foundation must be voted in the same ratio as all other outstanding
shares of Holding Company Common Stock on all proposals considered by
stockholders of the Holding Company; provided, however that, consistent with
this condition, the FDIC and the Superintendent shall waive this voting
restriction under certain circumstances if compliance with the voting
restriction would: (a) cause a violation of the law of the State of Delaware;
(b) would cause the Foundation to lose its tax-exempt status or otherwise have a
material and adverse tax consequence on the Foundation; or (c) would cause the
Foundation to be subject to an excise tax under Section 4941 of the Code. In
order for the FDIC and the Superintendent to waive such voting restriction, the
Holding Company's or the Foundation's legal counsel must render an opinion
satisfactory to FDIC and the Superintendent that compliance with the voting
restriction would have the effect described in clauses (a), (b) or (c) above.
Under those circumstances, the FDIC and the Superintendent shall grant a waiver
of the voting restriction upon submission of such opinion(s) by the Holding
Company or the Foundation which are satisfactory to the FDIC and the
Superintendent. There can be no assurances that a legal opinion addressing these
issues will be rendered, or if rendered, that the FDIC and the Superintendent
will grant an unconditional waiver of the voting restriction. If the
Superintendent waives the voting restriction, the Department may (1) impose a
condition that a certain portion of the members of the Foundation's Board of
Directors shall be persons who are not directors, officers or employees of the
Bank or the Holding Company or any affiliate thereof or (2) impose such other
condition relating to control of the Holding Company Common Stock held by the
Foundation as determined by the Department to be appropriate. In no event will
the voting restriction survive the sale of shares of the Holding Company Common
Stock held by the Foundation.
Conditions to the Merger
The merger agreement provides that the consummation of the proposed
transaction is subject to the satisfaction of certain conditions, or the waiver
of such conditions by the Party entitled to do so, at or prior to the Closing
Date, as defined in the merger agreement. Each of the Parties' obligations under
the merger agreement are subject to the following conditions, among others: (a)
valid corporate authorization by the parties, including SFS stockholder
approval, of the transactions contemplated by the merger agreement; (b) receipt
of all necessary governmental approvals required to consummate the transactions
contemplated by the merger agreement, and the expiration of all waiting periods
with respect thereto, and receipt of consents from each other person whose
consent is necessary to the consummation of the Merger; (c) absence of any law,
regulation or decree which prohibits or restricts consummation of the
transactions
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contemplated by the merger agreement; (d) effectiveness of the Form S-1 and
receipt of or exemption from all state securities authorizations; (e) approval
for listing on The Nasdaq National Market of the shares to be issued in the
Merger; (f) receipt by the Bank and SFS of a written opinion of Arthur Andersen
that the Merger will constitute a reorganization under the Code; (g)
consummation of the Conversion in accordance with the Plan of Conversion; and
(h) amendment of the federal stock charter of Schenectady Federal.
In addition to the foregoing conditions, the obligations of SFS under
the merger agreement are further subject to the satisfaction, at or prior to the
Closing Date, of the following conditions, any one or more of which can be
waived by SFS: (a) truth and correctness of the representations and warranties
of the Bank; (b) the Bank's performance in all material respects of all
obligations and covenants under the merger agreement; (c) delivery of a Bank
officers' certificate attesting to the satisfaction of conditions (a) and (b);
(d) absence of any proceeding initiated by a governmental entity seeking to
restrain the Merger; (e) delivery of such other Bank certificates and documents
as SFS may reasonably request; and (f) receipt of a letter from its accountants
that the Merger shall be accounted for as a pooling of interests.
In addition to the conditions set forth in the second preceding
paragraph, the obligations of the Bank under the merger agreement are further
subject to the satisfaction, at or prior to the Closing Date, of the following
conditions, any one or more of which can be waived by the Bank: (a) truth and
correctness of the representations and warranties of SFS; (b) SFS performance in
all material respects of all obligations and covenants under the merger
agreement; (c) delivery of an SFS officers' certificate attesting to the
satisfaction of conditions (a) and (b); (d) absence of any proceeding initiated
by a governmental entity seeking to restrain the Merger; (e) delivery of such
other SFS certificates and documents as the Bank may reasonably request; (f)
receipt of a letter from its accountants that the Merger shall be accounted for
as a pooling of interests; and (g) delivery by Elias, Matz, Tiernan & Herrick,
L.L.P. of an opinion with respect to such matters as KBW, in its capacity as
underwriter, shall reasonably require.
Conduct of Business Prior to the Merger Closing Date
Under the terms of the merger agreement, the Bank and SFS shall, and
shall cause each of their respective subsidiaries to, conduct its businesses and
engage in transactions only in the ordinary course and consistent with past
practice or to the extent otherwise contemplated under the merger agreement,
except with the prior written consent of the Bank or SFS, as the case may be.
SFS also shall use its reasonable efforts to (1) preserve its business
organization and that of it subsidiaries intact, (2) keep available to itself
and the Bank the present services of its employees and those of its
subsidiaries, and (3) preserve for itself and the Bank the goodwill of its
customers and those of its subsidiaries and others with whom business
relationships exist.
In addition, under the terms of the merger agreement, SFS has agreed
that, except as otherwise approved by the Bank in writing or as permitted,
contemplated or required by the merger agreement, it will not, nor will it
permit any of its subsidiaries to:
(i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any
combination thereof) in respect of the SFS Common Stock,
except for regular quarterly cash dividends at a rate not in
excess of $.08 per share and except, in the event the
Effective Time occurs more than 45 days after the commencement
of any calendar quarter but prior to the normal dividend
payment date for such calendar quarter, a pro rata cash
dividend based on SFS normal quarterly cash dividend rate;
(ii) issue any shares of its capital stock, other than upon
exercise of the SFS Options or upon the reissuance of shares
pursuant to the merger agreement, or issue, grant, modify or
authorize any rights; purchase any shares of SFS Common Stock;
or effect any recapitalization, reclassification, stock
dividend, stock split or like change in capitalization;
(iii) amend its Certificate of Incorporation, Bylaws or similar
organizational documents; impose, or suffer the imposition, on
any share of stock or other ownership interest
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held by SFS in a subsidiary thereof, of any lien, charge or
encumbrance or permit any such lien, charge or encumbrance to
exist; or waive or release any material right or cancel or
compromise any material debt or claim;
(iv) increase the rate of compensation of any of its directors,
officers or employees, or pay or agree to pay any bonus or
severance to, or provide any other new employee benefit or
incentive to, any of its directors, officers or employees,
except (A) as may be required pursuant to previously disclosed
commitments existing on July 31, 1998; (B) as may be required
by law; (C) merit increases in accordance with past practices,
normal cost-of-living increases and normal increases related
to promotions or increased job responsibilities; and (D)
immediately prior to the Effective Time, SFS may pay bonuses
under the SFS Incentive Plan in amounts provided under such
plan, provided that if the Effective Time is prior to December
31, 1998, then the amount for 1998 shall be prorated for the
period from January 1, 1998 to the Effective Time;
(v) enter into or, except as may be required by law and for
amendments contemplated by the merger agreement, modify any
pension, retirement, stock option, stock purchase, stock
appreciation right, savings, profit sharing, deferred
compensation, supplemental retirement, consulting, bonus,
group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement
related thereto in respect of any of its directors, officers
or employees; or make any contributions to SFS defined benefit
plan or the SFS ESOP (other than as required by law or
regulation or in a manner and amount consistent with past
practices);
(vi) enter into (A) any transaction, agreement, arrangement or
commitment not made in the ordinary course of business, (B)
any agreement, indenture or other instrument relating to the
borrowing of money by SFS or a subsidiary thereof or guarantee
by SFS or any subsidiary thereof of any such obligation,
except in the case of Schenectady Federal for deposits, FHLB
advances, federal funds purchased and securities sold under
agreements to repurchase in the ordinary course of business
consistent with past practice, (C) any agreement, arrangement
or commitment relating to the employment of an employee or
consultant, or amend any such existing agreement, arrangement
or commitment, provided that SFS and Schenectady Federal may
employ an employee or consultant in the ordinary course of
business if the employment of such employee or consultant is
terminable by SFS or Schenectady Federal at will and without
liability, other than as required by law; and provided that
the term of the employment agreements and change in control
severance agreements existing as of July 31, 1998 (other than
the employment agreement with Joseph Giaquinto) may be
extended for an additional one year as of the anniversary date
of such agreements in accordance with the provisions thereof;
or (D) any contract, agreement or understanding with a labor
union;
(vii) change its method of accounting in effect for the year ended
December 31, 1997, except as required by changes in laws or
regulation or generally accepted accounting principles, or
change any of its methods of reporting income and deductions
for federal income tax purposes from those employed in the
preparation of its federal income tax return for such year,
except as required by changes in laws or regulations;
(viii) make any capital expenditures in excess of $25,000
individually or $50,000 in the aggregate, other than pursuant
to binding commitments existing on July 31, 1998 and other
than expenditures necessary to maintain existing assets in
good repair;
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or enter into any new lease of real property or any new lease
of personal property providing for annual payments exceeding
$10,000;
(ix) file any applications or make any contract with respect to
branching or site location or relocation;
(x) acquire in any manner whatsoever (other than to realize upon
collateral for a defaulted loan) control over or any equity
interest in any business or entity, except for investments in
marketable equity securities in the ordinary course of
business and not exceeding 5% of the outstanding shares of any
class;
(xi) enter or agree to enter into any agreement or arrangement
granting any preferential right to purchase any of its assets
or rights or requiring the consent of any party to the
transfer and assignment of any such assets or right;
(xii) except as necessitated in the reasonable opinion of SFS due to
changes in interest rates, and in accordance with safe and
sound banking practices, change or modify in any material
respect any of its lending or investment policies, except to
the extent required by law or an applicable regulatory
authority;
(xiii) take any action that would prevent or impede the Merger or the
Conversion from qualifying as a reorganization within the
meaning of Section 368 of the Code or from being accounted for
as a pooling-of-interests under GAAP;
(xiv) except as necessitated in the reasonable opinion of SFS due to
changes in interest rates, and in accordance with safe and
sound banking practices, enter into any futures contract,
option contract, interest rate caps, interest rate floors,
interest rate exchange agreement or other agreement for
purposes of hedging the exposure of its interest-earning
assets and interest-bearing liabilities to changes in market
rates of interest; or
(xv) take any action that would result in any of the
representations and warranties of the Holding Company
contained in the merger agreement not to be true and correct
in any material respect at the Effective Time or that would
cause any of the conditions to consummation of the Merger from
being satisfied.
Pursuant to the merger agreement, during the period from the date of
the merger agreement and continuing until the Effective Time, except with the
prior written consent of SFS or as expressly contemplated in the merger
agreement, the Bank shall not, and shall cause each subsidiary thereof not to
(i) take any action that would prevent or impede the Merger or the Conversion
from qualifying as a reorganization within the meaning of Section 368 of the
Code or from being accounted for as a pooling-of-interests under GAAP; or (ii)
take any action that would result in any of the representations and warranties
of the Bank contained in the Agreement not to be true and correct in any
material respect at the Effective Time or that would cause any of the conditions
to consummation of the Merger from being satisfied.
Required Approvals for the Conversion and the Merger
Various approvals of the Department and the FDIC are required in order
to consummate the Conversion and the Merger. The Department and the FDIC have
approved the Plan of Conversion, subject to approval by the Bank's voting
depositors. In addition, consummation of the Conversion and the Merger is
subject to OTS approval of the Holding Company's holding company application to
acquire all the SFS Common Stock and all of the Bank common stock and the
applications under the Home Owners' Loan Act, the Bank Merger Act and the New
York State Banking laws, with respect to the Merger of Schenectady Federal with
and into the Bank with the Bank being the surviving entity. Applications for
these approvals have been filed and are currently pending.
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Pursuant to Department and FDIC regulation, the Plan of Conversion must
be approved by at least a majority of the total number of votes eligible to be
cast by the Bank's voting depositors and by at least seventy-five percent (75%)
in amount of deposit liabilities of Voting Depositors represented in person or
by proxy at the Special Meeting. The merger agreement must be approved by a
majority of the Voting Depositors present in person or by proxy and voting at
the Special Meeting. In addition, under Delaware law, the merger agreement must
be approved by a majority of the outstanding SFS Common Stock entitled to vote
thereon at the SFS Special Meeting.
The Holding Company is required to make certain filings with state
securities regulatory authorities in connection with the issuance of Holding
Company Common Stock in the Conversion and the Merger.
Acquisition Proposals
Until the Closing Date or the earlier termination of the merger
agreement, SFS shall not, and shall cause each subsidiary thereof not to,
solicit or encourage inquiries or proposals with respect to, furnish any
information relating to, or participate in any negotiations or discussions
concerning, any acquisition, purchase of all or a substantial portion of the
assets of, or any equity interest in, SFS or any of its subsidiaries (other than
with the Bank or an affiliate thereof), provided, however, that the Board of
Directors of SFS may furnish such information or participate in such
negotiations or discussions if the Board of Directors, after having consulted
with and considered the advice of outside counsel, has determined that the
failure to do the same may cause the members of such Board of Directors to
breach their fiduciary duties under applicable law. SFS is required to promptly
inform the Bank orally and in writing of any such request for information or of
any such negotiations or discussions.
Representations and Warranties
The merger agreement contains representations and warranties of SFS and
the Bank which are customary in Merger transactions, including, but not limited
to, representations and warranties concerning: (a) the organization and
capitalization of SFS and the Bank and their respective subsidiaries; (b) the
due authorization, execution, delivery and enforceability of the merger
agreement; (c) the consents or approvals required, and the lack of conflicts or
violations under applicable certificates of incorporation, charter, bylaws,
instruments and laws, with respect to the transactions contemplated by the
merger agreement; (d) the absence of material adverse changes, (e) the documents
to be filed by the Parties with the SEC and other regulatory agencies; (f) the
conduct of business in the ordinary course and absence of certain changes; (g)
the financial statements; (h) the compliance with laws; and (i) the allowance
for loan losses and real estate owned. The representations and warranties of the
Bank and SFS will not survive beyond the Effective Time if the Merger is
consummated, and, if the merger agreement is terminated without consummation of
the Merger, there will be no liability on the part of any Party to the merger
agreement except that no Party shall be relieved from any liability arising out
of a willful breach of any covenant, undertaking, misrepresentation or warranty
in the merger agreement and except as described under " - Termination and
Amendment" and " - Expenses of the Merger."
Closing Date of the Merger
The Effective Time of the Merger shall be the date specified in the
Certificate of Merger to be filed with the Delaware Secretary of State with
respect to the Merger of SFS with and into the Holding Company unless a later
date and time is specified as the effective time in such Certificate of Merger.
Such filing will occur only after the receipt of all requisite regulatory
approvals, approval of the transaction by the requisite vote of the stockholders
of SFS and of the Voting Depositors of the Bank, and the satisfaction or waiver
of all other conditions to the Merger.
A closing (the "Closing") shall take place on the Closing Date, which
shall be at such time as the Bank and SFS may mutually agree to following the
receipt of all necessary regulatory or governmental approvals and consents and
the expiration of all statutory waiting periods in respect thereof and the
satisfaction or waiver (to the extent permitted) of all the conditions to
consummation of the Merger.
141
Termination and Amendment
The merger agreement may be terminated prior to the Effective Time by:
(a) the mutual written consent of the parties; (b) by the Bank or SFS if (i) the
other party has in any material respect breached the merger agreement, and such
breach has not been timely cured after notice; (ii) any necessary governmental
approval is denied, unless such denial is due to a breach of the party seeking
to terminate; (iii) if a final, nonappealable order prohibits any transaction
contemplated by the merger agreement; (iv) the stockholders of SFS do not
approve the merger agreement or the depositors of the Bank do not approve the
Plan of Conversion, unless the failure of such approval is due to a breach of
the party seeking to terminate; (v) the Effective Time has not occurred by March
31, 1999 (or in certain circumstances, April 15, 1999 for the Bank) unless the
failure of such occurrence is due to a breach of the party seeking to terminate;
or (c) by the Bank if a Purchase Event has occurred. The term "Purchase Event"
means any of the following events or transactions occurring after the date of
the merger agreement:
(i) SFS or Schenectady Federal, without having received the Bank's
prior written consent, enter into an agreement to engage in an
Acquisition Transaction (as defined) with any person other
than the Holding Company or the Bank or the Board of Directors
of SFS shall have recommended that the stockholders of SFS
approve or accept any Acquisition Transaction with any person
other than the Holding Company or the Bank;
(ii) After a bona fide proposal is made by any person other than
the Holding Company or the Bank to SFS or its stockholders to
engage in an Acquisition Transaction, (A) SFS or Schenectady
Federal shall have breached any covenant or obligation
contained in the merger agreement and such breach would
entitle the Bank to terminate the merger agreement or (B) the
holders of the SFS Common Stock shall not have approved the
merger agreement at the SFS Special Meeting or (C) the SFS
Special Meeting to approve the merger agreement shall not have
been held or shall have been canceled prior to termination of
the merger agreement or (D) the Board of Directors of SFS
shall have withdrawn or modified in a manner adverse to the
Bank the recommendation of the Board of Directors of SFS with
respect to the merger agreement.
For purposes of the merger agreement, "Acquisition Transaction" means
(x) a Merger or consolidation, or any similar transaction, involving SFS or
Schenectady Federal, (y) a purchase, lease or other acquisition of all or
substantially all of the assets of SFS or Schenectady Federal, or (z) a purchase
or other acquisition (including by way of Merger, consolidation, share exchange
or otherwise) of securities representing 25% or more of the voting power of SFS
or Schenectady Federal.
In the event of termination of the merger agreement, as provided above,
the merger agreement shall thereafter become void and have no effect, and there
shall be no liability on the party of any Party to the merger agreement or their
respective officers and directors, except that (i) certain provisions regarding
confidential information and expenses shall survive and remain in full force and
effect; (ii) a breaching party shall not be relieved of liability for any
willful breach giving rise to such termination; and (iii) certain provisions
relating to expenses and termination fees shall survive and remain in full force
and effect. The Bank shall pay to SFS a termination fee of $2.0 million unless
(i) the Bank terminates in response to a breach or Purchase Event by SFS; (ii)
the termination is due to failure to receive any required governmental approval,
failure to receive the approval of the Bank's depositors, or failure of the
Effective Time to occur by March 31, 1999; (iii) SFS stockholders do not approve
the merger agreement; (iv) the merger agreement is terminated because certain
closing conditions cannot be satisfied; or (v) SFS exercises a right of
termination before March 31, 1999. If termination is due to failure to receive
the approval of the Bank's depositors, or failure of the Effective Time to occur
by March 31, 1999, the Bank shall pay to SFS the reasonable and verifiable
expenses incurred by SFS in connection with the merger agreement. If termination
is due to (i) failure to receive any required governmental approval or (ii) all
other conditions are satisfied, but the required pooling of interest letters
cannot be obtained due to an act or omission of the Bank, the Holding Company or
a Bank affiliate, the Bank will pay to SFS a break up fee of $1.0 million. SFS
shall pay to the Bank a fee of $2.0 million upon the occurrence of a purchase
event prior to a fee termination event.
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A Fee Termination Event shall be the first to occur of the following:
(i) the Effective Date, (ii) termination of the merger agreement in accordance
with the terms thereof prior to the occurrence of a Purchase Event (other than a
termination of the merger agreement by the Bank as a result of a willful breach
of any representation, warranty, covenant or agreement of SFS or Schenectady
Federal) or (iii) 12 months following termination of the merger agreement by the
Bank unless a Purchase Event shall have occurred prior thereto.
The merger agreement may be amended or supplemented at any time by
mutual agreement of the Bank and SFS, subject to certain limitations. Any such
amendment or supplement must be in writing and authorized by or under the
direction of their respective Boards of Directors.
Interests of Certain Persons in the Merger
Boards of Directors. Upon consummation of the Conversion and the
Merger, the Holding Company and the Bank will also take all necessary action to
appoint Mr. Giaquinto, currently the Chairman of SFS and Schenectady Federal's
Boards, to their respective Boards of Directors ,and the Holding Company will
nominate Mr. Giaquinto to be elected to a three-year term at the next annual
meeting of the Holding Company's stockholders. The remaining directors and
certain officers of Schenectady Federal as of the Effective Time will be
appointed to an advisory board to the Holding Company for a three-year term
(four years, with respect to the appointment of David J. Jurczynski).
Existing Benefit Plans and employment agreements. As of July 31, 1998,
there were an aggregate of 125,579 stock options to purchase SFS Common Stock
outstanding under SFS Stock Option and Incentive Plan (the "SFS Option Plan").
Of these stock options 46,496 are currently exercisable. If any of the SFS
Options remain outstanding immediately prior to consummation of the Merger, they
will be converted into options to purchase Holding Company Common Stock, with
the number of shares subject to the option and the exercise price per share to
be adjusted based upon the Exchange Ratio so that the aggregate exercise price
remains unchanged, and with the duration of the option remaining unchanged. SFS
Options which have not vested as of the Effective Time will continue to vest in
accordance with their terms for as long as the holders of the options are either
a director, advisory director or employee of the Holding Company and/or the
Bank.
As of July 31, 1998, an aggregate of 32,530 shares of SFS Common Stock
have been awarded to the directors and officers of SFS pursuant to the RRP and
have not yet vested. Upon consummation of the Merger, all unvested awards will
be converted into Holding Company Common Stock based upon the Exchange Ratio and
will continue to vest in accordance with their terms for as long as the holders
of the awards are either a director, advisory director or employee of the
Holding Company and/or the Bank.
As of July 31, 1998, the SFS ESOP held 83,720 shares of SFS Common
Stock which had not yet been allocated to participants and which were pledged as
collateral for the remaining $837,200 loan to the SFS ESOP. The ESOP is expected
to be terminated six months following consummation of the Merger, at which time
the loan will be repaid and the remaining unallocated shares will be allocated
to the participants.
Pursuant to the merger agreement, the Bank has agreed to retain
employees of SFS and Schenectady Federal after the Effective Time, provided that
the Holding Company and the Bank shall not have any obligation to continue the
employment of such persons. The merger agreement provides that officers and
employees of SFS and the Bank who become employees of the Bank after the Merger
will be entitled to participate in the Bank's employee benefit plans maintained
generally for the benefit of its employees. The Bank shall treat SFS employees
who become employees of the Bank as new employees, but shall amend its employee
benefit plans to provide credit, for purposes of vesting and eligibility to
participate for service with SFS to the extent that such service was recognized
for similar purposes under SFS plans. In addition, the provisions of certain
employment agreements and Supplemental Executive Retirement Agreements with
officers of SFS will result in cash payments aggregating approximately $____
million to certain of SFS officers, including $______ million to Mr. Giaquinto.
In the merger agreement, the Holding Company has agreed to indemnify
the directors, officers and employees of SFS and each of its subsidiaries for a
period of six years after the Effective Time to the fullest extent which SFS or
any SFS subsidiary would have been permitted to do so under its respective
Certificate of Incorporation, Charter or
143
Bylaws. In addition, all limitations of liability existing in favor of such
individuals in the Certificate of Incorporation, Charter or Bylaws of SFS or any
SFS subsidiary, arising out of matters existing or occurring at or prior to the
Effective Time, shall survive the Merger and shall continue in full force and
effect. The Holding Company has also agreed to maintain SFS existing directors'
and officers' liability insurance policy (or purchase another policy providing
substantially the same coverage) for a period of six years following the
Effective Time, subject to certain limits on the cost to the Holding Company.
Delivery of Certificates
Conversion Shares. Certificates representing Conversion Shares issued
in the Conversion will be mailed by the Holding Company's transfer agent to the
persons entitled thereto at the addresses of such persons appearing on the stock
order form as soon as practicable following consummation of the Merger. Any
certificates returned as undeliverable will be held by the Holding Company until
claimed by persons legally entitled thereto or otherwise disposed of in
accordance with applicable law. Until certificates for Conversion Shares are
available and delivered to subscribers, such subscribers may not be able to sell
the Conversion Shares for which they have subscribed, even though trading of the
Holding Company Common Stock may have commenced.
Exchange Shares. After consummation of the Merger, each holder of a
certificate or certificates previously evidencing issued and outstanding shares
of SFS Common Stock, upon surrender of the same to an agent, duly appointed by
the Holding Company (the "Exchange Agent") shall be entitled to receive in
exchange therefore a certificate or certificates representing the number of full
shares of Holding Company Common Stock for which the shares of SFS Common Stock
surrendered shall have been converted based on the Exchange Ratio. The Exchange
Agent shall, after expiration of the ten trading day period required to
determine the Exchange Ratio, promptly mail to each such holder of record of an
outstanding certificate which immediately prior to the consummation of the
Merger evidenced shares of SFS Common Stock, and which is to be exchanged for
Holding Company Common Stock based on the Exchange Ratio as provided in the
merger agreement, a form of letter of transmittal (which shall specify that
delivery shall be effected, any risk of loss and title to such certificate shall
pass, only upon delivery of such certificate to the Exchange Agent) advising
such Holder of the terms of the exchange effected by the Merger and of the
procedure for surrendering to the Exchange Agent such certificate in exchange
for a certificate or certificates evidencing Holding Company Common Stock. The
stockholders of SFS should not forward SFS Common Stock certificates to the
Holding Company or the Exchange Agent until they have received the transmittal
letter.
No holder of a certificate representing shares of SFS Common Stock
shall be entitled to receive any dividends in respect of the Holding Company
Common Stock into which such shares shall have been converted by virtue of the
Merger until the certificate representing such shares of SFS Common Stock is
surrendered in exchange for certificates representing shares of Holding Company
Common Stock. In the event that dividends are declared and paid by the Holding
Company in respect of Holding Company Common Stock after the consummation of the
Merger but prior to surrender of certificates representing shares of SFS Common
Stock, dividends payable in respect of shares of Holding Company Common Stock
not then issued shall accrue (without interest). Any such dividends shall be
paid (without interest) upon surrender of the certificates representing such
shares of SFS Common Stock. The Holding Company shall be entitled, after the
consummation of the Merger, to treat certificates representing shares of SFS
Common Stock as evidencing ownership of the number of full shares of Holding
Company Common Stock into which the shares of SFS Common Stock represented by
such certificates shall have been converted, notwithstanding the failure on the
part of the holder thereof to surrender such certificates.
The Holding Company shall not be obligated to deliver a certificate or
certificates representing Holding Company Common Stock to which a holder of SFS
Common Stock would otherwise be entitled as a result of the Merger until such
holder surrenders the certificate or certificates representing the shares of SFS
Common Stock for exchange as provided above, or, in default thereof, an
appropriate affidavit of loss and indemnity agreement and/or a bond as may be
required in each case by the Holding Company. If any certificate evidencing
shares of Holding Company Common Stock is to be issued in a name other than that
in which the certificate evidencing SFS Common Stock surrendered in exchange
therefore is registered, it shall be a condition of the issuance thereof that
the certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer tax or other tax required by reason of the issuance of
a certificate for share of Holding Company Common Stock in any name other than
that of the registered holder of the
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certificate surrendered or otherwise establish to the satisfaction of the
Exchange Agent that such tax has been paid or is not payable.
Resale Considerations With Respect to the Holding Company Common Stock Issued in
the Merger
The shares of Holding Company Common Stock that will be issued if the
Merger is consummated have been registered under the Exchange Act and approved
for listing on The Nasdaq National Market and will be freely transferable,
except for shares of Holding Company Common Stock received in the Merger by
persons, including directors and executive officers of any of the Parties, who
may be deemed to be "affiliates" of any of the Parties under Rule 145
promulgated under the Securities Act. Affiliates may not sell their shares of
Holding Company Common Stock acquired pursuant to the Merger, except pursuant to
an effective registration statement under the Securities Act covering such
shares of Holding Company Common Stock or in compliance with Rule 145 or another
applicable exemption from the registration requirements of the Securities Act.
Persons who may be deemed to be affiliates of any of the Parties generally
include individuals or entities that control, are controlled by, or are under
common control with, any of the Parties and may include certain officers and
directors of any of the Parties as well as any stockholders who own more than
10% of the common stock of any of the Parties.
Certain Restrictions on Purchase or Transfer of Shares After the Conversion
All Conversion Shares owned by any director or executive officer of the
Holding Company and/or the Bank will be subject to a restriction that the shares
not be sold for a period of one year following the Conversion, except in the
event of the death of such director or executive officer or pursuant to a Merger
or similar transaction approved by the Department and the FDIC. Each certificate
for restricted shares will bear a legend giving notice of this restriction on
transfer, and instructions will be issued to the effect that any transfer within
such time period of any certificate or record ownership of such shares other
than as provided above is a violation of the restriction. Any shares of Holding
Company Common Stock issued at a later date within this one year period as a
stock dividend, stock split or otherwise with respect to such restricted stock
will be subject to the same restrictions.
Purchases of Holding Company Common Stock by directors, executive
officers and their associates during the three-year period following completion
of the Conversion and the Merger may be made only through a broker or dealer
registered with the SEC, except with the prior written approval of the
Department and the FDIC. This restriction does not apply, however, to negotiated
transactions involving more than 1% of the outstanding Holding Company Common
Stock or to certain purchases of stock pursuant to an employee stock benefit
plan.
Pursuant to FDIC regulations, the Holding Company will generally be
prohibited from repurchasing any shares of the Holding Company Common Stock
within one year following the consummation of the Conversion, although the FDIC
under its current policies may approve a request to repurchase shares of Holding
Company Common Stock following the six-month anniversary of the Conversion.
During the second and third years following consummation of the Conversion, the
Holding Company may not repurchase any shares of its Holding Company Common
Stock other than pursuant to (i) an offer to all stockholders on a pro rata
basis which is approved by the FDIC; (ii) the repurchase of qualifying shares of
a director, if any; (iii) purchases in the open market by a tax-qualified or
non-tax-qualified employee stock benefit plan in an amount reasonable and
appropriate to fund the plan; or (iv) purchases that are part of an open-market
stock repurchase program not involving more than 5% of its outstanding capital
stock during a 12- month period, if the repurchases do not cause the Bank to
become undercapitalized and the Bank provides to the FDIC written notice
containing a full description of the program to be undertaken and such program
is not disapproved by the FDIC. The FDIC may permit stock repurchases in excess
of such amounts prior to the third anniversary of the Conversion if exceptional
circumstances are shown to exist. However, in order to preserve
pooling-of-interests accounting treatment for the Merger and GAAP, the Holding
Company's ability to repurchase shares of its Holding Company Common Stock will
be limited during the two-year period following consummation of the Merger.
145
Liquidation Rights
In the unlikely event of a complete liquidation of the Bank in its
present mutual form, each depositor of the Bank would receive his pro rata share
of any assets of the Bank remaining after payment of claims of all creditors
including the claims of all depositors to the withdrawal value of their
accounts. Each depositor's pro rata share of such remaining assets would be in
the same proportion as the value of his or her deposit account was to the total
value of all deposit accounts in the Bank at the time of liquidation. After the
Conversion, each depositor, in the event of a complete liquidation of the Bank,
would have a claim as a creditor of the same general priority as the claims of
all other general creditors of the Bank. However, except as described below, his
or her claim would be solely in the amount of the balance in his deposit account
plus accrued interest. He or she would not have an interest in the value or
assets of the Bank above that amount.
The Plan provides for the establishment, upon the completion of the
Conversion, of a special "Liquidation Account" for the benefit of Eligible
Account Holders and Supplemental Eligible Account Holders in an amount equal to
the Bank's net worth as of the date of its latest statement of financial
condition contained in the final prospectus utilized in the Conversion. As of
June 30, 1998, the initial balance of the liquidation account would be
approximately $53.3 million. Each Eligible Account Holder and Supplemental
Eligible Account Holder, if he or she were to continue to maintain his or her
deposit account at the Bank, would be entitled, upon a complete liquidation of
the Bank after the Conversion, to an interest in the liquidation account prior
to any payment to the Holding Company as the sole stockholder of the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder would have an
initial interest in such liquidation account for each deposit account, including
passbook accounts, NOW accounts, money market deposit accounts, and certificates
of deposit, held in the Bank at the close of business on March 31, 1997 or
September 30, 1998, as the case may be. Each Eligible Account Holder and
Supplemental Eligible Account Holder will have a pro rata interest in the total
liquidation account for each of his or her deposit accounts based on the
proportion that the balance of each such deposit account on the March 31, 1997
Eligibility Record Date (or the September 30, 1998 Supplemental Eligibility
Record Date, as the case may be) bore to the balance of all deposit accounts in
the Bank on such dates.
If, however, on any June 30 annual closing date of the Bank, commencing
June 30, 1999, the amount in any deposit account is less than the amount in such
deposit account on March 31, 1997 or September 30, 1998, as the case may be, or
any other annual closing date, then the interest in the liquidation account
relating to such deposit account would be reduced by the proportion of any such
reduction, and such interest will cease to exist if such deposit account is
closed. In addition, no interest in the liquidation account would ever be
increased despite any subsequent increase in the related deposit account. Any
assets remaining after the claims of general creditors (including the claims of
all depositors to the withdrawal value of their accounts) and the above
liquidation rights of the Eligible Account Holders and Supplemental Eligible
Account Holders are satisfied would be distributed to the Holding Company as the
sole stockholder of the Bank.
Schenectady Federal currently maintains a liquidation account for the
benefit of savings account holders of Schenectady Federal on December 31, 1993
and March 31, 1995. Upon consummation of the Conversion and the Merger, the Bank
will assume Schenectady Federal's current liquidation account in addition to the
establishment of the liquidation account for the benefit of Eligible Account
Holders and Supplemental Eligible Account Holders of the Bank described above.
Accounting Treatment
Consummation of the Merger will be accounted for under the
pooling-of-interests method of accounting. As a result, the historical basis of
the assets and liabilities of SFS and the Holding Company will be combined at
the Closing Date and carried forward at their previously recorded amounts, and
the stockholders' equity accounts of SFS and the Holding Company will also be
combined. The consolidated income and other financial statements of the Holding
Company issued after consummation of the Merger will be restated retroactively
to reflect the consolidated operations of the Holding Company and SFS as if the
Merger had taken place prior to the periods covered by such financial
statements. See "Pro Forma Unaudited Financial Information."
146
In the past, SFS had made certain repurchases of shares of SFS Common
Stock. In order to qualify for the pooling-of-interests method of accounting,
SFS will issue approximately ________________ shares of SFS Common Stock prior
to the Effective Time to cure tainted shares. SFS has made no repurchases since
October 22, 1997 and, pursuant to the terms of the merger agreement, will not
make any repurchases prior to consummation of the Merger. In addition,
regulations of the FDIC restrict the Holding Company's ability to implement any
repurchases of stock subsequent to the Merger. Any repurchase program
implemented by the Holding Company subsequent to the Merger also will be limited
as necessary to preserve pooling-of-interests accounting treatment of the
Merger.
Expenses of the Merger
The merger agreement provides, in general, that the Bank and SFS shall
each bear and pay all their respective costs and expenses incurred by it in
connection with the transactions contemplated by the merger agreement, including
fees and expenses of their respective financial consultants, investment bankers,
accountants and counsel. If the merger agreement is terminated under certain
specified circumstances, the Bank is obligated to pay SFS a break-up fee of up
to $2 million, and if a Purchase Event (as defined) occurs, then SFS must pay
the Bank a fee of $2 million. See " Termination."
THE OFFERING
Stock Pricing
The Plan of Conversion requires that the purchase price of the Holding
Company Common Stock must be based on the appraised pro forma market value of
the Holding Company Common Stock, as determined on the basis of an independent
valuation. The Bank and the Holding Company have retained RP Financial to make
such valuation. For its services in making such appraisal, RP Financial will
receive a fee of $47,500, plus out-of-pocket expenses. The Bank and the Holding
Company have agreed to indemnify RP Financial and its employees and affiliates
against certain losses (including any losses in connection with claims under the
federal securities laws) arising out of its services as appraiser, except where
RP Financial's liability results from its negligence or bad faith.
An appraisal has been made by RP Financial in reliance upon the
information contained in this Prospectus, including the financial statements. RP
Financial also considered the following factors, among others: the present and
projected operating results and financial condition of the Holding Company and
the Bank, and the economic and demographic conditions in the Bank's existing
market area; certain historical, financial and other information relating to the
Bank; a comparative evaluation of the operating and financial statistics of the
Bank with those of other similarly situated publicly-traded savings associations
and savings institutions located in the Bank's market area and the State of New
York; the aggregate size of the offering of the Holding Company Common Stock;
the impact of the Conversion on the Bank's equity and earnings potential; the
proposed dividend policy of the Holding Company and the Bank; and the trading
market for securities of comparable institutions and general conditions in the
market for such securities.
On the basis of the foregoing, RP Financial has advised the Holding
Company and the Bank that, in its opinion, dated as of September 4, 1998, the
estimated pro forma market value of the Holding Company Common Stock ranged from
a minimum of $59,500,000 to a maximum of $80,500,000 with a midpoint of
$70,000,000. The Board of Trustees of the Bank held a meeting to review and
discuss the appraisal report prepared by RP Financial. A representative of RP
Financial participated in the meeting to explain the contents of the appraisal
report. In connection with its review of the reasonableness and adequacy of such
appraisal consistent with NYBB and FDIC regulations and policies, the Board of
Trustees reviewed the methodology that RP Financial employed to determine the
pro forma market value of the Holding Company Common Stock and the
appropriateness of the assumptions that RP Financial used in determining this
value.
Based upon the Valuation Range and the Purchase Price of $10.00 per
share for the Holding Company Common Stock established by the Board of Trustees,
the Board of Trustees has established the Estimated Valuation Range of
$59,500,000 to $80,500,000, with a midpoint of $70,000,000, and the Holding
Company expects to issue between 5,950,000 and 8,050,000 shares of Holding
Company Common Stock. The Estimated Valuation Range may
147
be amended with the approval of the Superintendent and FDIC (if required), if
necessitated by subsequent developments in the financial condition of the
Holding Company or the Bank or market conditions generally.
The valuation prepared by RP Financial is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
such shares. RP Financial did not independently verify the financial statements
and other information provided by the Bank, nor did RP Financial value
independently the assets or liabilities of the Bank. The valuation considers the
Bank as a going concern and should not be considered as an indication of the
liquidation value of the Bank. Moreover, because such valuation is necessarily
based upon estimates and projections of a number of matters, all of which are
subject to change from time to time, no assurance can be given that persons
purchasing such shares in the Conversion will thereafter be able to sell such
shares at prices at or above the Purchase Price or in the range of the foregoing
valuation of the pro forma market value thereof.
Following commencement of the Subscription Offering or Community
Offering, if any, the maximum of the Estimated Valuation Range may be increased
up to 15% and the number of shares of Holding Company Common Stock to be issued
in the Conversion may be increased to 9,257,500 shares due to regulatory
considerations, changes in the market and general financial and economic
conditions, without the resolicitation of subscribers. See "-- Limitations on
Common Stock Purchases" as to the method of distribution and allocation of
additional shares that may be issued in the event of an increase in the
Estimated Valuation Range to fill unfilled orders in the Subscription and
Community Offerings.
No sale of shares of Holding Company Common Stock may be consummated
unless, prior to such consummation, RP Financial confirms to the Bank, Holding
Company, Superintendent and FDIC that, to the best of its knowledge, nothing of
a material nature has occurred which, taking into account all relevant factors,
would cause RP Financial to conclude that the value of the Holding Company
Common Stock at the price so determined is incompatible with its estimate of the
pro forma market value of the Holding Company Common Stock at the conclusion of
the Subscription Offering and Community Offering, if any.
If, based on RP Financial's estimate, the pro forma market value of the
Holding Company Common Stock, as of the date that RP Financial so confirms, is
not more than 15% above the maximum and not less than the minimum of the
Estimated Valuation Range then, (1) with the approval of the Superintendent, if
required, and the FDIC, the number of shares of Holding Company Common Stock to
be issued in the Conversion may be increased or decreased, pro rata to the
increase or decrease in value, without resolicitation of subscriptions, to no
more than 9,257,500 shares or no less than 5,950,000 shares, and (2) all shares
purchased in the Subscription and Community Offerings will be purchased for the
Purchase Price of $10.00 per share. If the number of shares issued in the
Conversion is increased due to an increase of up to 15% in the Estimated
Valuation Range to reflect changes in market or financial conditions, persons
who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for an adjusted maximum number of shares, except for
the Employee Plans which will be able to subscribe for such adjusted amount up
to their 10% subscription. See "- Limitations on Common Stock Purchases."
If the pro forma market value of the Holding Company Common Stock is
either more than 15% above the maximum of the Estimated Valuation Range or less
than the minimum of the Estimated Valuation Range, the Bank and the Holding
Company, after consulting with the Superintendent and the FDIC, may terminate
the Plan and return all funds promptly with interest at the Bank's passbook rate
of interest on payments made by check, draft or money order, extend or hold new
Subscription and Community Offerings, establish a new Estimated Valuation Range,
commence a resolicitation of subscribers or take such other actions as permitted
by the Superintendent and the FDIC in order to complete the Conversion. In the
event that a resolicitation is commenced, unless an affirmative response is
received within a reasonable period of time, all funds will be promptly returned
to investors as described above. A resolicitation, if any, following the
conclusion of the Subscription and Community Offerings would not exceed 45 days
unless such resolicitation is further extended by the Superintendent and the
FDIC for periods of up to 60 days not to extend beyond
_________________________, 2000.
If all shares of Holding Company Common Stock are not sold through the
Subscription and Community Offerings, then the Bank and the Holding Company
expect to offer the remaining shares in a Syndicated Community
148
Offering, which would occur as soon as practicable following the close of the
Subscription Offering or Community Offering, if any, but may commence during the
Subscription Offering and Community Offering, if any, subject to the prior
rights of subscribers. All shares of Holding Company Common Stock will be sold
at the same price per share in the Syndicated Community Offering as in the
Subscription and Community Offerings. See "--Syndicated Community Offering."
No sale of shares of Holding Company Common Stock may be consummated
unless, prior to such consummation, RP Financial confirms to the Bank, the
Holding Company, Superintendent and the FDIC that, to the best of its knowledge,
nothing of a material nature has occurred which, taking into account all
relevant factors, including those which would be involved in a cancellation of
the Syndicated Community Offering, would cause RP Financial to conclude that the
aggregate value of the Holding Company Common Stock at the Purchase Price is
incompatible with its estimate of the pro forma market value of the Holding
Company Common Stock of the Holding Company at the time of the Syndicated
Community Offering. Any change which would result in an aggregate purchase price
which is below, or more than 15% above, the Estimated Valuation Range would be
subject to Superintendent and FDIC approval. If such confirmation is not
received, the Bank may extend the Conversion, extend, reopen or commence new
Subscription and Community Offerings or a Syndicated Community Offering,
establish a new Estimated Valuation Range and commence a resolicitation of all
subscribers with the approval of the Superintendent and FDIC or take such other
actions as permitted by the Superintendent and FDIC in order to complete the
Conversion, or terminate the Plan and cancel the Subscription and Community
Offerings and/or the Syndicated Community Offering. In the event market or
financial conditions change so as to cause the aggregate purchase price of the
shares to be below the minimum of the Estimated Valuation Range or more than 15%
above the maximum of such range, and the Holding Company and the Bank determine
to continue the Conversion, subscribers will be resolicited (i.e., be permitted
to continue their orders, in which case they will need to affirmatively
reconfirm their subscriptions prior to the expiration of the resolicitation
offering or their subscription funds will be promptly refunded with interest at
the Bank's passbook rate of interest, or be permitted to decrease or cancel
their subscriptions). Any change in the Estimated Valuation Range must be
approved by the Superintendent and FDIC. A resolicitation, if any, following the
conclusion of the Subscription Offering or the Community Offering would not
exceed 45 days, or if following the Syndicated Community Offering, 60 days,
unless further extended by the Superintendent for periods up to 60 days not to
extend beyond ______________________ , 2000. If such resolicitation is not
effected, the Bank will return with interest all funds promptly at the Bank's
passbook rate of interest on payments made by check, savings bank draft or money
order.
Copies of the appraisal report of RP Financial, including any
amendments thereto, and the detailed memoran dum of the appraiser setting forth
the method and assumptions for such appraisal are available for inspection at
the offices of the Bank and the other locations specified under "Additional
Information."
Number of Shares to be Issued
Depending upon market or financial conditions following the
commencement of the Subscription Offering and Community Offering, if any, the
total number of shares to be issued in the Conversion may be increased or
decreased without a resolicitation of subscribers; provided, that the product of
the total number of shares times the price per share is not below the minimum or
more than 15% above the maximum of the Estimated Valuation Range, and the total
number of shares to be issued in the Conversion is not less than 5,950,000 or
greater than 8,050,000 (or 9,257,500 if the Estimated Valuation Range is
increased by 15%).
In the event market or financial conditions change so as to cause the
aggregate purchase price of the shares to be below the minimum of the Estimated
Valuation Range or more than 15% above the maximum of such range, if the Plan is
not terminated by the Holding Company and the Bank after consultation with the
Superintendent and FDIC, purchasers will be resolicited (i.e., permitted to
continue their orders, in which case they will need to affirmatively reconfirm
their subscriptions prior to the expiration of the resolicitation offering or
their subscription funds will be promptly refunded, or be permitted to modify or
rescind their subscriptions). Any change in the Estimated Valuation Range must
be approved by the Superintendent and FDIC. If the number of shares issued in
the Conversion is increased due to an increase of up to 15% in the Estimated
Valuation Range to reflect changes in market or financial conditions, persons
who subscribed for the maximum number of shares will not be given the
opportunity to subscribe for an
149
adjusted maximum number of shares, except for the Employee Plans, which will be
able to subscribe for such adjusted amount up to their 10% subscription. See "--
Limitations on Common Stock Purchases."
An increase in the number of shares to be issued in the Conversion as a
result of an increase in the estimated pro forma market value would decrease
both a subscriber's ownership interest and the Holding Company's pro forma net
earnings and stockholders' equity on a per share basis while increasing pro
forma net earnings and stockholders' equity on an aggregate basis. A decrease in
the number of shares to be issued in the Conversion would increase both a
subscriber's ownership interest and the Holding Company's pro forma net earnings
and stockholders' equity on a per share basis while decreasing pro forma net
earnings and stockholders' equity on an aggregate basis. For a presentation of
the effects of such changes see "Pro Forma Data."
To fund the Foundation, the number of shares to be issued and
outstanding as a result of the sale of Holding Company Common Stock in the
Conversion will be increased by a number of shares equal to 3% of the Holding
Company Common Stock sold in the Conversion. Assuming the sale of shares in the
Offerings at the maximum of the Estimated Valuation Range, the Holding Company
will contribute 241,500 shares of its Holding Company Common Stock from
authorized but unissued shares to the Foundation immediately following the
completion of the Conversion. In that event, the Holding Company will have total
shares of Holding Company Common Stock outstanding of 8,291,500 shares. Funding
the Foundation with authorized but unissued shares will have the effect of
diluting the ownership and voting interests of persons purchasing shares in the
Conversion by 2.9% since a greater number of shares will be outstanding upon
completion of the Conversion than would be if the Foundation were not
established. See "Pro Forma Data."
Subscription Offering and Subscription Rights
In accordance with the Plan of Conversion, rights to subscribe for the
purchase of Holding Company Common Stock have been granted under the Plan of
Conversion to the following persons in the following order of descending
priority: (1) depositors whose deposits in qualifying accounts in the Bank
totaled $100 or more on March 31, 1997 ("Eligible Account Holders"); (2) the
Employee Plans, including the ESOP; and (3) depositors whose deposits in
qualifying accounts in the Bank totaled $100 or more on September 30, 1998,
other than (i) those depositors who would otherwise qualify as Eligible Account
Holders or (ii) trustees or executive officers of the Bank or their Associates,
(as defined herein) ("Supplemental Eligible Account Holders"). All subscriptions
received will be subject to the availability of Holding Company Common Stock
after satisfaction of all subscriptions of all persons having prior rights in
the Subscription Offering and to the maximum and minimum purchase limitations
set forth in the Plan of Conversion and as described below under "- Limitations
on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Eligible Account Holder will
receive, without payment therefor, first priority, non-transferable subscription
rights to subscribe for Holding Company Common Stock in the Subscription
Offering up to the greatest of (i) the amount permitted to be purchased in the
Community Offering, which amount is currently $250,000 of the Holding Company
Common Stock offered, (ii) one-tenth of one percent (0.10%) of the total
offering of shares of Holding Company Common Stock or (iii) fifteen times the
product (rounded down to the next whole number) obtained by multiplying the
total number of shares of Holding Company Common Stock to be issued by a
fraction the numerator of which is the amount of the Eligible Account Holder's
qualifying deposit and the denominator of which is the total amount of
qualifying deposits of all Eligible Account Holders ($______________________ ),
in each case on the Eligibility Record Date, subject to the overall maximum and
minimum purchase limitations and exclusive of an increase in the shares issued
pursuant to an increase in the Estimated Valuation Range of up to 15%. See "-
Limitations on Common Stock Purchases."
In the event that Eligible Account Holders exercise subscription rights
for a number of shares in excess of the total number of shares eligible for
subscription, the shares will be allocated so as to permit each subscribing
Eligible Account Holder to purchase a number of shares sufficient to make such
Eligible Account Holder's total allocation equal to the lesser of 100 shares or
the number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Eligible Account Holders whose
subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all remaining Eligible Account Holders whose subscriptions remain unfilled.
150
To ensure a proper allocation of stock, each Eligible Account Holder
must list on his or her stock order form all accounts in which such Eligible
Account Holder has an ownership interest. Failure to list an account could
result in fewer shares being allocated than if all accounts had been disclosed.
The subscription rights of Eligible Account Holders who are also trustees or
executive officers of the Bank or their Associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the one-year period preceding the Eligibility Record
Date.
Priority 2: The Employee Plans. To the extent that there are sufficient
shares remaining after satisfaction of the subscriptions by Eligible Account
Holders, the Employee Plans, including the ESOP, will receive, without payment
therefor, second priority, non-transferable subscription rights to purchase up
to 10% of the Holding Company Common Stock to be issued in the Conversion,
including shares to be issued to the Foundation, subject to the purchase
limitations set forth in the Plan of Conversion and as described below under "-
Limitations on Common Stock Purchases." As an Employee Plan, the ESOP intends to
purchase 8% of the shares to be issued in the Conversion, or 490,280 shares and
663,320 shares, based on the issuance of 6,128,500 shares and 8,291,500 shares,
respectively, at the minimum and the maximum of the Estimated Valuation Range,
including the shares of Holding Company Common Stock to be issued to the
Foundation. Subscriptions by the ESOP will not be aggregated with shares of
Holding Company Common Stock purchased directly by or which are otherwise
attributable to any other participants in the Subscription and Community
Offerings, including subscriptions of any of the Bank's trustees, officers,
employees or associates thereof. See "Management of the Bank--Benefit
Plans--Employee Stock Ownership Plan."
Priority 3.- Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of the subscriptions by
the Eligible Account Holders and Employee Plans, Supplemental Eligible Account
Holders will receive, without payment therefor, third priority, non-transferable
subscription rights to subscribe for Holding Company Common Stock in the
Subscription Offering up to the greatest of (i) the amount permitted to be
subscribed for in the Community Offering, which amount is currently $250,000 of
the Holding Company Common Stock offered, (ii) one-tenth of one, percent (0.10%)
of the total offering of shares of Holding Company Common Stock or (iii) fifteen
times the product (rounded down to the next whole number) obtained by
multiplying the total number of shares of Holding Company Common Stock to be
issued by a fraction of which the numerator is the amount of the Supplemental
Eligible Account Holder's qualifying deposit and the denominator is the total
amount of qualifying deposits of all Supplemental Eligible Account Holders
($______________________), in each case on the Supplemental Eligibility Record
Date, subject to the overall maximum and minimum purchase limitations and
exclusive of an increase in the shares issued pursuant to an increase in the
Estimated Valuation Range of up to 15%. See "--Limitations on Common Stock
Purchases."
In the event that Supplemental Eligible Account Holders exercise
subscription rights for a number of shares in excess of the total number of
shares eligible for subscription, the shares will be allocated so as to permit
each subscribing Supplemental Eligible Account Holder, to the extent possible,
to purchase a number of shares sufficient to make such Supplemental Eligible
Account Holder's total allocation equal to the lesser of 100 shares or the
number of shares subscribed for. Thereafter, unallocated shares will be
allocated among the remaining subscribing Supplemental Eligible Account Holders
whose subscriptions remain unfilled in the proportion that the amounts of their
respective qualifying deposits bear to the total amount of qualifying deposits
of all remaining Supplemental Eligible Account Holders whose subscriptions
remain unfilled.
To ensure a proper allocation of stock, each Supplemental Eligible
Account Holder must list on his or her stock order form all accounts in which
such Supplemental Eligible Account Holder has an ownership interest. Failure to
list an account could result in fewer shares being allocated than if all
accounts had been disclosed.
Expiration Date for the Subscription Offering. The Subscription
Offering will expire at 12:00 noon, Eastern time, on ______________________,
1998, unless extended for an initial period of up to 45 days by the Bank or an
additional 60 day periods with the approval of the Superintendent and if
necessary, the FDIC. Subscription rights which have not been exercised prior to
the Expiration Date will become void.
The Bank will not execute orders until all shares of Holding Company
Common Stock have been subscribed for or otherwise sold. If all shares have not
been subscribed for or sold within 45 days after the Subscription Expiration
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Date, unless such period is extended with the consent of the Superintendent, all
funds delivered to the Bank pursuant to the Subscription Offering will be
returned with interest promptly to the subscribers and all withdrawal
authorizations will be canceled. If an extension beyond the 45-day period
following the Subscription Expiration Date is granted, the Bank will notify
subscribers of the extension of time and of any rights of subscribers to modify
or rescind their subscriptions. Each such extension may not exceed 60 days, and
such extensions, in the aggregate, may not last beyond ______________________,
2000.
Persons in Non-qualified States or Foreign Countries. The Holding
Company and the Bank will make reasonable efforts to comply with the securities
laws of all states in the United States in which persons entitled to subscribe
for stock pursuant to the Plan reside. However, the Bank and the Holding Company
are not required to offer stock in the Subscription Offering to any person who
resides in a foreign country.
Community Offering
Upon completion of the Subscription Offering, to the extent that shares
remain available for purchase after satisfaction of all subscriptions of the
Eligible Account Holders, the Employee Plans and the Supplemental Eligible
Account Holders, the Bank will offer shares pursuant to the Plan in the
Community Offering to certain members of the general public to whom a copy of
this prospectus has been delivered, subject to the right of the Holding Company
and the Bank to accept or reject any such orders, in whole or in part, in its
sole discretion. The Community Offering, if any, shall commence upon the
completion of the Subscription Offering and shall terminate seven days after the
close of the Subscription Offering unless extended by the Bank and the Holding
Company, with the approval of the Superintendent and the FDIC, if necessary.
Such persons, together with associates of and persons acting in concert with
such persons, may purchase up to $250,000 of Holding Company Common Stock
subject to the maximum purchase limitation. See "- Limitations on Common Stock
Purchases." This amount may be increased to up to a maximum of 5% or decreased
to less than $250,000 of Holding Company Common Stock at the discretion of the
Holding Company and the Bank. The opportunity to subscribe for shares of Holding
Company Common Stock in the Community Offering category is subject to the right
of the Bank and the Holding Company, in their sole discretion, to accept or
reject any such orders in whole or in part either at the time of receipt of an
order or as soon as practicable following the Expiration Date. However, no such
rejection will be in contravention of any applicable law or regulation. If the
Holding Company or the Bank rejects a subscription in part, the subscriber will
not have the right to cancel the remainder of his or her subscription.
Subject to the foregoing, if the amount of stock remaining is
insufficient to fill the orders of subscribers in the Community Offering after
completion of the Subscription and Community Offerings, such stock will be
allocated first to each subscriber whose order is accepted by the Bank, in an
amount equal to 2% of the shares offered in the Conversion.
Syndicated Community Offering
As a final step in the Conversion, the Plan provides that, if feasible,
all shares of Holding Company Common Stock not purchased in the Subscription
Offering or the Community Offering, if any, will be offered for sale to the
general public in a Syndicated Community Offering through a syndicate of
registered broker-dealers to be formed and managed by KBW acting as agent of the
Holding Company. There are no known agreements between KBW and any broker-dealer
in connection with a possible Syndicated Community Offering. The Holding Company
and the Bank have reserved the right to reject orders in whole or in part in
their sole discretion in the Syndicated Community Offering. However, no such
rejection will be in contravention of any applicable law or regulation. If the
Holding Company or the Bank rejects an order in part, the subscriber will not
have the right to cancel the remainder of his or her subscription. Neither KBW
nor any registered broker-dealer shall have any obligation to take or purchase
any shares of the Holding Company Common Stock in the Syndicated Community
Offering; however, KBW has agreed to use its best efforts in the sale of shares
in the Syndicated Community Offering.
The price at which Holding Company Common Stock is sold in the
Syndicated Community Offering will be determined as described above under "-
Stock Pricing." Subject to overall purchase limitations, no person, together
with any associate or group of persons acting in concert, will be permitted to
subscribe in the Syndicated Community
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Offering for more than 1% of the Holding Company Common Stock offered in the
Conversion; provided, however, that shares of Holding Company Common Stock
purchased in the Community Offering by any persons, together with associates of
or persons acting in concert with such persons, will be aggregated with
purchases in the Syndicated Community Offering and be subject to a maximum
purchase limitation of 1% of the Holding Company Common Stock offered.
Payments made in the form of a check, bank draft, money order or in
cash will earn interest at the Bank's passbook rate of interest from the date
such payment is actually received by the Bank until completion or termination of
the Conversion.
In addition to the foregoing, if a syndicate of broker-dealers
("selected dealers") is formed to assist in the Syndicated Community Offering, a
purchaser may pay for his or her shares with funds held by or deposited with a
selected dealer. If an order form is executed and forwarded to the selected
dealer or if the selected dealer is authorized to execute the order form on
behalf of a purchaser, the selected dealer is required to forward the order form
and funds to the Bank for deposit in a segregated account on or before noon of
the business day following receipt of the order form or execution of the order
form by the selected dealer. Alternatively, selected dealers may solicit
indications of interest from their customers to place orders for shares. Such
selected dealers shall subsequently contact their customers who indicated an
interest and seek their confirmation as to their intent to purchase. Those
indicating an intent to purchase shall execute order forms and forward them to
their selected dealer or authorize the selected dealer to execute such forms.
The selected dealer will acknowledge receipt of the order to its customer in
writing on the following business day and will debit such customer's account on
the third business day after the customer has confirmed his or her intent to
purchase ("debit date") and on or before noon of the next business day following
the debit date, will send order forms and funds to the Bank for deposit in a
segregated account. Although purchasers' funds are not required to be in their
accounts with selected dealers until the debit date, in the event that such
alternative procedure is employed once a confirmation of an intent to purchase
has been received by the selected dealer, the purchaser has no right to rescind
his or her order.
Certificates representing shares of Holding Company Common Stock
purchased, together with any refund due, will be mailed to purchasers at the
address specified in the order form, as soon as practicable following
consummation of the sale of the Holding Company Common Stock. Any certificates
returned as undeliverable will be disposed of in accordance with applicable law.
The Syndicated Community Offering will terminate no more than 45 days
following the Subscription Expiration Date, unless extended by the Holding
Company with the approval of the Superintendent and FDIC. Such extensions may
not be beyond ____________, 2000. See "- Stock Pricing" above for a discussion
of rights of subscribers, if any, in the event an extension is granted.
Marketing and Underwriting Arrangements
The Bank and the Holding Company have engaged KBW as a financial and
marketing advisor in connection with the offering of the Holding Company Common
Stock and KBW has agreed to use its best efforts to assist the Holding Company
with the solicitation of subscriptions and purchase orders for shares of Holding
Company Common Stock in the Offerings. Based upon negotiations between the Bank
and the Holding Company, KBW will receive a fee for services provided in
connection with the Offerings equal to 1.20% of the aggregate Purchase Price of
Holding Company Common Stock sold in the Offerings. No fees will be paid to KBW
with respect to any shares of Holding Company Common Stock purchased by any
trustee, director, executive officer or employee of the Bank or the Holding
Company or members of their immediate families or any employee benefit plan of
the Holding Company or the Bank. In the event of a Syndicated Community
Offering, KBW will negotiate with the Holding Company for the receipt of an
additional fee to be remitted to selected dealers under one or more selected
dealer agreements to be entered into by KBW with certain dealers; provided,
however, that the aggregate fees payable to KBW and any selected dealers in
connection with any Syndicated Community Offering will not exceed 5.5% of the
aggregate Purchase Price of the Holding Company Common Stock sold in the
Syndicated Community Offering. Fees to KBW and to any other broker-dealer may be
deemed to be underwriting fees and KBW and such broker-dealer may be deemed to
be underwriters. KBW will also be reimbursed for its reasonable out-of pocket
expenses, including legal fees and expenses, up to a
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maximum of $75,000. Notwithstanding the foregoing, in the event the Offerings
are not consummated or KBW ceases, under certain circumstances after the
subscription solicitation activities are commenced, to provide assistance to the
Holding Company, KBW will be entitled to reimbursement for its reasonable
out-of-pocket expenses as described above. The Holding Company and the Bank have
agreed to indemnify KBW for costs and expenses in connection with certain claims
or liabilities related to or arising out of the services to be provided by KBW
pursuant to its engagement by the Bank and the Holding Company as financial
advisor in connection with the Conversion, including certain liabilities under
the Securities Act. Total marketing fees to KBW are estimated to be $__________
million and $__________ million at the minimum and the maximum of the Estimated
Valuation Range, respectively. See "Pro Forma Data" for the assumptions used to
arrive at these estimates.
Directors, trustees and executive officers of the Holding Company and
the Bank may participate in the solicitation of offers to purchase Holding
Company Common Stock. Questions of prospective purchasers will be directed to
executive officers or registered representatives. Other employees of the Bank
may participate in the Offerings in ministerial capacities or provide clerical
work in effecting a sales transaction. Such other employees have been instructed
not to solicit offers to purchase Holding Company Common Stock or provide advice
regarding the purchase of Holding Company Common Stock. The Holding Company will
rely on Rule 3a4-1 under the Exchange Act, and sales of Holding Company Common
Stock will be conducted within the requirements of Rule 3a4-1, so as to permit
officers, trustees, directors and employees to participate in the sale of
Holding Company Common Stock. No officer, director or employee of the Holding
Company or the Bank will be compensated in connection with his or her
participation by the payment of commissions or other remuneration based either
directly or indirectly on the transactions in the Holding Company Common Stock.
Procedure for Purchasing Shares in Subscription and Community Offerings
To ensure that each purchaser receives a Prospectus at least 48 hours
prior to the respective expiration dates for the Offerings, in accordance with
Rule 15c2-8 of the Exchange Act, no Prospectus will be mailed later than five
days prior to such date or hand delivered any later than two days prior to such
date. Execution of the stock order form will confirm receipt or delivery in
accordance with Rule 15c2-8. Stock order forms will only be distributed with a
Prospectus and a certification form requiring each prospective investor to
acknowledge, among other things, that the shares of Holding Company Common Stock
are not insured by the Bank, the FDIC or any other governmental agency and that
such prospective investor has received a copy of this Prospectus, which, among
other things, describes the risks involved in the investment in the Holding
Company Common Stock.
To purchase shares in the Subscription Offering and, if a Community
Offering is held, the Community Offering, an executed order form with the
required payment for each share subscribed for, or with appropriate
authorization for withdrawal from the Bank's deposit account (which may be given
by completing the appropriate blanks in the stock order form), must be received
by the Bank at its office by 12:00 noon, Eastern time, on the Expiration Date,
in the case of the Subscription Offering, or 7 days after the close of the
Subscription Offering, in the case of the Community Offering. Stock order forms
which are not received by such time or are executed defectively or are received
without full payment (or appropriate withdrawal instructions) are not required
to be accepted. In addition, the Holding Company and Bank are not obligated to
accept orders submitted on photocopied or facsimile order forms and will not
accept order forms unaccompanied by an executed certification form. The Holding
Company and the Bank have the power to waive or permit the correction of
incomplete or improperly executed forms, but do not represent that they will do
so. Once received, an executed order form may not be modified, amended or
rescinded without the consent of the Bank unless the Conversion has not been
completed within 45 days after the end of the Subscription and Community
Offerings, unless such period has been extended.
In order to ensure that Eligible Account Holders and Supplemental
Eligible Account Holders are properly identified as to their stock purchase
priorities, depositors must list all accounts on the stock order form giving all
names in each account and the account numbers.
Payment for subscriptions may be made (i) in cash if delivered in
person to the office of the Bank, (ii) by check, bank draft or money order, or
(iii) by authorization of withdrawal from deposit accounts maintained with the
Bank. No wire transfers will be accepted. Interest will be paid on payments made
by cash, check, cashier's check or money order
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at the Bank's passbook rate of interest from the date payment is received until
the completion or termination of the Conversion. If payment is made by
authorization of withdrawal from deposit accounts, the funds authorized to be
withdrawn from a deposit account will continue to accrue interest at the
contractual rates until completion or termination of the Conversion, but a hold
will be placed on such funds, thereby making them unavailable to the depositor
until completion or termination of the Conversion. Notwithstanding the
foregoing, the Holding Company shall have the right, in its sole discretion, to
permit institutional investors to submit irrevocable orders together with a
legally binding commitment for payment and to thereafter pay for the shares of
Holding Company Common Stock for which they subscribe in the Community Offering
at any time prior to 48 hours before the completion of the Conversion.
If a subscriber authorizes the Bank to withdraw the amount of the
purchase price from such subscriber's deposit account, the Bank will do so as of
the effective date of the Conversion. The Bank will waive any applicable
penalties for early withdrawal from certificate accounts. If the remaining
balance in a certificate account is reduced below the applicable minimum balance
requirement at the time that the funds actually are transferred under the
authorization, the certificate will be canceled at the time of the withdrawal,
without penalty, and the remaining balance will be converted into a passbook
account and will earn interest at the passbook rate. Upon completion of the
Conversion, funds withdrawn from depositors' accounts for stock purchases will
no longer be insured by the FDIC.
The ESOP will not be required to pay for the shares subscribed for at
the time it subscribes but, rather, may pay for such shares of Holding Company
Common Stock subscribed for at the Purchase Price upon consummation of the
Offerings; provided, that there is in force from the time of its subscription
until such time, a loan commitment acceptable to the Holding Company from an
unrelated financial institution or the Holding Company to lend to the ESOP, at
such time, the aggregate Purchase Price of the shares for which it subscribed.
The Holding Company intends to provide such a loan to the ESOP.
Owners of self-directed IRAs may use the assets of such IRAs to
purchase shares of Holding Company Common Stock in the Subscription and
Community Offerings. Persons with IRAs maintained at the Bank must have their
accounts transferred to an unaffiliated institution or broker to purchase shares
of Holding Company Common Stock in the Subscription and Community Offerings. In
addition, the provisions of ERISA and IRS regulations require that officers,
trustees and ten percent stockholders who use self-directed IRA funds to
purchase shares of Holding Company Common Stock in the Subscription and
Community Offerings make such purchases for the exclusive benefit of the IRAs.
Certificates representing shares of Holding Company Common Stock
purchased will be mailed to purchasers at the last address of such persons
appearing on the records of the Bank, or to such other address specified in
properly completed order forms, as soon as practicable following consummation of
the sale of all shares of Holding Company Common Stock. Any certificates
returned as undeliverable will be disposed of in accordance with applicable law.
Restrictions on Transfer of Subscription Rights
Prior to the completion of the Conversion, the NYBB Conversion
regulations prohibit any person with subscription rights (i.e., the Eligible
Account Holders, the Employee Plans, the Supplemental Eligible Account Holders
and the Other Depositors) from transferring or entering into any agreement or
understanding to transfer the legal or beneficial ownership of the subscription
rights issued under the Plan or the shares of Holding Company Common Stock to be
issued upon their exercise. Certificates representing shares of Holding Company
Common Stock purchased in the Subscription Offering must be registered in the
name of the Eligible Account Holder, Supplemental Eligible Account Holder or
Other Depositor, as the case may be. Joint registrations will be allowed only if
the qualifying deposit account is so registered. Such rights may be exercised
only by the person to whom they are granted and only for such person's account.
Each person exercising such subscription rights will be required to certify that
such person is purchasing shares solely for such person's own account and that
such person has no agreement or understanding regarding the sale or transfer of
such shares. The regulations also prohibit any person from offering or making an
announcement of an offer or an intent to make an offer to purchase such
subscription rights or shares of Holding Company Common Stock prior to the
completion of the Conversion.
155
The Bank and the Holding Company will pursue any and all legal and
equitable remedies (including forfeiture) in the event they become aware of the
transfer of subscription rights and will not honor orders known by them to
involve the transfer of such rights.
Limitations on Holding Company Common Stock Purchases
The Plan includes the following limitations on the number of shares of
Holding Company Common Stock which may be purchased in the Conversion:
(1) No subscription for fewer than 25 shares will be accepted;
(2) Each Eligible Account Holder may subscribe for and purchase Holding
Company Common Stock in the Subscription Offering in an amount up to the
greatest of (a) the amount permitted to be purchased in the Community Offering,
currently $250,000 of the Holding Company Common Stock offered, (b) one-tenth of
one percent (0.10%) of the total offering of shares of Holding Company Common
Stock or (c) fifteen times the product (rounded down to the next whole number)
obtained by multiplying the total number of shares of Holding Company Common
Stock to be issued in the Conversion by a fraction the numerator of which is the
amount of the qualifying deposit of the Eligible Account Holder and the
denominator of which is the total amount of qualifying deposits of all Eligible
Account Holders in each case on the Eligibility Record Date, subject to the
overall limitation in (8) below and exclusive of an increase in the total number
of shares issued due to an increase in the Estimated Valuation Range of up to
15%;
(3) The Employee Plans are permitted to purchase up to 10% of the
shares of Holding Company Common Stock issued in the Conversion and as an
Employee Plan, the ESOP intends to purchase 8% of the shares of Holding Company
Common Stock issued in the Conversion, in each case, including shares to be
issued to the Foundation;
(4) Each Supplemental Eligible Account Holder may subscribe for and
purchase Holding Company Common Stock in the Subscription Offering in an amount
up to the greatest of (a) the amount permitted to be purchased in the Community
Offering, currently $250,000 of the Holding Company Common Stock offered, (b)
one-tenth of one percent (0.10%) of the total offering of shares of Holding
Company Common Stock or (c) fifteen times the product (rounded down to the next
whole number) obtained by multiplying the total number of shares of Holding
Company Common Stock to be issued in the Conversion by a fraction the numerator
of which is the amount of the qualifying deposit of the Supplemental Eligible
Account Holder and the denominator of which is the total amount of qualifying
deposits of all Supplemental Eligible Account Holders in each case on the
Supplemental Eligibility Record Date, subject to the overall limitation in (8)
below and exclusive of an increase in the total number of shares issued due to
an increase in the Estimated Valuation Range of up to 15%;
(5) Persons purchasing shares of Holding Company Common Stock in the
Community Offering, together with associates of and groups of persons acting in
concert with such persons, may purchase Holding Company Common Stock in the
Community Offering in an amount up to $250,000 of the Holding Company Common
Stock offered in the Conversion subject to the overall limitation in (8) below;
(6) Persons purchasing shares of Holding Company Common Stock in the
Syndicated Community Offering, together with associates of and persons acting in
concert with such persons, may purchase Holding Company Common Stock in the
Syndicated Offering in an amount up to $250,000 of the shares of Holding Company
Common Stock offered in the Conversion subject to the overall limitation in (8)
below; provided, that shares of Holding Company Common Stock purchased in the
Community Offering by any persons, together with associates of and persons
acting in concert with such persons, will be aggregated with purchases by such
persons in the Syndicated Community Offering in applying the $250,000 purchase
limitation;
(7) Eligible Account Holders, Supplemental Eligible Account Holders,
Other Depositors and certain members of the general public may purchase stock in
the Community Offering and Syndicated Community Offering subject to the purchase
limitations described in (6) and (7) above; provided, that, except for the
Employee Plans, the maximum number of shares of Holding Company Common Stock
subscribed for or purchased in all categories of the
156
Conversion by any person, together with associates of and groups of persons
acting in concert with such persons, shall not exceed 1.0% of the shares of
Holding Company Common Stock offered for sale in the Conversion; and
(8) The directors and officers of the Bank and their associates in the
aggregate, excluding purchases by the Employee Plans, may purchase up to 25% of
shares offered for sale in the Conversion.
Subject to any required regulatory approval and the requirements of
applicable laws and regulations, but without further approval of the depositors
of the Bank, both the individual amount permitted to be subscribed for and the
overall maximum purchase limitation may be increased to up to a maximum of 5% of
the shares offered for sale in the Offering at the sole discretion of the
Holding Company and the Bank. It is currently anticipated that the overall
maximum purchase limitation may be increased if, after a Community Offering, the
Holding Company has not received subscriptions for an aggregate amount equal to
at least the minimum of the Estimated Valuation Range. If such amount is
increased, subscribers for the maximum amount will be, and certain other large
subscribers in the sole discretion of the Holding Company and the Bank may be,
given the opportunity to increase their subscriptions up to the then applicable
limit. Requests to purchase additional shares of Holding Company Common Stock
under this provision will be determined by the Board of Directors of the Holding
Company and the Board of Trustees of the Bank and, if approved, allocated on a
pro rata basis giving priority in accordance with the priority rights set forth
in the Plan and described herein.
The overall maximum purchase limitation may not be reduced to less than
1.0%; the individual amount permitted to be subscribed for in the Offerings,
however, may be reduced by the Bank to less than $250,000 of the Holding Company
Common Stock offered. An individual Eligible Account Holder, Supplemental
Eligible Account Holder or Other Depositor may not purchase individually in the
Subscription Offering the overall maximum purchase limitation of 1.0% of the
shares offered for sale, but may make such purchase, together with associates of
and persons acting in concert with such person, by also purchasing in other
available categories of the Conversion, subject to availability of shares and
the maximum overall purchase limitation for purchases in the Conversion.
In the event of an increase in the total number of shares offered in
the Conversion due to an increase in the Estimated Valuation Range of up to 15%
("Adjusted Maximum"), the additional shares will be allocated in the following
order of priority in accordance with the Plan: (i) in the event that there is an
oversubscription by Eligible Account Holders, to fill unfilled subscriptions of
Eligible Account Holders, exclusive of the Adjusted Maximum; (ii) to fill the
Employee Plans' subscription of up to 10% of the Adjusted Maximum number of
shares; (iii) in the event that there is an oversubscription by Supplemental
Eligible Account Holders, to fill unfilled subscriptions of Supplemental
Eligible Account Holders. exclusive of the Adjusted Maximum; (iv) in the event
that there is an oversubscription by Other Depositors, to fill unfulfilled
subscriptions of Other Depositors, exclusive of the Adjusted Maximum; and (v) to
fill unfilled subscriptions in the Community Offering, exclusive of the Adjusted
Maximum, each to the extent possible.
The term "Associate" of a person is defined to mean: (i) any
corporation or organization (other than the Holding Company, the Bank or a
majority-owned subsidiary of the Bank) of which such person is an officer,
partner or is directly or indirectly, either alone or with one or more members
of his or her immediate family, the beneficial owner of 10% or more of any class
of equity securities; (ii) any trust or other estate in which such person has a
substantial beneficial interest or as to which such person serves as trustee or
in a similar fiduciary capacity, except that the term "Associate" does not
include any employee stock benefit plan maintained by the Holding Company or the
Bank in which a person has a substantial beneficial interest or serves as a
trustee or in a similar fiduciary capacity, and except that, for purposes of
aggregating total shares that may be acquired or held by officers and directors
and their Associates, the term "Associate" does not include any tax-qualified
employee stock benefit plan; and (iii) any relative or spouse of such person, or
any relative of such spouse, who has the same home as such person or who is a
director or officer of the Holding Company or the Bank. Trustees, directors and
officers are not treated as associates of each other solely by virtue of holding
such positions. For a further discussion of limitations on purchases of a
converting institution's stock at the time of Conversion and subsequent to
Conversion, see "- Certain Restrictions on Purchase or Transfer of Shares After
Conversion," "Management of the Bank - Subscriptions by Executive Officers and
Directors" and "Restrictions on Acquisition of the Holding Company and the
Bank."
157
Interpretation, Amendment and Termination
All interpretations of the Plan by the Board of the Bank will be final,
subject to the authority of the Superintendent and FDIC. The Plan provides that,
if deemed necessary or desirable by the Board of Trustees of the Bank, the Plan
may be substantively amended prior to the solicitation of proxies from
depositors by a vote of the Board of Trustees; amendment of the Plan thereafter
requires the approval of the Superintendent and FDIC. The Plan will terminate if
the sale of all shares of stock being offered pursuant to the Plan is not
completed prior to 24 months after the date of the approval of the Plan by the
Superintendent unless a longer time period is permitted by governing laws and
regulations. The Plan may be terminated by a vote of the Board of Trustees of
the Bank at any time prior to the Special Meeting, and thereafter by such a vote
with the approval of the Superintendent and FDIC.
RESTRICTIONS ON ACQUISITION OF THE HOLDING COMPANY AND THE BANK
General
The Bank's Plan of Conversion provides for the Conversion of the Bank
from the mutual to the stock form of organization and, in connection therewith,
a Restated Organization Certificate and Bylaws to be adopted by depositors of
the Bank. The Plan also provides for the concurrent formation of a holding
company, which form of organization may or may not be utilized at the option of
the Board of Trustees of the Bank. See "The Conversion and the Merger General."
In the event that the holding company form of organization is utilized, as
described below, certain provisions in the Holding Company's Certificate of
Incorporation and Bylaws and in its management remuneration plans and agreements
entered into in connection with the Conversion, together with provisions of the
DGCL, may have anti-takeover effects. In the event that the holding company form
of organization is not utilized, the Bank's Restated Organization Certificate
and Bylaws and management remuneration plans and agreements entered into in
connection with the Conversion may have anti-takeover effects as described
below. In addition, regulatory restrictions may make it difficult for persons or
companies to acquire control of either the Holding Company or the Bank.
Restrictions in the Holding Company's Certificate of Incorporation and Bylaws
The following discussion is a general summary of certain provisions of
the Holding Company's Certificate of Incorporation and Bylaws and certain other
statutory and regulatory provisions relating to stock ownership and transfers,
the Board of Directors and business combinations, that might have a potential
"anti-takeover" effect. The Certificate of Incorporation and Bylaws of the
Holding Company are filed as exhibits to the Registration Statement, of which
this Prospectus is a part, and the descriptions herein of such documents are
qualified in their entirety by reference to such documents. A number of
provisions of the Holding Company's Certificate of Incorporation and Bylaws deal
with matters of corporate governance and certain rights of stockholders. These
provisions might have the effect of discouraging future takeover attempts which
are not approved by the Board of Directors but which individual Holding Company
stockholders may deem to be in their best interests or in which stockholders may
receive substantial premiums for their shares over then current market prices.
As a result, stockholders who might desire to participate in such transactions
may not have an opportunity to do so. Such provisions will also render the
removal of the current Board of Directors or management of the Holding Company
more difficult. The following description of certain of the provisions of the
Certificate of Incorporation and Bylaws of the Holding Company is necessarily
general and reference should be made in each case to such Certificate of
Incorporation and Bylaws, which are incorporated herein by reference. See
"Additional Information" as to how to obtain a copy of these documents.
Limitation on Voting Rights. The Certificate of Incorporation of the
Holding Company provides that any record owner of any outstanding Holding
Company Common Stock which is beneficially owned, directly or indirectly, by a
person who beneficially owns in excess of 10% of the then outstanding shares of
Holding Company Common Stock ("Limit") shall be entitled or permitted to only
one one-hundredth (1 /100) of a vote with respect of each share held in excess
of the Limit. Beneficial ownership of shares includes shares beneficially owned
by such person or any of his affiliates, shares which such person or his
affiliates have the right to acquire upon the exercise of Conversion rights or
options and shares as to which such person and his affiliates have or share
investment or voting power, but shall not include shares beneficially owned by
the ESOP or shares that are subject to a revocable proxy and that are not
otherwise
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beneficially owned or deemed by the Holding Company to be beneficially owned by
such person and his affiliates. The Certificate of Incorporation further
provides that this provision limiting voting rights may only be amended upon (i)
the approval of the Board of Directors, and (ii) the affirmative vote of the
holders of a majority of the total votes eligible to be cast by the holders of
all outstanding shares of capital stock entitled to vote thereon and (iii) by
the affirmative vote of either (1) not less than a majority of the authorized
number of directors and, if one or more Interested Stockholders exist, by not
less than a majority of the Disinterested Directors (as defined in the
Certificate of Incorporation) or (2) the holders of not less than two-thirds of
the total votes eligible to be cast by the holders of all outstanding shares of
the capital stock of the Holding Company entitled to vote thereon and, if the
amendment is proposed by or on behalf of an Interested Stockholder or a director
who is an Affiliate or Associate of an Interested Stockholder, by the
affirmative vote of the holders of not less than a majority of the total votes
eligible to be cast by holders of all outstanding shares entitled to vote
thereon not beneficially owned by an Interested Stockholder or an Affiliate or
Associate thereof.
Board of Directors. The Board of Directors of the Holding Company is
divided into three classes, each of which shall contain approximately one-third
of the total number of members of the Board. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The Holding Company's Certificate of Incorporation and Bylaws
provide that the size of the Board shall be determined by a majority of the
directors but shall not be less than seven nor more than 20. The Certificate of
Incorporation and the Bylaws provide that any vacancy occurring in the Board,
including a vacancy created by an increase in the number of directors or
resulting from death, resignation, retirement, disqualification, removal from
office or other cause, shall be filled for the remainder of the unexpired term
exclusively by a majority vote of the directors then in office. The classified
Board is intended to provide for continuity of the Board of Directors and to
make it more difficult and time consuming for a stockholder group to fully use
its voting power to gain control of the Board of Directors without the consent
of the incumbent Board of Directors of the Holding Company. The Certificate of
Incorporation of the Holding Company provides that a director may be removed
from the Board of Directors prior to the expiration of his term only for cause,
upon the affirmative vote of at least 80% of the outstanding shares of voting
stock. In the absence of these provisions, the vote of the holders of a majority
of the shares could remove the entire Board, with or without cause, and replace
it with persons of such holders' choice.
Cumulative Voting, Special Meetings and Action by Written Consent. The
Certificate of Incorporation does not provide for cumulative voting for any
purpose. Moreover, special meetings of stockholders of the Holding Company may
be called only by resolution of at least three-fourths of the Board of Directors
then in office or by the Chairman, if one has been elected by the Board, or the
Chief Executive Officer of the Holding Company. The Certificate of Incorporation
also provides that any action required or permitted to be taken by the
stockholders of the Holding Company may be taken only at an annual or special
meeting and prohibits stockholder action by written consent in lieu of a
meeting.
Authorized Shares. The Certificate of Incorporation authorizes the
issuance of thirty million (30,000,000) shares of capital stock, consisting of
twenty-five million (25,000,000) shares of Holding Company Common Stock and five
million (5,000,000) shares of preferred stock ("Preferred Stock"). The shares of
Holding Company Common Stock and Preferred Stock were authorized in an amount
greater than that to be issued in the Conversion to provide the Holding
Company's Board of Directors with as much flexibility as possible to effect,
among other transactions, financings, acquisitions, stock dividends, stock
splits and employee stock options. However, these additional authorized shares
may also be used by the Board of Directors, consistent with its fiduciary duty,
to deter future attempts to gain control of the Holding Company. The Board of
Directors also has sole authority to determine the terms of any one or more
series of Preferred Stock, including voting rights, Conversion rates, and
liquidation preferences. As a result of the ability to fix voting rights for a
series of Preferred Stock, the Board has the power, to the extent consistent
with its fiduciary duty, to issue a series of Preferred Stock to persons
friendly to management in order to attempt to block a post- tender offer Merger
or other transaction by which a third party seeks control, and thereby assist
management to retain its position. The Holding Company's Board of Directors
currently has no plans for the issuance of additional shares, other than the
issuance of additional shares pursuant to the terms of the RRP and upon exercise
of stock options to be issued pursuant to the terms of the Stock Option Plan,
all of which, if implemented prior to the first anniversary of the Conversion,
will be presented to stockholders for approval at a meeting of stockholders to
be held no earlier than six months after completion of the Conversion.
159
Stockholder Vote Required to Approve Business Combinations with
Principal Stockholders. The Certificate of Incorporation requires the approval
of the holders of at least 80% of the Holding Company's outstanding shares of
voting stock, together with the affirmative vote of at least 50% of the Holding
Company's outstanding shares of voting stock not beneficially owned by an
Interested Stockholder (as defined below) to approve certain "Business
Combinations," as defined therein, and related transactions. Under Delaware law,
absent this provision, Business Combinations, including Mergers, consolidations
and sales of all or substantially all of the assets of a corporation must,
subject to certain exceptions, be approved by the vote of the holders of only a
majority of the outstanding shares of Holding Company Common Stock and any other
affected class of stock. Under the Certificate of Incorporation, at least 80%
approval of stockholders is required in connection with any transaction
involving an Interested Stockholder except (i) in cases where the proposed
transaction has been approved in advance by a majority of those members of the
Holding Company's Board of Directors who are unaffiliated with the Interested
Stockholder and were directors prior to the time when the Interested Stockholder
became an Interested Stockholder or (ii) if the proposed transaction meets
certain conditions set forth therein which are designed to afford the
stockholders a fair price in consideration for their shares in which case, if a
stockholder vote is required, approval of only a majority of the outstanding
shares of voting stock would be sufficient. The term "Interested Stockholder" is
defined to include any individual, corporation, partnership or other entity
(other than the Holding Company or its subsidiary or any employee benefit plan
maintained by the Holding Company or its subsidiary) which owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
voting stock of the Holding Company. This provision of the Certificate of
Incorporation applies to any "Business Combination," which is defined to include
(i) any Merger or consolidation of the Holding Company or any of its
subsidiaries with or into any Interested Stockholder or Affiliate (as defined in
the Certificate of Incorporation) of an Interested Stockholder-, (ii) any sale,
lease, exchange, mortgage, pledge, transfer, or other disposition to or with any
Interested Stockholder or Affiliate of 5% or more of the assets of the Holding
Company or combined assets of the Holding Company and its subsidiary; (iii) the
issuance or transfer to any Interested Stockholder or its Affiliate by the
Holding Company (or any subsidiary) of any securities of the Holding Company
other than on a pro rata basis to all stockholders; (iv) the adoption of any
plan for the liquidation or dissolution of the Holding Company proposed by or on
behalf of any Interested Stockholder or Affiliate thereof, (v) any
reclassification of securities, recapitalization, Merger or consolidation of the
Holding Company which has the effect of increasing the proportionate share of
Holding Company Common Stock or any class of equity or convertible securities of
the Holding Company owned directly or indirectly by an Interested Stockholder or
Affiliate thereof-, and (vi) the acquisition by the Holding Company or its
subsidiary of any securities of an Interested Stockholder or its Affiliates or
Associates.
The trustees and executive officers of the Bank are purchasing in the
aggregate approximately 4.0% of the shares of the Holding Company Common Stock
at the maximum of the Estimated Valuation Range. In addition, the ESOP intends
to purchase 8% of the Holding Company Common Stock to be issued in the
Conversion, including shares to be issued to the Foundation. Additionally, if,
the proposed RRP and Stock Options Plan are implemented, the Holding Company
expects to acquire 4% of the Holding Company Common Stock issued in the
Conversion, including shares to be issued to the Foundation, on behalf of the
RRP and expects to issue an amount equal to 10% of the Holding Company Common
Stock issued in the Conversion, including shares to be issued to the Foundation,
under the Stock Option Plan to directors, executive officers and employees. As a
result, assuming the RRP and Stock Option Plan are implemented, the directors,
executive officers and employees have the potential to control the voting of
approximately 25% of the Holding Company Common Stock, on a fully diluted basis
at the maximum of the Estimated Valuation Range, thereby enabling them to
prevent the approval of the transactions requiring the approval of at least 80%
of the Holding Company's outstanding shares of voting stock described herein
above,
Amendment of Certificate of Incorporation and Bylaws. The Certificate
of Incorporation provides that certain provisions of the Certificate of
Incorporation may not be altered, amended, repealed or rescinded without the
affirmative vote of either (1) not less than a majority of the authorized number
of directors and, if one or more Interested Stockholders exist, by not less than
a majority of the Disinterested Directors (as defined in the Certificate of
Incorporation) or (2) the holders of not less than two-thirds of the total votes
eligible to be cast by the holders of all outstanding shares of the capital
stock of the Holding Company entitled to vote thereon and, if the alteration,
amendment, repeal, or rescission is proposed by or on behalf of an Interested
Stockholder or a director who is an Affiliate or Associate of an Interested
Stockholder, by the affirmative vote of the holders of not less than a majority
of the total votes eligible to be cast by holders of all outstanding shares
entitled to vote thereon not beneficially owned by an Interested Stockholder or
an Affiliate or Associate thereof. Amendment of the provision relating to
business
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combinations must also be approved by either (i) a majority of the Disinterested
Directors, or (ii) the affirmative vote of not less than eighty percent (80%) of
the total number of votes eligible to be cast by the holders of all outstanding
shares of the Voting Stock, voting together as a single class, together with the
affirmative vote of not less than fifty percent (50%) of the total number of
votes eligible to be cast by the holders of all outstanding shares of the Voting
Stock not beneficially owned by any Interested Stockholder or Affiliate or
Associate thereof, voting together as a single class. Furthermore, the Holding
Company's Certificate of Incorporation provides that provisions of the Bylaws
that contain supermajority voting requirements may not be altered, amended,
repealed or rescinded without a vote of the Board or holders of capital stock
entitled to vote thereon that is not less than the supermajority specified in
such provision. Absent these provisions, the DGCL provides that a corporation's
certificate of incorporation and bylaws may be amended by the holders of a
majority of the corporation's outstanding capital stock. The Certificate of
Incorporation also provides that the Board of Directors is authorized to make,
alter, amend, rescind or repeal any of the Holding Company's bylaws in
accordance with the terms thereof, regardless of whether the Bylaw was initially
adopted by the stockholders. However, this authorization neither divests the
stockholders of their right, nor limits their power to adopt, amend, rescind or
repeal any Bylaw under the DGCL. These provisions could have the effect of
discouraging a tender offer or other takeover attempt where the ability to make
fundamental changes through Bylaw amendments is an important element of the
takeover strategy of the acquiror.
Certain By-Law Provisions. The Bylaws of the Holding Company also
require a stockholder who intends to nominate a candidate for election to the
Board of Directors, or to raise new business at an annual stockholder meeting to
give approximately 90 days notice in advance of the anniversary of the prior
year's annual stockholders' meeting to the Secretary of the Holding Company. The
notice provision requires a stockholder who desires to raise new business to
provide certain information to the Holding Company concerning the nature of the
new business, the stockholder and the stockholder's interest in the business
matter. Similarly, a stockholder wishing to nominate any person for election as
a director must provide the Holding Company with certain information concerning
the nominee and the proposing stockholder.
Anti-Takeover Effects of the Holding Company's Certificate of Incorporation and
Bylaws and Certain Benefit Plans Adopted in the Conversion
The provisions described above are intended to reduce the Holding
Company's vulnerability to takeover attempts and certain other transactions
which have not been negotiated with and approved by members of its Board of
Directors. The provisions of the employment agreements, the ESOP, the RRP and
the Stock Option and Incentive Plan to be established may also discourage
takeover attempts by increasing the costs to be incurred by the Bank and the
Holding Company in the event of a takeover. See "Management of the
Bank--employment agreements," and "- Benefits - Employee Stock Ownership,"
"Benefits - Stock Option Plan" and "- Benefits - RRP."
The Board of Directors believes that the provisions of the Certificate
of Incorporation, Bylaws and management remuneration plans to be established are
in the best interests of the Holding Company and its stockholders. An
unsolicited non-negotiated proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Accordingly, the Board
of Directors believes it is in the best interests of the Holding Company and its
stockholders to encourage potential acquirers to negotiate directly with
management and that these provisions will encourage such negotiations and
discourage non-negotiated takeover attempts, It is also the Board of Directors'
view that these provisions should not discourage persons from proposing a Merger
or other transaction at a price that reflects the true value of the Holding
Company and that otherwise is in the best interests of all stockholders.
Delaware Corporate Law
The State of Delaware has a statute designed to provide Delaware
corporations with additional protection against hostile takeovers. The takeover
statute, which is codified in Section 203 of the DGCL ("Section 203"), is
intended to discourage certain takeover practices by impeding the ability of a
hostile acquiror to engage in certain transactions with the target company.
In general, Section 203 provides that a "Person" (as defined therein)
who owns 15% or more of the outstanding voting stock of a Delaware corporation
(a "DGCL Interested Stockholder") may not consummate a Merger or other
161
business combination transaction with such corporation at any time during the
three-year period following the date such "Person" became a DGCL Interested
Stockholder. The term "business combination" is defined broadly to cover a wide
range of corporate transactions including Mergers, sales of assets, issuances of
stock, transactions with subsidiaries and the receipt of disproportionate
financial benefits.
The statute exempts the following transactions from the requirements of
Section 203: (i) any business combination if, prior to the date a person became
a DGCL Interested Stockholder, the Board of Directors approved either the
business combination or the transaction which resulted in the stockholder
becoming a DGCL Interested Stockholder; (ii) any business combination involving
a person who acquired at least 85% of the outstanding voting stock in the
transaction in which he became a DGCL Interested Stockholder, with the number of
shares outstanding calculated without regard to those shares owned by the
corporation's directors who are also officers and by certain employee stock
plans; (iii) any business combination with an Interested Stockholder that is
approved by the Board of Directors and by a two-thirds vote of the outstanding
voting stock not owned by the DGCL Interested Stockholder; and (iv) certain
business combinations that are proposed after the corporation had received other
acquisition proposals and which are approved or not opposed by a majority of
certain continuing members of the Board of Directors. A corporation may exempt
itself from the requirement of the statute by adopting an amendment to its
Certificate of Incorporation or Bylaws electing not to be governed by Section
203 of the DGCL. At the present time, the Board of Directors does not intend to
propose any such amendment.
Restrictions in the Bank's Restated Organization Certificate and Bylaws
Although the Board of Trustees of the Bank is not aware of any effort
that might be made to obtain control of the Bank after the Conversion, the Board
of Directors believes that it is appropriate to adopt certain provisions
permitted by the Banking Law and the Conversion regulations of the NYBB to
protect the interests of the converted Bank and its stockholders from any
hostile takeover. Such provisions may, indirectly, inhibit a change in control
of the Holding Company, as the Bank's sole stockholder. See "Risk Factors -
Certain Anti-Takeover Provisions."
In the event that the Holding Company is not formed and the
subscription rights are deemed to be subscriptions to purchase the common stock
of the Bank, the provisions contained in the Restated Organization Certificate
and Bylaws of the Bank, to be effective on the effective date of the Conversion,
will govern corporate procedure and certain rights of stockholders. The
anti-takeover effects of such provisions are generally similar to those
described above for the Holding Company, except that the issuance of any
additional capital stock of the Bank would require the prior approval of the
NYBB, and the consent of the holders of two-thirds of the outstanding shares of
capital stock of the Bank would be required prior to effecting a Merger of, or
certain acquisitions of assets by, the Bank.
Limitation on Voting Rights. The Bank's Restated Organization
Certificate will contain a provision whereby the acquisition of or offer to
acquire beneficial ownership of more than 10% of the issued and outstanding
shares of any class of equity securities of the Bank by any person (i.e., any
individual, corporation, group acting in concert, trust, partnership, joint
stock company or similar organization), either directly or indirectly, will be
prohibited for a period of three years following the date of completion of the
Conversion. Any stock in excess of 10% acquired in violation of this provision
will not be counted as outstanding for voting purposes. This limitation shall
not apply to (a) any offer or sale with a view towards public resale made
exclusively by the Bank to any underwriter acting on behalf of the Bank in
connection with a public offering of the common stock of the Bank; (b) any
corporation formed by the Bank in connection with its Conversion from mutual to
stock form to acquire all of the shares of stock of the Bank to be issued in
connection with such Conversion; or (c) any reclassification of securities
(including any reverse stock split), or recapitalization of the Bank, or any
Merger or consolidation of the Bank with any of its subsidiaries or any other
transaction or reorganization (including a transaction in which the Bank shall
form a holding company) that does not have the effect, directly or indirectly,
of changing the beneficial ownership interests of the Bank's stockholders, other
than pursuant to the exercise of any appraisal rights.
In the event that holders of revocable proxies for more than 10% of the
shares of the Holding Company Common Stock seek, among other things, to elect
one-third or more of the Holding Company's Board of Directors, to cause the
Holding Company's stockholders to approve the acquisition or corporate
reorganization of the Holding Company or to exert a continuing influence on a
material aspect of the business operations of the Holding Company,
162
which actions could indirectly result in a change in control of the Bank, the
Board of Directors of the Bank will be able to assert this provision of the
Bank's Restated Organization Certificate against such holders. Although the
Board of Directors of the Bank is not currently able to determine when and if it
would assert this provision of the Bank's Restated Organization Certificate, the
Bank's Board of Directors, in exercising its fiduciary duty, may assert this
provision if it were deemed to be in the best interests of the Bank, the Holding
Company and its stockholders. It is unclear, however, whether this provision, if
asserted, would be successful against such persons in a proxy contest which
could result in a change in control of the Bank indirectly through a change in
control of the Holding Company.
Board of Directors. The Board of Directors of the Bank is divided into
three classes, each of which shall contain approximately one-third of the total
number of members of the Board of Directors. Each class shall serve a staggered
term, with approximately one-third of the total number of directors being
elected each year. The staggered terms of the Bank's Board of Directors could
have an anti-takeover effect by making it more difficult for a majority of
shares to force an immediate change in the Board since only one-third of the
Board is elected each year. The purpose of these provisions is to assure
stability and continuity of management of the Bank in the years immediately
following the Conversion. In addition, stockholders will not be permitted to
cumulate their votes in the election of directors. The Restated Organization
Certificate and Bylaws of the Bank provide that any director, or the entire
Board of Directors, may be removed at any time, but only for cause and only by
the affirmative vote of at least 80% of the outstanding shares of voting stock.
The Restated Organization Certificate and Bylaws of the Bank also provide that
any vacancy occurring in the Board of Directors, including any vacancy created
by an increase in the number of directors, shall be filled by the stockholders
of the Bank, except that vacancies not exceeding one-third of the entire Board
of Directors may be filled by the affirmative vote of a majority of the
directors then holding office.
Preferred Stock. Although the Bank has no arrangements, understandings
or plans at the present time, the Board of Directors believes that the
availability of unissued shares of Preferred Stock will provide the Bank with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other corporate needs which may arise. In the event of a proposed
Merger, tender offer or other attempt to gain control of the Bank of which
management does not approve, it might be possible for the Bank's Board of
Directors to authorize the issuance of one or more series of Preferred Stock
with rights and preferences which could impede the completion of such a
transaction. An effect of the possible issuance of such Preferred Stock,
therefore, may be to deter a future takeover attempt. The Bank's Board of
Directors does not intend to issue any Preferred Stock except on terms which the
Board deems to be in the best interests of the Bank and its then existing
stockholders.
Stockholder Vote Required for Certain Business Combinations. The Bank's
Restated Organization Certificate contains provisions requiring a higher
stockholder vote for certain business combinations, which provisions are
substantially identical to those contained in the Holding Company's Certificate
of Incorporation. See "- Restrictions in the Holding Company's Certificate of
Incorporation and Bylaws - Stockholder Vote Required to Approve Business
Combinations with Principal Stockholders."
Evaluation of Offers. The Restated Organization Certificate of the Bank
also provides that the Board of Directors of the Bank, when evaluating any offer
to the Bank or to the stockholders of the Bank from another party relating to a
change or potential change in control of the Bank, including, without
limitation, any offer to (a) purchase for cash or exchange any securities or
property for any outstanding equity securities of the Bank, (b) merge or
consolidate the Bank with another corporation or (c) purchase or otherwise
acquire all or substantially all of the properties and assets of the Bank,
shall, in connection with the exercise of its judgment in determining what is in
the best interest of the Bank and its stockholders, give due consideration not
only to the price or other consideration being offered, but also to all other
relevant factors including, without limitation, (1) both the long-term and the
short-term interests of the Bank and its stockholders and (2) the effects that
the Bank's actions may have in the short-term or in the long-term upon any of
the following: (i) the prospects for potential growth, development, productivity
and profitability of the Bank; (ii) the Bank's current employees; (iii) the
Bank's retired employees and other beneficiaries receiving or entitled to
receive retirement, welfare or similar benefits from or pursuant to any plan
sponsored, or agreement entered into, by the Bank; (iv) the Bank's customers and
creditors; and (v) the ability of the Bank to provide, as a going concern,
goods, services, employment opportunities and employment benefits and otherwise
to contribute to the communities in which is does business. By having these
standards in the Restated Organization Certificate, the Board of Directors of
the Bank may be in a stronger position to oppose such a transaction if the Board
concludes that the transaction would
163
not be in the best interests of the Bank, even if the price offered is
significantly greater than the then market price of any equity security of the
Bank.
Amendment of Restated Organization Certificate and Bylaws. The Bank's
Restated Organization Certificate provides that certain provisions of the
Restated Organization Certificate may not be altered, amended, repealed or
rescinded without the affirmative vote of either (i) not less than a majority of
the authorized number of directors and, if one or more Interested Stockholders
exist, by not less than a majority of the Disinterested Directors, or (ii) the
holders of not less than two-thirds of the total votes eligible to be cast by
the holders of all outstanding shares of capital stock entitled to vote thereon
and, if the alteration, amendment, repeal or rescission is proposed by or on
behalf of an Interested Stockholder or a director who is an Affiliate or
Associate of an Interested Stockholder, the holders of not less than a majority
of the total votes eligible to be cast by holders of all outstanding shares of
capital stock entitled to vote thereon not beneficially owned by an Interested
Stockholder or an Affiliate or Associate thereof.
In addition, provisions of the Bylaws of the Bank that contain
supermajority voting requirements may not be altered, amended, repealed or
rescinded without a vote of the Board or holders of capital stock entitled to
vote thereon that is not less than the supermajority specified in such
provision.
Regulatory Restrictions
New York State Banking Board Conversion Regulations. NYBB regulations
prohibit any person, prior to the completion of the Conversion, from
transferring, or from entering into any agreement or understanding to transfer,
to the account of another, legal or beneficial ownership of the subscription
rights issued under the Plan of Conversion or the Holding Company Common Stock
to be issued upon their exercise. The NYBB regulations also prohibit any person,
prior to the completion of the Conversion, from offering, or making an
announcement of an offer or intent to make an offer, to purchase such
subscription rights or Holding Company Common Stock. See "The Conversion and the
Merger Restrictions on Transfer of Subscription Rights and Shares." For one year
following the Conversion, NYBB regulations prohibit any person from acquiring or
making an offer to acquire more than 10% of the stock of any converted savings
institution, except with the prior approval of the Superintendent.
OTS Regulations. In addition, any proposal to acquire 10% of any class
of equity security of the Holding Company generally would be subject to approval
by the OTS under the Change in Bank Control Act (the "CBCA") and the HOLA. The
OTS requires all persons seeking control of a savings institution, either
directly or indirectly through its holding company, to obtain regulatory
approval prior to offering to obtain control. Federal law generally provides
that no "person," acting directly or indirectly or through or in concert with
one or more other persons, may acquire directly or indirectly "control," as that
term is defined in OTS regulations, of an OTS-regulated savings and loan holding
company without giving at least 60 days' written notice to the OTS and providing
the OTS an opportunity to disapprove the proposed acquisition. Such acquisitions
of control may be disapproved if it is determined, among other things, that (i)
the acquisition would substantially lessen competition; (ii) the financial
condition of the acquiring person might jeopardize the financial stability of
the savings institution or prejudice the interests of its depositors; or (iii)
the competency, experience or integrity of the acquiring person or the proposed
management personnel indicates that it wold not be in the interest of the
depositors or the public to permit the acquisition of control by such person.
Such change in control restrictions on the acquisition of the holding company
stock are not limited to a set time period but will apply for as long as the
CBCA is in effect. Persons holding revocable or irrevocable proxies may be
deemed to be beneficial owners of such securities under OTS regulations and
therefore prohibited from voting all or the portion of such proxies in excess of
10% aggregate beneficial ownership limit. Such regulatory restrictions may
prevent or inhibit proxy contests for control of the Holding Company or the Bank
which have not received prior regulatory approval. Acquisitions of control of a
savings bank are subject to the approval of the FDIC under the CBCA. However,
transactions involving the Holding Company for which OTS approval must be sought
under HOLA are exempted from this requirement.
New York State Bank Holding Company Regulation. Under New York Banking
Law, the prior approval of the NYBB is required before: (1) any action is taken
that causes any company to become a bank holding company; (2) any action is
taken that causes any banking institution to become or be merged or consolidated
with a subsidiary of a bank holding company; (3) any bank holding company
acquires direct or indirect ownership or control of more than 5% of
164
the voting stock of a banking institution; (4) any bank holding company or
subsidiary thereof acquires all or substantially all of the assets of a banking
institution; or (5) any action is taken that causes any bank holding company to
merge or consolidate with another bank holding company. See "Regulation --
Holding Company Regulation -- New York State Holding Company Regulation."
Accordingly, the prior approval of the NYBB would be required before any bank
holding company, as defined in the banking law, could acquire 5% of more of the
common stock of the Holding Company
New York State Change in Control Regulation. Prior approval of the NYBB
is also required before any action is taken that causes any company to acquire
direct or indirect control of a banking institution. Control is presumed to
exist if any company directly or indirectly owns, controls or holds with power
to vote 10% or more of the voting stock of a banking institution or of any
company that owns, controls or holds with power to vote 10% or more of the
voting stock of a banking institution. Accordingly, prior approval of the NYBB
would be required before any company could acquire 10% or more of the Holding
Company Common Stock.
Federal Reserve Board Regulations. In the event the Bank does not
qualify to be QTL and does not elect to be treated as a "savings association"
under Section 10 of HOLA, attempts to acquire control of the Bank become subject
to regulations of the Federal Reserve Board under the CBCA.
DESCRIPTION OF CAPITAL STOCK OF THE HOLDING COMPANY
General
The Holding Company is authorized to issue thirty million (30,000,000)
shares of Holding Company Common Stock having a par value of $.0l per share and
twenty-five million (25,000,000) shares of Preferred Stock having a par value of
$.0l per share. In connection with the Conversion, the Holding Company currently
expects to issue 8,050,000 shares of Holding Company Common Stock (or 9,257,500
in the event of an increase of 15% in the Estimated Valuation Range) and does
not expect to issue any shares of Preferred Stock. Except as discussed above in
"Restrictions on Acquisition of the Holding Company and the Bank," each share of
the Holding Company Common Stock will have the same relative rights as, and will
be identical in all respects with, each other share of Holding Company Common
Stock. Upon payment of the Purchase Price for the Holding Company Common Stock,
in accordance with the Plan, all such stock will be duly authorized, fully paid
and non-assessable. The Holding Company Common Stock will represent
non-withdrawable capital, will not be an account of an insurable type, and will
not be insured by the FDIC.
Holding Company Common Stock
Dividends. The Holding Company can pay dividends out of statutory
surplus or from certain net profits if, as and when declared by its Board of
Directors. The payment of dividends by the Holding Company is subject to
limitations which are imposed by law and applicable regulation. See "Dividend
Policy" and "Regulation and Supervi sion." The holders of Holding Company Common
Stock will be entitled to receive and share equally in such dividends as may be
declared by the Board of Directors of the Holding Company out of funds legally
available therefor. If the Holding Company issues Preferred Stock, the holders
thereof may have a priority over the holders of the Holding Company Common Stock
with respect to dividends.
Voting Rights. Upon Conversion, the holders of Holding Company Common
Stock will possess exclusive voting rights in the Holding Company. They will
elect the Holding Company's Board of Directors and act on such other matters as
are required to be presented to them under Delaware law or the Holding Company's
Certificate of Incorporation or as are otherwise presented to them by the Board
of Directors. Except as discussed in "Restrictions on Acquisition of the Holding
Company and the Bank," each holder of Holding Company Common Stock will be
entitled to one vote per share and will not have any right to cumulate votes in
the election of directors. If the Holding Company issues Preferred Stock,
holders of the Preferred Stock may also possess voting rights. Certain matters
require an 80% or two-thirds stockholder vote. See "Restrictions on Acquisition
of the Holding Company and the Bank."
165
As a New York mutual savings bank, corporate powers and control of the
Bank are vested in its Board of Trustees, who elect the officers of the Bank and
who fill any vacancies on the Board of Trustees as it exists upon Conversion.
Subsequent to Conversion, voting rights will be vested exclusively in the owners
of the shares of capital stock of the Bank, which owner will be the Holding
Company, and voted at the direction of the Holding Company's Board of Directors.
Consequently, the holders of the Holding Company Common Stock will not have
direct control of the Bank.
Liquidation. In the event of any liquidation, dissolution or winding up
of the Bank, the Holding Company, as holder of the Bank's capital stock, would
be entitled to receive, after payment or provision for payment of all debts and
liabilities of the Bank (including all deposit accounts and accrued interest
thereon) and after distribution of the balance in the special liquidation
account, which is a memorandum account only, to Eligible Account Holders and
Supplemental Eligible Account Holders (see "The Conversion and the Merger -
Effects of Conversion - Liquidation Rights"), all assets of the Bank available
for distribution in cash or in kind. In the event of liquidation, dissolution or
winding up of the Holding Company, the holders of its Holding Company Common
Stock would be entitled to receive, after payment or provision for payment of
all its debts and liabilities, all of the assets of the Holding Company
available for distribution. If Preferred Stock is issued, the holders thereof
may have a priority over the holders of the Holding Company Common Stock in the
event of the liquidation or dissolution of the Holding Company.
Preemptive Rights. Holders of the Holding Company Common Stock will not
be entitled to preemptive rights with respect to any shares which may be issued.
The Holding Company Common Stock is not subject to redemption.
Preferred Stock
None of the shares of the Holding Company's authorized Preferred Stock
will be issued in the Conversion. Such stock may be issued with such preferences
and designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and Conversion rights which could dilute the
voting strength of the holders of the Holding Company Common Stock and may
assist management in impeding an unsolicited takeover or attempted change in
control.
DESCRIPTION OF CAPITAL STOCK OF THE BANK
General
The Restated Organization Certificate of the Bank, to be effective upon
the Conversion, authorizes the issuance of capital stock consisting of
twenty-five million (25,000,000) shares of common stock, par value $.0l per
share, and five million (5,000,000) shares of preferred stock, par value $.01
per share, which preferred stock may be issued in series and classes having such
rights, preferences, privileges and restrictions as the Board of Directors may
determine. Except as discussed above in "Restrictions on Acquisition of the
Holding Company and the Bank," each share of common stock of the Bank will have
the same relative rights as, and will be identical in all respects with, each
other share of common stock. After the Conversion, the Board of Directors will
be authorized to approve the issuance of Holding Company Common Stock up to the
amount authorized by the Restated Organization Certificate without the approval
of the Bank's stockholders, except to the extent that such approval is required
by governing law. All of the issued and outstanding common stock of the Bank
will be held by the Holding Company as the Bank's sole stockholder. The capital
stock of the Bank will represent non-withdrawable capital, will not be an
account of an insurable type, and will not be insured by the FDIC.
Holding Company Common Stock
Dividends. The holders of the Bank's common stock (the Holding Company
upon consummation of the Conversion) will be entitled to receive and to share
equally in such dividends as may be declared by the Board of Directors of the
Bank out of funds legally available therefor. See "Dividend Policy" for certain
restrictions on the payment of dividends and "Federal and State Taxation -
Federal Taxation" for a discussion of the consequences of the payment of cash
dividends from income appropriated to bad debt reserves.
166
Voting Rights. Immediately after the Conversion, the holders of the
Bank's common stock (the Holding Company upon consummation of the Conversion)
will possess exclusive voting rights in the Bank. Each holder of shares of
common stock will be entitled to one vote for each share held. Cumulation of
votes will not be permitted. See "Restrictions on Acquisition of the Holding
Company and the Bank - Anti-Takeover Effects of the Holding Company's Articles
of Incorporation and Bylaws and Management Remuneration Plans Adopted in
Conversion."
Liquidation. In the event of any liquidation, dissolution, or winding
up of the Bank, the holders of its common stock (the Holding Company upon
consummation of the Conversion) will be entitled to receive, after payment of
all debts and liabilities of the Bank (including all deposit accounts and
accrued interest thereon), and distribution of the balance in the special
liquidation account, which is a memorandum account only, to Eligible Account
Holders and Supplemental Eligible Account Holders (see "The Conversion and the
Merger - Effects of Conversion - Liquidation Rights"), all assets of the Bank
available for distribution in cash or in kind. If preferred stock is issued
subsequent to the Conversion, the holders thereof may also have priority over
the holders of common stock in the event of liquidation or dissolution.
Preemptive Rights and Redemption. Holders of the common stock of the
Bank (the Holding Company upon consummation of the Conversion) will not be
entitled to preemptive rights with respect to any shares of the Bank which may
be issued. The common stock will not be subject to redemption. Upon receipt by
the Bank of the full specified purchase price therefor, the common stock will be
fully paid and non-assessable.
Preferred Stock
None of the shares of the Bank's authorized preferred stock will be
issued in the Conversion. Such stock may be issued with such preferences and
designations as the Board of Directors may from time to time determine. The
Board of Directors can, without stockholder approval, issue preferred stock with
voting, dividend, liquidation and Conversion rights.
EXPERTS
The consolidated financial statements of the Bank as of June 30, 1998
and 1997 and for each of the years in the three-year period ended June 30, 1998,
included in this Prospectus have been audited by Arthur Andersen LLP independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said report.
The financial statements of SFS as of December 31, 1997 and 1996 and
for each of the years in the three-year period ended December 31, 1997 included
in this Prospectus have been audited by KPMG Peat Marwick LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving such report.
RP Financial has consented to the publication herein of the summary of
its report to the Bank and Holding Company setting forth its opinion as to the
estimated pro forma market value of the Holding Company Common Stock upon
Conversion and its opinion with respect to subscription rights.
LEGAL AND TAX OPINIONS
The legality of the Holding Company Common Stock and the federal income
tax consequences of the Conversion and the Merger will be passed upon for the
Bank and the Holding Company by Silver, Freedman & Taff, L.L.P., Washington,
D.C., special counsel to the Bank and the Holding Company. The New York State
income tax consequences of the Conversion will be passed upon for the Bank and
the Holding Company by Arthur Andersen LLP New York, New York. Certain legal
matters will be passed upon for SFS by Elias, Matz, Tiernan & Herrick, L.L.P.,
Washington, D.C. and certain legal matters will be passed upon for KBW by
Serchuk & Zelermyer, White Plains, New York.
167
ADDITIONAL INFORMATION
The Holding Company has filed with the SEC a registration statement
under the Securities Act with respect to the Holding Company Common Stock
offered hereby. As permitted by the rules and regulations of the SEC, this
Prospectus does not contain all the information set forth in the registration
statement. Such information, including the Conversion Valuation Appraisal
Report, which is an exhibit to the Registration Statement, can be examined
without charge at the public reference facilities of the SEC located at 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of such material can be
obtained from the SEC at prescribed rates. In addition, the SEC maintains a web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including the Holding Company. The Conversion Valuation Appraisal
Report may also be inspected by Eligible Account Holders at the offices of the
Bank during normal business hours. Copies of the appraisal may also be requested
by Eligible Account Holders or Supplemental Eligible Account Holders; provided,
however, that such Eligible Account Holders or Supplemental Eligible Account
Holders shall be responsible for all costs associated with the copying and
transmittal of such appraisal. This Prospectus contains a description of the
material terms and features of all material contracts, reports or exhibits to
the registration statement required to be described; however, the statements
contained in this Prospectus as to the contents of any contract or other
document filed as an exhibit to the registration statement are, of necessity,
brief descriptions thereof and are not necessarily complete; each such statement
is qualified by reference to such contract or document.
The Bank has filed an application for approval of conversion with the
Superintendent and the FDIC. Pursuant to the rules and regulations of the
Superintendent, this Prospectus omits certain information contained in that
application. The application may be examined at the principal office of the
Superintendent, Two Rector Street, New York, New York, 10006.
The Holding Company has filed with the OTS an Application to Form a
Holding Company. This prospectus omits certain information contained in such
Application. Such Application may be inspected at the offices of the OTS, 1700 G
Street, N.W., Washington, D.C. 20552.
In connection with the Conversion, the Holding Company will register
its Holding Company Common Stock with the SEC under Section 12(g) of the
Exchange Act, and, upon such registration, the Holding Company and the holders
of its stock will become subject to the proxy solicitation rules, reporting
requirements and restrictions on stock purchases and sales by directors,
officers and greater than 10% stockholders, the annual and periodic reporting
and certain other requirements of the Exchange Act. Under the Plan, the Holding
Company has undertaken that it will not terminate such registration for a period
of at least three years following the Conversion. In the event that the Bank
amends the Plan to eliminate the concurrent formation of the Holding Company as
part of the Conversion, the Bank will register its stock with the FDIC under
Section 12(g) of the Exchange Act and, upon such registration, the Bank and the
holders of its stock will become subject to the same obligations and
restrictions.
A copy of the Certificate of Incorporation and the Bylaws of the
Holding Company and the Restated Organization Certificate and Bylaws of the Bank
are available without charge from the Bank. See "Restrictions on Acquisition of
the Holding Company and the Bank," "Description of Capital Stock of the Holding
Company" and "Description of Capital Stock of the Bank." The Bank's principal
office is located at 75 Remsen Street, Cohoes, New York 12047-2892, and its
telephone number is (518) 233-6500.
168
GLOSSARY
AICPA American Institute of Certified Public Accountants.
AMTI Alternative Minimum Taxable Income.
APB Accounting Practice Bulletin.
ARM Adjustable Rate Mortgage.
Associate The term "Associate" of a person is defined to mean (i) any
corporation or organization (other than the Bank or its subsidiaries
or the Holding Company) of which such person is a director, officer,
partner or 10% shareholder; (ii) any trust or other estate in which
such person has a substantial beneficial interest or serves as
trustee or in a similar fiduciary capacity; provided, however that
such term shall not include any employee stock benefit plan of the
Holding Company or the Bank in which such a person has a substantial
beneficial interest or serves as a trustee or in a similar fiduciary
capacity, and (iii) any relative or spouse of such person, or
relative of such spouse, who either has the same home as such person
or who is a director or officer of Lincoln Federal or its
subsidiaries or the Holding Company. ATM Automated Teller Machine.
Average Closing Price The average of the daily last sales price of
the Holding Company Common Stock as reported on the NASDAQ Stock
Market for the first ten trading days on which the Holding Company
Common Stock is traded.
Bank Cohoes Savings Bank.
Board of
Directors Board of Directors of Cohoes Bancorp, Inc.
Board of Trustees Board of Trustees of Cohoes Savings Bank.
Bylaws Bylaws of Cohoes Bancorp, Inc.
Code The Internal Revenue Code of 1986, as amended.
Conversion Simultaneous conversion of Cohoes Savings Bank to stock form, the
issuance of Cohoes Savings Bank's outstanding capital stock to
Cohoes Bancorp and Cohoes Bancorp's offer and sale of Holding
Company Common Stock.
Conversion
Shares Shares of Cohoes Bancorp, Inc. offered to complete conversion of
Cohoes Savings Bank to stock form.
CRA Community Reinvestment Act.
Department The New York State Banking Department.
DCGL Delaware General Corporations Law.
Eligible
Account
Holders Savings account holders of Cohoes Savings Bank with account balances
of at least $100 as of the close of business on March 31, 1998.
ERISA Employee Retirement Income Security Act of 1974, as amended.
169
Estimated
Valuation
Range Estimated pro forma market value of the Common Stock ranging from
$59,500,000 to $80,500,000.
ESOP Cohoes Bancorp, Inc. Employee Stock Ownership Plan.
Exchange
Act Securities Exchange Act of 1934, as amended.
Exchange
Ratio The lesser of: (i) 2.65; or (ii) the quotient determined by dividing
$35.00 by the Average Closing Price, which is the average of the
daily last sales price of Holding Company Common Stock as reported
on The Nasdaq Stock Market for the first ten trading days on which
Holding Company Common Stock is traded, for each SFS share they own
just before the Merger.
Exchange
Shares Shares of Cohoes Bancorp, Inc. exchanged for shares of SFS Bancorp.
FASB Financial Accounting Standards Board.
FDIA Federal Deposit Insurance Act.
FDIC Federal Deposit Insurance Corporation.
FHLB Federal Home Loan Bank.
FHLMC Federal Home Loan Mortgage Corporation.
FNMA Federal National Mortgage Association.
Foundation The Cohoes Savings Bank Charitable Foundation, Inc.
FRB Federal Reserve Board.
Freddie
Mac Federal Home Loan Mortgage Corporation.
GAAP Generally Accepted Accounting Practices.
HOLA Home Owners' Loan Act.
Holding
Company Cohoes Bancorp, Inc.
Holding
Company
Common
Stock Shares of Cohoes Bancorp, Inc.
IRS Internal Revenue Services.
KBW Keefe, Bruyette & Woods, Inc.
Merger Merger of SFS Bancorp with and into Cohoes Bancorp, Inc.
Merger
Agreement Agreement of Merger between Cohoes Bancorp, Inc. and SFS Bancorp,
Inc.
NASD National Association of Securities Dealers, Inc.
Nasdaq National Association of Securities Dealers Automated Quotation
System--National Market.
NPV Net portfolio value.
NYBB New York Banking Board.
OCC Office of the Comptroller of the Currency.
Offering The offering of between 5,950,000 and 8,050,000 shares of Cohoes
Bancorp, Inc. common stock at $10.00 per share in the Conversion.
170
ORE Other Real Estate Owned.
OTS Office of Thrift Supervision.
Plan or
Plan of
Conversion Plan of Cohoes Savings Bank to convert from a New York chartered
mutual savings bank to a New York chartered stock savings bank and
the issuance of all of Cohoes Savings Bank 's outstanding capital
stock to Cohoes Bancorp, Inc. and the issuance of Cohoes Bancorp,
Inc.'s Common Stock to the public.
QTL Qualified thrift lender.
ROA Return On Average Assets.
ROE Return On Average Equity.
RP
Financial RP Financial, LC., independent appraiser.
RRP Recognition and Retention Plan to be submitted for approval at a
meeting of the Holding Company's shareholders to be held at least
six months after the completion of the Conversion.
SAIF Savings Association Insurance Fund of the FDIC.
Schenectady
Federal Schenectady Federal Savings Bank.
SEC Securities and Exchange Commission.
Securities
Act Securities Act of 1933, as amended.
SFAS Statement of Financial Accounting Standard.
SFS SFS Bancorp, Inc.
SFS Common
Stock Common Stock of SFS Bancorp, Inc.
SFS Special
Meeting Special Meeting of members of SFS Bancorp, Inc. called for December
____, 1998 for the purpose of approving the Merger.
Stock
Contribution Shares contributed to Cohoes Savings Foundation.
Stock Option
and Incentive
Plan The Cohoes Bancorp, Inc. Stock Option and Incentive Plan for
directors and officers to be submitted for approval at a meeting of
the Holding Company's shareholders to be held at least six months
after the completion of the Conversion.
Subscription
Offering Offering of non-transferable rights to subscribe for the Common
Stock, in order of priority, to Eligible Account Holders, the ESOP,
and Supplemental Eligible Account Holders.
Superintendent Superintendent of Banks of the New York State Banking Department.
Voting
Record
Date The close of business on March 31, 1998, the date for determining
voting depositors entitled to vote at the Special Meeting.
171
COHOES SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
COHOES SAVINGS BANK AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
Page
----
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ................................ F-1
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
AS OF JUNE 30, 1998 AND 1997 .......................................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR EACH OF THE YEARS
IN THE THREE-YEAR PERIOD ENDED JUNE 30, 1998 ..........................
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS AND UNDIVIDED PROFITS
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED JUNE 30, 1998 .... F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR EACH OF THE YEARS
IN THE THREE-YEAR PERIOD ENDED JUNE 30, 1998 .......................... F-4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .............................. F-6
NOTE: All schedules are omitted because the required information
applicable is included in the consolidated financial statements or
related notes.
The financial statements of Cohoes Bancorp, Inc. have been omitted
because the Company has not yet issued any stock, has no assets, no
liabilities and has not conducted any business other than of an
organizational nature.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Examining Committee of
the Board of Trustees of
Cohoes Savings Bank:
We have audited the accompanying consolidated statements of financial condition
of Cohoes Savings Bank and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, changes in surplus and undivided
profits and cash flows for each of the years in the three-year period ended June
30, 1998. These consolidated financial statements are the responsibility of the
Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Cohoes Savings Bank and
subsidiaries as of June 30, 1998 and 1997, and the results of their operations
and their cash flows for each of the years in the three-year period ended June
30, 1998, in conformity with generally accepted accounting principles.
New York, New York
August 12, 1998
F-1
COHOES SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 AND 1997
(000's omitted)
ASSETS 1998 1997
- ------ ---- ----
CASH AND CASH EQUIVALENTS:
Cash and due from banks ................................ $ 8,653 $ 10,795
Federal funds sold ..................................... 5,000 5,770
Interest-bearing deposits with banks ................... 576 99
-------- --------
Total cash and cash equivalents ................... 14,229 16,664
MORTGAGE LOANS HELD FOR SALE ............................. 38 175
SECURITIES AVAILABLE FOR SALE, amortized cost of $48,701
and $35,621 at June 30, 1998 and 1997,
respectively (Note 5) .................................. 48,720 35,475
INVESTMENT SECURITIES, approximate fair value of $45,547
and $25,186 at June 30, 1998 and 1997,
respectively (Note 6) .................................. 45,424 25,273
NET LOANS RECEIVABLE (Note 7) ............................ 412,759 398,530
ACCRUED INTEREST RECEIVABLE (Note 8) ..................... 3,482 3,210
BANK PREMISES AND EQUIPMENT (Note 9) ..................... 7,303 7,657
OTHER REAL ESTATE OWNED .................................. 509 1,874
MORTGAGE SERVICING RIGHTS (Note 10) ...................... 1,042 1,146
OTHER ASSETS ............................................. 2,210 1,696
-------- --------
Total assets ...................................... $535,716 $491,700
======== ========
LIABILITIES, SURPLUS AND UNDIVIDED PROFITS
LIABILITIES:
Due to depositors (Note 11) ............................ $449,541 $429,390
Mortgagors' escrow deposits ............................ 8,994 9,062
Borrowings (Note 12) ................................... 19,897 --
Other liabilities ...................................... 4,002 4,156
-------- --------
Total liabilities ................................. 482,434 442,608
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 16) .........
SURPLUS AND UNDIVIDED PROFITS (Note 14):
Surplus ................................................ 10,378 10,378
Undivided profits ...................................... 42,892 38,805
Net unrealized gain (loss) on securities available
for sale, net of income taxes ........................ 12 (91)
-------- --------
Total surplus and undivided profits .............. 53,282 49,092
-------- --------
Total liabilities, surplus and undivided profits . $535,716 $491,700
======== ========
The accompanying notes are an integral part of these statements.
F-2
COHOES SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SURPLUS AND UNDIVIDED PROFITS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(000's omitted)
Net Unrealized
Gain (Loss) on
Securities
Available for
Undivided Sale, Net of
Surplus Profits Income Taxes Total
------- ------- ------------ -----
BALANCE, June 30, 1995 ........................ $ 10,378 $ 29,767 $ (15) $ 40,130
Change in unrealized gain (loss) on
securities available for sale, net
of income taxes ........................ -- -- (234) (234)
Net income for the year ended June 30, 1996 -- 4,395 -- 4,395
-------- -------- -------- --------
BALANCE, June 30, 1996 ........................ 10,378 34,162 (249) 44,291
Change in unrealized gain (loss) on
securities available for sale, net
of income taxes ........................ -- -- 158 158
Net income for the year ended June 30, 1997 -- 4,643 -- 4,643
-------- -------- -------- --------
BALANCE, June 30, 1997 ........................ 10,378 38,805 (91) 49,092
Change in unrealized gain (loss) on
securities available for sale, net
of income taxes ........................ -- -- 103 103
Net income for the year ended June 30, 1998 -- 4,087 -- 4,087
-------- -------- -------- --------
BALANCE, June 30, 1998 ........................ $ 10,378 $ 42,892 $ 12 $ 53,282
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
F-3
COHOES SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1998, 1997 AND 1996
(000's omitted)
1998 1997 1996
---- ---- ----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS:
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,087 $ 4,643 $ 4,395
------------- ------------- -------------
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation .................................................. 1,117 1,101 1,015
Amortization of purchased and originated mortgage servicing
rights .................................................... 185 169 165
Provision for loan losses ..................................... 1,400 1,325 490
Provision for real estate owned losses ........................ - - 153
Provision for deferred tax (benefit) expense .................. (317) 1 (252)
Net gain on investment securities redeemed .................... - (3) -
Net (gain) loss on securities available for sale redeemed ..... 1 (37) (10)
Net premium amortization of investment securities ............. 33 49 69
Net premium (discount) amortization of securities available
for sale .................................................. 4 (16) (14)
Net gain on sale of mortgage loans ............................ (81) (106) 20
Proceeds from sale of loans held for sale ..................... 8,304 7,265 24,379
Loans originated for sale ..................................... (8,087) (6,745) (24,719)
Increase in interest receivable ............................... (272) (87) (311)
(Increase) decrease in other assets, net of deferred tax
(benefit) expense ......................................... (197) (547) 1,310
Increase (decrease) in other liabilities ...................... (154) 856 (1,479)
Net loss on sale/writedowns of other real estate owned ........ 644 55 31
------------- ------------- -------------
Total adjustments ................................... 2,580 3,280 847
------------- ------------- -------------
Net cash provided by operating activities ........... 6,667 7,923 5,242
------------- ------------- -------------
F-4
1998 1997 1996
---- ---- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of investment securities ..................... $ 1,000 $ 3,559 $ 113
Proceeds from investment securities called .......................... 12,000 3,065 3,669
Purchase of investment securities ................................... (40,591) (10,194) (14,774)
Proceeds from the maturity of securities available for sale ......... 550 - 2,000
Proceeds from securities available for sale called .................. 23,100 - 1,000
Proceeds from the sale of securities available for sale ............. 60 287 10,024
Purchase of securities available for sale ........................... (42,305) (18,552) (8,512)
Proceeds from principal reduction in investment securities .......... 7,408 4,219 6,242
Proceeds from principal reduction in securities available for sale .. 5,448 3,887 3,588
Net loans made to customers ......................................... (16,723) (8,418) (15,893)
Originated mortgage servicing rights ................................ (81) (104) -
Proceeds from sale of other real estate owned ....................... 1,815 1,239 380
Capital expenditures ................................................ (763) (1,827) (704)
------------- ------------- -------------
Net cash used in investing activities ............... (49,082) (22,839) (12,867)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in mortgagors' escrow deposits ......................... (68) (71) (276)
Net increase (decrease) in borrowings ............................... 19,897 (2,100) (3,954)
Net increase in deposits ............................................ 20,151 24,851 5,576
------------- ------------- -------------
Net cash provided by financing activities ........... 39,980 22,680 1,346
------------- ------------- -------------
Net increase (decrease) in cash and cash
equivalents ..................................... (2,435) 7,764 (6,279)
CASH AND CASH EQUIVALENTS, beginning of year ............................ 16,664 8,900 15,179
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year .................................. $ 14,229 $ 16,664 $ 8,900
============= ============= =============
ADDITIONAL DISCLOSURE RELATIVE TO CASH FLOWS:
Interest paid .................................................... $ 19,235 $ 17,664 $ 17,819
Taxes paid ....................................................... 2,780 3,113 2,457
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Transfer of loans to other real estate owned ..................... $ 1,094 $ 2,677 $ 635
The accompanying notes are an integral part of these statements.
F-5
COHOES SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
(000's omitted)
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of Cohoes Savings Bank and
subsidiaries (the "Bank") conform, in all material respects, to generally
accepted accounting principles and to general practice within the savings bank
industry. The Bank utilizes the accrual method of accounting for financial
reporting purposes.
Principles of Consolidation
The consolidated financial statements include the accounts of the Bank, its
wholly owned financial services subsidiary and its wholly owned insurance
subsidiary. Intercompany accounts and transactions have been eliminated.
Use of Estimates
In preparing the consolidated financial statements, management is required to
make estimates and assumptions that affect the reported assets and liabilities
as of the date of the consolidated statements of financial condition. The same
is true of revenues and expenses reported for the period. Actual results could
differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses and
the valuation of other real estate acquired in connection with foreclosures. In
connection with the determination of the allowance for loan losses and the
valuation of other real estate owned, management obtains appraisals for
significant properties.
Investment Securities and Securities
Available for Sale
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," management
determines the appropriate classification of securities, including
mortgage-backed securities, at the time of purchase. If management has the
positive intent and ability to hold debt securities to maturity, they are
classified as investment securities held to maturity and are stated at amortized
cost. If securities are purchased for the purpose of selling them in the near
term, they are classified as trading securities and are reported at fair value
with unrealized holding gains and losses reflected in current earnings. All
other debt and equity securities are classified as securities available for sale
and are reported at fair value, with net unrealized gains or losses reported,
net of income taxes, as a separate component of surplus and undivided profits.
Gains and losses on disposition of all investment securities are based on the
adjusted cost of the specific security sold. At June 30, 1998 and 1997, the Bank
did not hold any securities considered to be trading securities.
F-6
Unrealized losses on securities which reflect a decline in value which is other
than temporary, if any, are charged to income and reported as a component of
"net (loss) gain on securities transactions" in the consolidated statements of
operations.
The cost of securities is adjusted for amortization of premium and accretion of
discount, which is calculated on an effective interest method.
Loans Receivable and Loan Fees
Loans receivable are reported at the principal amount outstanding, net of
unearned discount, net deferred loan fees and an allowance for possible loan
losses. Discounts on loans are accreted to income using a method which
approximates the level yield interest method. Interest income on loans is not
recognized when considered doubtful of collection by management.
The Bank accounts for fees and costs associated with loan originations in
accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating and Acquiring Loans and Initial Direct Costs of
Leases." Fees received from loan originations and certain related costs are
deferred and are amortized into income so as to provide for a level-yield of
interest on the underlying loans.
Allowance for Loan Losses
A substantial portion of the Bank's loans are secured by real estate located in
the Albany, New York area and the Metropolitan New York City area. In addition,
a substantial portion of the other real estate owned is located in those same
markets. Accordingly, the ultimate collectibility of a substantial portion of
the Bank's loan portfolio and the recovery of a substantial portion of the
carrying amount of other real estate owned are dependent upon market conditions
in these market areas.
Management believes that the allowance for loan losses is adequate and that
other real estate owned is recorded at its fair value less an estimated cost to
sell these properties. While management uses available information to recognize
losses on loans and other real estate owned, future additions to the allowance
or write-downs of other real estate owned may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's allowance for
loan losses and other real estate owned. Such agencies may require the Bank to
recognize additions to the allowance or write down other real estate owned based
on their judgments about information available to them at the time of their
examination, which may not be currently available to management.
The allowance for loan losses is established through a provision for loan losses
charged to operations. Loans are charged against the allowance for loan losses
when management believes that the collectibility of the principal is unlikely.
The allowance is an amount that management believes will be adequate to absorb
losses on existing loans that may become uncollectible, based on evaluations of
the collectibility of loans and prior loan loss experience. Management's
evaluation of the adequacy of the allowance for loan losses is performed on a
periodic basis and takes into consideration such factors as the historical loan
loss experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, review of specific problem loans and current economic
conditions that may affect borrowers' ability to pay.
F-7
SFAS No. 114 defines an impaired loan as a loan for which it is probable, based
on current information, that the lender will not collect all amounts due under
the contractual terms of the loan agreement. The Bank applies the impairment
criteria to all loans, except for large groups of smaller balance homogenous
loans that are collectively evaluated for impairment, such as residential
mortgages and consumer installment loans. Income recognition and charge-off
policies were not changed as a result of this statement.
Mortgage Loans Held for Sale
Management determines the appropriate classification of mortgage loans at the
time that rate lock agreements are entered into with the customer. If management
has the intent and the Bank has the ability at the time of rate lock to hold the
loans to maturity, they are classified as mortgage loans and carried at the
amount of unpaid principal, net of deferred fees, reduced by the allowance for
loan losses. Mortgage loans not intended to be held to maturity are classified
as "held for sale" and carried at the lower of aggregate cost or fair value as
determined by outstanding commitments from investors or current market prices
for loans with no commitments.
Loan servicing revenues and expenses are recognized when service fees are earned
and expenses are incurred. The mortgage loans being serviced are not included in
these consolidated financial statements as they are not assets of the Bank.
Purchased mortgage servicing rights represent the costs of acquiring the rights
to service mortgage loans originated by other institutions; such costs are
capitalized and amortized into servicing fee income over the estimated period of
net servicing income, adjusted for significant prepayments and payoffs of the
underlying serviced loans.
Gains or losses on sales of mortgage loans held for sale are recognized based
upon the difference between the selling price and the carrying value of the
related mortgage loans sold. Such gains and losses are increased or decreased by
the amount of excess servicing fees recorded, if any. Net deferred origination
fees are recognized at the time of sale in the gain or loss determination. Gains
and losses are decreased or increased for commissions and legal fees on loan
closings, and direct employee costs related to loan originations. These costs
amounted to $36, $34 and $104, for the years ended June 30, 1998, 1997 and 1996,
respectively.
Bank Premises and Equipment
Bank premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets.
Other Real Estate Owned
Other real estate owned includes foreclosed real estate properties. Other real
estate owned is recorded at the lower of cost or the fair value of the asset
acquired less an estimate of the costs to sell the asset. Fair value of other
real estate owned is generally determined through independent appraisals. At the
time of foreclosure, the excess, if any, of the loan value over the estimated
fair value of the asset received less costs to sell, is charged to the allowance
for loan losses. Subsequent declines in the fair value of such assets, or
increases in the estimated costs to sell the properties and net operating
expenses of such assets, are charged directly to other noninterest expense. At
June 30, 1998 and 1997, these properties consisted of residential and commercial
mortgage properties located in the Albany, New York area.
F-8
Income Taxes
For federal income and New York State franchise tax purposes, the Bank utilizes
the accrual basis method of accounting.
The Bank utilizes the asset and liability method of accounting for income taxes
required under SFAS No. 109, "Accounting for Income Taxes." Under the asset and
liability method of SFAS No. 109, deferred tax assets are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax basis. To the extent that current available evidence about the
future raises doubt about the realization of a deferred tax asset, a valuation
allowance must be established. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Statutory Transfer of Surplus
A required quarterly transfer of 10% of net income is to be made to the surplus
fund in accordance with New York State Banking Regulations. No transfer is
required if net worth as a percent of deposits exceeds 10% at the end of each
quarter.
Financial Instruments
In the normal course of business, the Bank is a party to certain financial
instruments with off-balance sheet risk such as commitments to extend credit,
unused lines of credit and letters of credit. The Bank's policy is to record
such instruments when funded.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash and cash
equivalents consist of cash, due from banks, federal funds sold and
interest-bearing deposits with banks.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130 "Reporting Comprehensive Income." This statement is effective for fiscal
years beginning after December 31, 1997 and restatement of financial statements
or information for earlier periods provided for comparative purposes is
required. The provisions of this statement will not affect the Bank's results of
operations or financial condition.
F-9
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures About
Pensions and Other Postretirement Benefits." SFAS No. 132 supersedes the
disclosure requirements for pension and other postretirement plans as set forth
in SFAS No. 87 "Employers' Accounting for Pension," SFAS No. 88 "Employers'
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and
for Termination Benefits," and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132 does not address
measurement or recognition for pension and other postretirement benefit plans.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997.
Restatement of disclosures for earlier periods provided for comparative purposes
is required unless the information is not readily available, in which case the
notes to the financial statements shall include all available information and a
description of the information not available.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial condition and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. SFAS No. 133 will
not impact the Bank's accounting or disclosures.
Reclassifications
Amounts in the prior year's consolidated financial statements are reclassified
whenever necessary to conform with the current year's presentation.
2. CONVERSION TO STOCK FORM OF OWNERSHIP
On May 21,1998, the Board of Trustees adopted a Plan of Conversion ("Plan") to
convert the Bank from a New York mutual savings bank to a New York stock savings
bank and to become a wholly owned subsidiary of a new Delaware corporation
("Company") to be organized at the direction of the Bank. Pursuant to the Plan,
the Company will issue and offer for sale shares of its common stock and use up
to 50% of the net proceeds of such sale to acquire all of the capital stock of
the Bank. The proposed transaction is subject to the approval of the
Superintendent of Banks of New York State and of the Federal Deposit Insurance
Corporation, as well as to a vote of the Bank's voting depositors. In addition,
the Company will file a registration statement with the Securities and Exchange
Commission ("SEC") with respect to the offering of its common stock and will
seek the permission of the Office of Thrift Supervision ("OTS") to acquire the
stock of the Bank to be issued upon the Bank's conversion.
At the time of conversion, the Bank will establish a liquidation account in an
amount equal to the retained income of the Bank as of the date of the most
recent financial statements contained in the final conversion prospectus. The
liquidation account will be reduced annually to the extent that eligible account
holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
account holder will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held.
The Company may not declare or pay cash dividends on or repurchase any of its
shares of common stock if the effect thereof would cause stockholders' equity to
be reduced below applicable regulatory capital maintenance requirements, the
amount required for the liquidation account, or if such declaration and payment
would otherwise violate regulatory requirements.
F-10
Pursuant to the Plan, the Company intends to establish a Charitable Foundation,
Employee Stock Ownership Plan (ESOP), Stock Option Plan, Recognition and
Retention Plan and Employment and Retention Agreements as discussed below.
The Company proposes to fund the Charitable Foundation by contributing to the
Charitable Foundation, immediately following the conversion, a number of shares
of authorized but unissued shares of the Common Stock equal to approximately 3%
of Common Stock sold in the Offering. Such contribution, once made, will not be
recoverable by the Company or the Bank. The Company will recognize the full
expense equal to the fair value of the stock, in the amount of the contribution
in the quarter in which it occurs. Such expense will reduce earnings and have a
material impact on the Company's and the Bank's earnings for such quarter and
for the year.
The Company plans to set up an ESOP, a tax-qualified benefit plan for officers
and employees of the Company and the Bank. It is anticipated that an amount
equal to 8% of the shares of Common Stock sold in the Offering (including shares
issued to the Foundation) will be purchased by the ESOP with funds loaned by the
Company. The Company and the Bank intend to make annual contributions to the
ESOP in an amount equal to the principal and interest requirement of the debt.
Following consummation of the conversion, the Company intends to adopt a Stock
Option Plan and a Recognition and Retention Plan, pursuant to which the Company
intends to reserve a number of shares of Common Stock equal to an aggregate of
10% and 4%, respectively, of the Common Stock issued in the conversion for
issuance pursuant to stock options and stock appreciation rights and stock. The
Stock Option Plan and Recognition and Retention Plan will not be implemented
prior to receipt of stockholder approval of the Plan.
Upon consummation of the conversion, the Company and the Bank intend to enter
into employment agreements with certain senior management personnel and change
in control agreements with other key employees.
Conversion costs will be deferred and reduce the proceeds from the shares sold
in the conversion. If the conversion is not completed, all costs will be charged
as an expense. As of June 30, 1998, approximately $59 conversion costs had been
incurred.
The conversion will not affect the terms of any loans held by borrowers of the
Bank or the balances, interest rates, federal deposit insurance or maturities of
deposit accounts at the Bank.
3. SUBSEQUENT EVENT - MERGER
On July 31, 1998, Cohoes Savings Bank and SFS Bancorp, Inc. ("SFS"), parent of
Schenectady Federal Savings Bank, executed an Agreement and Plan of Merger
pursuant to which SFS will merge into a newly formed holding company of the Bank
to be organized in connection with the Bank's conversion from a mutual to a
stock institution. Under the terms of the agreement, each share of SFS will be
exchanged for a number of shares of common stock of the holding company equal to
the lesser of $26.50 divided by the initial public offering price of the holding
company common stock or $35.00 divided by the average closing price of that
stock for the first ten trading days. The transaction is expected to constitute
a tax-free reorganization under the Internal Revenue Code, so that shareholders
of SFS who receive holding company common stock will not recognize gain or loss
in connection with the exchange. This merger will be accounted for as a
pooling-of-interest transaction.
F-11
Consummation of the merger is subject to the approval of the shareholders of
SFS, the conversion of the Bank and the receipt of all required regulatory
approvals. The transaction is anticipated to close in the fourth quarter of
1998.
4. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to risk
weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of June 30, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.
As of June 30, 1998, the most recent notification from the Federal Deposit
Insurance Corporation categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based,
Tier 1 leverage ratios as set forth in the table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the following
table:
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 1998:
Total capital (to risk weighted
assets) $ 56,803 17.1% $ 26,601 greater than 8.0% $ 33,251 greater than 10.0%
Tier 1 Capital (to risk weighted
assets) 53,270 16.0 13,300 greater than 4.0 19,951 greater than 6.0
Tier 1 Capital (to average assets) 53,270 10.6 20,063 greater than 4.0 25,079 greater than 5.0
F-12
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 1997:
Total capital (to risk weighted
assets) $ 52,288 16.4% $ 25,519 greater than 8.0% $ 31,898 greater than 10.0%
Tier 1 Capital (to risk weighted
assets) 49,183 15.4 12,759 greater than 4.0 19,139 greater than 6.0
Tier 1 Capital (to average assets) 49,183 10.1 19,455 greater than 4.0 24,319 greater than 5.0
To Be Well Capitalized
For Capital Adequacy Under Prompt Corrective
Actual Purposes Action Provisions
------ -------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of June 30, 1996:
Total capital (to risk weighted
assets) $ 47,789 15.1% $ 25,310 greater than 8.0% $ 31,637 greater than 10.0%
Tier 1 Capital (to risk weighted
assets) 44,540 14.1 12,655 greater than 4.0 18,982 greater than 6.0
Tier 1 Capital (to average assets) 44,540 9.7 13,842 greater than 3.0 23,070 greater than 5.0
5. SECURITIES AVAILABLE FOR SALE
The amortized cost of securities available for sale and their related estimated
fair values at June 30, 1998 and 1997, are as follows:
June 30, 1998
------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
Debt securities:
U.S. Government and agencies ......... $ 23,296 $ - $ (59) $ 23,237
Other obligations .................... 271 5 - 276
Mortgage-backed securities ........... 16,855 91 - 16,946
Collateralized mortgage obligations .. 4,019 8 (24) 4,003
------------- ------------- ------------- -------------
Total debt securities ...... 44,441 104 (83) 44,462
Equity securities .................... 4,260 - (2) 4,258
------------- ------------- ------------- -------------
Total securities available
for sale ................ $ 48,701 $ 104 $ (85) $ 48,720
============= ============= ============= =============
F-13
June 30, 1997
-------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
Debt securities:
U.S. Government and agencies ......... $ 18,551 $ 9 $ (123) $ 18,437
Other obligations .................... 488 7 (2) 493
Mortgage-backed securities ........... 6,724 38 - 6,762
Collateralized mortgage obligations .. 6,377 14 (89) 6,302
------------- ------------- ------------- -------------
Total debt securities ...... 32,140 68 (214) 31,994
Equity securities .................... 3,481 - - 3,481
------------- ------------- ------------- -------------
Total securities available
for sale ................. $ 35,621 $ 68 $ (214) $ 35,475
============= ============= ============= =============
The equity investment securities at June 30, 1998 and 1997 consist primarily of
common stock of the Federal Home Loan Bank of New York. These securities are
nonmarketable and are, therefore, stated at cost.
A summary of maturities of debt securities available for sale at June 30, 1998
is as follows:
Estimated Fair
Amortized Cost Value
-------------- -----
Within one year ...................... $ 179 $ 178
From one to five years ............... 42,654 42,669
After five years to ten years ........ 1,608 1,615
After ten years ...................... - -
------------- -------------
$ 44,441 $ 44,462
============= =============
During the years ended June 30, 1998 and 1997, there were no sales of debt
securities available for sale. During the year ended June 30, 1996, proceeds of
sales of debt securities available for sale totaled $10,024. Gross gains of $34
and gross losses of $24 were realized on those sales.
6. INVESTMENT SECURITIES
The carrying values of securities held for investment and their related
estimated fair values at June 30, 1998 and 1997 are as follows:
June 30, 1998
-------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
Investment securities:
U.S. Government and agencies ...... $ 22,025 $ 6 $ (32) $ 21,999
Other obligations ................. 388 1 - 389
Mortgage-backed securities ........ 23,011 153 (5) 23,159
------------- ------------- ------------- -------------
Total investment securities $ 45,424 $ 160 $ (37) $ 45,547
============= ============= ============= =============
F-14
June 30, 1997
------------------------------------------------------------------
Gross Gross
Unrealized Unrealized Estimated Fair
Amortized Cost Gains Losses Value
-------------- ----- ------ -----
Investment securities:
U.S. Government and agencies ...... $ 6,049 $ 3 $ (52) $ 6,000
Other obligations ................. 848 - (2) 846
Mortgage-backed securities ........ 18,376 53 (89) 18,340
-------------- -------------- ----------- --------------
Total investment securities $ 25,273 $ 56 $ (143) $ 25,186
=============== ============== =========== ==============
A summary of maturities of debt securities held for investment at June 30, 1998
is as follows:
Estimated Fair
Amortized Cost Value
-------------- --------------
Within one year ................... $ 682 $ 687
From one to five years ............ 32,723 32,801
After five years to ten years ..... 11,636 11,672
After ten years ................... 383 387
-------------- --------------
$ 45,424 $ 45,547
============== ==============
There were no sales of securities held for investment during the three years
ended June 30, 1998.
7. NET LOANS RECEIVABLE
A summary of loans at June 30, 1998 and 1997 is as follows:
1998 1997
---- ----
Mortgage loans on real estate:
Residential adjustable rate loans . $ 170,010 $ 222,255
Commercial real estate ............ 93,229 93,979
Residential fixed rate loans ...... 87,715 20,470
FHA and VA insured loans .......... 674 895
----------- -----------
351,628 337,599
----------- -----------
Other loans:
Conventional second mortgages ... 15,093 14,069
Home equity lines of credit ...... 21,976 25,205
Commercial business loans ........ 14,991 12,096
Home improvement loans ........... 547 662
Auto loans ....................... 9,783 9,290
Credit card loans ................ 1,655 2,152
Personal loans, secured and unsecured 409 576
Other loans ...................... 228 200
------------ ------------
64,682 64,250
------------ ------------
Less:
Deferred loan origination fees and costs (18) (214)
Allowance for loan losses ......... (3,533) (3,105)
------------ ------------
Net loans ............... $ 412,759 $ 398,530
============ ============
F-15
Changes in the allowance for loan losses for the years ended June 30, 1998 and
1997 were as follows:
1998 1997 1996
---- ---- ----
Allowance for loan losses at
beginning of year ................ $ 3,105 $ 3,249 $ 3,133
Provision charged to operations .. 1,400 1,325 490
Loans charged-off, net ........... (972) (1,469) (374)
-------- -------- --------
Allowance for loan losses at year-end $ 3,533 $ 3,105 $ 3,249
======== ======== ========
The following table sets forth the information with regard to nonperforming
mortgage loans at June 30, 1998 and 1997:
1998 1997
---- ----
Loans on nonaccrual status and in the process
of foreclosure ............................... $ 2,545 $ 3,382
Loans on nonaccrual status but not in the process
of foreclosure ............................... 997 1,063
Loans past due 90 days or more and still
accruing interest ............................ - -
Loans restructured as to payment terms and/or
interest rates ............................... 1,929 1,906
---------- ----------
Total nonperforming mortgage loans .. $ 5,471 $ 6,351
========== ==========
The following table sets forth the information with regard to nonperforming
other loans at June 30, 1998 and 1997:
1998 1997
---- ----
Nonaccrual loans .................................. $ 121 $ 295
Loans past due 90 days or more and still
accruing interest ........................... 57 42
Loans restructured as to payment terms and/or
interest rates .............................. - -
--------- --------
Total nonperforming other loans ..... $ 178 $ 337
======== ========
Accumulated interest income on nonaccrual loans of approximately $214, $262 and
$441 was not recognized as income in the years ended June 30, 1998, 1997 and
1996, respectively. There are no commitments to extend further credit on
nonperforming loans.
F-16
As of June 30, 1998 and 1997, the Bank's recorded investment in impaired loans
and the related valuation allowance calculated under SFAS No. 114 are as
follows:
1998 1997
------------------------------- --------------------------------
Recorded Valuation Recorded Valuation
Investment Allowance Investment Allowance
---------- --------- ---------- ---------
Valuation allowance required $ 1,638 $ 344 $ 1,261 $ 198
Valuation allowance not required 630 - 645 -
-------------- -------------- -------------- -------------
$ 2,268 $ 344 $ 1,906 $ 198
============== ============== ============== ==============
This allowance is included in the allowance for loan losses on the consolidated
statements of financial condition.
The average recorded investment in impaired loans for the years ended June 30,
1998 and 1997 was approximately $2,087 and $1,979, respectively.
Interest payments received on impaired loans are recorded as interest income
unless collection of the remaining investment is doubtful in which case payments
received are recorded as reductions of principal. The Bank recognized interest
of $215, $185 and $189 on impaired loans for the years ended June 30, 1998, 1997
and 1996, respectively. Accumulated interest income on impaired loans of
approximately $15, $18 and $19 was not recognized as income in the years ended
June 30, 1998, 1997 and 1996, respectively.
8. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable consists of the following at June 30, 1998 and 1997:
1998 1997
---- ----
Loans ................................ $ 2,531 $ 2,558
Investment securities and securities
available for sale ............ 951 652
------------ ------------
$ 3,482 $ 3,210
============ ============
9. BANK PREMISES AND EQUIPMENT
Bank premises and equipment consist of the following at June 30, 1998 and 1997:
1998 1997
---- ----
Land ................................... $ 1,529 $ 1,529
Building and leasehold improvements .... 6,553 6,335
Furniture, fixtures and equipment ...... 6,284 5,736
-------------- --------------
14,366 13,600
Less- Accumulated depreciation ......... (7,063) (5,943)
-------------- --------------
$ 7,303 $ 7,657
============== ==============
F-17
Amount charged to depreciation expense was $1,117, $1,101 and $1,015 for the
years ended June 30, 1998, 1997 and 1996, respectively.
10. MORTGAGE SERVICING RIGHTS
The following is a summary of the mortgage servicing rights activity during the
years ended June 30, 1998 and 1997: 1998 1997 1996
Balance, beginning of year .................... $ 1,146 $ 1,211 $ 1,376
Mortgage servicing rights originated from
unrelated third parties ................ 81 104 -
Amortization of mortgage servicing rights
included as a reduction of servicing fee
income in the consolidated statements of
operations ............................. (185) (169) (165)
-------- -------- --------
Balance, end of year .......................... $ 1,042 $ 1,146 $ 1,211
======== ======== ========
Serviced Loans
The total loans serviced by the Bank for unrelated third parties were
approximately $233.1 million, $256.9 million and $288.2 million at June 30,
1998, 1997 and 1996, respectively.
11. DUE TO DEPOSITORS
Due to depositors account balances as of June 30, 1998 and 1997 are summarized
as follows:
Range of
Interest Rate 1998 1997
------------- ---- ----
Savings accounts 3.0%-5.5% $ 142,867 $ 137,790
Money market accounts 2.8-3.9 21,672 15,450
----------------- -----------------
164,539 153,240
Time deposits 3.8-8.5 231,049 230,306
Commercial deposits 0.0-1.8 15,957 11,250
Demand accounts 0.0-1.8 37,996 34,594
----------------- -----------------
$ 449,541 $ 429,390
================= =================
Time deposits over $100,000 amounted to approximately $31.1 million and $35.2
million at June 30, 1998 and 1997, respectively.
F-18
The approximate amount of contractual maturities of time deposits for the years
subsequent to June 30, 1998 is as follows:
Years ending June 30:
1999 ........................ $ 159,550
2000 ........................ 50,043
2001 ........................ 7,983
2002 ........................ 5,064
2003 and thereafter ......... 8,409
-----------
$ 231,049
Interest expense on deposits for the years ended June 30, 1998, 1997 and 1996,
is summarized as follows:
1998 1997 1996
---- ---- ----
Savings accounts ...... $ 4,459 $ 4,359 $ 4,177
Money market accounts . 569 447 488
Time deposits ......... 13,484 12,487 12,830
Demand accounts ....... 304 275 246
--------------- --------------- ---------------
$ 18,816 $ 17,568 $ 17,741
=============== =============== ===============
12. BORROWINGS
Information concerning borrowings, which primarily consist of Federal Home Loan
Bank ("FHLB") advances, for the years ended June 30, 1998, 1997 and 1996 is
summarized as follows:
1998 1997 1996
---- ---- ----
Average balance during the year $ 5,467 $ 2,392 $ 4,682
Average interest rate during the year 6.07% 5.56% 6.34%
Maximum month-end balance during the year $ 19,983 $ 16,157 $ 13,213
Interest expense on borrowings $ 332 $ 133 $ 297
FHLB advances are made at fixed rates with remaining maturities of approximately
ten years as of June 30, 1998.
FHLB advances are collateralized by all FHLB stock owned by the Bank in addition
to a blanket pledge of eligible assets in an amount required to be maintained so
that the estimated fair value of such eligible assets exceeds, at all times,
110% of the outstanding advances.
13. EMPLOYEE BENEFITS
401(k) Retirement Savings Plan
The Bank sponsors a 401(k) Retirement Savings Plan which is available to all
full-time employees who have been employed by the Bank for a minimum of one year
and are at least 21 years of age. The Plan allows employees to defer up to 15%
of their salary on a pretax basis through contributions to the Retirement
Savings Plan. The Bank matches 50% of employee contributions up to a maximum of
6% of the amount deferred by the employee. The maximum contribution an employee
may make which is subject to matching by the Bank is set annually by the Board
of Trustees.
F-19
Employees may also make additional voluntary after-tax contributions to the
Plan, which are not matched by the Bank, up to an additional 10% of the
employee's salary. Total 401(k) Plan expenses for the years ended June 30, 1998,
1997 and 1996 were approximately $378, $319 and $285, respectively.
Postretirement Medical and Life
Insurance Benefits
The Bank provides postretirement medical and life insurance benefits for
full-time employees. All employees who meet the criteria for either normal or
early retirement and have at least 10 years of service are eligible. Retired
employees are required to contribute toward the cost of coverage as established
by the Bank, based on medical and life insurance costs.
Benefit and premium payments are made when they are due and are not funded in
advance.
The Bank's estimated accrued postretirement obligation at June 30, 1998 and 1997
is as follows:
1998 1997
---- ----
Accrued postretirement obligation:
Retired employees .................................. $ 530 $ 532
Fully eligible active employees .................... 72 67
Other active employees ............................. 114 96
-------- --------
716 695
Unrecognized net gain from actual experience different from
assumed, amortized over 12.3 years ................. 281 327
-------- --------
Total accrued postretirement obligation .. $ 997 $ 1,022
======== ========
Net periodic postretirement benefit cost included the following components:
1998 1997 1996
---- ---- ----
Service cost ............................ $ 12 $ 10 $ 19
Interest cost ........................... 49 48 64
Amortization of net gain from actual
experience different from assumed ... (61) (58) (17)
--------- --------- ---------
$ - $ - $ 66
======== ========= =========
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% as of June 30, 1998 and 1997 and
7.75% as of June 30, 1996. For measurement purposes, the assumed health care
cost trend rate of 10% decreases gradually until an ultimate trend rate of 5.5%
is reached over 10 years. In accordance with the terms of the Postretirement
Medical Benefit Plan, once costs are 150% of the 1993 level, additional
increases become the responsibility of the retiree.
F-20
The health care cost trend rate assumption has a significant effect on the
amount of obligation and expense reported. To illustrate, increasing the health
care trend rate by one percent each year would increase the accumulated
postretirement benefit obligation as of June 30, 1998 and 1997 by approximately
$2 and $2, respectively, and would have no material effect on the net periodic
postretirement benefit cost for the three years ended June 30, 1998.
14. SURPLUS AND UNDIVIDED PROFITS
In accordance with State of New York Banking Law, surplus is subject to certain
restrictions, including a prohibition of its use for payment of dividends,
except with the approval of the Superintendent of Banks.
The balance in surplus includes approximately $5.2 million at December 31, 1997,
the latest date from which this calculation is available, which has been
designated as a reserve for bad debts under federal income tax regulations and
has resulted in income tax deductions in prior years. Any use of this amount
other than as provided for in those regulations would result in taxable income
at the then current rate.
15. INCOME TAX EXPENSE
The components of the income tax expense (benefit) are as follows:
1998 1997 1996
Current tax expense:
Federal .................... $ 2,450 $ 2,440 $ 2,601
State ...................... 517 531 533
Deferred tax expense (benefit) . (317) 1 (252)
------------ ------------ ------------
$ 2,650 $ 2,972 $ 2,882
============ ============ ============
The provision for income taxes differs from that computed at the federal
statutory rate as follows:
1998 1997 1996
---- ---- ----
Tax at federal statutory rate ...... $ 2,291 $ 2,589 $ 2,474
State taxes, net of federal benefit. 341 350 352
Other, net ......................... 18 33 56
----------- ----------- -----------
Total income tax expense ... $ 2,650 $ 2,972 $ 2,882
=========== =========== ===========
Effective rate ..................... 39.34% 39.03% 39.60%
===== ===== =====
F-21
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at June 30, 1998 and
1997 are presented below:
1998 1997
---- ----
Deferred tax assets:
Differences in reporting the provision for loan losses $ 1,519 $ 1,335
Differences in reporting certain accrued expenses .... 789 771
Other ................................................ 297 167
--------- ---------
Total gross deferred tax assets ............ 2,605 2,273
--------- ---------
Deferred tax liabilities:
Differences in reporting the provision for loan losses 385 513
Deferred net loan origination fees ................... 218 92
Differences in reporting depreciation ................ 107 117
Differences in reporting certain accrued expenses .... 296 269
Other ................................................ 4 4
--------- ---------
Total gross deferred tax liabilities ....... 1,010 995
--------- ---------
Net deferred tax asset at end of year ...... 1,595 1,278
Net deferred tax asset at beginning of year .............. 1,278 1,279
--------- ---------
Deferred tax expense (benefit) for the year $ (317) $ 1
========= =========
The total deferred tax asset as of June 30, 1998 and 1997 is considered by the
Bank to be more likely than not realizable based upon the historical level of
taxable income in the prior years as well as the time period during which the
items giving rise to the deferred tax assets are expected to turn around.
In addition to the deferred tax assets and liabilities described above, the Bank
also has a deferred tax liability of approximately $19 and a deferred tax asset
of approximately $146 at June 30, 1998 and 1997, respectively, related to the
net unrealized gain (loss) on securities available for sale.
Under Section 593 of the Internal Revenue Code, thrift institutions such as the
Bank which met certain definitional tests, primarily relating to their assets
and the nature of their business, were permitted to establish a tax reserve for
bad debts and to make annual additions thereto, which additions may, within
specified limitations, be deducted in arriving at their taxable income. The
Bank's deduction with respect to "qualifying loans," which are generally loans
secured by certain interests in real property, could have been computed using an
amount based on the Bank's actual loss experience (the "Experience Method"), or
a percentage equal to 8% of the Bank's taxable income (the "PTI Method"),
computed without regard to this deduction and with additional modifications and
reduced by the amount of any permitted addition to the nonqualifying reserve.
Similar deductions or additions to the Bank's bad debt reserve are permitted
under the New York State Bank Franchise Tax; however, for purposes of these
taxes, the effective allowable percentage under the PTI Method is approximately
32% rather than 8%.
Effective January 1, 1997, Section 593 was amended, and the Bank is unable to
make additions to its tax bad debt reserve, is permitted to deduct bad debts
only as they occur and is additionally required to recapture (that is, take into
taxable income) over a multiyear period, beginning with the Bank's taxable year
beginning on January 1, 1997, the excess of the balance of its bad debt reserves
as of December 31, 1995 over the balance of such reserves as of December 31,
1987, or over a lesser amount if the Bank's loan portfolio has decreased since
December 31, 1987. Such recapture requirements would be deferred for each of the
two successive taxable years beginning January 1, 1997, in which the Bank
originates a minimum amount of certain residential loans based upon the average
of the principal amounts of such loans originated by the Bank during its six
taxable years preceding January 1, 1997. This amendment has no impact on the
Bank's results of operations for federal income tax purposes. The New York State
tax law has been amended to prevent a similar recapture of the Bank's bad debt
reserve, and to permit continued future use of the bad debt reserve method for
purposes of determining the Bank's New York State tax liability.
F-22
In addition, the Bank has accumulated bad debt reserves for tax purposes of $3.7
million under Section 593 through December 31, 1987 for which no deferred taxes
have been provided. Under the tax laws as amended, the event that would result
in taxation of these reserves is the failure of the Bank to maintain a specified
qualifying-assets ratio or meet other thrift definition tests for New York State
tax purposes.
16. COMMITMENTS AND CONTINGENT LIABILITIES
Off-Balance Sheet Financing and
Concentrations of Credit
The Bank is a party to certain financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include the Bank's commitments to extend credit.
Those instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized on the consolidated statements of financial condition.
The contract amounts of those instruments reflect the extent of involvement the
Bank has in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the commitments to extend credit is represented by the contractual
notional amount of those instruments. The Bank uses the same credit policies in
making commitments as it does for on-balance sheet instruments.
Unless otherwise noted, the Bank does not require collateral or other security
to support financial instruments with credit risk.
Contract amounts of financial instruments that represent credit risk as of June
30, 1998 and 1997 at fixed and variable interest rates are as follows:
1998
--------------------------------------------
Fixed Variable Total
----- -------- -----
Financial instruments whose contract amounts represent
credit risk (including unused lines of credit and
unadvanced funds):
Commercial business loans ......................... $ - $ 14,897 $ 14,897
Conventional mortgages ............................ 11,971 1,338 13,309
Commercial mortgage loans ......................... - 11,991 11,991
Construction loans ................................ - 890 890
Credit card loans ................................. - 2,996 2,996
Consumer loans .................................... 203 12,886 13,089
------------- ------------- -------------
$ 12,174 $ 44,998 $ 57,172
============= ============= =============
F-23
1997
--------------------------------------------------
Fixed Variable Total
----- -------- -----
Financial instruments whose contract amounts represent
credit risk (including unused lines of credit and
unadvanced funds):
Commercial business loans ......................... $ - $ 10,172 $ 10,172
Conventional mortgages ............................ 1,531 4,315 5,846
Commercial mortgage loans ......................... - 4,622 4,622
Construction loans ................................ - 830 830
Credit card loans ................................. - 3,300 3,300
Consumer loans .................................... 393 12,438 12,831
---------------- ------------- -------------
$ 1,924 $ 35,677 $ 37,601
============= ============= =============
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since certain commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral, if any,
required by the Bank upon the extension of credit is based on management's
credit evaluation of the customer. Mortgage and construction loan commitments
are secured by a first lien on real estate.
Commitments to extend credit may be written on a fixed rate basis, thus exposing
the Bank to interest rate risk, given the possibility that market rates may
change between commitment and actual extension of credit.
Certain mortgage loans are written on an adjustable basis and include interest
rate caps which limit annual and lifetime increases in the interest rates on
such loans. Generally, adjustable rate mortgages have an annual rate increase
cap of 2% and lifetime rate increase cap of 4.5% to 6.75%. These caps expose the
Bank to interest rate risk should market rates increase above these limits. As
of June 30, 1998 and 1997, $221.0 million and $262.4 million, respectively, of
mortgage loans had interest rate caps.
The Bank generally enters into rate lock agreements at the time that loan
applications are made. These rate lock agreements fix the interest rate at which
the loan, if ultimately made, will be originated. Such agreements may exist with
borrowers with whom commitments to extend credit have been made, as well as with
individuals who have not yet received a commitment. At June 30, 1998 and 1997,
the Bank had rate lock agreements related to commitments to extend credit as
well as uncommitted loan applications amounting to approximately $841 and $900,
respectively.
In order to reduce the interest rate risk associated with these items as well as
its portfolio of loans held for sale, the Bank enters into agreements to sell
loans in the secondary market to unrelated investors. At June 30, 1998 and 1997,
the Bank has $0 and $175, respectively, of commitments to sell loans to
unrelated investors.
Concentrations of Credit
The Bank primarily grants consumer and residential loans to customers located in
the New York State counties of Albany, Rensselaer, Schenectady and Saratoga.
Although the Bank has a diversified loan portfolio, a substantial portion of its
debtors' ability to honor their contracts are dependent upon the real estate and
construction-related sectors of the economy.
F-24
Borrowing Arrangements
The Bank has lines of credit available with a correspondent bank totaling
approximately $49.2 million. These lines of credit expire on October 28, 1998.
As of June 30, 1998, there was no outstanding balances on these lines.
Leases
The Bank leases certain branches, equipment and automobiles under various
noncancelable operating leases. The future minimum payments by year and the
aggregate, under all significant noncancelable operating leases with initial or
remaining terms of one year or more, are as follows:
Operating
Leases
------
Year ending June 30:
1999 ........................... $ 395
2000 ........................... 413
2001 ........................... 341
2002 ........................... 248
2003 and thereafter ............ 127
-----------
$ 1,524
===========
Total lease expense was approximately $383, $298 and $176 for the years ended
June 30, 1998, 1997 and 1996, respectively.
Contingent Liabilities
In the ordinary course of business, there are various legal proceedings pending
against the Bank. Based on consultation with outside counsel, management
considers that the aggregate exposure, if any, arising from such litigation
would not have a material adverse effect on the Bank's statement of financial
condition.
17. DISCLOSURES ABOUT THE FAIR
VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures About the Fair Value of Financial Instruments,"
requires that the Bank disclose estimated fair values for financial instruments.
Fair value estimates, methods and assumptions are set forth below.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Bank's entire holdings of a particular financial
instrument. The fair value estimates of a significant portion of the Bank's
financial instruments were based on judgments regarding future expected net cash
flow, current economic conditions, risk characteristics of various financial
instruments and other factors. These
F-25
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimate of fair value
under SFAS No. 107.
Short-Term Financial Instruments
The fair value of certain financial instruments is estimated to approximate
their carrying values because the remaining term to maturity of the financial
instruments is less than 90 days or the financial instrument reprices in 90 days
or less. Such financial instruments include cash and due from banks, federal
funds sold, interest-bearing deposits with banks and accrued interest
receivable.
Securities Available for Sale
and Investment Securities
Fair values are based upon market prices. If a quoted market price is not
available for a particular security, the fair value is determined by reference
to quoted market prices for securities with similar characteristics.
Loans
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type, including residential real
estate, commercial real estate and other consumer loans.
The estimated fair value of performing loans is calculated by discounting
scheduled cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent in the
respective loan portfolio.
Estimated fair value for nonperforming loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market information and specific borrower
information.
Management has made estimates of fair value discount rates that it believes to
be reasonable. However, because there is no market for many of these financial
instruments, management has no basis to determine whether the estimated fair
value would be indicative of the value negotiated in an actual sale.
Loans Held for Sale
The estimated fair value of loans held for sale is calculated by either using
quoted market rates or, in the case where a firm commitment has been made to
sell the loan, the firm committed price was used. At June 30, 1998 and 1997, the
estimated fair value of loans held for sale approximated their book value.
F-26
Deposit Liabilities
The estimated fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and money market accounts, is
regarded to be the amount payable on demand as of June 30, 1998 and 1997. The
estimated fair value of time deposits is based on the discounted value of
contractual cash flows. The discount rate is estimated using the rates currently
offered for deposits of similar remaining maturities. The fair value estimates
for deposits do not include the benefit that results from the low-cost funding
provided by the deposit liabilities as compared to the cost of borrowing funds
in the market.
Borrowings
The estimated fair value of FHLB borrowings is based on the discounted value of
their contractual cash flows. The discount rate used in the present value
computation is estimated by comparison to the current interest rates charged by
the FHLB for advances of similar remaining maturities.
Table of Financial Instruments
The carrying values and estimated fair values of financial instruments as of
June 30, 1998 and 1997 are as follows:
1998 1997
---------------------------------- -----------------------------------
Estimated Fair Estimated Fair
Carrying Value Value Carrying Value Value
-------------- ----- -------------- -----
Financial assets:
Cash and cash equivalents ............ $ 14,229 $ 14,229 $ 16,664 $ 16,664
Mortgage loans held for sale ......... 38 38 175 175
Securities available for sale ........ 48,720 48,720 35,475 35,475
Investment securities ................ 45,424 45,547 25,273 25,186
Loans ................................ 416,292 425,774 401,635 401,855
Less- Allowance for loan losses ... (3,533) - (3,105) -
--------------- --------------- --------------- --------------
Net loans receivable ....... 412,759 425,774 398,530 401,855
--------------- --------------- --------------- ---------------
Accrued interest receivable .............. 3,482 3,482 3,210 3,210
F-27
1998 1997
---------------------------------- -----------------------------------
Estimated Fair Estimated Fair
Carrying Value Value Carrying Value Value
-------------- ----- -------------- -----
Financial liabilities:
Due to depositors-
Demand, savings and money market
accounts ........................ $ 218,492 $ 218,492 $ 199,084 $ 199,084
Time deposits ...................... 231,049 246,220 230,306 231,081
Mortgagors' escrow deposits ........ 8,994 8,994 9,062 9,062
Borrowings ......................... 19,897 18,858 - -
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.
F-28
SFS BANCORP, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENTS
December 31, 1997 and 1996
Six Months ended June 30, 1998 and 1997 (unaudited)
Page
----
Report of Independent Public Accountants..................................
Consolidated Balance Sheets as of December 31, 1997 and 1996..............
Consolidated Statements of Income for each of the years in the
three-year period ended December 31, 1997...............................
Consolidated Statements of Changes in Stockholders' Equity
for each of the years in the three-year period ended
December 31, 1997.......................................................
Consolidated Statements of Cash Flows for each of the years
in the three-year period ended December 31, 1998........................
Notes to Consolidated Financial Statements................................
Consolidated Statements of Income for each of the periods in the
six-month period ended June 30, 1998 and 1997 (unaudited)...............
Consolidated Statements of Financial Condition as of
June 30, 1998 (unaudited) and December 31, 1997.........................
Consolidated Statements of Changes in Stockholders' Equity
for each of the periods in the six-month period ended
June 30, 1998 and 1997 (unaudited)......................................
Consolidated Statements of Cash Flows as of June 30, 1998 (unaudited).....
Notes to Unaudited Consolidated Interim Financial Statements
for the six months ended June 30, 1998 and 1997.........................
Independent Auditors' Report
The Board of Directors and Stockholders
SFS Bancorp, Inc.:
We have audited the accompanying consolidated balance sheets of SFS Bancorp,
Inc. and subsidiary (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SFS Bancorp, Inc.
and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
Albany, New York /s/ KPMG Peat Marwick LLP
January 23, 1998 -------------------------
KPMG Peat Marwick LLP
G-2
Consolidated Balance Sheets
December 31, 1997 and 1996
Assets 1997 1996
------ ---- ----
(in thousands, except share data)
Cash and due from banks ............................................. $ 1,876 1,296
Federal funds sold .................................................. 300 1,600
--------- ---------
Total cash and cash equivalents ....................... 2,176 2,896
Securities available for sale, at fair value (note 5) ............... 4,067 1,990
Investment securities (estimated fair value of $29,095
and $35,964 at December 31, 1997 and 1996, respectively)(note 6) .. 28,979 36,180
Stock in Federal Home Loan Bank of New York, at cost ................ 1,338 1,215
Loans receivable, net (note 7) ...................................... 133,786 118,455
Accrued interest receivable (note 8) ................................ 1,130 1,137
Premises and equipment, net (note 9) ................................ 2,242 1,921
Real estate owned (note 10) ......................................... 111 178
Prepaid expenses and other assets ................................... 599 916
--------- ---------
Total assets .......................................... $ 174,428 164,888
========= =========
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors (note 11):
Non-interest bearing ....................................... 2,265 1,392
Interest bearing ........................................... 148,204 139,224
--------- ---------
Total deposits ........................................ 150,469 140,616
--------- ---------
Advance payments by borrowers for taxes and insurance .......... 1,281 1,160
Accrued expenses and other liabilities ......................... 1,247 1,441
--------- ---------
Total liabilities ..................................... 152,997 143,217
--------- ---------
Commitments and contingent liabilities (notes 12 and 16)
G-3
Consolidated Balance Sheets
December 31, 1997 and 1996
(continued)
1997 1996
---- ----
(in thousands, except share data)
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 500,000 shares ..... -- --
Common stock, $.01 par value, authorized 2,500,000 shares;
1,495,000 shares issued at December 31, 1997 and 1996 ........ 15 15
Additional paid-in capital ..................................... 14,365 14,260
Retained earnings, substantially restricted .................... 12,422 11,687
Treasury stock, at cost (286,528 shares at December 31, 1997,
224,003 at December 31, 1996) ................................ (4,089) (2,840)
Common stock acquired by employee stock ownership plan (ESOP) .. (837) (957)
Unearned recognition and retention plan (RRP) .................. (455) (540)
Net unrealized gain on securities available for sale, net of tax 10 46
--------- ---------
Total stockholdersi equity ............................ 21,431 21,671
--------- ---------
Total liabilities and stockholders' equity ............ $ 174,428 164,888
========= =========
See accompanying notes to consolidated financial statements.
G-4
Consolidated Statements of Income
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(in thousands, except for per share amounts)
Interest income:
Loans ...................................................... $ 9,757 8,758 7,800
Investment securities ...................................... 2,085 2,477 2,505
Securities available for sale .............................. 286 307 492
Federal funds sold and cash deposits ....................... 153 247 640
Stock in Federal Home Loan Bank of New York ................ 87 78 86
------- ------- -------
Total interest income ............................. 12,368 11,867 11,523
Interest expense:
Deposits (note 11) ......................................... 6,623 6,187 6,236
------- ------- -------
Net interest income ............................... 5,745 5,680 5,287
Provision for loan losses (note 7) .............................. 120 120 370
------- ------- -------
Net interest income after provision for loan losses 5,625 5,560 4,917
------- ------- -------
Noninterest income:
Other loan charges ......................................... 207 145 110
Bank fees and service charges .............................. 160 138 143
Net gain on security transactions .......................... 56 8 --
Other income ............................................... 81 112 68
------- ------- -------
Total noninterest income .......................... 504 403 321
------- ------- -------
G-5
Consolidated Statements of Income
For the years ended December 31, 1997, 1996 and 1995
(continued)
1997 1996 1995
---- ---- ----
(in thousands, except for per share amounts)
Noninterest expense:
Compensation and benefits .................................. 2,710 2,512 2,250
Office occupancy and equipment expenses .................... 620 522 523
Professional service fees .................................. 270 242 189
Data processing fees ....................................... 175 166 157
Advertising and business promotion ......................... 86 108 106
Federal deposit insurance premiums ......................... 74 322 323
Federal deposit insurance special SAIF assessment .......... -- 930 --
Other expense .............................................. 434 437 479
------- ------- -------
Total noninterest expense ......................... 4,369 5,239 4,027
------- ------- -------
Income before taxes ............................... 1,760 724 1,211
Income tax expense (benefit) (note 12) .......................... 692 (106) 356
------- ------- -------
Net income ...................................................... $ 1,068 830 855
======= ======= =======
Basic earnings per share ........................................ $ .96 .68 .41
======= ======= =======
Diluted earnings per share ...................................... $ .93 .67 .41
======= ======= =======
See accompanying notes to consolidated financial statements.
G-6
Consolidated Statements of Changes in Stockholdersi Equity
Years ended December 31, 1997, 1996 and 1995
Retained
Additional earnings, Treasury
Shares Common paid-in substantially stock,
Issued stock capital restricted at cost
------ ----- ------- ---------- -------
(dollars in thousands)
Balance at December 31, 1994 ............................ -- $ -- -- 10,158 --
Net income .............................................. -- -- -- 855 --
Adjustment of securities available for sale to fair value -- -- -- -- --
Common stock issued ..................................... 1,495,000 15 14,185 -- --
Acquisition of common stock by ESOP (119,600 shares) .... -- -- -- -- --
Allocation of ESOP stock (11,960 shares) ................ -- -- 36 -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1995 ............................ 1,495,000 15 14,221 11,013 --
Net income .............................................. -- -- -- 830 --
Adjustment of securities available for sale to fair value -- -- -- -- --
Purchases of common stock (269,750 shares) .............. -- -- -- -- (3,418)
Grant of restricted stock under RRP (45,747 shares) ..... -- -- -- -- 578
Amortization of unearned RRP compensation ............... -- -- -- -- --
Cash dividends declared on common stock ................. -- -- -- (156) --
Allocation of ESOP stock (11,960 shares) ................ -- -- 39 -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1996 ............................ 1,495,000 15 14,260 11,687 (2,840)
Net income .............................................. -- -- -- 1,068 --
Adjustment of securities available for sale to fair value -- -- -- -- --
Purchases of common stock (77,475 shares) ............... -- -- -- -- (1,486)
Grants of restricted stock under RRP (7,475 shares) ..... -- -- -- -- 143
Amortization of unearned RRP compensation ............... -- -- -- -- --
Cash dividends declared on common stock ................. -- -- -- (333) --
Exercise of stock options (7,475 shares) ................ -- -- -- -- 94
Allocation of ESOP stock (11,960 shares) ................ -- -- 105 -- --
--------- --------- --------- --------- ---------
Balance at December 31, 1997 ............................ 1,495,000 $ 15 14,365 12,422 (4,089)
========= ========= ========= ========= =========
G-7
Consolidated Statements of Changes in Stockholdersi Equity
Years ended December 31, 1997, 1996 and 1995
Net unrealized
gain (loss) on
Common Unearned securities
stock recognition available
acquired and retention for sale,
by ESOP plan net of tax Total
------- ---- ---------- -----
Balance at December 31, 1994 ............................ -- -- (112) 10,046
Net income .............................................. -- -- -- 855
Adjustment of securities available for sale to fair value -- -- 200 200
Common stock issued ..................................... -- -- -- 14,200
Acquisition of common stock by ESOP (119,600 shares) .... (1,196) -- -- (1,196)
Allocation of ESOP stock (11,960 shares) ................ 120 -- -- 156
--------- --------- --------- ---------
Balance at December 31, 1995 ............................ (1,076) -- 88 24,261
Net income .............................................. -- -- -- 830
Adjustment of securities available for sale to fair value -- -- (42) (42)
Purchases of common stock (269,750 shares) .............. -- -- -- (3,418)
Grant of restricted stock under RRP (45,747 shares) ..... -- (578) -- --
Amortization of unearned RRP compensation ............... -- 38 -- 38
Cash dividends declared on common stock ................. -- -- -- (156)
Allocation of ESOP stock (11,960 shares) ................ 119 -- -- 158
--------- --------- --------- ---------
Balance at December 31, 1996 ............................ (957) (540) 46 21,671
Net income .............................................. -- -- -- 1,068
Adjustment of securities available for sale to fair value -- -- (36) (36)
Purchases of common stock (77,475 shares) ............... -- -- -- (1,486)
Grants of restricted stock under RRP (7,475 shares) ..... -- (143) -- --
Amortization of unearned RRP compensation ............... -- 228 -- 228
Cash dividends declared on common stock ................. -- -- -- (333)
Exercise of stock options (7,475 shares) ................ -- -- -- 94
Allocation of ESOP stock (11,960 shares) ................ 120 -- -- 225
--------- --------- --------- ---------
Balance at December 31, 1997 ............................ (837) (455) 10 21,431
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
G-8
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(in thousands)
Increase (decrease) in cash and cash equivalents:
Reconciliation of net income to net cash provided
by operating activities:
Net income ....................................................... $ 1,068 830 855
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ................................................ 190 140 143
Net accretion on securities ................................. (75) (12) (30)
ESOP compensation expense ................................... 225 158 156
Amortization of RRP ......................................... 228 38 --
Provision for loan losses ................................... 120 120 370
Real estate owned writedown ................................. -- 7 --
Loss on sale of real estate owned ........................... 3 -- --
Gain on sales of securities available for sale .............. (56) (8) --
(Increase) decrease in accrued interest receivable .......... 7 24 (109)
(Increase) decrease in prepaid expenses and other assets .... 317 (705) (60)
(Decrease) increase in accrued expenses and other liabilities (200) 246 (27)
-------- -------- --------
Net cash provided by operating activities ............... 1,827 838 1,298
-------- -------- --------
Cash flows from investing activities:
Proceeds from maturities and paydowns of
investment securities .............................................. 8,976 12,908 11,223
Proceeds from the sales and calls of securities
available for sale ................................................. 4,000 5,952 --
Purchases of investment securities ................................... (1,700) (6,000) (15,376)
Purchases of securities available for sale ........................... (6,051) -- --
Redemptions (purchases) of FHLB Stock ................................ (123) (98) 6
Net increase in loans made to customers .............................. (11,923) (10,859) (2,717)
Capital expenditures, net of disposals ............................... (511) (647) (90)
Purchases of loans receivable ........................................ (3,550) (6,973) (5,245)
Proceeds from the sales of real estate owned ......................... 86 193 378
-------- -------- --------
Net cash used by investing activities ................... (10,796) (5,524) (11,821)
-------- -------- --------
G-9
Consolidated Statements of Cash Flows, Continued
For the years ended December 31, 1997, 1996 and 1995
1997 1996 1995
---- ---- ----
(in thousands)
Cash flows from financing activities:
Net increase in deposits ............................................ $ 9,853 945 1,372
Net increase (decrease) in advance payments by
borrowers for property taxes and insurance ........................ 121 (242) 132
Purchases of common stock for treasury .............................. (1,486) (3,418) --
Cash dividends paid ................................................. (333) (156) --
Proceeds from exercise of stock options ............................. 94 -- --
Net proceeds from common stock issued in stock conversion ........... -- -- 14,200
Acquisition of common stock by ESOP ................................. -- -- (1,196)
------- ------- -------
Net cash provided (used) in financing activities ....... 8,249 (2,871) 14,508
------- ------- -------
Net increase (decrease) in cash and cash equivalents ..................... (720) (7,557) 3,985
Cash and cash equivalents at beginning of year ........................... 2,896 10,453 6,468
------- ------- -------
Cash and cash equivalents at end of year ................................. $ 2,176 2,896 10,453
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest paid ................................................... $ 6,623 6,187 6,264
======= ======= =======
Taxes paid ...................................................... $ 538 509 520
======= ======= =======
Supplemental schedule of noncash investing activities:
Transfer of loans to other real estate owned ........................ $ 22 178 367
======= ======= =======
Adjustment of securities available for sale to fair value,
net of increase in deferred tax liability of $6 in 1997 ................. $ (36) (42) 200
======= ======= =======
See accompanying notes to consolidated financial statements.
G-10
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
SFS Bancorp, Inc. (the Holding Company) was incorporated under Delaware
law in March, 1995 as a holding company to purchase 100% of the common
stock of Schenectady Federal Savings Bank and subsidiary (the Bank). The
Bank converted from a mutual form to a stock form institution, and the
Holding Company completed its initial public offering on June 29, 1995,
at which time the Holding Company purchased all of the outstanding stock
of the Bank. To date, the principal operations of SFS Bancorp, Inc. and
subsidiary (the Company) have been those of the Bank.
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements:
(a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Holding Company, its wholly owned subsidiary the
Bank, and the Bankis wholly owned subsidiary. All significant
intercompany transactions and balances are eliminated in
consolidation. The accounting and reporting policies of the
Company conform in all material respects to generally accepted
accounting principles and to general practice within the thrift
industry. In the "Parent Company Only" financial statements, the
investment in the wholly owned subsidiary is carried under the
equity method of accounting.
The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ
from those estimates.
Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of
the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of
loans. In connection with the determination of the allowance for
loan losses and the valuation of real estate owned, management
obtained appraisals for significant properties.
(b) Business
A substantial portion of the Companyis assets are loans secured by
real estate in the upstate New York area. In addition, a
substantial portion of the real estate owned is located in those
same markets. Accordingly, the ultimate collectibility of a
G-11
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies (continued)
substantial portion of the Bankis loan portfolio and the recovery
of a substantial portion of the carrying amount of real estate
owned are dependent upon market conditions in the upstate New York
region.
Management believes that the allowance for loan losses is adequate
and that real estate owned is properly valued. While management
uses available information to recognize losses on loans and real
estate owned, future additions to the allowance or writedowns on
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 Bankis allowance for loan losses. Such agencies may require
the Bank to recognize additions to the allowance or writedowns on
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.
(c) Cash Equivalents
For purposes of the consolidated statements of cash flows, the
Company considers all cash and due from banks and federal funds
sold to be cash equivalents.
(d) Securities Available for Sale, Investment Securities and Federal
Home Loan Bank of New York Stock
Management determines the appropriate classification of securities
at the time of purchase. If management has the positive intent and
ability to hold debt securities to maturity, they are classified
as investment securities and are stated at amortized cost. 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 as a separate component of
stockholders' equity, net of estimated income taxes. The Company
does not maintain a trading portfolio.
Realized gains and losses on the sale of securities are based on
the net proceeds and the amortized cost of the securities sold,
using the specific identification method. The cost of securities
is adjusted for amortization of premium and accretion of discount,
which is calculated on an effective interest method.
Mortgage backed securities, which are guaranteed by the Government
National Mortgage Association ("GNMA"), the Federal Home Loan
Mortgage Corporation ("FHLMC"), or the Federal National Mortgage
Association ("FNMA"), represent participating interests in direct
pass-through pools of long-term first mortgage loans originated
and serviced by the issuers of the securities.
G-12
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
Unrealized losses on securities are charged to earnings when the
decline in fair value of a security is judged to be other than
temporary.
Non-marketable equity securities, such as Federal Home Loan Bank
of New York stock, are stated at cost. The investment in Federal
Home Bank of New York stock is required for membership.
(e) Loans Receivable
Loans receivable are stated at unpaid principal amount, net of
unearned discount, unamortized premiums, deferred loan fees and
the allowance for loan losses. Premiums and discounts on related
loans are amortized into income using a method that approximates
the level-yield method. Loan origination fees net of certain
related costs are generally amortized into income over the
estimated term of the loan using the interest method of
amortization. Interest income on loans is not recognized when
considered doubtful of collection by management.
Loans considered doubtful of collection by management are placed
on a nonaccrual status for the recording of interest. Generally
loans past due 90 days or more as to principal or interest are
placed on nonaccrual status except for certain loans which, in
management's judgment, are adequately secured and for which
collection is probable. Previously accrued income that has not
been collected is reversed from current income. Thereafter, the
application of payments received (principal or interest) is
dependent on the expectation of ultimate repayment of the loan. If
ultimate repayment of the loan is expected, any payments received
are applied in accordance with contractual terms. If ultimate
repayment of principal is not expected or management judges it to
be prudent, any payment received on a nonaccrual loan is applied
to principal until ultimate repayment becomes expected. Loans are
removed from nonaccrual status when they become current as to
principal and interest and when, in the opinion of management, the
loans are estimated to be fully collectible as to principal and
interest. Amortization of related deferred fees is suspended when
a loan is placed on nonaccrual status.
The allowance for loan losses is maintained at a level deemed
appropriate by management based on an evaluation of the known and
inherent risks in the present portfolio, the level of
non-performing loans, past loan loss experience, estimated value
of underlying collateral, and current and prospective economic
conditions. The allowance is increased by provisions for loan
losses charged to operations.
G-13
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
Impaired loans are identified and measured in accordance with
Statement of Financial Accounting Standards (SFAS) No. 114,
"Accounting by Creditors for Impairment of a Loan," and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." A loan is considered impaired when
it is probable that the borrower will be unable to repay the loan
according to the original contractual terms of the loan agreement,
or the loan is restructured in a troubled debt restructuring
subsequent to January 1, 1995. These standards are applicable
principally to commercial and commercial real estate loans,
however, certain provisions related to restructured loans are
applicable to all loan types. The adoption of these Statements did
not have a material effect on the Company's consolidated financial
statements.
Under these Statements the allowance for loan losses related to
impaired loans is based on discounted cash flows using the loan's
initial effective interest rate or the fair value of the
collateral for certain loans where repayment of the loan is
expected to be provided solely by the underlying collateral
(collateral dependent loans). The Company's impaired loans are
generally collateral dependent. The Company considers estimated
costs to sell on a discounted basis when determining the fair
value of collateral in the measurement of impairment if these
costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loans.
As a matter of policy, the Company generally places impaired loans
on nonaccrual status and recognizes interest income on such loans
only on a cash basis. In some instances, all monies received from
the borrower, or from the proceeds of collateral, are applied
directly to reduce the principal balance of the loan, and no
interest income is recognized until the principal balance of the
impaired loan is paid in full or is no longer considered impaired.
(f) Real Estate Owned
Included in real estate owned are assets received from foreclosure
and in-substance foreclosures. In accordance with SFAS No. 114, a
loan is classified as an in-substance foreclosure when the Company
has taken possession of the collateral regardless of whether
formal foreclosure proceedings have taken place.
Foreclosed assets, including in-substance foreclosures, are
recorded on an individual asset basis at net realizable value
which is the lower of fair value minus estimated costs to sell or
"cost" (defined as the fair value at initial foreclosure). When a
property is acquired or identified as in-substance foreclosure,
G-14
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
the excess of the loan balance over fair value is charged to the
allowance for loan losses. Subsequent writedowns to carry the
property at fair value are included in noninterest expense. Costs
incurred to develop or improve properties are capitalized, while
holding costs are charged to expense.
(g) Premises and Equipment, Net
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed on the
straight-line or accelerated method over the estimated useful
lives of the related assets. Useful lives are 20 to 50 years for
banking house and 3 to 15 years for furniture, fixtures, and
office equipment.
(h) Pension Plan
The Company has a defined benefit pension plan covering all full
time employees meeting age and service requirements. This plan is
accounted for in accordance with SFAS No. 87, "Employers'
Accounting for Pensions."
(i) Income Taxes
Income taxes are provided on income reported in the consolidated
statements of income regardless of when such taxes are payable.
The Company accounts for income taxes in accordance with SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 requires the
asset and liability method of accounting for income taxes. Under
the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the future tax
consequences attributable to differences between financial
statement carrying amounts of existing assets and liabilities and
their respective tax basis. 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. Under SFAS No. 109, 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. The Company's policy is that deferred tax assets
are reduced by a valuation reserve if, based on the weight of
available evidence, it is more likely than not that some or all of
the deferred tax assets will not be realized.
G-15
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
(j) Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities
In June, 1996, the Financial Accounting Standards Board (FASB)
issued SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," which
provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities
based on consistent application of a financial-components approach
that focuses on control. The Company adopted SFAS No. 125 as of
January 1, 1997. Certain aspects of SFAS No. 125 were amended by
SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." The adoption of SFAS No.
125 did not have a material impact on the Company's consolidated
financial statements.
(k) Borrowings
The Company has an overnight line of credit and a one-month
overnight repricing line of credit with the Federal Home Loan Bank
of New York as of December 31, 1997 totaling approximately $16.6
million. The interest rate may fluctuate based on existing market
conditions and customers' demands for credit. There were no
amounts outstanding under this line of credit at December 31,
1997.
(l) Stock Based Compensation Plans
Compensation expense in connection with the Company's Employee
Stock Ownership Plan (ESOP) is recorded in accordance with the
American Institute of Certified Public Accountants' Statement of
Position No. 93-6, "Employers' Accounting for Employee Stock
Ownership Plans."
The Company accounts for its stock option plans in accordance with
the provisions of Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly,
compensation expense is recognized only if the exercise price of
the option is less than the fair value of the underlying stock at
the grant date. SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages entities to recognize the fair value of
all stock-based awards on the date of grant as compensation
expense over the vesting period. Alternatively, SFAS No. 123
allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma disclosures of net income and
earnings per share as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures required by SFAS No. 123.
G-16
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
The Company's Recognition and Retention Plan ("RRP") is also
accounted for in accordance with APB Opinion No. 25. The fair
value of the shares awarded, measured as of the grant date, is
recognized as unearned compensation (a deduction from
stockholders' equity) and amortized to compensation expense as the
shares become vested. Any excess of the cost to fund purchases of
RRP shares over the grant-date fair value is charged to
stockholders' equity.
(m) Earnings per Share
In February, 1997, the FASB issued SFAS No. 128, "Earnings per
Share," which establishes standards for computing and presenting
earnings per share. SFAS No. 128 requires dual presentation of
basic and diluted earnings per share on the face of the income
statement for all entities with a complex capital structure. Basic
earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
entity. The Company adopted SFAS No. 128 as of December 31, 1997.
All earnings per share data reflect the adoption of SFAS No. 128.
Unallocated ESOP shares are not included in the weighted average
number of common shares outstanding for either the basic or
diluted earnings per share calculations.
(n) Reclassifications
Amounts in the prior years' financial statements are reclassified
whenever necessary, in order to conform to the presentation in the
current year's financial statements.
(2) Conversion to Stock Ownership
On June 29, 1995, the Holding Company sold 1,495,000 shares of
common stock at $10.00 per share to depositors, employees of the
Bank, and outsiders. Net proceeds from the sale of stock of the
Holding Company, after deducting conversion expenses of
approximately $750,000, were $14.2 million and are reflected as
common stock and additional paid-in capital in the accompanying
consolidated balance sheets. The Company utilized $7.1 million of
the net proceeds to acquire all of the capital stock of the Bank.
As part of the conversion, the Bank established a liquidation
account for the benefit of eligible depositors who continue to
maintain their deposit accounts in the Bank after conversion. In
G-17
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
(1) Summary of Significant Accounting Policies
the unlikely event of a complete liquidation of the Bank, each
eligible depositor will be entitled to receive a liquidation
distribution from the liquidation account, in the proportionate
amount of the then current adjusted balance for deposit accounts
held, before distribution may be made with respect to the Bankis
capital stock. The Bank may not declare or pay a cash dividend to
the Holding Company on, or repurchase any of, its capital stock if
the effect thereof would cause the retained earnings of the Bank
to be reduced below the amount required for the liquidation
account. Except for such restrictions, the existence of the
liquidation account does not restrict the use or application of
retained earnings.
The Bank is capital exceeds all of the fully phased-in capital
regulatory requirements. The Office of Thrift Supervision (OTS)
regulations provide that an institution that exceeds all fully
phased-in capital requirements before and after a proposed capital
distribution could, after prior notice but without the approval by
the OTS, make capital distributions during the calendar year of up
to 100% of its net income to date during the calendar year plus
the amount that would reduce by one-half its isurplus capital
ratioi (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year. Any
additional capital distributions would require prior regulatory
approval. At December 31, 1997, the maximum amount that could have
been paid by the Bank to the Holding Company was approximately
$7.3 million.
The Holding Company's ability to pay dividends to its stockholders
is dependent on the ability of the Bank to pay dividends to the
Holding Company.
(3) Earnings Per Share
The following is a reconciliation of the numerators and
denominators for the basic and diluted earnings per share (EPS)
calculations for the years ended December 31:
G-18
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(in thousands except share and per share information)
1997
Weighted
Average
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS ................................. $1,068 1,108,094 $ .96
==========
Dilutive effect of potential common shares
related to stock based compensation plans -- 46,231
------ -----------
Diluted EPS ............................... $1,068 1,154,325 $ .93
====== =========== ==========
1996
Weighted
Average
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS ................................. $830 1,224,703 $ .68
======
Dilutive effect of potential common shares
related to stock based compensation plans -- 10,128
---- ---------
Diluted EPS ............................... $830 1,234,831 $ .67
==== ========= ======
There were no potential common shares outstanding during 1995.
Earnings per share in 1995 were compiled on earnings and weighted
average shares from the date of the initial public offering
through December 31, 1995. Weighted average shares outstanding and
net income for this period were 1,495,000 and $613,000,
respectively.
(4) Reserve Requirements
The Company is required to maintain certain reserves of cash
and/or deposits with the Federal Reserve Bank. The amount of this
reserve requirement, included in cash and due from banks, was
approximately $164,000 and $171,000 at December 31, 1997 and 1996,
respectively.
The Company is also required to maintain certain levels of stock
in the Federal Home Loan Bank of New York.
G-19
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(5) Securities Available for Sale
The amortized cost and estimated fair value are as follows at
December 31:
1997
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
U.S. Government securities and agencies $ 4,051 16 - 4,067
------- ----- ------ --------
Total securities available for sale $ 4,051 16 - 4,067
======= ===== ====== ========
1996
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(in thousands)
Mutual funds $ 1,944 46 - 1,990
------- ----- ------ --------
Total securities available for sale $ 1,944 46 - 1,990
======= ===== ====== ========
The securities available for sale portfolio at December 31, 1996
consists of mutual funds representing investments in both
adjustable and fixed rate mortgage-related securities and U.S.
Government obligations.
Proceeds from the sale of securities available for sale were
approximately $2.0 million and $6.0 million during 1997 and 1996,
respectively. During 1997, sales of securities available for sale
resulted in gross realized gains of $56,000. During 1996, sales of
securities available for sale resulted in gross realized gains of
$44,000 and gross realized losses of $36,000. There were no sales
of securities available for sale during 1995.
All securities available for sale at December 31, 1997 are due to
contractually mature in approximately five years. Expected
maturities will differ from contractual maturities because certain
issuers may have the right to call or prepay obligations with or
without call or prepayment penalties.
G-20
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(6) Investment Securities
The amortized cost and estimated fair values of investment
securities are as follows at December 31:
1997
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
Mortgage backed
securities .................. $16,966 194 (84) 17,076
U.S. Government
securities and agencies ..... 11,937 24 (18) 11,943
States and political
subdivisions ................ 76 -- -- 76
------- ------- ------- -------
Total investment securities $28,979 218 (102) 29,095
======= ======= ======= =======
1996
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(in thousands)
Mortgage backed
securities ...................... $20,434 232 (344) 20,322
U.S. Government
securities and agencies ......... 13,461 1 (98) 13,364
States and political subdivisions ... 84 -- -- 84
Public utilities .................... 2,201 -- (7) 2,194
------- ------- ------- -------
Total investment securities$ .. 36,180 233 (449) 35,964
======= ======= ======= =======
There were no sales of investment securities during 1997, 1996 or
1995.
G-21
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The amortized cost and estimated fair value of investment
securities at December 31, 1997, by contractual maturity, are
shown below (mortgage backed securities are included by final
contractual maturity). Expected maturities will differ from
contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment
penalties.
Amortized Estimated
Cost Fair Value
---- ----------
(in thousands)
Due within one year .......................... $ 4,118 4,114
Due one year to five years ................... 16,625 16,544
Due five years to ten years .................. 1,381 1,384
Due after ten years .......................... 6,855 7,053
------- -------
Total investment securities ............. $28,979 29,095
======= =======
(7) Loans Receivable, Net
A summary of loans receivable is as follows at December 31:
1997 1996
---- ----
(in thousands)
Loans secured by real estate:
Residential:
Conventional ................................ $100,277 84,840
Home equity ................................. 22,658 22,904
FHA insured ................................. 2,772 3,511
VA guaranteed ............................... 2,028 2,810
Commercial and multi family ..................... 6,130 4,532
-------- --------
133,865 118,597
------- --------
Other loans:
Loans on savings accounts ....................... 573 478
Personal ........................................ 143 34
Other ........................................... 5 11
-------- --------
721 523
-------- --------
Less:
Unearned discount and net deferred loan fees .... 22 23
Allowance for loan losses ....................... 778 642
-------- --------
800 665
-------- --------
Loans receivable, net ....................... $133,786 118,455
======== ========
G-22
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Not included in the Company's loans receivable are real estate
mortgages serviced by the Bank for other institutions of
approximately $3.5 and $4.2 million at December 31, 1997 and 1996,
respectively.
At December 31, 1997 and 1996, the recorded investment in loans
that were considered to be impaired under SFAS No. 114 totaled
approximately $691,000 and $744,000, respectively. The amount in
both years represents one impaired loan that, as a result of
charge-offs of approximately $202,000, did not require an
allowance for credit losses determined in accordance with SFAS No.
114. The average recorded investment in impaired loans during the
years ended December 31, 1997, 1996 and 1995 was approximately
$718,000, $744,000 and $1,091,000, respectively.
For the years ended December 31, 1997, 1996 and 1995, the Company
recognized approximately $0, $74,000 and $50,000 of interest
income on impaired loans, respectively.
The following table sets forth the information with regard to
non-performing loans at December 31:
1997 1996
---- ----
(in thousands)
Loans on a nonaccrual status ..................... $1,328 801
Loans contractually past due 90 days
or more and still accruing interest .......... 19 32
Restructured loans ............................... -- --
------ ------
Total non-performing loans .............. $1,347 833
====== ======
Interest on nonaccrual loans of approximately $89,000, $81,000,
and $99,000 would have been earned in accordance with the original
contractual terms of the loans in 1997, 1996 and 1995,
respectively. Approximately $0, $74,000, and $38,000 of interest
was collected and recognized as income in 1997, 1996 and 1995,
respectively. There are no commitments to extend further credit on
the restructured loans.
Certain directors and executive officers of the Company were
customers of and had other transactions with the Company in the
ordinary course of business. Loans to these parties were made in
the ordinary course of business at the Companyis normal credit
terms, including interest rate and collateralization. The
aggregate of such loans totaled approximately $127,000 and
$145,000 at December 31, 1997 and 1996, respectively. There were
no advances to the directors and executive officers during the
year ended December 31, 1997. Total payments made on these loans
were approximately $18,000 during 1997.
G-23
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Changes in the allowance for loan losses were as follows for the
years ended December 31:
1997 1996 1995
---- ---- ----
(in thousands)
Balance, beginning of year .................... $ 642 572 861
Provision charged to operations ............... 120 120 370
Loans charged off ............................. (26) (87) (718)
Recoveries on loans previously charged off .... 42 37 59
----- ----- -----
Balance, end of year .......................... $ 778 642 572
===== ===== =====
(8) Accrued Interest Receivable
A summary of accrued interest receivable by type was as follows at
December 31:
1997 1996
(in thousands)
Loans ............................................ $ 766 693
Securities available for sale .................... 68 --
Investment securities ............................ 296 444
------ ------
Total accrued interest receivable ............ $1,130 1,137
====== ======
(9) Premises and Equipment, Net
Premises and equipment are summarized by major classification as
follows at December 31:
1997 1996
---- ----
(in thousands)
Land ................................................. $ 338 305
Leasehold improvements ............................... 241 240
Office buildings ..................................... 2,550 2,338
Furniture, fixtures and equipment .................... 1,135 889
------ ------
Total ........................................ 4,264 3,772
Less accumulated depreciation and amortization ....... 2,022 1,851
------ ------
Premises and equipment, net .................. $2,242 1,921
====== ======
G-24
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Depreciation expense included in office occupancy and equipment
expense amounted to approximately $190,000, $140,000, and $143,000
for the years ended December 31, 1997, 1996 and 1995,
respectively.
(10) Real Estate Owned
A summary of real estate acquired through foreclosure by the
Company or classified as in-substance foreclosure is as follows at
December 31:
1997 1996
---- ----
(in thousands)
Residential (1 - 4 family) ..................... $ 26 93
Commercial property ............................ 85 85
---- ----
Total real estate owned .................... $111 178
==== ====
(11) Due to Depositors
Due to depositors account balances are summarized as follows at
December 31:
Stated
rate 1997 1996
----------- -------- ---------
(in thousands)
Savings deposit accounts:
Passbook and statement deposit accounts ........... 3.00% $ 36,681 37,152
Money market deposit accounts ..................... 2.60 - 4.30 7,619 6,074
-------- --------
44,300 43,226
Time deposit accounts:
4.00 - 4.99 801 23,244
5.00 - 5.99 84,451 50,815
6.00 - 6.99 9,489 12,835
-------- --------
94,741 86,894
NOW deposit accounts ................................... 1.75 9,163 9,104
Demand deposit accounts ................................ 0 2,265 1,392
-------- --------
Total deposits ................................ $150,469 140,616
======== ========
G-25
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The approximate amount of contractual maturities of time deposit
accounts at December 31, 1997 are as follows:
Year ended December 31, (in thousands)
----------------------- --------------
1998 $ 65,273
1999 22,314
2000 3,247
2001 1,508
2002 2,399
-----------
$ 94,741
At December 31, 1997 and 1996, the aggregate amount of time
deposit accounts with balances equal to or in excess of $100,000
was approximately $8.4 million and $6.2 million, respectively.
Interest expense on deposits and advance payments by borrowers for
property taxes and insurance is summarized as follows for the
years ended December 31:
1997 1996 1995
---- ---- ----
(in thousands)
Escrow balances ............................ $ 25 25 29
Passbook and statement savings ............. 1,113 1,173 1,325
Money market accounts ...................... 251 161 129
Time deposits .............................. 5,075 4,680 4,620
NOW accounts ............................... 159 148 133
------ ------ ------
Total interest on deposits and advance
payments by borrowers for property
taxes and insurance ................ $6,623 6,187 6,236
====== ====== ======
Weighted average interest rates ... 4.59% 4.37% 4.56%
====== ====== ======
G-26
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(12) Income Taxes
The following is a summary of the components of income tax expense
for the years ended December 31:
1997 1996 1995
---- ---- ----
(in thousands)
Current tax expense:
Federal ........................... $ 583 372 306
State ............................. 121 76 50
Deferred benefit .................. (12) (554) --
----- ----- -----
Income tax expense (benefit) .......... $ 692 (106) 356
===== ===== =====
The provision for income taxes is less than the amount computed by
applying the U.S. Federal income tax rate of 34% to income before
taxes as follows:
1997 1996 1995
------------------- ------------------- --------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------ ------ ------ ------ ------ ------
(dollars in thousands)
Tax expense at statutory rate ....... $ 598 34.0% $ 246 34.0% $ 412 34.0%
State income tax, net of
federal tax benefit ............. 105 5.9 45 6.2 33 2.7
Change in beginning of year
balance of the valuation
allowance for deferred tax assets -- -- (396) (54.7) (78) (6.4)
Other, net .......................... (11) (.6) (1) (.1) (11) (.9)
----- ---- ----- ---- ----- ----
$ 692 39.3% $(106) (14.6)% $ 356 29.4%
===== ==== ===== ==== ===== ====
G-27
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The tax effects of significant temporary differences that give
rise to the deferred tax assets and liabilities were as follows at
December 31:
1997 1996
---- ----
(in thousands)
Deferred tax assets:
Allowance for loan losses .......................... $ 334 276
Deferred compensation and pension costs ............ 430 406
Recognition and retention plan expense ............. 52 62
Securities basis adjustment ........................ 22 46
----- -----
Total gross deferred tax assets ............... 838 790
Less valuation allowance ...................... (96) (96)
----- -----
Net deferred tax assets ....................... 742 694
----- -----
Deferred tax liabilities:
Depreciation differences ........................... 72 74
Accretion of discount on securities ................ 53 19
Other items ........................................ 51 47
----- -----
Total gross deferred tax liabilities .......... 176 140
----- -----
Net deferred tax asset at year-end ............ 566 554
Net deferred tax asset at beginning of year ... 554 --
----- -----
Deferred tax benefit for the years ended ...... $ 12 554
===== =====
In addition to the deferred tax amounts described above, the
Company also had a deferred tax liability of approximately $6,000
at December 31, 1997, related to the net unrealized gains on
securities available for sale.
The valuation allowance for deferred tax assets as of December 31,
1997 and 1996 was $96,000. During the year ended December 31,
1996, the valuation allowance was reduced by $396,000. This
reduction was primarily the result of the expected realization of
G-28
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
certain deferred items which were previously considered to be
uncertain. In evaluating the valuation allowance the Company takes
into consideration the nature and timing of the deferred tax asset
items as well as the amount of available open tax carrybacks. The
Company has fully reserved its New York State deferred tax asset,
which is a significant component of deferred tax assets, due to
the lack of carryback and carryforward provisions available in New
York State. Any changes in the deferred tax asset valuation
allowance is based upon the Company's continuing evaluation of the
level of such allowance and the realizability of the temporary
differences creating the deferred tax asset. Based on recent
historical and anticipated future pre-tax earnings, management
believes it is more likely than not that the Company will realize
its net deferred tax assets.
As a thrift institution, the Bank is subject to special provisions
in the Federal and New York State tax laws regarding its allowable
tax bad debt deductions and related tax bad debt reserves. These
deductions historically have been determined using methods based
on loss experience or a percentage of taxable income. Tax bad debt
reserves are maintained equal to the excess of allowable
deductions over actual bad debt losses and other reserve
reductions. These reserves consist of a defined base-year amount,
plus additional amounts ("excess reserves") accumulated after the
base year. SFAS No. 109 requires recognition of deferred tax
liabilities with respect to such excess reserves, as well as any
portion of the base-year amount which is expected to become
taxable (or "recaptured") in the foreseeable future.
Certain amendments to the Federal and New York State tax laws
regarding bad debt deductions were enacted in July and August
1996. The Federal amendments include elimination of the percentage
of taxable income method for tax years beginning after December
31, 1995, and imposition of a requirement to recapture into
taxable income (over a period of approximately six years) the bad
debt reserves in excess of the base-year amounts. The Bank
previously established, and will continue to maintain, a deferred
tax liability with respect to such excess Federal reserves. The
New York State amendments redesignate the Bank's state bad debt
reserves at December 31, 1995 as the base-year amount and also
provide for future additions to the base-year reserve using the
percentage of taxable income method.
In accordance with SFAS No. 109, a deferred tax liability has not
been recognized at December 31, 1997 with respect to the base-year
reserve of $4.6 million, since the Bank does not expect that this
amount will become taxable in the foreseeable future. Under New
York State tax law, as amended, events that would result in
taxation of this reserve include the failure of the Bank to
maintain a specified qualifying assets ratio or meet other thrift
definition tests for tax purposes. The unrecognized deferred tax
liability at December 31, 1997 with respect to the base-year
reserve was approximately $1.6 million.
G-29
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(13) Employee Benefit Plans
(a) Pension Plan
The Company's defined benefit, non-contributory, pension plan (the
"Plan") covers all full time employees meeting age and service
requirements. The benefit formula is equal to 2% of three year
average base earnings multiplied by the number of years of
credited service up to 30 years. Benefits contemplated by the Plan
are being funded under a group annuity contract with an insurance
company.
The following table sets forth the Plan's funded status and
amounts recognized in the Company is consolidated financial
statements at December 31:
1997 1996
---- ----
(in thousands)
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including
vested benefits of approximately $3,357,000
in 1997 and $2,828,000 in 1996 ........................ $(3,436) (2,927)
======= =======
Projected benefit obligation for service rendered to date (4,662) (3,936)
Plan assets at fair value ................................ 3,636 3,190
------- -------
Projected benefit obligations in excess of plan assets ... (1,026) (746)
Unrecognized net loss from past experience different
from that assumed of effects and changes in assumptions 704 359
Unrecognized prior service costs ......................... 2 2
Unrecognized net obligation at January 1, 1989 being
recognized over 19.66 years ........................... 246 269
------- -------
Accrued pension liability ................................ $ (74) (116)
======= =======
Net pension cost for 1997, 1996 and 1995 included the
following components:
1997 1996 1995
---- ---- ----
Service cost - benefits earned during the period $ 171 171 139
Interest cost on projected benefit obligations . 288 265 237
Actual return on plan assets ................... (295) (171) (352)
Net amortization and deferral .................. 26 (67) 151
----- ----- -----
Net periodic pension cost ...................... $ 190 198 175
===== ===== =====
G-30
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Significant assumptions used in determining pension expense of the
Plan are as follows for the years ended December 31:
1997 1996 1995
---- ---- ----
Discount rate .............................. 7.0% 7.5% 7.5%
Expected long-term rate of return .......... 9.0% 9.0% 9.0%
Compensation increase rate ................. 6.0% 6.0% 6.0%
(b) Executive Supplemental Retirement Plan
The Company maintains an Executive Supplemental Retirement Plan
for key management personnel. An expense of approximately $72,000,
$72,000, and $107,000 was recorded in 1997, 1996 and 1995,
respectively.
(c) 401(k) Savings Plan
The Company maintains a defined contribution 401(k) savings plan,
covering all full time employees who have attained age 21 and have
completed one year of employment. The Company matches 50% of
employee contributions that are less than or equal to 6% of the
employeeis salary. Total expense recorded during 1997, 1996 and
1995 was approximately $27,000, $23,000, and $24,000,
respectively.
(14) Stock-Based Compensation Plans
(a) Employee Stock Ownership Plan
As part of the conversion discussed in note 2, an employee stock
ownership plan (ESOP) was established to provide substantially all
employees of the Company the opportunity to also become
stockholders. The ESOP borrowed $1,196,000 from the Holding
Company and used the funds to purchase 119,600 shares of the
common stock of the Company issued in the conversion. The loan
will be repaid principally from the Bankis discretionary
contributions to the ESOP over a period of ten years. At December
31, 1997 and 1996, the loan had an outstanding balance of $837,200
and $956,800, respectively, and an interest rate of 7.31%. Both
the loan obligation and the unearned compensation are reduced by
the amount of loan repayments made by the ESOP. Shares purchased
with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. Contributions
to the ESOP and shares released from the suspense account are
allocated among participants on the basis of compensation in the
year of allocation.
G-31
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Unallocated ESOP shares are pledged as collateral on the loan and
are reported in stockholders' equity. As shares are released from
collateral, the Company reports compensation expense equal to the
current market price of the shares, and the shares become
outstanding for earnings per share computations. Unallocated ESOP
shares are not included in the earnings per share computations.
The Company recorded approximately $225,000 and $158,000 of
compensation expense under the ESOP in 1997 and 1996,
respectively.
The ESOP shares as of December 31, 1997 were as follows:
Allocated shares 23,920
Shares released for allocation 11,960
Unallocated shares 83,720
------------
119,600
============
Market value of unallocated shares at
December 31, 1997 $ 2,250,000
============
(b) Stock Option Plan
On January 16, 1996, the Company's stockholders approved the SFS
Bancorp, Inc. 1996 Stock Option and Incentive Plan (Stock Option
Plan). The primary objective of the Stock Option Plan is to
provide officers and directors with a proprietary interest in the
Company and as an incentive to encourage such persons to remain
with the Company.
Under the Stock Option Plan, 149,500 shares of authorized but
unissued stock are reserved for issuance upon option exercises.
The Company also has the alternative to fund the Stock Option Plan
with treasury stock. Options under the plan may be either
non-qualified stock options or incentive stock options. Each
option entitles the holder to purchase one share of common stock
at an exercise price equal to the fair market value on the date of
grant. Options expire no later than ten years following the date
of grant.
The Company applies APB Opinion No. 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has
been recognized for its stock option plans. In October 1995, the
FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 requires Companies not using a fair
value based method of accounting for employee stock options or
similar plans, to provide pro forma disclosure of net income and
earnings per share as if that method of accounting had been
applied.
G-32
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997 and
1996:
October January January
1997 1997 1996
---- ---- ----
Dividend yield ................. 1.3% 1.9% 1.7%
Expected volatility ............ 22.0% 22.0% 25.0%
Risk-free interest rate ........ 6.0% 6.5% 5.6%
Expected life .................. 7 years 7 years 7 years
Had the Company recorded compensation cost based on the fair value
at grant date for its stock options under SFAS No. 123, the
company's consolidated net income and basic and diluted earnings
per share would have been reduced to the pro forma amounts
indicated below:
(in thousands except per share data)
1997 1996
---- ----
Net income:
As reported .......................... $1,068 830
Pro forma ............................ 976 744
Basic earnings per share:
As reported .......................... .96 .68
Pro forma ............................ .88 .61
Diluted earnings per share:
As reported .......................... .93 .67
Pro forma ............................ .86 .62
Because the Company's employee stock options have characteristics
significantly different from those of traded options for which the
Black-Scholes model was developed, and because changes in the
subjective input assumptions can materially affect the fair value
estimate, the existing models, in management's opinion, do not
necessarily provide a reliable single measure of the fair value of
its employee stock options.
G-33
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
A summary of the status of the Company's stock option plans as of
December 31, 1997 and 1996 and changes during the years ended on
those dates is presented below:
1997 1996
--------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ ----- ------ -----
Options:
Outstanding at January 1 114,367 $ 12.63 - -
Granted 18,687 19.12 133,054 12.63
Exercised (7,475) 12.63 - -
Cancelled - - (18,687) 12.63
Outstanding at year-end 125,579 13.59 114,367 12.63
Exercisable at year-end 21,379 12.63 - -
Estimated weighted-average
fair value of options granted
during the year $ 6.29 $ 4.08
======= ========
The following table summarizes information about the Company's
stock options at December 31, 1997:
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price at 12/31/97 Life Price at 12/31/97 Price
----- ----------- ---- ----- ----------- -----
$ 12.625 106,892 8 years $ 12.63 21,379 $ 12.63
14.75 7,475 9 years 14.75 - -
22.03 11,212 9.8 years 22.03 - -
(c) Recognition and Retention Plan
On January 16, 1996, the Company's stockholders approved the SFS
Bancorp, Inc. Recognition and Retention Plan (RRP). The purpose of
the plan is to promote the long-term interests of the Company and
its shareholders by providing a stock based compensation program
to attract and retain officers and directors. Under the RRP,
59,800 shares of authorized but unissued shares are reserved for
issuance under the plan. The Company also has the alternative to
fund the RRP with treasury stock.
G-34
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
During 1997 and 1996, 7,475 shares and 53,222 shares,
respectively, were awarded under the RRP. During 1996, 7,475
shares were forfeited under the RRP. 2,990 shares and 8,691 shares
vested under the RRP during 1997 and 1996, respectively.
(15) Fair Value of Financial Instruments
SFAS No. 107, iDisclosures about Fair Value of Financial
Instrumentsi requires the Company to disclose estimated fair
values for its financial instruments. SFAS No. 107 defined fair
value of financial instruments as the amount at which the
instrument could be exchanged in a current transaction between
willing parties other than in a forced or liquidation sale. SFAS
No. 107 defines a financial instrument as cash, evidence of
ownership interest in an entity, or a contract that imposes on one
entity a contractual obligation to deliver cash or another
financial instrument to a second entity or to exchange other
financial instruments on potentially unfavorable terms with a
second entity and conveys to that second entity a contractual
right to receive cash or another financial instrument from the
first entity or to exchange other financial instruments on
potentially favorable terms with the first entity.
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 Companyis
entire holdings of a particular financial instrument. Because no
ready market exists for a significant portion of the Companyis
financial instruments, fair value estimates are based on judgments
regarding future expected net cash flows, current economic
conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance
sheet financial instruments without attempting to estimate the
value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments.
Significant assets and liabilities that are not considered
financial assets or liabilities include the deferred tax asset and
office premises and equipment. In addition, tax ramifications
related to the realization of the unrealized gains and losses,
which can have a significant effect on fair value estimates, have
not have been considered in the estimates of fair value under SFAS
No. 107.
In addition there are significant intangible assets that SFAS No.
107 does not recognize, such as the value of "core deposits", the
Company's branch network and other items generally referred to as
goodwill.
G-35
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The following tables present the carrying amounts and estimated
fair values of the Company is financial instruments at December
31, 1997 and 1996:
1997
-----------------------
(in thousands)
Carrying Estimated
Amount Fair Value
------ ----------
Financial assets:
Cash and cash equivalents ................................ $ 2,176 2,176
Securities available for sale ............................ 4,067 4,067
Investment securities .................................... 28,979 29,095
Loans .................................................... 134,586 135,886
Less: allowance for loan losses .................... 778 --
unearned discount, and deferred loan fees, net 22 --
-------- --------
Net loans ....................................... 133,786 135,886
Accrued interest receivable .............................. 1,130 1,130
Financial liabilities:
Savings, now, and demand deposit accounts ................ 55,728 55,728
Time deposit accounts .................................... 94,741 94,880
Advance payments by borrowers for property taxes
and insurance ....................................... 1,281 1,281
Accrued interest on depositors accounts .................. 7 7
1996
----------------------
(in thousands)
Carrying Estimated
Amount Fair Value
------ ----------
Financial assets:
Cash and cash equivalents ................................... $ 2,896 2,896
Securities available for sale ............................... 1,990 1,990
Investment securities ....................................... 36,180 35,964
Loans ....................................................... 119,120 118,903
Less: allowance for loan losses ....................... 642 --
unearned discount, and deferred loan fees, net 23 --
-------- --------
Net loans .......................................... 118,455 118,903
Accrued interest receivable ................................. 1,137 1,137
Financial liabilities:
Savings, now, and demand deposit accounts ................... 53,722 53,722
Time deposit accounts ....................................... 86,894 86,968
Advance payments by borrowers for property taxes
and insurance .......................................... 1,160 1,160
Accrued interest on depositors accounts ..................... 7 7
G-36
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Financial Instruments with Carrying Amount Equal to Fair Value
The carrying amount of cash and due from banks and fed eral funds
sold (collectively defined as icash and cash equivalentsi),
accrued interest receivable, accrued interest payable, and advance
payments by borrowers for property taxes and insurance is
considered to be equal to fair value as a result of their
short-term nature.
Securities Available for Sale, Debt Securities and Mortgage-Backed
Securities
The fair value of securities available for sale and investment
securities is estimated based on bid prices published in financial
newspapers and bid quotations received from either quotation
services or securities dealers.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
one- to four-family, commercial real estate, consumer and
commercial loans. Each loan category is further segmented into
fixed and adjustable rate interest terms and by performing and
nonperforming categories.
The 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 loan. The estimate of maturity
is based on the contractual term of the loans to maturity,
adjusted for estimated prepayments.
Fair value for nonperforming loans is based on recent external
appraisals and discounting of cash flows. Estimated cash flows are
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.
Deposit Liabilities
Under SFAS No. 107, the fair value of deposits with no stated
maturity, such as noninterest-bearing demand deposits, savings
deposits, NOW deposits and money market deposits, must be stated
at the amount payable on demand as of December 31, 1997 and 1996.
The fair value of certificates of deposit 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 of deposit
liabilities in the foregoing table do not include the benefit that
results from the low cost funding provided by the deposit
liabilities compared to the cost of borrowing funds in the market.
G-37
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments to extend 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
loan commitments, fair value also considers the difference between
current level of interest rates and the committed rates. Based on
an analysis of the foregoing factors, the fair value of these
items approximates their carrying value at December 31, 1997 and
1996.
(16) Commitments and Contingent Liabilities
(a) Off-Balance Sheet Financing and Concentrations of Credit
The Company is a party to certain financial instruments with
off-balance sheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
are limited to commitments to extend credit. These instruments
involve, to varying degrees, elements of credit risk in excess of
the amount recognized on the statement of financial condition. The
contract amounts of these instruments reflect the extent of
involvement by the Company.
The Company's exposure to credit loss in the event of
nonperformance by the other party to the commitment to extend
credit is represented by the contractual notional amount of those
instruments. The Company uses the same credit policies in making
commitments as it does for on-balance sheet instruments.
Contract amounts of financial instruments that represent credit
risk as of December 31, 1997 and 1996 at fixed and variable
interest rates are as follows:
1997
----------------------------------
Fixed Variable Total
----- -------- -----
(in thousands)
Financial instruments
whose contract amounts
represent credit risk:
Conventional mortgage loans ...... $ 921 2,296 3,217
Home equity ...................... -- 10,279 10,279
Commercial loans ................. 257 -- 257
Overdraft loans .................. 135 -- 135
------- ------- -------
$ 1,313 12,575 13,888
======= ======= =======
G-38
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
1996
----------------------------------
Fixed Variable Total
----- -------- -----
(in thousands)
Financial instruments
whose contract amounts
represent credit risk:
Conventional mortgage loans ...... $ 316 1,572 1,888
Home equity ...................... -- 10,278 10,278
Commercial loans ................. 306 -- 306
Overdraft loans .................. 114 -- 114
------- ------- -------
$ 736 11,850 12,586
======= ======= =======
The range of interest rates on fixed rate commitments was 7.13% to
18.00% at December 31, 1997 and 5.0% to 18.00% at December 31,
1996. The Company offers various adjustable rate mortgage (ARM)
products on 1-4 family residential dwellings. The principal
one-year ARM offered as of December 31, 1997 and 1996 has a 2.00%
annual interest rate adjustment cap, and uses the weekly average
from the one-year Treasury Constant Maturity Series, plus a margin
of 3.00%, as an index for rate adjustments. The lifetime rate
ceiling for the one-year ARM product at December 31, 1997 and 1996
was 6.00% above the initial rate. The Company also offers 3/1 and
5/1 ARM products where the rate is fixed for the first 3 and 5
years, respectively. After the initial fixed term, the mortgage
has the same characteristics as a one-year ARM. The other ARM
product offered at December 31, 1997 and 1996, was a jumbo ARM
with a lifetime ceiling of 6.00% above the initial rate. The
Company does not originate loans which provide for negative
amortization. Mortgage loan terms vary from 10 to 30 years.
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
many of the commitments are expected to expire without being fully
drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral, if any, required by the Company upon the extension of
credit is based on management's credit evaluation of the customer.
Mortgage and construction loan commitments are secured by a first
or second lien on real estate. Typically, consumer credit and
overdraft loans do not require collateral.
The Company does not engage in investments in futures contracts,
forwards, swaps, option contracts or other derivative investments
with similar characteristics.
G-39
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
(b) Lease Commitments
The Company leases a branch facility under a noncancelable
operating lease expiring in 2006. Total expenses under this lease
for the years ended December 31, 1997, 1996 and 1995 were
approximately $53,000, $45,000, and $42,000, respectively. A
summary of the future minimum commitments required under the
noncancelable facility lease are as follows:
Years ending December 31: (in thousands)
1998 $ 52,000
1999 52,000
2000 52,000
2001 52,000
2002 52,000
Thereafter 203,000
----------
$ 463,000
==========
(17) Regulatory Capital Requirements
OTS regulations require savings institutions to maintain minimum
levels of regulatory capital. Under the regulations in effect at
December 31, 1997, the Bank was required to maintain a minimum
ratio of tangible capital to total adjusted assets of 1.5%; a
minimum ratio of Tier 1 (core) capital to total adjusted assets of
3.0%; and a minimum ratio of total (core and supplementary)
capital to risk-weighted assets of 8.0%.
Under its prompt corrective action regulations, the OTS is
required to take certain supervisory actions (and may take
additional discretionary actions) with respect to an
undercapitalized institution. Such actions could have a direct
material effect on an institution's financial statements. The
regulations establish a framework for the classification of
savings institutions into five categories: well capitalized,
adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Generally, an
institution considered well capitalized if it has a Tier 1 (core)
capital ratio of at least 5.0%; a Tier 1 risk-based capital ratio
of at least 6.0%; and a total risk-based capital ratio of at least
10.0%.
The foregoing capital ratios are based in part on specific
quantitative measures of assets, liabilities and certain
off-balance sheet items as calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by the OTS about capital components, risk
weightings and other factors.
G-40
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
Management believes that, as of December 31, 1997, the Bank meets
all capital adequacy requirements to which it is subject. Further,
the most recent OTS notification categorized the Bank as a well
capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since that
notification that management believes have changed the Bank's
capital classification.
The following is a summary of the Bank's and Company's actual
capital amounts and ratios, compared to the OTS minimum capital
adequacy requirements and the OTS requirements for classification
as a well capitalized institution, at December 31:
1997
-------------------------------------------------------------------------
Minimum Capital Classification
Actual Adequacy as Well Capitalized
Amount Ratio Ratio Ratio
------ ----- ----- -----
Bank
Tangible capital $ 18,977 10.88% 1.50% -
Tier 1 (core) capital 18,977 10.88 3.00 5.00
Risk-based capital:
Tier 1 18,977 20.33 - 6.00
Total 19,755 21.16 8.00 10.00
Actual
Amount Ratio
------ -----
Consolidated
Tangible capital $ 21,421 12.28%
Tier 1 (core) capital 21,421 12.28
Risk-based capital:
Tier 1 21,421 22.95
Total 22,199 23.78
G-41
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
1996
-------------------------------------------------------------------------
Minimum Capital Classification
Actual Adequacy as Well Capitalized
Amount Ratio Ratio Ratio
------ ----- ----- -----
Bank
Tangible capital $ 17,762 10.77% 1.50% -
Tier 1 (core) capital 17,762 10.77 3.00 5.00
Risk-based capital:
Tier 1 17,762 20.19 - 6.00
Total 18,405 20.92 8.00 10.00
Actual
Amount Ratio
------ -----
Consolidated
Tangible capital $ 21,625 13.12%
Tier 1 (core) capital 21,625 13.12
Risk-based capital:
Tier 1 21,625 24.59
Total 22,267 25.32
(18) Parent Company Financial Information
SFS Bancorp, Inc. was organized to serve as the holding company
for the Bank and began operations on June 29, 1995 in conjunction
with the Bankis mutual-to-stock conversion and the Holding
Company's initial public offering of its common stock.
G-42
SFS Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements, Continued
Balance Sheets
as of December 31, 1997 and 1996
Assets 1997 1996
(in thousands, except share data)
Cash and cash equivalents ........................................... $ 76 96
Loan receivable from subsidiary ..................................... 2,337 3,757
Equity in net assets of subsidiary .................................. 18,987 17,808
Other assets ........................................................ 60 58
-------- --------
Total assets ...................................... $ 21,460 21,719
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Other liabilities .............................................. $ 29 48
-------- --------
Stockholders' Equity:
Preferred stock, $.01 par value, authorized 500,000 shares ..... -- --
Common stock, $.01 par value, authorized 2,500,000 shares;
1,495,000 shares issued at December 31, 1997 and 1996 ...... 15 15
Additional paid-in capital ..................................... 14,365 14,260
Retained earnings, substantially restricted .................... 12,422 11,687
Treasury stock, at cost (286,528 shares at
December 31, 1997, 224,003 at December 31, 1996) .......... (4,089) (2,840)
Common stock acquired by employee stock ownership plan (ESOP) .. (837) (957)
Unearned recognition and retention plan (RRP) .................. (455) (540)
Net unrealized gain on securities available for sale, net of tax 10 46
-------- --------
Total stockholders' equity ........................ 21,431 21,671
-------- --------
Total liabilities and stockholders' equity ........ $ 21,460 21,719
======== ========
G-43
Statements of Income
For the years ended December 31, 1997 and 1996
1997 1996
---- ----
(in thousands)
Interest income ............................................ $ 245 384
Interest expense ........................................... -- --
------ ------
Net interest income ................................... 245 384
Noninterest expense ........................................ 115 104
------ ------
Income before income taxes and equity in undistributed
earnings of subsidiary ................................ 130 280
------ ------
Income tax expense ......................................... 52 112
------ ------
Income before equity in undistributed earnings of subsidiary 78 168
Equity in undistributed earnings of subsidiary
(for the years ended December 31, 1997 and 1996) ...... 990 662
------ ------
Net income ................................................. $1,068 830
====== ======
G-44
Statements of Cash Flows
For the years ended December 31, 1997 and 1996
1997 1996
---- ----
(in thousands)
Cash flows from operating activities:
Net income ......................................... $ 1,068 830
Adjustment to reconcile net income to net cash
provided by operating activities:
Equity in undistributed earnings of subsidiary (990) (662)
Increase in other assets ..................... (2) (17)
Increase (decrease) in liabilities ........... (19) 27
Amortization of RRP .......................... 228 38
------- -------
Net cash provided by operating activities . 285 216
------- -------
Cash flows from investing activities:
Net (increase) decrease in loans ................... 1,420 3,319
------- -------
Net cash provided in investing activities . 1,420 3,319
------- -------
Cash flows from financing activities:
Purchase of treasury stock ......................... (1,486) (3,418)
Cash dividends paid ................................ (333) (156)
Proceeds from exercise of stock option ............. 94 --
------- -------
Net cash used from financing activities ... (1,725) (3,574)
------- -------
Net decrease in cash and cash equivalents ............... (20) (39)
Cash and cash equivalents:
Beginning of period ................................ 96 135
------- -------
End of period ...................................... $ 76 96
======= =======
These financial statements should be read in conjunction with the
Company is consolidated financial statements and notes thereto.
G-45
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
THREE MONTHS ENDED
JUNE 30,
1998 1997
------ ------
(Unaudited)
Interest income:
Loans .................................................... $2,687 2,386
Investment securities .................................... 329 529
Securities available for sale ............................ 127 88
Federal funds sold and cash deposits ..................... 37 56
Stock in Federal Home Loan Bank .......................... 25 21
------ ------
Total interest income ............................. 3,205 3,080
Interest expense:
Deposits ................................................. 1,746 1,640
------ ------
Net interest income ............................... 1,459 1,440
Provision for loan losses ...................................... 30 30
------ ------
Net interest income after provision for loan losses 1,429 1,410
------ ------
Noninterest income:
Other loan charges ....................................... 43 23
Bank fees and service charges ............................ 44 45
Other .................................................... 34 16
------ ------
Total noninterest income .......................... 121 84
------ ------
G-46
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(continued)
THREE MONTHS ENDED
JUNE 30,
1998 1997
------ ------
(Unaudited)
Noninterest expense:
Compensation and employee benefits ....................... 629 643
Advertising and business promotion ....................... 9 20
Office occupancy and equipment expense ................... 150 151
Federal deposit insurance premiums ....................... 23 23
Other insurance premiums ................................. 19 22
Mortgage servicing fees .................................. 5 8
Data processing fees ..................................... 47 43
Professional service fees ................................ 79 56
Other .................................................... 83 69
------ ------
Total noninterest expense ......................... 1,044 1,035
------ ------
Income before taxes ............................... 506 459
Income tax expense ............................................. 208 191
------ ------
Net income ........................................ $ 298 268
====== ===
Earnings per share:
Basic ..................................................... $ .27 .24
====== ======
Diluted ................................................... $ .26 .23
====== ======
See accompanying notes to unaudited consolidated interim financial statements.
G-47
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
------ ------
(Unaudited)
Interest income:
Loans ..................................................... $5,325 4,695
Investment securities ..................................... 763 1,083
Securities available for sale ............................. 198 125
Federal funds sold and cash deposits ...................... 56 103
Stock in Federal Home Loan Bank ........................... 49 41
------ ------
Total interest income ............................. 6,391 6,047
Interest expense:
Deposits .................................................. 3,460 3,188
------ ------
Net interest income ................................ 2,931 2,859
Provision for loan losses ....................................... 60 60
------ ------
Net interest income after provision for loan losses 2,871 2,799
------ ------
Noninterest income:
Other loan charges ........................................ 84 54
Bank fees and service charges ............................. 83 82
Other ..................................................... 59 32
------ ------
Total noninterest income ........................... 226 168
------ ------
G-48
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(continued)
SIX MONTHS ENDED
JUNE 30,
-----------------
1998 1997
------ ------
(Unaudited)
Noninterest expense:
Compensation and employee benefits ........................ 1,328 1,330
Advertising and business promotion ........................ 19 61
Office occupancy and equipment expense .................... 307 309
Federal deposit insurance premiums ........................ 47 28
Other insurance premiums .................................. 36 44
Mortgage servicing fees ................................... 11 17
Data processing fees ...................................... 94 88
Professional service fees ................................. 138 121
Other ..................................................... 151 152
------ ------
Total noninterest expense .......................... 2,131 2,150
------ ------
Income before taxes ................................ 966 817
Income tax expense .............................................. 399 324
------ ------
Net income ......................................... $ 567 493
====== ======
Earnings per share:
Basic ...................................................... $ .52 .44
====== ======
Diluted .................................................... $ .49 .43
====== ======
See accompanying notes to unaudited consolidated interim financial statements.
G-49
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in Thousands)
June 30, December 31,
1998 1997
--------- ---------
Assets (Unaudited)
------
Cash and due from banks ................................................... $ 980 1,876
Federal funds sold ........................................................ 5,600 300
--------- ---------
Total cash and cash equivalents ............................... 6,580 2,176
Securities available for sale, at fair value .............................. 8,062 4,067
Investment securities (estimated fair value of $16,992
at June 30, 1998 and $29,095 at December 31, 1997) ........... 16,910 28,979
Stock in Federal Home Loan Bank of NY, at cost ............................ 1,338 1,338
Loans receivable, net ..................................................... 141,222 133,786
Accrued interest receivable ............................................... 1,061 1,130
Premises and equipment, net ............................................... 2,171 2,242
Real estate owned ......................................................... 151 111
Prepaid expenses and other asset .......................................... 598 599
--------- ---------
Total Assets .................................................. $ 178,093 174,428
========= =======
Liabilities and Stockholders' Equity
Liabilities:
Due to depositors:
Non-interest bearing deposits ................................... $ 1,407 2,265
Savings and interest bearing demand deposits .................... 54,547 53,463
Time deposit accounts ........................................... 96,925 94,741
--------- ---------
Total Deposits ................................................ 152,879 150,469
Advance payments by borrowers for property taxes and insurance ....... 1,861 1,281
Accrued expenses and other liabilities ............................... 1,438 1,247
--------- ---------
Total Liabilities ............................................. 156,178 152,997
--------- ---------
G-50
SFS BANCORP, INC. AND SUBSIDIARY
Consolidated Statements of Financial Condition
(Dollars in Thousands)
June 30, December 31,
1998 1997
--------- ---------
(Unaudited)
Stockholders' Equity:
Preferred stock, $.01 par value. Authorized 500,000 shares; none issued -- --
Common stock, $.01 par value. Authorized 2,500,000 shares; 1,495,000
shares issued at June 30, 1998 and December 31, 1997 ................... 15 15
Additional paid-in capital ............................................. 14,411 14,365
Retained earnings, substantially restricted ............................ 12,795 12,422
Common stock acquired by :
Employee stock ownership plan ("ESOP") (83,720 shares) ................. (837) (837)
Recognition and retention plan ("RRP") (32,530 shares) ................. (386) (455)
Treasury stock, at cost (286,528 shares at June 30, 1998 and
December 31, 1997) .......................................... (4,089) (4,089)
Accumulated other comprehensive income ................................. 6 10
--------- ---------
Total Stockholders' Equity .............................. 21,915 21,431
--------- ---------
Total Liabilities and Stockholders' Equity ............ $ 178,093 174,428
========= =========
See accompanying notes to unaudited consolidated interim financial statements.
G-51
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
Common Common Accumulated
Additional Stock Stock Other
Common Paid-in Retained Treasury Acquired Acquired Comprehensive
Stock Capital Earnings Stock By ESOP By RRP Income
----- ------- -------- ----- ------- ------ ------
Six Months Ended
June 30, 1998
Balance at December 31, 1997 .... $ 15 14,365 12,422 (4,089) (837) (455) 10
Comprehensive income:
Net income .................... -- -- 567 -- -- -- --
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the year
(pre-tax $6) ............ -- -- -- -- -- -- (4)
Comprehensive income ............
Amortization of unearned RRP
compensation ................. -- -- -- -- -- 69 --
Cash dividends declared ........ -- -- (194) -- -- -- --
Tax benefit related to vested
RRP shares ................ -- 46 -- -- -- -- --
-------- ------ ------ ------ ---- ---- ----
Balance at June 30, 1998 ........ $ 15 14,411 12,795 (4,089) (837) (386) 6
======== ====== ====== ====== ==== ==== ====
G-52
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
(continued)
Six Months Ended
June 30, 1997
Balance at December 31, 1996..... $ 15 14,260 11,687 (2,840) (957) (540) 46
Comprehensive income:
Net income .................... -- -- 493 -- -- -- --
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the period
(pre-tax $5) .............. -- -- -- -- -- -- (3)
Comprehensive income ............
Amortization of unearned RRP
compensation ................. -- -- -- -- -- 166 --
Cash dividends declared ........ -- -- (163) -- -- -- --
Exercise of stock options ....... -- -- -- 94 -- -- --
-------- ------ ------ ------ ---- ---- ----
Balance at June 30, 1997 ........ $ 15 14,260 12,017 (3,450) (957) (374) 43
======== ====== ====== ====== ==== ==== ====
G-53
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
Comprehensive
Income Total
------ -----
Balance at December 31, 1997 .... 21,431
Comprehensive income:
Net income .................... $ 567 567
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the year
(pre-tax $6) ............ (4) (4)
--------
Comprehensive income ............ $ 563
========
Amortization of unearned RRP
compensation ................. 69
Cash dividends declared ........ (194)
Tax benefit related to vested
RRP shares ................ 46
------
Balance at June 30, 1998 ........ 21,915
======
G-54
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands) (Unaudited)
(continued)
Six Months Ended
June 30, 1997
Balance at December 31, 1996 .... $ 21,671
Comprehensive income:
Net income .................... $ 493 493
Other comprehensive income,
net of tax:
Unrealized net holding losses
arising during the period
(pre-tax $5) .............. (3) (3)
--------
Comprehensive income ............ $ 490
========
Amortization of unearned RRP
compensation ................. 166
Cash dividends declared ........ (163)
Exercise of stock options ....... 94
Purchase of Treasury shares .... (704)
--------
Balance at June 30, 1997 ........ 21,554
========
See accompanying notes to unaudited consolidated interim financial statements.
G-55
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
--------------------
1998 1997
------- -----
Increase (decrease) in cash and cash equivalents: .................... (Unaudited)
Reconciliation of net income to net cash provided
by operating activities:
Net income .................................................. $ 567 493
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .......................... 100 91
Net accretion on investment securities ..................... (74) (5)
Net accretion on securities available for sale ............. (1) --
Amortization of unearned RRP compensation .................. 69 166
Provision for loan losses .................................. 60 60
Decrease (increase) in accrued interest receivable ......... 69 (60)
Decrease (increase) in prepaid expense and other assets .... 1 (20)
Increase in accrued expense and other liabilities .......... 239 332
------- -----
Total adjustments ................................. 463 564
------- -----
Net cash provided by operating activities ........... 1,030 1,057
------- -----
Cash flows from investing activities:
Proceeds from maturity/paydown of investment securities .......... 8,885 2,009
Purchase of securities available for sale ........................ (4,000) (4,050)
Purchase of Federal Home Loan Bank Stock ......................... -- (123)
Principal repayments on mortgage-backed securities ............... 3,258 1,629
Net increase in loans receivable ................................. (6,059) (3,932)
Purchase of loans receivable ..................................... (1,504) (1,852)
Capital expenditures, net of disposals ........................... (29) (440)
Proceeds from the sale of real estate owned ...................... 27 100
------- -----
Net cash provided (used) by investing activities ............ 578 (6,659)
------- -----
Cash flows from financing activities:
Net increase in deposits ......................................... 2,410 7,385
Net increase in advance payments by borrowers for
property taxes and insurance ................................ 580 367
Proceeds upon exercise of common stock options ............. 94
Dividends paid ................................................... (194) (163)
Purchase of Treasury stock ....................................... -- (704)
------- -----
Net cash provided by financing activities ........................ 2,796 6,979
------- -----
Net increase in cash and cash equivalents ................... 4,404 1,377
Cash and cash equivalents at beginning of period ................. 2,176 2,896
------- -----
Cash and cash equivalents at end of period ....................... $ 6,580 4,273
======= =====
G-56
SFS BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(continued)
Six Months Ended
June 30,
--------------------
1998 1997
------- -----
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest paid ............................................... $ 3,475 3,188
======= =====
Taxes paid .................................................. $ 405 211
======= =====
Transfer of loans to other real estate owned ..................... $ 67 11
======= =====
Net unrealized loss on securities available for sale, net of taxes $ (4) (3)
======= =====
Deferred tax benefit on unrealized gain/loss
on securities available for sale ............................ $ 2 2
======= =====
Deferred tax benefit related to vested RRP shares ................ $ 46 --
======= =====
See accompanying notes to unaudited consolidated interim financial statements.
G-57
SFS BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. Presentation of Financial Information
The accompanying unaudited consolidated interim financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying unaudited consolidated interim financial
statements should be read in conjunction with the consolidated financial
statements and the related management's discussion and analysis of financial
condition and results of operations filed with the 1997 Form 10-KSB of SFS
Bancorp, Inc. and Subsidiary (the "Company"). Amounts in prior periods'
unaudited consolidated interim financial statements are reclassified whenever
necessary to conform to the current periods' presentation. The results of
operations for the three and six months ended June 30, 1998, are not necessarily
indicative of results that may be expected for the entire year ending December
31, 1998.
The unaudited consolidated interim financial statements include the accounts of
SFS Bancorp, Inc. (the "Holding Company") and its wholly owned subsidiary,
Schenectady Federal Savings Bank and subsidiary (the "Bank").
NOTE 2. Earnings Per Share
The following is a reconciliation of the numerators and denominators for the
basic and diluted earnings per share (EPS) calculations for the three and six
month periods ended June 30, 1998 and 1997.
Three Months Ended June 30:
(in thousands except share and per share information)
1998
--------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
Basic EPS ................................ $ 298 1,092,222 $ 0.27
========
Dilutive effect of potential common shares
related to stock based compensation ... -- 55,590
---------
Diluted EPS .............................. $ 298 1,147,812 $ 0.26
========= ========= ========
G-58
1997
--------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
Basic EPS ................................. $ 268 1,112,210 $ 0.24
========
Dilutive effect of potential common shares
related to stock based compensation .... -- 29,616
--------- ---------
Diluted EPS ................................ $ 268 1,141,826 $ 0.23
========= ========= ========
Six Months Ended June 30:
(in thousands except share and per share information)
1998
--------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
Basic EPS ................................ $ 567 1,091,464 $ 0.52
========
Dilutive effect of potential common shares
related to stock based compensation ... -- 56,563
--------- ---------
Diluted EPS .............................. $ 567 1,148,027 $ 0.49
========= ========= ========
1997
--------------------------------------
Weighted Per Share
Net Income Average Shares Amount
---------- -------------- ------
Basic EPS $ 493 1,125,872 $ 0.44
========
Dilutive effect of potential common shares
related to stock based compensation -- 27,887
--------- ---------
Diluted EPS $ 493 1,153,759 $ 0.43
======== ========== ========
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NOTE 3. Comprehensive Income
On January 1, 1998, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
establishes standards for reporting and display of comprehensive income and its
components. Comprehensive income includes the reported net income of a company
adjusted for items that are currently accounted for as direct entries to equity,
such as the mark to market adjustment on securities available for sale, foreign
currency items and minimum pension liability adjustments. At the Company,
comprehensive income represents net income plus other comprehensive income,
which consists of the net change in unrealized gains or losses on securities
available for sale for the period. Accumulated other comprehensive income
represents the net unrealized gains or losses on securities available for sale
as of the balance sheet dates.
NOTE 4. Proposed Merger
On July 31, 1998, SFS Bancorp, Inc. and Cohoes Savings Bank (Cohoes), Cohoes,
New York announced the execution of a definitive agreement pursuant to which the
Company will merge into a newly-formed holding company of Cohoes to be organized
in connection with Cohoes' conversion from a mutual to stock institution.
Consummation of the merger is subject to the approval of the shareholders of the
Company, the depositors of Cohoes, the conversion of Cohoes, and the receipt of
all required regulatory approvals. The transaction is anticipated to close in
the fourth quarter of 1998.
================================================================================
No person has been authorized to give any information or to make any
representation other than as contained in this Prospectus in connection with the
offering made hereby, and, if given or made, such other information or
representation must not be relied upon as having been authorized by the Holding
Company or the Bank. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which such offer or solicitation is not authorized
or in which the person making such offer or solicitation is not qualified to do
so, or to any person to whom it is unlawful to make such offer or solicitation
in such jurisdiction. Neither the delivery of this Prospectus nor any sale
hereunder shall under any circumstances create any implication that there has
been no change in the affairs of the Holding Company or the Bank since any of
the dates as of which information is furnished herein or since the date hereof.
TABLE OF CONTENTS
Page
----
Summary...................................................
Selected Consolidated Financial and
Other Data of Cohoes Savings Bank......................
Selected Consolidated Financial and
Other Data of SFS Bancorp, Inc.........................
Selected Pro Forma Unaudited Consolidated
Financial Data of the Holding Company..................
Risk Factors..............................................
Cohoes Bancorp, Inc.......................................
Cohoes Savings Bank.......................................
Use of Proceeds...........................................
Dividends.................................................
Market for Common Stock...................................
Regulatory Capital........................................
Capitalization............................................
Pro Forma Unaudited Financial Information.................
Pro Forma Data With Merger................................
Pro Forma Data Without Merger.............................
Comparison of Valuation and Pro Forma Information
With No Foundation But With Merger.....................
Comparison of Valuation and Pro Forma Information
With No Foundation and Without Merger..................
Management's Discussion and Analysis of Financial
Condition and Results of Operations
of Cohoes Savings Bank.................................
Business of the Holding Company...........................
Business of the Bank......................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations
of SFS Bancorp, Inc....................................
Business of SFS Bancorp, Inc..............................
Regulation................................................
Taxation..................................................
Management of the Holding Company.........................
Management of the Bank....................................
The Conversion and the Merger.............................
The Offering..............................................
Restrictions on Acquisitions of the Holding Company
and the Bank...........................................
Description of Capital Stock of the Holding Company.......
Description of Capital Stock of the Bank..................
Experts...................................................
Legal and Tax Opinions....................................
Additional Information....................................
Glossary..................................................
Index to Consolidated Financial Statements................
Until the later of __________________, 1998 or 25 days after commencement of the
offering of Holding Company Common Stock, all dealers effecting transactions in
the registered securities, whether or not participating in this distribution,
may be required to deliver a prospectus. This is in addition to the obligation
of dealers to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
================================================================================
================================================================================
___________________ Shares
COHOES BANCORP, INC.
(Proposed Holding Company for Cohoes Savings Bank)
COMMON STOCK
----------
PROSPECTUS
----------
Keefe, Bruyette & Woods
_________________, 1998
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses (other
than underwriting discounts and commissions) to be incurred in connection with
the issuance of the shares.
SEC registration fees................................................. 37,698
NASD fee.............................................................. 18,841
Nasdaq registration fee............................................... 84,875
New York State Banking Department filing fee.......................... 5,000
Counsel fees and expenses............................................. 200,000
Accounting fees and expenses.......................................... 100,000
Appraisal and business plan fees and expenses......................... 70,000
Conversion agent fees and expenses.................................... 30,000
Marketing agent's expenses............................................ 50,000
Marketing agent's fees (1)............................................ 826,000
Printing, postage and mailing......................................... 360,000
Blue sky fees and expenses............................................ 10,000
Other expenses........................................................ 33,586
---------
TOTAL............................................................ 1,826,000
- ----------
(1) Based on maximum of Estimated Valuation Range and assumptions set forth
under "Pro Forma Data" in the Prospectus.
Item 14. Indemnification of Directors and Officers
Article ELEVENTH of the Holding Company's Certificate of Incorporation
provides for indemnification of directors and officers of the Holding Company
against any and all liabilities, judgments, fines and reasonable settlements,
costs, expenses and attorneys' fees incurred in any actual, threatened or
potential proceeding, except to the extent that such indemnification is limited
by Delaware law and such law cannot be varied by contract or bylaw. Article
ELEVENTH also provides for the authority to purchase insurance with respect
thereto.
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation's Board of Directors to grant indemnity under certain
circumstances to directors and officers, when made, or threatened to be made,
parties to certain proceedings by reason of such status with the corporation,
against judgments, fines, settlements and expenses, including attorneys' fees.
In addition, under certain circumstances such persons may be indemnified against
II-1
expenses actually and reasonably incurred in defense of a proceeding by or on
behalf of the corporation. Similarly, the corporation, under certain
circumstances, is authorized to indemnify directors and officers of other
corporations or enterprises who are serving as such at the request of the
corporation, when such persons are made, or threatened to be made, parties to
certain proceedings by reason of such status, against judgments, fines,
settlements and expenses, including attorneys' fees; and under certain
circumstances, such persons may be indemnified against expenses actually and
reasonably incurred in connection with the defense or settlement of a proceeding
by or in the right of such other corporation or enterprise. Indemnification is
permitted where such person (i) was acting in good faith; (ii) was acting in a
manner he reasonably believed to be in or not opposed to the best interests of
the corporation or other corporation or enterprise, as appropriate; (iii) with
respect to a criminal proceeding, has no reasonable cause to believe his conduct
was unlawful; and (iv) was not adjudged to be liable to the corporation or other
corporation or enterprise (unless the court where the proceeding was brought
determines that such person is fairly and reasonably entitled to indemnity).
Unless ordered by a court, indemnification may be made only following a
determination that such indemnification is permissible because the person being
indemnified has met the requisite standard of conduct. Such determination may be
made (i) by the Board of Directors of the Holding Company by a majority vote of
a quorum consisting of directors not at the time parties to such proceeding; or
(ii) if such a quorum cannot be obtained or the quorum so directs, then by
independent legal counsel in a written opinion; or (iii) by the stockholders.
Section 145 also permits expenses incurred by directors and officers in
defending a proceeding to be paid by the corporation in advance of the final
disposition of such proceedings upon the receipt of an undertaking by the
director or officer to repay such amount if it is ultimately determined that he
is not entitled to be indemnified by the corporation against such expenses.
Item 15. Recent Sales of Unregistered Securities
The Registrant is newly incorporated, solely for the purpose of acting as
the holding company of Cohoes Savings Bank pursuant to the Plan of Conversion
(filed as Exhibit 2 herein), and no sales of its securities have occurred to
date.
II-2
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits:
1.1 Letter Agreement regarding marketing and consulting services
1.2 Form of Agency Agreement*
2.1 Plan of Conversion
2.2 Agreement and Plan of Merger
3.1 Certificate of Incorporation of the Holding Company
3.2 Bylaws of the Holding Company
3.3 Restated Organization Certificate of Cohoes Savings Bank
in stock form
3.4 Bylaws of Cohoes Savings Bank in stock form
4 Form of Stock Certificate of the Holding Company
5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to
legality of stock
8.1 Opinion of Silver, Freedman & Taff, L.L.P. with respect to
Federal income tax consequences of the Conversion*
8.2 Opinion of Arthur Andersen with respect to New York income
tax consequences of the Conversion*
8.3 Letter of RP Financial LC. with respect to Subscription Rights
10.1 Form of proposed Employment Agreement between Cohoes Savings
Bank and certain executive officers
10.2 Form of proposed Employment Agreement between Cohoes Bancorp, Inc.
and certain executive officers
10.3 Form of Change-In-Control Severance Agreement with certain officers
of Cohoes Savings Bank
10.4 Cohoes Savings Bank Employee Severance Compensation Plan
10.5 Employee Stock Ownership Plan
10.6 Form of Cohoes Savings Bank 401(k) Savings Plan*
10.7 Benefit Restoration Plan
10.8 Stock Option and Incentive Plan
10.9 Recognition and Retention Plan
21 Subsidiaries of Cohoes Bancorp, Inc.
23.1 Consent of Silver, Freedman & Taff, L.L.P.
23.2 Consent of Arthur Andersen
23.3 Consent of RP Financial
24 Power of Attorney (set forth on signature page)
27 Financial Data Schedule
99.1 Appraisal*
99.2 Draft of Cohoes Savings Bank Foundation Gift Instrument
99.3 Marketing Materials
99.4 Stock Order Form
99.5 Consent of Joseph Giaquinto to be identified as a proposed director
99.6 Form of SFS Bancorp, Inc. Proxy Card
* To be filed supplementally by amendment.
II-3
Item 17. Undertakings
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and it will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant
II-4
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Cohoes, New York on
September 14, 1998.
COHOES BANCORP, INC.
By: /s/ Harry L. Robinson
--------------------------------
Harry L. Robinson, President
and Chief Executive Officer
(Duly Authorized Representative)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Harry L. Robinson his true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for him and in his name, place and stead, in any and all capacities, to sign any
and all amendments (including post-effective amendments) to this Registration
Statement, and to file the same, with all exhibits thereto, and all other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
/s/ Harry L. Robinson /s/ Duncan S. Mac Affer
- -------------------------------------- -----------------------------
Harry L. Robinson, Director, President Duncan S. Mac Affer, Director
and Chief Executive Officer
(Principal Executive and Operating Officer)
Date: September 14, 1998 Date: September 14, 1998
------------------------------------- -----------------------
II-6
/s/ Arthur E. Bowen /s/ Walter H. Speidel
- ----------------------------- -----------------------------
Arthur E. Bowen, Director Walter H. Speidel, Director
Date: September 14, 1998 Date: September 14, 1998
----------------------- -----------------------
/s/ Donald A. Wilson /s/ Frederick G. Field, Jr.
- ----------------------------- -----------------------------
Donald A. Wilson, Director Frederick G. Field, Jr., Director
Date: September 14, 1998 Date: September 14, 1998
----------------------- -----------------------
/s/ R. Douglas Paton /s/ J. Timothy O'Hearn
- ----------------------------- -----------------------------
R. Douglas Paton, Director J. Timothy O'Hearn, Director
Date: September 14, 1998 Date: September 14, 1998
----------------------- -----------------------
/s/ Chester C. DeLaMater /s/ Peter G. Casabonne
- ----------------------------- -----------------------------
Chester C. DeLaMater, Director Peter G. Casabonne, Director
Date: September 14, 1998 Date: September 14, 1998
----------------------- -----------------------
/s/ Michael L. Crotty /s/ Richard A. Ahl
- ----------------------------- -----------------------------
Michael L. Crotty, Director Richard Ahl, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: September 14, 1998 Date: September 14, 1998
----------------------- -----------------------
II-7