-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dis9pGXfmcYwoZJ+ImH8lD8UaEXzRZAn4A2/flgM+hiruQPCBtYgLqQHz7Lxz29d Wx36w73oyBG3p5j7uMWy2g== 0000950164-98-000134.txt : 19980918 0000950164-98-000134.hdr.sgml : 19980918 ACCESSION NUMBER: 0000950164-98-000134 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19980916 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COHOES BANCORP INC CENTRAL INDEX KEY: 0001070321 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-63539 FILM NUMBER: 98710658 BUSINESS ADDRESS: STREET 1: 75 REMSEN STREET CITY: COHOES STATE: NY ZIP: 12047 BUSINESS PHONE: 5182336500 MAIL ADDRESS: STREET 1: 75 REMSEN STREET CITY: COHOES STATE: NY ZIP: 12047 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on September 16, 1998 Registration No. 333-__________ ================================================================================ 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. ================================================================================ 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 ---- 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 ---- 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 ---- 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. 78 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% 113 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. 118 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. 120 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 121 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 122 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. 123 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. 126 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%. 127 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. 129 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. 130 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. 136 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 137 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 138 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; 139 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. 140 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. 142 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 144 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 151 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 152 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 153 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 154 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 158 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 160 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 ======== ========== ========
G-59 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 EX-1 2 EXHIBIT 1.1 [Keefe Bruyette & Woods, Inc. Letterhead] June 8, 1998 Mr. Harry Robinson President and Chief Executive Officer Cohoes Savings Bank 75 Remsen Street Cohoes, NY 12047-2892 Dear Mr. Robinson: This proposal is in connection with Cohoes Savings Bank's (the "Bank") intention to convert from a mutual to a capital stock form of organization (the "Conversion"). In order to effect the Conversion, it is contemplated that all of the Bank's common stock to be outstanding pursuant to the Conversion will be issued to a holding company (the "Company") to be formed by the Bank, and that the Company will offer and sell shares of its common stock first to eligible persons (pursuant to the Bank's Plan of Conversion) in a Subscription and Community Offering. Keefe, Bruyette and Woods, Inc. ("KBW") will act as the Bank's and the Company's exclusive financial advisor and marketing agent in connection with the Conversion. This letter sets forth selected terms and conditions of our engagement. 1. Advisory/Conversion Services. As the Bank's and Company's financial advisor and marketing agent, KBW will provide the Bank and the Company with a comprehensive program of conversion services designed to promote an orderly, efficient, cost-effective and long-term stock distribution. KBW will provide financial and logistical advice to the Bank and the Company concerning the offering and related issues. KBW will assist in providing conversion enhancement services intended to maximize stock sales in the Subscription Offering and to residents of the Bank's market area, if necessary, in the Community Offering. KBW shall provide financial advisory services to the Bank which are typical in connection with an equity offering and include, but are not limited to, overall financial analysis of the client with a focus on identifying factors which impact the valuation of the common stock and provide the appropriate recommendations for the betterment of the equity valuation. Additionally, post conversion financial advisory services will include advice on shareholder relations, NASDAQ listing, dividend policy (for both regular and special dividends), stock repurchase strategy and communication with market makers. Prior to the closing of the offering, KBW shall furnish to client a Post-Conversion reference manual which will include specifics relative to these items. (The nature of the services to be provided by KBW as the Bank's and the Company's financial advisor and marketing agent are further described in Exhibit A attached hereto.) 2. Preparation of Offering Documents. The Bank, the Company and their counsel will draft the Registration Statement, Application for Conversion, Prospectus and other documents to be used in connection with the Conversion. KBW will attend meetings to review these documents and advise you on their form and content. KBW and its counsel will draft appropriate agency agreement and related documents as well as marketing materials other than the Prospectus. 3. Due Diligence Review. Prior to filing the Registration Statement, Application for Conversion or any offering or other documents naming KBW as the Bank's and the Company's financial advisor and marketing agent, KBW and their representatives will undertake substantial investigations to learn about the Bank's business and operations ("due diligence review") in order to confirm information provided to us and to evaluate information to be contained in the Bank's and/or the Company's offering documents. The Bank agrees that it will make available to KBW all relevant information, whether or not publicly available, which KBW reasonably requests, and will permit KBW to discuss with management the operations and prospects of the Bank. KBW will treat all material non-public information as confidential. The Bank acknowledges that KBW will rely upon the accuracy and completeness of all information received from the Bank, its officers, directors, employees, agents and representatives, accountants and counsel including this letter to serve as the Bank's and the Company's financial advisor and marketing agent. 4. Regulatory Filings. The Bank and/or the Company will cause appropriate offering documents to be filed with all regulatory agencies including, the Securities and Exchange Commission ("SEC"), the National Association of Securities Dealers ("NASD"), Office of Thrift Supervision ("OTS") and such state securities commissioners as may be determined by the Bank. 5. Agency Agreement. The specific terms of the conversion services, conversion offering enhancement and syndicated offering services contemplated in this letter shall be set forth in an Agency Agreement between KBW and the Bank and the Company to be executed prior to commencement of the offering, and dated the date that the Company's Prospectus is declared effective and/or authorized to be disseminated by the appropriate regulatory agencies, the SEC, the NASD, the OTS and such state securities commissioners and other regulatory agencies as required by applicable law. 6. Representations, Warranties and Covenants. The Agency Agreement will provide for customary representations, warranties and covenants by the Bank and KBW, and for the Company to indemnify KBW and their controlling persons (and, if applicable, the members of the selling group and their controlling persons), and for KBW to indemnify the Bank and the Company against certain liabilities, including, without limitation, liabilities under the Securities Act of 1933. 7. Fees. For the services hereunder, the Bank and/or Company shall pay the following fees to KBW at closing unless stated otherwise: (a) A Management Fee of $40,000 payable in four consecutive monthly installments of $10,000 commencing with the signing of this letter. Such fees shall be deemed to have been earned when due. Should the Conversion be terminated for any reason not attributable to the action or inaction of KBW, KBW shall have earned and be entitled to be paid fees accruing through the stage at which point the termination occurred. (b) A Success Fee of 1.40% on the aggregate Purchase Price of Common Stock sold in the Subscription Offering and Community Offering Such fee calculation shall exclude shares purchased by the Bank's officers, directors, or employees (or members of their immediate families) plus any ESOP, tax-qualified or stock based compensation plans (except IRA's) or similar plan created by the Bank for some or all of its directors or employees. The Management Fee described in 7(a) will be applied against the Success Fee. (c) If any shares of the Company's stock remain available after the Subscription Offering, at the request of the Bank, KBW will seek to form a syndicate of registered broker-dealers to assist in the sale of such common stock on a best efforts basis, subject to the terms and conditions set forth in the selected dealers agreement. KBW will endeavor to distribute the common stock among dealers in a fashion which best meets the distribution objectives of the Bank and the Plan of Conversion. KBW will be paid a fee not to exceed 5.5% of the aggregate Purchase Price of the shares of common stock sold by them. KBW will pass onto selected broker-dealers, who assist in the syndicated community offering, an amount competitive with gross underwriting discounts charged at such time for comparable amounts of stock sold at a comparable price per share in a similar market environment. Fees with respect to purchases effected with the assistance of a broker/dealer other than KBW shall be transmitted by KBW to such broker/dealer. The decision to utilize selected broker-dealers will be made by the Bank upon consultation with KBW. In the event, with respect to any stock purchases, fees are paid pursuant to this subparagraph 7(c), such fees shall be in lieu of, and not in addition to, payment pursuant to subparagraph 7(a) and 7(b). 8. Additional Services. KBW further agrees to provide financial advisory assistance to the Company and the Bank for a period of one year following completion of the Conversion, including formation of a dividend policy and share repurchase program, assistance with shareholder reporting and shareholder relations matters, general advice on mergers and acquisitions and other related financial matters, without the payment by the Company and the Bank of any fees in addition to those set forth in Section 7 hereof. Nothing in this Agreement shall require the Company and the Bank to obtain such services from KBW. Following this initial one year term, if both parties wish to continue the relationship, a fee will be negotiated and an agreement entered into at that time. 9. Expenses. The Bank will bear those expenses of the proposed offering customarily borne by issuers, including, without limitation, regulatory filing fees, SEC, "Blue Sky," and NASD filing and registration fees; the fees of the Bank's accountants, attorneys, appraiser, transfer agent and registrar, printing, mailing and marketing expenses associated with the Conversion; the fees set forth in Section 7; and fees for "Blue Sky" legal work. If KBW incurs expenses on behalf of Client, Client will reimburse KBW for such expenses. KBW will receive reimbursement for reasonable out-of-pocket expenses related to travel, meals lodging, photocopying, etc. KBW will request reimbursement for reasonable fees and expenses of their counsel (such fees of counsel will not be incurred without the prior approval of Client). Such reimbursement of legal fees will be subject to a cap to be agreed upon with Client. 10. Conditions. KBW's willingness and obligation to proceed hereunder shall be subject to, among other things, satisfaction of the following conditions in KBW's opinion, which opinion shall have been formed in good faith by KBW after reasonable determination and consideration of all relevant factors: (a) full and satisfactory disclosure of all relevant material, financial and other information in the disclosure documents and a determination by KBW, in its sole discretion, that the sale of stock on the terms proposed is reasonable given such disclosures; (b) no material adverse change in the condition or operations of the Bank subsequent to the execution of the agreement; and (c) no adverse market conditions at the time of offering which in KBW's opinion make the sale of the shares by the Company inadvisable. 12. Benefit. This Agreement shall inure to the benefit of the parties hereto and their respective successors and to the parties indemnified pursuant to the terms and conditions of the Agency Agreement and their successors, and the obligations and liabilities assumed hereunder by the parties hereto shall be binding upon their respective successors provided, however, that this Agreement shall not be assignable by KBW. 13. Definitive Agreement. This letter reflects KBW's present intention of proceeding to work with the Bank on its proposed conversion. It does not create a binding obligation on the part of the Bank, the Company or KBW except as to the agreement to maintain the confidentiality of non-public information set forth in Section 3, the payment of certain fees as set forth in Section 7(a) and 7(b) and the assumption of expenses as set forth in Section 9, all of which shall constitute the binding obligations of the parties hereto and which shall survive the termination of this Agreement or the completion of the services furnished hereunder and shall remain operative and in full force and effect. You further acknowledge that any report or analysis rendered by KBW pursuant to this engagement is rendered for use solely by the management of the Bank and its agents in connection with the Conversion. Accordingly, you agree that you will not provide any such information to any other person without our prior written consent. KBW acknowledges that in offering the Company's stock no person will be authorized to give any information or to make any representation not contained in the offering prospectus and related offering materials filed as part of a registration statement to be declared effective in connection with the offering. Accordingly, KBW agrees that in connection with the offering it will not give any unauthorized information or make any unauthorized representation. We will be pleased to elaborate on any of the matters discussed in this letter at your convenience. If the foregoing correctly sets forth our mutual understanding, please so indicate by signing and returning the original copy of this letter to the undersigned. Very truly yours, KEEFE, BRUYETTE & WOODS, INC. By: /s/Patricia A. McJoynt ------------------------------- Patricia A. McJoynt Senior Vice President COHOES SAVINGS BANK By: /s/Harry Robinson Date: 6/10/98 ------------------------------- ------------------ Harry Robinson President and Chief Executive Officer EXHIBIT A CONVERSION SERVICES PROPOSAL TO COHOES SAVINGS BANK KBW provides thrift institutions converting from mutual to stock form of ownership with a comprehensive program of conversion services designed to promote an orderly, efficient, cost-effective and long-term stock distribution. The following list is representative of the conversion services, if appropriate, we propose to perform on behalf of the Bank. General Services Assist management and legal counsel with the design of the transaction structure. Analyze and make recommendations on bids from printing, transfer agent, and appraisal firms. Assist officers and directors in obtaining bank loans to purchase stock, if requested. Assist in drafting and distribution of press releases as required or appropriate. Conversion Offering Enhancement Services Establish and manage Stock Information Center at the Bank. Stock Information Center personnel will track prospective investors; record stock orders; mail order confirmations; provide the Bank's senior management with daily reports; answer customer inquiries; and handle special situations as they arise. Assign KBW's personnel to be at the Bank through completion of the Subscription and Community Offerings to manage the Stock Information Center, meet with prospective shareholders at individual and community information meetings, solicit local investor interest through a tele-marketing campaign, answer inquiries, and otherwise assist in the sale of stock in the Subscription and Community Offerings. This effort will be lead by a Principal of KBW. Create target investor list based upon review of the Bank's depositor base. Provide intensive financial and marketing input for drafting of the prospectus. Conversion Offering Enhancement Services- Continued Prepare other marketing materials, including prospecting letters and brochures, and media advertisements. Arrange logistics of community information meeting(s) as required. Prepare audio-visual presentation by senior management for community information meeting(s). Prepare management for question-and-answer period at community information meeting(s). Attend and address community information meeting(s) and be available to answer questions. Broker-Assisted Sales Services. Arrange for broker information meeting(s) as required. Prepare audio-visual presentation for broker information meeting(s). Prepare script for presentation by senior management at broker information meeting(s). Prepare management for question-and-answer period at broker information meeting(s). Attend and address broker information meeting(s) and be available to answer questions. Produce confidential broker memorandum to assist participating brokers in selling the Bank's common stock. Aftermarket Support Services. KBW will use their best efforts to secure market making and on-going research commitment from at least three NASD firms, one of which will be Keefe, Bruyette & Woods, Inc. EX-2 3 EXHIBIT 2 Exhibit 2 Plan of Conversion Cohoes Savings Bank Cohoes, New York PLAN OF CONVERSION From Mutual to Stock Form of Organization I. GENERAL On May 21, 1998, the Board of Trustees of Cohoes Savings Bank (the "Bank") unanimously adopted a Plan of Conversion whereby the Bank would convert from a New York chartered mutual savings institution to a New York chartered stock savings institution. The Bank was chartered by the State of New York by an act of the State legislature on April 11, 1851, such Act having been amended and supplemented from time to time thereafter. The Board of Trustees of Cohoes Savings Bank has been continually monitoring developments in the banking industry through its strategic planning process. It is the opinion of the Board of Trustees that the stock form of ownership will provide the Bank with the structure and capital necessary to meet the challenges of the market place, will enhance the Bank's ability to grow and prosper during its second 150 years, will assist the Bank to fulfill its dual role as a leader in the Capital District Business Community, and will enable the Bank to continue as a people oriented community Bank offering an ever increasing array of services to its customers. The principal office of the Bank is located at 75 Remsen Street, in the city of Cohoes, county of Albany, New York. The Plan includes, as part of the conversion, the concurrent formation of a holding company, to be named in the future. The Plan provides that non-transferable subscription rights to purchase Holding Company Conversion Stock will be offered first to Eligible Account Holders of record as of the Eligibility Record Date, then to the Holding Company and the Bank's Tax-Qualified Employee Plans and then to Supplemental Eligible Account Holders of record as of the Supplemental Eligibility Record Date. Concurrently with, at any time during, or promptly after the Subscription Offering, and on a lowest priority basis, an opportunity to subscribe may also be offered to the general public in a Community Offering and/or a Public Offering. The price of the Holding Company Conversion Stock will be based upon an independent appraisal of the Bank and will reflect its estimated pro forma market value, as converted. It is the desire of the Board of Trustees of the Bank to attract new capital to the Bank in order to increase its capital, support future savings growth and increase the amount of funds available for residential and other mortgage lending. The Converted Bank is also expected to benefit from its management and other personnel having a stock ownership in its business, since stock ownership is viewed as an effective performance incentive and a means of attracting, retaining and compensating management and other personnel. No change will be made in the Board of Trustees or management as a result of the Conversion. In furtherance of the Bank's long term commitment to its community, the Plan provides that, in connection with the Conversion, the Holding Company will make a donation of an undetermined amount of its stock to a foundation ("The Foundation"), the name of which will be determined, established by the Holding Company. This Plan has been unanimously approved by the Board of Trustees of the Bank, based upon its determination that the Conversion is in the best interests of the Bank, its depositors and the communities served by the Bank. This Plan sets forth the terms and conditions of the Conversion, and the procedures for effecting the same. This Plan must be approved by the Superintendent or his or her designees, must not be objected to by the FDIC and certain waivers must be granted by the Superintendent. This Plan must also be approved by the affirmative vote of at least seventy-five percent (75%) in amount of deposit liabilities of Voting Depositors represented in person or by proxy at the Special Meeting, and the affirmative vote of at least a majority of the amount of votes eligible to be cast at the Special Meeting. P-1 Upon the Conversion, each Person having a Deposit Account at the Bank prior to the Conversion will continue to have a Deposit Account, without payment therefor, in the same amount and subject to the same terms and conditions (except for voting and liquidation rights) as in effect prior to the Conversion. After the Conversion, the Bank will succeed to all the rights, interests, duties and obligations of the Bank before the Conversion, including, but not limited to, all rights and interests of the Bank in and to its assets and properties, whether real, personal or mixed. The Bank will continue to be a member of the Federal Home Loan Bank System. All of the Bank's insured Deposit Accounts will continue to be insured by the Bank Insurance Fund of the FDIC to the extent provided by applicable law. II. DEFINITIONS Acting in Concert: The term "acting in concert" shall have the same meaning given it in ss.574.2(c) of the Rules and Regulations of the OTS as applied by the FDIC. Actual Subscription Price: The price per share, determined as provided in Section V of the Plan, at which Holding Company Conversion Stock will be sold in the Subscription Offering. Affiliate: An "affiliate" of, or a Person "affiliated" with, a specified Person, is a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by or is under common control with, the Person specified. Associate: The term "associate," when used to indicate a relationship with any Person, means (i) any corporation or organization (other than the Holding Company, the Bank or a majority-owned subsidiary of the Holding Company) of which such Person is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent 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, 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 or any subsidiary of the Holding Company; provided, however, that any Tax-Qualified or Non-Tax-Qualified Employee Plan shall not be deemed to be an associate of any director or officer of the Holding Company or the Bank, to the extent provided in Section V hereof. Bank: Cohoes Savings Bank or such other name as the institution may adopt. Banking Board: The Banking Board of the State of New York. BIF: Bank Insurance Fund. Community Offering: The offering to the general public of any unsubscribed shares which may be effected as provided in Section V hereof. Conversion: Change of the Bank's mutual charter and bylaws to stock charter and bylaws; sale by the Holding Company of Holding Company Conversion Stock; and issuance and sale by the Converted Bank of Converted Bank Common Stock to the Holding Company, all as provided for in the Plan. Converted Bank: The stock savings institution resulting from the Conversion of the Bank in accordance with the Plan. Deposit Account: Any withdrawable or repurchasable account or deposit in the Bank including Savings Accounts and demand accounts. P-2 Depositor: Any person or entity that qualifies as a depositor of the Bank pursuant to its charter and bylaws. Eligibility Record Date: The close of business on March 31, 1997. Eligible Account Holder: Any Person holding a Qualifying Deposit in the Bank on the Eligibility Record Date. Exchange Act: The Securities Exchange Act of 1934, as amended. FDIC. Federal Deposit Insurance Corporation. Holding Company: A corporation which upon completion of the Conversion will own all of the outstanding common stock of the Converted Bank, and the name of which will be selected in the future. Holding Company Conversion Stock: Shares of common stock, par value $.01 per share, to be issued and sold by the Holding Company as a part of the Conversion; provided, however, that for purposes of calculating Subscription Rights and maximum purchase limitations under the Plan, references to the number of shares of Holding Company Conversion Stock shall refer to the number of shares offered in the Subscription Offering. Local Community: The geographic area encompassing counties in which the Bank has offices. Market Maker: A dealer (i.e., any Person who engages directly or indirectly as agent, broker or principal in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another Person) who, with respect to a particular security, (i) regularly publishes bona fide, competitive bid and offer quotations in a recognized inter-dealer quotation system; or (ii) furnishes bona fide competitive bid and offer quotations on request; and (iii) is ready, willing, and able to effect transactions in reasonable quantities at his quoted prices with other brokers or dealers. Maximum Subscription Price: The price per share of Holding Company Conversion Stock to be paid initially by subscribers in the Subscription Offering. Non-Tax-Qualified Employee Plan: Any defined benefit plan or defined contribution plan of the Bank or the Holding Company, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which with its related trust does not meet the requirements to be "qualified" under Section 401 of the Internal Revenue Code. OTS: Office of Thrift Supervision, Department of the Treasury, and its successors. Officer: An executive officer of the Holding Company or the Bank, including the President, Executive Vice Presidents, Senior Vice Presidents in charge of principal business functions, Secretary and Treasurer. Order Forms: Forms to be used in the Subscription Offering to exercise Subscription Rights. Person: An individual, a corporation, a partnership, an association, a joint-stock company, a trust, any unincorporated organization, or a government or political subdivision thereof. P-3 Plan: This Plan of Conversion of the Bank, including any amendment approved as provided in this Plan. Public Offering: The offering for sale through the Underwriters to selected depositors or the general public of any shares of Holding Company Conversion Stock not subscribed for in the Subscription Offering or the Community Offering, if any. Public Offering Price: The price per share at which any unsubscribed shares of Holding Company Conversion Stock are initially offered for sale in the Public Offering. Qualifying Deposit: The aggregate balance of $100 or more of each Deposit Account of an Eligible Account Holder as of the Eligibility Record Date or of a Supplemental Eligible Account Holder as of the Supplemental Eligibility Record Date. Regulatory Authorities: The FDIC, the Superintendent and the OTS. Savings Account: The term "Savings Account" means any withdrawable account in the Bank except a demand account. SEC: Securities and Exchange Commission. Special Meeting: The Special Meeting of Depositors called for the purpose of considering and voting upon the Plan of Conversion. Subscription Offering: The offering of shares of Holding Company Conversion Stock for subscription and purchase pursuant to Section V of the Plan. Subscription Rights: Non-transferable, non-negotiable, personal rights of the Bank's Eligible Account Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account Holders to subscribe for shares of Holding Company Conversion Stock in the Subscription Offering. Superintendent: Superintendent of Banks of the State of New York. Supplemental Eligibility Record Date: The last day of the calendar quarter preceding approval of the Plan by the FDIC. Supplemental Eligible Account Holder: Any person holding a Qualifying Deposit in the Bank (other than an officer or director and their associates) on the Supplemental Eligibility Record Date. Tax-Qualified Employee Plans: Any defined benefit plan or defined contribution plan of the Bank or the Holding Company, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which with its related trust meets the requirements to be "qualified" under Section 401 of the Internal Revenue Code. Underwriters: The investment banking firm or firms agreeing to offer and sell Holding Company Conversion Stock in the Public Offering. Voting Depositor: Any person holding a Qualifying Deposit at the close of business on September 30, 1998 for purposes of determining those Persons entitled to vote on the Plan of Conversion at the Special Meeting. P-4 Voting Record Date: The date set by the Board of Trustees for determining Depositors eligible to vote at the Special Meeting is March 31, 1998. III. STEPS PRIOR TO SUBMISSION OF PLAN OF CONVERSION TO THE DEPOSITORS FOR APPROVAL Prior to submission of the Plan of Conversion to its Depositors for approval, the Bank must receive from the appropriate Regulatory Authorities prior written approval of the Application for Approval of Conversion to convert to the stock form of organization. The following steps must be taken prior to such regulatory approval: A. The Board of Trustees shall adopt the Plan by not less than a two-thirds vote. B. The Bank shall notify its Depositors of the adoption of the Plan by publishing a statement in a newspaper having a general circulation in each community in which the Bank maintains an office. C. Copies of the Plan adopted by the Board of Trustees shall be made available for inspection at each office of the Bank. D. The Bank will promptly cause an Application for Approval of Conversion to be prepared and filed with the Superintendent for his/her approval, and for the granting of any waivers, if necessary, and with the FDIC (in the form of a notice for their non-objection). Additionally, a Holding Company Application will be prepared and filed with the OTS for its approval and a Registration Statement on Form S-1 will be prepared and filed with the SEC. Following (i) approval of the Bank's Application for Conversion by the Superintendent, (ii) the non- objection of the FDIC and (iii) the receipt of all necessary waivers from the Superintendent, the Bank shall submit the Plan to the Bank's Voting Depositors for approval at the Special Meeting. The Bank shall mail to each Voting Depositor, at his or her last known address appearing on the records of the Bank, a copy of the Plan and the proposed Restated Organization Certificate of the Bank and proposed By-Laws of the Bank, a Notice of Special Meeting, Proxy Card and Subscription Order form and a long-form Proxy Statement (which contains a detailed description of the Conversion and contains offering material relating to the Subscription Offering) in the forms required by the Conversion Regulations, describing the Plan and certain other matters relating to the Bank and its Conversion. Separate and readily distinguishable postage-paid envelopes shall be provided for the return of Proxy Cards and Subscription Order Forms. The Special Meeting shall be held upon written notice given no less than 20 days nor more than 45 days prior to the date of the Special Meeting. At the Special Meeting, each Voting Depositor shall be entitled to cast one vote in person or by proxy for every one hundred dollars ($100.00) such Voting Depositor had on deposit with the Bank as of the Voting Record Date; provided, however, that no Voting Depositor shall be eligible to cast more than one thousand (1,000) votes. The Board of Trustees shall appoint an independent custodian and tabulator to receive and hold proxies to be voted at the Special Meeting and count the votes cast in favor of and in opposition to the Plan. The Superintendent shall be notified of the results of the Special Meeting by a certificate signed by the President and Secretary of the Bank within five days after the conclusion of the Special Meeting. The Plan must be approved by the affirmative vote of (i) at least seventy-five percent (75%) in amount of deposit liabilities of the Voting Depositors represented in person or by proxy at the Special Meeting and (ii) at least a majority of the amount of votes entitled to be cast at the Special Meeting. If the Plan is so approved, the Bank will take all other necessary steps to effect the Conversion subject to the terms and conditions of the P-5 Plan. If the Plan is not so approved, upon conclusion of the Special Meeting and any adjournment or postponement thereof, the Plan shall not be implemented without further vote and all funds submitted in the Subscription Offering and Community Offering will be returned to subscribers, with interest as provided herein, and all withdrawal authorizations will be canceled. IV. CONVERSION PROCEDURE The Holding Company Conversion Stock will be offered for sale in the Subscription Offering at the Subscription Price to Eligible Account Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account Holders prior to or within 45 days after the date of the Special Meeting. The Bank may, either concurrently with, at any time during, or promptly after the Subscription Offering, also offer the Holding Company Conversion Stock to and accept subscriptions from other Persons in a Community Offering and/or a Public Offering; provided that the Bank's Eligible Account Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account Holders shall have the priority rights to subscribe for Holding Company Conversion Stock set forth in Section V of this Plan. However, the Holding Company and the Bank may delay commencing the Subscription Offering beyond such 45-day period in the event there exist unforeseen material adverse market or financial conditions. If the Subscription Offering commences prior to the Special Meeting, subscriptions will be accepted subject to the approval of the Plan at the Special Meeting. No offer for sale of the Holding Company Conversion Stock will be made prior to the mailing of the proxy statement for the Special Meeting. The period for the Subscription Offering and Community Offering will be not less than 20 days nor more than 45 days unless extended by the Bank. Upon completion of the Subscription Offering and the Community Offering any unsubscribed shares of Holding Company Conversion Stock may be sold through the Underwriters to the general public in the Public Offering. If for any reason all of the shares are not sold in the Subscription Offering, the Community Offering and the Public Offering, if any, the Holding Company and the Bank will use their best efforts to obtain other purchasers, subject to the prior written approval of the appropriate Regulatory Authorities. Completion of the sale of all shares of Holding Company Conversion Stock not sold in the Subscription Offering is required within 45 days after termination of the Subscription Offering, subject to extension of such 45-day period by the Holding Company and the Bank with the prior written approval of the appropriate Regulatory Authorities. The Holding Company and the Bank may jointly seek one or more extensions of such 45-day period if necessary to complete the sale of all shares of Holding Company Conversion Stock. In connection with such extensions, subscribers and other purchasers will be permitted to increase, decrease or rescind their subscriptions or purchase orders to the extent required by the prior written approval of the appropriate Regulatory Authorities in approving the extensions. Completion of the sale of all shares of Holding Company Conversion Stock is required within 24 months after the date of the Special Meeting. V. STOCK OFFERING A. Total Number of Shares and Purchase Price of Conversion Stock The total number of shares of Holding Company Conversion Stock to be issued in the Conversion will be determined jointly by the Board of Directors of the Holding Company and the Board of Trustees of the Bank prior to the commencement of the Subscription Offering, subject to adjustment if necessitated by market or financial conditions prior to consummation of the Conversion. The total number of shares of Holding Company Conversion Stock shall also be subject to increase in connection with any oversubscriptions in the Subscription Offering or Community Offering. P-6 The aggregate price for which all shares of Holding Company Conversion Stock will be issued will be based on an independent appraisal of the estimated total pro forma market value of the Holding Company and the Converted Bank. Such appraisal shall be performed in accordance with the guidelines of the appropriate Regulatory Authorities and will be updated as appropriate under or required by applicable regulations. The appraisal will be made by an independent investment banking or financial consulting firm experienced in the area of thrift institution appraisals. The appraisal will include, among other things, an analysis of the historical and pro forma operating results and net worth of the Converted Bank and a comparison of the Holding Company, the Converted Bank and the Conversion Stock with comparable thrift institutions and holding companies and their respective outstanding capital stocks. Based upon the independent appraisal, the Board of Directors of the Holding Company and the Board of Trustees of the Bank will jointly fix the Subscription Price. If, following completion of the Subscription Offering and Community Offering, a Public Offering is effected, the Actual Subscription Price for each share of Holding Company Conversion Stock will be the same as the Public Offering Price at which unsubscribed shares of Holding Company Conversion Stock are initially offered for sale by the Underwriters in the Public Offering. If, upon completion of the Subscription Offering, Community Offering and Public Offering, if any, all of the Holding Company Conversion Stock is subscribed for or only a limited number of shares remain unsubscribed for, subject to Part VII hereof, the Actual Subscription Price for each share of Holding Company Conversion Stock will be determined by dividing the estimated appraised aggregate pro forma market value of the Holding Company and the Converted Bank, based on the independent appraisal as updated upon completion of the Subscription Offering or other sale of all of the Holding Company Conversion Stock, by the total number of shares of Holding Company Conversion Stock to be issued by the Holding Company upon Conversion. Such appraisal will then be expressed in terms of a specific aggregate dollar amount rather than as a range. However, such shares must be sold at a uniform price pursuant to ss.563(b)7 of the Rules and Regulations of the OTS as applied by the FDIC. B. Subscription Rights Non-transferable Subscription Rights to purchase shares will be issued without payment therefor to Eligible Account Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account Holders of the Bank as set forth below. 1. Preference Category No.1: Eligible Account Holders Each Eligible Account Holder shall receive non-transferable Subscription Rights to subscribe for shares of Holding Company Conversion Stock in an amount equal to the greater of $250,000, or one-tenth of one percent (.10%) of the total offering of shares, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction of which the numerator is the amount of the qualifying deposit of the Eligible Account Holder and the P-7 denominator is the total amount of qualifying deposits of all Eligible Account Holders in the converting Bank in each case on the Eligibility Record Date. If sufficient shares are not available, shares shall be allocated first to permit each subscribing Eligible Account Holder to purchase to the extent possible 100 shares, and thereafter among each subscribing Eligible Account Holder pro rata in the same proportion that his Qualifying Deposit bears to the total Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unsatisfied. Non-transferable Subscription Rights to purchase Holding Company Conversion Stock received by Trustees and Officers of the Bank and their Associates, based on their increased deposits in the Bank in the one-year period preceding the Eligibility Record Date, shall be subordinated to all other subscriptions involving the exercise of non-transferable Subscription Rights of Eligible Account Holders. 2. Preference Category No.2: Tax-Qualified Employee Plans Each Tax-Qualified Employee Plan shall be entitled to receive non-transferable Subscription Rights to purchase up to 10% of the shares of Holding Company Conversion Stock, provided that singly or in the aggregate such plans (other than that portion of such plans which is self-directed) shall not purchase more than 10% of the shares of the Holding Company Conversion Stock. Subscription Rights received pursuant to this Category shall be subordinated to all rights received by Eligible Account Holders to purchase shares pursuant to Category No. 1. 3. Preference Category No.3: Supplemental Eligible Account Holders Each Supplemental Eligible Account Holder shall receive non-transferable Subscription Rights to subscribe for shares of Holding Company Conversion Stock in an amount equal to the greater of $250,000, or one-tenth of one percent (.10%) of the total offering of shares, or 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of common stock to be issued by a fraction of which the numerator is the amount of the qualifying deposit of the Supplemental Eligible Account Holder and the denominator is the total amount of qualifying deposits of all Supplemental Eligible Account Holders in the converting Bank in each case on the Supplemental Eligibility Record Date. Subscription Rights received pursuant to this category shall be subordinated to all Subscription Rights received by Eligible Account Holders and Tax-Qualified Employee Plans pursuant to Category Nos. 1 and 2 above. Any non-transferable Subscription Rights to purchase shares received by an Eligible Account Holder in accordance with Category No. 1 shall reduce to the extent thereof the Subscription Rights to be distributed to such person pursuant to this Category. In the event of an oversubscription for shares under the provisions of this subparagraph, the shares available shall be allocated first to permit each subscribing Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation (including the number of shares, if any, allocated in accordance with Category No. 1) equal to 100 shares, and thereafter among P-8 each subscribing Supplemental Eligible Account Holder pro rata in the same proportion that his Qualifying Deposit bears to the total Qualifying Deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unsatisfied. C. Community Offering and Public Offering 1. Any shares of Holding Company Conversion Stock not subscribed for in the Subscription Offering will be offered for sale in a Community Offering. This will involve an offering of all unsubscribed shares directly to the general public with a preference to those natural persons residing in the Local Community. The Community Offering, if any, shall be for a period of not less than 20 days nor more than 45 days unless extended by the Holding Company and the Bank, and shall commence concurrently with, during or promptly after the Subscription Offering. The purchase price per share to the general public in a Community Offering shall be the same as the Actual Subscription Price. The Holding Company and the Bank shall use an investment banking firm or firms on a best efforts basis to sell the unsubscribed shares in the Subscription and Community Offering. The Holding Company and the Bank shall pay a commission or other fee to such investment banking firm or firms as to the shares sold by such firm or firms in the Subscription and Community Offering and may also reimburse such firm or firms for expenses incurred in connection with the sale. The Holding Company Conversion Stock will be offered and sold in the Community Offering, if any, in accordance with the regulations of the appropriate Regulatory Authorities, so as to achieve the widest distribution of the Holding Company Conversion Stock. No person, by himself or herself, or with an Associate or group of Persons acting in concert, may subscribe for or purchase more than $250,000 of Holding Company Conversion Stock in the Community Offering, if any. Further, the Bank may limit total subscriptions under this Section V.C.1 so as to assure that the number of shares available for the Public Offering may be up to a specified percentage of the number of shares of Holding Company Conversion Stock. Finally, the Bank may reserve shares offered in the Community Offering for sales to institutional investors. In the event of an oversubscription for shares in the Community Offering, shares may be allocated (to the extent shares remain available) first to cover orders of natural persons residing in the Local Community, then to cover the orders of any other person subscribing for shares in the Community Offering so that each such person may receive 2% of the shares, and thereafter, on a pro rata basis to such persons based on the amount of their respective subscriptions. The Bank and the Holding Company, in their sole discretion, may reject subscriptions, in whole or in part, received from any Person under this Section V.C. Further, the Bank and the Holding Company may, at their sole discretion, elect to forego a Community Offering and instead effect a Public Offering as described below. 2. Any shares of Holding Company Conversion Stock not sold in the Subscription Offering or in the Community Offering, if any, may then be sold at a uniform price through the Underwriters to selected Depositors or the general public in the Public Offering. It is expected that the Public Offering will commence as soon as practicable after termination of the Subscription Offering and the Community Offering, if any. The Bank and the Holding Company, in their sole discretion, may reject any subscription, in whole or in part, received in the Public Offering. The Public Offering shall be completed within 45 P-9 days after the termination of the Subscription Offering, unless such period is extended as provided in Section IV hereof. No person, by himself or herself, or with an Associate or group of Persons acting in concert, may purchase more than $250,000 in the Public Offering, if any. 3. If for any reason any shares remain unsold after the Subscription Offering, the Community Offering and the Public Offering, if any, the Board of Directors of the Holding Company and the Board of Trustees of the Bank will seek to make other arrangements for the sale of the remaining shares. Such other arrangements will be subject to the prior written approval of the appropriate Regulatory Authorities and to compliance with applicable securities laws. D. Additional Limitations Upon Purchases of Shares of Holding Company Conversion Stock The following additional limitations shall be imposed on all purchases of Holding Company Conversion Stock in the Conversion: 1. No Person, by himself or herself, or with an Associate or group of Persons acting in concert, may subscribe for or purchase in the Conversion a number of shares of Holding Company Conversion Stock which exceeds an amount of shares equal to 1% of the total offering of shares sold in the Conversion. For purposes of this paragraph, an Associate of a Person does not include a Tax-Qualified or Non-Tax Qualified Employee Plan in which the person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity. Moreover, for purposes of this paragraph, shares held by one or more Tax-Qualified or Non-Tax Qualified Employee Plans attributed to a Person shall not be aggregated with shares purchased directly by or otherwise attributable to that Person. 2. Trustees and Officers and their Associates may not purchase in all categories in the Conversion an aggregate of more than 25% of the Holding Company Conversion Stock. For purposes of this paragraph, an Associate of a Person does not include any Tax- Qualified Employee Plan. Moreover, any shares attributable to the Officers and Trustees and their Associates, but held by one or more Tax-Qualified Employee Plans shall not be included in calculating the number of shares which may be purchased under the limitation in this paragraph. 3. The minimum purchase amount of Holding Company Conversion Stock that may be purchased by any Person in the Conversion is 25 shares. 4. The Board of Directors of the Holding Company and the Board of Trustees of the Bank may, in their sole discretion, increase the maximum purchase limitation referred to in subparagraph 1. herein up to 9.99%, provided that orders for shares exceeding 5% of the shares being offered in the Conversion shall not exceed, in the aggregate, 10% of the shares being offered in the Conversion. Requests to purchase additional shares of Holding Company Conversion Stock under this provision will be allocated by the Board of Directors of the Holding Company and the Board of Trustees of the Bank on a pro rata basis giving priority in accordance with the priority rights set forth in this Section V. Depending upon market and financial conditions, the Board of Directors of the Holding Company and the Board of Trustees of the Bank, with the prior written approval of the appropriate Regulatory Authorities and without further approval of the Depositors, may P-10 increase or decrease any of the above purchase limitations. However, no increase in the purchase limitations shall occur without the prior written approval of the appropriate Regulatory Authorities. Each Person purchasing Conversion Stock in the Conversion shall be deemed to confirm that such purchase does not conflict with the above purchase limitations. E. Restrictions and Other Characteristics of Holding Company Conversion Stock Being Sold 1. Transferability. Holding Company Conversion Stock purchased by Persons other than Trustees and Officers of the Holding Company or the Bank will be transferable without restriction. Shares purchased by Trustees or Officers shall not be sold or otherwise disposed of for value for a period of one year from the date of Conversion, except for any disposition of such shares (i) following the death of the original purchaser, or (ii) resulting from an exchange of securities in a merger or acquisition approved by the applicable regulatory authorities. Any transfers that could result in a change of control of the Bank or the Holding Company or result in the ownership by any Person or group acting in concert of more than 10% of any class of the Bank's or the Holding Company's equity securities are subject to the prior written approval of the OTS and the Superintendent. The certificates representing shares of Holding Company Conversion Stock issued to Trustees and Officers shall bear a legend giving appropriate notice of the one-year holding period restriction. Appropriate instructions shall be given to the transfer agent for such stock with respect to the applicable restrictions relating to the transfer of restricted stock. Any shares of common stock of the Holding Company subsequently issued as a stock dividend, stock split, or otherwise, with respect to any such restricted stock, shall be subject to the same holding period restrictions for Holding Company or Bank Trustees and Officers as may be then applicable to such restricted stock. No Trustee or Officer of the Holding Company or of the Bank, or Associate of such a Trustee or Officer, shall purchase any outstanding shares of capital stock of the Holding Company for a period of three years following the Conversion without the prior written approval of the Superintendent and, as applicable, the FDIC, except through a broker or dealer registered with the SEC. 2. Repurchase and Dividend Rights. Except as permitted by applicable regulations, for a period of three years following Conversion, the Converted Bank shall not repurchase any shares of its capital stock, except with the prior permission of the Superintendent. Present regulations also provide that the Converted Bank may not declare or pay a cash dividend on or repurchase any of its stock (i) if the result thereof would be to reduce the regulatory capital of the Converted Bank below the amount required for the liquidation account to be established pursuant to Section XIII hereof, and (ii) except in compliance with requirements of the Rules and Regulations of the appropriate Regulatory Authorities. The above limitations are subject to the Rules and Regulations of the appropriate Regulatory Authorities which generally provide that the Holding Company of the Converted Bank may repurchase its capital stock provided (i) no repurchases occur within one year following conversion, (ii) repurchases during the second and third year after P-11 conversion are part of an open market stock repurchase program that does not allow for a repurchase of more than 5% of the Bank's outstanding capital stock during a twelve-month period without the prior written approval of the appropriate Regulatory Authorities, (iii) the repurchases do not cause the Bank to become undercapitalized. In addition, the above limitations shall not preclude payments of dividends or repurchases of capital stock by the Converted Bank in the event applicable federal regulatory limitations are liberalized or waived subsequent to regulatory approval of the Plan. 3. Voting Rights. After Conversion, exclusive voting rights as to the Bank will be vested in the Holding Company, as the sole stockholder of the Bank. Voting rights as to the Holding Company will be held exclusively by its stockholders. Presently all voting rights are vested in the Board of Trustees. F. Exercise of Subscription Rights; Order Forms 1. If the Subscription Offering occurs concurrently with the solicitation of proxies for the Special Meeting, the subscription prospectus and Order Form may be sent to each Eligible Account Holder, Tax-Qualified Employee Plan and Supplemental Eligible Account Holder at their last known address as shown on the records of the Bank. However, the Bank may, and if the Subscription Offering commences after the Special Meeting the Bank shall, furnish a subscription prospectus and Order Form only to Eligible Account Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account Holders who have returned to the Bank by a specified date prior to the commencement of the Subscription Offering a post card or other written communication requesting a subscription prospectus and Order Form. In such event, the Bank shall provide a postage-paid post card for this purpose and make appropriate disclosure in its proxy statement for the solicitation of proxies to be voted at the Special Meeting and/or letter sent in lieu of the proxy statement to those Eligible Account Holders, Tax-Qualified Employee Plans or Supplemental Eligible Account Holders who are not Depositors on the Voting Record Date. 2. Each Order Form will be preceded or accompanied by a subscription prospectus describing the Holding Company and the Converted Bank and the shares of Holding Company Conversion Stock being offered for subscription and containing all other information required by the appropriate Regulatory Authorities or necessary to enable Persons to make informed investment decisions regarding the purchase of Holding Company Conversion Stock. 3. The Order Forms (or accompanying instructions) used for the Subscription Offering will contain, among other things, the following: (i) A clear and intelligible explanation of the Subscription Rights granted under the Plan to Eligible Account Holders, Tax-Qualified Employee Plans and Supplemental Eligible Account Holders; (ii) A specified expiration date by which Order Forms must be returned to and actually received by the Bank or its representative for purposes of exercising Subscription Rights, which date will be not less than 20 days after the Order Forms are mailed by the Bank; P-12 (iii) The Maximum Subscription Price to be paid for each share subscribed for when the Order Form is returned; (iv) A statement that 25 shares is the minimum purchase amount for Holding Company Conversion Stock that may be subscribed for under the Plan; (v) A specifically designated blank space for indicating the number of shares being subscribed for; (vi) A set of detailed instructions as to how to complete the Order Form including a statement as to the available alternative methods of payment for the shares being subscribed for; (vii) Specifically designated blank spaces for dating and signing the Order Form; (viii) An acknowledgment that the subscriber has received the subscription prospectus; (ix) A statement of the consequences of failing to properly complete and return the Order Form, including a statement that the Subscription Rights will expire on the expiration date specified on the Order Form unless such expiration date is extended by the Holding Company and the Bank, and that the Subscription Rights may be exercised only by delivering the Order Form, properly completed and executed, to the Bank or its representative by the expiration date, together with required payment of the Maximum Subscription Price for all shares of Holding Company Conversion Stock subscribed for; (x) A statement that the Subscription Rights are non-transferable and that all shares of Holding Company Conversion Stock subscribed for upon exercise of Subscription Rights must be purchased on behalf of the Person exercising the Subscription Rights for his own account; and (xi) A statement that, after receipt by the Bank or its representative, a subscription may not be modified, withdrawn or canceled without the consent of the Bank. G. Method of Payment Payment for all shares of Holding Company Conversion Stock subscribed for, computed on the basis of the Maximum Subscription Price, must accompany all completed Order Forms. Payment may be made in cash (if presented in Person), by check, or, if the subscriber has a Deposit Account in the Bank (including a certificate of deposit), the subscriber may authorize the Bank to charge the subscriber's account. If a subscriber authorizes the Bank to charge his or her account, the funds will continue to earn interest, but may not be used by the subscriber until all Holding Company Conversion Stock has been sold or the Plan of Conversion is terminated, whichever is earlier. The Bank will allow subscribers to purchase shares by withdrawing funds from certificate accounts without the assessment of early withdrawal penalties with the exception of prepaid interest in the form of promotional gifts. In the case of early withdrawal of only a portion of such account, the certificate evidencing such account shall be canceled if the remaining balance of the account is less than the applicable minimum balance requirement, in which event the P-13 remaining balance will earn interest at the passbook rate. This waiver of the early withdrawal penalty is applicable only to withdrawals made in connection with the purchase of Holding Company Conversion Stock under the Plan of Conversion. Interest will also be paid, at not less than the then-current passbook rate, on all orders paid in cash, by check or money order, from the date payment is received until consummation of the Conversion. Payments made in cash, by check or money order will be placed by the Bank in an escrow or other account established specifically for this purpose. In the event of an unfilled amount of any subscription order, the Converted Bank will make an appropriate refund or cancel an appropriate portion of the related withdrawal authorization, after consummation of the Conversion, including any difference between the Maximum Subscription Price and the Actual Subscription Price (unless subscribers are afforded the right to apply such difference to the purchase of additional whole shares). If for any reason the Conversion is not consummated, purchasers will have refunded to them all payments made and all withdrawal authorizations will be canceled in the case of subscription payments authorized from accounts at the Bank. If any Tax-Qualified Employee Plans or Non-Tax-Qualified Employee Plans subscribe for shares during the Subscription Offering, such plans will not be required to pay for the shares subscribed for at the time they subscribe, but may pay for such shares of Holding Company Conversion Stock subscribed for upon consummation of the Conversion. In the event that, after the completion of the Subscription Offering, the amount of shares to be issued is increased above the maximum of the appraisal range included in the Prospectus, the Tax Qualified and Non-Tax Qualified Employee Plans shall be entitled to increase their subscriptions by a percentage equal to the percentage increase in the amount of shares to be issued above the maximum of the appraisal range provided that such subscriptions shall continue to be subject to applicable purchase limits and stock allocation procedures. H. Undelivered, Defective or Late Order Forms; Insufficient Payment The Board of Directors of the Holding Company and the Board of Trustees of the Bank shall have the absolute right, in their sole discretion, to reject any Order Form, including but not limited to, any Order Forms which (i) are not delivered or are returned by the United States Postal Service (or the addressee cannot be located); (ii) are not received back by the Bank or its representative, or are received after the termination date specified thereon; (iii) are defectively completed or executed; (iv) are not accompanied by the total required payment for the shares of Holding Company Conversion Stock subscribed for (including cases in which the subscribers' Deposit Accounts or certificate accounts are insufficient to cover the authorized withdrawal for the required payment); or (v) are submitted by or on behalf of a Person whose representations the Board of Directors of the Holding Company and the Board of Trustees of the Bank believe to be false or who they otherwise believe, either alone or acting in concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of this Plan. In such event, the Subscription Rights of the Person to whom such rights have been granted will not be honored and will be treated as though such Person failed to return the completed Order Form within the time period specified therein. The Bank may, but will not be required to, waive any irregularity relating to any Order Form or require submission of corrected Order Forms or the remittance of full payment for subscribed shares by such date as the Bank may specify. The interpretation of the Holding Company and the Bank of the terms and conditions of this Plan P-14 and of the proper completion of the Order Form will be final, subject to the authority of the appropriate Regulatory Authorities. P-15 I. Member in Non-Qualified States or in 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 Holding Company Conversion 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. VI. ORGANIZATION CERTIFICATE AND BYLAWS A. As part of the Conversion, the Bank will take all appropriate steps to amend its organization certificate to read in the form of a stock savings institution organization certificate as prescribed by the Regulatory Authorities. A copy of the proposed stock organization certificate is available upon request. By their approval of the Plan, the Depositors of the Bank will thereby approve and adopt such organization certificate. B. The Bank will also take appropriate steps to amend its bylaws to read in the form prescribed by the appropriate Regulatory Authorities for a stock savings institution. A copy of the proposed stock bylaws is available upon request. C. The effective date of the adoption of the Bank's restated organization certificate and bylaws shall be the date of the issuance and sale of the Holding Company Conversion Stock as specified by the appropriate Regulatory Authorities. VII. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION As part of the Conversion, and notwithstanding any other statement herein to the contrary, the Holding Company intends to issue an amount equal to no more than 8% of the shares of its Common Stock from its authorized but unissued shares to The Foundation, a charitable organization created under Section 501(c)(3) of the Internal Revenue Code. Such issuance (the "Contribution") shall be in the form of a direct contribution of stock by the Holding Company. The Contribution is being made in connection with the Conversion in order to complement the Bank's existing community reinvestment activities and to support the communities in which the Bank operates. The Contribution is expected to be completed not later than twelve months after the completion of the Conversion. The Foundation is dedicated to the promotion of charitable purposes within the communities in which the Bank operates, including, but not limited to, grants or donations to support not-for-profit medical facilities, cultural activities, community groups and other types of organizations or projects. As a private foundation, the Foundation is required to distribute annually in grants or donations at least 5% of its net investment assets. The authority for the affairs of the Foundation is vested in the Board of Trustees of the Foundation, none of whom may vote as directors of the Bank or the Holding Company on the Donation. VIII. HOLDING COMPANY CERTIFICATE OF INCORPORATION A copy of the proposed certificate of incorporation of the Holding Company will be made available to depositors upon request. P-16 XI. DIRECTORS OF THE CONVERTED BANK Each Person serving as a member of the Board of Trustees of the Bank at the time of the Conversion will thereupon become a director of the Converted Bank. X. STOCK OPTION AND INCENTIVE PLAN AND RECOGNITION AND RETENTION PLAN In order to provide an incentive for Directors, Officers and employees of the Holding Company and its subsidiaries (including the Bank), the Board of Directors of the Holding Company intends to adopt, subject to shareholder approval, a stock option and incentive plan and a recognition and retention plan sometime following the Conversion in accordance with such regulations as are applicable to the plans at that time. XI. CONTRIBUTIONS TO TAX-QUALIFIED EMPLOYEE PLANS The Converted Bank and the Holding Company may in their discretion make scheduled contributions to any Tax-Qualified Employee Plans, provided that any such contributions which are for the acquisition of Holding Company Conversion Stock, or the repayment of debt incurred for such an acquisition, do not cause the Converted Bank to fail to meet its regulatory capital requirements. XII. SECURITIES REGISTRATION AND MARKET MAKING Promptly following the Conversion, the Holding Company will register its stock with the SEC pursuant to the Exchange Act. In connection with the registration, the Holding Company will undertake not to deregister such stock, without the prior written approval of the appropriate Regulatory Authorities, for a period of three years thereafter. The Holding Company shall use its best efforts to encourage and assist two or more market makers to establish and maintain a market for its common stock promptly following Conversion. The Holding Company will also use its best efforts to cause its common stock to be quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or to be listed on a national or regional securities exchange. XIII. STATUS OF DEPOSIT ACCOUNTS AND LOANS SUBSEQUENT TO CONVERSION Each Deposit Account holder shall retain, without payment, a withdrawable Deposit Account or Accounts in the Converted Bank, equal in amount to the withdrawable value of such account holder's Deposit Account or Accounts prior to Conversion. All Deposit Accounts will continue to be insured by the BIF up to the applicable limits of insurance coverage, and shall be subject to the same terms and conditions (except as to voting and liquidation rights) as such Deposit Account in the Bank at the time of the Conversion. All loans shall retain the same status after Conversion as these loans had prior to Conversion. XIV. LIQUIDATION ACCOUNT For purposes of granting to Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain Deposit Accounts at the Converted Bank a priority in the event of a complete liquidation of the Converted Bank, the Converted Bank will, at the time of Conversion, establish a liquidation account in an amount equal to the net worth of the Bank as shown on its latest statement of financial condition contained in the final offering circular (prospectus) used in connection with the Conversion. The creation and maintenance of the liquidation account will not operate to restrict the use or P-17 application of any of the regulatory capital accounts of the Converted Bank; provided, however, that such regulatory capital accounts will not be voluntarily reduced below the required dollar amount of the liquidation account. Each Eligible Account Holder and Supplemental Eligible Account Holder shall, with respect to the Deposit Account held, have a related inchoate interest in a portion of the liquidation account balance ("subaccount balance"). The initial subaccount balance of a Deposit Account held by an Eligible Account Holder and/or Supplemental Eligible Account Holder shall be determined by multiplying the opening balance in the liquidation account by a fraction of which the numerator is the amount of the Qualifying Deposit in the Deposit Account on the Eligibility Record Date and/or the Supplemental Eligibility Record Date and the denominator is the total amount of the Qualifying Deposits of all Eligible Account Holders and Supplemental Eligible Account Holders on such record dates in the Bank. For Deposit Accounts in existence at both dates, separate subaccounts shall be determined on the basis of the Qualifying Deposits in such Deposit Accounts on such record dates. Such initial subaccount balance shall not be increased, and it shall be subject to downward adjustment as provided below. If the deposit balance in any Deposit Account of an Eligible Account Holder or Supplemental Eligible Account Holder at the close of business on any annual closing date subsequent to the record date is less than the lesser of (i) the deposit balance in such Deposit Account at the close of business on any other annual closing date subsequent to the Eligibility Record Date or the Supplemental Eligibility Record Date or (ii) the amount of the Qualifying Deposit in such Deposit Account on the Eligibility Record Date or Supplemental Eligibility Record Date, the subaccount balance shall be reduced in an amount proportionate to the reduction in such deposit balance. In the event of a downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any increase in the deposit balance of the related Deposit Account. If all funds in such Deposit Account are withdrawn, the related subaccount balance shall be reduced to zero. In the event of a complete liquidation of the Bank (and only in such event), each Eligible Account Holder and Supplemental Eligible Account Holder shall be entitled to receive a liquidation distribution from the liquidation account in the amount of the then-current adjusted subaccount balances for Deposit Accounts then held before any liquidation distribution may be made to stockholders. No merger, consolidation, bulk purchase of assets with assumptions of Deposit Accounts and other liabilities, or similar transactions with another institution the accounts of which are insured by the BIF, shall be considered to be a complete liquidation. In such transactions, the liquidation account shall be assumed by the surviving institution. XV. RESTRICTIONS ON ACQUISITION OF CONVERTED BANK Regulations of the Regulatory Authorities limit acquisitions, and offers to acquire, direct or indirect beneficial ownership of more than 10% of any class of an equity security of the Converted Bank or the Holding Company. In addition, consistent with the regulations of the Regulatory Authorities, the organization certificate of the Converted Bank shall provide that for a period of three years following completion of the Conversion: (i) no Person (i.e., no individual, group acting in concert, corporation, partnership, association, joint stock company, trust, or unincorporated organization or similar company, syndicate, or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution) shall directly or indirectly offer to acquire or acquire beneficial ownership of more than 10% of any class of the Bank's equity securities. Shares beneficially owned in violation of this organization certificate provision shall not be counted as shares entitled to vote and shall not be voted by any Person or counted as voting shares in connection with any matter submitted to the shareholders for a vote. This limitation shall not apply to any offer to acquire or acquisition of beneficial ownership of more than 10% of the common stock of the Bank by a corporation whose ownership is or will be substantially the same as P-18 the ownership of the Bank, provided that the offer or acquisition is made more than one year following the date of completion of the Conversion; (ii) shareholders shall not be permitted to cumulate their votes for elections of trustees or directors; and (iii) special meetings of the shareholders relating to changes in control or amendment of the organization certificate may only be called by the Board of Directors, as appropriate. XVI. AMENDMENT OR TERMINATION OF PLAN If necessary or desirable, the Plan may be amended at any time prior to submission of the Plan and proxy materials to the Voting Depositors by a two-thirds vote of the Board of Directors of the Holding Company and the Board of Trustees of the Bank. After submission of the Plan and proxy materials to the Voting Depositors, the Plan may be amended by a two-thirds vote of the respective Board of Directors of the Holding Company and the Board of Trustees of the Bank only with the concurrence of the appropriate Regulatory Authorities. In the event that the Bank determines that for tax purposes or otherwise it is in the best interest of the Bank to convert from a mutual to a stock institution without the concurrent formation of a holding company, the Plan may be substantively amended, with the prior written approval of the appropriate Regulatory Authorities, in such respects as the Board of Trustees of the Bank deems appropriate to reflect such change from a holding company conversion to a direct conversion. In the event the Plan is so amended, common stock of the Bank will be substituted for Holding Company Conversion Stock in the Subscription, Community or Public Offerings, and subscribers will be resolicited as described in Section V hereof. Any amendments to the Plan (including amendments to reflect the elimination of the concurrent holding company formation) made after approval by the Voting Depositors with the concurrence of the appropriate regulatory authorities shall not necessitate further approval by the Voting Depositors unless otherwise required. The Plan may be terminated by a two-thirds vote of the Bank's Board of Trustees at any time prior to the Special Meeting of Voting Depositors, and at any time following such Special Meeting with the concurrence of the appropriate Regulatory Authorities. In its discretion, the Board of Trustees of the Bank may modify or terminate the Plan upon the order or with the prior written approval of the appropriate Regulatory Authorities and without further approval by Voting Depositors. The Plan shall terminate if the sale of all shares of Conversion Stock is not completed within 24 months of the date of the Special Meeting. A specific resolution approved by a majority of the Board of Trustees of the Bank is required in order for the Bank to terminate the Plan prior to the end of such 24-month period. XVII. EXPENSES OF THE CONVERSION The Holding Company and the Bank will assure that expenses incurred by them in connection with the Conversion shall be reasonable. XVIII. TAX RULING Consummation of the Conversion is expressly conditioned upon prior receipt of either a ruling of the United States Internal Revenue Service or an opinion of tax counsel with respect to federal taxation, and either a ruling of the New York taxation authorities or an opinion of tax counsel or other tax advisor with respect to New York taxation, to the effect that consummation of the transactions contemplated herein will not be taxable to the Holding Company or the Bank. XIX. EXTENSION OF CREDIT FOR PURCHASE OF STOCK The Bank may not loan funds or otherwise extend credit to any Person to purchase in the Conversion shares of Holding Company Conversion Stock. P-19 EX-3 4 EXHIBIT 3.1 Exhibit 3.1 Certificate of Incorporation of the Holding Company CERTIFICATE OF INCORPORATION OF COHOES BANCORP, INC. FIRST: The name of the Corporation is Cohoes Bancorp, Inc. (hereinafter sometimes referred to as the "Corporation"). SECOND: The address of the registered office of the Corporation in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. FOURTH: A. The total number of shares of all classes of stock which the Corporation shall have the authority to issue is thirty million (30,000,000) consisting of: 1. five million (5,000,000) shares of preferred stock, par value one cent ($.01) per share (the "Preferred Stock"); and 2. twenty-five million (25\,000,000) shares of common stock, par value one cent ($.01) per share (the "Common Stock"). B. The Board of Directors is hereby expressly authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware (such certificate being hereinafter referred to as a "Preferred Stock Designation"), to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of the Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any series thereof, unless a vote of any such holders is required pursuant to the terms of any Preferred Stock Designation. C. 1. Notwithstanding any other provision of this Certificate of Incorporation, in no event shall any record owner of any outstanding Common Stock which is beneficially owned, directly or indirectly, by a person who, as of any record date for the determination of stockholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of Common Stock (the "Limit"), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit. The number of votes which may be cast by any 1 record owner by virtue of the provisions hereof in respect of Common Stock beneficially owned by such person owning shares in excess of the Limit shall be a number equal to the total number of votes which a single record owner of all Common Stock owned by such person would be entitled to cast, multiplied by a fraction, the numerator of which is the number of shares of such class or series beneficially owned by such person and owned of record by such record owner and the denominator of which is the total number of shares of Common Stock beneficially owned by such person owning shares in excess of the Limit. 2. The following definitions shall apply to this Section C of this Article FOURTH: (a) An "affiliate" of a specified person shall mean a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. (b) "Beneficial ownership" shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or statutory provision thereto, pursuant to said Rule 13d-3 as in effect on June 30, 1998; provided, however, that a person shall, in any event, also be deemed the "beneficial owner" of any Common Stock: (1) which such person or any of its affiliates beneficially owns, directly or indirectly; or (2) which such person or any of its affiliates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with this Corporation to effect any transaction which is described in any one or more of the clauses of Section A of Article EIGHTH) or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (ii) sole or shared voting or investment power with respect thereto pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such person nor any such affiliate is otherwise deemed the beneficial owner); or (3) which are beneficially owned, directly or indirectly, by any other person with which such first mentioned person or any of its affiliates acts as a partnership, limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of this Corporation; 2 and provided further, however, that (1) no director or officer of this Corporation (or any affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Common Stock beneficially owned by any other such director or officer (or any affiliate thereof), and (2) neither any employee stock ownership or similar plan of this Corporation or any subsidiary of this Corporation nor any trustee with respect thereto (or any affiliate of such trustee) shall, solely by reason of such capacity of such trustee, be deemed, for any purposes hereof, to beneficially own any Common Stock held under any such plan. For purposes of computing the percentage beneficial ownership of Common Stock of a person, the outstanding Common Stock shall include shares deemed owned by such person through application of this subsection but shall not include any other Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding Common Stock shall include only Common Stock then outstanding and shall not include any Common Stock which may be issuable by this Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise. (c) A "person" shall mean any individual, firm, corporation, or other entity. (d) The Board of Directors shall have the power to construe and apply the provisions of this section and to make all determinations necessary or desirable to implement such provisions, including but not limited to matters with respect to (1) the number of shares of Common Stock beneficially owned by any person, (2) whether a person is an affiliate of another, (3) whether a person has an agreement, arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (4) the application of any other definition or operative provision of this Section to the given facts, or (5) any other matter relating to the applicability or effect of this Section. 3. The Board of Directors shall have the right to demand that any person who is reasonably believed to beneficially own Common Stock in excess of the Limit (or holds of record Common Stock beneficially owned by any person in excess of the Limit) (a "Holder in Excess") supply the Corporation with complete information as to (a) the record owner(s) of all shares beneficially owned by such Holder in Excess, and (b) any other factual matter relating to the applicability or effect of this section as may reasonably be requested of such Holder in Excess. The Board of Directors shall further have the right to receive from any Holder in Excess reimbursement for all expenses incurred by the Board in connection with its investigation of any matters relating to the applicability or effect of this section on such Holder in Excess, to the extent such investigation is deemed appropriate by the Board of Directors as a result of the Holder in Excess refusing to supply the Corporation with the information described in the previous sentence. 4. Except as otherwise provided by law or expressly provided in this Section C, the presence, in person or by proxy, of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast one-third of the votes (after giving effect, if required, to the provisions of this Section) entitled to be cast by the holders of shares of capital stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders, and every reference in this Certificate of Incorporation to a majority or other proportion of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for 3 stockholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof) then entitled to be cast in respect of such capital stock. 5. Any constructions, applications, or determinations made by the Board of Directors, pursuant to this Section in good faith and on the basis of such information and assistance as was then reasonably available for such purpose, shall be conclusive and binding upon the Corporation and its stockholders. 6. In the event any provision (or portion thereof) of this Section C shall be found to be invalid, prohibited or unenforceable for any reason, the remaining provisions (or portions thereof) of this Section shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable, it being the intent of this Corporation and its stockholders that each such remaining provision (or portion thereof) of this Section C remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders, including stockholders owning an amount of stock over the Limit, notwithstanding any such finding. FIFTH: The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: A. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the powers and authority expressly conferred upon them by Statute or by this Certificate of Incorporation or the By-laws of the Corporation, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation. B. The directors of the Corporation need not be elected by written ballot unless the By-laws so provide. C. Subject to the rights of holders of any class or series of Preferred Stock, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. D. Subject to the rights of holders of any class or series of Preferred Stock, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors (the "Whole Board"). E. Stockholders shall not be permitted to cumulate their votes for the election of directors. 4 SIXTH: A. The number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the Whole Board. The directors, other than those who may be elected by the holders of any class or series of Preferred Stock, shall be divided into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the conclusion of the first annual meeting of stockholders, the term of office of the second class to expire at the conclusion of the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the conclusion of the annual meeting of stockholders two years thereafter, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. B. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until such director's successor shall have been duly elected and qualified. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. C. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation shall be given in the manner provided in the By-laws of the Corporation. D. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any directors, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of the voting power of all of the then-outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (after giving effect to the provisions of Article FOURTH of this Certificate of Incorporation), voting together as a single class. SEVENTH: The Board of Directors is expressly empowered to adopt, amend or repeal the By-laws of the Corporation. Any adoption, amendment or repeal of the By-laws of the Corporation by the Board of Directors shall require the approval of a majority of the Whole Board. The stockholders shall also have power to adopt, amend or repeal the By-laws of the Corporation. In addition to any vote of the holders of any class or series of stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 80% of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (after giving effect to the provisions of Article FOURTH 5 hereof), voting together as a single class, shall be required to adopt, amend or repeal any provisions of the By-laws of the Corporation. EIGHTH: A. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in this Section: 1. any merger or consolidation of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or 2. any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder, or any Affiliate of any Interested Stockholder, of any assets of the Corporation or any Subsidiary having an aggregate Fair Market Value (as hereafter defined) equaling or exceeding 25% or more of the combined assets of the Corporation and its Subsidiaries; or 3. the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value equaling or exceeding 25% of the combined assets of the Corporation and its Subsidiaries except pursuant to an employee benefit plan of the Corporation or any Subsidiary thereof; or 4. the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder; or 5. any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder (a "Disproportionate Transaction"); provided, however, that no such transaction shall be deemed a Disproportionate Transaction if the increase in the proportionate ownership of the Interested 6 Stockholder or Affiliate as a result of such transaction is no greater than the increase experienced by the other stockholders generally; shall require the affirmative vote of the holders of at least 80% of the voting power of the then-outstanding shares of stock of the Corporation entitled to vote in the election of directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or by any other provisions of this Certificate of Incorporation or any Preferred Stock Designation or in any agreement with any national securities exchange or quotation system or otherwise. The term "Business Combination" as used in this Article EIGHTH shall mean any transaction which is referred to in any one or more of paragraphs 1 through 5 of Section A of this Article EIGHTH. B. The provisions of Section A of this Article EIGHTH shall not be applicable to any particular Business Combination, and such Business Combination shall require only the affirmative vote of the majority of the outstanding shares of capital stock entitled to vote, or such vote as is required by law or by this Certificate of Incorporation, if, in the case of any Business Combination that does not involve any cash or other consideration being received by the stockholders of the Corporation solely in their capacity as stockholders of the Corporation, the condition specified in the following paragraph 1 is met or, in the case of any other Business Combination, either the condition specified in the following paragraph 1 or all of the conditions specified in either of the following paragraphs 1 and 2 are met: 1. The Business Combination shall have been approved by a majority of the Disinterested Directors (as hereinafter defined). 2. All of the following conditions shall have been met: (a) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by the holders of Common Stock in such Business Combination shall at least be equal to the higher of the following: (1) (if applicable) the Highest Per Share Price, including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder or any of its Affiliates for any shares of Common Stock acquired by it (i) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date"), or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher. (2) the Fair Market Value per share of Common Stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such latter date is referred to in this Article EIGHTH as the "Determination Date"), whichever is higher. (b) The aggregate amount of the cash and the Fair Market Value as of the date of the consummation of the Business Combination of consideration other than cash to be received per share by holders of shares of any class of 7 outstanding Voting Stock other than Common Stock shall be at least equal to the highest of the following (it being intended that the requirements of this subparagraph (b) shall be required to be met with respect to every such class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (1) (if applicable) the Highest Per Share Price (as hereinafter defined), including any brokerage commissions, transfer taxes and soliciting dealers' fees, paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (i) within the two-year period immediately prior to the Announcement Date, or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; (2) (if applicable) the highest preferential amount per share to which the holders of shares of such class of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and (3) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher. (c) The consideration to be received by holders of a particular class of outstanding Voting Stock (including Common Stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration to be received per share by holders of shares of such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder. The price determined in accordance with Section B.2 of this Article EIGHTH shall be subject to appropriate adjustment in the event of any stock dividend, stock split, combination of shares or similar event. (d) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of such Business Combination; (i) except as approved by a majority of the Disinterested Directors, there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding stock having preference over the Common Stock as to dividends or liquidation; (ii) there shall have been (X) no reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock), except as approved by a majority of the Disinterested Directors, and (Y) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of Common Stock, unless the failure 8 to so increase such annual rate is approved by a majority of the Disinterested Directors; and (iii) neither such Interested Stockholder nor any of its Affiliates shall have become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder. (e) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation, whether in anticipation of or in connection with such Business Combination or otherwise. (f) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). C. For the purposes of this Article EIGHTH: 1. A "Person" shall include an individual, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities. 2. "Interested Stockholder" shall mean any Person (other than the Corporation or any holding company or Subsidiary thereof) who or which: (a) is the beneficial owner, directly or indirectly, of more than 10% of the voting power of the outstanding Voting Stock; or (b) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then-outstanding Voting Stock; or 9 (c) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 3. A Person shall be a "beneficial owner" of any Voting Stock: (a) which such Person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on June 30, 1998; or (b) which such Person or any of its Affiliates or Associates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (ii) the right to vote pursuant to any agreement, arrangement or understanding (but neither such Person nor any such Affiliate or Associate shall be deemed to be the beneficial owner of any shares of Voting Stock solely by reason of a revocable proxy granted for a particular meeting of stockholders, pursuant to a public solicitation of proxies for such meeting, and with respect to which shares neither such Person nor any such Affiliate or Associate is otherwise deemed the beneficial owner); or (c) which are beneficially owned, directly or indirectly within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as in effect on June 30, 1998, by any other Person with which such Person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purposes of acquiring, holding, voting (other than solely by reason of a revocable proxy as described in Subparagraph (b) of this Paragraph 3) or in disposing of any shares of Voting Stock; provided, however, that, in the case of any employee stock ownership or similar plan of the Corporation or of any Subsidiary in which the beneficiaries thereof possess the right to vote any shares of Voting Stock held by such plan, no such plan nor any trustee with respect thereto (nor any Affiliate of such trustee), solely by reason of such capacity of such trustee, shall be deemed, for any purposes hereof, to beneficially own any shares of Voting Stock held under any such plan. 4. For the purpose of determining whether a Person is an Interested Stockholder pursuant to Section C.2., the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of this Section C.3. but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. 10 5. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on June 30, 1998. 6. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in this Section C.2., the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Corporation. 7. "Disinterested Director" means any member of the Board of Directors who is unaffiliated with the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any director who is thereafter chosen to fill any vacancy on the Board of Directors or who is elected and who, in either event, is unaffiliated with the Interested Stockholder, and in connection with his or her initial assumption of office is recommended for appointment or election by a majority of Disinterested Directors then on the Board of Directors. 8. "Fair Market Value" means: (a) in the case of stock, the highest closing sales price of the stock during the 30-day period immediately preceding the date in question of a share of such stock of the National Association of Securities Dealers Automated Quotations ("NASDAQ") System or any system then in use, or, if such stock is admitted to trading on a principal United States securities exchange registered under the Securities Exchange Act of 1934, Fair Market Value shall be the highest sale price reported during the 30-day period preceding the date in question, or, if no such quotations are available, the Fair Market Value on the date in question of a share of such stock as determined by the Board of Directors in good faith, in each case with respect to any class of stock, appropriately adjusted for any dividend or distribution in shares of such stock or in combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock, and (b) in the case of property other than cash or stock, the Fair Market Value of such property on the date in question as determined by the Board of Directors in good faith. 9. Reference to "Highest Per Share Price" shall in each case with respect to any class of stock reflect an appropriate adjustment for any dividend or distribution in shares of such stock or any stock split or reclassification of outstanding shares of such stock into a greater number of shares of such stock or any combination or reclassification of outstanding shares of such stock into a smaller number of shares of such stock. 10. In the event of any Business Combination in which the Corporation survives, the phrase "consideration other than cash to be received" as used in Sections B.2.(a) and B.2.(b) of this Article EIGHTH shall include the shares of Common Stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. D. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine for the purposes of this Article EIGHTH, on the basis of information 11 known to them after reasonable inquiry, (a) whether a person is an Interested Stockholder; (b) the number of shares of Voting Stock beneficially owned by any person; (c) whether a person is an Affiliate or Associate of another; and (d) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Business Combination has an aggregate Fair Market Value equaling or exceeding 25% of the combined assets of the Corporation and its Subsidiaries. A majority of the Disinterested Directors shall have the further power to interpret all of the terms and provisions of this Article EIGHTH. E. Nothing contained in this Article EIGHTH shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. F. Notwithstanding any other provisions of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the Voting Stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least 80% of the voting power of all of the then-outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, amend or repeal this Article EIGHTH. NINTH: The Board of Directors of the Corporation, when evaluating any offer of another Person (as defined in Article EIGHTH hereof) to (A) make a tender or exchange offer for any equity security of the Corporation, (B) merge or consolidate the Corporation with another corporation or entity or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, may, in connection with the exercise of its judgment in determining what is in the best interest of the Corporation and its stockholders, give due consideration to all relevant factors, including, without limitation, the social and economic effect of acceptance of such offer on the Corporation's present and future customers and employees and those of its Subsidiaries (as defined in Article EIGHTH hereof); on the communities in which the Corporation and its Subsidiaries operate or are located; on the ability of the Corporation to fulfill its corporate objectives as a financial institution holding company and on the ability of its subsidiary financial institution to fulfill the objectives of a federally insured financial institution under applicable statutes and regulations. TENTH: A. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the Corporation or is or was serving at the request of the Corporation as a director or officer of another corporation, including, without limitation, any Subsidiary (as defined in Article EIGHTH herein), partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits 12 the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section C hereof with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. B. The right to indemnification conferred in Section A of this Article shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication"), that such indemnitee is not entitled to be indemnified for such expenses under this Section or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee's heirs, executors and administrators. C. If a claim under Section A or B of this Article is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall also be entitled to be paid the expense of prosecuting or defending such suit. In (1) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (2) in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses 13 pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article or otherwise shall be on the Corporation. D. The rights to indemnification and to the advancement of expenses conferred in this Article shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Corporation's Certificate of Incorporation, By-laws, agreement, vote of stockholders or Disinterested Directors or otherwise. E. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. F. The Corporation may, to the extent authorized from time to time by a majority vote of the disinterested directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. ELEVENTH: A director of this Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (A) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (B) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (C) under Section 174 of the Delaware General Corporation Law, or (D) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is hereafter amended to further eliminate or limit the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification. TWELFTH: The Corporation reserves the right to amend or repeal any provision contained in this Certificate of Incorporation in the manner prescribed by the laws of the State of Delaware and all rights conferred upon stockholders are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of this Corporation required by law or by this Certificate of Incorporation, the affirmative vote of the holders of at least 80% of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (after giving effect to the provisions of Article FOURTH), voting together as a single class, shall be required to amend or repeal this Article TWELFTH, Sections B or C of 14 Article FOURTH, Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, Article EIGHTH, or Article TENTH. THIRTEENTH: The name and mailing address of the sole incorporator are as follows: NAME MAILING ADDRESS ---- --------------- Harry L. Robinson Cohoes Savings Bank 75 Remsen Street Cohoes, New York 12047-2892 15 I, THE UNDERSIGNED, being the incorporator, for the purpose of forming a corporation under the laws of the State of Delaware, do make, file and record this Certificate of Incorporation, do certify that the facts herein stated are true, and, accordingly, have hereto set my hand this ____ day of July 1998. --------------------------------- Harry L. Robinson, Incorporator 16 EX-3 5 EXHIBIT 3.2 Exhibit 3.2 Bylaws of the Holding Company COHOES BANCORP, INC. BY-LAWS ARTICLE I STOCKHOLDERS Section 1. Annual Meeting. An annual meeting of the stockholders, for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, on such date, and at such time as the Board of Directors shall each year fix. Section 2. Special Meetings. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, special meetings of stockholders of the Corporation may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Corporation would have if there were no vacancies on the Board of Directors (hereinafter the "Whole Board"). Section 3. Notice of Meetings. Written notice of the place, date, and time of all meetings of the stockholders shall be given, not less than ten nor more than 60 days before the date on which the meeting is to be held, to each stockholder entitled to vote at such meeting, except as otherwise provided herein or required by law (meaning, here and hereinafter, as required from time to time by the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation). When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than 30 days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Section 4. Quorum. At any meeting of the stockholders, the holders of at least one-third of all of the shares of the stock entitled to vote at the meeting, present in person or by proxy, shall constitute a quorum for all purposes, unless or except to the extent that the presence of a larger number may be required by law. Where a separate vote by a class or classes is required, a majority of the shares 1 of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter. If a quorum shall fail to attend any meeting, the chairman of the meeting or the holders of a majority of the shares of stock entitled to vote who are present, in person or by proxy, may adjourn the meeting to another place, date or time. If a notice of any adjourned special meeting of stockholders is sent to all stockholders entitled to vote thereat, stating that it will be held with those present constituting a quorum, then except as otherwise required by law, those present at such adjourned meeting shall constitute a quorum, and all matters shall be determined by a majority of the votes cast at such meeting. Section 5. Organization. Such person as the Board of Directors may have designated or, in the absence of such a person, the President of the Corporation or, in his or her absence, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman appoints. Section 6. Conduct of Business. (a) The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order. (b) At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 6(b). For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered or mailed to and received at the principal executive offices of the Corporation not less than 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 twenty days, or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not later than the close of business on the later of the 60th day prior to such annual meeting or the earlier of 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. A stockholder's notice to the Secretary shall set forth as to each matter such stockholder proposes to bring before the annual meeting (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 Corporation's books, of the stockholder who proposed such business, (iii) the class and number of shares of the Corporation's 2 capital stock that are beneficially owned by such stockholder and (iv) any material interest of such stockholder in such business. Notwithstanding anything in these By-laws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with the provisions of this Section 6(b). The officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 6(b) and, if he should so determine, he shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted. At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors. (c) Only persons who are nominated in accordance with the procedures set forth in these By-laws shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders at which directors are to be elected only (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 6(c). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered or mailed to and received at the principal executive offices of the Corporation not less than 60 days prior to the date of the meeting; provided, however, that in the event that less than 70 days' notice of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the earlier of the tenth day following the day on which such notice of the date of the meeting was mailed or public announcement of the date of such meeting was first made. Such stockholder's notice shall set forth (1) as to each person whom such stockholder proposes to nominate for election or re-election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (2) as to the stockholder giving the notice: (x) the name and address, as they appear on the Corporation's books, of such stockholder and (y) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the provisions of this Section 6(c). The officer of the Corporation or other person presiding at the meeting shall, if the facts so warrant, determine that a nomination was not made in accordance with such provisions and, if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. 3 Section 7. Proxies and Voting. At any meeting of the stockholders, every stockholder entitled to vote may vote in person or by proxy authorized by an instrument in writing (or as otherwise permitted under applicable law) by the stockholder or his duly authorized attorney-in-fact filed in accordance with the procedure established for the meeting. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or in the absence of such direction, as determined by a majority of the Board of Directors. No proxy shall be valid after eleven months from the date of its execution except for a proxy coupled with an interest. Each stockholder shall have one vote for every share of stock entitled to vote which is registered in his or her name on the record date for the meeting, except as otherwise provided herein or in the Certificate of Incorporation of the Corporation or as required by law. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided, however, that upon demand therefore by a stockholder entitled to vote or his or her proxy, a stock vote shall be taken. Every stock vote shall be taken by ballot, each of which shall state the name of the stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballot shall be counted by an inspector or inspectors appointed by the chairman of the meeting. All elections shall be determined by a plurality of the votes cast, and except as otherwise required by law or as provided in the Certificate of Incorporation, all other matters shall be determined by a majority of the votes cast. Section 8. Stock List. The officer who has charge of the stock transfer books of the Corporation shall prepare and make, in the time and manner required by applicable law, a list of stockholders entitled to vote and shall make such list available for such purposes, at such places, at such times and to such persons as required by applicable law. The stock transfer books shall be the only evidence as to the identity of the stockholders entitled to examine the stock transfer books or to vote in person or by proxy at any meeting of stockholders. Section 9. Consent of Stockholders in Lieu of Meeting. Subject to the rights of the holders of any class or series of preferred stock of the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders. 4 Section 10. Inspectors of Election The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more persons as inspectors of election, to act at the meeting or any adjournment thereof and make a written report thereof, in accordance with applicable law. ARTICLE II BOARD OF DIRECTORS Section 1. General Powers, Number and Term of Office. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. The number of directors shall be as provided for in the Certificate of Incorporation. The Board of Directors shall annually elect a Chairman of the Board and a President from among its members and shall designate, when present, either the Chairman of the Board or the President to preside at its meetings. The directors, other than those who may be elected by the holders of any class or series of preferred stock, shall be divided into three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the conclusion of the first annual meeting of stockholders, the term of office of the second class to expire at the conclusion of the annual meeting of stockholders one year thereafter and the term of office of the third class to expire at the conclusion of the annual meeting of stockholders two years thereafter, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, commencing with the first annual meeting, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. Section 2. Vacancies and Newly Created Directorships. Subject to the rights of the holders of any class or series of preferred stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires, and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board shall shorten the term of any incumbent director. 5 Section 3. Regular Meetings. Regular meetings of the Board of Directors shall be held at such place or places, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized among all directors. A notice of each regular meeting shall not be required. Section 4. Special Meetings. Special meetings of the Board of Directors may be called by one-third (1/3) of the directors then in office (rounded up to the nearest whole number) or by the President and shall be held at such place, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given to each director by whom it is not waived by mailing written notice not less than five days before the meeting or by telegraphing or telexing or by facsimile transmission of the same not less than twenty-four (24) hours before the meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Section 5. Quorum. At any meeting of the Board of Directors, a majority of the authorized number of directors then constituting the Board shall constitute a quorum for all purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof. Section 6. Participation in Meetings By Conference Telephone. Members of the Board of Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 7. Conduct of Business. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all matters shall be determined by the vote of a majority of the directors present, except as otherwise provided herein or required by law. Action may be taken by the Board of Directors without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. Section 8. Powers. The Board of Directors may, except as otherwise required by law, exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, including, without limiting the generality of the foregoing, the unqualified power: 6 (1) To declare dividends from time to time in accordance with law; (2) To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine; (3) To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do all things necessary in connection therewith; (4) To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being; (5) To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents; (6) To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; (7) To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may determine; and (8) To adopt from time to time regulations, not inconsistent with these By-laws, for the management of the Corporation's business and affairs. Section 9. Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of Directors. ARTICLE III COMMITTEES Section 1. Committees of the Board of Directors. The Board of Directors, by a vote of a majority of the Board of Directors, may from time to time designate committees of the Board, with such lawfully delegable powers and duties as it thereby confers, to serve at the pleasure of the Board and shall, for those committees and any others provided for herein, elect a director or directors to serve as the member or members, designating, if it desires, other directors as alternate members who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided 7 in the resolution(s) of the Board of Directors, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority to: (i) approve or adopt, or recommend to the stockholders, any action or matter expressly required by law to be submitted to stockholders for approval, or (ii) adopt, amend or repeal any bylaw of the Corporation. In the absence or disqualification of any member of any committee and any alternate member in his or her place, the member or members of the committee present at the meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may by unanimous vote appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Section 2. Conduct of Business. Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made for notice to members of all meetings; one-third (1/3) of the members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a majority vote of the members present. Action may be taken by any committee without a meeting if all members thereof consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of such committee. Section 3. Nominating Committee. The Board of Directors may appoint a Nominating Committee of the Board, consisting of not less than three members, one of which shall be the President if, and only so long as, the President remains in office as a member of the Board of Directors. The Nominating Committee shall have authority (i) to review any nominations for election to the Board of Directors made by a stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of these By-laws in order to determine compliance with such By-law and (ii) to recommend to the Whole Board nominees for election to the Board of Directors to replace those directors whose terms expire at the annual meeting of stockholders next ensuing. ARTICLE IV OFFICERS Section 1. Generally. (a) The Board of Directors as soon as may be practicable after the annual meeting of stockholders shall choose a President, a Secretary and a Treasurer and from time to time may choose such other officers as it may deem proper. The President shall be chosen from among the directors. Any number of offices may be held by the same person. 8 (b) The term of office of all officers shall be until the next annual election of officers and until their respective successors are chosen, but any officer may be removed from office at any time by the affirmative vote of a majority of the authorized number of directors then constituting the Board of Directors. (c) All officers chosen by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. Section 2. President. The President shall be the chief executive officer and, subject to the control of the Board of Directors, shall have general power over the management and oversight of the administration and operation of the Corporation's business and general supervisory power and authority over its policies and affairs. The President shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. Each meeting of the stockholders and of the Board of Directors shall be presided over by such officer as has been designated by the Board of Directors or, in his absence, by such officer or other person as is chosen at the meeting. The Secretary or, in the Secretary's absence, the General Counsel of the Corporation or such officer as has been designated by the Board of Directors or, in his absence, such officer or other person as is chosen by the person presiding, shall act as secretary of each such meeting. Section 3. Vice President. The Vice President or Vice Presidents, if any, shall perform the duties of the President in his absence or during his disability to act. In addition, the Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them from time to time by the Board of Directors, the Chairman of the Board or the President. Section 4. Secretary. The Secretary or an Assistant Secretary shall issue notices of meetings, shall keep their minutes, shall have charge of the seal and the corporate books, shall perform such other duties and exercise such other powers as are usually incident to such offices and/or such other duties and powers as are properly assigned thereto by the Board of Directors, the Chairman of the Board or the President. Section 5. Treasurer. The Treasurer shall have charge of all monies and securities of the Corporation, other than monies and securities of any division of the Corporation which has a treasurer or financial officer 9 appointed by the Board of Directors, and shall keep regular books of account. The funds of the Corporation shall be deposited in the name of the Corporation by the Treasurer with such banks or trust companies or other entities as the Board of Directors from time to time shall designate. The Treasurer shall sign or countersign such instruments as require his signature, shall perform all such duties and have all such powers as are usually incident to such office and/or such other duties and powers as are properly assigned to him by the Board of Directors, the Chairman of the Board or the President, and may be required to give bond, payable by the Corporation, for the faithful performance of his duties in such sum and with such surety as may be required by the Board of Directors. Section 6. Assistant Secretaries and Other Officers. The Board of Directors may appoint one or more assistant secretaries and one or more assistant treasurers, or one appointee to both such positions, which officers shall have such powers and shall perform such duties as are provided in these By-laws or as may be assigned to them by the Board of Directors, the Chairman of the Board or the President. Section 7. Action with Respect to Securities of Other Corporations Unless otherwise directed by the Board of Directors, the President or any officer of the Corporation authorized by the President shall have power to vote and otherwise act on behalf of the Corporation, in person or by proxy, at any meeting of stockholders of or with respect to any action of stockholders of any other corporation in which this Corporation may hold securities and otherwise to exercise any and all rights and powers which this Corporation may possess by reason of its ownership of securities in such other Corporation. ARTICLE V STOCK Section 1. Certificates of Stock. Each stockholder shall be entitled to a certificate signed by, or in the name of the Corporation by, the President or a Vice President, and by the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer, certifying the number of shares owned by him or her. Any or all of the signatures on the certificate may be by facsimile. Section 2. Transfers of Stock. Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a certificate is issued in accordance with Section 4 of Article V of these By-laws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefore. 10 Section 3. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders, or to receive payment of any dividend or other distribution or allotment of any rights or to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted and which record date shall not be more than 60 nor less than ten days before the date of any meeting of stockholders, nor more than 60 days prior to the time for such other action as hereinbefore described; provided, however, that if no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and, for determining stockholders entitled to receive payment of any dividend or other distribution or allotment of rights or to exercise any rights of change, conversion or exchange of stock or for any other purpose, the record date shall be at the close of business on the day on which the Board of Directors adopts a resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Section 4. Lost, Stolen or Destroyed Certificates. In the event of the loss, theft or destruction of any certificate of stock, another may be issued in its place pursuant to such regulations as the Board of Directors may establish concerning proof of such loss, theft or destruction and concerning the giving of a satisfactory bond or bonds of indemnity. Section 5. Regulations. The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish. ARTICLE VI NOTICES Section 1. Notices. Except as otherwise specifically provided herein or required by law, all notices required to be given to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mail, postage paid, by sending such notice by prepaid telegram or mailgram or by sending such notice by facsimile machine or other electronic transmission. Any such notice shall 11 be addressed to such stockholder, director, officer, employee or agent at his or her last known address as the same appears on the books of the Corporation. The time when such notice is received, if hand delivered, or dispatched, if delivered through the mail, by telegram or mailgram or by facsimile machine or other electronic transmission, shall be the time of the giving of the notice. Section 2. Waivers. A written waiver of any notice, signed by a stockholder, director, officer, employee or agent, whether before or after the time of the event for which notice is to be given, shall be deemed equivalent to the notice required to be given to such stockholder, director, officer, employee or agent. Neither the business nor the purpose of any meeting need be specified in such a waiver. ARTICLE VII MISCELLANEOUS Section 1. Facsimile Signatures. In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these By-laws, facsimile signatures of any officer or officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof. Section 2. Corporate Seal. The Board of Directors may provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary. If and when so directed by the Board of Directors or a committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer. Section 3. Reliance upon Books, Reports and Records. Each director, each member of any committee designated by the Board of Directors, and each officer of the Corporation shall, in the performance of his or her duties, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such director or committee member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. Section 4. Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors. 12 Section 5. Time Periods. In applying any provision of these By-laws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded and the day of the event shall be included. ARTICLE VIII AMENDMENTS The By-laws of the Corporation may be adopted, amended or repealed as provided in Article SEVENTH of the Certificate of Incorporation of the Corporation. 13 EX-3 6 EXHIBIT 3.3 Exhibit 3.3 Restated Organization Certificate of Cohoes Savings Bank in Stock Form RESTATED ORGANIZATION CERTIFICATE OF COHOES SAVINGS BANK UNDER SECTION 8007 OF THE BANKING LAW We, Harry L. Robinson, being the President and Chief Executive Officer, and Richard A. Ahl, being the Secretary, of Cohoes Savings Bank, in accordance with Section 8007 of the Banking Law of the State of New York (the "New York Banking Law"), do hereby certify as follows: FIRST, the name of the Corporation is Cohoes Savings Bank, originally formed under the name "Cohoes Savings Institution." SECOND, the Corporation was created under the name "Cohoes Savings Bank" by an Act of the Legislature of the State of New York, passed April 11, 1851, such Act having been amended and supplemented from time to time thereafter. Under Section 1001(5) of the Banking Law, such Act is the Organization Certificate of the Corporation. THIRD, the text of the Organization Certificate of the Corporation is hereby amended and restated in its entirety to read as follows: Section 1. Name. The name by which the Corporation is to be known is Cohoes Savings Bank (the "Bank"). Section 2. Principal Office. The principal office of the Bank shall be located in the City of Cohoes, County of Albany, State of New York. Section 3. Duration. The duration of the Bank is perpetual. Section 4. Capital Stock. The total number of shares of all classes of the capital stock which the Bank has authority to issue is thirty million (30,000,000), of which twenty-five million (25,000,000) shall be common stock, par value $.01 per share ("Common Stock") and of which five million (5,000,000) shall be preferred stock, par value $.01 per share ("Preferred Stock"). The shares may be issued from time to time as authorized by the Board of Directors without further approval of stockholders except as otherwise provided in this Section 4 or to the extent that such approval is required by governing law, -1- rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the Bank. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted), labor or services actually performed for the Bank, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the Board of Directors of the Bank, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the surplus of the Bank which is transferred to stated capital upon the issuance of shares as a share dividend shall be deemed to be the consideration for their issuance. Nothing contained in this Section 4 (or in any supplementary sections hereto) shall entitle the holders of any class or series of capital stock to vote as a separate class or series or to more than one vote per share, provided, that this restriction on voting separately by class or series shall not apply: (i) to any provision which would authorize the holders of Preferred Stock, voting as a class or series, to elect some members of the Board of Directors, but less than a majority thereof, in the event of default in the payment of dividends on any class or series of Preferred Stock; (ii) to any provision which would require the holders of Preferred Stock, voting as a class or series, to approve the merger or consolidation of the Bank with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the Bank if the Preferred Stock is exchanged for securities of such other corporation; provided, that no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of any regulatory authority; (iii) to any amendment which would adversely change the specific terms of any class or series of capital stock as set forth in this Section 4 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving institution in a merger or consolidation for the Bank, shall not be considered to be such an adverse change. A description of the different classes and series (if any) of the Bank's capital stock and a statement of the designations, and the relative rights, preferences, and limitations of the shares of each class of and series(if any) of capital stock are as follows: A. Common Stock. Except as provided in this Section 4 (or in any supplementary sections hereto) the holders of the Common Stock shall exclusively possess all voting -2- power. Each holder of shares of Common Stock shall be entitled to one vote for each share held by such holder. Shareholders shall not be entitled to cumulate their votes for the election of directors. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the Common Stock as to the payment of dividends, the full amount of dividends and of sinking fund, or retirement fund, or other retirement payments, if any, to which such holders are respectively entitled in preference to the Common Stock, then dividends may be paid on the Common Stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends. In the event of any liquidation, dissolution, or winding up of the Bank, the holders of the Common Stock (and the holders of any class or series of stock entitled to participate with the Common Stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Bank available for distribution remaining after: (i) payment or provision for payment of the Bank's debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the Common Stock in the liquidation, dissolution, or winding up of the Bank. Each share of Common Stock shall have the same relative rights as and be identical in all respects with all the other shares of Common Stock. B. Preferred Stock. The Bank may provide in amendments to this Restated Organization Certificate for one or more classes of Preferred Stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in an amendment to this Restated Organization Certificate. All shares of the same class shall be identical except as to the following relative rights and preferences, as to which there may be variations between different series: (a) The distinctive serial designation and the number of shares constituting such series; (b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s), the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends; (c) The voting powers, full or limited, if any, of the shares of such series; (d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed; -3- (e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Bank; (f) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund; (g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the Bank and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (h) The price or other consideration for which the shares of such series shall be issued; and -4- (i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial Preferred Stock and whether such shares may be reissued as shares of the same or any other series of serial Preferred Stock. Each share of each series of serial Preferred Stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series. The Board of Directors shall have authority to divide, by the adoption of an amendment to this Restated Organization Certificate, any authorized class of Preferred Stock into series, and, within the limitations set forth in this section and the remainder of this Restated Organization Certificate, fix and determine the relative rights and preferences of the shares of any series so established. Prior to the issuance of any preferred shares of a series established by an amendment to this Restated Organization Certificate adopted by the Board of Directors, the Bank shall make any filings of such amendments as may be required by applicable law. Section 5. Preemptive Rights. Holders of the capital stock of the Bank shall not be entitled to preemptive rights with respect to any shares of the Bank which may be issued. Section 6. Liquidation Account. Pursuant to the regulations of the New York State Banking Board, the Bank shall establish and maintain a liquidation account for the benefit of its deposit account holders as of March 31, 1998 ("eligible depositors") and September 30, 1998 ("supplemental eligible depositors"). In the event of a complete liquidation of the Bank, it shall comply with such regulations with respect to the amount and the priorities on liquidation of each of the Bank's eligible depositor's and supplemental -5- eligible depositor's inchoate interest in the liquidation account, to the extent it is still in existence; provided, that an eligible depositor's inchoate interest in the liquidation account shall not entitle such eligible depositor to any voting rights at meetings of the Bank's stockholders. Section 7. Certain Provisions Applicable for Three Years. Notwithstanding anything contained in the Bank's Restated Organization Certificate or bylaws to the contrary, for a period of three years from the date of consummation of the conversion of the Bank from mutual to stock form no person shall directly or indirectly acquire the beneficial ownership of more than 10 percent of any class of any equity security of the Bank. This limitation shall not apply to a transaction in which the Bank forms a holding company in conjunction with conversion, or thereafter, if such formation is without change in the respective beneficial ownership interests of the Bank's stockholders other than pursuant to the exercise of any dissenter and appraisal rights, the purchase of shares by underwriters in connection with a public offering, or the purchase of shares by a tax-qualified employee stock benefit plan. In the event shares are acquired in violation of this Section 7, all shares beneficially owned by any person in excess of 10% shall be considered "excess shares" and shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matters submitted to the stockholders for a vote; provided, however a person shall not be deemed to be the beneficial owner of shares represented by proxies held by such person unless such shares are otherwise deemed beneficially owned by such person. For the purposes of this Section 7, the following definitions apply: (i) The term "person" includes an individual, a firm, a group acting in concert, a corporation, a partnership, an association, a joint venture, a pool, a joint stock company, a trust, any unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of the equity securities of the Bank or any other entity. (ii) The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise. (iii) The term "acting in concert" means (a) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (b) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. Section 8. Call for Special Meetings. Special meetings of the stockholders for any purpose or purposes may be called at any time by the Chairman of the Board of Directors or the majority of the Whole Board of Directors (the term "Whole Board of Directors" shall mean the number of authorized directorships, whether or not there exists any vacancies in any previously authorized directorships). -6- Section 9. Directors. The Bank shall be under the direction of a Board of Directors. The authorized number of directors, as stated in the Bank's bylaws, shall not be less than seven nor more than 30 except when a greater number is approved by the Superintendent of Banks of the State of New York (the "Superintendent") or his delegatees. The Board shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. Section 10. Amendment of Restated Organization Certificate. Except as provided in Section 4, no amendment, addition, alteration, change, or repeal of this Restated Organization Certificate shall be made, unless such is first proposed by a majority of the Whole Board of Directors of the Bank and then approved by the affirmative vote of the holders of at least a majority of the total votes eligible to be cast at a legal meeting. Any amendment, addition, alteration, change or repeal so acted upon shall be effective upon approval and filing by the Superintendent of Banks in accordance with applicable regulatory procedures. Section 11. Amendment of Bylaws. No amendment, addition, alteration, change or repeal of the Bylaws of the Bank shall be made, unless made in a manner consistent with the New York Banking Law and the regulations thereunder and approved by a majority of the Whole Board of Directors or by the affirmative vote of at least 80% of the votes eligible to be cast by the stockholders of the Bank at any legal meeting. Section 12. Indemnification. (a) Scope of Indemnification. The Bank shall, to the maximum extent permitted and in the manner provided by the New York Banking Law and any applicable federal law, indemnify each person made, or threatened to be made, a party to any action, suit or proceeding, whether criminal or civil, by reason of the fact that such person or such person's testator or intestate is or was a director or officer of the Bank, or is or was serving, in any capacity, at the request of the Bank, any other corporation, or any partnership, joint venture, trust, employee benefit plan or other enterprise, against judgments, fines, penalties, amounts paid in settlement and reasonable expenses, including attorneys' fees and expenses actually and necessarily incurred in connection therewith, or any appeal therein, provided that the person to be indemnified has met the applicable standard of conduct to be so indemnified under the New York Banking Law or any other applicable law. (b) Reimbursement of Expenses. The Bank shall advance or promptly reimburse upon request any person entitled to indemnification hereunder for all reasonable expenses, including attorneys' fees and expenses, reasonably incurred in defending any action or proceeding in advance of the final disposition thereof upon receipt of an undertaking by or on behalf of such person to repay such amount if such person is -7- ultimately found not to be entitled to indemnification or, where indemnification is granted, to the extent the expenses so advanced or reimbursed exceed the amount to which such person is entitled; provided, however, that such person shall cooperate in good faith with any request by the Bank that common counsel be used by the parties to any action or proceeding who are similarly situated unless to do so would be inappropriate due to actual or potential differing interest between or among parties. (c) Additional Rights. Nothing herein shall limit or affect any right of any director, officer, or other corporate personnel otherwise than hereunder to indemnification or expenses, including attorneys' fees and expenses, under any statute, rule, regulation, certificate of incorporation, bylaws, insurance policy, contract, or otherwise; without affecting or limiting the rights of any director, officer or other corporate personnel pursuant to this Section 12, the Bank is authorized to enter into agreements with any of its directors, officers or other corporate personnel extending rights to indemnification and advancement of expenses to the fullest extent permitted by applicable law. (d) Notice of Amendments or Elimination. Anything in this Restated Organization Certificate to the contrary notwithstanding, no elimination or amendment of this Section 12 adversely affecting the right of any person to indemnification or advancement of expenses hereunder shall be effective until the 60th day following notice to such person of such action, and no elimination of or amendment to this Section 12 shall deprive any such person's rights hereunder arising out of alleged or actual occurrences, act or failures to act prior to such 60th day. Any amendments or eliminations made pursuant to this Section 12 are only effective with regard to acts occurring after such date. (e) Continuation of Benefit. The indemnification of any person provided by this Section 12 shall continue after such person has ceased to be a director or officer of the Bank and shall inure to the benefit of such person's heirs, executors, administrators and legal representatives. (f) Severability of Provisions. In case any provision in this Section 12 shall be determined at any time to be unenforceable in any respect, the other provisions of this Section 12 shall not in any way be affected or impaired thereby, and the affected provision shall be given the fullest possible enforcement in the circumstances, it being the intention of the Bank to afford indemnification and advancement of expenses to its directors or officers, acting in such capacities or in the other capacities mentioned herein, to the fullest extent permitted by law. -8- As approved by a majority of the Board of Trustees of the Bank on ____________, 1998 and approved by at least 75% in amount of the deposit liabilities of voting depositors of the Bank present in person or by proxy at a meeting of voting depositors held on _________, 1998, to be effective on the date filed by the Superintendent of Banks of the State of New York in his office. _____________________________________ _________________ Harry L. Robinson Richard A. Ahl President and Chief Executive Officer Secretary -9- EX-3 7 EXHIBIT 3.4 Exhibit 3.4 Bylaws of Cohoes Savings Bankin Stock Form BYLAWS OF COHOES SAVINGS BANK ARTICLE I. PRINCIPAL OFFICE The principal office of Cohoes Savings Bank (the "Bank") shall be located in the City of Cohoes, County of Albany, State of New York. ARTICLE II. STOCKHOLDERS Section l. Place of Meetings. All annual and special meetings of stockholders shall be held at the principal office of the Bank or at such other place in the state in which the principal place of business of the Bank is located as the Board of Directors may determine. Section 2. Annual Meeting. A meeting of the stockholders of the Bank for the election of Directors and for the transaction of any other appropriate business of the Bank shall be held annually within 120 days after the end of each calendar year. Section 3. Special Meetings. Special meetings of stockholders for any purpose or purposes, may be called at any time by the Chairman of the Board of Directors or by a majority of the Whole Board of Directors. The term "Whole Board of Directors" shall mean the number of authorized directorships, whether or not there exists any vacancies in any previously authorized directorships. Section 4. Conduct of Meetings. The Chairman of the Board of Directors shall preside at all meetings and in his absence, a person designated by a majority of the Board of Directors shall preside at all meetings. The chairman of any meeting of stockholders shall determine the order of business and the procedures at the meeting, including such regulations of the manner of voting and the conduct of discussion as seem to him in order. Section 5. Notice of Meetings. Written notice stating the place, day and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 10 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the Chairman of the Board of Directors, the Secretary, or the Board of Directors calling the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when -1- deposited in the mail, addressed to the stockholder at the address as it appears on the stock transfer books or records of the Bank as of the record date prescribed in Section 7 of this Article II or at such other address as the stockholders shall have furnished in writing to the Secretary of the Bank, with postage prepaid. When any stockholders' meeting, either annual or special, is adjourned to another time or place, no notice of the adjourned meeting need be given, other than an announcement at the meeting at which such adjournment is taken giving the time and place to which the meeting is adjourned. However, if, after adjournment, the Board of Directors fixes a new record date for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record as of the new record date. Section 6. Waiver of Notice. Notice of any annual or special meeting need not be given to any stockholder who submits a signed waiver of notice, in person or by proxy, whether before or after the meeting. The attendance of any stockholder at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by such stockholder. Section 7. Fixing of Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the Board of Directors shall fix in advance a date as the record date for any such determination of stockholders. Such date in any case shall be not more than 50 days and, in case of a meeting of stockholders, not fewer than 10 days, prior to the date on which the particular action requiring such determination of stockholders is to be taken. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment unless the Board of Directors fixes a new record date for the adjourned meeting. Section 8. Voting Lists. A list of stockholders as of the record date, certified by the officer responsible for its preparation or by a transfer agent of the Bank, shall be produced at any meeting of stockholders upon the request thereat or prior thereto of any stockholder. If the right to vote at any meeting is challenged, the inspectors of election, or person presiding thereat, shall require such list of stockholders to be produced as evidence of the right of the persons challenged to vote at such meeting, and all persons who appear from such list to be stockholders entitled to vote thereat may vote at such meeting. -2- Section 9. Quorum. A majority of the outstanding shares of the Bank entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to constitute less than a quorum. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The existence of a quorum at any meeting, or the existence of a duly organized meeting at which enough stockholders have withdrawn from such meeting to constitute less than a quorum, however, shall not serve to amend, alter or modify any provisions in the Bank's Restated Organization Certificate or these Bylaws which require the vote of more than a majority of the outstanding shares entitled to vote at a duly organized meeting. Section 10. Proxies. At all meetings of stockholders, a stockholder may vote by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management of the Bank shall be voted as directed by the stockholder or, in the absence of such direction, as determined by the Board of Directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest. Section 11. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Bank to the contrary, at any meeting of the stockholders of the Bank any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. Section 12. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares held by an administrator, executor, guardian, conservator, committee, or other fiduciary, except a trustee, may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares held by a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name as trustee or into the name of his nominee. Shares held by or under the control of a receiver may be voted by such receiver without the transfer into his name, if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. -3- A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee or nominee of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Bank nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Bank, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. Section 13. Cumulative Voting. Stockholders shall not be entitled to cumulate their votes for the election of directors. Section 14. Nominations. The Board of Directors, or a committee appointed by the Board of Directors, shall select the nominees for election as directors of the Bank. Except in the case of a nominee substituted as a result of the death, incapacity, withdrawal or other inability to serve of a nominee, the Board of Directors shall deliver written nominations to the Secretary of the Bank at least 20 days prior to the date of the annual meeting. Provided the Board of Directors, or a committee appointed by the Board of Directors, makes such nominations, no nominations for directors except those made by the Board of Directors or such committee shall be voted upon at the annual meeting unless other nominations by stockholders are made in writing and delivered to the secretary of the Bank at least 30 days prior to the date of the annual meeting. Ballots bearing the names of all persons nominated by the nominating committee and stockholders shall be provided for use at the annual meeting. Section 15. New Business. Any new business to be taken up at an annual meeting shall be stated in writing and filed with the Bank at least 45 days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting, but no other proposal shall be acted upon at the annual meeting. Any stockholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least 45 days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the stockholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees; but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. Section 16. Informal Action by Stockholders. Any action required to be taken at a meeting of stockholders, or any other action which may be taken at a meeting of the stockholders, may be taken without a meeting if consent in writing, -4- setting forth the action so taken, shall be given by all of the stockholders entitled to vote with respect to the subject matter. ARTICLE III. BOARD OF DIRECTORS Section 1. Responsibilities; Number of Directors. The business and affairs of the Bank shall be under the direction of its Board of Directors. The Board of Directors shall consist of not less than 7 nor more than 30 directors. Within the foregoing limits, the number of directors shall be determined by resolution of the Board of Directors. The Board of Directors shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. Section 2. Qualifications. Each director shall be at least 18 years of age and at least one-half of the directors shall be citizens of the United States at the time of their election and during their continuance in office. Section 3. Age of Directors. No person who has attained seventy-five (75) years of age may be appointed or elected as a director of the Bank. This restriction shall not apply to any person who was serving as a trustee of the Bank immediately prior to its mutual-to-stock conversion. Section 4. Regular and Annual Meetings. An annual meeting of the Board of Directors for the election of officers shall be held, without notice other than these Bylaws, immediately after, and at the same place as, the annual meeting of stockholders of the Bank, or at such other time or place within 25 days following the annual meeting of stockholders as the Board of Directors may fix by resolution. The Board of Directors shall hold at least 10 regular meetings per year and shall be required to meet at least twice during any three consecutive months during the calendar year. For these purposes, the annual meeting shall be considered a regular meeting. The Board of Directors may provide, by resolution, the time and place for the holding of regular meetings of the Board of Directors without notice other than such resolution. Section 5. Special Meetings. Special meetings of the Board of Directors may be called at any time by or at the request of the Chairman, if one has been elected, or by the President. Special meetings of the Board of Directors shall also be convened by the Secretary upon the written request of at least three directors. The persons authorized to call special meetings of the Board of Directors shall give notice of such -5- meetings in the manner prescribed by these Bylaws and may fix any place, within or without the Bank's regular business area, as the place for holding any special meeting of the Board of Directors called by such persons. No business shall be conducted at a special meeting other than that specified in the notice of meeting. Section 6. Conduct of Meetings. Meetings of the Board of Directors shall be presided over by the Chairman, if a Chairman has been elected by the Board of Directors, or such other director or officer as the Chairman shall designate. If a Chairman has not been elected by the Board of Directors or the Chairman is absent or otherwise unable to preside over the meeting, the presiding officer shall be the President. If the President is absent or otherwise unable to preside over the meeting, the presiding officer shall be the then senior member of the Board of Directors in terms of length of service on the Board of Directors (including its predecessor body, the Board of Trustees of the Bank prior to the Bank's mutual-to-stock conversion). The Secretary, or in the absence or disability of the Secretary, a person appointed by the Chairman (or other presiding person), shall act as secretary of the meeting. The Chairman (or other presiding person) shall conduct all meetings of the Board of Directors in accordance with the best interests of the Bank and shall have the authority and discretion to establish reasonable procedural rules for the conduct of Board of Directors meetings. Any one or more directors may participate in a meeting of the Board of Directors or committee thereof by means of a conference telephone or communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at any such meeting. Section 7. Notice of Meetings; Waiver of Notice. Except as otherwise provided herein, at least 24 hours' notice of meetings shall be given to each director if given in person or by telephone, telegraph, telex, facsimile, or other electronic transmission, and at least two business days notice of meetings shall be given if notice is given in writing and delivered by courier or by postage-prepaid mail. The purpose of any special meeting shall be stated in the notice. Such notice shall be deemed given when sent or given to any such mail or courier service or company providing electronic transmission service. Any director may waive notice of any meeting by filing a signed waiver of notice with the Secretary of the Bank, whether before or after the meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting if the director does not protest, prior thereto or at its commencement, the lack of notice to such director. Section 8. Quorum and Voting Requirements. A quorum at any meeting of the Board of Directors shall consist of not less than a majority of the Whole Board of Directors or such greater number as shall be required by law, these Bylaws or the Restated Organization Certificate of the Bank. If less than a quorum is present, the majority of those directors present may adjourn the meeting to another time and place without further notice. -6- At such adjourned meeting at which a quorum shall be represented, any business may be transacted that might have been transacted at the meeting as originally noticed. Except as otherwise provided by law, the Restated Organization Certificate of the Bank or these Bylaws, a majority vote of the directors present at a meeting, if a quorum is present at the time of such vote, shall constitute an act of the Board of Directors. Section 9. Resignation. Any director may resign at any time by sending a written notice of such resignation to the principal office of the Bank addressed to the Chairman, if one has been elected, or the President. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof. Section 10. Removal. Notwithstanding any other provision of the Restated Organization Certificate of the Bank or these Bylaws, any director may be removed at any time with or without cause, upon the affirmative vote of the holders of record of not less than 80% of the outstanding shares of capital stock of the Bank entitled to vote generally in the election of directors at a meeting of the stockholders called for that purpose. Section 11. Vacancies. Subject to the limitations prescribed by law, the Restated Organization Certificate of the Bank and these Bylaws, all vacancies in the office of director, including vacancies created by newly created directorships resulting from an increase in the number of directors, shall be filled by the stockholders, 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. No person shall be elected a director unless nominated at a previous regular or special meeting, called for that purpose, upon the recommendation of the Board of Directors, or a committee appointed by the Board of Directors. Any director so elected shall serve for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until his successor shall be elected and qualified. Section 12. Compensation. The compensation of the directors of the Bank shall be fixed by the Board of Directors. Section 13. Emergency Authority. In the event there shall occur an acute emergency resulting from a hostile attack, as defined in Article 7 of the New York State Defense Emergency Act, which shall be of such severity as to prevent the conduct and management of the affairs and business of the Bank by its Directors and officers as otherwise provided in these Bylaws, any three or more available members of the then -7- incumbent Executive Committee shall constitute an emergency Board of Directors which shall have the power, subject to limitations prescribed in Article 7 of the New York State Defense Emergency Act, by a majority of such persons present, to take any and every action which may be necessary to meet the exigencies of the acute emergency and to enable the Bank to conduct its business during such period, including the relocation elsewhere of any office of the Bank which shall be unable to function because of the acute emergency. If during the period of acute emergency there shall be no Executive Committee, or a minimum of three members of the then incumbent Executive Committee shall not be available, then and in that event such other available Directors as may be needed to obtain the minimum of three members shall serve on the emergency Board of Directors. ARTICLE IV. COMMITTEES Section 1. Enumeration of Committees. The standing committees of the Board of Directors shall be an Executive Committee, an Audit Committee, and a Nominating Committee. The Board of Directors, by vote of a majority of the whole Board of Directors, may from time to time designate additional committees of the Board of Directors, either temporary or permanent, with such lawfully delegable powers and duties as it thereby confers not inconsistent with these Bylaws, to serve at the pleasure of the Board of Directors and shall, for these committees and any others provided for herein, elect a Director or Directors to serve as the member or members, designating, if it desires, other Directors as alternate members ("Alternate Directors") who may replace any absent or disqualified member at any meeting of the committee; provided however, that the Chairman shall be a member of, and shall serve as the chairman of the Executive Committee and he shall be an ex-officio member of all other committees, except the Audit Committee and any other committee on which he is prohibited from being a member, by law, the Restated Organization Certificate or these Bylaws. The Board of Directors, by a resolution adopted by a majority of the Whole Board of Directors may terminate any committee previously established. Section 2. The Executive Committee. The Executive Committee shall consist of the Chairman of the Board of Directors and four additional Directors elected annually by the vote of the majority of the Whole Board of Directors. If any member of the Executive Committee shall be absent from any meeting of the committee, the Chairman shall designate some other Director, other than one serving as a salaried officer, to act as a member of the committee at that meeting. In the event there shall be a vacancy in the office of Chairman, then and in that event such other additional Director or Directors as may be needed to obtain the full complement of five members shall be elected by the Board of Directors to serve until the vacancy is filled, or until the next annual meeting. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the Whole Board of Directors. Regular meetings of the Executive Committee may be held without notice at such times and places as the Executive Committee may fix from time to time by resolution. Special meetings of the committee may be called by the Chairman or at any time by any two members of the -8- committee, upon twenty-four hours' notice by mail, in person, or by telegraph or telephone. The notice of a special meeting of the committee, however given, shall state the time when and the place, which shall be within the State of New York, where the meeting is to be held and the business which is to be presented and no business other than that stated in the notice shall be transacted at said meeting. The Executive Committee may make rules for the regulation of its meetings and proceedings not inconsistent with these Bylaws. Four members of the committee, including designees designated to act for an absent member or members of the committee, shall be necessary for a quorum at any meeting of the committee. Attendance by Alternate Directors shall constitute membership on the Committee for determining quorum requirements. Action of the Executive Committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. Any action required or permitted to be taken by the Executive Committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the Executive Committee. Except as otherwise provided herein, the Executive Committee, when the Board of Directors is not in session, shall have and may exercise all of the authority of the Board of Directors, except to the extent, if any, that such authority may be limited by resolution adopted by a majority of the Whole Board of Directors or by the laws of the State of New York. In addition, the Executive Committee shall not have the authority of the Board of Directors with reference to: the submission to stockholders of any action that requires stockholders' authorization under New York law; the filling of vacancies in the Board of Directors or in any committee of the Board of Directors; the fixing of compensation of the Directors for serving on the Board of Directors or any committee thereof; the amendment or repeal of any resolution of the Board of Directors which by its terms shall not be so amendable or repealable; the taking of any action which is expressly required by New York law to be taken at a meeting of the Board of Directors or by a specified proportion of Directors; the amendment or repeal of the Restated Organization Certificate or Bylaws of the Bank or adoption of new Bylaws of the Bank; recommending to the stockholders a plan of merger, consolidation, or conversion; the sale, lease or other disposition of all or substantially all of the property and assets of the Bank otherwise than in the usual and regular course of its business; a voluntary dissolution of the Bank; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest. Section 3. The Nominating Committee. The Board of Directors, by resolution adopted by a majority of the Whole Board of Directors, shall appoint a Nominating Committee of the Board of the Board of Directors, consisting of not less than three Directors. The Nominating Committee shall have authority (a) to review any nominations for election to the Board of Directors made by a stockholder of the Bank and (b) to recommend to the Whole Board of Directors nominees for election to the Board of Directors (i) to replace those Directors whose terms expire at the annual meeting of stockholders next ensuing and (ii) to fill vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, or resulting from an increase in the authorized number of Directors. -9- Section 4. The Audit Committee. The Audit Committee shall consist of two or more Directors, none of whom shall be a salaried officer of the Bank, who shall be elected to said Committee at the annual meeting of the Board of Directors, or in the case of the filling of a vacancy (such vacancy, in every case to be filled by an existing non-salaried Director) at any regular or special meeting of the Board of Directors. The Audit Committee shall assist the Board of Directors in fulfilling its obligation to oversee the appropriateness of accounting policies, and Bank procedures and controls and shall be charged with the duty of carrying out the requirements of Section 254 of the Banking Law of the State of New York (the "New York Banking Law") as the same now is in force or as it may be amended or of any law substituted therefor. In performing its functions, the Audit Committee shall utilize the expertise of the Bank's internal Auditing Department under the direction of the Bank's internal Auditor. The Audit Committee shall hold formal meetings with the Bank's internal auditors on a quarterly basis. ARTICLE V. OFFICERS Section 1. Positions. The officers of the Bank shall be a President, one or more Vice Presidents, a Secretary, and a Chief Financial Officer, each of whom shall be elected by the Board of Directors. The Board of Directors may also designate the Chairman of the Board as an officer. The President shall be the Chief Executive Officer, unless the Board of Directors designates the Chairman of the Board as Chief Executive Officer. The President shall be a director of the Bank. Any two or more offices may be held by the same person, except for the offices of President and Secretary. The Board of Directors may designate one or more Vice Presidents as Executive Vice President or Senior Vice President. The Board of Directors may also elect or authorize the appointment of such other officers as the business of the Bank may require. The officers shall have such authority and perform such duties as the Board of Directors may from time to time authorize or determine. In the absence of action by the Board of Directors, the officers shall have such powers and duties as generally pertain to their respective offices. Section 2. Election and Term of Office. The officers of the Bank shall be elected annually at the first meeting of the Board of Directors held after each annual meeting of the stockholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The Board of Directors may authorize the Bank to enter into an employment contract with any officer in accordance with applicable law, but no such contract shall impair the right of the Board of Directors to remove any officer at any time in accordance with Section 3 of this Article V. Section 3. Removal. Any officer may be removed by the Board of Directors at any time with or without cause, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed. -10- Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise may be filled by the Board of Directors for the unexpired portion of the term. Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the Board of Directors. ARTICLE VI. SECURITIES AND INVESTMENTS Section 1. Loans and Investments. The Board of Directors shall from time to time determine and direct to what extent the funds and property of the Bank shall be invested, and, subject to all applicable provisions of law, the kind and character of the investments which are to be made and how the same shall be handled and dealt with. No loans shall be contracted on behalf of the Bank and no evidence of indebtedness shall be issued in its name unless authorized by the Board of Directors. Such authority may be general or confined to specific instances. Section 2. Care and Custody of Securities. All stocks, bonds and other securities, including bonds and mortgages, not directed by the Board of Directors to be held in bearer form, or in the name of a nominee, shall be in the name of the Bank and, to the extent that the form of the several securities may permit or as may be permitted or required by law, shall be registered or recorded in the name of the Bank. All securities including bonds and mortgages held by the Bank shall be kept in such manner and at such places as the Board of Directors, having due regard for the safety and protection thereof, may direct, and all or any part thereof may be lodged or deposited for safekeeping with such other institutions as the Board of Directors may from time to time approve. Section 3. Transfers of Securities, Etc. Transfers and assignments of stocks, bonds and other securities standing, issued or registered in the name of the Bank may be signed by any two of the following officers acting by virtue of their several offices, to wit: the Chairman, the President, an Executive Vice President, the Secretary, or may be signed by any one of said officers together with such other officer or officers, or person or persons, as the Board of Directors may from time to time authorize or designate. The Chairman or the President, or in their absence an Executive Vice President or the Secretary, shall execute any and all instruments for the proper transaction of the business of the Bank relating to its mortgage investments, including extensions, modifications, alterations, and amendments, assignments and satisfaction pieces. The Board of Directors may, nevertheless, at any time authorize and empower other additional officers or employees to do any one or more of these things. -11- ARTICLE VII. DEPOSITORIES, CHECKS AND DRAFTS Section 1. Depositaries and Withdrawals. The Board of Directors may from time to time designate banks, trust companies or similar institutions to be depositaries of funds of the Bank and may by resolution designate the officer or officers, or employee or employees, who shall be authorized to sign the checks, drafts, vouchers or orders of the Bank upon which such depositaries shall be authorized to pay out the moneys so deposited. Unless and until the Board of Directors shall otherwise provide, such checks, drafts, vouchers or orders for the payment of deposited funds shall be signed by any two of the following officers: the Chairman, the President, the Chief Financial Officer, an Executive Vice President, a Senior Vice President, a Vice President, the Secretary, the Controller, an Assistant Vice President, an Assistant Secretary, an Assistant Controller and the Assistant to the President, if the Board of Directors shall have established the offices of Assistant Vice President, Assistant Secretary, Assistant Controller or Assistant to the Chairman. Section 2. Depositors' Withdrawals. The Chairman, the President, an Executive Vice President or the Secretary shall designate those officers and employees who shall be authorized to sign or countersign checks drawn upon the general deposit accounts of the Bank issued in payment of depositor withdrawals. The Board of Directors may also adopt such other means of payment of depositor withdrawals as to it may seem proper and expedient. ARTICLE VIII. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section l. Certificates for Shares. Certificates representing shares of capital stock of the Bank shall be in such form as shall be determined by the Board of Directors. Such certificates shall be signed by the Chairman of the Board of Directors or by any other officer of the Bank authorized by the Board of Directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the Bank itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Bank. All certificates surrendered to the Bank for transfer shall be canceled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and canceled, except that in case of a lost or -12- destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Bank as the Board of Directors may prescribe. Section 2. Transfer of Shares. Transfer of shares of capital stock of the Bank shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney authorized by a duly executed power of attorney and filed with the Bank. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Bank shall be deemed by the Bank to be the owner for all purposes. ARTICLE IX. FISCAL YEAR; ANNUAL AUDIT The fiscal year of the Bank shall be as fixed by the Board of Directors. The Bank shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the Board of Directors. The appointment of such accountants shall be subject to annual ratification by the stockholders. ARTICLE X. DIVIDENDS Subject to the terms of the Bank's Restated Organization Certificate and applicable law, the Board of Directors may, from time to time, declare, and the Bank may pay, dividends on its outstanding shares of capital stock. ARTICLE XI. CORPORATE SEAL The Board of Directors shall provide a Bank seal, which shall be two concentric circles between which shall be the name of the Bank, or in such other form deemed appropriate by the Board of Directors. The year of incorporation or an emblem may appear in the center. ARTICLE XII. SURETY BONDS Section 1. Surety Bonds and Premiums Thereon. The Bank shall procure from a responsible surety company approved by the Board of Directors and shall keep continuously in force and effect a Banker's blanket bond of insurance or a fidelity bond of similar type and character covering all of the officers and employees of the Bank in such amount as the Board of Directors may fix. The Board of Directors may also require that individual officers or employees shall furnish separate bonds conditioned for the faithful performance of their several duties. It shall be obligatory upon the officers and employees to furnish to the Bank and to the surety company involved any and all information necessary or appropriate to the procurement of any bond or bonds herein provided for. The Bank may dismiss any officer or -13- employee who shall fail when asked or who shall refuse to give any and all proper and relevant information required by the designated surety company or as to whom such surety company shall decline to give a bond or whom the surety company shall decline to include in a general bond. All expenses connected with such bond or bonds and all premiums thereon shall be borne by the Bank. ARTICLE XIII. RULES AND REGULATIONS Management shall adopt rules and regulations not inconsistent with law for the payment of deposits and interest and, generally, for the transaction and management of the affairs of the Bank. Such rules and regulations shall be posted in a conspicuous place in the offices of the Bank and shall be available to depositors upon request. Such posting shall be taken and held as actual notice to and be binding upon each depositor and to all persons claiming any interest in any account. All notices to the Bank from depositors, or other persons claiming any interest in any account, shall be not effective unless they are in writing and signed by the persons giving such notice. Rules and regulations adopted by management or any amendments thereto shall be transmitted to the Board of Directors at its next regular monthly meeting following the adoption of same. ARTICLE XIV. AMENDMENTS These Bylaws may be amended in a manner consistent with the New York Banking Law and the regulations thereunder at any time by a majority vote of the Whole Board of Directors, or by the affirmative vote of at least 80% of the votes eligible to be cast by the stockholders of the Bank at any legal meeting. -14- EX-4 8 EXHIBIT 4 Exhibit 4 Form of Stock Certificate of the Holding Company COHOES BANCORP, INC. INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFIES THAT S P E C I M E N is the owner of: FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK $.01 PAR VALUE PER SHARE OF COHOES BANCORP, INC. The shares represented by this certificate are transferable only on the stock transfer books of the Corporation by the holder of record hereof, or by his duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Certificate of Incorporation of the Corporation and any amendments thereto (copies of which are on file at the principal executive offices of the Corporation), to all of which provisions the holder by acceptance hereof, assents. This certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. The shares represented by this Certificate are not insured by the Federal Deposit Insurance Corporation or any other government agency. IN WITNESS THEREOF, COHOES BANCORP, INC. has caused this certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its corporate seal to be hereunto affixed. Dated:_________________ _______________________ [SEAL] _____________________________ Richard A. Ahl Harry L. Robinson Secretary President and Chief Executive Officer COHOES BANCORP, INC. The Corporation's certificate of incorporation provides that no "person" (as defined in the certificate of incorporation) who "beneficially owns" (as defined in the certificate of incorporation) in excess of 10% of the outstanding shares of the Corporation shall be entitled to vote any shares held in excess of such limit. This provision of the certificate of incorporation shall not apply to an acquisition of securities of the Corporation by an employee stock purchase plan or other employee benefit plan of the Corporation or any of its subsidiaries. The Corporation's certificate of incorporation also includes a provision the general effect of which is to require the affirmative vote of the holders of 80% of the outstanding voting shares of the Corporation to approve certain "business combinations" (as defined in the certificate of incorporation) between the Corporation and a stockholder owning in excess of 10% of the outstanding shares of the Corporation. However, only the affirmative vote of a majority of the outstanding shares or such vote as is otherwise required by law (rather than the 80% voting requirement) is applicable to the particular transaction if it is approved by a majority of the "disinterested directors" (as defined in the certificate of incorporation) or, alternatively, the transaction satisfies certain minimum price and procedural requirements. The Corporation's certificate of incorporation also contains a provision which requires the affirmative vote of holders of at least 80% of the outstanding voting shares of the Corporation which are not beneficially owned by the "interested person" (as defined in the certificate of incorporation) to approve the direct or indirect purchase or other acquisition by the Corporation of any "equity security" (as defined in the certificate of incorporation) from such interested person. The Corporation will furnish to any stockholder upon request and without charge a full statement of the powers, designations, preferences and relative participating, optional or other special rights of each authorized class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights, to the extent that the same have been fixed, and of the authority of the board of directors to designate the same with respect to other series. Such request may be made to the Corporation or to its transfer agent and registrar. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MIN ACT_____Custodian______ (Cust} (Minor) TEN ENT - as tenants by the entirety Under Uniform Gift to Minors Act-______ (State) JT TEN - as joint tenants with right of UNIF TRANS MIN ACT____Custodian______ survivorship and not as tenants (Cust) (Minor) in common. Under Uniform Transfers to Minor Act-____ (State) Additional abbreviations may also be used though not in the above list. For Value Received, _____________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _____________________________ |_____________________________| _______________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) _______________________________ Shares of Common Stock represented by the within certificate, and do hereby irrevocably constitute and appoint________________ as Attorney to transfer the said shares on the books of the within named Association with full power of substitution in the premises. Dated______________ ______________________________ NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. The shares represented by this certificate are subject to a limitation contained in the Certificate of Incorporation to the effect that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of common stock (the "Limit") be entitled or permitted to any vote in respect of shares held in excess of the Limit. EX-5 9 EXHIBIT 5 Exhibit 5 Opinion of Silver, Freedman & Taff, L.L.P. with respect to legality of stock September 14, 1998 Board of Directors Cohoes Bancorp, Inc. 75 Remsen Street Cohoes, New York 12047 Re: The Offering of up to 12,788,790 Shares of Cohoes Bancorp, Inc. Common Stock Gentlemen: You have requested our opinion concerning certain matters of Delaware law in connection with the conversion of Cohoes Savings Bank (the "Bank"), a New York chartered savings bank, from the mutual form of ownership to the stock form of ownership (the "Conversion"), and the related subscription offering, community offering and syndicated community offering (the "Offerings") by Cohoes Bancorp, Inc., a Delaware corporation (the "Company"), of up to 12,788,790 shares of its common stock, par value $.01 per share, ("Common Stock"). In connection with your request for our opinion, you have provided to us and we have reviewed the Company's certificate of incorporation filed with the Delaware Secretary of State on September 14, 1998 (the "Certificate of Incorporation"); the Company's Bylaws; the Company's Registration Statement on Form S-1, as filed with the Securities and Exchange Commission initially on September 16, 1998 (the "Registration Statement"); resolutions of the Board of Directors of the Company (the "Board") concerning the organization of the Company, the Offerings and designation of a Pricing Committee of the Board, and the form of stock certificate approved by the Board to represent shares of Common Stock. We have also been furnished a certificate of the Delaware Secretary of State certifying the Company's good standing as a Delaware corporation. Capitalized terms used but not defined herein shall have the meaning given them in the Certificate of Incorporation. Board of Directors September 14, 1998 Page 2 We understand that the Company will loan to the trust for the Bank's Employee Stock Ownership Plan (the "ESOP") the funds which the ESOP Trust will use to purchase shares of Common Stock for which the ESOP Trust subscribes pursuant to the Offerings and for purposes of rendering the opinion set forth in paragraph 2 below, we assume that: (a) the Board has duly authorized the loan to the ESOP Trust (the "Loan"); (b) the ESOP serves a valid corporate purpose; (c) the Loan will be made at an interest rate and on other terms that are fair to the Company; (d) the terms of the Loan will be set forth in customary and appropriate documents including, without limitation, a promissory note representing the indebtedness of the ESOP Trust to the Company as a result of the Loan; and (e) the closing for the Loan and for the sale of Common Stock to the ESOP Trust will be held after the closing for the sale of the other shares of Common Stock sold in the Offerings and the receipt by the Company of the proceeds thereof. Based upon and subject to the foregoing, and limited in all respects to matters of Delaware law, it is our opinion that: 1. The Company has been duly organized and is validly existing in good standing as a corporation under the laws of the State of Delaware. 2. Upon the due adoption by the Pricing Committee of a resolution fixing the number of shares of Common stock to be sold in the Offerings, the Common Stock to be issued in the Offerings (including the shares to be issued to the ESOP Trust and the shares to be granted to a charitable foundation to be established by the Company in connection with the Conversion) will be duly authorized and, when such shares are sold and paid for in accordance with the terms set forth in the Prospectus and such resolution of the Pricing Committee, and certificates representing such shares in the form provided to us are duly and properly issued, will be validly issued, fully paid and nonassessable. This opinion is furnished solely for your benefit and may not be relied upon by any other person. We consent to the filing of this opinion as an exhibit to the Registration Statement on Form S-1, Notice of the Application for Conversion, and the Form 86-AC and to the use of the name of our firm where it appears in the Registration Statement, Notice of the Application for Conversion, Form 86-AC and in the Prospectus. Very truly yours, /s/SILVER FREEDMAN AND TAFF, L.L.P. SILVER FREEDMAN AND TAFF, L.L.P. EX-8 10 EXHIBIT 8.3 September 11, 1998 Board of Trustees Cohoes Savings Bank 75 Remsen Street Cohoes, New York 12047 Re: Plan of Conversion: Subscription Rights Cohoes Savings Bank Ladies and Gentlemen: All capitalized terms not otherwise defined in this letter have the meanings given such terms in the Plan of Conversion adopted by the Board of Trustees of Cohoes Savings Bank ("Cohoes Savings" or the "Bank") whereby the Bank will convert from a New York state chartered mutual savings bank to a New York state chartered stock savings bank and issue all of the Bank's outstanding capital stock to Cohoes Bancorp, Inc. (the "Holding Company"). Simultaneously, the Holding Company will issue shares of Common Stock. We understand that in accordance with the Plan of Conversion, Subscription Rights to purchase shares of Common Stock in the Holding Company are to be issued to: (1) Eligible Account Holders; (2) Employee Plans, including the ESOP; and (3) Supplemental Eligible Account Holders. Based solely upon our observation that the Subscription Rights will be available to such parties without cost, will be legally non-transferable and of short duration, and will afford such parties the right only to purchase shares of Common Stock at the same price as will be paid by members of the general public in the Community Offering, but without undertaking any independent investigation of state or federal law or the position of the Internal Revenue Service with respect to this issue, we are of the belief that, as a factual matter: (1) the Subscription Rights will have no ascertainable market value; and, (2) the price at which the Subscription Rights are exercisable will not be more or less than the pro forma market value of the shares upon issuance. Changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the Holding Company's value alone. Accordingly, no assurance can be given that persons who subscribe to shares of Common Stock in the Subscription Offering will thereafter RP Financial, LC. Board of Directors September 11, 1998 Page 2 be able to buy or sell such shares at the same price paid in the Subscription Offering. Sincerely, /s/ Gregory E. Dunn Gregory E. Dunn Senior Vice President EX-10 11 EXHIBIT 10.1 Exhibit 10.1 Form of proposed Employment Agreement between Cohoes Savings Bank and certain executive officers EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of ________ ___, 1998 by and between Cohoes Savings Bank, a state-chartered savings bank organized and existing under the laws of the State of New York (the "Bank"), and Richard A. Ahl (the "Executive"). W I T N E S S E T H : WHEREAS, the Executive currently serves as the Executive Vice President, Chief Financial Officer and Secretary of the Bank and as the Executive Vice President, Chief Financial Officer and Secretary of Cohoes Bancorp, Inc. (the "Company"), and effective as of the date of this Agreement, the Bank has converted from mutual to capital stock form and has become the wholly owned subsidiary of the Company; and WHEREAS, the Bank desires to assure for itself the continued availability of the Executive's services as provided in this Agreement, and the Board of Directors of the Bank (the "Board") recognizes the need for the Executive to be able to perform such services with a minimum of personal distraction in the event of a pending or threatened Change in Control (as hereinafter defined); and WHEREAS, the Executive is willing to continue to serve the Bank on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Bank and the Executive hereby agree as follows: SECTION 1. EMPLOYMENT. The Bank agrees to continue to employ the Executive, and the Executive hereby agrees to such continued employment, during the period and upon the terms and conditions set forth in this Agreement. SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this section 2 ("Employment Period"). The Employment Period shall be for an initial term of three years beginning on the date of this Agreement and ending on the third anniversary date of this Agreement (each, an "Anniversary Date"), plus such extensions, if any, as are provided pursuant to section 2(b). 1 (b) Except as provided in section 2(c), beginning on the date of this Agreement, the Employment Period shall automatically be extended for one additional day each day, unless either the Bank or the Executive elects not to extend the Agreement further by giving written notice thereof to the other party, in which case the Employment Period shall end on the third anniversary of the date on which such written notice is given. For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on the last day of the Employment Period taking into account any extensions under this section 2(b). Upon termination of the Executive's employment with the Bank for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Bank at any time from terminating the Executive's employment during the Employment Period with or without notice for any reason; provided, however, that the relative rights and obligations of the Bank and the Executive in the event of any such termination shall be determined under this Agreement. SECTION 3. DUTIES. The Executive shall serve as Executive Vice President, Chief Financial Officer and Secretary of the Bank, having such power, authority and responsibility and performing such duties as are prescribed by or under the By-Laws of the Bank and as are customarily associated with such position. The Executive shall devote his full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Bank and shall use his best efforts to advance the interests of the Bank. SECTION 4. CASH COMPENSATION. In consideration for the services to be rendered by the Executive hereunder, the Bank shall pay to him a salary equal to the base salary from the Company and the Bank in effect on the date of this Agreement, less the amount of base salary actually paid to the Executive by the Company during the Employment Period. The Executive's salary shall be payable in approximately equal installments in accordance with the Bank's customary payroll practices for senior officers. The Board shall review the Executive's annual rate of salary at such times during the Employment Period as it deems appropriate, but not less frequently than once every twelve months, and may, in its discretion, approve an increase therein. In addition to salary, the Executive may receive other cash compensation from the Bank for services hereunder at such times, in such amounts and on such terms and conditions as the Board may determine from time to time. SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS. During the Employment Period, the Executive shall be treated as an employee of the Bank and shall be entitled to participate in and receive benefits under any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term 2 disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Bank, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Bank's customary practices. In addition, the Executive shall be entitled to receive such perquisites as are customary for an individual employed in the Executive's position in a firm of the size and nature of the Bank, including, but not limited to, the use of an automobile and the payment of country club and other club fees and expenses. SECTION 6. INDEMNIFICATION AND INSURANCE. (a) During the Employment Period and for a period of six years thereafter, the Bank shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Bank or service in other capacities at the request of the Bank. The coverage provided to the Executive pursuant to this section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Bank. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six years thereafter, the Bank shall indemnify the Executive against and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Bank or any subsidiary or affiliate thereof. SECTION 7. OUTSIDE ACTIVITIES. The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he may disclose to and as may be approved by the Board (which approval shall not be unreasonably withheld); provided, however, that such service shall not materially interfere with the performance of his duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Bank and generally applicable to all similarly situated Executives. The Executive may also serve as an officer or director of the Company on such terms and conditions as the Company and the Bank may mutually agree upon, and such service shall not be deemed to materially interfere with the Executive's performance of his duties hereunder or otherwise result in a material breach of this Agreement. If the Executive is discharged or suspended, or is subject to any regulatory prohibition or restriction with respect to participation in the affairs of the Company, he shall continue to perform services for the Bank in accordance with this Agreement but shall not directly or indirectly provide services to or participate in the affairs of the Company in a manner inconsistent with the terms of such discharge or suspension or any applicable regulatory order. 3 SECTION 8. WORKING FACILITIES AND EXPENSES. The Executive's principal place of employment shall be at the Bank's executive offices located in Cohoes, New York, or at such other location within 50 miles of the address at which the Bank shall maintain its principal executive offices, or at such other location as the Bank and the Executive may mutually agree upon. The Bank shall provide the Executive at his principal place of employment with a private office, secretarial services and other support services and facilities suitable to his position with the Bank and necessary or appropriate in connection with the performance of his assigned duties under this Agreement. The Bank shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, the Executive's travel and entertainment expenses incurred in connection with the performance of his duties under this Agreement, in each case upon presentation to the Bank of an itemized account of such expenses in such form as the Bank may reasonably require. SECTION 9. TERMINATION OF EMPLOYMENT WITH BENEFITS. (a) The Executive shall be entitled to the benefits described in section 9(b) in the event that: (i) his employment with the Bank terminates during the Employment Period as a result of the Executive's voluntary resignation within 90 days following: (A) the failure of the Board to appoint or re-appoint or elect or re-elect the Executive to the position with the Bank stated in section 3 of this Agreement (or a more senior office); (B) if the Executive is a member of the Board, the failure of the shareholders of the Bank to elect or re-elect the Executive to the Board or the failure of the Board (or the nominating committee thereof) to nominate the Executive for such election or re-election; (C) the expiration of a 30-day period following the date on which the Executive gives written notice to the Bank of its material failure, whether by amendment of the Bank's Restated Organization Certificate, the Bank's By-Laws, action of the Board or the Bank's shareholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in section 3 of this Agreement, unless, during such 30-day period, the Bank cures such failure; (D) the expiration of a 30-day period following the date on which the Executive gives written notice to the Bank of its material breach of any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package), unless, during such 30-day period, the Bank cures such failure; or 4 (E) a change in the Executive's principal place of employment for a distance in excess of 50 miles from the Bank's principal office in Cohoes, New York; or (F) the liquidation, dissolution, bankruptcy, or insolvency of the Bank, the Bank or any of their respective subsidiaries or affiliates; or (ii) the Executive's employment with the Bank is terminated by the Bank during the Employment Period for any reason other than for "cause," as provided in section 10(a). (b) Upon the occurrence of any of the events described in section 9(a) of this Agreement, the Bank shall pay and provide to the Executive (or, in the event of his death, to his estate): (i) his earned but unpaid salary (including, without limitation, all items which constitute wages under applicable law and the payment of which is not otherwise provided for in this section 9(b)) as of the date of the termination of his employment with the Bank, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after termination of employment; (ii) the benefits, if any, to which he is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Bank's officers and employees; (iii) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage equivalent to the coverage to which he would have been entitled under such plans (as in effect on the date of his termination of employment, or, if his termination of employment occurs after a Change of Control, on the date of such Change of Control, whichever benefits are greater), if he had continued working for the Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period; (iv) within 30 days following the Executive's termination of employment with the Bank, a lump sum payment, in an amount equal to the present value of the salary (excluding any additional payments made to the Executive in lieu of the use of an automobile) that the Executive would have earned if he had continued working for the Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986, as amended (the "Code"), compounded using the compounding periods corresponding to the Bank's regular payroll periods for its officers, such lump sum to be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination; 5 (v) within 30 days following the Executive's termination of employment with the Bank, a lump sum payment in an amount equal to the present value of the additional employer contributions to which he would have been entitled under the Cohoes Savings Bank 401(k) Savings and Profit-Sharing Plan, the Cohoes Bancorp, Inc. Employee Stock Ownership Plan (together with the defined contribution portion of the Benefit Restoration Plan of Cohoes Bancorp, Inc. or any other supplemental defined contribution plan) and any and all other qualified and non-qualified defined contribution plans maintained by, or covering employees of, the Bank as if he were 100% vested thereunder and had continued working for the Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period and making the maximum amount of employee contributions, if any, required or permitted under such plan or plans, such present value to be determined on the basis of a discount rate, compounded using the compounding period that corresponds to the frequency with which employer contributions are made to the relevant plan, equal to the Applicable PBGC Rate; (vi) within 30 days following the Executive's termination of employment with the Bank, a lump sum payment in an amount equal to the payments that would have been made (without discounting for early payment) to the Executive under any cash bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Bank if he had continued working for the Bank during the Remaining Unexpired Employment Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Remaining Unexpired Employment Period, such payments to be equal to the product of: (A) the maximum percentage rate at which an award was ever available to the Executive under such incentive compensation plan; multiplied by (B) the salary that would have been paid to the Executive during each such calendar year at the highest annual rate of salary achieved during the Employment Period. (vii) at the election of the Bank made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of options or appreciation rights issued to the Executive under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Bank, a lump sum payment in an amount equal to the product of: (A) the excess of (I) the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of termination of employment, over (II) the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; multiplied by (B) the number of shares with respect to which options or appreciation rights are being surrendered. 6 For purposes of this section 9(b)(vii), the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Bank, even if he is not vested under the terms of such plan or program; and (viii) at the election of the Bank made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of any shares awarded to the Executive under any restricted stock plan maintained by, or covering employees of, the Bank, a lump sum payment in an amount equal to the product of: (A) the fair market value of a share of stock of the same class of stock granted under such plan, determined as of the date of the Executive's termination of employment; multiplied by (B) the number of shares which are being surrendered. For purposes of this section 9(b)(viii), the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Bank, even if he is not vested under the terms of such plan. The Bank and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this section 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Bank and the Executive further agree that the Bank may condition the payments and benefits (if any) due under sections 9(b)(iii), (iv), (v) and (vi) on the receipt of the Executive's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Bank or any of its subsidiaries or affiliates. SECTION 10. TERMINATION WITHOUT ADDITIONAL BANK LIABILITY. In the event that the Executive's employment with the Bank shall terminate during the Employment Period on account of: (a) the discharge of the Executive for "cause," which, for purposes of this Agreement, shall mean a discharge because the Board determines that the Executive: (i) has intentionally failed to perform his assigned duties under this Agreement (including, for these purposes, the Executive's inability to perform such duties as a result of drug or alcohol dependency); (ii) has intentionally engaged in dishonest or illegal conduct in connection with his performance of services for the Bank or has been convicted of a felony; (iii) has willfully violated, in any material respect, any law, rule, regulation, written agreement or final cease-and-desist order with respect to his performance of services for the Bank, as determined by the Board; or (iv) has intentionally breached the material terms of this Agreement; 7 (b) the Executive's voluntary resignation from employment with the Bank for reasons other than those specified in section 9(a)(i); or (c) the death of the Executive while employed by the Bank, or the termination of the Executive's employment because of "total and permanent disability" within the meaning of the Company's or the Bank's long-term disability plan for employees; then the Bank shall have no further obligations under this Agreement, other than the payment to the Executive of his earned but unpaid salary as of the date of the termination of his employment and the provision of such other benefits, if any, to which he is entitled as a former employee under the Bank's employee benefit plans and programs and compensation plans and programs. For purposes of this section 10, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Bank. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the written advice of counsel for the Bank shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Bank. Prior to the date on which a Change in Control occurs, the cessation of employment of the Executive shall not be deemed to be for "cause" within the meaning of section 10(a) unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of three-fourths of the members of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in section 10(a) above, and specifying the particulars thereof in detail. On and after the date that a Change in Control occurs, a determination under this section 10 shall require the affirmative vote of at least three-fourths of the members of the Board acting in good faith, and such vote shall not be made prior to the expiration of a 60-day period following the date on which the Board shall, by written notice to the Executive, furnish to him a statement of its grounds for proposing to make such determination, during which period the Executive shall be afforded a reasonable opportunity to make oral and written presentations to the members of the Board, and to be represented by his legal counsel at such presentations to refute the grounds for the proposed determination. SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE IN CONTROL. (a) A Change in Control of the Bank ("Change in Control") shall be deemed to have occurred upon the happening of any of the following events: (i) approval by the shareholders of the Bank of a transaction that would result and does result in the reorganization, merger or consolidation of the Bank, respectively, with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated 8 under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Bank; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Bank; (ii) the acquisition of all or substantially all of the assets of the Bank or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Bank entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the shareholders of the Bank of any transaction which would result in such an acquisition; (iii) a complete liquidation or dissolution of the Bank, or approval by the shareholders of the Bank of a plan for such liquidation or dissolution; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board do not belong to any of the following groups: (A) individuals who were members of the Board on the date of this Agreement; or (B) individuals who first became members of the Board after the date of this Agreement either: (1) upon election to serve as a member of the Board by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (2) upon election by the shareholders of the Board to serve as a member of the Board, but only if nominated for election by affirmative vote of three-quarters of the members of the board of directors of the Board, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of the Bank; or 9 (v) any event which would be described in section 11(a)(i), (ii), (iii) or (iv) if the term "Company" were substituted for the term "Bank" therein and the term "Company Board" were substituted for the term "Board" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 11(a), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event that the Executive's employment with the Bank terminates within eighteen months following a Change in Control for any reason other than for "cause," as described in section 10, the Bank shall pay to the Executive, in addition to the amounts payable pursuant to section 9, a severance benefit in a lump sum payment, within 25 days after the later of the effective time of such Change in Control or his termination of employment, equal to the greater of (i) the sum of the amounts payable as salary pursuant to section 4 hereof during the Remaining Unexpired Employment Period and as additional cash compensation pursuant to the terms of section 9(b)(vi) hereof, or (ii) three times the annual average of the amount paid or payable to the Executive under section 4 of this Agreement or the corresponding section of any prior employment agreement with the Bank or its predecessor during the five preceding taxable years of the Executive (or during the entire period of the Executive's employment with the Bank or its predecessor if such period is less than five years). The Bank shall also continue to provide to the Executive and to his eligible dependents the benefits described in section 9(b)(iii) hereof for a period of at least 36 months following the later of the effective time of such Change in Control or his termination of employment. SECTION 12. TAX INDEMNIFICATION. (a) This section 12 shall apply if the Executive's employment is terminated upon or following (i) a Change in Control (as defined in section 11 of this Agreement); or (ii) a change "in the ownership or effective control" of the Company or the Bank or "in the ownership of a substantial portion of the assets" of the Company or the Bank within the meaning of section 280G of the Code. If this section 12 applies, then, if for any taxable year, the Executive shall be liable for the payment of an excise tax under section 4999 of the Code with respect to any payment in the nature of compensation made by the Bank or any direct or indirect subsidiary or affiliate of the Bank to (or 10 for the benefit of) the Executive, the Bank shall pay to the Executive an amount equal to X determined under the following formula: E x P X= ---------------------------------------------- 1 - [FI x (1-SLI)) + SLI + E + M] where E = the rate at which the excise tax is assessed under section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this section 12; FI = the highest marginal rate of income tax applicable to the Executive under the Code for the taxable year in question; SLI = the sum of the highest marginal rates of income tax applicable to the Executive under all applicable state and local laws for the taxable year in question; and M = the highest marginal rate of Medicare tax applicable to the Executive under the Code for the taxable year in question. With respect to any payment in the nature of compensation that is made to (or for the benefit of) the Executive under the terms of this Agreement, the Executive's employment agreement with the Company, or otherwise, and on which an excise tax under section 4999 of the Code will be assessed, the payment determined under this section 12(a) shall be made to the Executive on the earlier of (i) the date the Company, the Bank or any direct or indirect subsidiary or affiliate of the Company or the Bank is required to withhold such tax, or (ii) the date the tax is required to be paid by the Executive. (b) Notwithstanding anything in this section 12 to the contrary, in the event that the Executive's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount determined by the formula (X + P) x E, where X, P and E have the meanings provided in section 12(a), the Executive or the Bank, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under section 12(a), when increased by the amount of the payment made to the Executive under this section 12(b) by the Bank, or when reduced by the amount of the payment made to the Bank under this section 12(b) by the Executive, equals the amount that should have properly been paid to the Executive under section 12(a). The interest paid under this section 12(b) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid to the Executive under this section 12, the Executive shall furnish to the Bank a copy of each tax return 11 which reflects a liability for an excise tax payment made by the Bank, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. SECTION 13. COVENANT NOT TO COMPETE. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Bank prior to the expiration of the Employment Period, for a period of one year following the date of his termination of employment with the Bank (or, if less, for the Remaining Unexpired Employment Period), he shall not, without the written consent of the Bank, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working within any county in which the Bank maintains an office; provided, however, that this section 13 shall not apply if the Executive's employment is terminated for the reasons set forth in section 9(a). SECTION 14. CONFIDENTIALITY. Unless he obtains the prior written consent of the Bank, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Bank or any entity which is a subsidiary of the Bank or of which the Bank is a subsidiary, any material document or information obtained from the Bank, or from its parent or subsidiaries, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this section 14 shall prevent the Executive, with or without the Bank's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. SECTION 15. SOLICITATION. The Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Bank, he shall not, without the written consent of the Bank, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13; 12 (b) provide any information, advice or recommendation with respect to any such officer or employee of any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13, that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13; (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Bank to terminate an existing business or commercial relationship with the Bank. SECTION 16. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Bank or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Bank from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Executive to which the Bank is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. SECTION 17. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Bank and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Bank may be sold or otherwise transferred. Failure of the Bank to obtain from any successor its express written assumption of the Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. SECTION 18. NOTICES. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in 13 writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Richard A. Ahl At the address last appearing on the personnel records of the Executive If to the Bank: Cohoes Savings Bank 75 Remsen Street Cohoes, New York 12047 Attention: President with a copy to: Silver, Freedman & Taff, L.L.P. 1100 New York Avenue Washington, D.C. 20005-3934 Attention: Robert L. Freedman, P.C. SECTION 19. INDEMNIFICATION FOR ATTORNEYS' FEES. (a) The Bank shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees and expenses, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Bank's obligations hereunder shall be conclusive evidence of the Executive's entitlement to indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Bank's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Bank may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. Unless it is determined that a claim made by the Executive was either frivolous or 14 made in bad faith, the Bank agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of or in connection with his consultation with legal counsel or arising out of any action, suit, proceeding or contest (regardless of the outcome thereof) by the Bank, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. This section 19(b) shall apply whether such consultation, action, suit, proceeding or contest arises before, on, after or as a result of a Change in Control. SECTION 20. SEVERABILITY. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. SECTION 21. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. SECTION 22. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. SECTION 23. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. SECTION 24. HEADINGS AND CONSTRUCTION. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. 15 SECTION 25. ENTIRE AGREEMENT; MODIFICATIONS. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. SECTION 26. NON-DUPLICATION. In the event that the Executive shall perform services for the Company or any other direct or indirect subsidiary or affiliate of the Bank, it is intended that any compensation or benefits provided to the Executive by such other employer shall not duplicate the compensation or benefits provided under this Agreement. The compensation and benefits payable under this Agreement shall be reduced to the extent necessary to effectuate this intention. SECTION 27. REQUIRED REGULATORY PROVISIONS. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and any regulations promulgated thereunder. 16 IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and the Executive has hereunto set his hand, all as of the day and year first above written. ---------------------------------------- EXECUTIVE ATTEST: COHOES SAVINGS BANK By_____________________________ By____________________________________ ____________________ Name: ____________________________ Its: 17 [Seal] STATE OF NEW YORK ) ) ss.: COUNTY OF __________ ) On this ________ day of ____________________, 1998, before me personally came _____________________, to me known, and known to me to be the individual described in the foregoing instrument, who, being by me duly sworn, did depose and say that he resides at the address set forth in said instrument, and that he signed his name to the foregoing instrument. ----------------------------------- Notary Public My commission expires: - -------------------------- 18 STATE OF NEW YORK ) ) ss.: COUNTY OF __________ ) On this ________ day of ____________________, 1998, before me personally came ___________, to me known, who, being by me duly sworn, did depose and say that he is the _______________________ of _____________________, the _____________________ State chartered stock savings bank described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said corporation; and that he or she signed his name thereto by like order. ----------------------------------- Notary Public My commission expires: - -------------------------- 19 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of ________ ___, 1998 by and between Cohoes Savings Bank, a state-chartered savings bank organized and existing under the laws of the State of New York (the "Bank"), and Harry L. Robinson (the "Executive"). W I T N E S S E T H : WHEREAS, the Executive currently serves as the President and Chief Executive Officer of the Bank and as the President and Chief Executive Officer of Cohoes Bancorp, Inc. (the "Company"), and effective as of the date of this Agreement, the Bank has converted from mutual to capital stock form and has become the wholly owned subsidiary of the Company; and WHEREAS, the Bank desires to assure for itself the continued availability of the Executive's services as provided in this Agreement, and the Board of Directors of the Bank (the "Board") recognizes the need for the Executive to be able to perform such services with a minimum of personal distraction in the event of a pending or threatened Change in Control (as hereinafter defined); and WHEREAS, the Executive is willing to continue to serve the Bank on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Bank and the Executive hereby agree as follows: SECTION 1. EMPLOYMENT. The Bank agrees to continue to employ the Executive, and the Executive hereby agrees to such continued employment, during the period and upon the terms and conditions set forth in this Agreement. SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this section 2 ("Employment Period"). The Employment Period shall be for an initial term of three years beginning on the date of this Agreement and ending on the third anniversary date of this Agreement (each, an "Anniversary Date"), plus such extensions, if any, as are provided pursuant to section 2(b). 1 (b) Except as provided in section 2(c), beginning on the date of this Agreement, the Employment Period shall automatically be extended for one additional day each day, unless either the Bank or the Executive elects not to extend the Agreement further by giving written notice thereof to the other party, in which case the Employment Period shall end on the third anniversary of the date on which such written notice is given. For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on the last day of the Employment Period taking into account any extensions under this section 2(b). Upon termination of the Executive's employment with the Bank for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Bank at any time from terminating the Executive's employment during the Employment Period with or without notice for any reason; provided, however, that the relative rights and obligations of the Bank and the Executive in the event of any such termination shall be determined under this Agreement. SECTION 3. DUTIES. The Executive shall serve as President and Chief Executive Officer of the Bank, having such power, authority and responsibility and performing such duties as are prescribed by or under the By-Laws of the Bank and as are customarily associated with such position. The Executive shall devote his full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Bank and shall use his best efforts to advance the interests of the Bank. SECTION 4. CASH COMPENSATION. In consideration for the services to be rendered by the Executive hereunder, the Bank shall pay to him a salary equal to the base salary from the Company and the Bank in effect on the date of this Agreement, less the amount of base salary actually paid to the Executive by the Company during the Employment Period. The Executive's salary shall be payable in approximately equal installments in accordance with the Bank's customary payroll practices for senior officers. The Board shall review the Executive's annual rate of salary at such times during the Employment Period as it deems appropriate, but not less frequently than once every twelve months, and may, in its discretion, approve an increase therein. In addition to salary, the Executive may receive other cash compensation from the Bank for services hereunder at such times, in such amounts and on such terms and conditions as the Board may determine from time to time. SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS. During the Employment Period, the Executive shall be treated as an employee of the Bank and shall be entitled to participate in and receive benefits under any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but 2 not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Bank, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Bank's customary practices. In addition, the Executive shall be entitled to receive such perquisites as are customary for an individual employed in the Executive's position in a firm of the size and nature of the Bank, including, but not limited to, the use of an automobile and the payment of country club and other club fees and expenses. SECTION 6. INDEMNIFICATION AND INSURANCE. (a) During the Employment Period and for a period of six years thereafter, the Bank shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Bank or service in other capacities at the request of the Bank. The coverage provided to the Executive pursuant to this section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Bank. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six years thereafter, the Bank shall indemnify the Executive against and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Bank or any subsidiary or affiliate thereof. SECTION 7. OUTSIDE ACTIVITIES. The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he may disclose to and as may be approved by the Board (which approval shall not be unreasonably withheld); provided, however, that such service shall not materially interfere with the performance of his duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Bank and generally applicable to all similarly situated Executives. The Executive may also serve as an officer or director of the Company on such terms and conditions as the Company and the Bank may mutually agree upon, and such service shall not be deemed to materially interfere with the Executive's performance of his duties hereunder or otherwise result in a material breach of this Agreement. If the Executive is discharged or suspended, or is subject to any regulatory prohibition or restriction with respect to participation in the affairs of the Company, he shall continue to perform services for the Bank in accordance with this Agreement but shall not directly or indirectly provide services to or participate in the affairs of the Company in a manner inconsistent with the terms of such discharge or suspension or any applicable regulatory order. 3 SECTION 8. WORKING FACILITIES AND EXPENSES. The Executive's principal place of employment shall be at the Bank's executive offices located in Cohoes, New York, or at such other location within 50 miles of the address at which the Bank shall maintain its principal executive offices, or at such other location as the Bank and the Executive may mutually agree upon. The Bank shall provide the Executive at his principal place of employment with a private office, secretarial services and other support services and facilities suitable to his position with the Bank and necessary or appropriate in connection with the performance of his assigned duties under this Agreement. The Bank shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, the Executive's travel and entertainment expenses incurred in connection with the performance of his duties under this Agreement, in each case upon presentation to the Bank of an itemized account of such expenses in such form as the Bank may reasonably require. SECTION 9. TERMINATION OF EMPLOYMENT WITH BENEFITS. (a) The Executive shall be entitled to the benefits described in section 9(b) in the event that: (i) his employment with the Bank terminates during the Employment Period as a result of the Executive's voluntary resignation within 90 days following: (A) the failure of the Board to appoint or re-appoint or elect or re-elect the Executive to the position with the Bank stated in section 3 of this Agreement (or a more senior office); (B) if the Executive is a member of the Board, the failure of the shareholders of the Bank to elect or re-elect the Executive to the Board or the failure of the Board (or the nominating committee thereof) to nominate the Executive for such election or re-election; (C) the expiration of a 30-day period following the date on which the Executive gives written notice to the Bank of its material failure, whether by amendment of the Bank's Restated Organization Certificate, the Bank's By-Laws, action of the Board or the Bank's shareholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in section 3 of this Agreement, unless, during such 30-day period, the Bank cures such failure; (D) the expiration of a 30-day period following the date on which the Executive gives written notice to the Bank of its material breach of any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package), unless, during such 30-day period, the Bank cures such failure; or 4 (E) a change in the Executive's principal place of employment for a distance in excess of 50 miles from the Bank's principal office in Cohoes, New York; or (F) the liquidation, dissolution, bankruptcy, or insolvency of the Bank, the Bank or any of their respective subsidiaries or affiliates; or (ii) the Executive's employment with the Bank is terminated by the Bank during the Employment Period for any reason other than for "cause," as provided in section 10(a). (b) Upon the occurrence of any of the events described in section 9(a) of this Agreement, the Bank shall pay and provide to the Executive (or, in the event of his death, to his estate): (i) his earned but unpaid salary (including, without limitation, all items which constitute wages under applicable law and the payment of which is not otherwise provided for in this section 9(b)) as of the date of the termination of his employment with the Bank, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after termination of employment; (ii) the benefits, if any, to which he is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Bank's officers and employees; (iii) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage equivalent to the coverage to which he would have been entitled under such plans (as in effect on the date of his termination of employment, or, if his termination of employment occurs after a Change of Control, on the date of such Change of Control, whichever benefits are greater), if he had continued working for the Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period; (iv) within 30 days following the Executive's termination of employment with the Bank, a lump sum payment, in an amount equal to the present value of the salary (excluding any additional payments made to the Executive in lieu of the use of an automobile) that the Executive would have earned if he had continued working for the Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986, as amended (the "Code"), compounded using the compounding periods corresponding to the Bank's regular payroll periods for its officers, such lump sum to be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination; 5 (v) within 30 days following the Executive's termination of employment with the Bank, a lump sum payment in an amount equal to the present value of the additional employer contributions to which he would have been entitled under the Cohoes Savings Bank 401(k) Savings and Profit-Sharing Plan, the Cohoes Bancorp, Inc. Employee Stock Ownership Plan (together with the defined contribution portion of the Benefit Restoration Plan of Cohoes Bancorp, Inc., or any other supplemental defined contribution plan) and any and all other qualified and non-qualified defined contribution plans maintained by, or covering employees of, the Bank as if he were 100% vested thereunder and had continued working for the Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period and making the maximum amount of employee contributions, if any, required or permitted under such plan or plans, such present value to be determined on the basis of a discount rate, compounded using the compounding period that corresponds to the frequency with which employer contributions are made to the relevant plan, equal to the Applicable PBGC Rate; (vi) within 30 days following the Executive's termination of employment with the Bank, a lump sum payment in an amount equal to the payments that would have been made (without discounting for early payment) to the Executive under any cash bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Bank if he had continued working for the Bank during the Remaining Unexpired Employment Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Remaining Unexpired Employment Period, such payments to be equal to the product of: (A) the maximum percentage rate at which an award was ever available to the Executive under such incentive compensation plan; multiplied by (B) the salary that would have been paid to the Executive during each such calendar year at the highest annual rate of salary achieved during the Employment Period. (vii) at the election of the Bank made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of options or appreciation rights issued to the Executive under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Bank, a lump sum payment in an amount equal to the product of: (A) the excess of (I) the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of termination of employment, over (II) the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; multiplied by (B) the number of shares with respect to which options or appreciation rights are being surrendered. 6 For purposes of this section 9(b)(vii), the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Bank, even if he is not vested under the terms of such plan or program; and (viii) at the election of the Bank made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of any shares awarded to the Executive under any restricted stock plan maintained by, or covering employees of, the Bank, a lump sum payment in an amount equal to the product of: (A) the fair market value of a share of stock of the same class of stock granted under such plan, determined as of the date of the Executive's termination of employment; multiplied by (B) the number of shares which are being surrendered. For purposes of this section 9(b)(viii), the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Bank, even if he is not vested under the terms of such plan. The Bank and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this section 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Bank and the Executive further agree that the Bank may condition the payments and benefits (if any) due under sections 9(b)(iii), (iv), (v) and (vi) on the receipt of the Executive's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Bank or any of its subsidiaries or affiliates. SECTION 10. TERMINATION WITHOUT ADDITIONAL BANK LIABILITY. In the event that the Executive's employment with the Bank shall terminate during the Employment Period on account of: (a) the discharge of the Executive for "cause," which, for purposes of this Agreement, shall mean a discharge because the Board determines that the Executive: (i) has intentionally failed to perform his assigned duties under this Agreement (including, for these purposes, the Executive's inability to perform such duties as a result of drug or alcohol dependency); (ii) has intentionally engaged in dishonest or illegal conduct in connection with his performance of services for the Bank or has been convicted of a felony; (iii) has willfully violated, in any material respect, any law, rule, regulation, written agreement or final cease-and-desist order with respect to his performance of services for the Bank, as determined by the Board; or (iv) has intentionally breached the material terms of this Agreement; 7 (b) the Executive's voluntary resignation from employment with the Bank for reasons other than those specified in section 9(a)(i); or (c) the death of the Executive while employed by the Bank, or the termination of the Executive's employment because of "total and permanent disability" within the meaning of the Company's or the Bank's long-term disability plan for employees; then the Bank shall have no further obligations under this Agreement, other than the payment to the Executive of his earned but unpaid salary as of the date of the termination of his employment and the provision of such other benefits, if any, to which he is entitled as a former employee under the Bank's employee benefit plans and programs and compensation plans and programs. For purposes of this section 10, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Bank. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the written advice of counsel for the Bank shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Bank. Prior to the date on which a Change in Control occurs, the cessation of employment of the Executive shall not be deemed to be for "cause" within the meaning of section 10(a) unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of three-fourths of the members of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in section 10(a) above, and specifying the particulars thereof in detail. On and after the date that a Change in Control occurs, a determination under this section 10 shall require the affirmative vote of at least three-fourths of the members of the Board acting in good faith, and such vote shall not be made prior to the expiration of a 60-day period following the date on which the Board shall, by written notice to the Executive, furnish to him a statement of its grounds for proposing to make such determination, during which period the Executive shall be afforded a reasonable opportunity to make oral and written presentations to the members of the Board, and to be represented by his legal counsel at such presentations to refute the grounds for the proposed determination. SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE IN CONTROL. (a) A Change in Control of the Bank ("Change in Control") shall be deemed to have occurred upon the happening of any of the following events: (i) approval by the shareholders of the Bank of a transaction that would result and does result in the reorganization, merger or consolidation of the Bank, respectively, with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated 8 under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Bank; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Bank; (ii) the acquisition of all or substantially all of the assets of the Bank or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Bank entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the shareholders of the Bank of any transaction which would result in such an acquisition; (iii) a complete liquidation or dissolution of the Bank, or approval by the shareholders of the Bank of a plan for such liquidation or dissolution; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board do not belong to any of the following groups: (A) individuals who were members of the Board on the date of this Agreement; or (B) individuals who first became members of the Board after the date of this Agreement either: (1) upon election to serve as a member of the Board by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or (2) upon election by the shareholders of the Board to serve as a member of the Board, but only if nominated for election by affirmative vote of three-quarters of the members of the board of directors of the Board, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of the Bank; or 9 (v) any event which would be described in section 11(a)(i), (ii), (iii) or (iv) if the term "Company" were substituted for the term "Bank" therein and the term "Company Board" were substituted for the term "Board" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 11(a), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event that the Executive's employment with the Bank terminates within eighteen months following a Change in Control for any reason other than for "cause," as described in section 10, the Bank shall pay to the Executive, in addition to the amounts payable pursuant to section 9, a severance benefit in a lump sum payment, within 25 days after the later of the effective time of such Change in Control or his termination of employment, equal to the greater of (i) the sum of the amounts payable as salary pursuant to section 4 hereof during the Remaining Unexpired Employment Period and as additional cash compensation pursuant to the terms of section 9(b)(vi) hereof, or (ii) three times the annual average of the amount paid or payable to the Executive under section 4 of this Agreement or the corresponding section of any prior employment agreement with the Bank or its predecessor during the five preceding taxable years of the Executive (or during the entire period of the Executive's employment with the Bank or its predecessor if such period is less than five years). The Bank shall also continue to provide to the Executive and to his eligible dependents the benefits described in section 9(b)(iii) hereof for a period of at least 36 months following the later of the effective time of such Change in Control or his termination of employment. SECTION 12. TAX INDEMNIFICATION. (a) This section 12 shall apply if the Executive's employment is terminated upon or following (i) a Change in Control (as defined in section 11 of this Agreement); or (ii) a change "in the ownership or effective control" of the Company or the Bank or "in the ownership of a substantial portion of the assets" of the Company or the Bank within the meaning of section 280G of the Code. If this section 12 applies, then, if for any taxable year, the Executive shall be liable for the payment of an excise tax under section 4999 of the Code with respect to any payment in the nature of compensation made by the Bank or any direct or indirect subsidiary or affiliate of the Bank to (or 10 for the benefit of) the Executive, the Bank shall pay to the Executive an amount equal to X determined under the following formula: E x P X= ---------------------------------------------- 1 - [FI x (1-SLI)) + SLI + E + M] where E = the rate at which the excise tax is assessed under section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this section 12; FI = the highest marginal rate of income tax applicable to the Executive under the Code for the taxable year in question; SLI = the sum of the highest marginal rates of income tax applicable to the Executive under all applicable state and local laws for the taxable year in question; and M = the highest marginal rate of Medicare tax applicable to the Executive under the Code for the taxable year in question. With respect to any payment in the nature of compensation that is made to (or for the benefit of) the Executive under the terms of this Agreement, the Executive's employment agreement with the Company, or otherwise, and on which an excise tax under section 4999 of the Code will be assessed, the payment determined under this section 12(a) shall be made to the Executive on the earlier of (i) the date the Company, the Bank or any direct or indirect subsidiary or affiliate of the Company or the Bank is required to withhold such tax, or (ii) the date the tax is required to be paid by the Executive. (b) Notwithstanding anything in this section 12 to the contrary, in the event that the Executive's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount determined by the formula (X + P) x E, where X, P and E have the meanings provided in section 12(a), the Executive or the Bank, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under section 12(a), when increased by the amount of the payment made to the Executive under this section 12(b) by the Bank, or when reduced by the amount of the payment made to the Bank under this section 12(b) by the Executive, equals the amount that should have properly been paid to the Executive under section 12(a). The interest paid under this section 12(b) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid to the Executive under this section 12, the Executive shall furnish to the Bank a copy of each tax return 11 which reflects a liability for an excise tax payment made by the Bank, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. SECTION 13. COVENANT NOT TO COMPETE. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Bank prior to the expiration of the Employment Period, for a period of one year following the date of his termination of employment with the Bank (or, if less, for the Remaining Unexpired Employment Period), he shall not, without the written consent of the Bank, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working within any county in which the Bank maintains an office; provided, however, that this section 13 shall not apply if the Executive's employment is terminated for the reasons set forth in section 9(a). SECTION 14. CONFIDENTIALITY. Unless he obtains the prior written consent of the Bank, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Bank or any entity which is a subsidiary of the Bank or of which the Bank is a subsidiary, any material document or information obtained from the Bank, or from its parent or subsidiaries, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this section 14 shall prevent the Executive, with or without the Bank's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. SECTION 15. SOLICITATION. The Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Bank, he shall not, without the written consent of the Bank, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13; 12 (b) provide any information, advice or recommendation with respect to any such officer or employee of any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13, that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13; (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Bank to terminate an existing business or commercial relationship with the Bank. SECTION 16. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Bank or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Bank from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Executive to which the Bank is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. SECTION 17. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Bank and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Bank may be sold or otherwise transferred. Failure of the Bank to obtain from any successor its express written assumption of the Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. SECTION 18. NOTICES. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in 13 writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Harry L. Robinson At the address last appearing on the personnel records of the Executive If to the Bank: Cohoes Savings Bank 75 Remsen Street Cohoes, New York 12047 Attention: President with a copy to: Silver, Freedman & Taff, L.L.P. 1100 New York Avenue Washington, D.C. 20005-3934 Attention: Robert L. Freedman, P.C. SECTION 19. INDEMNIFICATION FOR ATTORNEYS' FEES. (a) The Bank shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees and expenses, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Bank's obligations hereunder shall be conclusive evidence of the Executive's entitlement to indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Bank's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Bank may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. Unless it is determined that a claim made by the Executive was either frivolous or 14 made in bad faith, the Bank agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of or in connection with his consultation with legal counsel or arising out of any action, suit, proceeding or contest (regardless of the outcome thereof) by the Bank, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. This section 19(b) shall apply whether such consultation, action, suit, proceeding or contest arises before, on, after or as a result of a Change in Control. SECTION 20. SEVERABILITY. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. SECTION 21. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. SECTION 22. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. SECTION 23. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. SECTION 24. HEADINGS AND CONSTRUCTION. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. 15 SECTION 25. ENTIRE AGREEMENT; MODIFICATIONS. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. SECTION 26. NON-DUPLICATION. In the event that the Executive shall perform services for the Company or any other direct or indirect subsidiary or affiliate of the Bank, it is intended that any compensation or benefits provided to the Executive by such other employer shall not duplicate the compensation or benefits provided under this Agreement. The compensation and benefits payable under this Agreement shall be reduced to the extent necessary to effectuate this intention. SECTION 27. REQUIRED REGULATORY PROVISIONS. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and any regulations promulgated thereunder. 16 IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and the Executive has hereunto set his hand, all as of the day and year first above written. ---------------------------------------- EXECUTIVE ATTEST: COHOES SAVINGS BANK By_____________________________ By____________________________________ ____________________ Name: ____________________________ Its: 17 [Seal] STATE OF NEW YORK ) ) ss.: COUNTY OF __________ ) On this ________ day of ____________________, 1998, before me personally came _____________________, to me known, and known to me to be the individual described in the foregoing instrument, who, being by me duly sworn, did depose and say that he resides at the address set forth in said instrument, and that he signed his name to the foregoing instrument. ----------------------------------- Notary Public My commission expires: - -------------------------- 18 STATE OF NEW YORK ) ) ss.: COUNTY OF __________ ) On this ________ day of ____________________, 1998, before me personally came ___________, to me known, who, being by me duly sworn, did depose and say that he is the _______________________ of _____________________, the _____________________ State chartered stock savings bank described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said corporation; and that he or she signed his name thereto by like order. ----------------------------------- Notary Public My commission expires: - -------------------------- 19 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of ___________, 1998 by and between Cohoes Savings Bank, a state-chartered savings bank organized and existing under the laws of the State of New York, the ("Bank"), and Albert J. Picchi (the "Executive"). W I T N E S S E T H : WHEREAS, the Executive currently serves as the Vice President and Senior Loan Officer of the Bank, and effective as of the date of this Agreement, the Bank has converted from mutual to capital stock form and has become the wholly owned subsidiary of Cohoes Bancorp, Inc. (the "Company"); and WHEREAS, the Bank desires to assure for itself the continued availability of the Executive's services as provided in this Agreement; and WHEREAS, the Executive is willing to continue to serve the Bank on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Bank and the Executive hereby agree as follows: SECTION 1. EMPLOYMENT. The Bank agrees to continue to employ the Executive, and the Executive hereby agrees to such continued employment, during the period and upon the terms and conditions set forth in this Agreement. SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this section 2 ("Employment Period"). The Employment Period shall be for an initial term of two years beginning on the date of this Agreement and ending on the second anniversary date of this Agreement (each, an "Anniversary Date"), plus such extensions, if any, as are provided pursuant to section 2(b). (b) Except as provided in section 2(c), beginning on the date of this Agreement, the Employment Period shall automatically be extended for one additional day each day, unless either the Bank or the Executive elects not to extend the Agreement further by giving written notice thereof 1 to the other party, in which case the Employment Period shall end on the second anniversary of the date on which such written notice is given. For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on the last day of the Employment Period taking into account any extensions under this section 2(b). Upon termination of the Executive's employment with the Bank for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Bank at any time from terminating the Executive's employment during the Employment Period with or without notice for any reason; provided, however, that the relative rights and obligations of the Bank and the Executive in the event of any such termination shall be determined under this Agreement. SECTION 3. DUTIES. The Executive shall serve as Vice President and Senior Loan Officer of the Bank, having such power, authority and responsibility and performing such duties as are prescribed by or under the By-Laws of the Bank and as are customarily associated with such position. The Executive shall devote his full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Bank and shall use his best efforts to advance the interests of the Bank. SECTION 4. CASH COMPENSATION. In consideration for the services to be rendered by the Executive hereunder, the Bank shall pay to him a salary equal to the base salary from the Bank in effect on the date of this Agreement. The Executive's salary shall be payable in approximately equal installments in accordance with the Bank's customary payroll practices for senior officers. The Board shall review the Executive's annual rate of salary at such times during the Employment Period as it deems appropriate, but not less frequently than once every twelve months, and may, in its discretion, approve an increase therein. In addition to salary, the Executive may receive other cash compensation from the Bank for services hereunder at such times, in such amounts and on such terms and conditions as the Board may determine from time to time. SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS. During the Employment Period, the Executive shall be treated as an employee of the Bank and shall be entitled to participate in and receive benefits under any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Bank, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Bank's customary practices. In 2 addition, the Executive shall be entitled to receive such perquisites as are customary for an individual employed in the Executive's position in a firm of the size and nature of the Bank. SECTION 6. INDEMNIFICATION AND INSURANCE. (a) During the Employment Period and for a period of six years thereafter, the Bank shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Bank or service in other capacities at the request of the Bank. The coverage provided to the Executive pursuant to this section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Bank. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six years thereafter, the Bank shall indemnify the Executive against and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Bank or any subsidiary or affiliate thereof. SECTION 7. OUTSIDE ACTIVITIES. The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he may disclose to and as may be approved by the Board (which approval shall not be unreasonably withheld); provided, however, that such service shall not materially interfere with the performance of his duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Bank and generally applicable to all similarly situated Executives. If the Executive is discharged or suspended, or is subject to any regulatory prohibition or restriction with respect to participation in the affairs of the Company, he shall continue to perform services for the Bank in accordance with this Agreement but shall not directly or indirectly provide services to or participate in the affairs of the Company in a manner inconsistent with the terms of such discharge or suspension or any applicable regulatory order. 3 SECTION 8. WORKING FACILITIES AND EXPENSES. The Executive's principal place of employment shall be at the Bank's executive offices located in Cohoes, New York, or at such other location within 50 miles of the address at which the Bank shall maintain its principal executive offices, or at such other location as the Bank and the Executive may mutually agree upon. The Bank shall provide the Executive at his principal place of employment with a private office, secretarial services and other support services and facilities suitable to his position with the Bank and necessary or appropriate in connection with the performance of his assigned duties under this Agreement. The Bank shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, the Executive's travel and entertainment expenses incurred in connection with the performance of his duties under this Agreement, in each case upon presentation to the Bank of an itemized account of such expenses in such form as the Bank may reasonably require. SECTION 9. TERMINATION OF EMPLOYMENT WITH BENEFITS. (a) The Executive shall be entitled to the benefits described in section 9(b) in the event that: (i) his employment with the Bank terminates during the Employment Period as a result of the Executive's voluntary resignation within 90 days following: (A) the failure of the Board to appoint or re-appoint or elect or re-elect the Executive to the position with the Bank stated in section 3 of this Agreement (or a more senior office); (B) if the Executive is a member of the Board, the failure of the shareholders of the Bank to elect or re-elect the Executive to the Board or the failure of the Board (or the nominating committee thereof) to nominate the Executive for such election or re-election; (C) the expiration of a 30-day period following the date on which the Executive gives written notice to the Bank of its material failure, whether by amendment of the Bank's Restated Organization Certificate, the Bank's By-Laws, action of the Board or the Bank's shareholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in section 3 of this Agreement, unless, during such 30-day period, the Bank cures such failure; (D) the expiration of a 30-day period following the date on which the Executive gives written notice to the Bank of its material breach of any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package), unless, during such 30-day period, the Bank cures such failure; or 4 (E) a change in the Executive's principal place of employment for a distance in excess of 50 miles from the Bank's principal office in Cohoes, New York; or (F) the liquidation, dissolution, bankruptcy, or insolvency of the Bank, the Bank or any of their respective subsidiaries or affiliates; or (ii) the Executive's employment with the Bank is terminated by the Bank during the Employment Period for any reason other than for "cause," as provided in section 10(a). (b) Upon the occurrence of any of the events described in section 9(a) of this Agreement, the Bank shall pay and provide to the Executive (or, in the event of his death, to his estate): (i) his earned but unpaid salary (including, without limitation, all items which constitute wages under applicable law and the payment of which is not otherwise provided for in this section 9(b)) as of the date of the termination of his employment with the Bank, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after termination of employment; (ii) the benefits, if any, to which he is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Bank's officers and employees; (iii) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage equivalent to the coverage to which he would have been entitled under such plans (as in effect on the date of his termination of employment), if he had continued working for the Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period; (iv) within 30 days following the Executive's termination of employment with the Bank, a lump sum payment, in an amount equal to the present value of the salary (excluding any additional payments made to the Executive in lieu of the use of an automobile) that the Executive would have earned if he had continued working for the Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986, as amended (the "Code"), compounded using the compounding periods corresponding to the Bank's regular payroll periods for its officers, such lump sum to be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination; 5 (v) within 30 days following the Executive's termination of employment with the Bank, a lump sum payment in an amount equal to the present value of the additional employer contributions to which he would have been entitled under the Cohoes Savings Bank 401(k) Savings and Profit-Sharing Plan, the Cohoes Savings Bank Employee Stock Ownership Plan (together with the defined contribution portion of the Benefit Restoration Plan of Cohoes Bancorp, Inc. or any other supplemental defined contribution plan) and any and all other qualified and non-qualified defined contribution plans maintained by, or covering employees of, the Bank as if he were 100% vested thereunder and had continued working for the Bank during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period and making the maximum amount of employee contributions, if any, required or permitted under such plan or plans, such present value to be determined on the basis of a discount rate, compounded using the compounding period that corresponds to the frequency with which employer contributions are made to the relevant plan, equal to the Applicable PBGC Rate; (vi) within 30 days following the Executive's termination of employment with the Bank, a lump sum payment in an amount equal to the payments that would have been made (without discounting for early payment) to the Executive under any cash bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Bank if he had continued working for the Bank during the Remaining Unexpired Employment Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Remaining Unexpired Employment Period, such payments to be equal to the product of: (A) the maximum percentage rate at which an award was ever available to the Executive under such incentive compensation plan; multiplied by (B) the salary that would have been paid to the Executive during each such calendar year at the highest annual rate of salary achieved during the Employment Period. (vii) at the election of the Bank made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of options or appreciation rights issued to the Executive under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Bank, a lump sum payment in an amount equal to the product of: (A) the excess of (I) the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of termination of employment, over (II) the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; multiplied by (B) the number of shares with respect to which options or appreciation rights are being surrendered. 6 For purposes of this section 9(b)(vii), the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Bank, even if he is not vested under the terms of such plan or program; and (viii) at the election of the Bank made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of any shares awarded to the Executive under any restricted stock plan maintained by, or covering employees of, the Bank, a lump sum payment in an amount equal to the product of: (A) the fair market value of a share of stock of the same class of stock granted under such plan, determined as of the date of the Executive's termination of employment; multiplied by (B) the number of shares which are being surrendered. For purposes of this section 9(b)(viii), the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Bank, even if he is not vested under the terms of such plan. The Bank and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this section 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Bank and the Executive further agree that the Bank may condition the payments and benefits (if any) due under sections 9(b)(iii), (iv), (v) and (vi) on the receipt of the Executive's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Bank or any of its subsidiaries or affiliates. SECTION 10. TERMINATION WITHOUT ADDITIONAL BANK LIABILITY. In the event that the Executive's employment with the Bank shall terminate during the Employment Period on account of: (a) the discharge of the Executive for "cause," which, for purposes of this Agreement, shall mean a discharge because the Board determines that the Executive: (i) has intentionally failed to perform his assigned duties under this Agreement (including, for these purposes, the Executive's inability to perform such duties as a result of drug or alcohol dependency); (ii) has intentionally engaged in dishonest or illegal conduct in connection with his performance of services for the Bank or has been convicted of a felony; (iii) has willfully violated, in any material respect, any law, rule, regulation, written agreement or final cease-and-desist order with respect to his performance of services for the Bank, as determined by the Board; or (iv) has intentionally breached the material terms of this Agreement; 7 (b) the Executive's voluntary resignation from employment with the Bank for reasons other than those specified in section 9(a)(i); or (c) the death of the Executive while employed by the Bank, or the termination of the Executive's employment because of "total and permanent disability" within the meaning of the Bank's long-term disability plan for employees; then the Bank shall have no further obligations under this Agreement, other than the payment to the Executive of his earned but unpaid salary as of the date of the termination of his employment and the provision of such other benefits, if any, to which he is entitled as a former employee under the Bank's employee benefit plans and programs and compensation plans and programs. For purposes of this section 10, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Bank. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the written advice of counsel for the Bank shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Bank. The cessation of employment of the Executive shall not be deemed to be for "cause" within the meaning of section 10(a) unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of three-fourths of the members of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in section 10(a) above, and specifying the particulars thereof in detail. SECTION 11. COVENANT NOT TO COMPETE. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Bank prior to the expiration of the Employment Period, for a period of one year following the date of his termination of employment with the Bank (or, if less, for the Remaining Unexpired Employment Period), he shall not, without the written consent of the Bank, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working within any county in which the Bank maintains an office; provided, however, that this section 11 shall not apply if the Executive's employment is terminated for the reasons set forth in section 9(a). SECTION 12. CONFIDENTIALITY. Unless he obtains the prior written consent of the Bank, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Bank or any entity which is a subsidiary of the Bank or of which the Bank is a subsidiary, any material document or information obtained from the Bank, or from its parent or subsidiaries, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information 8 or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this section 12 shall prevent the Executive, with or without the Bank's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. SECTION 13. SOLICITATION. The Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Bank, he shall not, without the written consent of the Bank, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 11; (b) provide any information, advice or recommendation with respect to any such officer or employee of any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 11, that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Bank or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 11; (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Bank to terminate an existing business or commercial relationship with the Bank. SECTION 14. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Bank or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Bank's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, 9 medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Bank from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Executive to which the Bank is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. SECTION 15. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Bank and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Bank may be sold or otherwise transferred. Failure of the Bank to obtain from any successor its express written assumption of the Bank's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. SECTION 16. NOTICES. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Albert J. Picchi At the address last appearing on the personnel records of the Executive If to the Bank: 75 Remsen Street Cohoes, New York 12047 Attention: President with a copy to: Silver, Freedman & Taff, L.L.P. 1100 New York Avenue Washington, D.C. 20005-3934 Attention: Robert L. Freedman, P.C. 10 SECTION 17. INDEMNIFICATION FOR ATTORNEYS' FEES. (a) The Bank shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees and expenses, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Bank's obligations hereunder shall be conclusive evidence of the Executive's entitlement to indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Bank's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Bank may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. Unless it is determined that a claim made by the Executive was either frivolous or made in bad faith, the Bank agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of or in connection with his consultation with legal counsel or arising out of any action, suit, proceeding or contest (regardless of the outcome thereof) by the Bank, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. SECTION 18. SEVERABILITY. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. SECTION 19. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. SECTION 20. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. 11 SECTION 21. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. SECTION 22. HEADINGS AND CONSTRUCTION. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. SECTION 23. ENTIRE AGREEMENT; MODIFICATIONS. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. SECTION 24. NON-DUPLICATION. In the event that the Executive shall perform services for the Company or any other direct or indirect subsidiary or affiliate of the Bank, it is intended that any compensation or benefits provided to the Executive by such other employer shall not duplicate the compensation or benefits provided under this Agreement. The compensation and benefits payable under this Agreement shall be reduced to the extent necessary to effectuate this intention. SECTION 25. REQUIRED REGULATORY PROVISIONS. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Bank, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and any regulations promulgated thereunder. 12 IN WITNESS WHEREOF, the Bank has caused this Agreement to be executed and the Executive has hereunto set his hand, all as of the day and year first above written. ---------------------------------------- EXECUTIVE ATTEST: COHOES SAVINGS BANK By_____________________________ By____________________________________ ----------------- ------------------------ ------------------- ------------------------------- 13 [Seal] STATE OF NEW YORK ) ) ss.: COUNTY OF ____________ ) On this ________ day of ____________________, 1998, before me personally came _______________, to me known, and known to me to be the individual described in the foregoing instrument, who, being by me duly sworn, did depose and say that he resides at the address set forth in said instrument, and that he signed his name to the foregoing instrument. ----------------------------------- Notary Public My commission expires: - -------------------------- 14 STATE OF NEW YORK ) ) ss.: COUNTY OF _____________ ) On this ________ day of ____________________, 1998, before me personally came ______________, to me known, who, being by me duly sworn, did depose and say that he is the ___________________ of Cohoes Savings Bank, the state chartered stock savings bank described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said corporation; and that he or she signed his name thereto by like order. ----------------------------------- Notary Public My commission expires: - -------------------------- 15 EX-10 12 EXHIBIT 10.2 Exhibit 10.2 Form of proposed employment Agreement between Cohoes Bancorp, Inc. and certain executive officers EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of _____ ___, 1998 by and between Cohoes Bancorp, Inc., a business corporation organized and existing under the laws of the State of Delaware (the "Company"), and Richard A. Ahl (the "Executive"). W I T N E S S E T H : WHEREAS, the Executive currently serves as the Executive Vice President, Chief Financial Officer and Secretary of the Company and as the Executive Vice President, Chief Financial Officer and Secretary of Cohoes Savings Bank (the "Bank"), and effective as of the date of this Agreement, the Bank has converted from mutual to capital stock form and has become the wholly owned subsidiary of the Company; and WHEREAS, the Company desires to assure for itself the continued availability of the Executive's services as provided in this Agreement, and the Board of Directors of the Company (the "Board") recognizes the need for the Executive to be able to perform such services with a minimum of personal distraction in the event of a pending or threatened Change in Control (as hereinafter defined); and WHEREAS, the Executive is willing to continue to serve the Company on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Company and the Executive hereby agree as follows: SECTION 1. EMPLOYMENT. The Company agrees to continue to employ the Executive, and the Executive hereby agrees to such continued employment, during the period and upon the terms and conditions set forth in this Agreement. SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this section 2 ("Employment Period"). The Employment Period shall be for an initial term of three years beginning on the date of this Agreement and ending on the third anniversary date of this Agreement (each, an "Anniversary Date"), plus such extensions, if any, as are provided pursuant to section 2(b). (b) Except as provided in section 2(c), beginning on the date of this Agreement, the Employment Period shall automatically be extended for one additional day each day, unless either 1 the Company or the Executive elects not to extend the Agreement further by giving written notice thereof to the other party, in which case the Employment Period shall end on the third anniversary of the date on which such written notice is given. For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on the last day of the Employment Period taking into account any extensions under this section 2(b). Upon termination of the Executive's employment with the Company for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Company at any time from terminating the Executive's employment during the Employment Period with or without notice for any reason; provided, however, that the relative rights and obligations of the Company and the Executive in the event of any such termination shall be determined under this Agreement. SECTION 3. DUTIES. The Executive shall serve as the Executive Vice President, Chief Financial Officer and Secretary of the Company, having such power, authority and responsibility and performing such duties as are prescribed by or under the By-Laws of the Company and as are customarily associated with such position. The Executive shall devote his full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Company and shall use his best efforts to advance the interests of the Company. SECTION 4. CASH COMPENSATION. In consideration for the services to be rendered by the Executive hereunder, the Company shall pay to him a salary equal to the base salary from the Company and the Bank in effect on the date of this Agreement, less the amount of base salary actually paid to the Executive by the Bank during the Employment Period. The Executive's salary shall be payable in approximately equal installments in accordance with the Company's customary payroll practices for senior officers. The Board shall review the Executive's annual rate of salary at such times during the Employment Period as it deems appropriate, but not less frequently than once every twelve months, and may, in its discretion, approve an increase therein. In addition to salary, the Executive may receive other cash compensation from the Company for services hereunder at such times, in such amounts and on such terms and conditions as the Board may determine from time to time. 2 SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS. During the Employment Period, the Executive shall be treated as an employee of the Company and shall be entitled to participate in and receive benefits under any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Company, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Company's customary practices. SECTION 6. INDEMNIFICATION AND INSURANCE. (a) During the Employment Period and for a period of six years thereafter, the Company shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Company or service in other capacities at the request of the Company. The coverage provided to the Executive pursuant to this section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Company. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six years thereafter, the Company shall indemnify the Executive against and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Company or any subsidiary or affiliate thereof. SECTION 7. OUTSIDE ACTIVITIES. The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he may disclose to and as may be approved by the Board (which approval shall not be unreasonably withheld); provided, however, that such service shall not materially interfere with the performance of his duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Company and generally applicable to all similarly situated Executives. The Executive may also serve as an officer or director of the Bank on such terms and conditions as the Company and the Bank may mutually agree upon, and such service shall not be deemed to materially interfere with the Executive's performance of his duties hereunder or otherwise result in a material breach of this Agreement. If the Executive is discharged or suspended, or is subject to any regulatory prohibition or restriction with respect to participation in the affairs of the Bank, he shall continue to perform services for the Company in accordance with this Agreement but shall not directly or indirectly provide services to 3 or participate in the affairs of the Bank in a manner inconsistent with the terms of such discharge or suspension or any applicable regulatory order. SECTION 8. WORKING FACILITIES AND EXPENSES. The Executive's principal place of employment shall be at the Company's executive offices located in Cohoes, New York, or at such other location within 50 miles of the address at which the Company shall maintain its principal executive offices, or at such other location as the Company and the Executive may mutually agree upon. The Company shall provide the Executive at his principal place of employment with a private office, secretarial services and other support services and facilities suitable to his position with the Company and necessary or appropriate in connection with the performance of his assigned duties under this Agreement. The Company shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, the Executive's travel and entertainment expenses incurred in connection with the performance of his duties under this Agreement, in each case upon presentation to the Company of an itemized account of such expenses in such form as the Company may reasonably require. SECTION 9. TERMINATION OF EMPLOYMENT WITH BENEFITS. (a) The Executive shall be entitled to the benefits described in section 9(b) in the event that: (i) his employment with the Company terminates during the Employment Period as a result of the Executive's voluntary resignation within 90 days following: (A) the failure of the Board to appoint or re-appoint or elect or re-elect the Executive to the position with the Company stated in section 3 of this Agreement (or a more senior office); (B) if the Executive is a member of the Board, the failure of the shareholders of the Company to elect or re-elect the Executive to the Board or the failure of the Board (or the nominating committee thereof) to nominate the Executive for such election or re-election; (C) the expiration of a 30-day period following the date on which the Executive gives written notice to the Company of its material failure, whether by amendment of the Company's Certificate of Incorporation, the Company's By-Laws, action of the Board or the Company's shareholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in section 3 of this Agreement, unless, during such 30-day period, the Company cures such failure; (D) the expiration of a 30-day period following the date on which the Executive gives written notice to the Company of its material breach of any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and conditions of any compensation or benefit program in which the Executive participates 4 which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package), unless, during such 30-day period, the Company cures such failure; or (E) a change in the Executive's principal place of employment for a distance in excess of 50 miles from the Company's principal office in Cohoes, New York; or (F) the liquidation, dissolution, bankruptcy, or insolvency of the Company, the Bank or any of their respective subsidiaries or affiliates; or (ii) the Executive's employment with the Company is terminated by the Company during the Employment Period for any reason other than for "cause," as provided in section 10(a). (b) Upon the occurrence of any of the events described in section 9(a) of this Agreement, the Company shall pay and provide to the Executive (or, in the event of his death, to his estate): (i) his earned but unpaid salary (including, without limitation, all items which constitute wages under applicable law and the payment of which is not otherwise provided for in this section 9(b)) as of the date of the termination of his employment with the Company, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after termination of employment; (ii) the benefits, if any, to which he is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Company's officers and employees; (iii) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage equivalent to the coverage to which he would have been entitled under such plans (as in effect on the date of his termination of employment, or, if his termination of employment occurs after a Change of Control, on the date of such Change of Control, whichever benefits are greater), if he had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period; (iv) within 30 days following the Executive's termination of employment with the Company, a lump sum payment, in an amount equal to the present value of the salary (excluding any additional payments made to the Executive in lieu of the use of an automobile) that the Executive would have earned if he had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate 5 of salary achieved during the Employment Period, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986, as amended (the "Code"), compounded using the compounding periods corresponding to the Company's regular payroll periods for its officers, such lump sum to be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination; (v) within 30 days following the Executive's termination of employment with the Company, a lump sum payment in an amount equal to the present value of the additional employer contributions to which he would have been entitled under the Cohoes Savings Bank 401(k) Savings and Profit-Sharing Plan, the Cohoes Savings Bank Employee Stock Ownership Plan (together with the defined contribution portion of the Benefit Restoration Plan of Cohoes Bancorp, Inc., or any other supplemental defined contribution plan) and any and all other qualified and non-qualified defined contribution plans maintained by, or covering employees of, the Company as if he were 100% vested thereunder and had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period and making the maximum amount of employee contributions, if any, required or permitted under such plan or plans, such present value to be determined on the basis of a discount rate, compounded using the compounding period that corresponds to the frequency with which employer contributions are made to the relevant plan, equal to the Applicable PBGC Rate; (vi) within 30 days following the Executive's termination of employment with the Company, a lump sum payment in an amount equal to the payments that would have been made (without discounting for early payment) to the Executive under any cash bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Company if he had continued working for the Company during the Remaining Unexpired Employment Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Remaining Unexpired Employment Period, such payments to be equal to the product of: (A) the maximum percentage rate at which an award was ever available to the Executive under such incentive compensation plan; multiplied by (B) the salary that would have been paid to the Executive during each such calendar year at the highest annual rate of salary achieved during the Employment Period. (vii) at the election of the Company made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of options or appreciation rights issued to the Executive under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Company, a lump sum payment in an amount equal to the product of: (A) the excess of (I) the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of 6 termination of employment, over (II) the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; multiplied by (B) the number of shares with respect to which options or appreciation rights are being surrendered. For purposes of this section 9(b)(vii), the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Company, even if he is not vested under the terms of such plan or program; and (viii) at the election of the Company made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of any shares awarded to the Executive under any restricted stock plan maintained by, or covering employees of, the Company, a lump sum payment in an amount equal to the product of: (A) the fair market value of a share of stock of the same class of stock granted under such plan, determined as of the date of the Executive's termination of employment; multiplied by (B) the number of shares which are being surrendered. For purposes of this section 9(b)(viii), the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Company, even if he is not vested under the terms of such plan. The Company and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this section 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Company and the Executive further agree that the Company may condition the payments and benefits (if any) due under sections 9(b)(iii), (iv), (v) and (vi) on the receipt of the Executive's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Company or any of its subsidiaries or affiliates. SECTION 10. TERMINATION WITHOUT ADDITIONAL COMPANY LIABILITY. In the event that the Executive's employment with the Company shall terminate during the Employment Period on account of: (a) the discharge of the Executive for "cause," which, for purposes of this Agreement, shall mean a discharge because the Board determines that the Executive: (i) has intentionally failed to perform his assigned duties under this Agreement (including, for these purposes, the Executive's 7 inability to perform such duties as a result of drug or alcohol dependency); (ii) has intentionally engaged in dishonest or illegal conduct in connection with his performance of services for the Company or has been convicted of a felony; (iii) has willfully violated, in any material respect, any law, rule, regulation, written agreement or final cease-and-desist order with respect to his performance of services for the Company, as determined by the Board; or (iv) has intentionally breached the material terms of this Agreement; (b) the Executive's voluntary resignation from employment with the Company for reasons other than those specified in section 9(a)(i); or (c) the death of the Executive while employed by the Company, or the termination of the Executive's employment because of "total and permanent disability" within the meaning of the Company's or the Bank's long-term disability plan for employees; then the Company shall have no further obligations under this Agreement, other than the payment to the Executive of his earned but unpaid salary as of the date of the termination of his employment and the provision of such other benefits, if any, to which he is entitled as a former employee under the Company's employee benefit plans and programs and compensation plans and programs. For purposes of this section 10, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the written advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. Prior to the date on which a Change in Control occurs, the cessation of employment of the Executive shall not be deemed to be for "cause" within the meaning of section 10(a) unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of three-fourths of the members of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in section 10(a) above, and specifying the particulars thereof in detail. On and after the date that a Change in Control occurs, a determination under this section 10 shall require the affirmative vote of at least three-fourths of the members of the Board acting in good faith, and such vote shall not be made prior to the expiration of a 60-day period following the date on which the Board shall, by written notice to the Executive, furnish to him a statement of its grounds for proposing to make such determination, during which period the Executive shall be afforded a reasonable opportunity to make oral and written presentations to the members of the Board, and to be represented by his legal counsel at such presentations to refute the grounds for the proposed determination; 8 SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE IN CONTROL. (a) A Change in Control of the Company ("Change in Control") shall be deemed to have occurred upon the happening of any of the following events: (i) approval by the shareholders of the Company of a transaction that would result and does result in the reorganization, merger or consolidation of the Company, respectively, with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the shareholders of the Company of any transaction which would result in such an acquisition; (iii) a complete liquidation or dissolution of the Company, or approval by the shareholders of the Company of a plan for such liquidation or dissolution; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board do not belong to any of the following groups: (A) individuals who were members of the Board on the date of this Agreement; or (B) individuals who first became members of the Board after the date of this Agreement either: (1) upon election to serve as a member of the Board by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or 9 (2) upon election by the shareholders of the Board to serve as a member of the Board, but only if nominated for election by affirmative vote of three-quarters of the members of the board of directors of the Board, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of the Company; or (v) any event which would be described in section 11(a)(i), (ii), (iii) or (iv) if the term "Bank" were substituted for the term "Company" therein and the term "Bank Board" were substituted for the term "Board" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 11(a), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event that the Executive's employment with the Company terminates within eighteen months following a Change in Control for any reason other than for "cause," as described in section 10, the Company shall pay to the Executive, in addition to the amounts payable pursuant to section 9, a severance benefit in a lump sum payment, within 25 days after the later of the effective time of such Change in Control or his termination of employment, equal to the greater of (i) the sum of the amounts payable as salary pursuant to section 4 hereof during the Remaining Unexpired Employment Period and as additional cash compensation pursuant to the terms of section 9(b)(vi) hereof, or (ii) three times the annual average of the amount paid or payable to the Executive under section 4 of this Agreement or the corresponding section of any prior employment agreement with the Company or its predecessor during the five preceding taxable years of the Executive (or during the entire period of the Executive's employment with the Company or its predecessor if such period is less than five years). The Company shall also continue to provide to the Executive and to his eligible dependents the benefits described in section 9(b)(iii) hereof for a period of at least 36 months following the later of the effective time of such Change in Control or his termination of employment. In addition, the Company will guarantee the payment of the severance benefit provided pursuant to section 11(b) of the Executive's employment agreement with the Bank. SECTION 12. TAX INDEMNIFICATION. (a) This section 12 shall apply if the Executive's employment is terminated upon or following (i) a Change in Control (as defined in section 11 of this Agreement); or (ii) a change "in the ownership or effective control" of the Company or the Bank or "in the ownership of a substantial portion of the assets" of the Company or the Bank within the meaning of section 280G of the Code. If this section 12 applies, then, if for any taxable year, the Executive shall be liable for the payment 10 of an excise tax under section 4999 of the Code with respect to any payment in the nature of compensation made by the Company or any direct or indirect subsidiary or affiliate of the Company to (or for the benefit of) the Executive, the Company shall pay to the Executive an amount equal to X determined under the following formula: E x P X= ---------------------------------------------- 1 - [FI x (1-SLI)) + SLI + E + M] where E = the rate at which the excise tax is assessed under section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this section 12; FI = the highest marginal rate of income tax applicable to the Executive under the Code for the taxable year in question; SLI = the sum of the highest marginal rates of income tax applicable to the Executive under all applicable state and local laws for the taxable year in question; and M = the highest marginal rate of Medicare tax applicable to the Executive under the Code for the taxable year in question. The Company will guarantee the payment of the tax indemnification provided pursuant to section 12(a) of the Executive's employment agreement with the Bank. With respect to any payment in the nature of compensation that is made to (or for the benefit of) the Executive under the terms of this Agreement, the Executive's employment agreement with the Bank, or otherwise, and on which an excise tax under section 4999 of the Code will be assessed, the payment determined under this section 12(a) shall be made to the Executive on the earlier of (i) the date the Company, the Bank or any direct or indirect subsidiary or affiliate of the Company or the Bank is required to withhold such tax, or (ii) the date the tax is required to be paid by the Executive. (b) Notwithstanding anything in this section 12 to the contrary, in the event that the Executive's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount determined by the formula (X + P) x E, where X, P and E have the meanings provided in section 12(a), the Executive or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under section 12(a), when increased by the amount of the payment made to the Executive under this section 12(b) by the Company, or when reduced by the amount of the payment made to the Company under this section 12(b) by the Executive, equals the amount that should have properly been paid to the Executive 11 under section 12(a). The interest paid under this section 12(b) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid to the Executive under this section 12, the Executive shall furnish to the Company a copy of each tax return which reflects a liability for an excise tax payment made by the Company, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. SECTION 13. COVENANT NOT TO COMPETE. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Company prior to the expiration of the Employment Period, for a period of one year following the date of his termination of employment with the Company (or, if less, for the Remaining Unexpired Employment Period), he shall not, without the written consent of the Company, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working within any county in which the Company maintains an office; provided, however, that this section 13 shall not apply if the Executive's employment is terminated for the reasons set forth in section 9(a). SECTION 14. CONFIDENTIALITY. Unless he obtains the prior written consent of the Company, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Company or any entity which is a subsidiary of the Company or of which the Company is a subsidiary, any material document or information obtained from the Company, or from its parent or subsidiaries, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this section 14 shall prevent the Executive, with or without the Company's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. SECTION 15. SOLICITATION. The Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Company, he shall not, without the written consent of the Company, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, 12 bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13; (b) provide any information, advice or recommendation with respect to any such officer or employee of any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13, that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13; (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Company to terminate an existing business or commercial relationship with the Company. SECTION 16. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Company or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Company's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Company from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Executive to which the Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. SECTION 17. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Company and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company may be sold or otherwise transferred. Failure of the Company to obtain from any successor its express written assumption of the Company's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. 13 SECTION 18. NOTICES. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Richard A. Ahl At the address last appearing on the personnel records of the Executive If to the Company: Cohoes Bancorp, Inc. 75 Remsen Street Cohoes, New York 12047 Attention: President with a copy to: Silver, Freedman & Taff, L.L.P. 1100 New York Avenue Washington, D.C. 20005-3934 Attention: Robert L. Freedman, P.C. SECTION 19. INDEMNIFICATION FOR ATTORNEYS' FEES. (a) The Company shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees and expenses, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Company's obligations hereunder shall be conclusive evidence of the Executive's entitlement to indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the 14 Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. Unless it is determined that a claim made by the Executive was either frivolous or made in bad faith, the Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of or in connection with his consultation with legal counsel or arising out of any action, suit, proceeding or contest (regardless of the outcome thereof) by the Company, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. This section 19(b) shall apply whether such consultation, action, suit, proceeding or contest arises before, on, after or as a result of a Change in Control. SECTION 20. SEVERABILITY. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. SECTION 21. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. SECTION 22. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. SECTION 23. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. 15 SECTION 24. HEADINGS AND CONSTRUCTION. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. SECTION 25. ENTIRE AGREEMENT; MODIFICATIONS. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. SECTION 26. NON-DUPLICATION. In the event that the Executive shall perform services for the Bank or any other direct or indirect subsidiary or affiliate of the Company, it is intended that any compensation or benefits provided to the Executive by such other employer shall not duplicate the compensation or benefits provided under this Agreement. The compensation and benefits payable under this Agreement shall be reduced to the extent necessary to effectuate this intention. SECTION 27. REQUIRED REGULATORY PROVISIONS. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and any regulations promulgated thereunder. 16 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and the Executive has hereunto set his hand, all as of the day and year first above written. ---------------------------------------- EXECUTIVE ATTEST: COHOES BANCORP, INC. By_____________________________ By____________________________________ ___________________________ Name: ___________________________ Its: [Seal] 17 STATE OF NEW YORK ) ) ss.: COUNTY OF __________ ) On this ________ day of ____________________, 1998, before me personally came ______________________, to me known, and known to me to be the individual described in the foregoing instrument, who, being by me duly sworn, did depose and say that he resides at the address set forth in said instrument, and that he signed his name to the foregoing instrument. ----------------------------------- Notary Public My commission expires: - -------------------------- 18 STATE OF NEW YORK ) ) ss.: COUNTY OF __________ ) On this ________ day of ____________________, 1998, before me personally came _______________________, to me known, who, being by me duly sworn, did depose and say that he is the _______________ of _____________ the Delaware corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said corporation; and that he or she signed his name thereto by like order. ----------------------------------- Notary Public My commission expires: - -------------------------- 19 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of _____ ___, 1998 by and between Cohoes Bancorp, Inc., a business corporation organized and existing under the laws of the State of Delaware (the "Company"), and Harry L. Robinson (the "Executive"). W I T N E S S E T H : WHEREAS, the Executive currently serves as the President and Chief Executive Officer of the Company and as the President and Chief Executive Officer of Cohoes Savings Bank (the "Bank"), and effective as of the date of this Agreement, the Bank has converted from mutual to capital stock form and has become the wholly owned subsidiary of the Company; and WHEREAS, the Company desires to assure for itself the continued availability of the Executive's services as provided in this Agreement, and the Board of Directors of the Company (the "Board") recognizes the need for the Executive to be able to perform such services with a minimum of personal distraction in the event of a pending or threatened Change in Control (as hereinafter defined); and WHEREAS, the Executive is willing to continue to serve the Company on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants and conditions hereinafter set forth, the Company and the Executive hereby agree as follows: SECTION 1. EMPLOYMENT. The Company agrees to continue to employ the Executive, and the Executive hereby agrees to such continued employment, during the period and upon the terms and conditions set forth in this Agreement. SECTION 2. EMPLOYMENT PERIOD; REMAINING UNEXPIRED EMPLOYMENT PERIOD. (a) The terms and conditions of this Agreement shall be and remain in effect during the period of employment established under this section 2 ("Employment Period"). The Employment Period shall be for an initial term of three years beginning on the date of this Agreement and ending on the third anniversary date of this Agreement (each, an "Anniversary Date"), plus such extensions, if any, as are provided pursuant to section 2(b). (b) Except as provided in section 2(c), beginning on the date of this Agreement, the Employment Period shall automatically be extended for one additional day each day, unless either the Company or the Executive elects not to extend the Agreement further by giving written notice 1 thereof to the other party, in which case the Employment Period shall end on the third anniversary of the date on which such written notice is given. For all purposes of this Agreement, the term "Remaining Unexpired Employment Period" as of any date shall mean the period beginning on such date and ending on the last day of the Employment Period taking into account any extensions under this section 2(b). Upon termination of the Executive's employment with the Company for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Company at any time from terminating the Executive's employment during the Employment Period with or without notice for any reason; provided, however, that the relative rights and obligations of the Company and the Executive in the event of any such termination shall be determined under this Agreement. SECTION 3. DUTIES. The Executive shall serve as the President and Chief Executive Officer of the Company, having such power, authority and responsibility and performing such duties as are prescribed by or under the By-Laws of the Company and as are customarily associated with such position. The Executive shall devote his full business time and attention (other than during weekends, holidays, approved vacation periods, and periods of illness or approved leaves of absence) to the business and affairs of the Company and shall use his best efforts to advance the interests of the Company. SECTION 4. CASH COMPENSATION. In consideration for the services to be rendered by the Executive hereunder, the Company shall pay to him a salary equal to the base salary from the Company and the Bank in effect on the date of this Agreement, less the amount of base salary actually paid to the Executive by the Bank during the Employment Period. The Executive's salary shall be payable in approximately equal installments in accordance with the Company's customary payroll practices for senior officers. The Board shall review the Executive's annual rate of salary at such times during the Employment Period as it deems appropriate, but not less frequently than once every twelve months, and may, in its discretion, approve an increase therein. In addition to salary, the Executive may receive other cash compensation from the Company for services hereunder at such times, in such amounts and on such terms and conditions as the Board may determine from time to time. 2 SECTION 5. EMPLOYEE BENEFIT PLANS AND PROGRAMS. During the Employment Period, the Executive shall be treated as an employee of the Company and shall be entitled to participate in and receive benefits under any and all qualified or non-qualified retirement, pension, savings, profit-sharing or stock bonus plans, any and all group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans, and any other employee benefit and compensation plans (including, but not limited to, any incentive compensation plans or programs, stock option and appreciation rights plans and restricted stock plans) as may from time to time be maintained by, or cover employees of, the Company, in accordance with the terms and conditions of such employee benefit plans and programs and compensation plans and programs and consistent with the Company's customary practices. SECTION 6. INDEMNIFICATION AND INSURANCE. (a) During the Employment Period and for a period of six years thereafter, the Company shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by it to insure its directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Company or service in other capacities at the request of the Company. The coverage provided to the Executive pursuant to this section 6 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Company. (b) To the maximum extent permitted under applicable law, during the Employment Period and for a period of six years thereafter, the Company shall indemnify the Executive against and hold him harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Company or any subsidiary or affiliate thereof. SECTION 7. OUTSIDE ACTIVITIES. The Executive may serve as a member of the boards of directors of such business, community and charitable organizations as he may disclose to and as may be approved by the Board (which approval shall not be unreasonably withheld); provided, however, that such service shall not materially interfere with the performance of his duties under this Agreement. The Executive may also engage in personal business and investment activities which do not materially interfere with the performance of his duties hereunder; provided, however, that such activities are not prohibited under any code of conduct or investment or securities trading policy established by the Company and generally applicable to all similarly situated Executives. The Executive may also serve as an officer or director of the Bank on such terms and conditions as the Company and the Bank may mutually agree upon, and such service shall not be deemed to materially interfere with the Executive's performance of his duties hereunder or otherwise result in a material breach of this Agreement. If the Executive is discharged or suspended, or is subject to any regulatory prohibition or restriction with respect to participation in the affairs of the Bank, he shall continue to perform services for the Company in accordance with this Agreement but shall not directly or indirectly provide services to 3 or participate in the affairs of the Bank in a manner inconsistent with the terms of such discharge or suspension or any applicable regulatory order. SECTION 8. WORKING FACILITIES AND EXPENSES. The Executive's principal place of employment shall be at the Company's executive offices located in Cohoes, New York, or at such other location within 50 miles of the address at which the Company shall maintain its principal executive offices, or at such other location as the Company and the Executive may mutually agree upon. The Company shall provide the Executive at his principal place of employment with a private office, secretarial services and other support services and facilities suitable to his position with the Company and necessary or appropriate in connection with the performance of his assigned duties under this Agreement. The Company shall reimburse the Executive for his ordinary and necessary business expenses, including, without limitation, the Executive's travel and entertainment expenses incurred in connection with the performance of his duties under this Agreement, in each case upon presentation to the Company of an itemized account of such expenses in such form as the Company may reasonably require. SECTION 9. TERMINATION OF EMPLOYMENT WITH BENEFITS. (a) The Executive shall be entitled to the benefits described in section 9(b) in the event that: (i) his employment with the Company terminates during the Employment Period as a result of the Executive's voluntary resignation within 90 days following: (A) the failure of the Board to appoint or re-appoint or elect or re-elect the Executive to the position with the Company stated in section 3 of this Agreement (or a more senior office); (B) if the Executive is a member of the Board, the failure of the shareholders of the Company to elect or re-elect the Executive to the Board or the failure of the Board (or the nominating committee thereof) to nominate the Executive for such election or re-election; (C) the expiration of a 30-day period following the date on which the Executive gives written notice to the Company of its material failure, whether by amendment of the Company's Certificate of Incorporation, the Company's By-Laws, action of the Board or the Company's shareholders or otherwise, to vest in the Executive the functions, duties, or responsibilities prescribed in section 3 of this Agreement, unless, during such 30-day period, the Company cures such failure; (D) the expiration of a 30-day period following the date on which the Executive gives written notice to the Company of its material breach of any term, condition or covenant contained in this Agreement (including, without limitation, any reduction of the Executive's rate of base salary in effect from time to time and any change in the terms and 4 conditions of any compensation or benefit program in which the Executive participates which, either individually or together with other changes, has a material adverse effect on the aggregate value of his total compensation package), unless, during such 30-day period, the Company cures such failure; or (E) a change in the Executive's principal place of employment for a distance in excess of 50 miles from the Company's principal office in Cohoes, New York; or (F) the liquidation, dissolution, bankruptcy, or insolvency of the Company, the Bank or any of their respective subsidiaries or affiliates; or (ii) the Executive's employment with the Company is terminated by the Company during the Employment Period for any reason other than for "cause," as provided in section 10(a). (b) Upon the occurrence of any of the events described in section 9(a) of this Agreement, the Company shall pay and provide to the Executive (or, in the event of his death, to his estate): (i) his earned but unpaid salary (including, without limitation, all items which constitute wages under applicable law and the payment of which is not otherwise provided for in this section 9(b)) as of the date of the termination of his employment with the Company, such payment to be made at the time and in the manner prescribed by law applicable to the payment of wages but in no event later than 30 days after termination of employment; (ii) the benefits, if any, to which he is entitled as a former employee under the employee benefit plans and programs and compensation plans and programs maintained for the benefit of the Company's officers and employees; (iii) continued group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance benefits, in addition to that provided pursuant to section 9(b)(ii), and after taking into account the coverage provided by any subsequent employer, if and to the extent necessary to provide for the Executive, for the Remaining Unexpired Employment Period, coverage equivalent to the coverage to which he would have been entitled under such plans (as in effect on the date of his termination of employment, or, if his termination of employment occurs after a Change of Control, on the date of such Change of Control, whichever benefits are greater), if he had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period; (iv) within 30 days following the Executive's termination of employment with the Company, a lump sum payment, in an amount equal to the present value of the salary (excluding any additional payments made to the Executive in lieu of the use of an automobile) that the Executive would have earned if he had continued working for the 5 Company during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period, where such present value is to be determined using a discount rate equal to the applicable short-term federal rate prescribed under section 1274(d) of the Internal Revenue Code of 1986, as amended (the "Code"), compounded using the compounding periods corresponding to the Company's regular payroll periods for its officers, such lump sum to be paid in lieu of all other payments of salary provided for under this Agreement in respect of the period following any such termination; (v) within 30 days following the Executive's termination of employment with the Company, a lump sum payment in an amount equal to the present value of the additional employer contributions to which he would have been entitled under the Cohoes Savings Bank 401(k) Savings and Profit-Sharing Plan, the Cohoes Bancorp, Inc. Employee Stock Ownership Plan (together with the defined contribution portion of the Benefit Restoration Plan of Cohoes Bancorp, Inc., or any other supplemental defined contribution plan) and any and all other qualified and non-qualified defined contribution plans maintained by, or covering employees of, the Company as if he were 100% vested thereunder and had continued working for the Company during the Remaining Unexpired Employment Period at the highest annual rate of salary achieved during the Employment Period and making the maximum amount of employee contributions, if any, required or permitted under such plan or plans, such present value to be determined on the basis of a discount rate, compounded using the compounding period that corresponds to the frequency with which employer contributions are made to the relevant plan, equal to the Applicable PBGC Rate; (vi) within 30 days following the Executive's termination of employment with the Company, a lump sum payment in an amount equal to the payments that would have been made (without discounting for early payment) to the Executive under any cash bonus or long-term or short-term cash incentive compensation plan maintained by, or covering employees of, the Company if he had continued working for the Company during the Remaining Unexpired Employment Period and had earned the maximum bonus or incentive award in each calendar year that ends during the Remaining Unexpired Employment Period, such payments to be equal to the product of: (A) the maximum percentage rate at which an award was ever available to the Executive under such incentive compensation plan; multiplied by (B) the salary that would have been paid to the Executive during each such calendar year at the highest annual rate of salary achieved during the Employment Period. (vii) at the election of the Company made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of options or appreciation rights issued to the Executive under any stock option and appreciation rights plan or program maintained by, or covering employees of, the Company, a lump sum payment in an amount equal to the product of: 6 (A) the excess of (I) the fair market value of a share of stock of the same class as the stock subject to the option or appreciation right, determined as of the date of termination of employment, over (II) the exercise price per share for such option or appreciation right, as specified in or under the relevant plan or program; multiplied by (B) the number of shares with respect to which options or appreciation rights are being surrendered. For purposes of this section 9(b)(vii), the Executive shall be deemed fully vested in all options and appreciation rights under any stock option or appreciation rights plan or program maintained by, or covering employees of, the Company, even if he is not vested under the terms of such plan or program; and (viii) at the election of the Company made within 30 days following the occurrence of the event described in section 9(a), upon the surrender of any shares awarded to the Executive under any restricted stock plan maintained by, or covering employees of, the Company, a lump sum payment in an amount equal to the product of: (A) the fair market value of a share of stock of the same class of stock granted under such plan, determined as of the date of the Executive's termination of employment; multiplied by (B) the number of shares which are being surrendered. For purposes of this section 9(b)(viii), the Executive shall be deemed fully vested in all shares awarded under any restricted stock plan maintained by, or covering employees of, the Company, even if he is not vested under the terms of such plan. The Company and the Executive hereby stipulate that the damages which may be incurred by the Executive following any such termination of employment are not capable of accurate measurement as of the date first above written and that the payments and benefits contemplated by this section 9(b) constitute reasonable damages under the circumstances and shall be payable without any requirement of proof of actual damage and without regard to the Executive's efforts, if any, to mitigate damages. The Company and the Executive further agree that the Company may condition the payments and benefits (if any) due under sections 9(b)(iii), (iv), (v) and (vi) on the receipt of the Executive's resignation from any and all positions which he holds as an officer, director or committee member with respect to the Company or any of its subsidiaries or affiliates. SECTION 10. TERMINATION WITHOUT ADDITIONAL COMPANY LIABILITY. In the event that the Executive's employment with the Company shall terminate during the Employment Period on account of: 7 (a) the discharge of the Executive for "cause," which, for purposes of this Agreement, shall mean a discharge because the Board determines that the Executive: (i) has intentionally failed to perform his assigned duties under this Agreement (including, for these purposes, the Executive's inability to perform such duties as a result of drug or alcohol dependency); (ii) has intentionally engaged in dishonest or illegal conduct in connection with his performance of services for the Company or has been convicted of a felony; (iii) has willfully violated, in any material respect, any law, rule, regulation, written agreement or final cease-and-desist order with respect to his performance of services for the Company, as determined by the Board; or (iv) has intentionally breached the material terms of this Agreement; (b) the Executive's voluntary resignation from employment with the Company for reasons other than those specified in section 9(a)(i); or (c) the death of the Executive while employed by the Company, or the termination of the Executive's employment because of "total and permanent disability" within the meaning of the Company's or the Bank's long-term disability plan for employees; then the Company shall have no further obligations under this Agreement, other than the payment to the Executive of his earned but unpaid salary as of the date of the termination of his employment and the provision of such other benefits, if any, to which he is entitled as a former employee under the Company's employee benefit plans and programs and compensation plans and programs. For purposes of this section 10, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the written advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. Prior to the date on which a Change in Control occurs, the cessation of employment of the Executive shall not be deemed to be for "cause" within the meaning of section 10(a) unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of three-fourths of the members of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in section 10(a) above, and specifying the particulars thereof in detail. On and after the date that a Change in Control occurs, a determination under this section 10 shall require the affirmative vote of at least three-fourths of the members of the Board acting in good faith, and such vote shall not be made prior to the expiration of a 60-day period following the date on which the Board shall, by written notice to the Executive, furnish to him a statement of its grounds for proposing to make such determination, during which period the Executive shall be afforded a reasonable opportunity to make oral and written presentations to the members of the Board, and to be represented by his legal counsel at such presentations to refute the grounds for the proposed determination; 8 SECTION 11. TERMINATION UPON OR FOLLOWING A CHANGE IN CONTROL. (a) A Change in Control of the Company ("Change in Control") shall be deemed to have occurred upon the happening of any of the following events: (i) approval by the shareholders of the Company of a transaction that would result and does result in the reorganization, merger or consolidation of the Company, respectively, with one or more other persons, other than a transaction following which: (A) at least 51% of the equity ownership interests of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended ("Exchange Act")) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the outstanding equity ownership interests in the Company; and (B) at least 51% of the securities entitled to vote generally in the election of directors of the entity resulting from such transaction are beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) in substantially the same relative proportions by persons who, immediately prior to such transaction, beneficially owned (within the meaning of Rule 13d-3 promulgated under the Exchange Act) at least 51% of the securities entitled to vote generally in the election of directors of the Company; (ii) the acquisition of all or substantially all of the assets of the Company or beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 25% or more of the outstanding securities of the Company entitled to vote generally in the election of directors by any person or by any persons acting in concert, or approval by the shareholders of the Company of any transaction which would result in such an acquisition; (iii) a complete liquidation or dissolution of the Company, or approval by the shareholders of the Company of a plan for such liquidation or dissolution; (iv) the occurrence of any event if, immediately following such event, at least 50% of the members of the Board do not belong to any of the following groups: (A) individuals who were members of the Board on the date of this Agreement; or (B) individuals who first became members of the Board after the date of this Agreement either: (1) upon election to serve as a member of the Board by affirmative vote of three-quarters of the members of such board, or of a nominating committee thereof, in office at the time of such first election; or 9 (2) upon election by the shareholders of the Board to serve as a member of the Board, but only if nominated for election by affirmative vote of three-quarters of the members of the board of directors of the Board, or of a nominating committee thereof, in office at the time of such first nomination; provided, however, that such individual's election or nomination did not result from an actual or threatened election contest (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents (within the meaning of Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) other than by or on behalf of the Board of the Company; or (v) any event which would be described in section 11(a)(i), (ii), (iii) or (iv) if the term "Bank" were substituted for the term "Company" therein and the term "Bank Board" were substituted for the term "Board" therein. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them. For purposes of this section 11(a), the term "person" shall have the meaning assigned to it under sections 13(d)(3) or 14(d)(2) of the Exchange Act. (b) In the event that the Executive's employment with the Company terminates within eighteen months following a Change in Control for any reason other than for "cause," as described in section 10, the Company shall pay to the Executive, in addition to the amounts payable pursuant to section 9, a severance benefit in a lump sum payment, within 25 days after the later of the effective time of such Change in Control or his termination of employment, equal to the greater of (i) the sum of the amounts payable as salary pursuant to section 4 hereof during the Remaining Unexpired Employment Period and as additional cash compensation pursuant to the terms of section 9(b)(vi) hereof, or (ii) three times the annual average of the amount paid or payable to the Executive under section 4 of this Agreement or the corresponding section of any prior employment agreement with the Company or its predecessor during the five preceding taxable years of the Executive (or during the entire period of the Executive's employment with the Company or its predecessor if such period is less than five years). The Company shall also continue to provide to the Executive and to his eligible dependents the benefits described in section 9(b)(iii) hereof for a period of at least 36 months following the later of the effective time of such Change in Control or his termination of employment. In addition, the Company will guarantee the payment of the severance benefit provided pursuant to section 11(b) of the Executive's employment agreement with the Bank. SECTION 12. TAX INDEMNIFICATION. (a) This section 12 shall apply if the Executive's employment is terminated upon or following (i) a Change in Control (as defined in section 11 of this Agreement); or (ii) a change "in the ownership or effective control" of the Company or the Bank or "in the ownership of a substantial portion of the assets" of the Company or the Bank within the meaning of section 280G of the Code. If this section 12 applies, then, if for any taxable year, the Executive shall be liable for the payment 10 of an excise tax under section 4999 of the Code with respect to any payment in the nature of compensation made by the Company or any direct or indirect subsidiary or affiliate of the Company to (or for the benefit of) the Executive, the Company shall pay to the Executive an amount equal to X determined under the following formula: E x P X= ---------------------------------------------- 1 - [FI x (1-SLI)) + SLI + E + M] where E = the rate at which the excise tax is assessed under section 4999 of the Code; P = the amount with respect to which such excise tax is assessed, determined without regard to this section 12; FI = the highest marginal rate of income tax applicable to the Executive under the Code for the taxable year in question; SLI = the sum of the highest marginal rates of income tax applicable to the Executive under all applicable state and local laws for the taxable year in question; and M = the highest marginal rate of Medicare tax applicable to the Executive under the Code for the taxable year in question. The Company will guarantee the payment of the tax indemnification provided pursuant to section 12(a) of the Executive's employment agreement with the Bank. With respect to any payment in the nature of compensation that is made to (or for the benefit of) the Executive under the terms of this Agreement, the Executive's employment agreement with the Bank, or otherwise, and on which an excise tax under section 4999 of the Code will be assessed, the payment determined under this section 12(a) shall be made to the Executive on the earlier of (i) the date the Company, the Bank or any direct or indirect subsidiary or affiliate of the Company or the Bank is required to withhold such tax, or (ii) the date the tax is required to be paid by the Executive. (b) Notwithstanding anything in this section 12 to the contrary, in the event that the Executive's liability for the excise tax under section 4999 of the Code for a taxable year is subsequently determined to be different than the amount determined by the formula (X + P) x E, where X, P and E have the meanings provided in section 12(a), the Executive or the Company, as the case may be, shall pay to the other party at the time that the amount of such excise tax is finally determined, an appropriate amount, plus interest, such that the payment made under section 12(a), when increased by the amount of the payment made to the Executive under this section 12(b) by the Company, or when reduced by the amount of the payment made to the Company under this section 12(b) by the Executive, equals the amount that should have properly been paid to the Executive 11 under section 12(a). The interest paid under this section 12(b) shall be determined at the rate provided under section 1274(b)(2)(B) of the Code. To confirm that the proper amount, if any, was paid to the Executive under this section 12, the Executive shall furnish to the Company a copy of each tax return which reflects a liability for an excise tax payment made by the Company, at least 20 days before the date on which such return is required to be filed with the Internal Revenue Service. SECTION 13. COVENANT NOT TO COMPETE. The Executive hereby covenants and agrees that, in the event of his termination of employment with the Company prior to the expiration of the Employment Period, for a period of one year following the date of his termination of employment with the Company (or, if less, for the Remaining Unexpired Employment Period), he shall not, without the written consent of the Company, become an officer, employee, consultant, director or trustee of any savings bank, savings and loan association, savings and loan holding company, bank or bank holding company, or any direct or indirect subsidiary or affiliate of any such entity, that entails working within any county in which the Company maintains an office; provided, however, that this section 13 shall not apply if the Executive's employment is terminated for the reasons set forth in section 9(a). SECTION 14. CONFIDENTIALITY. Unless he obtains the prior written consent of the Company, the Executive shall keep confidential and shall refrain from using for the benefit of himself, or any person or entity other than the Company or any entity which is a subsidiary of the Company or of which the Company is a subsidiary, any material document or information obtained from the Company, or from its parent or subsidiaries, in the course of his employment with any of them concerning their properties, operations or business (unless such document or information is readily ascertainable from public or published information or trade sources or has otherwise been made available to the public through no fault of his own) until the same ceases to be material (or becomes so ascertainable or available); provided, however, that nothing in this section 14 shall prevent the Executive, with or without the Company's consent, from participating in or disclosing documents or information in connection with any judicial or administrative investigation, inquiry or proceeding to the extent that such participation or disclosure is required under applicable law. SECTION 15. SOLICITATION. The Executive hereby covenants and agrees that, for a period of one year following his termination of employment with the Company, he shall not, without the written consent of the Company, either directly or indirectly: (a) solicit, offer employment to, or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, 12 bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13; (b) provide any information, advice or recommendation with respect to any such officer or employee of any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13, that is intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any officer or employee of the Company or any of its subsidiaries or affiliates to terminate his employment and accept employment or become affiliated with, or provide services for compensation in any capacity whatsoever to, any savings bank, savings and loan association, bank, bank holding company, savings and loan holding company, or other institution engaged in the business of accepting deposits, making loans or doing business within the counties specified in section 13; (c) solicit, provide any information, advice or recommendation or take any other action intended, or that a reasonable person acting in like circumstances would expect, to have the effect of causing any customer of the Company to terminate an existing business or commercial relationship with the Company. SECTION 16. NO EFFECT ON EMPLOYEE BENEFIT PLANS OR PROGRAMS. The termination of the Executive's employment during the term of this Agreement or thereafter, whether by the Company or by the Executive, shall have no effect on the rights and obligations of the parties hereto under the Company's qualified or non-qualified retirement, pension, savings, thrift, profit-sharing or stock bonus plans, group life, health (including hospitalization, medical and major medical), dental, accident and long term disability insurance plans or such other employee benefit plans or programs, or compensation plans or programs, as may be maintained by, or cover employees of, the Company from time to time; provided, however, that nothing in this Agreement shall be deemed to duplicate any compensation or benefits provided under any agreement, plan or program covering the Executive to which the Company is a party and any duplicative amount payable under any such agreement, plan or program shall be applied as an offset to reduce the amounts otherwise payable hereunder. SECTION 17. SUCCESSORS AND ASSIGNS. This Agreement will inure to the benefit of and be binding upon the Executive, his legal representatives and testate or intestate distributees, and the Company and its successors and assigns, including any successor by merger or consolidation or a statutory receiver or any other person or firm or corporation to which all or substantially all of the assets and business of the Company may be sold or otherwise transferred. Failure of the Company to obtain from any successor its express written assumption of the Company's obligations hereunder at least 60 days in advance of the scheduled effective date of any such succession shall be deemed a material breach of this Agreement. 13 SECTION 18. NOTICES. Any communication required or permitted to be given under this Agreement, including any notice, direction, designation, consent, instruction, objection or waiver, shall be in writing and shall be deemed to have been given at such time as it is delivered personally, or five days after mailing if mailed, postage prepaid, by registered or certified mail, return receipt requested, addressed to such party at the address listed below or at such other address as one such party may by written notice specify to the other party: If to the Executive: Harry L. Robinson At the address last appearing on the personnel records of the Executive If to the Company: Cohoes Bancorp, Inc. 75 Remsen Street Cohoes, New York 12047 Attention: President with a copy to: Silver, Freedman & Taff, L.L.P. 1100 New York Avenue Washington, D.C. 20005-3934 Attention: Robert L. Freedman, P.C. SECTION 19. INDEMNIFICATION FOR ATTORNEYS' FEES. (a) The Company shall indemnify, hold harmless and defend the Executive against reasonable costs, including legal fees and expenses, incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved, as a result of his efforts, in good faith, to defend or enforce the terms of this Agreement. For purposes of this Agreement, any settlement agreement which provides for payment of any amounts in settlement of the Company's obligations hereunder shall be conclusive evidence of the Executive's entitlement to indemnification hereunder, and any such indemnification payments shall be in addition to amounts payable pursuant to such settlement agreement, unless such settlement agreement expressly provides otherwise. (b) The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the 14 Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment. Unless it is determined that a claim made by the Executive was either frivolous or made in bad faith, the Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of or in connection with his consultation with legal counsel or arising out of any action, suit, proceeding or contest (regardless of the outcome thereof) by the Company, the Executive or others regarding the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in section 7872(f)(2)(A) of the Code. This section 19(b) shall apply whether such consultation, action, suit, proceeding or contest arises before, on, after or as a result of a Change in Control. SECTION 20. SEVERABILITY. A determination that any provision of this Agreement is invalid or unenforceable shall not affect the validity or enforceability of any other provision hereof. SECTION 21. WAIVER. Failure to insist upon strict compliance with any of the terms, covenants or conditions hereof shall not be deemed a waiver of such term, covenant, or condition. A waiver of any provision of this Agreement must be made in writing, designated as a waiver, and signed by the party against whom its enforcement is sought. Any waiver or relinquishment of any right or power hereunder at any one or more times shall not be deemed a waiver or relinquishment of such right or power at any other time or times. SECTION 22. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same Agreement. SECTION 23. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the federal laws of the United States and, to the extent that federal law is inapplicable, in accordance with the laws of the State of New York applicable to contracts entered into and to be performed entirely within the State of New York. 15 SECTION 24. HEADINGS AND CONSTRUCTION. The headings of sections in this Agreement are for convenience of reference only and are not intended to qualify the meaning of any section. Any reference to a section number shall refer to a section of this Agreement, unless otherwise stated. SECTION 25. ENTIRE AGREEMENT; MODIFICATIONS. This instrument contains the entire agreement of the parties relating to the subject matter hereof, and supersedes in its entirety any and all prior agreements, understandings or representations relating to the subject matter hereof. No modifications of this Agreement shall be valid unless made in writing and signed by the parties hereto. SECTION 26. NON-DUPLICATION. In the event that the Executive shall perform services for the Bank or any other direct or indirect subsidiary or affiliate of the Company, it is intended that any compensation or benefits provided to the Executive by such other employer shall not duplicate the compensation or benefits provided under this Agreement. The compensation and benefits payable under this Agreement shall be reduced to the extent necessary to effectuate this intention. SECTION 27. REQUIRED REGULATORY PROVISIONS. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and any regulations promulgated thereunder. 16 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed and the Executive has hereunto set his hand, all as of the day and year first above written. ---------------------------------------- EXECUTIVE ATTEST: COHOES BANCORP, INC. By_____________________________ By____________________________________ ___________________________ Name: ___________________________ Its: [Seal] 17 STATE OF NEW YORK ) ) ss.: COUNTY OF __________ ) On this ________ day of ____________________, 1998, before me personally came ______________________, to me known, and known to me to be the individual described in the foregoing instrument, who, being by me duly sworn, did depose and say that he resides at the address set forth in said instrument, and that he signed his name to the foregoing instrument. ----------------------------------- Notary Public My commission expires: - -------------------------- 18 STATE OF NEW YORK ) ) ss.: COUNTY OF __________ ) On this ________ day of ____________________, 1998, before me personally came _______________________, to me known, who, being by me duly sworn, did depose and say that he is the _______________ of _____________ the Delaware corporation described in and which executed the foregoing instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such seal; that it was so affixed by order of the Board of Directors of said corporation; and that he or she signed his name thereto by like order. ----------------------------------- Notary Public My commission expires: - -------------------------- 19 EX-10 13 EXHIBIT 10.3 Exhibit 10.3 Form of Change-In-Control Severance Agreement with certain officers of the Company CHANGE IN CONTROL SEVERANCE AGREEMENT THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (the "Agreement") is made and entered into as of this ___ day of _______, 1998 (the "Commencement Date"), by and between COHOES SAVINGS BANK (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 5(a) hereof or which otherwise becomes bound by all of the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and Tammy L. Kimble (the "Executive"). WHEREAS, the Executive is currently serving as Director of Human Resources; and WHEREAS, the Board of Directors of the Bank (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Bank or of its holding company, Cohoes Bancorp, Inc. (the "Company"), may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Bank, the Company and its stockholders; and WHEREAS, the Board believes it is in the best interests of the Bank to enter into this Agreement with the Executive in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Executive to the Executive's assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Company and/or the Bank, although no such change is now contemplated; and WHEREAS, the Board has approved and authorized the execution of this Agreement with the Executive; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Certain Definitions. (a) The term "Change in Control" means (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any Consolidated Subsidiaries (as hereinafter defined), any person (as hereinabove defined) acting on behalf of the Company as underwriter pursuant to an offering who is temporarily holding securities in connection with such offering, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) individuals who are members of the Board on the Commencement Date (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Commencement Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board or whose nomination for election by the Company's stockholders was approved by the nominating committee serving under an 1 Incumbent Board, shall be considered a member of the Incumbent Board; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (b) The term "Commencement Date" means ________, 1998. (c) The term "Consolidated Subsidiaries" means any subsidiary or subsidiaries of the Company that are part of the affiliated group (as defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), without regard to subsection (b) thereof) that includes the Bank, including but not limited to the Company. (d) The term "Date of Termination" means the date specified in the Notice of Termination (which, in the case of a Termination for Cause shall not be less than 30 days from the date such Notice of Termination is given, and in the case of a termination for Good Reason shall not be less than 15 nor more than 60 days from the date such Notice of Termination is given); provided, however, that if within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, whether by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); and provided, further, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay the Executive the Executive's full salary at the rate in effect when the notice giving rise to the dispute was given and continue the Executive as a participant in all benefit and fringe benefit plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 1(d). (e) The term "Good Reason" means the occurrence, without the Executive's express written consent, of a material diminution of or interference with the Executive's duties, responsibilities or benefits, including (without limitation) any of the following circumstances unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given by the Executive in respect thereof: 2 (i) a requirement that the Executive be based at any location not within 50 miles of Cohoes, New York, or that she substantially increase her travel on Company or Bank business; (ii) a material demotion of the Executive; (iii) a material reduction in the number or seniority of personnel reporting to the Executive or a material reduction in the frequency with which, or in the nature of the matters with respect to which such personnel are to report to the Executive, other than as part of a Company-wide or Bank-wide reduction in staff; (iv) a reduction in the Executive's salary or a material adverse change in the Executive's perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Company or the Bank; (v) a material and extended increase in the required hours of work or the workload of the Executive; (vi) the failure of the Bank to obtain a satisfactory agreement from any successor to assume the obligations and liabilities under this Agreement, as contemplated in Section 5(a) hereof; or (vii) any purported termination of the Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 4 hereof (and, if applicable, the requirements of Section 1(g) hereof), which purported termination shall not be effective for purposes of this Agreement. (f) The term "Notice of Termination" means a notice of termination of the Executive's employment pursuant to Section 7 of this Agreement. (g) The term "Termination for Cause" means termination of the employment of the Employee because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. No act or failure to act by the Executive shall be considered intentional unless the Executive acted or failed to act with an absence of good faith and without a reasonable belief that her action or failure to act was in the best interest of the Bank. Notwithstanding the foregoing, no Termination for Cause shall be deemed to have occurred unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board duly called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), stating that in the good faith opinion of the Board the Executive has engaged in conduct described in the preceding sentence and specifying the particulars thereof in detail. 3 2. Term. (a) The term of this Agreement shall be a period of one year commencing on the Commencement Date, subject to extension or earlier termination as provided herein. (b) Except as provided in section 2(c), beginning on the date of this Agreement, the term of this Agreement shall automatically be extended for one additional day each day, unless either the Bank or the Executive elects not to extend the Agreement further by giving written notice thereof to the other party, in which case the term of this Agreement shall end on the one anniversary of the date on which such written notice is given. Upon termination of the Executive's employment with the Bank for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Bank at any time from terminating the Executive's employment during the term of this Agreement with or without notice for any reason; provided, however, that the relative rights and obligations of the Bank and the Executive in the event of any such termination shall be determined under this Agreement. 3. Severance Benefits. (a) In the event that the Bank shall terminate the Executive's employment other than Termination for Cause, or the Executive shall terminate her employment for Good Reason, within 12 months following a Change in Control, the Bank shall (i) pay the Executive her salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given, at the time such payments are due; (ii) continue to pay, for a period of 12 months following the Date of Termination, for the life, health and disability coverage that is in effect with respect to the Executive and her eligible dependents at the time the Notice of Termination is given; and (iii) pay to the Executive in a lump sum in cash, within 25 days after the later of the date of such Change in Control or the Date of Termination, an amount equal to 100% of the Executive's "base amount" as determined under Section 280G of the Code, less the aggregate present value of the payments or benefits, if any, in the nature of compensation for the benefit of the Executive, arising under any other plans or arrangements (i.e., not this Agreement) between the Company or any of the Consolidated Subsidiaries and the Executive, which constitute "parachute payments" under Section 280G of the Code. While it is not contemplated that the Executive will receive any amounts or benefits that will constitute "excess parachute payments" under Section 280G of the Code, in the event that any payments or benefits provided or to be provided to the Executive pursuant to this Agreement, in combination with payments or benefits, if any, from other plans or arrangements maintained by the Company or any of the Consolidated Subsidiaries, constitute "excess parachute payments" under Section 280G of the Code that are subject to the excise tax under Section 4999 of the Code, the Bank shall pay to the Executive in cash an additional amount equal to the amount of the Gross Up Payment (as hereinafter defined). The "Gross Up Payment" shall be the amount needed to ensure that the amount of such payments and the value of such benefits received by the Executive (net of such excise tax and any federal, state and local tax on the Bank's payment to her attributable to such excise tax) equals the amount of such payments and value of such benefits as she would receive in the absence of such excise tax and any federal, state and local tax on the Bank's payment to her 4 attributable to such excise tax. The Bank shall pay the Gross Up Payment within 30 days after the Date of Termination. For purposes of determining the amount of the Gross Up Payment, the value of any non-cash benefits and deferred payments or benefits shall be determined by the Bank's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. In the event that, after the Gross Up Payment is made, the amount of the excise tax is determined to be less than the amount calculated in the determination of the actual Gross Up Payment made by the Bank, the Executive shall repay to the Bank, at the time that such reduction in the amount of excise tax is finally determined, the portion of the Gross Up Payment attributable to such reduction, plus interest on the amount of such repayment at the applicable federal rate under Section 1274 of the Code from the date of the Gross Up Payment to the date of the repayment. The amount of the reduction of the Gross Up Payment shall reflect any subsequent reduction in excise taxes resulting from such repayment. In the event that, after the Gross Up Payment is made, the amount of the excise tax is determined to exceed the amount anticipated at the time the Gross Up Payment was made, the Bank shall pay to the Executive, in immediately available funds, at the time that such additional amount of excise tax is finally determined, an additional payment ("Additional Gross Up Payment") equal to such additional amount of excise tax and any federal, state and local taxes thereon, plus all interest and penalties, if any, owed by the Executive with respect to such additional amount of excise and other tax. The Bank shall have the right to challenge, on the Executive's behalf, any excise tax assessment against her as to which the Executive is entitled to (or would be entitled if such assessment is finally determined to be proper) a Gross Up Payment or Additional Gross Up Payment, provided that all costs and expenses incurred in such a challenge shall be borne by the Bank and the Bank shall indemnify the Executive and hold her harmless, on an after-tax basis, from any excise or other tax (including interest and penalties with respect thereto) imposed as a result of such payment of costs and expenses by the Bank. (b) The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits after the Date of Termination or otherwise. This Agreement shall not be construed as providing the Executive any right to be retained in the employ of the Bank or any affiliate of the Bank. 4. Notice of Termination. In the event that the Bank desires to terminate the employment of the Executive during the term of this Agreement, the Bank shall deliver to the Executive a written notice of termination, stating (i) whether such termination constitutes Termination for Cause, and, if so, setting forth in reasonable detail the facts and circumstances that are the basis for the Termination for Cause, and (ii) specifying the Date of Termination. In the event that the Executive desires to terminate her employment and determines in good faith that she has experienced Good Reason to terminate her employment, she shall send a written notice to the Bank stating the circumstances that constitute Good Reason and the Date of Termination. The Executive's right to terminate her employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Agreement. 5 5. No Assignments. (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation, operation of law or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Executive to compensation and benefits from the Bank in the same amount and on the same terms that she would be entitled to hereunder if she terminated her employment for Good Reason, in addition to any payments and benefits to which the Executive is entitled under Section 3 hereof. For purposes of implementing the provisions of this Section 5(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of the death of the Executive, unless otherwise provided herein, all amounts payable hereunder shall be paid to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 6. Deferred Payments. If following a termination of the Executive, the aggregate payments to be made by the Bank under this Agreement and all other plans or arrangements maintained by the Company or any of the Consolidated Subsidiaries would exceed the limitation on deductible compensation contained in Section 162(m) of the Code in any calendar year, any such amounts in excess of such limitation shall be mandatorily deferred with interest thereon at 7.0% per annum to a calendar year such that the amount to be paid to the Executive in such calendar year, including deferred amounts, does not exceed such limitation. 7. Delivery of Notices. For the purposes of this Agreement, all notices and other communications to any party hereto shall be in writing and shall be deemed to have been duly given when delivered or sent by certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Tammy L. Kimble At the address last appearing on the personnel records of the Executive 6 If to the Bank: Cohoes Savings Bank 75 Remsen Street Cohoes, New York 12047 Attention: Secretary or to such other address as such party may have furnished to the other in writing in accordance herewith, except that a notice of change of address shall be effective only upon receipt. 8. Amendments. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 9. Headings. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 10. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 11. Governing Law. This Agreement shall be governed by the laws of the State of New York to the extent that federal law does not govern. 12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, conducted before a panel of three arbitrators in a location selected by the Executive within 100 miles of such Executive's job location with the Bank, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the Executive shall be entitled to seek specific performance of her rights under Section 1(d) during the pendency of any dispute or controversy arising under or in connection with this Agreement. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 13. Reimbursement of Expenses. In the event any dispute shall arise between the Executive and the Bank as to the terms or interpretation of this Agreement, including this Section 13, whether instituted by formal legal proceedings or otherwise, including any action taken by the Executive to enforce the terms of this Section 13, or in defending against any action taken by the Bank, the Bank shall reimburse the Executive for all costs and expenses incurred by the Executive, including reasonable attorney's fees, arising from such dispute, proceedings or actions, unless a court of competent jurisdiction renders a final and nonappealable judgment against the Executive as to the matter in dispute. Reimbursement of the Executive's expenses shall be paid within ten days of the Executive furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Executive. 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: Cohoes Savings Bank - ------------------------------- --------------------------------- - ------------------------ By: - ------------------------ Its: EXECUTIVE --------------------------------- Tammy L. Kimble 8 CHANGE IN CONTROL SEVERANCE AGREEMENT THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (the "Agreement") is made and entered into as of this ___ day of _______, 1998 (the "Commencement Date"), by and between COHOES SAVINGS BANK (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 5(a) hereof or which otherwise becomes bound by all of the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and Johanna O. Robbins (the "Executive"). WHEREAS, the Executive is currently serving as Treasurer; and WHEREAS, the Board of Directors of the Bank (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Bank or of its holding company, Cohoes Bancorp, Inc. (the "Company"), may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Bank, the Company and its stockholders; and WHEREAS, the Board believes it is in the best interests of the Bank to enter into this Agreement with the Executive in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Executive to the Executive's assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Company and/or the Bank, although no such change is now contemplated; and WHEREAS, the Board has approved and authorized the execution of this Agreement with the Executive; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Certain Definitions. (a) The term "Change in Control" means (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any Consolidated Subsidiaries (as hereinafter defined), any person (as hereinabove defined) acting on behalf of the Company as underwriter pursuant to an offering who is temporarily holding securities in connection with such offering, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) individuals who are members of the Board on the Commencement Date (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Commencement Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board or whose nomination for election by the Company's stockholders was approved by the nominating committee serving under an 1 Incumbent Board, shall be considered a member of the Incumbent Board; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (b) The term "Commencement Date" means ________, 1998. (c) The term "Consolidated Subsidiaries" means any subsidiary or subsidiaries of the Company that are part of the affiliated group (as defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), without regard to subsection (b) thereof) that includes the Bank, including but not limited to the Company. (d) The term "Date of Termination" means the date specified in the Notice of Termination (which, in the case of a Termination for Cause shall not be less than 30 days from the date such Notice of Termination is given, and in the case of a termination for Good Reason shall not be less than 15 nor more than 60 days from the date such Notice of Termination is given); provided, however, that if within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, whether by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); and provided, further, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay the Executive the Executive's full salary at the rate in effect when the notice giving rise to the dispute was given and continue the Executive as a participant in all benefit and fringe benefit plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 1(d). (e) The term "Good Reason" means the occurrence, without the Executive's express written consent, of a material diminution of or interference with the Executive's duties, responsibilities or benefits, including (without limitation) any of the following circumstances unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given by the Executive in respect thereof: 2 (i) a requirement that the Executive be based at any location not within 50 miles of Cohoes, New York, or that she substantially increase her travel on Company or Bank business; (ii) a material demotion of the Executive; (iii) a material reduction in the number or seniority of personnel reporting to the Executive or a material reduction in the frequency with which, or in the nature of the matters with respect to which such personnel are to report to the Executive, other than as part of a Company-wide or Bank-wide reduction in staff; (iv) a reduction in the Executive's salary or a material adverse change in the Executive's perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Company or the Bank; (v) a material and extended increase in the required hours of work or the workload of the Executive; (vi) the failure of the Bank to obtain a satisfactory agreement from any successor to assume the obligations and liabilities under this Agreement, as contemplated in Section 5(a) hereof; or (vii) any purported termination of the Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 4 hereof (and, if applicable, the requirements of Section 1(g) hereof), which purported termination shall not be effective for purposes of this Agreement. (f) The term "Notice of Termination" means a notice of termination of the Executive's employment pursuant to Section 7 of this Agreement. (g) The term "Termination for Cause" means termination of the employment of the Employee because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. No act or failure to act by the Executive shall be considered intentional unless the Executive acted or failed to act with an absence of good faith and without a reasonable belief that her action or failure to act was in the best interest of the Bank. Notwithstanding the foregoing, no Termination for Cause shall be deemed to have occurred unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board duly called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), stating that in the good faith opinion of the Board the Executive has engaged in conduct described in the preceding sentence and specifying the particulars thereof in detail. 3 2. Term. (a) The term of this Agreement shall be a period of one year commencing on the Commencement Date, subject to extension or earlier termination as provided herein. (b) Except as provided in section 2(c), beginning on the date of this Agreement, the term of this Agreement shall automatically be extended for one additional day each day, unless either the Bank or the Executive elects not to extend the Agreement further by giving written notice thereof to the other party, in which case the term of this Agreement shall end on the one anniversary of the date on which such written notice is given. Upon termination of the Executive's employment with the Bank for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Bank at any time from terminating the Executive's employment during the term of this Agreement with or without notice for any reason; provided, however, that the relative rights and obligations of the Bank and the Executive in the event of any such termination shall be determined under this Agreement. 3. Severance Benefits. (a) In the event that the Bank shall terminate the Executive's employment other than Termination for Cause, or the Executive shall terminate her employment for Good Reason, within 12 months following a Change in Control, the Bank shall (i) pay the Executive her salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given, at the time such payments are due; (ii) continue to pay, for a period of 12 months following the Date of Termination, for the life, health and disability coverage that is in effect with respect to the Executive and her eligible dependents at the time the Notice of Termination is given; and (iii) pay to the Executive in a lump sum in cash, within 25 days after the later of the date of such Change in Control or the Date of Termination, an amount equal to 100% of the Executive's "base amount" as determined under Section 280G of the Code, less the aggregate present value of the payments or benefits, if any, in the nature of compensation for the benefit of the Executive, arising under any other plans or arrangements (i.e., not this Agreement) between the Company or any of the Consolidated Subsidiaries and the Executive, which constitute "parachute payments" under Section 280G of the Code. While it is not contemplated that the Executive will receive any amounts or benefits that will constitute "excess parachute payments" under Section 280G of the Code, in the event that any payments or benefits provided or to be provided to the Executive pursuant to this Agreement, in combination with payments or benefits, if any, from other plans or arrangements maintained by the Company or any of the Consolidated Subsidiaries, constitute "excess parachute payments" under Section 280G of the Code that are subject to the excise tax under Section 4999 of the Code, the Bank shall pay to the Executive in cash an additional amount equal to the amount of the Gross Up Payment (as hereinafter defined). The "Gross Up Payment" shall be the amount needed to ensure that the amount of such payments and the value of such benefits received by the Executive (net of such excise tax and any federal, state and local tax on the Bank's payment to her attributable to such excise tax) equals the amount of such payments and value of such benefits as she would receive in the absence of such excise tax and any federal, state and local tax on the Bank's payment to her 4 attributable to such excise tax. The Bank shall pay the Gross Up Payment within 30 days after the Date of Termination. For purposes of determining the amount of the Gross Up Payment, the value of any non-cash benefits and deferred payments or benefits shall be determined by the Bank's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. In the event that, after the Gross Up Payment is made, the amount of the excise tax is determined to be less than the amount calculated in the determination of the actual Gross Up Payment made by the Bank, the Executive shall repay to the Bank, at the time that such reduction in the amount of excise tax is finally determined, the portion of the Gross Up Payment attributable to such reduction, plus interest on the amount of such repayment at the applicable federal rate under Section 1274 of the Code from the date of the Gross Up Payment to the date of the repayment. The amount of the reduction of the Gross Up Payment shall reflect any subsequent reduction in excise taxes resulting from such repayment. In the event that, after the Gross Up Payment is made, the amount of the excise tax is determined to exceed the amount anticipated at the time the Gross Up Payment was made, the Bank shall pay to the Executive, in immediately available funds, at the time that such additional amount of excise tax is finally determined, an additional payment ("Additional Gross Up Payment") equal to such additional amount of excise tax and any federal, state and local taxes thereon, plus all interest and penalties, if any, owed by the Executive with respect to such additional amount of excise and other tax. The Bank shall have the right to challenge, on the Executive's behalf, any excise tax assessment against her as to which the Executive is entitled to (or would be entitled if such assessment is finally determined to be proper) a Gross Up Payment or Additional Gross Up Payment, provided that all costs and expenses incurred in such a challenge shall be borne by the Bank and the Bank shall indemnify the Executive and hold her harmless, on an after-tax basis, from any excise or other tax (including interest and penalties with respect thereto) imposed as a result of such payment of costs and expenses by the Bank. (b) The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits after the Date of Termination or otherwise. This Agreement shall not be construed as providing the Executive any right to be retained in the employ of the Bank or any affiliate of the Bank. 4. Notice of Termination. In the event that the Bank desires to terminate the employment of the Executive during the term of this Agreement, the Bank shall deliver to the Executive a written notice of termination, stating (i) whether such termination constitutes Termination for Cause, and, if so, setting forth in reasonable detail the facts and circumstances that are the basis for the Termination for Cause, and (ii) specifying the Date of Termination. In the event that the Executive desires to terminate her employment and determines in good faith that she has experienced Good Reason to terminate her employment, she shall send a written notice to the Bank stating the circumstances that constitute Good Reason and the Date of Termination. The Executive's right to terminate her employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Agreement. 5 5. No Assignments. (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation, operation of law or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Executive to compensation and benefits from the Bank in the same amount and on the same terms that she would be entitled to hereunder if she terminated her employment for Good Reason, in addition to any payments and benefits to which the Executive is entitled under Section 3 hereof. For purposes of implementing the provisions of this Section 5(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of the death of the Executive, unless otherwise provided herein, all amounts payable hereunder shall be paid to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 6. Deferred Payments. If following a termination of the Executive, the aggregate payments to be made by the Bank under this Agreement and all other plans or arrangements maintained by the Company or any of the Consolidated Subsidiaries would exceed the limitation on deductible compensation contained in Section 162(m) of the Code in any calendar year, any such amounts in excess of such limitation shall be mandatorily deferred with interest thereon at 7.0% per annum to a calendar year such that the amount to be paid to the Executive in such calendar year, including deferred amounts, does not exceed such limitation. 7. Delivery of Notices. For the purposes of this Agreement, all notices and other communications to any party hereto shall be in writing and shall be deemed to have been duly given when delivered or sent by certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Johanna O. Robbins At the address last appearing on the personnel records of the Executive 6 If to the Bank: Cohoes Savings Bank 75 Remsen Street Cohoes, New York 12047 Attention: Secretary or to such other address as such party may have furnished to the other in writing in accordance herewith, except that a notice of change of address shall be effective only upon receipt. 8. Amendments. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 9. Headings. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 10. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 11. Governing Law. This Agreement shall be governed by the laws of the State of New York to the extent that federal law does not govern. 12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, conducted before a panel of three arbitrators in a location selected by the Executive within 100 miles of such Executive's job location with the Bank, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the Executive shall be entitled to seek specific performance of her rights under Section 1(d) during the pendency of any dispute or controversy arising under or in connection with this Agreement. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 13. Reimbursement of Expenses. In the event any dispute shall arise between the Executive and the Bank as to the terms or interpretation of this Agreement, including this Section 13, whether instituted by formal legal proceedings or otherwise, including any action taken by the Executive to enforce the terms of this Section 13, or in defending against any action taken by the Bank, the Bank shall reimburse the Executive for all costs and expenses incurred by the Executive, including reasonable attorney's fees, arising from such dispute, proceedings or actions, unless a court of competent jurisdiction renders a final and nonappealable judgment against the Executive as to the matter in dispute. Reimbursement of the Executive's expenses shall be paid within ten days of the Executive furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Executive. 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: Cohoes Savings Bank - ------------------------------- --------------------------------------- - ------------------------ By: - ------------------------ Its: EXECUTIVE --------------------------------------- Johanna O. Robbins 8 CHANGE IN CONTROL SEVERANCE AGREEMENT THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (the "Agreement") is made and entered into as of this ___ day of _______, 1998 (the "Commencement Date"), by and between COHOES SAVINGS BANK (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 5(a) hereof or which otherwise becomes bound by all of the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and John G. Sturn (the "Executive"). WHEREAS, the Executive is currently serving as Vice President, Director of Retail Banking; and WHEREAS, the Board of Directors of the Bank (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Bank or of its holding company, Cohoes Bancorp, Inc. (the "Company"), may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Bank, the Company and its stockholders; and WHEREAS, the Board believes it is in the best interests of the Bank to enter into this Agreement with the Executive in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Executive to the Executive's assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Company and/or the Bank, although no such change is now contemplated; and WHEREAS, the Board has approved and authorized the execution of this Agreement with the Executive; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Certain Definitions. (a) The term "Change in Control" means (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any Consolidated Subsidiaries (as hereinafter defined), any person (as hereinabove defined) acting on behalf of the Company as underwriter pursuant to an offering who is temporarily holding securities in connection with such offering, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) individuals who are members of the Board on the Commencement Date (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Commencement Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board or whose nomination for election 1 by the Company's stockholders was approved by the nominating committee serving under an Incumbent Board, shall be considered a member of the Incumbent Board; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (b) The term "Commencement Date" means ________, 1998. (c) The term "Consolidated Subsidiaries" means any subsidiary or subsidiaries of the Company that are part of the affiliated group (as defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), without regard to subsection (b) thereof) that includes the Bank, including but not limited to the Company. (d) The term "Date of Termination" means the date specified in the Notice of Termination (which, in the case of a Termination for Cause shall not be less than 30 days from the date such Notice of Termination is given, and in the case of a termination for Good Reason shall not be less than 15 nor more than 60 days from the date such Notice of Termination is given); provided, however, that if within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, whether by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); and provided, further, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay the Executive the Executive's full salary at the rate in effect when the notice giving rise to the dispute was given and continue the Executive as a participant in all benefit and fringe benefit plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 1(d). (e) The term "Good Reason" means the occurrence, without the Executive's express written consent, of a material diminution of or interference with the Executive's duties, responsibilities or benefits, including (without limitation) any of the following circumstances unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given by the Executive in respect thereof: 2 (i) a requirement that the Executive be based at any location not within 50 miles of Cohoes, New York, or that he substantially increase his travel on Company or Bank business; (ii) a material demotion of the Executive; (iii) a material reduction in the number or seniority of personnel reporting to the Executive or a material reduction in the frequency with which, or in the nature of the matters with respect to which such personnel are to report to the Executive, other than as part of a Company-wide or Bank-wide reduction in staff; (iv) a reduction in the Executive's salary or a material adverse change in the Executive's perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Company or the Bank; (v) a material and extended increase in the required hours of work or the workload of the Executive; (vi) the failure of the Bank to obtain a satisfactory agreement from any successor to assume the obligations and liabilities under this Agreement, as contemplated in Section 5(a) hereof; or (vii) any purported termination of the Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 4 hereof (and, if applicable, the requirements of Section 1(g) hereof), which purported termination shall not be effective for purposes of this Agreement. (f) The term "Notice of Termination" means a notice of termination of the Executive's employment pursuant to Section 7 of this Agreement. (g) The term "Termination for Cause" means termination of the employment of the Employee because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. No act or failure to act by the Executive shall be considered intentional unless the Executive acted or failed to act with an absence of good faith and without a reasonable belief that his action or failure to act was in the best interest of the Bank. Notwithstanding the foregoing, no Termination for Cause shall be deemed to have occurred unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board duly called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), stating that in the good faith opinion of the Board the Executive has engaged in conduct described in the preceding sentence and specifying the particulars thereof in detail. 3 2. Term. (a) The term of this Agreement shall be a period of one year commencing on the Commencement Date, subject to extension or earlier termination as provided herein. (b) Except as provided in section 2(c), beginning on the date of this Agreement, the term of this Agreement shall automatically be extended for one additional day each day, unless either the Bank or the Executive elects not to extend the Agreement further by giving written notice thereof to the other party, in which case the term of this Agreement shall end on the one anniversary of the date on which such written notice is given. Upon termination of the Executive's employment with the Bank for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Bank at any time from terminating the Executive's employment during the term of this Agreement with or without notice for any reason; provided, however, that the relative rights and obligations of the Bank and the Executive in the event of any such termination shall be determined under this Agreement. 3. Severance Benefits. (a) In the event that the Bank shall terminate the Executive's employment other than Termination for Cause, or the Executive shall terminate his employment for Good Reason, within 12 months following a Change in Control, the Bank shall (i) pay the Executive his salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given, at the time such payments are due; (ii) continue to pay, for a period of 12 months following the Date of Termination, for the life, health and disability coverage that is in effect with respect to the Executive and his eligible dependents at the time the Notice of Termination is given; and (iii) pay to the Executive in a lump sum in cash, within 25 days after the later of the date of such Change in Control or the Date of Termination, an amount equal to 100% of the Executive's "base amount" as determined under Section 280G of the Code, less the aggregate present value of the payments or benefits, if any, in the nature of compensation for the benefit of the Executive, arising under any other plans or arrangements (i.e., not this Agreement) between the Company or any of the Consolidated Subsidiaries and the Executive, which constitute "parachute payments" under Section 280G of the Code. While it is not contemplated that the Executive will receive any amounts or benefits that will constitute "excess parachute payments" under Section 280G of the Code, in the event that any payments or benefits provided or to be provided to the Executive pursuant to this Agreement, in combination with payments or benefits, if any, from other plans or arrangements maintained by the Company or any of the Consolidated Subsidiaries, constitute "excess parachute payments" under Section 280G of the Code that are subject to the excise tax under Section 4999 of the Code, the Bank shall pay to the Executive in cash an additional amount equal to the amount of the Gross Up Payment (as hereinafter defined). The "Gross Up Payment" shall be the amount needed to ensure that the amount of such payments and the value of such benefits received by the Executive (net of such excise tax and any federal, state and local tax on the Bank's payment tohim attributable to such excise tax) equals the amount of such payments and value of such benefits as he would receive in the absence of such excise tax and any federal, state and local tax on the Bank's payment tohim 4 attributable to such excise tax. The Bank shall pay the Gross Up Payment within 30 days after the Date of Termination. For purposes of determining the amount of the Gross Up Payment, the value of any non-cash benefits and deferred payments or benefits shall be determined by the Bank's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. In the event that, after the Gross Up Payment is made, the amount of the excise tax is determined to be less than the amount calculated in the determination of the actual Gross Up Payment made by the Bank, the Executive shall repay to the Bank, at the time that such reduction in the amount of excise tax is finally determined, the portion of the Gross Up Payment attributable to such reduction, plus interest on the amount of such repayment at the applicable federal rate under Section 1274 of the Code from the date of the Gross Up Payment to the date of the repayment. The amount of the reduction of the Gross Up Payment shall reflect any subsequent reduction in excise taxes resulting from such repayment. In the event that, after the Gross Up Payment is made, the amount of the excise tax is determined to exceed the amount anticipated at the time the Gross Up Payment was made, the Bank shall pay to the Executive, in immediately available funds, at the time that such additional amount of excise tax is finally determined, an additional payment ("Additional Gross Up Payment") equal to such additional amount of excise tax and any federal, state and local taxes thereon, plus all interest and penalties, if any, owed by the Executive with respect to such additional amount of excise and other tax. The Bank shall have the right to challenge, on the Executive's behalf, any excise tax assessment againsthim as to which the Executive is entitled to (or would be entitled if such assessment is finally determined to be proper) a Gross Up Payment or Additional Gross Up Payment, provided that all costs and expenses incurred in such a challenge shall be borne by the Bank and the Bank shall indemnify the Executive and holdhim harmless, on an after-tax basis, from any excise or other tax (including interest and penalties with respect thereto) imposed as a result of such payment of costs and expenses by the Bank. (b) The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits after the Date of Termination or otherwise. This Agreement shall not be construed as providing the Executive any right to be retained in the employ of the Bank or any affiliate of the Bank. 4. Notice of Termination. In the event that the Bank desires to terminate the employment of the Executive during the term of this Agreement, the Bank shall deliver to the Executive a written notice of termination, stating (i) whether such termination constitutes Termination for Cause, and, if so, setting forth in reasonable detail the facts and circumstances that are the basis for the Termination for Cause, and (ii) specifying the Date of Termination. In the event that the Executive desires to terminate his employment and determines in good faith that he has experienced Good Reason to terminate his employment, he shall send a written notice to the Bank stating the circumstances that constitute Good Reason and the Date of Termination. The Executive's right to terminate his employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Agreement. 5 5. No Assignments. (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation, operation of law or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Executive to compensation and benefits from the Bank in the same amount and on the same terms that he would be entitled to hereunder if he terminated his employment for Good Reason, in addition to any payments and benefits to which the Executive is entitled under Section 3 hereof. For purposes of implementing the provisions of this Section 5(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of the death of the Executive, unless otherwise provided herein, all amounts payable hereunder shall be paid to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 6. Deferred Payments. If following a termination of the Executive, the aggregate payments to be made by the Bank under this Agreement and all other plans or arrangements maintained by the Company or any of the Consolidated Subsidiaries would exceed the limitation on deductible compensation contained in Section 162(m) of the Code in any calendar year, any such amounts in excess of such limitation shall be mandatorily deferred with interest thereon at 7.0% per annum to a calendar year such that the amount to be paid to the Executive in such calendar year, including deferred amounts, does not exceed such limitation. 7. Delivery of Notices. For the purposes of this Agreement, all notices and other communications to any party hereto shall be in writing and shall be deemed to have been duly given when delivered or sent by certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: John G. Sturn At the address last appearing on the personnel records of the Executive 6 If to the Bank: Cohoes Savings Bank 75 Remsen Street Cohoes, New York 12047 Attention: Secretary or to such other address as such party may have furnihed to the other in writing in accordance herewith, except that a notice of change of address shall be effective only upon receipt. 8. Amendments. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 9. Headings. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 10. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 11. Governing Law. This Agreement shall be governed by the laws of the State of New York to the extent that federal law does not govern. 12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, conducted before a panel of three arbitrators in a location selected by the Executive within 100 miles of such Executive's job location with the Bank, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the Executive shall be entitled to seek specific performance of his rights under Section 1(d) during the pendency of any dispute or controversy arising under or in connection with this Agreement. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 13. Reimbursement of Expenses. In the event any dispute shall arise between the Executive and the Bank as to the terms or interpretation of this Agreement, including this Section 13, whether instituted by formal legal proceedings or otherwise, including any action taken by the Executive to enforce the terms of this Section 13, or in defending against any action taken by the Bank, the Bank shall reimburse the Executive for all costs and expenses incurred by the Executive, including reasonable attorney's fees, arising from such dispute, proceedings or actions, unless a court of competent jurisdiction renders a final and nonappealable judgment against the Executive as to the matter in dispute. Reimbursement of the Executive's expenses shall be paid within ten days of the Executive furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Executive. 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: Cohoes Savings Bank - ------------------------------- --------------------------------------- - ------------------------------- By: - ------------------------------- Its: EXECUTIVE --------------------------------------- John G. Sturn 8 CHANGE IN CONTROL SEVERANCE AGREEMENT THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (the "Agreement") is made and entered into as of this ___ day of _______, 1998 (the "Commencement Date"), by and between COHOES SAVINGS BANK (which, together with any successor thereto which executes and delivers the assumption agreement provided for in Section 5(a) hereof or which otherwise becomes bound by all of the terms and provisions of this Agreement by operation of law, is hereinafter referred to as the "Bank"), and Kathleen Kelleher (the "Executive"). WHEREAS, the Executive is currently serving as Operations Officer; and WHEREAS, the Board of Directors of the Bank (the "Board") recognizes that, as is the case with many publicly held corporations, the possibility of a change in control of the Bank or of its holding company, Cohoes Bancorp, Inc. (the "Company"), may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the departure or distraction of management personnel to the detriment of the Bank, the Company and its stockholders; and WHEREAS, the Board believes it is in the best interests of the Bank to enter into this Agreement with the Executive in order to assure continuity of management of the Bank and to reinforce and encourage the continued attention and dedication of the Executive to the Executive's assigned duties without distraction in the face of potentially disruptive circumstances arising from the possibility of a change in control of the Company and/or the Bank, although no such change is now contemplated; and WHEREAS, the Board has approved and authorized the execution of this Agreement with the Executive; NOW, THEREFORE, in consideration of the foregoing and of the respective covenants and agreements of the parties herein, it is AGREED as follows: 1. Certain Definitions. (a) The term "Change in Control" means (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company, any Consolidated Subsidiaries (as hereinafter defined), any person (as hereinabove defined) acting on behalf of the Company as underwriter pursuant to an offering who is temporarily holding securities in connection with such offering, any trustee or other fiduciary holding securities under an employee benefit plan of the Company, or any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company's then outstanding securities; (ii) individuals who are members of the Board on the Commencement Date (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Commencement Date whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board or whose nomination for election by the Company's stockholders was approved by the nominating committee serving under an 1 Incumbent Board, shall be considered a member of the Incumbent Board; (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no person (as hereinabove defined) acquires more than 25% of the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (or any transaction having a similar effect). (b) The term "Commencement Date" means ________, 1998. (c) The term "Consolidated Subsidiaries" means any subsidiary or subsidiaries of the Company that are part of the affiliated group (as defined in Section 1504 of the Internal Revenue Code of 1986, as amended (the "Code"), without regard to subsection (b) thereof) that includes the Bank, including but not limited to the Company. (d) The term "Date of Termination" means the date specified in the Notice of Termination (which, in the case of a Termination for Cause shall not be less than 30 days from the date such Notice of Termination is given, and in the case of a termination for Good Reason shall not be less than 15 nor more than 60 days from the date such Notice of Termination is given); provided, however, that if within 15 days after any Notice of Termination is given, or, if later, prior to the Date of Termination (as determined without regard to this proviso), the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, then the Date of Termination shall be the date on which the dispute is finally determined, whether by mutual written agreement of the parties, by a binding arbitration award, or by a final judgment, order or decree of a court of competent jurisdiction (which is not appealable or with respect to which the time for appeal therefrom has expired and no appeal has been perfected); and provided, further, that the Date of Termination shall be extended by a notice of dispute only if such notice is given in good faith and the party giving such notice pursues the resolution of such dispute with reasonable diligence. Notwithstanding the pendency of any such dispute, the Bank will continue to pay the Executive the Executive's full salary at the rate in effect when the notice giving rise to the dispute was given and continue the Executive as a participant in all benefit and fringe benefit plans in which the Executive was participating when the notice giving rise to the dispute was given, until the dispute is finally resolved in accordance with this Section 1(d). (e) The term "Good Reason" means the occurrence, without the Executive's express written consent, of a material diminution of or interference with the Executive's duties, responsibilities or benefits, including (without limitation) any of the following circumstances unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given by the Executive in respect thereof: 2 (i) a requirement that the Executive be based at any location not within 50 miles of Cohoes, New York, or that she substantially increase her travel on Company or Bank business; (ii) a material demotion of the Executive; (iii) a material reduction in the number or seniority of personnel reporting to the Executive or a material reduction in the frequency with which, or in the nature of the matters with respect to which such personnel are to report to the Executive, other than as part of a Company-wide or Bank-wide reduction in staff; (iv) a reduction in the Executive's salary or a material adverse change in the Executive's perquisites, benefits, contingent benefits or vacation, other than as part of an overall program applied uniformly and with equitable effect to all members of the senior management of the Company or the Bank; (v) a material and extended increase in the required hours of work or the workload of the Executive; (vi) the failure of the Bank to obtain a satisfactory agreement from any successor to assume the obligations and liabilities under this Agreement, as contemplated in Section 5(a) hereof; or (vii) any purported termination of the Executive's employment that is not effected pursuant to a Notice of Termination satisfying the requirements of Section 4 hereof (and, if applicable, the requirements of Section 1(g) hereof), which purported termination shall not be effective for purposes of this Agreement. (f) The term "Notice of Termination" means a notice of termination of the Executive's employment pursuant to Section 7 of this Agreement. (g) The term "Termination for Cause" means termination of the employment of the Employee because of the Employee's personal dishonesty, incompetence, willful misconduct, breach of a fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. No act or failure to act by the Executive shall be considered intentional unless the Executive acted or failed to act with an absence of good faith and without a reasonable belief that her action or failure to act was in the best interest of the Bank. Notwithstanding the foregoing, no Termination for Cause shall be deemed to have occurred unless and until there shall have been delivered to the Executive a copy of a resolution, duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board duly called and held for such purpose (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard before the Board), stating that in the good faith opinion of the Board the Executive has engaged in conduct described in the preceding sentence and specifying the particulars thereof in detail. 3 2. Term. (a) The term of this Agreement shall be a period of one year commencing on the Commencement Date, subject to extension or earlier termination as provided herein. (b) Except as provided in section 2(c), beginning on the date of this Agreement, the term of this Agreement shall automatically be extended for one additional day each day, unless either the Bank or the Executive elects not to extend the Agreement further by giving written notice thereof to the other party, in which case the term of this Agreement shall end on the one anniversary of the date on which such written notice is given. Upon termination of the Executive's employment with the Bank for any reason whatsoever, any daily extensions provided pursuant to this section 2(b), if not theretofore discontinued, shall automatically cease. (c) Nothing in this Agreement shall be deemed to prohibit the Bank at any time from terminating the Executive's employment during the term of this Agreement with or without notice for any reason; provided, however, that the relative rights and obligations of the Bank and the Executive in the event of any such termination shall be determined under this Agreement. 3. Severance Benefits. (a) In the event that the Bank shall terminate the Executive's employment other than Termination for Cause, or the Executive shall terminate her employment for Good Reason, within 12 months following a Change in Control, the Bank shall (i) pay the Executive her salary through the Date of Termination at the rate in effect at the time the Notice of Termination is given, at the time such payments are due; (ii) continue to pay, for a period of 12 months following the Date of Termination, for the life, health and disability coverage that is in effect with respect to the Executive and her eligible dependents at the time the Notice of Termination is given; and (iii) pay to the Executive in a lump sum in cash, within 25 days after the later of the date of such Change in Control or the Date of Termination, an amount equal to 100% of the Executive's "base amount" as determined under Section 280G of the Code, less the aggregate present value of the payments or benefits, if any, in the nature of compensation for the benefit of the Executive, arising under any other plans or arrangements (i.e., not this Agreement) between the Company or any of the Consolidated Subsidiaries and the Executive, which constitute "parachute payments" under Section 280G of the Code. While it is not contemplated that the Executive will receive any amounts or benefits that will constitute "excess parachute payments" under Section 280G of the Code, in the event that any payments or benefits provided or to be provided to the Executive pursuant to this Agreement, in combination with payments or benefits, if any, from other plans or arrangements maintained by the Company or any of the Consolidated Subsidiaries, constitute "excess parachute payments" under Section 280G of the Code that are subject to the excise tax under Section 4999 of the Code, the Bank shall pay to the Executive in cash an additional amount equal to the amount of the Gross Up Payment (as hereinafter defined). The "Gross Up Payment" shall be the amount needed to ensure that the amount of such payments and the value of such benefits received by the Executive (net of such excise tax and any federal, state and local tax on the Bank's payment to her attributable to such excise tax) equals the amount of such payments and value of such benefits as she would receive in the absence of such excise tax and any federal, state and local tax on the Bank's payment to her 4 attributable to such excise tax. The Bank shall pay the Gross Up Payment within 30 days after the Date of Termination. For purposes of determining the amount of the Gross Up Payment, the value of any non-cash benefits and deferred payments or benefits shall be determined by the Bank's independent auditors in accordance with the principles of Section 280G(d)(3) and (4) of the Code. In the event that, after the Gross Up Payment is made, the amount of the excise tax is determined to be less than the amount calculated in the determination of the actual Gross Up Payment made by the Bank, the Executive shall repay to the Bank, at the time that such reduction in the amount of excise tax is finally determined, the portion of the Gross Up Payment attributable to such reduction, plus interest on the amount of such repayment at the applicable federal rate under Section 1274 of the Code from the date of the Gross Up Payment to the date of the repayment. The amount of the reduction of the Gross Up Payment shall reflect any subsequent reduction in excise taxes resulting from such repayment. In the event that, after the Gross Up Payment is made, the amount of the excise tax is determined to exceed the amount anticipated at the time the Gross Up Payment was made, the Bank shall pay to the Executive, in immediately available funds, at the time that such additional amount of excise tax is finally determined, an additional payment ("Additional Gross Up Payment") equal to such additional amount of excise tax and any federal, state and local taxes thereon, plus all interest and penalties, if any, owed by the Executive with respect to such additional amount of excise and other tax. The Bank shall have the right to challenge, on the Executive's behalf, any excise tax assessment against her as to which the Executive is entitled to (or would be entitled if such assessment is finally determined to be proper) a Gross Up Payment or Additional Gross Up Payment, provided that all costs and expenses incurred in such a challenge shall be borne by the Bank and the Bank shall indemnify the Executive and hold her harmless, on an after-tax basis, from any excise or other tax (including interest and penalties with respect thereto) imposed as a result of such payment of costs and expenses by the Bank. (b) The Executive shall not be required to mitigate the amount of any payment or benefit provided for in this Agreement by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Agreement be reduced by any compensation earned by the Executive as the result of employment by another employer, by retirement benefits after the Date of Termination or otherwise. This Agreement shall not be construed as providing the Executive any right to be retained in the employ of the Bank or any affiliate of the Bank. 4. Notice of Termination. In the event that the Bank desires to terminate the employment of the Executive during the term of this Agreement, the Bank shall deliver to the Executive a written notice of termination, stating (i) whether such termination constitutes Termination for Cause, and, if so, setting forth in reasonable detail the facts and circumstances that are the basis for the Termination for Cause, and (ii) specifying the Date of Termination. In the event that the Executive desires to terminate her employment and determines in good faith that she has experienced Good Reason to terminate her employment, she shall send a written notice to the Bank stating the circumstances that constitute Good Reason and the Date of Termination. The Executive's right to terminate her employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. The Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason under this Agreement. 5 5. No Assignments. (a) This Agreement is personal to each of the parties hereto, and neither party may assign or delegate any of its rights or obligations hereunder without first obtaining the written consent of the other party; provided, however, that the Bank shall require any successor or assign (whether direct or indirect, by purchase, merger, consolidation, operation of law or otherwise) to all or substantially all of the business and/or assets of the Bank, by an assumption agreement in form and substance satisfactory to the Executive, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Bank would be required to perform it if no such succession or assignment had taken place. Failure of the Bank to obtain such an assumption agreement prior to the effectiveness of any such succession or assignment shall be a breach of this Agreement and shall entitle the Executive to compensation and benefits from the Bank in the same amount and on the same terms that she would be entitled to hereunder if she terminated her employment for Good Reason, in addition to any payments and benefits to which the Executive is entitled under Section 3 hereof. For purposes of implementing the provisions of this Section 5(a), the date on which any such succession becomes effective shall be deemed the Date of Termination. (b) This Agreement and all rights of the Executive hereunder shall inure to the benefit of and be enforceable by the Executive's personal and legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. In the event of the death of the Executive, unless otherwise provided herein, all amounts payable hereunder shall be paid to the Executive's devisee, legatee, or other designee or, if there be no such designee, to the Executive's estate. 6. Deferred Payments. If following a termination of the Executive, the aggregate payments to be made by the Bank under this Agreement and all other plans or arrangements maintained by the Company or any of the Consolidated Subsidiaries would exceed the limitation on deductible compensation contained in Section 162(m) of the Code in any calendar year, any such amounts in excess of such limitation shall be mandatorily deferred with interest thereon at 7.0% per annum to a calendar year such that the amount to be paid to the Executive in such calendar year, including deferred amounts, does not exceed such limitation. 7. Delivery of Notices. For the purposes of this Agreement, all notices and other communications to any party hereto shall be in writing and shall be deemed to have been duly given when delivered or sent by certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: Kathleen Kelleher At the address last appearing on the personnel records of the Executive 6 If to the Bank: Cohoes Savings Bank 75 Remsen Street Cohoes, New York 12047 Attention: Secretary or to such other address as such party may have furnished to the other in writing in accordance herewith, except that a notice of change of address shall be effective only upon receipt. 8. Amendments. No amendments or additions to this Agreement shall be binding unless in writing and signed by both parties, except as herein otherwise provided. 9. Headings. The headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 10. Severability. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 11. Governing Law. This Agreement shall be governed by the laws of the State of New York to the extent that federal law does not govern. 12. Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by binding arbitration, conducted before a panel of three arbitrators in a location selected by the Executive within 100 miles of such Executive's job location with the Bank, in accordance with the rules of the American Arbitration Association then in effect; provided, however, that the Executive shall be entitled to seek specific performance of her rights under Section 1(d) during the pendency of any dispute or controversy arising under or in connection with this Agreement. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 13. Reimbursement of Expenses. In the event any dispute shall arise between the Executive and the Bank as to the terms or interpretation of this Agreement, including this Section 13, whether instituted by formal legal proceedings or otherwise, including any action taken by the Executive to enforce the terms of this Section 13, or in defending against any action taken by the Bank, the Bank shall reimburse the Executive for all costs and expenses incurred by the Executive, including reasonable attorney's fees, arising from such dispute, proceedings or actions, unless a court of competent jurisdiction renders a final and nonappealable judgment against the Executive as to the matter in dispute. Reimbursement of the Executive's expenses shall be paid within ten days of the Executive furnishing to the Bank written evidence, which may be in the form, among other things, of a canceled check or receipt, of any costs or expenses incurred by the Executive. 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES. Attest: Cohoes Savings Bank - ------------------------------- --------------------------------------- - ------------------------ By: - ------------------------ Its: EXECUTIVE -------------------------------------- Kathleen Kelleher 8 EX-10 14 EXHIBIT 10.4 Exhibit 10.4 Cohoes Savings Bank Employee Severance Compensation Plan COHOES SAVINGS BANK EMPLOYEE SEVERANCE COMPENSATION PLAN PLAN PURPOSE The purpose of Cohoes Savings Bank Employee Severance Compensation Plan (the "Plan") is to assure for Cohoes Savings Bank (the "Bank") the services of the Employees in the event of a Change in Control of Cohoes Bancorp, Inc. (the "Holding Company") or the Bank. The benefits contemplated by the Plan recognize the value to the Bank of the services and contributions of the eligible Employees and the effect upon the Bank resulting from uncertainties relating to continued employment, reduced employee benefits, management changes and employee relations that may arise if a Change in Control occurs or is threatened. The Bank's and the Holding Company's Boards of Directors believe that it is in the best interests of the Bank and the Holding Company to provide eligible Employees with such benefits in order to defray the costs and changes in employee status that could follow a Change in Control. The Boards of Directors believe that the Plan will also aid the Bank in attracting and retaining highly qualified individuals who are essential to its success and that the Plan's assurance of fair treatment of the Bank's employees will reduce the distractions and other adverse effects on Employees' performance if a Change in Control occurs or is threatened. ARTICLE I ESTABLISHMENT OF PLAN 1.1 Establishment of Plan As of the Effective Date, the Bank hereby establishes a severance compensation plan to be known as the "Cohoes Savings Bank Employee Severance Compensation Plan." The purposes of the Plan are as set forth above. 1.2 Applicability of Plan The benefits provided by this Plan shall be available to all Employees, who, at or after the Effective Date, meet the eligibility requirements of Article III. The Plan shall not apply to any Employee whose employment was terminated prior to the Effective Date. 1.3 Contractual Right to Benefits This Plan establishes and vests in each Participant a contractual right to the benefits to which each Participant is entitled hereunder, enforceable by the Participant against the Employer. 1 ARTICLE II DEFINITIONS AND CONSTRUCTION 2.1 Definitions Whenever used in the Plan, the following terms shall have the meanings set forth below. (a) "Annual Compensation" of a Participant means and includes all wages, salary, bonus, and incentive compensation (other than stock based compensation), paid (including accrued amounts) by an Employer as consideration for the Participant's services during the 12 months ended the date as of which Annual Compensation is to be determined, which are or would be includable in the gross income of the Participant receiving the same for federal income tax purposes. (b) "Bank" means Cohoes Savings Bank or any successor as provided for in Article VII hereof. (c) "Change in Control," for purposes of determining under the Plan whether there has been a change in control of the Bank or the Holding Company, means the definition of change in control set forth in 12 C.F.R. ss. 574 et. seq. as interpreted by the Board of Directors of the Bank, as it is constituted prior to the Change in Control. (d) "Continuous Employment" means the absence of any interruption or termination of service as an Employee of the Bank or an affiliate. Service shall not be considered interrupted in the case of sick leave, military leave or any other leave of absence approved by the Bank or in the case of transfers between payroll locations of the Bank or between the Bank, its Parent, its Subsidiary or its successor. (e) "Effective Date," as to Employees of an Employer, means the date the Plan is approved by the Board of Directors of the Bank, or such other date as the Board shall designate in its resolution approving the Plan. (f) "Employee" means an employee employed by the Employer on a full-time basis, excluding any executive officer of the Employer who is covered by an employment contract or a change in control severance agreement with the Employer. (g) "Employer" means the Bank or a Subsidiary or a Parent which has adopted the Plan pursuant to Article VI hereof. (h) "Expiration Date" means the date fifteen (15) years from the Effective Date unless earlier terminated pursuant to Section 8.2 or extended pursuant to Section 8.1. (i) "Holding Company" means Cohoes Bancorp, Inc., the Parent of the Bank. (j) "Just Cause," with respect to termination of employment, means an act or acts of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal 2 profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. In determining incompetence, acts or omissions shall be measured against standards generally prevailing in the savings institution industry. (k) "Parent" means any corporation which holds a majority of the voting power of the outstanding shares of the Bank's common stock. (l) "Participant" means an Employee who meets the eligibility requirements of Article III. (m) "Payment" means the payment of severance compensation as provided in Article IV hereof. (n) "Plan" means the Cohoes Savings Bank Employee Severance Compensation Plan. (o) "Subsidiary" means any corporation in which the Bank, directly or indirectly, holds a majority of the voting power of its outstanding shares of capital stock. 2.2 Applicable Law To the extent not preempted by the laws of the United States as now or hereafter in effect, the laws of the State of New York shall be the controlling law in all matters relating to the Plan. The Plan neither requires nor establishes an ongoing administrative system for its effect or operation. Payments under the Plan are precipitated by a single event, a Change in Control, which event is the sole focus of the Plan. Consequently, it is intended that the Plan shall not be covered by or be subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). 2.3 Severability If a provision of this Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 3 ARTICLE III ELIGIBILITY 3.1 Participation Each Employee who has completed at least one year of Continuous Employment as of the Effective Date and who is selected as a Participant by the Board of Directors of the Bank shall become a Participant on the Effective Date. Thereafter, each Employee shall become a Participant on the later of the day on which (a) he or she completes one year of Continuous Employment or (b) is selected as a Participant by the Board of Directors of the Bank. Notwithstanding the foregoing, persons who have entered into and continue to be covered by an employment or change in control severance agreement with the Employer shall not be entitled to participate in the Plan. 3.2 Duration of Participation A Participant shall cease to be a Participant in the Plan when the Participant ceases to be an Employee of an Employer or is otherwise determined by the Board of Directors of the Bank no longer to be a Participant in the Plan, unless such Participant is entitled to a Payment as provided in the Plan. Furthermore, an Employee shall cease to be a Participant upon entering into an employment or change in control severance agreement with the Employer. A Participant entitled to receipt of a Payment shall remain a Participant in this Plan until the full amount of such Payment has been paid to the Participant. ARTICLE IV PAYMENTS 4.1 Right to Payment A Participant shall be entitled to receive from his respective Employer a Payment in the amount provided in Section 4.3 if there has been a Change in Control of the Bank or the Holding Company and if, within one (1) year thereafter, the Participant's employment by an Employer shall terminate for any reason specified in Section 4.2, whether the termination is voluntary or involuntary. A Participant shall not be entitled to a Payment if termination occurs by reason of death, voluntary retirement, voluntary termination other than for reasons specified in Section 4.2, total and permanent disability, or for Just Cause. 4.2 Reasons for Termination Following a Change in Control, a Participant shall be entitled to a Payment if his employment with an Employer is terminated, voluntarily or involuntarily, within one year following such Change in Control, for any one or more of the following reasons: 4 (a) The Employer reduces the Participant's base salary or rate of compensation as in effect immediately prior to the Change in Control, or as the same may have been increased thereafter. (b) The Employer requires the Participant to change the location of the Participant's job or office, so that such Participant will be based at a location more than fifteen miles from the location of the Participant's job or office immediately prior to the Change in Control, provided that such new location is not closer to Participant's home. (c) The Employer materially reduces the benefits and perquisites, taken as a whole, available to the Participant immediately prior to the Change in Control; provided, however, that a material reduction on a nondiscriminatory basis in the benefits and perquisites generally provided to all employees of the Bank that does not reduce a Participant's Annual Compensation shall not trigger a Payment. (d) A successor bank or company fails or refuses to assume the Bank's obligations under this Plan, as required by Article VII. (e) The Bank or any successor company breaches any other provisions of the Plan. (f) The Employer terminates the employment of a Participant at or after a Change in Control other than for Just Cause. 4.3 Amount of Payment Each Participant entitled to a Payment under the Plan shall receive from the Bank a lump sum cash payment, in an amount determined as follows: (a) The Participant's cash payment shall equal the product of 3.846% of his or her Annual Compensation paid or accrued during each of his or her years of Continuous Employment prior to the Change in Control times the number of full or substantially completed (nine months or more) years of Continuous Employment with the Employer, provided that no Participant shall receive a cash payment hereunder in an aggregate amount of more than fifty percent (50%) of his or her Annual Compensation. (b) Notwithstanding the provisions of (a) above, if a Payment to a Participant who is a "disqualified individual" shall be in an amount which includes an "excess parachute payment," the payment hereunder to that Participant shall be reduced to the maximum amount which does not include an "excess parachute payment." The terms "disqualified individual" and "excess parachute payment" shall have the same meaning as defined in Section 280G of the Internal Revenue Code of 1986, as amended, or any successor section of similar import. The Participant shall not be required to mitigate damages on the amount of the Payment by seeking other employment or otherwise, nor shall the amount of such Payment be reduced by any compensation earned by the Participant as a result of employment after termination of employment with an Employer. 5 4.4 Time of Payment The Payment to which a Participant is entitled shall be paid to the Participant by the Employer or the successor to the Employer, in cash and in full, not later than twenty-five (25) business days after the termination of the Participant's employment. If any Participant should die after termination of employment but before all amounts have been paid, such unpaid amounts shall be paid to the Participant's surviving spouse, or if none, to the Participant's named beneficiary, if living, otherwise to the personal representative on behalf of or for the benefit of the Participant's estate. ARTICLE V OTHER RIGHTS AND BENEFITS NOT AFFECTED 5.1 Other Benefits Neither the provisions of the Plan nor the Payment provided for hereunder shall reduce any amounts otherwise payable, or in any way diminish the Participant's rights as an Employee of an Employer, whether existing now or hereafter, under any benefit, incentive, retirement, stock option, stock bonus, stock ownership or any employment agreement or other plan or arrangement. 5.2 Employment Status This Plan does not constitute a contract of employment or impose on the Participant or the Participant's Employer any obligation to retain the Participant as an Employee, to change the status of the Participant's employment, or to change the Employer's policies regarding termination of employment. ARTICLE VI PARTICIPATING EMPLOYERS Upon approval by the Board of Directors of the Bank, this Plan may be adopted by any Subsidiary or Parent of the Bank. Upon such adoption, the Subsidiary or Parent shall become an Employer hereunder and the provisions of the Plan shall be fully applicable to the Employees of that Subsidiary or Parent. ARTICLE VII SUCCESSOR TO THE BANK The Bank shall require any successor to or assignee of, whether direct or indirect, by purchase, merger, consolidation or otherwise, all or substantially all the business or assets of the Bank, expressly and unconditionally to assume and agree to perform the Bank's obligations under the Plan. 6 ARTICLE VIII DURATION, AMENDMENT AND TERMINATION 8.1 Duration If a Change in Control has not occurred, the Plan shall expire fifteen (15) years from the Effective Date, unless sooner terminated as provided in Section 8.2, or unless extended for an additional period or periods by resolution adopted by the Board of Directors of the Bank. Notwithstanding the foregoing, if a Change in Control occurs, the Plan shall continue in full force and effect, and shall not terminate or expire until such date as all Participants who become entitled to Payments hereunder shall have received such Payments in full. 8.2 Amendment and Termination The Plan may be terminated or amended in any respect by resolution adopted by a majority of the Board of Directors of the Bank, unless (i) a Change in Control has previously occurred, (ii) the Bank shall have in the previous year received an offer, which was not subsequently withdrawn, from a third party to engage in a transaction which would involve a Change in Control or (iii) a third party shall have disclosed in a filing with the Securities and Exchange Commission ("SEC") its intent to engage in a transaction which would result in a Change in Control and has not subsequently indicated in another SEC filing that it no longer had such intention. For so long as any of the events listed in paragraphs (i), (ii) and (iii) persist, the Plan shall not be subject to amendment, change, substitution, deletion, revocation or termination in any respect whatsoever unless any acquiror of the Bank shall agree in writing to provide benefits to covered employees which are at least as substantial as those set forth herein if such employees are terminated without cause within one year of a Change in Control of the Bank. 8.3 Form of Amendment The form of any proper amendment or termination of the Plan shall be a written instrument signed by the duly authorized officer or officers of the Bank, certifying that the amendment or termination has been approved by the Board of Directors. A proper amendment of the Plan automatically shall effect a corresponding amendment to all Participant's rights hereunder, regardless of whether the Participants receive notice of such action. A proper termination of the Plan automatically shall effect a termination of all Participants' rights and benefits hereunder, regardless of whether the Participants receive notice of such action. ARTICLE IX LEGAL FEES AND EXPENSES 9.1 Subject to the notice provision in section 9.2 hereof, the Bank shall pay all legal fees, costs of litigation, and other expenses incurred by each Participant as a result of the Bank's refusal 7 to make the Payment to which the Participant becomes entitled under this Plan, or as a result of the Bank's unsuccessfully contesting the validity, enforceability or interpretation of the Plan. 9.2 A Participant must provide the Bank with 10 (ten) business days notice of a complaint of entitlement under the Plan before the Bank shall be liable for the payment of any legal fees, costs of litigation or other expenses referred to in section 9.1 hereof. ARTICLE X ARBITRATION Any dispute or controversy arising under or in connection with the Plan shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the Participant within fifty (50) miles from the location of the Bank, in accordance with rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. All expenses of such arbitration, including the fees and expenses of the counsel for the Participant, shall be borne by the Bank. Having been adopted by its Board of Directors on _________, 1998, the Plan is executed by its duly authorized officers as of the ___ day of _______, 1998. Attest Cohoes Savings Bank ______________________________ By ______________________________ Richard A. Ahl Harry L. Robinson Secretary President and Chief Executive Officer Having been adopted by its Board of Directors on ________, 1998, the Plan is executed by its duly authorized officers this ____ day of _______, 1998. Attest Cohoes Bancorp, Inc. - ----------------------------- -------------------------------- Richard A. Ahl Harry L. Robinson Secretary President and Chief Executive Officer 8 EX-10 15 EXHIBIT 10.5 Exhibit 10.5 Employee stock Ownership Plan COHOES BANCORP, INC. EMPLOYEE STOCK OWNERSHIP PLAN Effective as of January 1, 1998 COHOES BANCORP, INC. EMPLOYEE STOCK OWNERSHIP PLAN TABLE OF CONTENTS PREAMBLE...................................................................... 1 ARTICLE I DEFINITION OF TERMS AND CONSTRUCTION..................................... 2 1.1 Definitions...................................................... 2 (a) "Account"................................................ 2 (b) "Act".................................................... 2 (c) "Administrator".......................................... 2 (d) "Annual Additions"....................................... 2 (e) "Authorized Leave of Absence"............................ 2 (f) "Beneficiary"............................................ 3 (g) "Board of Directors"..................................... 3 (h) "Break".................................................. 3 (i) "Code"................................................... 3 (j) "Compensation"........................................... 3 (k) "Date of Hire"........................................... 3 (l) "Disability"............................................. 3 (m) "Disability Retirement Date"............................. 3 (n) "Early Retirement Date".................................. 4 (o) "Effective Date"......................................... 4 (p) "Eligibility Period"..................................... 4 (q) "Employee"............................................... 4 (r) "Employee Stock Ownership Account"....................... 4 (s) "Employee Stock Ownership Contribution".................. 4 (t) "Employee Stock Ownership Suspense Account".............. 4 (u) "Employer"............................................... 4 (v) "Employer Securities".................................... 4 (w) "Entry Date"............................................. 5 (x) "Exempt Loan"............................................ 5 (y) "Exempt Loan Suspense Account"........................... 5 (z) "Financed Shares"........................................ 5 (aa) "Former Participant"..................................... 5 (bb) "Fund"................................................... 5 i (cc) "Hour of Service"........................................ 5 (dd) "Investment Adjustments"................................. 6 (ee) "Limitation Year"........................................ 6 (ff) "Normal Retirement Date"................................. 6 (gg) "Participant"............................................ 6 (hh) "Plan"................................................... 6 (ii) "Plan Year".............................................. 6 (jj) "Qualified Domestic Relations Order"..................... 6 (kk) "Related Employer"....................................... 6 (ll) "Retirement"............................................. 7 (mm) "Service"................................................ 7 (nn) "Sponsor"................................................ 7 (oo) "Trust Agreement"........................................ 7 (pp) "Trustee"................................................ 7 (qq) "Valuation Date"......................................... 7 (rr) "Year of Eligibility Service"............................ 7 (ss) "Year of Vesting Service"................................ 7 1.2 Plurals and Gender............................................... 8 1.3 Incorporation of Trust Agreement................................. 8 1.4 Headings......................................................... 8 1.5 Severability..................................................... 8 1.6 References to Governmental Regulations........................... 8 1.7 Notices.......................................................... 8 1.8 Evidence......................................................... 8 1.9 Action by Employer............................................... 9 ARTICLE II PARTICIPATION............................................................10 2.1 Commencement of Participation....................................10 2.2 Termination of Participation.....................................10 2.3 Resumption of Participation......................................10 ii 2.4 Determination of Eligibility.....................................11 2.5 Restricted Participation.........................................11 ARTICLE III CREDITED SERVICE.........................................................12 3.1 Service Counted for Eligibility Purposes.........................12 3.2 Service Counted for Vesting Purposes.............................12 3.3 Credit for Pre-Break Service.....................................12 3.4 Service Credit During Authorized Leaves..........................12 3.5 Service Credit During Maternity or Paternity Leave.................................................13 3.6 Ineligible Employees.............................................13 ARTICLE IV CONTRIBUTIONS............................................................14 4.1 Employee Stock Ownership Contribution............................14 4.2 Time and Manner of Employee Stock Ownership Contribution..........................................14 4.3 Records of Contributions.........................................15 4.4 Erroneous Contributions..........................................15 ARTICLE V ACCOUNTS, ALLOCATIONS AND INVESTMENTS....................................17 5.1 Establishment of Separate Participant Accounts........................................................17 5.2 Establishment of Suspense Accounts...............................18 5.3 Allocation of Earnings, Losses and Expenses....................................................18 5.4 Allocation of Forfeitures........................................18 iii 5.5 Allocation of Employee Stock Ownership Contribution....................................................18 5.6 Limitation on Annual Additions...................................19 5.7 Erroneous Allocations............................................22 5.8 Value of Participant's Account...................................22 5.9 Investment of Account Balances...................................22 ARTICLE VI RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY.........................23 6.1 Normal Retirement................................................23 6.2 Early Retirement.................................................23 6.3 Disability Retirement............................................23 6.4 Death Benefits...................................................23 6.5 Designation of Beneficiary and Manner of Payment...............................................23 ARTICLE VII VESTING AND FORFEITURES..................................................25 7.1 Vesting on Death, Disability and Normal Retirement......................................................25 7.2 Vesting on Termination of Participation..........................25 7.3 Disposition of Forfeitures.......................................25 ARTICLE VIII EMPLOYEE STOCK OWNERSHIP PROVISIONS......................................27 8.1 Right to Demand Employer Securities..............................27 8.2 Voting Rights....................................................27 8.3 Nondiscrimination in Employee Stock Ownership Contribution..........................................27 iv 8.4 Dividends........................................................28 8.5 Exempt Loans.....................................................28 8.6 Exempt Loan Payments.............................................29 8.7 Put Option.......................................................30 8.8 Diversification Requirements.....................................31 8.9 Independent Appraiser............................................32 8.10 Nonterminable Rights.............................................32 ARTICLE IX PAYMENTS AND DISTRIBUTIONS...............................................33 9.1 Payments on Termination of Service - In General..................33 9.2 Commencement of Payments.........................................33 9.3 Mandatory Commencement of Benefits...............................33 9.4 Required Beginning Dates.........................................36 9.5 Form of Payment..................................................36 9.6 Payments Upon Termination of Plan................................36 9.7 Distributions Pursuant to Qualified Domestic Relations Orders.......................................37 9.8 Cash-Out Distributions...........................................37 9.9 ESOP Distribution Rules..........................................37 9.10 Direct Rollover..................................................38 9.11 Waiver of 30-day Notice..........................................39 9.12 Re-employed Veterans.............................................39 9.13 Share Legend.....................................................39 v ARTICLE X PROVISIONS RELATING TO TOP-HEAVY PLANS...................................40 10.1 Top-Heavy Rules to Control.......................................40 10.2 Top-Heavy Plan Definitions.......................................40 10.3 Calculation of Accrued Benefits..................................41 10.4 Determination of Top-Heavy Status................................43 10.5 Determination of Super Top-Heavy Status..........................43 10.6 Minimum Contribution.............................................43 10.7 Vesting..........................................................44 10.8 Maximum Benefit Limitation.......................................45 ARTICLE XI ADMINISTRATION...........................................................46 11.1 Appointment of Administrator.....................................46 11.2 Resignation or Removal of Administrator..........................46 11.3 Appointment of Successors: Terms of Office, Etc.................46 11.4 Powers and Duties of Administrator...............................46 11.5 Action by Administrator..........................................48 11.6 Participation by Administrator...................................48 11.7 Agents...........................................................48 11.8 Allocation of Duties.............................................48 11.9 Delegation of Duties.............................................48 11.10 Administrator's Action Conclusive................................49 vi 11.11 Compensation and Expenses of Administrator.......................49 11.12 Records and Reports..............................................49 11.13 Reports of Fund Open to Participants.............................49 11.14 Named Fiduciary..................................................49 11.15 Information from Employer........................................50 11.16 Reservation of Rights by Employer................................50 11.17 Liability and Indemnification....................................50 11.18 Service as Trustee and Administrator.............................50 ARTICLE XII CLAIMS PROCEDURE.........................................................51 12.1 Notice of Denial.................................................51 12.2 Right to Reconsideration.........................................51 12.3 Review of Documents..............................................51 12.4 Decision by Administrator........................................51 12.5 Notice by Administrator..........................................51 ARTICLE XIII AMENDMENTS, TERMINATION AND MERGER.......................................53 13.1 Amendments.......................................................53 13.2 Effect of Change In Control......................................53 13.3 Consolidation or Merger of Trust.................................55 13.4 Bankruptcy or Insolvency of Employer.............................56 13.5 Voluntary Termination............................................56 13.6 Partial Termination of Plan or Permanent Discontinuance of Contributions.................................57 vii ARTICLE XIV MISCELLANEOUS............................................................58 14.1 No Diversion of Funds............................................58 14.2 Liability Limited................................................58 14.3 Facility of Payment..............................................58 14.4 Spendthrift Clause...............................................58 14.5 Benefits Limited to Fund.........................................59 14.6 Cooperation of Parties...........................................59 14.7 Payments Due Missing Persons.....................................59 14.8 Governing Law....................................................59 14.9 Nonguarantee of Employment.......................................59 14.10 Counsel..........................................................60 viii COHOES BANCORP, INC. EMPLOYEE STOCK OWNERSHIP PLAN PREAMBLE Effective as of January 1, 1998, Cohoes Bancorp, Inc., a Delaware corporation (the "Sponsor"), has adopted the Cohoes Bancorp, Inc. Employee Stock Ownership Plan in order to enable Participants to share in the growth and prosperity of the Sponsor and its wholly owned subsidiary, Cohoes Savings Bank, and to provide Participants with an opportunity to accumulate capital for their future economic security by accumulating funds to provide retirement, death and disability benefits. The Plan is a stock bonus plan designed to meet the applicable requirements of Section 409 of the Code and of an employee stock ownership plan, as defined in Section 4975(e)(7) of the Code and Section 407(d)(6) of the Act. The employee stock ownership plan is intended to invest primarily in "qualifying employer securities" as defined in Section 4975(e)(8) of the Code. The Sponsor intends that the Plan will qualify under Sections 401(a) and 501(a) of the Code and will comply with the provisions of the Act. The Plan has been drafted to comply with all applicable provisions of law, including the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1986, the Omnibus Budget Reconciliation Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, the Revenue Reconciliation Act of 1989, the Omnibus Budget Reconciliation Act of 1993, the Small Business Job Protection Act of 1996, and the Taxpayer Relief Act of 1997. The terms of this Plan shall apply only with respect to Employees of the Employer on and after January 1, 1998. 1 ARTICLE I DEFINITION OF TERMS AND CONSTRUCTION 1.1 Definitions. Unless a different meaning is plainly implied by the context, the following terms as used in this Plan shall have the following meanings: (a) "Account" shall mean a Participant's or Former Participant's entire accrued benefit under the Plan, including the balance credited to his Employee Stock Ownership Account and any other account described in Section 5.1. (b) "Act" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, or any successor statute, together with the applicable regulations promulgated thereunder. (c) "Administrator" shall mean the fiduciary provided for in Article XI. (d) "Annual Additions" shall mean, with respect to each Participant, the sum of those amounts allocated to the Participant's Account under this Plan and accounts under any other qualified defined contribution plan to which the Employer or a Related Employer contributes for any Limitation Year, consisting of the following: (1) Employer contributions; (2) Forfeitures; and (3) Employee contributions (if any). Annual Additions shall not include any Investment Adjustment. Annual Additions also shall not include employer contributions which are used by the Trust to pay interest on an Exempt Loan nor any forfeitures of Employer Securities purchased with the proceeds of an Exempt Loan, provided that not more than one-third of the employer contributions are allocated to Participants who are among the group of employees deemed "highly compensated employees" within the meaning of Code Section 414(q), as further described in Section 8.3. (e) "Authorized Leave of Absence" shall mean an absence from Service with respect to which the Employee may or may not be entitled to Compensation and which meets any one of the following requirements: (1) Service in any of the armed forces of the United States for up to 36 months, provided that the Employee resumes Service within 90 days after discharge, or such longer period of time during which such Employee's employment rights are protected by law; or 2 (2) Any other absence or leave expressly approved and granted by the Employer which does not exceed 24 months, provided that the Employee resumes Service at or before the end of such approved leave period. In approving such leaves of absence, the Employer shall treat all Employees on a uniform and nondiscriminatory basis. (f) "Beneficiary" shall mean such legal or natural persons, who may be designated contingently or successively, as may be designated by the Participant pursuant to Section 6.5 to receive benefits after the death of the Participant, or in the absence of a valid designation, such persons specified in Section 6.5(b) to receive benefits after the death of the Participant. (g) "Board of Directors" shall mean the Board of Directors of the Sponsor. (h) "Break" shall mean a Plan Year during which an Employee fails to complete more than 500 Hours of Service. (i) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, or any successor statute, together with the applicable regulations promulgated thereunder. (j) "Compensation" shall mean the amount of remuneration paid to an Employee by the Employer, after the date on which the Employee becomes a Participant, for services rendered to the Employer during a Plan Year, including base salary, bonuses, overtime and commissions, elective deferrals to a cash or deferred arrangement described in Code Section 401(k), and any amount contributed on a pre-tax salary reduction basis to a cafeteria plan described in Section 125 of the Code, but excluding amounts paid by the Employer or accrued with respect to this Plan or any other qualified or non-qualified unfunded plan of deferred compensation or other employee welfare plan to which the Employer contributes, payments for group insurance, medical benefits, reimbursement for expenses, and other forms of extraordinary pay, and excluding amounts accrued for a prior Plan Year. Notwithstanding anything herein to the contrary, the annual Compensation of each Participant taken into account under the Plan for any purpose during any Plan Year shall not exceed $160,000, as adjusted from time to time in accordance with Section 415(d) of the Code. (k) "Date of Hire" shall mean the date on which an Employee shall perform his first Hour of Service. Notwithstanding the foregoing, in the event that an Employee incurs one or more consecutive Breaks after his initial Date of Hire which results in the forfeiture of his pre-Break Service pursuant to Section 3.3, his "Date of Hire" shall thereafter be the date on which he completes his first Hour of Service after such Break or Breaks. (l) "Disability" shall mean a physical or mental impairment which prevents a Participant from performing the duties assigned to him by the Employer and which either has caused the Social Security Administration to classify the individual as "disabled" for purposes of Social Security or has been determined by a qualified physician selected by the Administrator. (m) "Disability Retirement Date" shall mean the first day of the month after which a Participant incurs a Disability. 3 (n) "Early Retirement Date" shall mean the first day of the month coincident with or next following the later of the date on which a Participant attains age 55 and completes 5 Years of Vesting Service. (o) "Effective Date" shall mean January 1, 1998. (p) "Eligibility Period" shall mean the period of 12 consecutive months commencing on an Employee's Date of Hire. Succeeding Eligibility Periods after the initial Eligibility Period shall be based on Plan Years, the first of which shall include the first anniversary of an Employee's Date of Hire. (q) "Employee" shall mean any person who is classified as an employee by the Employer or a Related Employer, including officers, but excluding directors in their capacity as such. (r) "Employee Stock Ownership Account" shall mean the separate bookkeeping account established for each Participant pursuant to Section 5.1(a). (s) "Employee Stock Ownership Contribution" shall mean the cash, Employer Securities, or both that are contributed to the Plan by the Employer pursuant to Article IV. (t) "Employee Stock Ownership Suspense Account" shall mean the temporary account in which the Trustee may maintain any Employee Stock Ownership Contribution that is made prior to the last day of the Plan Year for which it is made, as described in Section 5.2. (u) "Employer" shall mean Cohoes Bancorp, Inc., a Delaware corporation, and its wholly owned subsidiary, Cohoes Savings Bank, or any successors to the aforesaid corporations by merger, consolidation or otherwise, which may agree to continue this Plan, or any Related Employer or any other business organization which, with the consent of the Sponsor, shall agree to become a party to this Plan. To the extent required by the Code or the Act, references herein to the Employer shall also include all Related Employers, whether or not they are participating in this Plan. (v) "Employer Securities" shall mean the common stock issued by Cohoes Bancorp, Inc., a Delaware corporation. Such term shall also mean, in the discretion of the Board of Directors, any other common stock issued by the Employer or any Related Employer having voting power and dividend rights equal to or in excess of: (1) that class of common stock of the Employer or a Related Employer having the greatest voting power, and (2) that class of common stock of the Employer or a Related Employer having the greatest dividend rights. Non-callable preferred stock shall be treated as Employer Securities if such stock is convertible at any time into stock which meets the requirements of (1) and (2) next above and if such conversion 4 is at a conversion price which (as of the date of the acquisition by the Plan) is reasonable. For purposes of the last preceding sentence, preferred stock shall be treated as non-callable if, after the call, there will be a reasonable opportunity for a conversion which meets the requirements of the last preceding sentence. (w) "Entry Date" shall mean each January 1 and July 1. (x) "Exempt Loan" shall mean a loan described at Section 4975(d)(3) of the Code to the Trustee to purchase Employer Securities for the Plan, made or guaranteed by a disqualified person, as defined at Section 4975(e)(2) of the Code, including, but not limited to, a direct loan of cash, a purchase money transaction, an assumption of an obligation of the Trustee, an unsecured guarantee or the use of assets of such disqualified person as collateral for such a loan. (y) "Exempt Loan Suspense Account" shall mean the account to which Financed Shares are initially credited until they are released in accordance with Section 8.5. (z) "Financed Shares" shall mean the Employer Securities acquired by the Trustee with the proceeds of an Exempt Loan and which are credited to the Exempt Loan Suspense Account until they are released in accordance with Section 8.5. (aa) "Former Participant" shall mean any previous Participant whose participation has terminated but who has a vested Account in the Plan which has not been distributed in full. (bb) "Fund" shall mean the trust fund maintained by the Trustee pursuant to the Trust Agreement in order to provide for the payment of the benefits specified in the Plan. (cc) "Hour of Service" shall mean each hour for which an Employee is directly or indirectly paid or entitled to payment by the Employer or a Related Employer for the performance of duties or for reasons other than the performance of duties (such as vacation time, holidays, sickness, disability, paid lay-offs, jury duty and similar periods of paid nonworking time). To the extent not otherwise included, Hours of Service shall also include each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer or a Related Employer. Hours of working time shall be credited on the basis of actual hours worked, even though compensated at a premium rate for overtime or other reasons. In computing and crediting Hours of Service for an Employee under this Plan, the rules set forth in Sections 2530.200b-2(b) and (c) of the Department of Labor Regulations shall apply, said sections being herein incorporated by reference. Hours of Service shall be credited to the Plan Year or other relevant period during which the services were performed or the nonworking time occurred, regardless of the time when compensation therefor may be paid. Any Employee for whom no hourly employment records are kept by the Employer or a Related Employer shall be credited with 45 Hours of Service for each calendar week in which he would have been credited with a least one Hour or Service under the foregoing provisions, if hourly records were available. Effective January 1, 1985, for absences commencing on or after that date, solely for purposes of determining whether a Break for participation and vesting purposes has occurred in an Eligibility Period or a Plan Year, an individual 5 who is absent from work for maternity or paternity reasons shall receive credit for the Hours of Service which would otherwise have been credited to such individual but for such absence, or in any case in which such hours cannot be determined, 8 Hours of Service per day of such absence. For purposes of this Section 1.1(cc), an absence from work for maternity or paternity reasons means an absence (1) by reason of the pregnancy of the individual, (2) by reason of the birth of a child of the individual, (3) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (4) for purposes of caring for such child for a period beginning immediately following such birth or placement. The Hours of Service credited under this provision shall be credited (1) in the computation period in which the absence begins if the crediting is necessary to prevent a Break in that period, or (2) in all other cases, in the following computation period. (dd) "Investment Adjustments" shall mean the increases and/or decreases in the value of a Participant's Account attributable to earnings, gains, losses and expenses of the Fund, as set forth in Section 5.3. (ee) "Limitation Year" shall mean the Plan Year. (ff) "Normal Retirement Date" shall mean the first day of the month coincident with or next following the later of the date on which a Participant attains age 65 or the fifth anniversary of the date he commenced participation in the Plan. (gg) "Participant" shall mean an Employee who has met all of the eligibility requirements of the Plan and who is currently included in the Plan as provided in Article II hereof; provided, however, that the term "Participant" shall not include (1) leased Employees, (2) any Employee who is regularly employed outside the Employer's own offices in connection with the operation and maintenance of buildings or other properties acquired through foreclosure or deed, (3) any individual who is employed by a Related Employer that has not adopted the Plan in accordance with Section 1.1(u) hereof, (4) any Employee who is a non-resident alien individual and who has no earned income from sources within the United States, or (5) any Employee who is included in a unit of Employees covered by a collective-bargaining agreement with the Employer or a Related Employer that does not expressly provide for participation of such Employees in the Plan, where there has been good-faith bargaining between the Employer or a Related Employer and Employees' representatives on the subject of retirement benefits. To the extent required by the Code or the Act, or appropriate based on the context, references herein to Participant shall include Former Participant. (hh) "Plan" shall mean the Cohoes Bancorp, Inc. Employee Stock Ownership Plan, as described herein or as hereafter amended from time to time. (ii) "Plan Year" shall mean any 12 consecutive month period commencing on each January 1 and ending on the next following December 31. (jj) "Qualified Domestic Relations Order" shall mean any judgment, decree or order that satisfies the requirements to be a "qualified domestic relations order," as defined in Section 414(p) of the Code. 6 (kk) "Related Employer" shall mean any entity that is: (1) a member of a controlled group of corporations that includes the Employer, while it is a member of such controlled group (within the meaning of Section 414(b) of the Code); (2) a member of a group of trades or businesses under common control with the Employer, while it is under common control (within the meaning of Section 414(c) of the Code); (3) a member of an affiliated service group that includes the Employer, while it is a member of such affiliated service group (within the meaning of Section 414(m) of the Code); or (4) a leasing or other organization that is required to be aggregated with the Employer pursuant to the provisions of Section 414(n) or 414(o) of the Code. (ll) "Retirement" shall mean termination of employment which qualifies as early, normal or Disability retirement as described in Article VI. (mm) "Service" shall mean, for purposes of eligibility to participate and vesting, employment with the Employer or any Related Employer, and for purposes of allocation of the Employee Stock Ownership Contribution and forfeitures, employment with the Employer. (nn) "Sponsor" shall mean Cohoes Bancorp, Inc., a Delaware corporation. (oo) "Trust Agreement" shall mean the agreement, dated ________, 1998, by and between Cohoes Bancorp, Inc., a Delaware corporation, and First Bankers Trust Company, N.A., of Quincy, Illinois. (pp) "Trustee" shall mean the trustee or trustees by whom the assets of the Plan are held, as provided in the Trust Agreement, or his or their successors. (qq) "Valuation Date" shall mean the last day of each Plan Year. The Trustee may make additional valuations, at the direction of the Administrator, but in no event may the Administrator request additional valuations by the Trustee more frequently than quarterly. Whenever such date falls on a Saturday, Sunday or holiday, the preceding business day shall be the Valuation Date. (rr) "Year of Eligibility Service" shall mean an Eligibility Period during which an Employee is credited with at least 1 Hour of Service, except as otherwise specified in Article III. (ss) "Year of Vesting Service" shall mean a Plan Year during which an Employee is credited with at least 1,000 Hours of Service, except as otherwise specified in Article III. 7 1.2 Plurals and Gender. Where appearing in the Plan and the Trust Agreement, the masculine gender shall include the feminine and neuter genders, and the singular shall include the plural, and vice versa, unless the context clearly indicates a different meaning. 1.3 Incorporation of Trust Agreement. The Trust Agreement, as the same may be amended from time to time, is intended to be and hereby is incorporated by reference into this Plan. All contributions made under the Plan will be held, managed and controlled by the Trustee pursuant to the terms and conditions of the Trust Agreement. 1.4 Headings. The headings and sub-headings in this Plan are inserted for the convenience of reference only and are to be ignored in any construction of the provisions hereof. 1.5 Severability. In case any provision of this Plan shall be held illegal or void, such illegality or invalidity shall not affect the remaining provisions of this Plan, but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provisions had never been inserted herein. 1.6 References to Governmental Regulations. References in this Plan to regulations issued by the Internal Revenue Service, the Department of Labor, or other governmental agencies shall include all regulations, rulings, procedures, releases and other position statements issued by any such agency. 1.7 Notices. Any notice or document required to be filed with the Administrator or Trustee under the Plan will be properly filed if delivered or mailed by registered mail, postage prepaid, to the Administrator in care of the Sponsor or to the Trustee, each at its principal business offices. Any notice required under the Plan may be waived in writing by the person entitled to notice. 1.8 Evidence. Evidence required of anyone under the Plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. 8 1.9 Action by Employer. Any action required or permitted to be taken by any entity constituting the Employer under the Plan shall be by resolution of its Board of Directors or by a person or persons authorized by its Board of Directors. 9 ARTICLE II PARTICIPATION 2.1 Commencement of Participation. (a) Any Employee who is otherwise eligible to become a Participant in accordance with Section 1.1(gg) hereof shall initially become a Participant on the Entry Date coincident with or next following the later of the following dates, provided he is employed by the Employer on that Entry Date: (1) The date on which he completes a Year of Eligibility Service; and (2) The date on which he attains age 21. (b) Any Employee who had satisfied the requirements set forth in Section 2.1(a) during the 12 consecutive month period prior to the Effective Date shall become a Participant on the Effective Date, provided he is still employed by the Employer on the Effective Date. 2.2 Termination of Participation. After commencement or resumption of his participation, an Employee shall remain a Participant during each consecutive Plan Year thereafter until the earliest of the following dates: (a) His actual Retirement date; (b) His date of death; or (c) The last day of a Plan Year during which he incurs a Break. 2.3 Resumption of Participation. (a) Any Participant whose employment terminates and who resumes Service before he incurs a Break shall resume participation immediately on the date he is reemployed. (b) Except as otherwise provided in Section 2.3(c), any Participant who incurs one or more Breaks and resumes Service shall resume participation retroactively as of the first day of the first Plan Year in which he completes a Year of Eligibility Service after such Break(s). (c) Any Participant who incurs one or more Breaks and resumes Service, but whose pre-Break Service is not reinstated to his credit pursuant to Section 3.3, shall be treated as a new Employee and shall again be required to satisfy the eligibility requirements contained in Section 2.1(a) before resuming participation on the appropriate Entry Date, as specified in Section 2.1(a). 10 2.4 Determination of Eligibility. The Administrator shall determine the eligibility of Employees in accordance with the provisions of this Article. For each Plan Year, the Employer shall furnish the Administrator a list of all Employees, indicating their Date of Hire, their Hours of Service during their Eligibility Period, their date of birth, the original date of their reemployment with the Employer, if any, and any Breaks they may have incurred. 2.5 Restricted Participation Subject to the terms and conditions of the Plan, during the period between the Participant's date of termination of participation in the Plan (as described in Section 2.2) and the distribution of his entire Account (as described in Article IX), and during any period that a Participant does not meet the requirements of Section 2.1(a) or is employed by a Related Employer that is not participating in the Plan, the Participant or, in the event of the Participant's death, the Beneficiary of the Participant, will be considered and treated as a Participant for all purposes of the Plan, except as follows: (a) the Participant will not share in the Employee Stock Ownership Contribution and forfeitures (as described in Sections 7.2 and 7.3), except as provided in Sections 5.4 and 5.5; and (b) the Beneficiary of a deceased Participant cannot designate a Beneficiary under Section 6.5. 11 ARTICLE III CREDITED SERVICE 3.1 Service Counted for Eligibility Purposes. Except as provided in Section 3.3, all Years of Eligibility Service completed by an Employee shall be counted in determining his eligibility to become a Participant on and after the Effective Date, whether such Service was completed before or after the Effective Date. 3.2 Service Counted for Vesting Purposes. All Years of Vesting Service completed by an Employee (including Years of Vesting Service completed prior to the Effective Date) shall be counted in determining his vested interest in this Plan, except the following: (a) Service which is disregarded under the provisions of Section 3.3; (b) Service prior to the Effective Date of this Plan if such Service would have been disregarded under the "break in service" rules (within the meaning of Section 1.411(a)-5(b)(6) of the Treasury Regulations). 3.3 Credit for Pre-Break Service. Upon his resumption of participation following one or a series of consecutive Breaks, an Employee's pre-Break Service shall be reinstated to his credit for eligibility and vesting purposes only if either: (a) He was vested in any portion of his accrued benefit at the time the Break(s) began; or (b) The number of his consecutive Breaks does not equal or exceed the greater of 5 or the number of his Years of Eligibility Service or Years of Vesting Service, as the case may be, credited to him before the Breaks began. Except as provided in the foregoing, none of an Employee's Service prior to one or a series of consecutive Breaks shall be counted for any purpose in connection with his participation in this Plan thereafter. 3.4 Service Credit During Authorized Leaves. An Employee shall receive no Service credit under Section 3.1 or 3.2 during any Authorized Leave of Absence. However, solely for the purpose of determining whether he has incurred a Break during any Plan Year in which he is absent from Service for one or more 12 Authorized Leaves of Absence, he shall be credited with 45 Hours of Service for each week during any such leave period. Notwithstanding the foregoing, if an Employee fails to return to Service on or before the end of a leave period, he shall be deemed to have terminated Service as of the first day of such leave period and his credit for Hours of Service, determined under this Section 3.4, shall be revoked. Notwithstanding anything contained herein to the contrary, an Employee who is absent by reason of military service as set forth in Section 1.1(e)(1) shall be given Service credit under this Plan for such military leave period to the extent, and for all purposes, required by law. 3.5 Service Credit During Maternity or Paternity Leave. Effective for absences beginning on or after January 1, 1985, for purposes of determining whether a Break has occurred for participation and vesting purposes, an individual who is on maternity or paternity leave as described in Section 1.1(cc), shall be deemed to have completed Hours of Service during such period of absence, all in accordance with Section 1.1(cc). Notwithstanding the foregoing, no credit shall be given for such Hours of Service unless the individual furnishes to the Administrator such timely information as the Administrator may reasonably require to determine: (a) that the absence from Service was attributable to one of the maternity or paternity reasons enumerated in Section 1.1(cc); and (b) the number of days of such absence. In no event, however, shall any credit be given for such leave other than for determining whether a Break has occurred. 3.6 Ineligible Employees. Notwithstanding any provisions of this Plan to the contrary, any Employee who is ineligible to participate in this Plan either because of his failure (a) To meet the eligibility requirements contained in Article II; or (b) To be a Participant, as defined in Section 1.1(gg), shall, nevertheless, earn Years of Eligibility Service and Years of Vesting Service pursuant to the rules contained in this Article III. However, such Employee shall not be entitled to an allocation of any contributions or forfeitures hereunder unless and until he becomes a Participant in this Plan, and then, only during his period of participation. 13 ARTICLE IV CONTRIBUTIONS 4.1 Employee Stock Ownership Contribution. (a) Subject to all of the provisions of this Article IV, for each Plan Year commencing on or after the Effective Date, the Employer shall make an Employee Stock Ownership Contribution to the Fund in such amount as may be determined by resolution of the Board of Directors in its discretion; provided, however, that the Employer shall contribute an amount in cash not less than the amount required to enable the Trustee to discharge any indebtedness incurred with respect to an Exempt Loan in accordance with Section 8.6(c). If any part of the Employee Stock Ownership Contribution under this Section 4.1 for any Plan Year is in cash in an amount exceeding the amount needed to pay the amount due during or prior to such Plan Year with respect to an Exempt Loan, such cash shall be applied by the Trustee, as directed by the Administrator in its sole discretion, either to the purchase of Employer Securities or to repay an Exempt Loan. Contributions hereunder shall be in the form of cash, Employer Securities or any combination thereof. In determining the value of Employer Securities transferred to the Fund as an Employee Stock Ownership Contribution, the Administrator may determine the average of closing prices of such securities for a period of up to 90 consecutive days immediately preceding the date on which the securities are contributed to the Fund. In the event that the Employer Securities are not readily tradable on an established securities market, the value of the Employer Securities transferred to the Fund shall be determined by an independent appraiser in accordance with Section 8.9. (b) In no event shall the Employee Stock Ownership Contribution exceed for any Plan Year the maximum amount that may be deducted by the Employer under Section 404 of the Code, nor shall such contribution cause the Employer to violate its regulatory capital requirements. Each Employee Stock Ownership Contribution by the Employer shall be deemed to be made on the express condition that the Plan, as then in effect, shall be qualified under Sections 401(a) and 501(a) of the Code and that the amount of such contribution shall be deductible from the Employer's income under Section 404 of the Code. 4.2 Time and Manner of Employee Stock Ownership Contribution. (a) The Employee Stock Ownership Contribution (if any) for each Plan Year shall be paid to the Trustee in one lump sum or installments at any time on or before the expiration of the time prescribed by law (including any extensions) for filing of the Employer's federal income tax return for its fiscal year ending concurrent with or during such Plan Year. Any portion of the Employee Stock Ownership Contribution for each Plan Year that may be made prior to the last day of the Plan Year shall, if there is an Exempt Loan outstanding at such time, at the election of the Administrator, either (i) be applied immediately to make payments on such Exempt Loan or (ii) be maintained by the Trustee in the Employee Stock Ownership Suspense Account described in Section 5.2 until the last day of such Plan Year. 14 (b) If an Employee Stock Ownership Contribution for a Plan Year is paid after the close of the Employer's fiscal year which ends concurrent with or during such Plan Year but on or prior to the due date (including any extensions) for filing of the Employer's federal income tax return for such fiscal year, it shall be considered, for allocation purposes, as an Employee Stock Ownership Contribution to the Fund for the Plan Year for which it was computed and accrued, unless such contribution is accompanied by a statement to the Trustee, signed by the Employer, which specifies that the Employee Stock Ownership Contribution is made with respect to the Plan Year in which it is received by the Trustee. Any Employee Stock Ownership Contribution paid by the Employer during any Plan Year but after the due date (including any extensions) for filing of its federal income tax return for the fiscal year of the Employer ending on or before the last day of the preceding Plan Year shall be treated, for allocation purposes, as an Employee Stock Ownership Contribution to the Fund for the Plan Year in which the contribution is paid to the Trustee. (c) Notwithstanding anything contained herein to the contrary, no Employee Stock Ownership Contribution shall be made for any Plan Year during which a limitations account created pursuant to Section 5.6(c)(3) is in existence until the balance of such limitations account has been reallocated in accordance with Section 5.6(c)(3). 4.3 Records of Contributions. The Employer shall deliver at least annually to the Trustee, with respect to the Employee Stock Ownership Contribution contemplated in Section 4.1, a certificate of the Administrator, in such form as the Trustee shall approve, setting forth: (a) The aggregate amount of such contribution, if any, to the Fund for such Plan Year; (b) The names, Internal Revenue Service identifying numbers and current residential addresses of all Participants in the Plan; (c) The amount and category of contributions to be allocated to each such Participant; and (d) Any other information reasonably required for the proper operation of the Plan. 4.4 Erroneous Contributions. (a) Notwithstanding anything herein to the contrary, upon the Employer's request, a contribution which was made by a mistake of fact, or conditioned upon the initial qualification of the Plan, under Code Section 401(a), or upon the deductibility of the contribution under Section 404 of the Code, shall be returned to the Employer by the Trustee within one year after the payment of the contribution, the denial of the qualification or the disallowance of the deduction (to the extent disallowed), whichever is applicable; provided, however, that in the case of denial of the initial qualification of the Plan, a contribution shall not be returned unless an Application for Determination has been timely filed with the Internal Revenue Service. Any portion of a contribution returned pursuant to this Section 4.4 shall be adjusted to reflect its proportionate share of the losses of the Fund, but shall not be adjusted to reflect any earnings or gains. Notwithstanding any provisions of 15 this Plan to the contrary, the right or claim of any Participant or Beneficiary to any asset of the Fund or any benefit under this Plan shall be subject to and limited by this Section 4.4. (b) In no event shall Employee contributions be accepted. Any such Employee contributions (and any earnings attributable thereto) mistakenly received by the Trustee shall promptly be returned to the Participant. 16 ARTICLE V ACCOUNTS, ALLOCATIONS AND INVESTMENTS 5.1 Establishment of Separate Participant Accounts. The Administrator shall establish and maintain a separate Account for each Participant in the Plan and for each Former Participant in accordance with the provisions of this Article V. Such separate Account shall be for bookkeeping purposes only and shall not require a segregation of the Fund, and no Participant, Former Participant or Beneficiary shall acquire any right to or interest in any specific assets of the Fund as a result of the allocations provided for under this Plan. (a) Employee Stock Ownership Accounts. The Administrator shall establish a separate Employee Stock Ownership Account in the Fund for each Participant. The Administrator may establish subaccounts hereunder, an Employer Stock Account reflecting a Participant's interest in Employer Securities held by the Trust, and an Other Investments Account reflecting the Participant's interest in his Employee Stock Ownership Account other than Employer Securities. Each Participant's Employer Stock Account shall reflect his share of any Employee Stock Ownership Contribution made in Employer Securities, his allocable share of forfeitures (as described in Section 5.4), and any Employer Securities attributable to earnings on such stock. Each Participant's Other Investments Account shall reflect any Employee Stock Ownership Contribution made in cash, any cash dividends on Employer Securities allocated and credited to his Employee Stock Ownership Account (other than currently distributable dividends) and his share of corresponding cash forfeitures, and any income, gains, losses, appreciation, or depreciation attributable thereto. (b) Distribution Accounts. In any case where distribution of a terminated Participant's vested Account is to be deferred, the Administrator shall establish a separate, nonforfeitable account in the Fund to which the balance in his Employee Stock Ownership Account in the Plan shall be transferred after such Participant incurs a Break. Unless the Former Participant's distribution accounts are segregated for investment purposes pursuant to Article IX, they shall share in Investment Adjustments. (c) Other Accounts. The Administrator shall establish such other separate accounts for each Participant as may be necessary or desirable for the convenient administration of the Fund. 17 5.2 Establishment of Suspense Accounts. The Administrator shall establish a separate Employee Stock Ownership Suspense Account. There shall be credited to such account any Employee Stock Ownership Contribution that may be made prior to the last day of the Plan Year and that are allocable to the Employee Stock Ownership Suspense Account pursuant to Section 4.2(a). The Employee Stock Ownership Suspense Account shall share proportionately as to time and amount in any Investment Adjustments. As of the last day of each Plan Year, the balance of the Employee Stock Ownership Suspense Account shall be added to the Employee Stock Ownership Contribution and allocated to the Employee Stock Ownership Accounts of Participants as provided in Section 5.5, except as provided herein. In the event that the Plan takes an Exempt Loan, the Employer Securities purchased thereby shall be allocated as Financed Shares to a separate Exempt Loan Suspense Account, from which Employer Securities shall be released in accordance with Section 8.5 and shall be allocated in accordance with Section 8.6(b). 5.3 Allocation of Earnings, Losses and Expenses. As of each Valuation Date, any increase or decrease in the net worth of the aggregate Employee Stock Ownership Accounts held in the Fund attributable to earnings, losses, expenses and unrealized appreciation or depreciation in each such aggregate account, as determined by the Trustee pursuant to the Trust Agreement, shall be credited to or deducted from the appropriate suspense accounts and all Participants' Employee Stock Ownership Accounts (except segregated distribution accounts described in Section 5.1(b) and the "limitations account" described in Section 5.6(c)(3)) in the proportion that the value of each such account (determined immediately prior to such allocation and before crediting any Employee Stock Ownership Contribution and forfeitures for the current Plan Year but after adjustment for any transfer to or from such accounts and for the time such funds were in such accounts) bears to the value of all Employee Stock Ownership Accounts. 5.4 Allocation of Forfeitures. As of the last day of each Plan Year, all forfeitures attributable to the Employee Stock Ownership Accounts which are then available for reallocation shall be, as appropriate, added to the Employee Stock Ownership Contribution (if any) for such year and allocated among the Participants' Employee Stock Ownership Accounts, as appropriate, in the manner provided in Sections 5.5 and 5.6. 5.5 Allocation of Employee Stock Ownership Contribution. As of the last day of each Plan Year for which the Employer shall make an Employee Stock Ownership Contribution, the Administrator shall allocate the Employee Stock Ownership Contribution (including reallocable forfeitures) for such Plan Year to the Employee Stock Ownership Account of each Participant who completed at least 1 Hour of Service during that Plan Year, provided that he is still employed by the Employer on the last day of the Plan Year. Such allocation shall be made in the same proportion that each such Participant's Compensation for such Plan Year 18 bears to the total Compensation of all such Participants for such Plan Year, subject to Section 5.6. Notwithstanding the foregoing, if a Participant attains his Normal Retirement Date and terminates Service prior to the last day of the Plan Year but after completing at least 1 Hour of Service, he shall be entitled to an allocation based on his Compensation earned prior to his termination and during the Plan Year. Furthermore, if a Participant completes at least 1 Hour of Service and is on a Leave of Absence on the last day of the Plan Year because of pregnancy or other medical reason, such a Participant shall be entitled to an allocation based on his Compensation earned during such Plan Year. 5.6 Limitation on Annual Additions. (a) Notwithstanding any provisions of this Plan to the contrary, the total Annual Additions credited to a Participant's Account under this Plan (and accounts under any other defined contribution plan maintained by the Employer or a Related Employer) for any Limitation Year shall not exceed the lesser of: (1) 25% of the Participant's compensation (as defined below) for such Limitation Year; or (2) $30,000 (or, if greater, one-fourth of the defined benefit dollar limitation set forth in Section 415(b)(1)(A) of the Code). Whenever otherwise allowed by law, the maximum amount of $30,000 shall be automatically adjusted annually for cost-of-living increases in accordance with Section 415(d) of the Code, and the highest such increase effective at any time during the Limitation Year shall be effective for the entire Limitation Year, without any amendment to this Plan. (b) Solely for the purpose of this Section 5.6, the term "compensation" is defined as wages, salaries, and fees for professional services, pre-tax elective deferrals and salary reduction contributions under a plan described in Section 401(k) or 125 of the Code, and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer or a Related Employer, to the extent that the amounts are includable in gross income (including, but not limited to, commissions paid to salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other expense allowances under a nonaccountable plan (as described in Treas. Regs. Section 1.62-2(c)), and excluding the following: (1) Employer contributions by the Employer or a Related Employer to a plan of deferred compensation (other than elective deferrals under a plan described in Section 401(k) of the Code) which are not includable in the Employee's gross income for the taxable year in which contributed, or employer contributions by the Employer or a Related Employer under a simplified employee pension plan to the extent such contributions are deductible by the Employee, or any distributions from a plan of deferred compensation; 19 (2) Amounts realized from the exercise of a non-qualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (3) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (4) Other amounts which received special tax benefits (other than pre-tax salary reduction contributions under a plan described in Section 125 of the Code), or contributions made by the employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in section 403(b) of the Code (whether or not the contributions are actually excludable from the gross income of the Employee). (c) In the event that the limitations on Annual Additions described in Section 5.6(a) above are exceeded with respect to any Participant in any Limitation Year, then the contributions allocable to the Participant for such Limitation Year shall be reduced to the minimum extent required by such limitations, in the following order of priority: (1) The Administrator shall determine to what extent the Annual Additions to any Participant's Employee Stock Ownership Account must be reduced in each Limitation Year. The Administrator shall reduce the Annual Additions to all other qualified, tax-exempt retirement plans maintained by the Employer or a Related Employer in accordance with the terms contained therein for required reductions or reallocations mandated by Section 415 of the Code before reducing any Annual Additions in this Plan. (2) If any further reductions in Annual Additions are necessary, then the Employee Stock Ownership Contribution and forfeitures allocated during such Limitation Year to the Participant's Employee Stock Ownership Account shall be reduced. The amount of any such reductions in the Employee Stock Ownership Contribution and forfeitures shall be reallocated to all other Participants in the same manner as set forth under Sections 5.4 and 5.5. (3) Any amounts which cannot be reallocated to other Participants in a current Limitation Year in accordance with Section 5.6(c)(2) above because of the limitations contained in Sections 5.6(a) and (d) shall be credited to an account designated as the "limitations account" and carried forward to the next and subsequent Limitation Years until it can be reallocated to all Participants as set forth in Sections 5.4 and 5.5, as appropriate. No Investment Adjustments shall be allocated to this limitations account. In the next and subsequent Limitation Years, all amounts in the limitations account must be allocated in the manner described in Sections 5.4 and 5.5, as appropriate, before any Employee Stock Ownership Contribution may be made to this Plan for that Limitation Year. 20 (4) In the event this Plan is voluntarily terminated by the Employer under Section 13.5, any amounts credited to the limitations account described in Section 5.6(c)(3) above which have not be reallocated as set forth herein shall be distributed to the Participants who are still employed by the Employer on the date of termination, in the proportion that each Participant's Compensation bears to the Compensation of all Participants. (d) The Annual Additions credited to a Participant's Account for each Limitation Year are further limited so that in the case of an Employee who is a Participant in both this Plan and any qualified defined benefit plan (hereinafter referred to as a "pension plan") of the Employer or Related Employer, the sum of (1) and (2) below will not exceed 1.0: (1) (A) The projected annual normal retirement benefit of a Participant under the pension plan, divided by (B) The lesser of: (i) The product of 1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such Limitation Year, or (ii) The product of 1.4 multiplied by the amount of compensation which may be taken into account under Section 415(b)(1)(B) of the Code for the Participant for such Limitation Year; plus (2) (A) The sum of Annual Additions credited to the Participant under this Plan for all Limitation Years, divided by: (B) The sum of the lesser of the following amounts determined for such Limitation Year and for each prior year of service with the Employer or a Related Employer: (i) The product of 1.25 multiplied by the dollar limitation in effect under Section 415(b)(1)(A) of the Code for such Limitation Year, or (ii) The product of 1.4 multiplied by the amount of compensation which may be taken into account under Section 415(b)(1)(B) of the Code for the Participant for such Limitation Year. The Administrator may, in calculating the defined contribution plan fraction described in Section 5.6(d)(2), elect to use the transitional rule pursuant to Section 415(e)(7) of the Code, if applicable. If the sum of the fractions produced above will exceed 1.0, even after the use of the "fresh start" rule contained in Section 235 of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), if applicable, then the same provisions as stated in Section 5.6(c) above shall apply. If, even after the reductions provided for in Section 5.6(c), the sum of the fractions still exceeds 1.0, 21 then the benefits of the Participant provided under the pension plan shall be reduced to the extent necessary, in accordance with Treasury Regulations issued under the Code. Solely for the purposes of this Section 5.6(d), the term "years of service" shall mean all years of service defined by Treasury Regulations issued under Section 415 of the Code. Notwithstanding the foregoing, the provisions of this Section 5.6(d) shall expire with respect to all Limitation Years beginning after December 31, 1999. 5.7 Erroneous Allocations. No Participant shall be entitled to any Annual Additions or other allocations to his Account in excess of those permitted under Sections 5.3, 5.4, 5.5, and 5.6. If it is determined at any time that the Administrator and/or Trustee have erred in accepting and allocating any contributions or forfeitures under this Plan, or in allocating Investment Adjustments, or in excluding or including any person as a Participant, then the Administrator, in a uniform and nondiscriminatory manner, shall determine the manner in which such error shall be corrected and shall promptly advise the Trustee in writing of such error and of the method for correcting such error. The accounts of any or all Participants may be revised, if necessary, in order to correct such error. To the extent applicable, such correction shall be made in accordance with the provisions of IRS Revenue Procedure 98-22 (or any amendment or successor thereto). 5.8 Value of Participant's Account. At any time, the value of a Participant's Account shall consist of the aggregate value of his Employee Stock Ownership Account and his distribution account, if any, determined as of the next-preceding Valuation Date. The Administrator shall maintain adequate records of the cost basis of Employer Securities allocated to each Participant's Employee Stock Ownership Account. 5.9 Investment of Account Balances. The Employee Stock Ownership Accounts shall be invested primarily in Employer Securities. All sales of Employer Securities by the Trustee attributable to the Employee Stock Ownership Accounts of all Participants shall be charged pro rata to the Employee Stock Ownership Accounts of all Participants. 22 ARTICLE VI RETIREMENT, DEATH AND DESIGNATION OF BENEFICIARY 6.1 Normal Retirement. A Participant who reaches his Normal Retirement Date and who shall retire at that time shall thereupon be entitled to retirement benefits based on the value of his Account, payable pursuant to the provisions of Section 9.1. A Participant who remains in Service after his Normal Retirement Date shall not be entitled to any retirement benefits until his actual termination of Service thereafter (except as provided in Section 9.4), and he shall meanwhile continue to participate in this Plan. 6.2 Early Retirement. A Participant who reaches his Early Retirement Date may retire at such time (or, at his election, as of the first day of any month thereafter prior to his Normal Retirement Date) and shall thereupon be entitled to retirement benefits based on the value of his Account, payable pursuant to the provisions of Section 9.1. 6.3 Disability Retirement. In the event a Participant incurs a Disability, he may retire on his Disability Retirement Date and shall thereupon be entitled to retirement benefits based on the value of his Account, payable pursuant to the provisions of Section 9.1. 6.4 Death Benefits. (a) Upon the death of a Participant before his Retirement or other termination of Service, the value of his Account shall be payable pursuant to the provisions of Section 9.1. The Administrator shall direct the Trustee to distribute his Account to any surviving Beneficiary designated by the Participant or, if none, to such persons specified in Section 6.5(b). (b) Upon the death of a Former Participant, the Administrator shall direct the Trustee to distribute any undistributed balance of his Account to any surviving Beneficiary designated by him or, if none, to such persons specified in Section 6.5(b). (c) The Administrator may require such proper proof of death and such evidence of the right of any person to receive the balance credited to the Account of a deceased Participant or Former Participant as the Administrator may deem desirable. The Administrator's determination of death and of the right of any person to receive payment shall be conclusive. 23 6.5 Designation of Beneficiary and Manner of Payment. (a) Each Participant shall have the right to designate a Beneficiary to receive the sum or sums to which he may be entitled upon his death. The Participant may also designate the manner in which any death benefits under this Plan shall be payable to his Beneficiary, provided that such designation is in accordance with Section 9.5. Such designation of Beneficiary and manner of payment shall be in writing and delivered to the Administrator, and shall be effective when received by the Administrator while the Participant is alive. The Participant shall have the right to change such designation by notice in writing to the Administrator while the Participant is alive. Such change of Beneficiary or the manner of payment shall become effective upon its receipt by the Administrator while the Participant is alive. Any such change shall be deemed to revoke all prior designations. (b) If a Participant shall fail to designate validly a Beneficiary, or if no designated Beneficiary survives the Participant, the balance credited to his Account shall be paid to the person or persons in the first of the following classes of successive preference Beneficiaries surviving at the death of the Participant: the Participant's (1) widow or widower, (2) natural-born or adopted children, (3) natural-born or adoptive parents, and (4) estate. The Administrator shall determine which Beneficiary, if any, shall have been validly designated or entitled to receive the balance credited to the Participant's Account in accordance with the foregoing order of preference, and its decision shall be binding and conclusive on all persons. (c) Notwithstanding the foregoing, if a Participant is married on the date of his death, the sum or sums to which he may be entitled under this Plan upon his death shall be paid to his spouse, unless the Participant's spouse shall have consented to the election of another Beneficiary. Such a spousal consent shall be in writing and shall be witnessed either by a representative of the Administrator or by a notary public. Any designation by an unmarried Participant shall be rendered ineffective by any subsequent marriage, and any consent of a spouse shall be effective only as to that spouse. If it is established to the satisfaction of the Administrator that spousal consent cannot be obtained because there is no spouse, because the spouse cannot be located, or other reasons prescribed by governmental regulations, the consent of the spouse may be waived, and the Participant may designate a Beneficiary or Beneficiaries other than his spouse. 24 ARTICLE VII VESTING AND FORFEITURES 7.1 Vesting on Death, Disability and Normal Retirement. Unless his participation in this Plan shall have terminated prior thereto, upon a Participant's death, Disability or Normal Retirement Date (whether or not he actually retires at that time) while he is still employed by the Employer, the Participant's entire Account shall be fully vested and nonforfeitable. 7.2 Vesting on Termination of Participation. Upon termination of his participation in this Plan for any reason other than death, Disability, or Normal Retirement, a Participant shall be vested in a percentage of his Employee Stock Ownership Account, such vested percentage to be determined under the following table, based on the Years of Vesting Service (including Years of Vesting Service prior to the Effective Date) credited to him at the time of his termination of participation: Years of Vesting Service Percentage Vested ------------------------ ----------------- Less than 1 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 or more 100% Any portion of the Participant's Employee Stock Ownership Account which is not vested at the time he incurs a Break shall thereupon be forfeited and disposed of pursuant to Section 7.3. Distribution of the vested portion of a terminated Participant's interest in the Plan shall be payable in any manner permitted under Section 9.1. 7.3 Disposition of Forfeitures. (a) In the event a Participant incurs a Break and subsequently resumes both his Service and his participation in the Plan prior to incurring at least 5 Breaks, the forfeitable portion of his Employee Stock Ownership Account shall be reinstated to the credit of the Participant as of the date he resumes participation. (b) In the event a Participant terminates Service and subsequently incurs a Break and receives a distribution, or in the event a Participant does not terminate Service, but incurs at least 5 Breaks, or in the event that a Participant terminates Service and incurs at least 5 Breaks but has not received a distribution, then the forfeitable portion of his Employee Stock Ownership 25 Account, including Investment Adjustments, shall be reallocated to other Participants, pursuant to Section 5.4, as of the date the Participant incurs such Break or Breaks, as the case may be. (c) In the event a former Participant who had received a distribution from the Plan is rehired, he shall repay the amount of his distribution before the earlier of 5 years after the date of his rehire by the Employer, or the close of the first period of 5 consecutive Breaks commencing after the withdrawal, in order for any forfeited amounts to be restored to him. 26 ARTICLE VIII EMPLOYEE STOCK OWNERSHIP PROVISIONS 8.1 Right to Demand Employer Securities. A Participant entitled to a distribution from his Account shall be entitled to demand that his interest in the Account be distributed to him in the form of Employer Securities, all subject to Section 9.9. The Administrator shall notify the Participant of his right to demand distribution of his vested Account balance entirely in whole shares of Employer Securities (with the value of any fractional share paid in cash). However, if the charter or by-laws of the Employer restrict ownership of substantially all of the outstanding Employer Securities to Employees and the Trust, then the distribution of a Participant's vested Account shall be made entirely in the form of cash or other property, and the Participant is not entitled to a distribution in the form of Employer Securities. 8.2 Voting Rights. Each Participant with an Employee Stock Ownership Account shall be entitled to direct the Trustee as to the manner in which the Employer Securities in such account are to be voted. Employer Securities held in the Employee Stock Ownership Suspense Account or the Exempt Loan Suspense Account shall be voted by the Trustee on each issue with respect to which shareholders are entitled to vote in the same proportion as the Participants who directed the Trustee as to the manner of voting their shares in the Employee Stock Ownership Accounts with respect to such issue. Prior to the initial allocation of shares, the Trustee shall be entitled to vote the shares in the Exempt Loan Suspense Account without prior direction from the Participants or the Administrator. In the event that a Participant fails to give timely voting instructions to the Trustee with respect to the voting of Employer Securities that are allocated to his Employee Stock Ownership Account, the Trustee shall vote such shares in such manner as directed by the Administrator. 8.3 Nondiscrimination in Employee Stock Ownership Contribution. In the event that the amount of the Employee Stock Ownership Contribution that would be required in any Plan Year to make the scheduled payments on an Exempt Loan would exceed the amount that would otherwise be deductible by the Employer for such Plan Year under Code Section 404, then no more than one-third of the Employee Stock Ownership Contribution for the Plan Year, which is also the Employer's taxable year, shall be allocated to the group of Employees who: (a) Was at any time during the Plan Year or the preceding Plan Year a 5 percent owner of the Employer; or 27 (b) Received compensation from the Employer for the preceding Plan Year in excess of $80,000, as adjusted under Code Section 414(q), and, if the Employer so elects, was in the "top-paid group" of Employees (as defined below) for such year. An Employee shall be deemed a member of the "top-paid group" of Employees for a given Plan Year if such Employee is in the group of the top 20% of the Employees of the Employer when ranked on the basis of compensation. 8.4 Dividends. Dividends paid with respect to Employer Securities credited to a Participant's Employee Stock Ownership Account as of the record date for the dividend payment may be allocated to the Participant's Employee Stock Ownership Account or paid in cash to the Participant, pursuant to the direction of the Administrator. If the Administrator shall direct that the aforesaid dividends shall be paid directly to Participants, the quarterly dividends paid with respect to such Employer Securities shall be paid to the Plan, from which dividend distributions in cash shall be made to the Participants with respect to the Employer Securities in their Employee Stock Ownership Accounts within 90 days of the close of the Plan Year in which the dividends were paid. Dividends on Employer Securities obtained pursuant to an Exempt Loan and still held in the Exempt Loan Suspense Account may be used to make payments on an Exempt Loan, as described in Section 8.6. 8.5 Exempt Loans. (a) The Sponsor may direct the Trustee to obtain Exempt Loans. The Exempt Loan may take the form of (i) a loan from a bank or other commercial lender to purchase Employer Securities (ii) a loan from the Employer to the Plan; or (iii) an installment sale of Employer Securities to the Plan. The proceeds of any such Exempt Loan shall be used, within a reasonable time after the Exempt Loan is obtained, only to purchase Employer Securities, repay the Exempt Loan, or repay any prior Exempt Loan. Any such Exempt Loan shall provide for no more than a reasonable rate of interest and shall be without recourse against the Plan. The number of years to maturity under the Exempt Loan must be definitely ascertainable at all times. The only assets of the Plan that may be given as collateral for an Exempt Loan are Financed Shares acquired with the proceeds of the Exempt Loan and Financed Shares that were used as collateral for a prior Exempt Loan repaid with the proceeds of the current Exempt Loan. Such Financed Shares so pledged shall be placed in an Exempt Loan Suspense Account. No person or institution entitled to payment under an Exempt Loan shall have recourse against Trust assets other than the Financed Shares, the Employer Stock Ownership Contribution (other than contributions of Employer Securities) that is available under the Plan to meet obligations under the Exempt Loan, and earnings attributable to such Financed Shares and the investment of such contribution. Any Employee Stock Ownership Contribution paid during the Plan Year in which an Exempt Loan is made (whether before or after the date the proceeds of the Exempt Loan are received), any Employee Stock Ownership Contribution paid thereafter until the Exempt Loan has been repaid in full, and all earnings from investment of such Employee Stock Ownership 28 Contribution, without regard to whether any such Employee Stock Ownership Contribution and earnings have been allocated to Participants' Employee Stock Ownership Accounts, shall be available to meet obligations under the Exempt Loan as such obligations accrue, or prior to the time such obligations accrue, unless otherwise provided by the Employer at the time any such contribution is made. Any pledge of Employer Securities shall provide for the release of Financed Shares upon the payment of any portion of the Exempt Loan. (b) For each Plan Year during the duration of the Exempt Loan, the number of Financed Shares released from such pledge shall equal the number of Financed Shares held immediately before release for the current Plan Year multiplied by a fraction. The numerator of the fraction is the sum of principal and interest paid in such Plan Year. The denominator of the fraction is the sum of the numerator plus the principal and interest to be paid for all future years. Such years will be determined without taking into account any possible extension or renewal periods. If interest on any Exempt Loan is variable, the interest to be paid in future years under the Exempt Loan shall be computed by using the interest rate applicable as of the end of the Plan Year. (c) Notwithstanding the foregoing, the Trustee may obtain an Exempt Loan pursuant to the terms of which the number of Financed Shares to be released from encumbrance shall be determined with reference to principal payments only. In the event that such an Exempt Loan is obtained, annual payments of principal and interest shall be at a cumulative rate that is not less rapid at any time than level payments of such amounts for not more than 10 years. The amount of interest in any such annual loan repayment shall be disregarded only to the extent that it would be determined to be interest under standard loan amortization tables. The requirement set forth in the preceding sentence shall not be applicable from the time that, by reason of a renewal, extension, or refinancing, the sum of the expired duration of the Exempt Loan, the renewal period, the extension period, and the duration of a new Exempt Loan exceeds 10 years. 8.6 Exempt Loan Payments. (a) Payments of principal and interest on any Exempt Loan during a Plan Year shall be made by the Trustee (as directed by the Administrator) only from (1) the Employee Stock Ownership Contribution to the Trust made to meet the Plan's obligation under an Exempt Loan (other than contributions of Employer Securities) and from any earnings attributable to Financed Shares and investments of such contributions (both received during or prior to the Plan Year); (2) the proceeds of a subsequent Exempt Loan made to repay a prior Exempt Loan; and (3) the proceeds of the sale of any Financed Shares. Such contribution and earnings shall be accounted for separately by the Plan until the Exempt Loan is repaid. (b) Employer Securities released from the Exempt Loan Suspense Account by reason of the payment of principal or interest on an Exempt Loan from amounts allocated to Participants' Employee Stock Ownership Accounts shall immediately upon release be allocated as set forth in Section 5.5. 29 (c) The Employer shall contribute to the Trust sufficient amounts to enable the Trust to pay principal and interest on any such Exempt Loans as they are due, provided, however, that no such contribution shall exceed the limitations in Section 5.6. In the event that such contributions by reason of the limitations in Section 5.6 are insufficient to enable the Trust to pay principal and interest on such Exempt Loan as it is due, then upon the Trustee's request the Employer shall: (1) Make an Exempt Loan to the Trust in sufficient amounts to meet such principal and interest payments. Such new Exempt Loan shall be subordinated to the prior Exempt Loan. Employer Securities released from the pledge of the prior Exempt Loan shall be pledged as collateral to secure the new Exempt Loan. Such Employer Securities will be released from this new pledge and allocated to the Employee Stock Ownership Accounts of the Participants in accordance with the applicable provisions of the Plan; (2) Purchase any Financed Shares in an amount necessary to provide the Trustee with sufficient funds to meet the principal and interest repayments. Any such sale by the Plan shall meet the requirements of Section 408(e) of the Act; or (3) Any combination of the foregoing. However, the Employer shall not, pursuant to the provisions of this subsection, do, fail to do or cause to be done any act or thing which would result in a disqualification of the Plan as an employee stock ownership plan under Section 4975(e)(7) of the Code. (d) Except as provided in Section 8.1 above and notwithstanding any amendment to or termination of the Plan which causes it to cease to qualify as an employee stock ownership plan within the meaning of Section 4975(e)(7) of the Code, or any repayment of an Exempt Loan, no shares of Employer Securities acquired with the proceeds of an Exempt Loan obtained by the Trust to purchase Employer Securities may be subject to a put, call or other option, or buy-sell or similar arrangement, while such shares are held by the Plan or when such shares are distributed from the Plan. 8.7 Put Option. In the event that the Employer Securities distributed to a Participant are not readily tradable on an established market, the Participant shall be entitled to require that the Employer repurchase the Employer Securities under a fair valuation formula, as provided by governmental regulations. The Participant or Beneficiary shall be entitled to exercise the put option described in the preceding sentence for a period of not more than 60 days following the date of distribution of Employer Securities to him. If the put option is not exercised within such 60-day period, the Participant or Beneficiary may exercise the put option during an additional period of not more than 60 days after the beginning of the first day of the first Plan Year following the Plan Year in 30 which the first put option period occurred, all as provided in regulations promulgated by the Secretary of the Treasury. If a Participant exercises the foregoing put option with respect to Employer Securities that were distributed as part of a total distribution pursuant to which a Participant's Employee Stock Ownership Account is distributed to him in a single taxable year, the Employer or the Plan may elect to pay the purchase price of the Employer Securities over a period not to exceed 5 years. Such payments shall be made in substantially equal installments not less frequently than annually over a period beginning not later than 30 days after the exercise of the put option. Reasonable interest shall be paid to the Participant with respect to the unpaid balance of the purchase price, and adequate security shall be provided with respect thereto. In the event that a Participant exercises a put option with respect to Employer Securities that are distributed as part of an installment distribution, if permissible under Section 9.5, the amount to be paid for such securities shall be paid not later than 30 days after the exercise of the put option. 8.8 Diversification Requirements. Each Participant who has completed at least 10 years of participation in the Plan and has attained age 55 may elect within 90 days after the close of each Plan Year during his "qualified election period" to direct the Plan as to the investment of at least 25 percent of his Employee Stock Ownership Account (to the extent such percentage exceeds the amount to which a prior election under this Section 8.8 had been made). For purposes of this Section 8.8, the term "qualified election period" shall mean the 5-Plan-Year period beginning with the Plan Year after the Plan Year in which the Participant attains age 55 (or, if later, beginning with the Plan Year after the first Plan Year in which the Employee first completes at least 10 years of participation in the Plan). In the case of an Employee who has attained age 60 and completed 10 years of participation in the prior Plan Year and in the case of the election year in which any other Participant who has met the minimum age and service requirements for diversification can make his last election hereunder, he shall be entitled to direct the Plan as to the investment of at least 50 percent of his Employee Stock Ownership Account (to the extent such percentage exceeds the amount to which a prior election under this Section 8.8 had been made). The Plan shall make available at least 3 investment options (chosen by the Administrator in accordance with regulations prescribed by the Department of Treasury) to each Participant making an election hereunder. The Plan shall be deemed to have met the requirements of this Section if the portion of the Participant's Employee Stock Ownership Account covered by the election hereunder is distributed to the Participant or his designated Beneficiary within 90 days after the period during which the election may be made. In the absence of such a distribution, the Trustee shall implement the Participant's election within 90 days following the expiration of the qualified election period. Notwithstanding the foregoing, if the fair market value of the Employer Securities allocated to the Employee Stock Ownership Account of a Participant otherwise entitled to diversify hereunder is $500 or less as of the Valuation Date immediately preceding the first day of any election period, then such Participant shall not be entitled to an election under this Section 8.8 for that qualified election period. 31 8.9 Independent Appraiser. An independent appraiser meeting the requirements of the regulations promulgated under Code Section 170(a)(1) shall value the Employer Securities in those Plan Years when such securities are not readily tradable on an established securities market. 8.10 Nonterminable Rights. The provisions of this Article VIII shall continue to be applicable to Employer Securities held by the Trustee, whether or not allocated to Participants' and Former Participants' Accounts, even if the Plan ceases to be an employee stock ownership plan, as defined in Section 4975(e)(7) of the Code. 32 ARTICLE IX PAYMENTS AND DISTRIBUTIONS 9.1 Payments on Termination of Service - In General. All benefits provided under this Plan shall be funded by the value of a Participant's vested Account in the Plan. As soon as practicable after a Participant's Retirement, Disability, death or other termination of Service, the Administrator shall ascertain the value of his vested Account, as provided in Article V, and the Administrator shall hold or dispose of the same in accordance with the following provisions of this Article IX. 9.2 Commencement of Payments. (a) Distributions upon Retirement, Disability or Death. Upon a Participant's Retirement, Disability or death, payment of benefits under this Plan shall, unless the Participant otherwise elects (in accordance with Section 9.3), commence as soon as practicable after the Valuation Date next following the date of the Participant's Retirement, Disability or death. (b) Distribution following Termination of Service. Unless a Participant elects otherwise, if a Participant terminates Service prior to Retirement, Disability or death, he shall be accorded an opportunity to commence receipt of benefits as soon as practicable after the Valuation Date next following the date of his termination of Service. A Participant who terminates Service with a vested Account balance shall be entitled to receive from the Administrator a statement of his benefits. In the event that a Participant elects not to commence receipt of distribution in accordance with this Section 9.2(b) after the Participant incurs a Break, the Administrator shall transfer his vested Account balance to a distribution account. If a Participant's vested Account balance does not exceed (or at the time of any prior distribution did not exceed) $5,000, the Plan Administrator shall distribute the vested portion of his Account balance as soon as administratively feasible without the consent of the Participant or his spouse. (c) Distribution of Accounts Greater Than $5,000. If the value of a Participant's vested Account balance exceeds (or at the time of any prior distribution exceeded) $5,000, and the Account balance is immediately distributable, the Participant must consent to any distribution of such Account balance. The Administrator shall notify the Participant of the right to defer any distribution until the Participant's Account balance is no longer immediately distributable. The consent of the Participant shall not be required to the extent that a distribution is required to satisfy Code Section 401(a)(9) or Code Section 415. 9.3 Mandatory Commencement of Benefits. (a) Unless a Participant elects otherwise, in writing, distribution of benefits will begin no later than the 60th day after the latest to occur of the close of the Plan Year in which (i) the Participant attains age 65, (ii) the tenth anniversary of the Plan Year in which the Participant 33 commenced participation, or (iii) the Participant terminates Service with the Employer and all Related Employers. (b) In the event that the Plan shall be subsequently amended to provide for a form of distribution other than a lump sum, as of the first distribution calendar year, distributions, if not made in a lump sum, may be made only over one of the following periods (or a combination thereof): (i) the life of the Participant, (ii) the life of the Participant and the designated Beneficiary, (iii) a period certain not extending beyond the life expectancy of the Participant, or (iv) a period certain not extending beyond the joint and last survivor expectancy of the Participant and a designated Beneficiary. (c) In the event that the Plan shall be subsequently amended to provide for a form of distribution other than a lump sum, if the Participant's interest is to be distributed in other than a lump sum, the following minimum distribution rules shall apply on or after the required beginning date: (i) If a Participant's benefit is to be distributed over (1) a period not extending beyond the life expectancy of the Participant or the joint life and last survivor expectancy of the Participant and the Participant's designated Beneficiary or (2) a period not extending beyond the life expectancy of the designated Beneficiary, the amount required to be distributed for each calendar year, beginning with distributions for the first distribution calendar year, must at least equal the quotient obtained by dividing the Participant's benefit by the applicable life expectancy. (ii) For calendar years beginning after December 31, 1988, the amount to be distributed each year, beginning with distributions for the first distribution calendar year, shall not be less than the quotient obtained by dividing the Participant's Account balance by the lesser of (1) the applicable life expectancy, or (2) if the Participant's spouse is not the designated Beneficiary, the applicable divisor determined from the table set forth in Q&A-4 of section 1.401(a)(9)-2 of the Proposed Regulations. Distributions after the death of the Participant shall be distributed using the applicable life expectancy in subsection (iii) of Section 9.3(b) above as the relevant divisor without regard to Proposed Regulations section 1.401(a)(9)-2. (iii) The minimum distribution required for the Participant's first distribution calendar year must be made on or before the Participant's required beginning date. The minimum distribution for other calendar years, including the minimum distribution for the 34 distribution calendar year in which the Participant's required beginning date occurs, must be made on or before December 31 of the distribution calendar year. (d) If a Participant dies after a distribution has commenced in accordance with Section 9.3(b) but before his entire interest has been distributed to him, the remaining portion of such interest shall be distributed to his Beneficiary at least as rapidly as under the method of distribution in effect as of the date of his death. (e) If a Participant shall die before the distribution of his Account balance has begun, the entire Account balance shall be distributed by December 31 of the calendar year containing the fifth anniversary of the death of the Participant, except in the following events: (i) If any portion of the Participant's Account balance is payable to (or for the benefit of) a designated Beneficiary over a period not extending beyond the life expectancy of such Beneficiary and such distributions begin not later than December 31 of the calendar year immediately following the calendar year in which the Participant died; or (ii) If any portion of the Participant's Account balance is payable to (or for the benefit of) the Participant's spouse over a period not extending beyond the life expectancy of such spouse and such distributions begin no later than December 31 of the calendar year in which the Participant would have attained age 70-1/2. If the Participant has not made a distribution election by the time of his death, the Participant's designated Beneficiary shall elect the method of distribution no later than the earlier of (1) December 31 of the calendar year in which distributions would be required to begin under this Article or (2) December 31 of the calendar year which contains the fifth anniversary of the date of death of the Participant. If the Participant has no designated Beneficiary, or if the designated Beneficiary does not elect a method of distribution, distribution of the Participant's entire interest shall be completed by December 31 of the calendar year containing the fifth anniversary of the Participant's death. (f) For purposes of this Article, the life expectancy of a Participant and his spouse may be redetermined but not more frequently than annually. The life expectancy (or joint and last survivor expectancy) shall be calculated using the attained age of the Participant (or designated Beneficiary) as of the Participant's (or designated Beneficiary's) birthday in the applicable calendar year reduced by one for each calendar year which has elapsed since the date life expectancy was first calculated. If life expectancy is being recalculated, the applicable life expectancy shall be the life expectancy as so recalculated. The applicable calendar year shall be the first distribution calendar year, and if life expectancy is being recalculated, such succeeding calendar year. Unless otherwise elected by the Participant (or his spouse, if applicable) by the time distributions are required to begin, life expectancies shall be recalculated annually. Any election not to recalculate shall be irrevocable and shall apply to all subsequent years. The life expectancy of a nonspouse Beneficiary may not be recalculated. 35 (g) For purposes of Section 9.3(b) and 9.3(e), any amount paid to a child shall be treated as if it had been paid to a surviving spouse if such amount will become payable to the surviving spouse upon such child reaching majority (or other designated event permitted under regulations). (h) For distributions beginning before the Participant's death, the first distribution calendar year is the calendar year immediately preceding the calendar year which contains the Participant's required beginning date. For distributions beginning after the Participant's death, the first distribution calendar year is the calendar year in which distributions are required to begin pursuant to this Article. 9.4 Required Beginning Dates. (a) General Rule. The required beginning date of a Participant who is a 5-percent owner of the Employer is the first day of April of the calendar year following the calendar year in which the Participant attains age 70-1/2. The required beginning date of a Participant who is not a 5-percent owner shall be April 1 of the calendar year following the later of either: (i) the calendar year in which the Participant attains age 70-1/2, or (ii) the calendar year in which the Participant retires. (b) 5-percent owner. A Participant is treated as a 5-percent owner for purposes of this section if such Participant is a 5-percent owner as defined in section 416(i) of the Code (determined in accordance with section 416 but without regard to whether the plan is top-heavy) at any time during the Plan Year ending with or within the calendar year in which such owner attains age 66-1/2 or any subsequent Plan Year. Once distributions have begun to a 5-percent owner under this section, they must continue to be distributed, even if the Participant ceases to be a 5-percent owner in a subsequent year. 9.5 Form of Payment. Each Participant's vested Account balance shall be distributed in a lump sum payment. Notwithstanding the preceding sentence, but subject to Section 9.3, the Administrator may not distribute a lump sum without the Participant's consent when the present value of a Participant's total Account balance is in excess of $5,000. This form of payment shall be the normal form of distribution. Furthermore, however, in the event that the Administrator must commence distributions, as required by Section 9.4 herein, with respect to an Employee who has attained age 70-1/2 and is still employed by the Employer, if the Employee does not elect a lump sum distribution, payments shall be made in installments in such amounts as shall satisfy the minimum distribution rules of Section 9.3. 9.6 Payments Upon Termination of Plan. Upon termination of this Plan pursuant to Sections 13.2, 13.4, 13.5 or 13.6, the Administrator shall continue to perform its duties and the Trustee shall make all payments upon 36 the following terms, conditions and provisions: The Account balance of each affected Participant and Former Participant shall immediately become fully vested and nonforfeitable; the Account balance of all Participants and Former Participants shall be determined within 60 days after such termination, and the Administrator shall have the same powers to direct the Trustee in making payments as contained in Sections 9.1 and 13.5. 9.7 Distributions Pursuant to Qualified Domestic Relations Orders. Upon receipt of a domestic relations order, the Administrator shall promptly notify the Participant and any alternate payee of receipt of the order and the Plan's procedure for determining whether the order is a Qualified Domestic Relations Order. While the issue of whether a domestic relations order is a Qualified Domestic Relations Order is being determined, if the benefits would otherwise be paid, the Administrator shall segregate in a separate account in the Plan the amounts that would be payable to the alternate payee during such period if the order were a Qualified Domestic Relations Order. If within 18 months the order is determined to be a Qualified Domestic Relations Order, the amounts so segregated, along with the interest or investment earnings attributable thereto, shall be paid to the alternate payee. Alternatively, if within 18 months, it is determined that the order is not a Qualified Domestic Relations Order or if the issue is still unresolved, the amounts segregated under this Section 9.7, with the earnings attributable thereto, shall be paid to the Participant or Beneficiary who would have been entitled to such amounts if there had been no order. The determination as to whether the order is qualified shall be applied prospectively. Thus, if the Administrator determines that the order is a Qualified Domestic Relations Order after the 18-month period, the Plan shall not be liable for payments to the alternative payee for the period before the order is determined to be a Qualified Domestic Relations Order. 9.8 Cash-Out Distributions. If a Participant receives a distribution of his entire vested Account balance because of the termination of his participation in the Plan, the Plan shall disregard a Participant's Service with respect to which such cash-out distribution shall have been made, in computing his Account balance in the event that a Former Participant shall again become an Employee and become eligible to participate in the Plan. Such a distribution shall be deemed to be made on termination of participation in the Plan if it is made not later than the close of the second Plan Year following the Plan Year in which such termination occurs. The forfeitable portion of a Participant's Account balance shall be restored upon repayment to the Plan by such Former Participant of the full amount of the cash-out distribution, provided that the Former Participant again becomes an Employee. Such repayment must be made by the Employee not later than the end of the 5-year period beginning with the date of the distribution. Forfeitures required to be restored by virtue of such repayment shall be restored from the following sources in the following order of preference: (i) current forfeitures; (ii) an additional Employee Stock Ownership Contribution, as appropriate, and as subject to Section 5.6; and (iii) investment earnings of the Fund. In the event that a Participant's Account balance is totally forfeitable, a Participant shall be deemed to have received a distribution of zero upon his termination of Service. In the event of a return to Service within 37 5 years of the date of his deemed distribution, the Participant shall be deemed to have repaid his distribution in accordance with the rules of this Section 9.8. 9.9 ESOP Distribution Rules. Notwithstanding any provision of this Article IX to the contrary, the distribution of a Participant's Employee Stock Ownership Account (unless the Participant elects otherwise in writing) shall commence as soon as administratively feasible as of the first Valuation Date coincident with or next following his death, Disability or termination of Service, but not later than 1 year after the close of the Plan Year in which the Participant separates from Service by reason of the attainment of his Normal Retirement Date, Disability, death or separation from Service. In addition, all distributions hereunder shall, to the extent that the Participant's Account is invested in Employer Securities, be made in the form of Employer Securities or cash, or a combination of Employer Securities and cash, in the discretion of the Administrator, subject to the Participant's right to demand Employer Securities in accordance with Section 8.1. Fractional shares, however, may be distributed in the form of cash. 9.10 Direct Rollover. (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Article IX, a distributee may elect, at the time and in the manner prescribed by the Administrator, to have any portion of an "eligible rollover distribution" paid directly to an "eligible retirement plan" specified by the distributee in a "direct rollover." (b) For purposes of this Section 9.10, an "eligible rollover distribution" is any distribution of all or any portion of the balance to the credit of the distributee, except that an "eligible rollover distribution" does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated Beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includable in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to Employer Securities). (c) For purposes of this Section 9.10, an "eligible retirement plan" is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an "eligible rollover distribution" to the surviving spouse, an "eligible retirement plan" is an individual retirement account or individual retirement annuity. (d) For purposes of this Section 9.10, a distributee includes a Participant or Former Participant. In addition, the Participant's or Former Participant's surviving spouse and the 38 Participant's or Former Participant's spouse or former spouse who is the alternate payee under a Qualified Domestic Relations Order are "distributees" with regard to the interest of the spouse or former spouse. (e) For purposes of this Section 9.10, a "direct rollover" is a payment by the Plan to the "eligible retirement plan" specified by the distributee. 39 9.11 Waiver of 30-day Notice. If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Section 1.411(a)-11(c) of the Income Tax Regulations is given, provided that: (1) the Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. 9.12 Re-employed Veterans. Notwithstanding any provision of the Plan to the contrary, contributions, benefits, Plan loan repayment suspensions and Service credit with respect to qualified military service will be provided in accordance with Code Section 414(u). 9.13 Share Legend. Employer Securities held or distributed by the Trustee may include such legend restrictions on transferability as the Employer may reasonably require in order to assure compliance with applicable Federal and State securities and other laws. 40 ARTICLE X PROVISIONS RELATING TO TOP-HEAVY PLANS 10.1 Top-Heavy Rules to Control. Anything contained in this Plan to the contrary notwithstanding, if for any Plan Year the Plan is a top-heavy plan, as determined pursuant to Section 416 of the Code, then the Plan must meet the requirements of this Article X for such Plan Year. 10.2 Top-Heavy Plan Definitions. Unless a different meaning is plainly implied by the context, the following terms as used in this Article X shall have the following meanings: (a) "Accrued Benefit" shall mean the account balances or accrued benefits of an Employee, calculated pursuant to Section 10.3. (b) "Determination Date" shall mean, with respect to any particular Plan Year of this Plan, the last day of the preceding Plan Year (or, in the case of the first Plan Year of the Plan, the last day of the first Plan Year). In addition, the term "Determination Date" shall mean, with respect to any particular plan year of any plan (other than this Plan) in a Required Aggregation Group or a Permissive Aggregation Group, the last day of the plan year of such plan which falls within the same calendar year as the Determination Date for this Plan. (c) "Employer" shall mean the Employer (as defined in Section 1.1(q)) and any entity which is (1) a member of a controlled group including such Employer, while it is a member of such controlled group (within the meaning of Section 414(b) of the Code), (2) in a group of trades or businesses under common control with such Employer, while it is under common control (within the meaning of Section 414(c) of the Code), and (3) a member of an affiliated service group including such Employer, while it is a member of such affiliated service group (within the meaning of Section 414(m) of the Code). (d) "Key Employee" shall mean any Employee or former Employee (or any Beneficiary of such Employee or former Employee, as the case may be) who, at any time during the Plan Year or during the 4 immediately preceding Plan Years, is one of the following: (1) An officer of the Employer who has compensation greater than 50% of the amount in effect under Code 415(b)(1)(A) for the Plan Year; provided, however, that no more than 50 Employees (or, if lesser, the greater of 3 or 10% of the Employees) shall be deemed officers; (2) One of the 10 Employees having annual compensation (as defined in Section 415 of the Code) in excess of the limitation in effect under Section 41 415(c)(1)(A) of the Code, and owning (or considered as owning, within the meaning of Section 318 of the Code) the largest interests in the Employer; (3) Any Employee owning (or considered as owning, within the meaning of Section 318 of the Code) more than 5% of the outstanding stock of the Employer or stock possessing more than 5% of the total combined voting power of all stock of the Employer; or (4) Any Employee having annual compensation (as defined in Section 415 of the Code) of more than $150,000 and who would be described in Section 10.2(d)(3) if "1%" were substituted for "5%" wherever the latter percentage appears. For purposes of applying Section 318 of the Code to the provisions of this Section 10.2(d), Section 318(a)(2)(C) of the Code shall be applied by substituting "5%" for "50%" wherever the latter percentage appears. In addition, for purposes of this Section 10.2(d), the provisions of Section 414(b), (c) and (m) shall not apply in determining ownership interests in the Employer. However, for purposes of determining whether an individual has compensation in excess of $150,000, or whether an individual is a Key Employee under Section 10.2(d)(1) and (2), compensation from each entity required to be aggregated under Sections 414(b), (c) and (m) of the Code shall be taken into account. Notwithstanding anything contained herein to the contrary, all determinations as to whether a person is or is not a Key Employee shall be resolved by reference to Section 416 of the Code and any rules and regulations promulgated thereunder. (e) "Non-Key Employee" shall mean any Employee or former Employee (or any Beneficiary of such Employee or former Employee, as the case may be) who is not considered to be a Key Employee with respect to this Plan. (f) "Permissive Aggregation Group" shall mean all plans in the Required Aggregation Group and any other plans maintained by the Employer which satisfy Sections 401(a)(4) and 410 of the Code when considered together with the Required Aggregation Group. (g) "Required Aggregation Group" shall mean each plan (including any terminated plan) of the Employer in which a Key Employee is (or in the case of a terminated plan, had been) a Participant in the Plan Year containing the Determination Date or any of the 4 preceding Plan Years, and each other plan of the Employer which enables any plan of the Employer in which a Key Employee is a Participant to meet the requirements of Sections 401(a)(4) and 410 of the Code. 10.3 Calculation of Accrued Benefits. (a) An Employee's Accrued Benefit shall be equal to: (1) With respect to this Plan or any other defined contribution plan (other than a defined contribution pension plan) in a Required Aggregation Group or a Permissive Aggregation Group, the Employee's account balances under the respective 42 plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, including contributions actually made after the valuation date but before the Determination Date (and, in the first plan year of a plan, also including any contributions made after the Determination Date which are allocated as of a date in the first plan year). (2) With respect to any defined contribution pension plan in a Required Aggregation Group or a Permissive Aggregation Group, the Employee's account balances under the plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, including contributions which have not actually been made, but which are due to be made as of the Determination Date. (3) With respect to any defined benefit plan in a Required Aggregation Group or a Permissive Aggregation Group, the present value of the Employee's accrued benefits under the plan, determined as of the most recent plan valuation date within a 12-month period ending on the Determination Date, pursuant to the actuarial assumptions used by such plan, and calculated as if the Employee terminated Service under such plan as of the valuation date (except that, in the first plan year of a plan, a current Participant's estimated Accrued Benefit as of the Determination Date shall be taken into account). (4) If any individual has not performed services for the Employer maintaining the Plan at any time during the 5-year period ending on the Determination Date, any Accrued Benefit for such individual shall not be taken into account. (b) The Accrued Benefit of any Employee shall be further adjusted as follows: (1) The Accrued Benefit shall be calculated to include all amounts attributable to both Employer and Employee contributions, but shall exclude amounts attributable to voluntary deductible Employee contributions, if any. (2) The Accrued Benefit shall be increased by the aggregate distributions made with respect to an Employee under the plan or plans, as the case may be, during the 5-year period ending on the Determination Date. (3) Rollover and direct plan-to-plan transfers shall be taken into account as follows: (A) If the transfer is initiated by the Employee and made from a plan maintained by one employer to a plan maintained by another unrelated employer, the transferring plan shall continue to count the amount transferred; the receiving plan shall not count the amount transferred. 43 (B) If the transfer is not initiated by the Employee or is made between plans maintained by related employers, the transferring plan shall no longer count the amount transferred; the receiving plan shall count the amount transferred. (c) If any individual has not performed services for the Employer at any time during the 5-year period ending on the Determination Date, any Accrued Benefit for such individual (and the account of such individual) shall not be taken into account. 10.4 Determination of Top-Heavy Status. This Plan shall be considered to be a top-heavy plan for any Plan Year if, as of the Determination Date, the value of the Accrued Benefits of Key Employees exceeds 60% of the value of the Accrued Benefits of all eligible Employees under the Plan. Notwithstanding the foregoing, if the Employer maintains any other qualified plan, the determination of whether this Plan is top-heavy shall be made after aggregating all other plans of the Employer in the Required Aggregation Group and, if desired by the Employer as a means of avoiding top-heavy status, after aggregating any other plan of the Employer in the Permissive Aggregation Group. If the required Aggregation Group is top-heavy, then each plan contained in such group shall be deemed to be top-heavy, notwithstanding that any particular plan in such group would not otherwise be deemed to be top-heavy. Conversely, if the Permissive Aggregation Group is not top-heavy, then no plan contained in such group shall be deemed to be top-heavy, notwithstanding that any particular plan in such group would otherwise be deemed to be top-heavy. In no event shall a plan included in a top-heavy Permissive Aggregation Group be deemed a top-heavy plan unless such plan is also included in a top-heavy Required Aggregation Group. 10.5 Determination of Super Top-Heavy Status. The Plan shall be considered to be a super top-heavy plan if, as of the Determination Date, the Plan would meet the test specified in Section 10.4 above for classification as a top-heavy plan, except that "90%" shall be substituted for "60%" whenever the latter percentage appears. 10.6 Minimum Contribution. (a) For any Plan Year in which the Plan is top-heavy, each Non-Key Employee who has met the age and service requirements, if any, contained in the Plan, shall be entitled to a minimum contribution (which may include forfeitures otherwise allocable) equal to a percentage of such Non-Key Employee's compensation (as defined in Section 415 of the Code) as follows: (1) If the Non-Key Employee is not covered by a defined benefit plan maintained by the Employer, then the minimum contribution under this Plan shall be 3% of such Non-Key Employee's compensation. 44 (2) If the Non-Key Employee is covered by a defined benefit plan maintained by the Employer, then the minimum contribution under this Plan shall be 5% of such Non-Key Employee's compensation. (b) Notwithstanding the foregoing, the minimum contribution otherwise allocable to a Non-Key Employee under this Plan shall be reduced in the following circumstances: (1) The percentage minimum contribution required under this Plan shall in no event exceed the percentage contribution made for the Key Employee for whom such percentage is the highest for the Plan Year after taking into account contributions under other defined contribution plans in this Plan's Required Aggregation Group; provided, however, that this Section 10.7(b)(1) shall not apply if this Plan is included in a Required Aggregation Group and this Plan enables a defined benefit plan in such Required Aggregation Group to meet the requirements of Section 401(a)(4) or 410 of the Code. (2) No minimum contribution shall be required (or the minimum contribution shall be reduced, as the case may be) for a Non-Key Employee under this Plan for any Plan Year if the Employer maintains another qualified plan under which a minimum benefit or contribution is being accrued or made on account of such Plan Year, in whole or in part, on behalf of the Non-Key Employee, in accordance with Section 416(c) of the Code. (c) For purposes of this Section 10.6, there shall be disregarded (1) any Employer contributions attributable to a salary reduction or similar arrangement, or (2) any Employer contributions to or any benefits under Chapter 21 of the Code (relating to the Federal Insurance Contributions Act), Title II of the Social Security Act, or any other federal or state law. (d) For purposes of this Section 10.6, minimum contributions shall be required to be made on behalf of only those Non-Key Employees, as described in Section 10.7(a), who have not terminated Service as of the last day of the Plan Year. If a Non-Key Employee is otherwise entitled to receive a minimum contribution pursuant to this Section 10.6(d), the fact that such Non-Key Employee failed to complete 1,000 Hours of Service or failed to make any mandatory or elective contributions under this Plan, if any are so required, shall not preclude him from receiving such minimum contribution. 10.7 Vesting. (a) For any Plan Year in which the Plan is a top-heavy plan, a Participant's Accrued Benefit derived from Employer contributions (not including contributions made pursuant to Code Section 401(k), if any) shall continue to vest according to the following schedule: 45 Years of Service Completed Percentage Vested -------------------------- ----------------- Less than 1 0% 1 but less than 2 20% 2 but less than 3 40% 3 but less than 4 60% 4 but less than 5 80% 5 or more 100% (b) For purposes of Section 10.7(a), the term "year of service" shall have the same meaning as Year of Vesting Service, as set forth in Section 1.1(ss), and as modified by Section 3.2. (c) If for any Plan Year the Plan becomes top-heavy and the vesting schedule set forth in Section 10.7(a) becomes effective, then, even if the Plan ceases to be top-heavy in any subsequent Plan Year, the vesting schedule set forth in Section 10.7(a) shall remain applicable with respect to any Participant who has completed 3 or more Years of Service. 10.8 Maximum Benefit Limitation. For any Plan Year in which the Plan is a top-heavy plan, Section 5.6(d)(1)(B)(i) and Section 5.6(d)(2)(B)(i) shall be read by substituting "1.0" for "1.25" wherever the latter figure appears; provided, however, that such substitution shall not have the effect of reducing any benefit accrued under a defined benefit plan prior to the first day of the Plan Year in which this Section 10.8 becomes applicable. 46 ARTICLE XI ADMINISTRATION 11.1 Appointment of Administrator. This Plan shall be administered by a committee consisting of up to 5 persons, whether or not Employees or Participants, who shall be appointed from time to time by the Board of Directors to serve at its pleasure. The Sponsor may require that each person appointed as an Administrator shall signify his acceptance by filing an acceptance with the Sponsor. The term "Administrator" as used in this Plan shall refer to the members of the committee, either individually or collectively, as appropriate. The authority to control and manage the operation and administration of the Plan is vested in the Administrator appointed by the Board of Directors. The Administrator shall have the rights, duties and obligations of an "administrator," as that term is defined in section 3(16)(A) of the Act, and of a "plan administrator," as that term is defined in Section 414(g) of the Code. In the event that the Sponsor shall elect not to appoint any individuals to constitute a committee to administer the Plan, the Sponsor shall serve as the Administrator hereunder. 11.2 Resignation or Removal of Administrator. An Administrator shall have the right to resign at any time by giving notice in writing, mailed or delivered to the Sponsor and to the Trustee. Any Administrator who was an employee of the Employer at the time of his appointment shall be deemed to have resigned as an Administrator upon his termination of Service. The Board of Directors may, in its discretion, remove any Administrator with or without cause, by giving notice in writing, mailed or delivered to the Administrator and to the Trustee. 11.3 Appointment of Successors: Terms of Office, Etc. Upon the death, resignation or removal of an Administrator, the Sponsor may appoint, by Board of Directors' resolution, a successor or successors. Notice of termination of an Administrator and notice of appointment of a successor shall be made by the Sponsor in writing, with copies mailed or delivered to the Trustee, and the successor shall have all the rights and privileges and all of the duties and obligations of the predecessor. 11.4 Powers and Duties of Administrator. The Administrator shall have the following duties and responsibilities in connection with the administration of this Plan: (a) To promulgate and enforce such rules, regulations and procedures as shall be proper for the efficient administration of the Plan, such rules, regulations and procedures to apply uniformly to all Employees, Participants and Beneficiaries; 47 (b) To exercise discretion in determining all questions arising in the administration, interpretation and application of the Plan, including questions of eligibility and of the status and rights of Participants, Beneficiaries and any other persons hereunder; (c) To decide any dispute arising hereunder strictly in accordance with the terms of the Plan; provided, however, that no Administrator shall participate in any matter involving any questions relating solely to his own participation or benefits under this Plan; (d) To advise the Employer and the Trustee regarding the known future needs for funds to be available for distribution in order that the Trustee may establish investments accordingly; (e) To correct defects, supply omissions and reconcile inconsistencies to the extent necessary to effectuate the Plan; (f) To advise the Employer of the maximum deductible contribution to the Plan for each fiscal year; (g) To direct the Trustee concerning all payments which shall be made out of the Fund pursuant to the provisions of this Plan; (h) To advise the Trustee on all terminations of Service by Participants, unless the Employer has so notified the Trustee; (i) To confer with the Trustee on the settling of any claims against the Fund; (j) To make recommendations to the Board of Directors with respect to proposed amendments to the Plan and the Trust Agreement; (k) To file all reports with government agencies, Employees and other parties as may be required by law, whether such reports are initially the obligation of the Employer, the Plan or the Trustee; and (l) To have all such other powers as may be necessary to discharge its duties hereunder. Reasonable discretion is granted to the Administrator to interpret the Plan and to determine the benefits, rights and privileges of Participants, Beneficiaries or other persons affected by this Plan. The Administrator shall exercise reasonable discretion under the terms of this Plan and shall administer the Plan strictly in accordance with its terms, such administration to be exercised uniformly so that all persons similarly situated shall be similarly treated. 48 11.5 Action by Administrator. The Administrator may elect a Chairman and Secretary from among its members and may adopt rules for the conduct of its business. A majority of the members then serving shall constitute a quorum for the transaction of business. All resolutions or other action taken by the Administrator shall be by vote of a majority of those present at such meeting and entitled to vote. Resolutions may be adopted or other action taken without a meeting upon written consent signed by at least a majority of the members. All documents, instruments, orders, requests, directions, instructions and other papers shall be executed on behalf of the Administrator by either the Chairman or the Secretary of the Administrator, if any, or by any member or agent of the Administrator duly authorized to act on the Administrator's behalf. 11.6 Participation by Administrator. No member of the committee constituting the Administrator shall be precluded from becoming a Participant in the Plan if he would be otherwise eligible, but he shall not be entitled to vote or act upon matters or to sign any documents relating specifically to his own participation under the Plan, except when such matters or documents relate to benefits generally. If this disqualification results in the lack of a quorum, then the Board of Directors shall appoint a sufficient number of temporary members of the committee constituting the Administrator who shall serve for the sole purpose of determining such a question. 11.7 Agents. The Administrator may employ agents and provide for such clerical, legal, actuarial, accounting, medical, advisory or other services as it deems necessary to perform its duties under this Plan. The cost of such services and all other expenses incurred by the Administrator in connection with the administration of the Plan shall be paid from the Fund, unless paid by the Employer. 11.8 Allocation of Duties. The duties, powers and responsibilities reserved to the Administrator may be allocated among its members so long as such allocation is pursuant to written procedures adopted by the Administrator, in which case, except as may be required by the Act, no Administrator shall have any liability, with respect to any duties, powers or responsibilities not allocated to him, for the acts of omissions of any other Administrator. 11.9 Delegation of Duties. The Administrator may delegate any of its duties to any Employees of the Employer, to the Trustee with its consent, or to any other person or firm, provided that the Administrator shall prudently choose such agents and rely in good faith on their actions. 49 11.10 Administrator's Action Conclusive. Any action on matters within the authority of the Administrator shall be final and conclusive except as provided in Article XII. 11.11 Compensation and Expenses of Administrator. No Administrator who is receiving compensation from the Employer as a full-time employee, as a director or agent, shall be entitled to receive any compensation or fee for his services hereunder. Any other Administrator shall be entitled to receive such reasonable compensation for his services as an Administrator hereunder as may be mutually agreed upon between the Employer and such Administrator. Any such compensation shall be paid from the Fund, unless paid by the Employer. Each Administrator shall be entitled to reimbursement by the Employer for any reasonable and necessary expenditures incurred in the discharge of his duties. 11.12 Records and Reports. The Administrator shall maintain adequate records of its actions and proceedings in administering this Plan and shall file all reports and take all other actions as it deems appropriate in order to comply with the Act, the Code and governmental regulations issued thereunder. 11.13 Reports of Fund Open to Participants. The Administrator shall keep on file, in such form as it shall deem convenient and proper, all annual reports of the Fund received by the Administrator from the Trustee, and a statement of each Participant's interest in the Fund as from time to time determined. The annual reports of the Fund and the statement of his Account balance, as well as a complete copy of the Plan and the Trust Agreement and copies of annual reports to the Internal Revenue Service, shall be made available by the Administrator to the Employer for examination by each Participant during reasonable hours at the office of the Employer, provided, however, that the statement of a Participant's Account balance shall not be made available for examination by any other Participant. 11.14 Named Fiduciary. The Administrator is the named fiduciary for purposes of Section 402 of the Act and shall be the designated agent for receipt of service of process on behalf of the Plan. It shall use the care and diligence in the performance of its duties under this Plan that are required of fiduciaries under the Act. Nothing in this Plan shall preclude the Employer from purchasing liability insurance to protect the Administrator with respect to its duties under this Plan. 50 11.15 Information from Employer. The Employer shall promptly furnish all necessary information to the Administrator to permit it to perform its duties under this Plan. The Administrator shall be entitled to rely upon the accuracy and completeness of all information furnished to it by the Employer, unless it knows or should have known that such information is erroneous. 11.16 Reservation of Rights by Employer. Where rights are reserved in this Plan to the Employer, such rights shall be exercised only by action of the Board of Directors, except where the Board of Directors, by written resolution, delegates any such rights to one or more officers of the Employer or to the Administrator. Subject to the rights reserved to the Board of Directors acting on behalf of the Employer as set forth in this Plan, no member of the Board of Directors shall have any duties or responsibilities under this Plan, except to the extent he shall be acting in the capacity of an Administrator or Trustee. 11.17 Liability and Indemnification. (a) To the extent not prohibited by the Act, the Administrator shall not be responsible in any way for any action or omission of the Employer, the Trustee or any other person in the performance of their duties and obligations set forth in this Plan and in the Trust Agreement. To the extent not prohibited by the Act, the Administrator shall also not be responsible for any act or omission of any of its agents, or with respect to reliance upon advice of its counsel (whether or not such counsel is also counsel to the Employer or the Trustee), provided that such agents or counsel were prudently chosen by the Administrator and that the Administrator relied in good faith upon the action of such agent or the advice of such counsel. (b) The Administrator shall not be relieved from responsibility or liability for any responsibility, obligation or duty imposed upon it under this Plan or under the Act. Except for its own gross negligence, willful misconduct or willful breach of the terms of this Plan, the Administrator shall be indemnified and held harmless by the Employer against liability or losses occurring by reason of any act or omission of the Administrator to the extent that such indemnification does not violate the Act or any other federal or state laws. 11.18 Service as Trustee and Administrator. Nothing in this Plan shall prevent one or more Trustees from serving as Administrator under this Plan. 51 ARTICLE XII CLAIMS PROCEDURE 12.1 Notice of Denial. If a Participant or his Beneficiary is denied any benefits under this Plan, either in whole or in part, the Administrator shall advise the claimant in writing of the amount of his benefit, if any, and the specific reasons for the denial. The Administrator shall also furnish the claimant at that time with a written notice containing: (a) A specific reference to pertinent Plan provisions; (b) A description of any additional material or information necessary for the claimant to perfect his claim, if possible, and an explanation of why such material or information is needed; and (c) An explanation of the Plan's claim review procedure. 12.2 Right to Reconsideration. Within 60 days of receipt of the information described in 12.1 above, the claimant shall, if he desires further review, file a written request for reconsideration with the Administrator. 12.3 Review of Documents. So long as the claimant's request for review is pending (including the 60-day period described in Section 12.2 above), the claimant or his duly authorized representative may review pertinent Plan documents and the Trust Agreement (and any pertinent related documents) and may submit issues and comments in writing to the Administrator. 12.4 Decision by Administrator. A final and binding decision shall be made by the Administrator within 60 days of the filing by the claimant of his request for reconsideration; provided, however, that if the Administrator feels that a hearing with the claimant or his representative present is necessary or desirable, this period shall be extended an additional 60 days. 12.5 Notice by Administrator. The Administrator's decision shall be conveyed to the claimant in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the 52 claimant, with specific references to the pertinent Plan provisions on which the decision is based. The Administrator's decision shall be binding and conclusive with respect to all persons interested therein unless the Administrator has no reasonable basis for its decision. 53 ARTICLE XIII AMENDMENTS, TERMINATION AND MERGER 13.1 Amendments. The Sponsor reserves the right at any time and from time to time, for any reason and retroactively if deemed necessary or appropriate by it, to the extent permissible under law, to conform with governmental regulations or other policies, to amend in whole or in part any or all of the provisions of this Plan, provided that: (a) No amendment shall make it possible for any part of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit of Participants or their Beneficiaries under the Trust Agreement, except to the extent provided in Section 4.4; (b) No amendment may, directly or indirectly, reduce the vested portion of any Participant's Account balance as of the effective date of the amendment or change the vesting schedule with respect to the future accrual of Employer contributions for any Participants unless each Participant with 3 or more Years of Vesting Service is permitted to elect to have the vesting schedule in effect before the amendment used to determine his vested benefit; (c) No amendment may eliminate an optional form of benefit; and. (d) No amendment may increase the duties of the Trustee without its consent. Amendments may be made in the form of Board of Directors' resolutions or separate written document. Copies of all amendments shall be delivered to the Trustee. 13.2 Effect of Change In Control (a) In the event of a "change in control" of the Sponsor, as defined in paragraph (d) below, this Plan shall terminate at the effective time of such change in control unless the Board of Directors shall affirmatively determine prior to such effective time that the Plan shall not terminate. Nothing in this Plan shall prevent the Sponsor from becoming a party to such a change in control. In the event that the Board of Directors determines that the Plan shall not terminate upon a change in control, any successor corporation or other entity formed and resulting from such change in control shall have the right to become the sponsor of this Plan by adopting the same by resolution. If, within 180 days from the effective time of such change in control, such entity does not affirmatively adopt this Plan, then this Plan shall automatically be terminated, all affected Participants' and Former Participants' Account balances shall become fully vested and nonforfeitable, and the Trustee shall make payments to the persons entitled thereto in accordance with Article IX. 54 (b) In the event that the Plan terminates upon a change in control in accordance with paragraph (a) above, the Account balances of all affected Participants and Former Participants shall become fully vested and nonforfeitable, and the Trustee shall either (i) make payments to each Participant and Beneficiary in accordance with Section 9.5 or, (ii) in the discretion of the Sponsor, continue the Trust Agreement and make distributions upon the contingencies and in all the circumstances under which distributions would have been made, on a fully vested basis, had there been no termination of the Plan. (c) Notwithstanding any provision of the Plan to the contrary, at and after the effective time of a change in control, whether or not the Plan terminates at such time, each of the following provisions shall become applicable; provided, however, that any such provision shall not apply if the Board of Directors determines that such provision either (i) would adversely affect the tax-qualified status of the Plan pursuant to Code Section 401(a), (ii) would adversely affect the accounting treatment of the change in control as a pooling of interests, if the Board of Directors desires that such treatment apply, or (iii) should not apply for any other reason: (1) The Plan shall be interpreted, maintained and operated exclusively for the benefit of those individuals who are participating in the Plan as of the effective time of the change in control and their Beneficiaries. Notwithstanding the provisions of Section 2.1(a), no Employee shall become a Participant for the first time at or after the effective time of a change in control. (2) After a Participant's Retirement, death, Disability or other termination of Service, such Participant's Account, regardless of its value, shall not be distributed and shall share in the allocation of the Employee Stock Ownership Contribution and Investment Adjustments until such time as either (A) the Fund is liquidated in connection with the termination of the Plan, or (B) the Participant (or his Beneficiary) receives a full distribution of his Account either upon his election in accordance with Section 9.2(c) or as required in accordance with Section 8.8, 9.3 or 9.4. (3) Upon the termination of the Plan, Employer Securities that are allocated to the Exempt Loan Suspense Account and that are not used to repay an Exempt Loan shall be allocated as Investment Adjustments in accordance with Section 5.3. (4) Employer Securities that are released from the Exempt Loan Suspense Account in accordance with Section 8.5 shall be allocated to the Employee Stock Ownership Account of each Participant regardless of whether he completed a Year of Vesting Service during the Plan Year or was an Employee on the last day of such Plan Year. (5) The Administrator shall consist of a committee selected by the Board of Directors, and such committee shall have the exclusive authority (i) to remove the Trustee and to appoint a successor trustee, (ii) to adopt amendments to the Plan or the Trust Agreement to effectuate the provisions and intent of this Section 13.2, and (iii) to perform any or all of the 55 functions and to exercise all of the discretion that are delegated to the Administrator pursuant to Article XI. (6) Any application for a favorable determination letter with respect to the tax-qualified status of the Plan under Code Section 401(a) with respect to its termination shall be subject to the prior review, comment and approval (which approval shall not be unreasonably withheld) of the Administrator, as defined in paragraph (5) above. (d) For purposes of this Section 13.2, the term "change in control" means (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Sponsor, any Related Employers, any person (as hereinabove defined) acting on behalf of the Sponsor as underwriter pursuant to an offering who is temporarily holding securities in connection with such offering, any trustee or other fiduciary holding securities under an employee benefit plan of the Sponsor, or any corporation owned, directly or indirectly, by the stockholders of the Sponsor in substantially the same proportions as their ownership of stock of the Sponsor), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Sponsor representing 25% or more of the combined voting power of the Sponsor's then outstanding securities; (ii) individuals who are members of the Board of Directors on the Effective Date (the "incumbent board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the Effective Date whose election was approved by a vote of at least three-quarters of the directors comprising the incumbent board or whose nomination for election by the Sponsor's stockholders was approved by the nominating committee serving under an incumbent board, shall be considered a member of the incumbent board; (iii) the stockholders of the Sponsor approve a merger or consolidation of the Sponsor with any other corporation, other than (1) a merger or consolidation which would result in the voting securities of the Sponsor outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the Sponsor or such surviving entity outstanding immediately after such merger or consolidation or (2) a merger or consolidation effected to implement a recapitalization of the Sponsor (or similar transaction) in which no person (as hereinabove defined) acquires more than 25% of the combined voting power of the Sponsor's then outstanding securities; or (iv) the stockholders of the Sponsor approve a plan of complete liquidation of the Sponsor or an agreement for the sale or disposition by the Sponsor of all or substantially all of the Sponsor's assets (or any transaction having a similar effect). 13.3 Consolidation or Merger of Trust. In the event of any merger or consolidation of the Fund with, or transfer in whole or in part of the assets and liabilities of the Fund to, another trust fund held under any other plan of deferred compensation maintained or to be established for the benefit of all or some of the 56 Participants of this Plan, the assets of the Fund applicable to such Participants shall be transferred to the other trust fund only if: (a) Each Participant would receive a benefit under such successor trust fund immediately after the merger, consolidation or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation or transfer (determined as if this Plan and such transferee trust fund had then terminated); (b) Resolutions of the Board of Directors, or of any new or successor employer of the affected Participants, shall authorize such transfer of assets, and, in the case of the new or successor employer of the affected Participants, its resolutions shall include an assumption of liabilities imposed under this Plan with respect to such Participants' inclusion in the new employer's plan; and (c) Such other plan and trust are qualified under Sections 401(a) and 501(a) of the Code. 13.4 Bankruptcy or Insolvency of Employer. In the event of (a) the Employer's legal dissolution or liquidation by any procedure other than a consolidation or merger, (b) the Employer's receivership, insolvency, or cessation of its business as a going concern, or (c) the commencement of any proceeding by or against the Employer under the federal bankruptcy laws, or similar federal or state statute, or any federal or state statute or rule providing for the relief of debtors, compensation of creditors, arrangement, receivership, liquidation or any similar event which is not dismissed within 30 days, this Plan shall terminate automatically with respect to such entity on such date (provided, however, that if a proceeding is brought against the Employer for reorganization under Chapter 11 of the United States Bankruptcy Code or any similar federal or state statute, then this Plan shall terminate automatically if and when said proceeding results in a liquidation of the Employer, or the approval of any Plan providing therefor, or the proceeding is converted to a case under Chapter 7 of the Bankruptcy Code or any similar conversion to a liquidation proceeding under federal or state law including, but not limited to, a receivership proceeding). In the event of any such termination as provided in the foregoing sentence, the Trustee shall make payments to the persons entitled thereto in accordance with Section 9.6 hereof. 13.5 Voluntary Termination. The Board of Directors reserves the right to terminate this Plan at any time by giving to the Trustee and the Administrator notice in writing of such desire to terminate. The Plan shall terminate upon the date of receipt of such notice, the Account balances of all affected Participants and Former Participants shall become fully vested and nonforfeitable, and the Trustee shall make payments to each Participant or Beneficiary in accordance with Section 9.6. Alternatively, the Sponsor, in its discretion, may determine to continue the Trust Agreement and to continue the maintenance of the Fund, in which event distributions shall be made upon the 57 contingencies and in all the circumstances under which such distributions would have been made, on a fully vested basis, had there been no termination of the Plan. In addition, an entity other than the Sponsor that is participating in this Plan may terminate its participation in the Plan on a prospective basis by action of its board of directors. Upon such termination of participation, Participants who are employees of such entity shall be entitled to distributions from this Plan in accordance with Article IX and this Article XIII. 13.6 Partial Termination of Plan or Permanent Discontinuance of Contributions. In the event that a partial termination of the Plan shall be deemed to have occurred, or if the Employer shall discontinue permanently its contributions hereunder, the right of each affected Participant and Former Participant in his Account balance shall be fully vested and nonforfeitable. The Sponsor, in its discretion, shall decide whether to direct the Trustee to make immediate distribution of such portion of the Fund assets to the persons entitled thereto or to make distribution in the circumstances and contingencies which would have controlled such distributions if there had been no partial termination or permanent discontinuance of contributions. 58 ARTICLE XIV MISCELLANEOUS 14.1 No Diversion of Funds. It is the intention of the Employer that it shall be impossible for any part of the corpus or income of the Fund to be used for, or diverted to, purposes other than for the exclusive benefit of the Participants or their Beneficiaries, except to the extent that a return of the Employer's contribution is permitted under Section 4.4. 14.2 Liability Limited. Neither the Employer nor the Administrator, nor any agents, employees, officers, directors or shareholders of any of them, nor the Trustee, nor any other person, shall have any liability or responsibility with respect to this Plan, except as expressly provided herein. 14.3 Facility of Payment. If the Administrator shall receive evidence satisfactory to it that a Participant or Beneficiary entitled to receive any benefit under the Plan is, at the time when such benefit becomes payable, a minor, or is physically or mentally incompetent to receive such benefit and to give a valid release therefor, and that another person or an institution is then maintaining or has custody of such Participant or Beneficiary and that no guardian, committee or other representative of the estate of such Participant or Beneficiary shall have been duly appointed, the Administrator may direct the Trustee to make payment of such benefit otherwise payable to such Participant or Beneficiary, to such other person or institution, including a custodian under a Uniform Gifts to Minors Act, or corresponding legislation (who shall be an adult, a guardian of the minor or a trust company), and the release of such other person or institution shall be a valid and complete discharge for the payment of such benefit. 14.4 Spendthrift Clause. Except as permitted by the Act or the Code, including in the case of certain judgments and settlements described in subparagraph (C) of Section 401(a)(13) of the Code, no benefits or other amounts payable under the Plan shall be subject in any manner to anticipation, sale, transfer, assignment, pledge, encumbrance, charge or alienation. If the Administrator determines that any person entitled to any payments under the Plan has become insolvent or bankrupt or has attempted to anticipate, sell, transfer, assign, pledge, encumber, charge or otherwise in any manner alienate any benefit or other amount payable to him under the Plan or that there is any danger of any levy or attachment or other court process or encumbrance on the part of any creditor of such person entitled to payments under the Plan against any benefit or other accounts payable to such person, the Administrator may, at any time, in its discretion, and in accordance with applicable law, direct the Trustee to withhold any or all payments to such person under the 59 Plan and apply the same for the benefit of such person, in such manner and in such proportion as the Administrator may deem proper. 14.5 Benefits Limited to Fund. All contributions by the Employer to the Fund shall be voluntary, and the Employer shall be under no legal liability to make any such contributions, except as otherwise provided herein. The benefits of this Plan shall be provided solely by the assets of the Fund, and no liability for the payment of benefits under the Plan or for any loss of assets due to any action or inaction of the Trustee shall be imposed upon the Employer. 14.6 Cooperation of Parties. All parties to this Plan and any party claiming interest hereunder agree to perform any and all acts and execute any and all documents and papers which are necessary and desirable for carrying out this Plan or any of its provisions. 14.7 Payments Due Missing Persons. The Administrator shall direct the Trustee to make a reasonable effort to locate all persons entitled to benefits under the Plan; however, notwithstanding any provision in the Plan to the contrary, if, after a period of 5 years from the date such benefit shall be due, any such persons entitled to benefits have not been located, their rights under the Plan shall stand suspended. Before this provision becomes operative, the Trustee shall send a certified letter to all such persons at their last known address advising them that their interest in benefits under the Plan shall be suspended. Any such suspended amounts shall be held by the Trustee for a period of 3 additional years (or a total of 8 years from the time the benefits first became payable), and thereafter such amounts shall be reallocated among current Participants in the same manner that a current contribution would be allocated. However, if a person subsequently makes a valid claim with respect to such reallocated amounts and any earnings thereon, the Plan earnings or the Employer's contribution to be allocated for the year in which the claim shall be paid shall be reduced by the amount of such payment. Any such suspended amounts shall be handled in a manner not inconsistent with regulations issued by the Internal Revenue Service and Department of Labor. 14.8 Governing Law. This Plan has been executed in the State of New York, and all questions pertaining to its validity, construction and administration shall be determined in accordance with the laws of that State, except to the extent superseded by the Act. 60 14.9 Nonguarantee of Employment. Nothing contained in this Plan shall be construed as a contract of employment between the Employer and any Employee, or as a right of any Employee to be continued in the employment of the Employer, or as a limitation of the right of the Employer to discharge any of its Employees, with or without cause. 14.10 Counsel. The Trustee and the Administrator may consult with legal counsel, who may be counsel for the Employer and for the Administrator or the Trustee (as the case may be), with respect to the meaning or construction of this Plan and the Trust Agreement, their respective obligations or duties hereunder, or with respect to any action or proceeding or any question of law, and they shall be fully protected to the extent allowable by law with respect to any action taken or omitted by them in good faith pursuant to the advice of legal counsel. IN WITNESS WHEREOF, the Sponsor has caused these presents to be executed by its duly authorized officers and its corporate seal to be affixed on this _____ day of _______, 1998. Cohoes Bancorp, Inc. ATTEST: ____________________________ By _____________________________________ Richard A. Ahl, Harry L. Robinson Secretary President and Chief Executive Officer [Corporate Seal] 61 EX-21 16 EXHIBIT 21 SUBSIDIARIES OF COHOES BANCORP, INC. PERCENTAGE OWNED STATE OF NAME BY COMPANY INCORPORATION - ---- ---------- ------------- Cohoes Savings Bank 100% New York CSB Financial Services, Inc. 100% New York CSB Funding, Inc. 100% New York CSB Services Agency, Inc. 100% New York EX-23 17 EXHIBIT 23.1 Exhibit 24.1 Consent of Silver, Freedman & Taff, L.L.P. September 11, 1998 The Board of Trustees Cohoes Savings Bank 75 Remsen Street Cohoes, New York 12047 CONSENT OF SILVER FREEDMAN & TAFF, L.L.P. Ladies and Gentlemen: We hereby consent to the references to this firm and our opinions in: the Registration Statement on Form S-1 filed by Cohoes Savings Bank, Cohoes, New York, and all amendments thereto; in the Form H-(e)l-S for Cohoes Bancorp, Inc., and all amendments thereto; and in the Application for Conversion on Form 86-AC filed by Cohoes Savings Bank (the "Bank"), and all amendments thereto, and in the Notice and Application for Cohoes Savings Bank filed with the Federal Deposit Insurance Corporation and all amendments thereto, relating to the conversion of the Bank from a New York State chartered mutual savings bank to a New York State chartered stock savings bank, the concurrent issuance of the Bank's outstanding capital stock to Cohoes Bancorp, Inc., a holding company formed for such purpose, and the offering of Cohoes Bancorp, Inc.'s common stock. /s/ SILVER, FREEDMAN & TAFF, L.L.P. SILVER, FREEDMAN & TAFF, L.L.P. EX-23 18 EXHIBIT 23.2 Exhibit 24.2 Consent of Arthur Andersen ARTHUR ANDERSEN ------------------------ Arthur Andersen LLP ------------------------ 1345 Avenue of the Americas New York, NY 10105-0032 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated August 12, 1998 (and to all references to our Firm) included in or made part of this Prospectus which is included in the Application for Conversion on Form 86-AC, the Notice and Application for Conversion for Cohoes Savings Bank, the Registration Statement on Form S-1, and related Prospectus of Cohoes Bancorp, Inc. New York, New York September 11, 1998 EX-23 19 EXHIBIT 23.3 RP Financial, LC. Board of Trustees September 11, 1998 Board of Trustees Cohoes Savings Bank and Board of Directors Cohoes Bancorp, Inc. 75 Remsen Street Cohoes, New York 12047 Gentlemen: We hereby consent to the use of our firm's name in the Application for Conversion on Form 86-AC of Cohoes Bancorp, Inc., Cohoes, New York and any amendments thereto, and in the Form S-1 Registration Statement and any amendments thereto for Cohoes Bancorp, Inc. We also hereby consent to the inclusion of, summary of and references to our Appraisal Report in such filings including the Prospectus of Cohoes Bancorp, Inc. Sincerely, RP FINANCIAL, LC. /s/ Gregory E. Dunn Gregory E. Dunn Senior Vice President EX-27 20 FDS
9 1,000 12-MOS JUN-30-1998 JUL-01-1997 JUN-30-1998 8,653 576 5,000 0 48,720 45,424 45,547 412,797 3,533 535,716 449,541 0 12,996 19,897 0 0 0 53,282 535,716 33,573 4,108 742 38,423 18,816 19,262 19,161 1,400 (1) 13,767 6,737 4,087 0 0 4,087 0 0 3.97 3,663 57 1,929 636 3,105 1,217 245 3,533 2,591 0 942
EX-99 21 EXHIBIT 99.2 Exhibit 99.2 Draft of Cohoes Savings Bank Foundation Gift Instrument Exhibit 99.2 GIFT INSTRUMENT CHARITABLE GIFT TO COHOES SAVINGS Cohoes Bancorp, Inc., 75 Remsen Street, Cohoes, New York 12047-2892 (the "Company"), desires to make a gift of its common stock, par value $.01 per share to Cohoes Savings Foundation (the "Foundation"), a nonprofit corporation organized under the laws of the State of Delaware. The purpose of the donation is to establish a bond between the Company and the community in which it and its affiliates operate to enable the community to share in the potential growth and success of the Company and its affiliates over the long term. To that end, the Company, Inc. now gives, transfers, and delivers to the Foundation ________ shares of its common stock, par value $.01 per share, or total consideration of $_______, subject to the following conditions: 1. The Foundation shall use the donation solely for charitable purposes, including community development, in the communities in which the Company and its affiliates operate in accordance with the provisions of the Foundation's Certificate of Incorporation; and 2. Consistent with the Company's intent to form a long-term bond between the Company and the community, the amount of Common Stock that may be sold by the Foundation in any one year shall not exceed 5% of the market value of the assets held by the Foundation, except that this restriction shall not prohibit the board of directors of the Foundation from selling a greater amount of Common Stock in any one year if the board of directors of the Foundation determines that the failure to sell a greater amount of the Common Stock held by the Foundation would: (a) result in a long-term reduction of the value of the Foundation's assets relative to their then current value that would jeopardize the Foundation's capacity to carry out its charitable purposes; or (b) otherwise jeopardize the Foundation's tax-exempt status. Dated: ____________ __, 1998 Cohoes Bancorp, Inc. By:________________________________ Harry L. Robinson, President and Chief Executive Officer EX-99 22 EXHIBIT 99.3 Exhibit 99.3 Marketing Materials FACTS ABOUT CONVERSION The Board of Directors of Cohoes Savings Bank ("Cohoes Savings") unanimously adopted a Plan of Conversion to convert from a state-chartered mutual savings bank to a state-chartered stock savings bank (the "Conversion"). This brochure answers some of the most frequently asked questions about the Conversion and about your opportunity to invest in common shares of Cohoes Bancorp, Inc. (the "Holding Company"), the newly-formed corporation that will become the holding company for Cohoes Savings following the Conversion. In connection with the Conversion, SFS Bancorp, Inc. ("SFS"), the holding company for Schenectady Federal Savings, of Schenectady, New York, will be merged into the Holding Company ("Merger"). Investment in the common shares of Cohoes Bancorp, Inc. involves certain risks. For a discussion of these risks and other factors, including a complete description of the offering, investors are urged to read the accompanying Prospectus, especially the discussion under the heading "Risk Factors" on page xx. WHY IS COHOES SAVINGS CONVERTING TO STOCK FORM? - -------------------------------------------------------------------------------- The stock form of ownership is used by most business corporations and an increasing number of savings institutions: o The stock form of organization offers many competitive advantages, including growth opportunities and increased capital levels. o The Conversion will permit the Bank's customers and members of the local community to become equity owners and to share in the future of the Company and the Bank. o The Conversion will facilitate the proposed merger with SFS Bancorp, Inc. WILL THE CONVERSION AFFECT ANY OF MY DEPOSIT ACCOUNTS OR LOANS? - -------------------------------------------------------------------------------- No. The Conversion and Merger will have no effect on the balance or terms of any savings account or loan, and your deposits will continue to be federally insured by the Federal Deposit Insurance Corporation ("FDIC") to the maximum legal limit. Your savings account is not being converted into stock. WHO IS ELIGIBLE TO PURCHASE COMMON SHARES IN THE SUBSCRIPTION OFFERING AND THE COMMUNITY OFFERING? - -------------------------------------------------------------------------------- Certain past and present depositors of Cohoes Savings and the Holding Company's Employee Stock Ownership Plan are eligible to purchase common shares in the subscription offering. HOW MANY COMMON SHARES ARE BEING OFFERED AND AT WHAT PRICE? - -------------------------------------------------------------------------------- Cohoes Bancorp, Inc. is offering up to 8,050,000 common shares, subject to adjustment as described in the Prospectus, at a price of $10.00 per share through the Prospectus. HOW MANY SHARES MAY I BUY? - -------------------------------------------------------------------------------- The minimum order is 25 common shares. The maximum amount of shares that a person may purchase in any particular priority category in the Offering is generally limited to 25,000 shares. No person, together with associates and persons acting in concert with such person, may purchase more than 80,500 shares WILL THE COMMON SHARES BE INSURED? - -------------------------------------------------------------------------------- No. Like any other common shares, the Holding Company's common shares will not be insured. DO MEMBERS HAVE TO BUY COMMON SHARES? - -------------------------------------------------------------------------------- No. However, the Conversion will allow depositors of Cohoes Savings an opportunity to buy common shares and become shareholders of the holding company for the local financial institution with which they do business. HOW DO I ORDER COMMON SHARES? - -------------------------------------------------------------------------------- You must complete the enclosed Stock Order Form and Certification Form. Instructions for completing your Stock Order Form and Certification Form are contained in this packet. Your order must be received by 12:00 Noon, Eastern Time on December xx, 1998. HOW MAY I PAY FOR MY COMMON SHARES? - -------------------------------------------------------------------------------- First, you may pay for common shares by check, cash or money order. Interest will be paid by Cohoes Savings on these funds at the passbook rate, which is currently x.xx%, from the day the funds are received until the completion or termination of the Conversion. Second, you may authorize us to withdraw funds from your deposit account or certificate of deposit at Cohoes Savings for the amount of funds you specify for payment. You will not have access to these funds from the day we receive your order until completion or termination of the Conversion. CAN I PURCHASE SHARES USING FUNDS IN MY COHOES SAVINGS IRA ACCOUNT? - -------------------------------------------------------------------------------- Federal regulations do not permit the purchase of common shares in connection with the Conversion from your existing Cohoes Savings IRA account. To accommodate our depositors, we have made arrangements with an outside trustee to allow such purchases. Please call our Stock Sales Center for additional information. WILL DIVIDENDS BE PAID ON THE COMMON SHARES? - -------------------------------------------------------------------------------- The Board of Directors of the Holding Company will consider whether to pay a cash dividend in the future, subject to regulatory limits and requirements. No decision has been made as to the amount or timing of such dividends, if any. HOW WILL THE COMMON SHARES BE TRADED? - -------------------------------------------------------------------------------- The Holding Company's stock is expected to trade on The Nasdaq National Market under the symbol "XXXX." However, no assurance can be given that an active and liquid market will develop. ARE OFFICERS AND DIRECTORS OF COHOES SAVINGS PLANNING TO PURCHASE SHARES? - -------------------------------------------------------------------------------- Yes! The officers and directors of Cohoes Savings plan to purchase, in the aggregate, $4,590,000 worth of shares or approximately 5.7% of the common shares offered at the maximum of the offering range. MUST I PAY A COMMISSION? - -------------------------------------------------------------------------------- No. You will not be charged a commission or fee on the purchase of common shares in the Conversion. SHOULD I VOTE TO APPROVE THE PLAN OF CONVERSION? - -------------------------------------------------------------------------------- Yes. Your "YES" vote is very important! PLEASE VOTE, SIGN AND RETURN ALL PROXY CARDS! WHY DID I GET SEVERAL PROXY CARDS? - -------------------------------------------------------------------------------- If you have more than one account, you could receive more than one proxy card, depending on the ownership structure of your accounts. HOW MANY VOTES DO I HAVE? - -------------------------------------------------------------------------------- Your proxy card(s) show(s) the number of votes you have. Every depositor is entitled to cast one vote for each $100, and a proportionate fractional vote for an amount of less than $100, on deposit as of the voting record date, up to 1,000 votes. MAY I VOTE IN PERSON AT THE SPECIAL MEETING? - -------------------------------------------------------------------------------- Yes, but we would still like you to sign and mail your proxy today. If you decide to revoke your proxy you may do so at any time before such proxy is exercised by executing and delivering a later dated proxy or by giving written notice of revocation or in person at the special meeting. Attendance at the special meeting will not, of itself, revoke a proxy. For Additional Information You May Call Our Stock Sales Center Monday through Wednesday 9:00 a.m. to 3:00 p.m., Thursday 9:00 a.m. to 6:00 p.m. or Friday 9:00 a.m. to 4:00 p.m. STOCK SALES CENTER (xxx) xxx-xxxx Cohoes Bancorp, Inc. xxxxxxxxxxxxx Cohoes, New York 12047 - -------------------------------------------------------------------------------- QUESTIONS AND ANSWERS - -------------------------------------------------------------------------------- Cohoes Bancorp, Inc. [LOGO] THE COMMON SHARES BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. November xx, 1998 Dear Member: We are pleased to announce that Cohoes Savings Bank ("Cohoes Savings") is converting from a state-chartered mutual savings bank to a state-chartered stock savings bank (the "Conversion"). In conjunction with the Conversion, Cohoes Bancorp, Inc., the newly-formed corporation that will become the holding company for Cohoes Savings, is offering common shares in a subscription offering (the "Offering") to certain of our depositors and our Employee Stock Ownership Plan, pursuant to a Plan of Conversion. In connection with the Conversion, SFS Bancorp, Inc. ("SFS"), the holding company for Schenectady Federal Savings Bank, located in Schenectady, New York, will be merged into the Holding Company ("Merger"). To accomplish this Conversion, we need your participation in an important vote. Enclosed is a proxy statement describing the Plan of Conversion and your voting and subscription rights. Cohoes Savings' Plan of Conversion has been approved by the Superintendent of Banks of the State of New York and now must be approved by you. YOUR VOTE IS VERY IMPORTANT. Enclosed, as part of the proxy materials, is your proxy card, located behind the window of your mailing envelope. This proxy card should be signed and returned to us prior to the Special Meeting to be held on December xx, 1998. Please take a moment now to sign the enclosed proxy card and return it to us in the postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING AGAINST THE CONVERSION. The Board of Directors of Cohoes Savings feels that the Conversion will offer a number of advantages, such as an opportunity for depositors of Cohoes Savings to become shareholders. Please remember: o Your accounts at Cohoes Savings will continue to be insured up to the maximum legal limit by the Federal Deposit Insurance Corporation ("FDIC"). o There will be no change in the balance, interest rate, or maturity of any deposit accounts because of the Conversion, unless you choose to purchase shares using your account balances. o Members have a right, but no obligation, to subscribe for common shares before they are offered to the public. Voting for the Conversion does not obligate you to purchase stock. o Like all stock, the common shares issued in the Offering WILL NOT BE INSURED BY THE FDIC. Enclosed are materials describing the Offering. We urge you to read these materials carefully. If you are interested in purchasing the common shares of Cohoes Bancorp, Inc., your Stock Order Form and Certification Form and payment must be received by Cohoes Savings prior to 12:00 Noon, Eastern Time, on December xx, 1998. If you have additional questions regarding the Offering, please call us at (xxx) xxx-xxxx, Monday through Wednesday from 9:00 a.m. to 3:00 p.m., Thursday from 9:00 a.m to 6:00 p.m., Friday from 9:00 a.m. to 4:00 p.m., or stop by the Stock Sales Center at xxxxxxxxxxx, Cohoes, New York. Best regards, Harry L. Robinson President and Chief Executive Officer THE COMMON SHARES BEING OFFERED IN THIS OFFERING ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS. November xx, 1998 Dear Friend: We are pleased to announce that Cohoes Savings Bank ("Cohoes Savings") is converting from a state-chartered mutual savings bank to a state-chartered stock savings bank (the "Conversion"). In conjunction with the Conversion, Cohoes Bancorp, Inc., the newly-formed corporation that will become the holding company for Cohoes Savings, is offering common shares in a subscription offering (the "Offering") to certain depositors and our Employee Stock Ownership Plan, pursuant to a Plan of Conversion. In connection with the Conversion, SFS Bancorp, Inc. ("SFS"), the holding company for Schenectady Federal Savings Bank, located in Schenectady, New York, will be merged into the Holding Company ("Merger"). Because we believe you may be interested in learning more about the merits of the common shares of Cohoes Bancorp, Inc. as an investment, we are sending you the following materials which describe the Offering. PROSPECTUS: This document provides detailed information about operations at Cohoes Savings and the Offering. QUESTIONS AND ANSWERS: Key questions and answers about the Offering are found in this pamphlet. STOCK ORDER FORM & CERTIFICATION FORM: This form is used to purchase stock by returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is 12:00 noon, Eastern Time, on December xx, 1998. As a friend of Cohoes Savings, you will have the opportunity to buy common shares directly from Cohoes Bancorp, Inc. in the Conversion without paying a commission or a fee. If you have additional questions regarding the Conversion and the Offering, please call us at (xxx) xxx-xxxx Monday through Wednesday from 9:00 a.m. to 3:00 p.m., Thursday from 9:00 a.m. to 6:00 p.m., Friday from 9:00 a.m to 4:00 p.m., or stop by the Stock Sales Center at xxxxxxxxxxx, Cohoes, New York. We are pleased to offer you this opportunity to become a shareholder of Cohoes Bancorp, Inc. Best regards, Harry L. Robinson President and Chief Executive Officer THE COMMON SHARES BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. November xx, 1998 Dear Member: We are pleased to announce that Cohoes Savings Bank ("Cohoes Savings") is converting from a state-chartered mutual savings bank to a state-chartered stock savings bank (the "Conversion"). In conjunction with the Conversion, Cohoes Bancorp, Inc., the newly-formed corporation that will become the holding company for Cohoes Savings, is offering common shares in a subscription offering (the "Offering") to certain of our depositors and our Employee Stock Ownership Plan, pursuant to a Plan of Conversion. In connection with the Conversion, SFS Bancorp, Inc. ("SFS"), the holding company for Schenectady Federal Savings Bank, located in Schenectady, New York, will be merged into the Holding Company ("Merger"). To accomplish this Conversion, we need your participation in an important vote. Enclosed is a proxy statement describing the Plan of Conversion and your voting and subscription rights. Cohoes Savings' Plan of Conversion has been approved by the Superintendent of Banks of the State of New York and now must be approved by you. YOUR VOTE IS VERY IMPORTANT. Enclosed, as part of the proxy materials, is your proxy card, located behind the window of your mailing envelope. This proxy card should be signed and returned to us prior to the Special Meeting to be held on December xx, 1998. Please take a moment now to sign the enclosed proxy card and return it to us in the postage-paid envelope provided. FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING AGAINST THE CONVERSION. The Board of Directors of Cohoes Savings feels that the Conversion will offer a number of advantages, such as an opportunity for depositors of Cohoes Savings to become shareholders. Please remember: Your accounts at Cohoes Savings will continue to be insured up to the maximum legal limit by the Federal Deposit Insurance Corporation ("FDIC"). There will be no change in the balance, interest rate, or maturity of any deposit accounts because of the Conversion, unless you choose to purchase shares using your account balances. Members have a right, but no obligation, to subscribe for common shares before they are offered to the public. Voting for the Conversion does not obligate you to purchase stock. Like all stock, the common shares issued in the Offering WILL NOT BE INSURED BY THE FDIC. Enclosed are materials describing the Offering. We urge you to read these materials carefully. If you are interested in purchasing the common shares of Cohoes Bancorp, Inc., your Stock Order Form and Certification Form and payment must be received by Cohoes Savings prior to 12:00 Noon, Eastern Time, on December xx, 1998. If you have additional questions regarding the Offering, please call us at (xxx) xxx-xxxx, Monday through Wednesday from 9:00 a.m. to 3:00 p.m., Thursday from 9:00 a.m to 6:00 p.m., Friday from 9:00 a.m. to 4:00 p.m., or stop by the Stock Sales Center at xxxxxxxxxxx, Cohoes, New York. Best regards, Harry L. Robinson President and Chief Executive Officer THE COMMON SHARES BEING OFFERED IN THIS OFFERING ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENT AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES. THE OFFER WILL BE MADE ONLY BY THE PROSPECTUS. [GRAPHIC OMITTED] [KEEFE, BRUYETTE & WOODS, INC. LETTERHEAD] November xx, 1998 To Members and Friends of Cohoes Savings Bank - -------------------------------------------------------------------------------- Keefe, Bruyette & Woods, Inc., a member of the National Association of Securities Dealers, Inc. ("NASD"), is assisting Cohoes Savings Bank ("Cohoes Savings" or the "Bank") in its conversion from a state-chartered mutual savings bank to a state-chartered stock savings bank (the "Conversion") and the concurrent offering of common shares by Cohoes Bancorp, Inc.. (the "Holding Company"), the newly formed corporation that will become the holding company of Cohoes Savings following the Conversion. At the request of the Holding Company, we are enclosing materials explaining this process and your options, including an opportunity to invest in the Holding Company's common shares being offered to the customers of Cohoes Savings Bank. Please read the enclosed offering materials carefully. The Holding Company has asked us to forward these documents to you in view of certain requirements of the securities laws in your state. If you have any questions, please visit our Stock Sales Center located at xxxxxxxxxxx, Cohoes, New York or feel free to call the Stock Sales Center at (xxx) xxx-xxxx. Very truly yours, Keefe, Bruyette & Woods, Inc. THE COMMON SHARES BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. November xx, 1998 Dear Member: We are pleased to announce that Cohoes Savings Bank ("Cohoes Savings") is converting from a state-chartered mutual savings bank to a state-chartered stock savings bank (the "Conversion"). In conjunction with the Conversion, Cohoes Bancorp, Inc., the newly-formed corporation that will become the holding company for Cohoes Savings, is offering common shares in a subscription offering. In connection with the Conversion, SFS Bancorp ("SFS") and its subsidiary, Schenectady Federal Savings of Schenectady, New York, will be merged into the Holding Company ("Merger"). Unfortunately, Cohoes Bancorp, Inc. is unable to either offer or sell its common shares to you because the small number of eligible subscribers in your jurisdiction makes registration or qualification of the common shares under the securities laws of your jurisdiction impractical, for reasons of cost or otherwise. Accordingly, this letter should not be considered an offer to sell or a solicitation of an offer to buy the common shares of Cohoes Bancorp, Inc. However, as a member of Cohoes Savings, you have the right to vote on the Plan of Conversion at the Special Meeting of Members to be held on December xx, 1998. Enclosed is a proxy card, a Proxy Statement (which includes the Notice of the Special Meeting), a Prospectus (which contains information incorporated into the Proxy Statement) and a return envelope for your proxy card. I invite you to attend the Special Meeting on December xx, 1998. However, whether or not you are able to attend, please complete the enclosed proxy card and return it in the enclosed envelope. Best Regards, Harry L. Robinson President and Chief Executive Officer November xx, 1998 Dear Prospective Investor: We are pleased to announce that Cohoes Savings Bank ("Cohoes Savings") is converting from a state-chartered mutual savings bank to a state-chartered stock savings bank (the "Conversion"). In conjunction with the Conversion, Cohoes Bancorp, Inc., the newly-formed corporation that will become the holding company for Cohoes Savings, is offering common shares in a subscription offering and community offering (collectively, the "Offering"). In connection with the Conversion, SFS Bancorp, Inc. ("SFS"), the holding company for Schenectady Federal Savings, of Schenectady, New York, will be merged into the Holding Company ("Merger"). We have enclosed the following materials which will help you learn more about the merits of Cohoes Bancorp, Inc. as an investment. Please read and review the materials carefully. PROSPECTUS: This document provides detailed information about operations at Cohoes Savings Bank and the Offering. QUESTIONS AND ANSWERS: Key questions and answers about the Offering are found in this pamphlet. STOCK ORDER FORM & CERTIFICATION FORM: This form is used to purchase common shares by returning it with your payment in the enclosed business reply envelope. The deadline for ordering common shares is 12:00 noon, Eastern Time, on December xx, 1998. We invite our loyal customers and local community members to become shareholders of Cohoes Bancorp, Inc.. Through the Offering you have the opportunity to buy common shares directly from Cohoes Bancorp, Inc., without paying a commission or a fee. If you have additional questions regarding the Conversion and the Offering, please call us at (xxx) xxx-xxxx, Monday through Wednesday from 9:00 a.m. to 3:00 p.m., Thursday from 9:00 a.m. to 6:00 p.m., Friday from 9:00 a.m. to 4:00 p.m., or stop by the Stock Sales Center at xxxxxxxxxxxxxx Cohoes, New York. Best regards, Harry L. Robinson President and Chief Executive Officer THE COMMON SHARES BEING OFFERED ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE BANK INSURANCE FUND, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. THIS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SHARES. THE OFFER IS MADE ONLY BY THE PROSPECTUS. EX-99 23 EXHIBIT 99.4 Cohoes Bancorp, Inc. Stock Ownership Guide and Stock Order Form Instructions Stock Order Form Instructions - -------------------------------------------------------------------------------- Item 1 and 2 - Fill in the number of shares that you wish to purchase and the total payment due. The amount due is determined by multiplying the number of shares ordered by the subscription price of $10.00 per share. The minimum number of shares that may be subscribed for is 25. Generally, each Eligible Account Holder, Supplemental Eligible Account Holder and Other Member may purchase in the Subscription Offering not more than 25,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 25,000 Common Shares. Except for Cohoes Bancorp, Inc.'s Employee Stock Ownership Plan, which may purchase up to 8% of the total Common Shares sold in the Offering, no person, together with his or her Associates and other persons Acting in Concert with him or her, may purchase more than 80,500 Common Shares in the Offering. Cohoes Bancorp, Inc. reserves the right to reject any order received in the Community Offering, if any, in whole or in part. For a more detailed explanation of the stock purchase limitations, please see "The Offerings - Limitations on Common Stock Purchases" in the prospectus which is incorporated herein by reference. Item 3 - Payment for shares may be made by check, bank draft or money order payable to Cohoes Bancorp, Inc. No wire transfers will be accepted. DO NOT MAIL CASH. Your funds will earn interest at Cohoes Savings Bank's passbook rate which is currently x.xx%. Item 4 - To pay by withdrawal from a savings account or certificate of deposit at Cohoes Savings Bank, insert the account number(s) and the amount(s) you wish to withdraw from each account. If the signature of more than one person is required to withdraw, each must sign in the signature box on the front of this form. To withdraw from an account with checking privileges, please write a check. No early withdrawal penalty will be charged on funds used to purchase stock. Payments will remain in account(s) until the Offering closes but a hold will be placed on the account(s) for the amount(s) you show. If a partial withdrawal reduces the balance of a certificate account to less than the applicable minimum, the remaining balance will be refunded. Item 5 - Please check this box to indicate whether you are a director, officer or employee of Cohoes Savings Bank or a member of such person's immediate household. Item 6 - Please check the appropriate box if you were: a) A depositor with $100.00 or more on deposit at Cohoes Savings Bank as of March 31, 1997. Enter information for all deposit accounts that you had at Cohoes Savings Bank on March 31, 1997. b) A depositor with $100.00 or more on deposit at Cohoes Savings Bank as of September 30, 1998, but are not an Eligible Account Holder. Enter information for all deposit accounts that you had at Cohoes Savings Bank on September 30, 1998. c) A member of Cohoes Savings Bank as of October 31, 1998, but are not an Eligible Account Holder or a Supplemental Eligible Account Holder. Enter information for all deposit and/or loan accounts that you had at Cohoes Savings Bank on October 31, 1998. Item 7 - The stock transfer industry has developed a uniform system of shareholder registrations that we will use in the issuance of Cohoes Bancorp, Inc. common shares. Please complete this section as fully and accurately as possible, and be certain to supply your social security or Tax I.D. number(s) and your daytime and evening phone numbers. We will need to call you if we cannot execute your order as given. If you have any questions regarding the registration of your stock, please consult your legal advisor. Subscription rights are not transferable. If you are a qualified member, to protect your priority over other purchasers as described in the Prospectus, you must take ownership in at least one of the account holder's names. Stock Ownership Guide - -------------------------------------------------------------------------------- Individual - The stock is to be registered in an individual's name only. You may not list beneficiaries for this ownership. Joint Tenants - Joint tenants with rights of survivorship identifies two or more owners. When stock is held by joint tenants with rights of survivorship, ownership automatically passes to the surviving joint tenant(s) upon the death of any joint tenant. You may not list beneficiaries for this ownership. Tenants in Common - Tenants in common may also identify two or more owners. When stock is to be held by tenants in common, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co-tenant. All parties must agree to the transfer or sale of shares held by tenants in common. You may not list beneficiaries for this ownership. Uniform Gift/Uniform Transfer to Minors - For residents of many states stock may by held in the name of a custodian for the benefit of a minor under the Uniform Gift to Minors Act. For residents in other states, including Indiana, stock may be held in a similar type of ownership under the Uniform Transfer to Minors Act of the individual state. SHARES MAY BE PURCHASED IN THE SUBSCRIPTION OFFERING UNDER EITHER ACT ONLY IF THE MINOR HAS SUBSCRIPTION RIGHTS. Only one custodian and one minor may be designated. Instructions: On the first "Name" line, print the first name, middle initial and last name of the custodian, with the abbreviation "CUST" after the name. Print the first name, middle initial and last name of the minor on the second "Name" line. Use the minor's social security number. Corporation/Partnership - Corporations and partnerships may purchase stock. Please provide the corporation/partnership's legal name and Tax I.D. To have subscription rights, the corporation/partnership must have an account in the legal name. Individual Retirement Account - Individual Retirement Account ("IRA") holders may make stock purchases from their deposits through a prearranged "trustee-to-trustee" transfer. Stock may only be held in a self-directed IRA. Cohoes Savings Bank does not offer a self-directed IRA. Please contact the Stock Sales Center if you have any questions about your IRA account. Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates, Guardianships, etc.) are established under a form of trust agreement or pursuant to a court order. Without a legal document establishing a fiduciary relationship, your stock may not be registered in a fiduciary capacity. Instructions: On the first "Name" line, print the first name, middle initial and last name of the fiduciary if the fiduciary is an individual. If the fiduciary is a corporation, list the corporate title on the first "Name" line. Following the name, print the fiduciary title such as trustee, executor, personal representative, etc. On the second "Name" line, print the name of the maker , donor or testator or the name of the beneficiary. Following the name, indicate the type of legal document establishing the fiduciary relationship (agreement, court order, etc.). In the blank after "Under Agreement Dated", fill in the date of the document governing the relationship. The date of the document need not be provided for a trust created by a will. PROXY CARD - -------------------------------------------------------------------------------- COHOES BANCORP, INC. Stock Sales Center xxxxxxxxxxxxxxxx Cohoes, New York (xxx) xxx-xxxx STOCK ORDER FORM Please refer to the enclosed Stock Ownership Guide and Stock Order Form Instructions. - -------------------------------------------------------------------------------- DEADLINE: The Subscription Offering ends at 12:00 Noon, Eastern Time, on December xx, 1998. Your original Stock Order and Certification Form, properly completed and executed and with the correct payment, must be received (not postmarked) at the address on the top of this form or any Citizens Financial branch by this deadline, or it will be considered void. FAXES OR COPIES OF THIS FORM WILL NOT BE ACCEPTED. - -------------------------------------------------------------------------------- (1) Number of Shares Price Per Share (2)Total Amount Due x $10.00= $ ____________________ __________________ The minimum number of shares that may be subscribed for is 25. Generally, each Eligible Account Holder, Supplemental Eligible Account Holder and Other Member may purchase in the Subscription Offering not more than 25,000 Common Shares. In connection with the exercise of subscription rights arising from a single deposit account in which two or more persons have an interest, however, the aggregate maximum number of Common Shares which the persons having an interest in such account may purchase in the Subscription Offering in relation to such account is 25,000 Common Shares. Except for the Cohoes Bancorp, Inc. Employee Stock Ownership Plan, which may purchase up to 8% of the total Common Shares sold in the Offering, no person, together with his or her Associates and other persons acting in concert with him or her, may purchase more than 80,500 (1%) Common Shares in the Offering. - -------------------------------------------------------------------------------- METHOD OF PAYMENT (3)[ ] Enclosed is a check, bank draft or money order payable to Cohoes Bancorp, Inc. for $______________. (4)[ ] I authorize Cohoes Savings Bank to make withdrawals from my Cohoes Savings certificate or savings account(s) shown below, and understand that the amounts will not otherwise be available for withdrawal: ACCOUNT NUMBER(s) AMOUNT(s) _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ TOTAL WITHDRAWAL ______________________ There is NO penalty for early withdrawals used for this payment. - -------------------------------------------------------------------------------- (5)[ ] Check here if you are a DIRECTOR, OFFICER or EMPLOYEE of Cohoes Savings Bank or a member of such person's immediate family (same household). (6) PURCHASER INFORMATION (CHECK ONE) a.[ ] Eligible Account Holder Check here if you were a depositor with $100.00 or more on deposit at Cohoes Savings Bank as of March 31, 1997. Enter information below for all deposit accounts that you had at Cohoes Savings Bank on March 31, 1997. b.[ ] Supplemental Eligible Account Holder - Check here if you were a depositor with $100.00 or more on deposit at Cohoes Savings Bank as of September 30, 1998 but are not an Eligible Account Holder. Enter information below for all deposit accounts that you had at Cohoes Savings Bank on September 30, 1998. c.[ ] Other Member - Check here if you were a member of Cohoes Savings Bank as of October 31, 1998 but are not an Eligible Account Holder or a supplemental Eligible Account Holder. Enter information below for all accounts that you had at Cohoes Savings Bank on October 31, 1998. ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ (additional space on back of form) PLEASE NOTE: FAILURE TO LIST ALL OF YOUR ACCOUNTS MAY RESULT IN THE LOSS OF PART OR ALL OF YOUR SUBSCRIPTION RIGHTS. - -------------------------------------------------------------------------------- (7) STOCK REGISTRATION - Please PRINT Legibly and Fill Out Completely (Note: The stock certificate and all correspondence related to this stock order will be mailed to the address provided below) [ ]Individual [ ]Uniform Transfer to Minors [ ]Partnership [ ]Joint Tenants [ ]Uniform Gift to Minors [ ]Individual Retirement Account [ ]Tenants in Common [ ]Corporation [ ]Fiduciary/Trust(Under Agreement Dated_____) - -------------------------------------------------------------------------------- Name Social Security or Tax I.D. - -------------------------------------------------------------------------------- Name Social Security or Tax I.D. - -------------------------------------------------------------------------------- Mailing Daytime Address Telephone - -------------------------------------------------------------------------------- Zip Evening City State Code County Telephone ================================================================================ [ ] NASD AFFILIATION (This section only applies to those individuals who meet the delineated criteria) Check here if you are a member of the National Association of Securities Dealers, Inc. ("NASD"), a person associated with an NASD member, a member of the immediate family of any such person who contributes to your support, directly or indirectly, or the holder of an account in which as NASD member or person associated with an NASD member has a beneficial interest. To comply with conditions under which an exemption from the NASD's Interpretation With Respect to Free-Riding and Withholding is available, you agree, if you have checked the NASD affiliation box: (1) not to sell, transfer or hypothecate the stock for a period of three months following the issuance and (2) to report this subscription in writing to the applicable NASD member within one day of the payment therefor. - -------------------------------------------------------------------------------- ACKNOWLEDGMENT By signing below, I acknowledge receipt of the Prospectus dated November xx, 1998 at least 48 hours prior to delivery of this Stock Order Form and understand I may not change or revoke my order once it is received by Cohoes Bancorp, Inc.. I also certify that this stock order is for my account and there is no agreement or understanding regarding any further sale or transfer of these shares. Applicable regulations prohibit any persons from transferring, or entering into any agreement directly or indirectly to transfer, the legal or beneficial ownership of subscription rights or the underlying securities to the account of another person. Cohoes Bancorp, Inc. will pursue any and all legal and equitable remedies in the event it becomes aware of the transfer of subscription rights and will not honor orders involving such transfer. Under penalties of perjury, I further certify that: (1) the social security number or taxpayer identification number given above is correct; and (2) I am not subject to backup withholding. You must cross out item (2) above, if you have been notified by the Internal Revenue Service that you are subject to backup withholding because of under-reporting interest or dividends on your tax return. By signing below, I also acknowledge that I have not waived any rights under the Securities Act of 1933 and the Securities Exchange Act of 1934. THE COMMON SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY. Signature THIS FORM MUST BE SIGNED AND DATED TWICE: Here and on the attached Certification Form. THIS ORDER IS NOT VALID UNLESS THE STOCK ORDER FORM AND CERTIFICATION FORM ARE BOTH SIGNED. YOUR ORDER IS SUBJECT TO THE PROVISIONS OF THE PLAN OF CONVERSION AND AS DESCRIBED IN THE PROSPECTUS. When purchasing as a custodian, corporate officer, etc., include your full title. An additional signature is required only if payment is by withdrawal from an account that requires more than one signature to withdraw funds. - -------------------------------------------------------------------------------- Signature Date - -------------------------------------------------------------------------------- Signature Date - -------------------------------------------------------------------------------- TURN PAGE OVER - -------------------------------------------------------------------------------- FOR OFFICE Date Rec'd ___/___/___ Check # ______________ USE Amount $ _____________ Category ______________ Batch # Order # - Deposit $ ______________ - -------------------------------------------------------------------------------- PROXY CARD Please Detach, sign, Date & Return ALL Proxies in the enclosed BLUE envelope - -------------------------------------------------------------------------------- COHOES BANCORP, INC. - -------------------------------------------------------------------------------- ITEM (6) CONTINUED; PURCHASER INFORMATION ACCOUNT TITLE (NAMES ON ACCOUNTS) ACCOUNT NUMBER __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ - -------------------------------------------------------------------------------- CERTIFICATION FORM (THIS CERTIFICATION MUST BE SIGNED IN ADDITION TO THE STOCK ORDER FORM) I ACKNOWLEDGE THAT THE COMMON SHARES, $0.01 VALUE PER SHARE, OF COHOES BANCORP, INC. ARE NOT DEPOSITS OR AN ACCOUNT AND ARE NOT FEDERALLY INSURED OR GUARANTEED BY COHOES SAVINGS BANK OR BY THE FEDERAL GOVERNMENT. If anyone asserts that the common shares are federally insured or guaranteed, or are as safe as an insured deposit, I should call the Superintendent of Banks of the State of New York at (xxx) xxx-xxxx. I further certify that, before purchasing the common shares of Cohoes Bancorp, Inc., I received a copy of the Prospectus dated November xx, 1998 which disclosed the nature of the common shares being offered thereby and describes the following risks involved in an investment in the common shares under the heading "Risk Factors" beginning on page xx of the Prospectus: 1. Decreased Return on Average Equity and Increased Expenses Immediately After Conversion 2. Risks Related to the Merger 3. Dilutive Effect of Issuance of Additional Shares 4. Interest Rate Risk Exposure 5. Risks related to Multi-Family and Commercial real Estate Loans: Geographic Concentration of Loans 6. Competition 7. Takeover Defensive provisions 8. Post Conversion Compensation and Other Expense 9. Absence of Active Market for the Common Stock 10. Year 2000 Compliance 11. Risks Associated with the Establishment of the Charitable Foundation _________________________________ __________________________________ Signature Date Signature Date _________________________________ __________________________________ (NOTE: IF SHARES TO BE HELD JOINTLY, BOTH PARTIES MUST SIGN) PROXY GRAM - -------------------------------------------------------------------------------- We recently forwarded to you a proxy statement and related materials regarding a proposal to convert Cohoes Savings Bank from a state-chartered mutual savings bank to a state-chartered stock savings bank (the "Conversion"). Your vote on our Plan of Conversion has not yet been received. Failure to Vote has the Same Effect as Voting Against the Conversion. Your vote is important to us, and we, therefore, are requesting that you sign the enclosed proxy card and return it promptly in the enclosed postage-paid envelope. Voting for the Conversion does not obligate you to purchase stock or affect the terms or insurance on your accounts. The Board of Directors unanimously recommends that you vote "FOR" the Conversion. Cohoes Savings Bank Cohoes, New York Harry L. Robinson Chairman and Chief Executive Officer If you mailed the proxy, please accept our thanks and disregard this request. For further information call (xxx) xxx-xxxx. EX-99 24 EXHIBIT 99.5 Exhibit 99.5 CONSENT TO BE IDENTIFIED AS A PROPOSED DIRECTOR I, Joseph H. Giaquinto, President of SFS Bancorp, Inc. and Schenectady Federal Savings Bank, a Federal Savings Bank, hereby consents to being identified as a proposed director of Cohoes Bancorp, Inc. (the "Company") and Cohoes Savings Bank in the Company's prospectus to be included in a registration statement on Form S-1 and on Application for Conversion on Form 86-AC. By: /s/ Joseph H. Giaquinto ----------------------- Joseph H. Giaquinto Dated: September 16, 1998 EX-99 25 EXHIBIT 99.6 SFS BANCORP, INC. REVOCABLE PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF SFS BANCORP, INC. ("SFS") FOR THE SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON DECEMBER ___, 1998. The undersigned stockholder of SFS hereby appoints the Board of Directors of SFS or any successors thereto as proxies, with full powers of substitution, to represent and to vote as proxy, as designated, all shares of common stock of SFS Bancorp, Inc. held of record by the undersigned on _________, 1998 at the Special Meeting of Stockholders (the "Special Meeting") to be held at the main office of SFS located at 251-263 State Street, Schenectady, New York, on ________, December __, 1998, at 10:00 a.m., Eastern Time, or at any adjournment or postponement thereof, upon the matters described in the accompanying Notice of Special Meeting and Proxy Statement/Prospectus and upon such other matters as may properly come before the Special Meeting. This proxy, when properly executed, will be voted in the manner directed herein by the undersigned stockholder. If no direction is given, this Proxy will be voted FOR Proposal 1. The undersigned hereby acknowledges receipt of the Notice of Special Meeting of Stockholders and the Proxy Statement/Prospectus for the Special Meeting. PLEASE MARK, SIGN AND DATE THIS PROXY ON THE REVERSE SIDE AND RETURN IT IN THE ENCLOSED ENVELOPE 33 The Board of Directors unanimously recommends a vote "FOR" Proposal 1. I. Approval of the Agreement and Plan of Merger, dated as of July 31, 1998, by and among Cohoes Savings Bank and SFS Bancorp, Inc. (the "Merger Agreement"), pursuant to which SFS Bancorp, Inc. will merge with and into Cohoes Bancorp, Inc. [ ] FOR [ ] AGAINST [ ] ABSTAIN In their discretion, the proxies are authorized to vote with respect to approval of the minutes of the last meeting of stockholders, matters incident to the conduct of the meeting, and upon such other matters as may properly come before the meeting. Dated: ___________________________, 1998 ---------------------------------------- ---------------------------------------- Signature(s) Please sign exactly as your name appears hereon. Joint owners should each sign. If signing as attorney, executor, administrator, trustee or guardian, please include your full title. Corporate or partnership proxies should be signed by an authorized officer. 34 -----END PRIVACY-ENHANCED MESSAGE-----