UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-24187
HUDSON RIVER BANCORP, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 14-1803212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Hudson City Centre, Hudson New York 12534
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 828-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
As of November 9, 1998, there were issued and outstanding 17,853,750
shares of the Registrant's Common Stock.
<PAGE>
FORM 10-Q
HUDSON RIVER BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1998 and
March 31, 1998
Consolidated Income Statements for the three and six
months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows for the six
months ended September 30, 1998 and 1997
Notes to Unaudited Consolidated Interim Financial
Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
EXHIBIT INDEX
SIGNATURE PAGE
<PAGE>
Item 1. Financial Statements
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
September 30, March 31,
Assets 1998 1998
- ------ --------- ---------
(In thousands)
<S> <C> <C>
Cash and due from banks ...................................................... $ 10,380 $ 12,423
Federal funds sold ........................................................... 900 21,850
Securities purchased under agreements to resell .............................. 38,563 --
--------- ---------
Cash and cash equivalents .............................................. 49,843 34,273
--------- ---------
Loans held for sale .......................................................... 56 1,286
Securities available for sale ................................................ 187,823 42,471
Investment securities ........................................................ 48,753 65,194
Federal Home Loan Bank of New York stock ..................................... 3,035 3,035
Loans receivable ............................................................. 526,224 506,978
Less: Allowance for loan losses ......................................... (11,560) (8,227)
--------- ---------
Net loans receivable .............................................. 514,664 498,751
--------- ---------
Accrued interest receivable .................................................. 5,984 4,402
Premises and equipment, net .................................................. 15,365 15,331
Other real estate owned and repossessed property ............................. 1,754 1,532
Other assets ................................................................. 3,689 4,939
--------- ---------
Total assets ...................................................... $ 830,966 $ 671,214
========= =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits:
Savings ............................................................ 139,682 142,569
N.O.W. and money market ............................................ 91,904 93,400
Time deposits ...................................................... 316,145 319,299
Non-interest bearing deposits ...................................... 47,655 33,046
--------- ---------
Total deposits .................................................... 595,386 588,314
--------- ---------
Short-term borrowings ................................................... -- 2,000
Mortgagors' escrow balances ............................................. 5,111 3,723
Other liabilities ....................................................... 4,527 8,873
--------- ---------
Total liabilities ................................................. 605,024 602,910
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
(continued)
September 30, March 31,
1998 1998
--------- ---------
(In thousands)
<S> <C> <C>
Stockholders' Equity:
Common Stock, $.01 par value. Authorized 40,000,000 shares;
17,853,750 shares issued at September 30, 1998 .................... 179 --
Additional paid in capital .............................................. 174,988 --
Common stock acquired by Employee Stock Ownership Plan
(1,428,300 shares ................................................. (18,428) --
Retained earnings, substantially restricted ............................. 68,372 68,308
Net unrealized gain (loss) on securities available for
sale, net of tax .................................................. 831 (4)
--------- ---------
Total stockholders' equity ........................................ 225,942 68,304
--------- ---------
Total liabilities and stockholders' equity ........................ $ 830,966 $ 671,214
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
For the Three For the Six
Months Ended September 30, Months Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans .................... $ 12,114 $ 11,921 $ 24,277 $ 23,645
Securities available for sale ................. 2,346 590 3,461 1,334
Investment securities ......................... 870 1,161 1,887 2,451
Federal funds sold ............................ 378 119 981 131
Securities purchased under agreements to resell 1,009 -- 1,198 --
Federal Home Loan Bank of New
York stock ................................ 54 47 111 91
-------- -------- -------- --------
Total interest and dividend income ....... 16,771 13,838 31,915 27,652
-------- -------- -------- --------
Interest expense:
Deposits ...................................... 6,464 6,490 13,593 12,813
Short-term borrowings ......................... 16 28 50 156
-------- -------- -------- --------
Total interest expense .................. 6,480 6,518 13,643 12,969
-------- -------- -------- --------
Net interest income ..................... 10,291 7,320 18,272 14,683
Provision for loan losses .......................... 1,944 2,045 4,160 4,405
-------- -------- -------- --------
Net interest income after
provision for loan losses ........... 8,347 5,275 14,112 10,278
-------- -------- -------- --------
Other operating income:
Service charges on deposit accounts ........... 323 260 656 577
Loan servicing income ......................... 46 126 93 292
Net securities transactions ................... 26 12 32 12
Net gain on sale of loans ..................... 16 9 65 14
Other income .................................. 264 355 453 529
-------- -------- -------- --------
Total other operating income ............ 675 762 1,299 1,424
-------- -------- -------- --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
(continued)
For the Three For the Six
Months Ended September 30, Months Ended September 30,
-------------------------- --------------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Other operating expenses:
Compensation and benefits ..................... 2,769 2,289 5,190 4,548
Occupancy ..................................... 384 335 767 661
Equipment ..................................... 368 451 748 854
Other real estate owned and
repossessed property expenses ............ 157 187 298 233
Legal and other professional fees ............. 238 191 334 341
Postage and item transportation ............... 183 202 377 387
Charitable foundation contribution ............ 5,200 -- 5,200 --
Other expenses ................................ 1,249 1,184 2,392 2,190
-------- -------- -------- --------
Total other operating
expenses .......................... 10,548 4,839 15,306 9,214
-------- -------- -------- --------
Income (loss) before income tax expense (benefit) .. (1,526) 1,198 105 2,488
Income tax expense (benefit) ....................... (604) 503 41 1,019
-------- -------- -------- --------
Net income (loss) ....................... $ (922) $ 695 $ 64 $ 1,469
======== ======== ======== ========
Basic earnings (loss) per share .................... $ (0.06) N/A $ (0.06) N/A
======== ======== ======== ========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
For the Six
Months Ended September 30,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income ................................................................... $ 64 $ 1,469
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ......................................................... 911 940
Provision for loan losses ............................................ 4,160 4,405
Charitable foundation expense ........................................ 5,200 --
Net securities transactions .......................................... (32) (12)
Net gain on sale of loans held for sale .............................. (65) (14)
Net loans originated for sale ........................................ (7,730) (1,077)
Proceeds from sale of loans held for sale ............................ 9,025 1,175
Adjustments of other real estate owned and
repossessed property to fair value .......................... 118 73
Net gain on sale of other real estate owned
and repossessed property .................................... (281) (185)
(Increase) decrease in accrued interest receivable ................... (1,582) 302
Decrease (increase) in other assets .................................. 713 (1,044)
Decrease in other liabilities ........................................ (4,346) (1,274)
--------- ---------
Total adjustments ........................................... 6,091 3,289
--------- ---------
Net cash provided by operating activities ................... 6,155 4,758
--------- ---------
Cash flows from investing activities:
Proceeds from maturities, calls, and paydowns of securities
available for sale ................................................... 18,485 14,996
Purchases of securities available for sale ................................... (162,433) (5,999)
Proceeds from maturities, calls and paydowns
of investment securities ............................................. 16,441 14,781
Purchase of investment securities ............................................ -- (2,981)
Net loans made to customers .................................................. (22,718) (25,412)
Proceeds from sales of and payments received on
other real estate owned and repossessed property ..................... 2,586 2,052
Purchases of premises and equipment .......................................... (945) (615)
--------- ---------
Net cash used in investing activities ....................... (148,584) (3,178)
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(continued)
For the Six
Months Ended September 30,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits ..................................................... 7,072 15,687
Net increase in mortgagors' escrow balances ................................. 1,388 (1,409)
Net decrease in short-term borrowings ........................................ (2,000) (10,585)
Repayment of UDAG Payable .................................................... -- (835)
Net proceeds from stock offering ............................................. 169,967 --
Acquisition of common stock by Employee Stock Ownership Plan ................ (18,428) --
--------- ---------
Net cash provided by financing activities ................... 157,999 2,858
--------- ---------
Net increase in cash and cash equivalents ......................................... 15,570 4,438
Cash and cash equivalents at beginning of period .................................. 34,273 10,457
--------- ---------
Cash and cash equivalents at end of period ........................................ $ 49,843 $ 14,895
========= =========
Supplemental cash flow information:
Supplemental information:
Interest paid ................................................................ $ 13,646 $ 12,974
========= =========
Taxes paid ................................................................... $ -- $ 1,546
========= =========
Supplemental disclosures of non-cash investing and financing
activities:
Loans transferred to other real estate owned and repossessed property ........ $ 2,645 $ 2,375
========= =========
Adjustment of securities available for sale to fair value,
net of tax ........................................................... $ 835 $ 365
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements
<PAGE>
Hudson River Bancorp, Inc.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. 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-Q 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. In the opinion of management, all adjustments
(consisting solely of normal recurring accruals) considered necessary for a fair
presentation have been included. The accompanying unaudited consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K as of and for the year ended March 31, 1998. Operating
results for the three month and six month periods ended September 30, 1998 are
not necessarily indicative of the results that may be expected for the full
year.
2. Hudson River Bancorp, Inc. ("the Company") was formed in March 1998
as part of the conversion of Hudson River Bank & Trust Company, formerly The
Hudson City Savings Institution ("the Bank"), from a New York State chartered
mutual savings bank to a New York State chartered stock savings bank (the
"Conversion"). The Conversion was completed on July 1, 1998. Concurrently with
the Conversion, the Company completed its initial public offering with the
issuance of 17,333,738 shares of common stock, receiving $173.3 million in gross
proceeds. An additional 520,012 shares were contributed to the Hudson River Bank
& Trust Company Foundation, resulting in a non-recurring charge of $5.2 million
which was reflected in the financial results for the three and six month periods
ended September 30, 1998. Subsequent to the initial public offering, 1,428,300
shares of its common stock were purchased for the benefit of the Bank's Employee
Stock Ownership Plan (ESOP). Fifty percent of the net proceeds from the offering
were utilized to acquire all of the outstanding common stock of the Bank. The
remaining proceeds were utilized by the Company for general corporate purposes,
including investments. The financial information presented herein prior to July
1, 1998 reflects the historical activity of the Bank. Earnings per share
information for periods prior to the initial public offering on July 1, 1998 is
not applicable.
3. On April 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) 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, net of tax. Accumulated other
comprehensive income represents the net unrealized gains or losses on securities
available for sale, net of tax, as of the balance sheet dates. Comprehensive
loss for the three month period ended September 30, 1998 was $162 thousand.
Comprehensive income for the three month period ended September 30, 1997 was
$832 thousand. Comprehensive income for the six month periods ended September
30, 1998 and 1997 was $899 thousand and $1.8 million, respectively.
<PAGE>
Hudson River Bancorp, Inc.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
4. On July 1, 1998, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share", which establishes standards for computing and presenting
earnings per share (EPS). SFAS No. 128 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. 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.
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.
The following sets forth certain information regarding the calculation
of basic earnings per share for the three and six month periods ended September
30, 1998. Earnings of the Company prior to its initial public offering are not
included in the calculation of earnings per share. Earnings per share
information prior to the Company's initial public offering is not applicable.
Diluted earnings per share calculations are not applicable as the Company does
not have any securities or other contracts which would effect the calculation of
earnings per share.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
(In thousands, except for share information)
Net Weighted Per Net Weighted Per
Income Average Share Income Average Share
(Loss) Shares Amount (Loss) Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $(922) 16,458,738 $(.06) $(922) 16,458,738 $(.06)
====== ========== ====== ====== ========== ======
</TABLE>
<PAGE>
Hudson River Bancorp, Inc.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
On July 1, 1998, Hudson River Bank & Trust Company (formerly The Hudson
City Savings Institution) (the "Bank") completed its conversion from a New York
chartered mutual savings bank to a New York chartered stock savings bank (the
"Conversion"). Concurrent with the Conversion, Hudson River Bancorp, Inc. (the
"Company") completed its initial public offering of common stock, receiving
approximately $173.3 million in gross proceeds in exchange for 17,333,738 shares
of its common stock. In addition, the Company purchased all of the common stock
of the Bank in exchange for 50% of the net Conversion proceeds. Prior to the
initial public offering, the Company had no results of operations, therefore
results of operations prior to July 1, 1998 principally reflect the operations
of the Bank.
The Company's primary market area, with 12 full-service branches,
consists of Columbia, Rensselaer, Albany, Schenectady, and Dutchess counties.
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services. The Company's
principal business is attracting deposits from customers within its market area
and investing those funds in primarily residential mortgage loans, and to a
lesser extent, in manufactured housing and consumer loans, commercial and
commercial real estate loans, and government and corporate debt securities. The
financial condition and operating results of the Company are dependent on its
net interest income which is the difference between the interest and dividend
income earned on its assets, primarily loans and investments, and the interest
expense paid on its liabilities, primarily consisting of deposits and
borrowings. Net income is also affected by other operating income, such as loan
servicing income and fees on deposit related services; other operating expenses,
such as compensation and occupancy expenses; provisions for loan losses; and
Federal and state income taxes.
The Company'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 Company. Lending
activities are substantially influenced by the demand for and supply of housing,
competition among lenders, the 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.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
FORWARD-LOOKING STATEMENTS
- --------------------------
When used in this filing or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation's Reform Act of 1995. In addition, certain disclosures and
information customarily provided by financial institutions, such as an analysis
of the adequacy of the allowance for loan losses or an analysis of the interest
rate sensitivity of the Company's assets and liabilities, are inherently based
upon predictions of future events and circumstances. Furthermore, from time to
time, the Company may publish other forward-looking statements relating to such
matters as anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Some of the risks and uncertainties that may affect
the operations, performance, development and results of the Company's business,
the interest rate sensitivity of its assets and liabilities, and the adequacy of
its allowance for loan losses, include but are not limited to the following:
a. Deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase in
loan delinquencies, a decrease in property values, or a change in
the housing turnover rate;
b. Changes in market interest rates or changes in the speed at which
market interest rates change;
c. Changes in laws and regulations affecting the financial service
industry;
d. Changes in competition; and
e. Changes in consumer preferences.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
affect the Company's financial performance and could cause the Company's actual
results or circumstances for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligations, to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
OPERATING RESULTS
- -----------------
Comparison of three months ended September 30, 1998 and 1997
The Company realized a net loss for the three months ended September
30, 1998 amounting to $922 thousand, down $1.6 million from the net income of
$695 thousand earned during the three months ended September 30, 1997. The
results for the three months ended September 30, 1998 were significantly
impacted by a non-recurring charge of $5.2 million ($3.1 million after-tax)
taken in connection with the Company's contribution of stock to establish the
Hudson River Bank & Trust Company Foundation. The Foundation was established as
part of the Bank's Conversion to provide funding to support charitable causes
and community development activities in the Bank's local communities. Income for
the quarter before the non-recurring charge was $2.2 million, up $1.5 million
from the same period a year ago. The increase was primarily a result of higher
net interest income (up $3.0 million), partially offset by higher other
operating expenses (up $509 thousand) and higher income tax expense before the
tax benefit associated with the non-recurring charge. The Company's return on
average assets before the effect of the non-recurring charge was 1.05% for the
three months ended September 30, 1998, up from .42% for the comparable period a
year earlier. The Company's return on average equity before the effect of the
non-recurring charge was 3.95% for the three months ended September 30, 1998,
down from 4.08% for the three months ended September 30, 1997. See Table A,
"Financial Highlights".
NET INTEREST INCOME. Net interest income for the three months ended
September 30, 1998 was $10.3 million, up from the $7.3 million for the three
months ended September 30, 1997. The increase was primarily the result of the
increase in average earning assets from $627.9 million for the three months
ended September 30, 1997 to $814.5 million for the same period in 1998. Average
interest-bearing liabilities also increased during this same period, up $6.1
million to $557.6 million from $551.6 million for the three months ended
September 30, 1997. Most of the increase in earning assets is attributed to the
proceeds received by the Company as part of its initial public offering. The
impact of these volume increases resulted in an increase in net interest income
of $2.9 million. The average yield on earning assets decreased from 8.74% to
8.17%, while the average rate paid on interest-bearing liabilities also
decreased slightly from 4.69% to 4.61%. The impact of these lower interest rates
actually resulted in an increase in net interest income of $91 thousand,
primarily due to the large increase in earning assets with no associated
increase in funding or funding costs. As a result, the Company's net interest
margin for the three months ended September 30, 1998 was 5.01%, up from 4.63%
for the three months ended September 30, 1997. See Table B, "Average Balances,
Interest and Yields" and Table C, "Volume and Rate Analysis".
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
INTEREST AND DIVIDEND INCOME. Interest and dividend income for the
three months ended September 30, 1998 was $16.8 million, up from $13.8 million
for the comparable period in 1997. The largest component of interest and
dividend income is interest on loans. Interest on loans increased from $11.9
million for the three months ended September 30, 1997 to $12.1 million for the
three months ended September 30, 1998. This increase of $193 thousand is the
result of volume increases offset slightly by lower rates. The average balance
of loans increased $9.1 million, while the yield on loans decreased slightly
from 9.29% to 9.27%. The interest on securities available for sale increased
$1.8 million from $590 thousand for the three months ended September 30, 1997 to
$2.3 million for the three months ended September 30, 1998. This increase in
interest on securities available for sale is the result of an increase in the
average balance of securities available for sale (from $35.7 million for the
three months ended September 30, 1997 to $142.5 million for the three months
ended September 30, 1998), offset by a decrease in the yield on this portfolio
(from 6.55% in 1997 to 6.53% in 1998). A decrease in interest earned on
investment securities, from $1.2 million in 1997 to $870 thousand in 1998 was
substantially due to reductions in volume. The average balance of investment
securities decreased from $71.9 million for the three months ended September 30,
1997 to $54.1 million for the three months ended September 30, 1998, resulting
in a $288 thousand decrease in interest income from reduced volume. Management
expects the average balance of investment securities to continue to decrease as
new purchases of securities are generally classified as securities available for
sale. The change in rates on investment securities was not significant. Interest
income on federal funds sold and securities purchased under agreements to resell
increased $1.3 million from $119 thousand earned in 1997 to $1.4 million in
1998. This increase is due to higher average balances, a combined $96.7 million
for the three months ended September 30, 1998, up from $8.3 million for the
three months ended September 30, 1997. See Table B, "Average Balances, Interest
and Yields" and Table C, "Volume and Rate Analysis".
INTEREST EXPENSE. Interest expense remained virtually the same at $6.5
million during both the three months ended September 30, 1998 and the comparable
period in 1997. Substantially all of the Company's interest expense is from the
Company's interest-bearing deposits. The largest category of interest-bearing
deposits is time deposits. Interest on time deposits for the three months ended
September 30, 1998 was $4.6 million, up from $4.5 million in 1997. Most of this
increase is the result of an increase in the average balance of time deposits,
from $308.3 million in 1997 to $313.4 million in 1998. The remainder of the
increase is the result of an increase in the rates paid on time deposits from
5.80% in 1997 to 5.83% in 1998. Interest expense paid on savings accounts was
$1.2 million for both the three months ended September 30, 1998 and 1997. The
consistency in interest expense paid on savings accounts is attributed to an
increase in the average balance of savings accounts (up $5.5 million) offset by
a decrease in the rates paid from 3.46% in 1997 to 3.21% in 1998. Interest
expense paid on NOW/Money Market accounts decreased $80 thousand from 1997 to
1998 as a result of lower average balances (down $4.2 million) and lower rates
(down 20 basis points). Fluctuations in interest expense on other categories of
interest-bearing liabilities were not significant. See Table B, "Average
Balances, Interest and Yields" and Table C, "Volume and Rate Analysis".
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased
slightly from $2.0 million for the three months ended September 30, 1997 to $1.9
million for the three months ended September 30, 1998. The decrease in the
provision for loan losses is related to the reduction in non-performing loans
and net charge-offs experienced in the quarter ended September 30, 1998, in
comparison to the comparable quarter of the prior year. While there has been
some improvement in non-performing loan and net charge-off numbers, the level of
the Company's non-performing loans and delinquencies continue to require the
current level of provision for loan losses. In addition, the Company continues
to maintain certain portfolios of loans with higher credit risk, such as
manufactured housing loans and financed insurance premiums, relative to loans
secured by real estate. Net charge-offs, risk elements of the Company's loan
portfolio, economic conditions in the Company's market area and non-performing
loan balances are the primary factors which are considered in determining the
levels of the Company's provision for loan losses. Although the Company
anticipates that the provision for loan losses will continue at current levels
through at least the remainder of fiscal 1999, there can be no assurance that
loan losses will not exceed estimated amounts or that the provision for loan
losses will not increase in future periods. See Table E, "Non-Performing Assets"
and Table F, "Loan Loss Experience".
OTHER OPERATING INCOME. Total other operating income decreased $87
thousand for the three months ended September 30, 1998 as compared to the same
period in 1997. Other operating income is composed primarily of service charges
on deposit accounts and loan servicing income. Income from service charges on
deposits accounts increased from $260 thousand for the three months ended
September 30, 1997 to $323 thousand for the three months ended September 30,
1998. This increase is attributed to the overall increase in the Company's
deposit accounts and fees on these accounts during this time period. Loan
servicing income decreased $80 thousand from $126 thousand in the three months
ended September 30, 1997 to $46 thousand in the three months ended September 30,
1998. This decrease relates to the termination of an agreement to service
financed insurance premiums for an unaffiliated premium finance company and the
runoff of the corresponding servicing portfolio. The servicing agreement was
terminated due to the financial difficulties and ultimate liquidation of the
unaffiliated premium finance company. Other income was $264 thousand for the
three months ended September 30, 1998, down slightly from $355 thousand for the
same period in 1997. A portion of this decrease is the result of a partial
recovery in the period ended September 30, 1997 of previous writedowns of the
Bank's investment in Nationar, a New York chartered institution that the Bank
utilized for certain correspondent banking services prior to its takeover and
liquidation by the State Banking Department in 1995.
OTHER OPERATING EXPENSES. Total other operating expenses increased $5.7
million to $10.5 million for the three months ended September 30, 1998, up from
$4.8 million for the comparable period in 1997. As discussed previously, the
most significant increase was the $5.2 million non-recurring charge associated
with the Company's stock contribution to the charitable foundation. Increases in
compensation and benefits (up $480 thousand), occupancy (up $49 thousand), legal
and other professional fees (up $47 thousand), and other expenses (up $65
thousand), offset by a decrease in equipment (down $83 thousand), were the
primary contributors to the overall increase.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
The increase in compensation and benefits is the result of the growth
of our commercial services department and the costs of the Employee Stock
Ownership Plan, established in connection with the Bank's Conversion, as well as
general merit increases to the Company's employees during the three months ended
September 30, 1998.
The increase in occupancy expenses is directly attributed higher
depreciation expense and real estate taxes associated with the new addition to
the Company's main office building to accommodate current and future growth,
offset by reduced expenses associated with the movement of the Company's Warren
Street, Hudson branch to the first floor of the Company's main office building.
The increase in legal and other professional fees is the result of
higher expenses associated with being a public company.
The increase in other expenses is the result of increases in
advertising and office supplies associated with the Bank's name change and other
general increases associated with being a public company.
The decrease in equipment expense is attributed to lower insurance
costs resulting from the movement of our Warren Street Hudson branch to our main
office building and reduced data processing and maintenance costs consistent
with the upgrade of various aspects of the Company's technology systems.
The remaining categories of other expenses and other operating expenses
did not experience significant fluctuations.
INCOME TAX EXPENSE. Income tax expense decreased from an expense of
$503 thousand for the three months ended September 30, 1997 to a benefit of $604
thousand for the comparable period in 1998. The decrease is primarily the result
of lower income before income tax expense resulting from the Company's
non-recurring expense associated with the Company's stock contribution to the
charitable foundation.
Comparison of six months ended September 30, 1998 and 1997
Net income for the six months ended September 30, 1998 was $64
thousand, down $1.4 million from the $1.5 million earned during the six months
ended September 30, 1997. The decrease in net income for the six months ended
September 30, 1998 was significantly impacted by the non-recurring charge of
$5.2 million ($3.1 million after-tax) taken in connection with the Company's
contribution of stock to the Bank's charitable foundation. Income for the six
months ended September 30, 1998 before the non-recurring charge was $3.2
million, up $1.7 million from the same period a year ago. This increase was
primarily a result of higher net interest income (up $3.6 million) and a lower
provision for loan losses (down $245 thousand), partially offset by higher other
operating expenses (up $892 thousand) and higher income tax expense before the
tax benefit associated with the non-recurring charge. The Company's return on
average assets before the effect of the non-recurring charge was .81% for the
six months ended September 30, 1998, up from .45% for the comparable period a
year earlier. The Company's return on average equity before the effect of the
non-recurring charge was 4.36% for both the six months ended September 30, 1998
and 1997. See Table A, "Financial Highlights".
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
NET INTEREST INCOME. Net interest income for the six months ended
September 30, 1998 was $18.3 million, up from the $14.7 million for the six
months ended September 30, 1997. The increase was primarily the result of the
increase in average earning assets from $626.3 million for the six months ended
September 30, 1997 to $759.1 million for the same period in 1998.
Interest-bearing liabilities also increased during this same period, up $39.7
million from $552.1 million. Most of the increase in earning assets and
interest-bearing liabilities is attributed to subscriptions received by the
Company as part of its initial public offering. The impact of these volume
increases resulted in an increase in net interest income of $3.5 million. The
yield on average earning assets decreased from 8.81% to 8.39%, while the rate
paid on interest-bearing liabilities also decreased slightly from 4.68% to
4.60%. The impact of these lower interest rates actually resulted in an increase
in net interest income of $67 thousand, primarily due to the large increase in
earning assets with no associated increase in funding or funding costs. Because
of this, the Company's net interest margin for the six months ended September
30, 1998 was 4.80%, up from 4.68% for the six months ended September 30, 1997.
See Table B, "Average Balances, Interest and Yields" and Table C, "Volume and
Rate Analysis".
INTEREST AND DIVIDEND INCOME. Interest and dividend income for the six
months ended September 30, 1998 was $31.9 million, up from $27.7 million for the
comparable period in 1997. The largest component of interest and dividend income
is interest on loans. Interest on loans increased from $23.6 million for the six
months ended September 30, 1997 to $24.3 million for the six months ended
September 30, 1998. This increase of $632 thousand is the result of both volume
increases and rate increases. The average balance of loans increased $12.5
million, while the average yield on loans increased from 9.36% to 9.38%. The
interest on securities available for sale increased $2.1 million from $1.3
million for the six months ended September 30, 1997 to $3.5 million for the six
months ended September 30, 1998. This increase in interest on securities
available for sale is the result of an increase in the average balance of
securities available for sale (from $40.1 million for the six months ended
September 30, 1997 to $105.4 million for the six months ended September 30,
1998), offset by a decrease in the average yield on this portfolio (from 6.64%
in 1997 to 6.55% in 1998). A decrease in interest earned on investment
securities, from $2.5 million in 1997 to $1.9 million in 1998, was substantially
due to reductions in volume. The average balance of investment securities
decreased from $75.2 million for the six months ended September 30, 1997 to
$58.4 million for the six months ended September 30, 1998, resulting in a $564
thousand decrease in interest income due to volume. Management expects the
average balance of investment securities to continue to decrease as new
purchases of securities are generally classified as securities available for
sale. The change in rates on investment securities was not significant. Interest
income on federal funds sold and securities purchased under agreements to resell
increased $2.0 million from the $131 thousand earned in 1997 to $2.2 million in
1998. This increase is due to higher average balances, a combined $76.1 million
for the six months ended September 30, 1998, up from $4.6 million for the six
months ended September 30, 1997. See Table B, "Average Balances, Interest and
Yields" and Table C, "Volume and Rate Analysis".
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
INTEREST EXPENSE. Interest expense increased during the six months
ended September 30, 1998 to $13.6 million, up from $13.0 million for the
comparable period in 1997. Substantially all of the Company's interest expense
is from the Company's interest-bearing deposits. The largest category of
interest-bearing deposits is time deposits. Interest on time deposits for the
six months ended September 30, 1998 was $9.3 million, up from $8.9 million in
1997. Most of this increase is the result of an increase in the average balance
of time deposits, from $307.4 million in 1997 to $316.4 million in 1998. The
remainder of the increase is the result of an increase in the average rates paid
on time deposits from 5.78% in 1997 to 5.84% in 1998. Interest expense paid on
savings accounts increased $493 thousand, from $2.4 million for the six months
ended September 30, 1997 to $2.9 million for the six months ended September 30,
1998. This increase is almost entirely attributed to an increase in the average
balance of savings accounts (up $33.2 million) resulting from proceeds received
for subscriptions in the Company's initial public offering. Interest expense
paid on NOW/Money Market accounts was relatively flat, decreasing only $69
thousand from 1997 to 1998. Interest expense paid on borrowings decreased from
$156 thousand in 1997 to $50 thousand in 1998 as a result of lower average
balances. Fluctuations in interest expense on other categories of
interest-bearing liabilities were not significant. See Table B, "Average
Balances, Interest and Yields" and Table C, "Volume and Rate Analysis".
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased
slightly from $4.4 million in the six months ended September 30, 1997 to $4.2
million in the six months ended September 30, 1998. The decrease in the
provision for loan losses is related to the reduction in non-performing loans
and net charge-offs experienced in the six months ended September 30, 1998, in
comparison to the comparable six months of the prior year. While there has been
some improvement in non-performing loan and net charge-off numbers, the level of
the Company's non-performing loans and delinquencies continue to require the
current level of provision for loan losses. In addition, the Company continues
to maintain certain portfolios of loans with higher credit risk, such as
manufactured housing loans and financed insurance premiums, relative to loans
secured by real estate. Net charge-offs, risk elements of the Company's loan
portfolio, economic conditions in the Company's market area and non-performing
loan balances are the primary factors which are considered in determining the
levels of the Company's provision for loan losses. Although the Company
anticipates that the provision for loan losses will continue at current levels
through at least the remainder of fiscal 1999, there can be no assurance that
loan losses will not exceed estimated amounts or that the provision for loan
losses will not increase in future periods. See Table E, "Non-Performing Assets"
and Table F, "Loan Loss Experience".
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
OTHER OPERATING INCOME. Total other operating income decreased $125
thousand for the six months ended September 30, 1998 as compared to the same
period in 1997. Other operating income is composed primarily of service charges
on deposit accounts and loan servicing income. Income from service charges on
deposits accounts increased from $577 thousand for the six months ended
September 30, 1997 to $656 thousand for the six months ended September 30, 1998.
This increase is attributed to the overall increase in the Company's deposit
accounts and fees on these accounts during this time period. Loan servicing
income decreased $199 thousand from $292 thousand in the six months ended
September 30, 1997 to $93 thousand in the six months ended September 30, 1998.
This decrease relates to the previously discussed termination of an agreement to
service financed insurance premiums for an unaffiliated premium finance company
and the runoff of the corresponding servicing portfolio. Other income was $453
thousand for the six months ended September 30, 1998, down slightly from $529
thousand for the same period in 1997. A portion of this decrease is the result
of a partial recovery in the period ended September 30, 1997 of previous
writedowns of the Bank's investment in Nationar, a New York chartered
institution that the Bank utilized for certain correspondent banking services
prior to its takeover and liquidation by the State Banking Department in 1995.
OTHER OPERATING EXPENSES. Total other operating expenses increased $6.1
million to $15.3 million for the six months ended September 30, 1998, up from
$9.2 million for the comparable period in 1997. As discussed previously, the
most significant increase was the $5.2 million non-recurring charge associated
with the Company's stock contribution to the charitable foundation. Increases in
compensation and benefits (up $642 thousand), occupancy (up $106 thousand), and
other expenses (up $202 thousand), offset by a decrease in equipment (down $106
thousand) were the primary contributors to the overall increase.
The increase in compensation and benefits is the result of the growth
of our commercial services department and the costs of the Employee Stock
Ownership Plan, established in connection with the Conversion, as well as
general merit increases to the Company's employees during the six months ended
September 30, 1998.
The increase in occupancy expenses is due to higher depreciation
expense and real estate taxes associated with the new addition to the Company's
main office building to accommodate current and future growth as referenced
above and the move of our mortgage brokerage subsidiary to larger
accommodations.
The increase in other expenses is the result of increases in
advertising and office supplies associated with the Bank's name change and other
general increases associated with being a public company.
The decrease in equipment expense is attributed to lower insurance
costs resulting from the movement of our Warren Street Hudson branch to our main
office building and reduced data processing and maintenance costs consistent
with the upgrade of various aspects of the Company's technology systems.
The remaining categories of other expenses and other operating expenses
did not experience significant fluctuations.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
INCOME TAX EXPENSE. Income tax expense decreased from $1.0 million for
the six months ended September 30, 1997 to $41 thousand for the comparable
period in 1998. The decrease is primarily the result of lower income before
income tax expense, $105 thousand in 1998 as compared to $2.5 million in 1997.
FINANCIAL CONDITION
- -------------------
Comparison of September 30, 1998 and March 31, 1998
Total assets at September 30, 1998 were at $831.0 million, up $159.8
million, from the $671.2 million at March 31, 1998. Substantially all of the
increase was due to the investment of the proceeds received as part of the
Company's initial public offering, increasing federal funds sold and securities
purchased under agreements to resell from a combined $21.9 million at March 31,
1998 to $39.5 million at September 30, 1998. The remainder of the increase was
concentrated in the securities available for sale and loan portfolios, which
increased $145.4 million and $19.2 million, respectively. This growth in assets
was funded by the proceeds received from the public offering as well as an
increase in deposits, from $588.3 million at March 31, 1998 to $595.4 million at
September 30, 1998. These increases as well as fluctuations in other asset and
liability categories are discussed below.
LENDING. The overall increase in total loans is primarily made up of
increases in residential real estate, commercial real estate, and commercial
loans, offset by a decline in financed insurance premiums. Although residential
real estate loans increased $9.4 million, the level of residential real estate
loans, as a percentage of total loans, remained flat. The growth in this
portfolio is primarily a result of the Bank's decision to portfolio a limited
amount of fixed rate products at a time when adjustable rate loans are less
popular. Commercial real estate loans increased from $76.6 million at March 31,
1998 or 15.1% of total loans, to $81.1 million or 15.4% of total loans at
September 30, 1998. Commercial loans increased $13.8 million to $32.3 million at
September 30, 1998 from $18.5 million at March 31, 1998. These increases in
commercial real estate and commercial loans are a result of management's
strategic goals to increase these portfolios as a percentage of total loans in
order to improve yields. Financed insurance premiums decreased from $28.0
million, or 5.5% of total loans at March 31, 1998 to $20.1 million, or 3.8% of
total loans at September 30, 1998. This decline is somewhat seasonal in nature
and is a result of management's efforts to focus on commercial insurance lines
rather than personal assigned-risk insurance lines.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased from
$8.2 million at March 31, 1998 to $11.6 million at September 30, 1998, an
increase of $3.3 million. This increase is the result of the $4.2 million
provision for loan losses taken in the six months ended September 30, 1998
offset by $827 thousand in net charge-offs for the same period. The adequacy of
the allowance for loan losses is evaluated monthly by management based upon a
review of significant loans, with particular emphasis on non-performing and
delinquent loans that management believes warrant special attention, as well as
an analysis of the higher risk elements of the Company's loan portfolio. At
September 30, 1998 the allowance for loan losses provides coverage of 81.74% of
total non-performing loans, up from 52.32% at March 31, 1998. 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 loan portfolio.
See Table E, "Non-Performing Assets" and Table F, "Loan Loss Experience".
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES. The total
balance of securities available for sale and investment securities increased
from $107.7 million at March 31, 1998 to $236.6 million at September 30, 1998.
This increase was driven by purchases of securities totaling $162.4 million
during the six months ended September 30, 1998, offset by maturities, calls and
paydowns of securities totaling $34.9 million. Management's intention is to
continue allowing investment securities to mature and paydown with the
reinvestment of the proceeds primarily in the securities available for sale or
loan portfolios.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL.
The increase of $17.6 million of Federal funds sold and securities purchased
under agreements to resell is the result of proceeds received as part of the
Company's initial public offering which have not been reinvested. Management
intends to reinvest the remainder of the proceeds in various securities while
maintaining sufficient liquidity to meet loan growth and other expansion
opportunities.
OREO AND REPOSSESSED PROPERTY. The balance of OREO and repossessed
property increased from $1.5 million at March 31, 1998 to $1.8 million at
September 30, 1998, an increase of approximately $222 thousand. This increase
relates primarily to management's efforts to aggressively reduce the level of
non-performing loans. See Table E, "Non-Performing Assets".
DEPOSITS. Total deposits increased $7.1 million, from $588.3 million at
March 31, 1998 to $595.4 million at September 30, 1998. Of this total increase,
savings accounts decreased $2.9 million, time deposits decreased $3.2 million,
NOW/Money market accounts decreased $1.5 million, while non-interest bearing
accounts increased $14.6 million, a result of the Company's initiatives to
increase commercial services.
MORTGAGORS' ESCROW BALANCES. The balance of mortgagors' escrow balances
increased $1.4 million to $5.1 million at September 30, 1998. This increase is
attributed to seasonal growth as these balances tend to grow until annual
property taxes are paid in early October.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
OTHER LIABILITIES. The balance of other liabilities declined from $8.9
million at March 31, 1998 to $4.5 million at September 30, 1998. This decrease
is largely due to the timing of payments from the Company's premium finance
subsidiary to insurance companies for premiums due under the terms of finance
agreements. At March 31, 1998 a large amount of premiums were due and were
funded shortly after the fiscal year end. This fluctuation is primarily seasonal
in nature.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity
- ---------
Liquidity is defined as the ability to generate sufficient cash flow to
meet all present and future funding commitments, depositor withdrawals and
operating expenses. Management monitors the Company's liquidity position on a
daily basis and evaluates its ability to meet depositor withdrawals or make new
loans or investments.
The Company's cash inflows result primarily from loan repayments,
maturities and calls of investment securities and securities available for sale,
new deposits, and to a lessor extent, drawings upon the Company's credit lines
with other financial institutions, including the Federal Home Loan Bank of New
York. The Company's cash outflows are substantially new loan originations,
investment purchases, deposit withdrawals and operating expenses. The timing of
cash inflows and outflows is closely monitored by management although changes in
interest rates, economic conditions, and competitive forces strongly impact the
predictability of these cash flows. The Company attempts to provide stable and
flexible sources of funding through the management of its liabilities, including
core deposit products offered through its branch network as well as with limited
use of borrowings. Management believes that the level of the Company's liquid
assets combined with daily monitoring of cash inflows and outflows provide
adequate liquidity to fund outstanding loan commitments, meet daily withdrawal
requirements of depositors, and meet all other daily obligations of the Company.
Capital
- -------
Consistent with its goals to operate a sound and profitable financial
organization, the Company actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. Total equity was $225.9
million at September 30, 1998, 27.19% of total assets on that date. As of March
31, 1998, total equity was $68.3 million or 10.18% of total assets. This growth
in the equity to assets ratio is the result of the Company's stock offering
which closed on July 1, 1998. As of September 30, 1998, the Company and the Bank
exceeded all of the capital requirements of its regulators.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
IMPACT OF THE YEAR 2000
- -----------------------
The Company has conducted a review of its computer systems to identify
applications that could be affected by the "Year 2000" issue, and has developed
an implementation plan to resolve the issue. The Company's data processing is
performed almost entirely in-house, however software and hardware utilized is
under maintenance agreements with third party vendors. Consequently, the Company
is very dependent on those vendors to conduct its business. The Company has
already contacted each vendor to request time tables for year 2000 compliance
and expected costs, if any, to be passed along to the Company. To date, the
Company has begun the testing phase to determine whether its hardware and
software is year 2000 compliant. Testing and renovation, if applicable, on all
"mission-critical" systems will be substantially completed by December 31, 1998.
In connection with Year 2000, "mission-critical" systems are defined as those
systems in which the inability to perform necessary functions would cause
significant disruptions in the Company's ability to complete day-to-day
operations, seriously impacting the Company's financial results. If systems
which are not defined as "mission-critical" fail to perform necessary functions,
the Company's day-to-day operations would not be significantly impacted,
although the lack of efficiencies the Company enjoys through performing these
functions in an automated manner could result in additional time or expense to
carry out the operation. The Company's testing plans provide a strict time frame
to determine that the reprogramming efforts of its primary service providers are
year 2000 compliant and completed within the time requirements provided by its
regulators. Testing of systems which are not considered to be "mission-critical"
is scheduled to be completed by June 30, 1999.
In the normal course of keeping pace with changing technology, the
Company has in recent years, and continues to, perform upgrades to its hardware
and software. Because of these significant investments, management does not
expect that any additional costs to ensure its systems are year 2000 compliant
will have a significant impact on its financial position or results of
operations; however, there can be no assurance that the vendors systems will be
2000 compliant, consequently the Company could incur incremental costs to
convert to another vendor or purchase additional hardware or software to be year
2000 compliant.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
The risks associated with this issue go beyond the Company'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. Should significant depositors or other sources of
funds fail to address Year 2000 issues effectively, the Company could be forced
to utilize alternative funding vehicles, possibly at higher costs than it
currently incurs. 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 Company's systems or fail to be Year
2000 compliant, it could have significant adverse affects on the operations and
financial results of the Company. The Company has taken steps in identifying
significant borrower, depositor and supplier relationships and contacting them
in order to assess their Year 2000 readiness and the potential for an adverse
impact to the Company should their systems not be compliant with Year 2000.
Based upon the information we have received to date, their have been no
significant issues with borrowers, depositors or suppliers Year 2000
preparedness identified.
IMPACT ON INFLATION AND CHANGING PRICES
- ---------------------------------------
The Company's consolidated financial statements are prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increasing cost of the Company's operations. Unlike most industrial companies,
nearly all assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent as the price of goods
and services.
IMPACT OF NEW ACCOUNTING STANDARDS
- ----------------------------------
In June 1997, the Financial Accounting Standards Board, (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, however, the statement need not be applied to
interim financial statements in the initial year of application. At this time,
management does not anticipate that the adoption of this Statement will
significantly impact the Company's financial reporting.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement 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 Postretirement 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 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 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 March 31, 1999 consolidated financial statements.
In June 1998, the FASB issued SFAS 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 the Company's
consolidated financial statements.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
<TABLE>
<CAPTION>
Table A. Financial Highlights
For the Three Months Ended For the Six Months Ended
September 30, September 30,
-------------------------- ------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Performance Ratios:
- -------------------
Basic earnings (loss) per share (1) (2) .......... $ (0.06) $ -- $ (0.06) $ --
Return on average assets ......................... (0.44%) 0.42% 0.02% 0.45%
Return on average equity ......................... (1.64) 4.08 0.09 4.36
Net interest rate spread ......................... 3.56 4.05 3.79 4.13
Net interest margin .............................. 5.01 4.63 4.80 4.68
Yield on average earning assets .................. 8.17 8.74 8.39 8.81
Rate on average interest-bearing liabilities ..... 4.61 4.69 4.60 4.68
Average earning assets to average interest-bearing
liabilities ................................. 146.07 113.85 128.27 113.44
Efficiency ratio ................................. 47.45 57.65 50.20 55.80
Expense ratio .................................... 2.45 2.80 2.48 2.72
Weighted average shares outstanding (1) .......... 16,458,738 -- 16,458,738 --
Core earnings (3) ................................ $ 2,219 $ 695 $ 3,205 $ 1,469
Core earnings per share (1) (2) .................. 0.13 N/A 0.13 N/A
Core earnings return on average assets ........... 1.05 0.42 0.81 0.45
Core earnings return on average equity ........... 3.95 4.08 4.36 4.36
Price/Annualized QTD Core Earnings ratio (1) (3) . 19.10 N/A 19.10 N/A
<PAGE>
<CAPTION>
At Period End
-----------------------------------------------------------
March 31,
September 30, June 30, --------------------
1998 1998 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Share Information
- -----------------
Shares outstanding at period end (1) 16,425,450 - - -
Book value per share (1) $ 13.76 - - -
Market price at period end 10.125 - - -
Asset Quality Ratios:
- ---------------------
Non-performing loans to total loans 2.69% 2.86% 3.10% 4.06%
Allowance for loan losses to non-performing loans 81.74 65.35 52.32 29.37
Allowance for loan losses to total loans 2.20 1.87 1.62 1.19
Non-performing assets to total assets 1.91 1.66 2.57 3.60
Capital Ratio:
- --------------
Equity to total assets 27.19 6.98 10.18 10.00
</TABLE>
(1) 1,428,300 shares purchased by the Company's ESOP are not considered
outstanding.
(2) Includes net income (loss) since July 1, 1998 only.
(3) Core earnings excludes the July 1, 1998, $3.1 million after-tax expense
resulting from the establishment of a charitable foundation.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
<TABLE>
<CAPTION>
Table B. Average Balances, Interest, and Yields
Three Months Ended September 30,
-------------------------------------------------------------------------------
1998 1997
---------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate (1) Balance Interest Yield/Rate (1)
---------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal Funds sold ............................ $ 27,230 $ 378 5.51% $ 8,341 $ 119 5.66%
Securities purchased under agreements to resell 69,515 1,009 5.76 -- -- --
Securities available for sale (2) ............. 142,486 2,346 6.53 35,712 590 6.55
Investment securities ......................... 54,054 870 6.39 71,923 1,161 6.40
Federal Home Loan Bank of NY stock ............ 3,035 54 7.06 2,812 47 6.63
Loans receivable (3) .......................... 518,220 12,114 9.27 509,132 11,921 9.29
--------------------------------- -----------------------------------
Total earning assets ..................... $ 814,540 $ 16,771 8.17% $ 627,920 $ 13,838 8.74%
------------------- ---------------------
Cash and due from banks ....................... $ 9,391 $ 11,064
Allowance for loan losses ..................... (10,202) (6,795)
Other non-earning assets ...................... 27,071 27,010
--------- ---------
Total assets ............................. $ 840,800 $ 659,199
========= =========
Interest-bearing liabilities:
Savings accounts .............................. $ 143,617 $ 1,163 3.21% $ 138,069 $ 1,204 3.46%
N.O.W. and Money Market accounts .............. 92,269 658 2.83 96,505 738 3.03
Time deposit accounts ......................... 313,355 4,602 5.83 308,348 4,508 5.80
Mortgagors' escrow balances ................... 7,300 41 2.23 6,612 40 2.40
Short-term borrowings ......................... 1,087 16 5.84 2,020 28 5.50
--------------------------------- -----------------------------------
Total interest-bearing liabilities ....... $ 557,628 $ 6,480 4.61% $ 551,554 $ 6,518 4.69%
=================== =====================
Non-interest bearing deposits ................. $ 54,553 $ 33,672
Other non-interest bearing liabilities ........ 5,481 6,344
Stockholders' Equity .......................... 223,138 67,629
--------- ---------
Total liabilities and stockholders' equity $ 840,800 $ 659,199
========= =========
Net interest income ........................... $ 10,291 $ 7,320
========= =========
Net interest spread ........................... 3.56% 4.05%
==== ====
Net interest margin ........................... 5.01% 4.63%
==== ====
</TABLE>
(1) Annualized
(2) Includes SFAS No. 115 fair value adjustment
(3) Includes non-accrual loans
(continued)
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
<TABLE>
<CAPTION>
Table B. (continued)
Six Months Ended September 30,
-------------------------------------------------------------------------------
1998 1997
---------------------------------------- ------------------------------------
Average Average Average Average
Balance Interest Yield/Rate (1) Balance Interest Yield/Rate (1)
---------------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal Funds sold ............................. $ 34,572 $ 981 5.66% $ 4,599 $ 131 5.68%
Securities purchased under agreements to resell 41,505 1,198 5.76 -- -- --
Securities available for sale (2) .............. 105,422 3,461 6.55 40,072 1,334 6.64
Investment securities .......................... 58,350 1,887 6.45 75,217 2,451 6.50
Federal Home Loan Bank of NY stock ............. 3,035 111 7.29 2,812 91 6.45
Loans receivable (3) ........................... 516,177 24,277 9.38 503,643 23,645 9.36
---------------------------------- ---------------------------------
Total earning assets ...................... $ 759,061 $ 31,915 8.39% $ 626,343 $ 27,652 8.81%
-------------------- -------------------
Cash and due from banks ........................ $ 13,264 $ 11,050
Allowance for loan losses ...................... (9,431) (6,009)
Other non-earning assets ....................... 26,581 26,411
--------- ---------
Total assets .............................. $ 789,475 $ 657,795
========= =========
Interest-bearing liabilities:
Savings accounts ............................... $ 170,332 $ 2,866 3.36% $ 137,093 $ 2,373 3.45%
N.O.W. and Money Market accounts ............... 97,093 1,392 2.86 95,734 1,461 3.04
Time deposit accounts .......................... 316,359 9,264 5.84 307,411 8,910 5.78
Mortgagors' escrow balances .................... 6,293 71 2.25 5,942 69 2.32
Short-term borrowings .......................... 1,713 50 5.82 5,957 156 5.22
---------------------------------- --------- -------------------
Total interest-bearing liabilities ........ $ 591,790 $ 13,643 4.60% $ 552,137 $ 12,969 4.68%
-------------------- -------------------
Non-interest bearing deposits .................. $ 44,882 $ 32,243
Other non-interest bearing liabilities ......... 6,204 6,228
Stockholders' Equity ........................... 146,599 67,187
--------- ---------
Total liabilities and stockholders' equity $ 789,475 $ 657,795
========= =========
Net interest income ............................ $ 18,272 $ 14,683
========= =========
Net interest spread ............................ 3.79% 4.13%
==== ====
Net interest margin ............................ 4.80% 4.68%
==== ====
</TABLE>
(1) Annualized
(2) Includes SFAS No. 115 fair value adjustment
(3) Includes non-accrual loans
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
<TABLE>
<CAPTION>
Table C. Volume and Rate Analysis
1998 vs 1997
------------------------------------------------------------------
Three Months Ended
September 30, Increase Due To
--------------------- ----------------------
1998 1997 (Decrease) Volume Rate
---- ---- ---------- ------ ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
- -----------------------------
Federal Funds sold ............................... $ 378 $ 119 $ 259 $ 262 (3)
Securities purchased under agreements to resell .. 1,009 -- 1,009 1,009 --
Securities available for sale .................... 2,346 590 1,756 1,758 (2)
Investment securities ............................ 870 1,161 (291) (288) (3)
Federal Home Loan Bank of NY stock ............... 54 47 7 4 3
Loans receivable ................................. 12,114 11,921 193 212 (19)
------- ------- ------- ------- -------
Total interest income ....................... 16,771 13,838 2,933 2,958 (25)
------- ------- ------- ------- -------
Interest expense:
- -----------------
Savings accounts ................................. 1,163 1,204 (41) 47 (88)
N.O.W. and Money Market accounts ................. 658 738 (80) (32) (48)
Time deposit accounts ............................ 4,602 4,508 94 73 21
Mortgagors' escrow balances ...................... 41 40 1 4 (3)
Short-term borrowings ............................ 16 28 (12) (14) 2
------- ------- ------- ------- -------
Total interest expense ...................... 6,480 6,518 (38) 79 (117)
------- ------- ------- ------- -------
Net interest income .............................. $10,291 $ 7,320 $ 2,971 $ 2,880 $ 91
======= ======= ======= ======= =======
</TABLE>
Note: Changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to volume and
the change due to rate.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
<TABLE>
<CAPTION>
Table C. Volume and Rate Analysis (continued)
1998 vs 1997
--------------------------------------------------------------
Six Months Ended
September 30, Increase Due To
-------------------- ----------------------
1998 1997 (Decrease) Volume Rate
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
- -----------------------------
Federal Funds sold ................................... $ 981 $ 131 $ 850 $ 851 (1)
Securities purchased under agreements to resell ...... 1,198 -- 1,198 1,198 --
Securities available for sale ........................ 3,461 1,334 2,127 2,146 (19)
Investment securities ................................ 1,887 2,451 (564) (546) (18)
Federal Home Loan Bank of NY stock ................... 111 91 20 8 12
Loans receivable ..................................... 24,277 23,645 632 589 43
------- ------- ------- ------- --
Total interest income ........................... 31,915 27,652 4,263 4,246 17
------- ------- ------- ------- --
Interest expense:
- -----------------
Savings accounts ..................................... 2,866 2,373 493 561 (68)
N.O.W. and Money Market accounts ..................... 1,392 1,461 (69) 21 (90)
Time deposit accounts ................................ 9,264 8,910 354 261 93
Mortgagors' escrow balances .......................... 71 69 2 4 (2)
Short-term borrowings ................................ 50 156 (106) (122) 16
------- ------- ------- ------- --
Total interest expense .......................... 13,643 12,969 674 725 (51)
------- ------- ------- ------- --
Net interest income .................................. $18,272 $14,683 $ 3,589 $ 3,522 $ 67
======= ======= ======= ======= =======
</TABLE>
Note:Changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately to the change due to volume and the change
due to rate.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
<TABLE>
<CAPTION>
Table D. Loan Portfolio Analysis
September 30, March 31,
------------------- ----------------------------------------------
1998 1998 1997
------------------- ------------------ ---------------------
Amount % Amount % Amount %
--------- ----- --------- ----- --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential $ 278,791 53.0% $ 269,435 53.2% $ 274,092 55.6%
Commercial 81,086 15.4 76,570 15.1 67,697 13.7
Construction 4,685 0.9 4,621 0.9 2,725 0.6
--------- ----- --------- ----- --------- -----
Total loans secured by real estate $ 364,562 69.3% $ 350,626 69.2% $ 344,514 69.9%
--------- ----- --------- ----- --------- -----
Other loans:
Manufactured housing $ 95,913 18.2% $ 97,426 19.2% $ 92,651 18.8%
Commercial 32,325 6.2 18,484 3.7 19,713 4.0
Financed insurance premiums 20,054 3.8 27,976 5.5 23,535 4.8
Consumer 12,279 2.3 11,857 2.3 11,577 2.3
--------- ----- --------- ----- --------- -----
Total other loans $ 160,571 30.5% $ 155,743 30.7% $ 147,476 29.9%
--------- ----- --------- ----- --------- -----
Net deferred loan origination costs and unearned
discount 1,091 0.2 609 0.1 1,029 0.2
--------- ----- --------- ----- --------- -----
Total loans receivable $ 526,224 100.0% $ 506,978 100.0% $ 493,019 100.0%
===== ===== =====
Allowance for loan losses (11,560) (8,227) (5,872)
--------- --------- ---------
Net loans receivable $ 514,664 $ 498,751 $ 487,147
========= ========= =========
</TABLE>
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
<TABLE>
<CAPTION>
Table E. Non-Performing Assets
September 30, March 31,
-----------------------------
1998 1998 1997
------- ------- -------
<S> <C> <C> <C>
Non-accruing Loans:
Residential real estate ...................... $ 3,727 $ 4,512 $ 4,553
Commercial real estate ....................... 4,081 5,253 3,239
Commercial loans ............................. -- -- 2,318
Manufactured housing ......................... 3,030 3,060 2,260
Financed insurance premiums .................. 3,251 2,768 2,867
Consumer ..................................... 54 114 45
------- ------- -------
Total ............................................. $14,143 $15,707 $15,282
------- ------- -------
Accruing loans past due 90-days or more:
Residential real estate ...................... -- -- $ 570
Commercial real estate ....................... -- -- 3,874
Commercial loans ............................. -- -- 244
Manufactured housing ......................... -- 16 --
Financed insurance premiums .................. -- -- --
Consumer ..................................... -- -- 23
------- ------- -------
Total ............................................. -- $ 16 $ 4,711
------- ------- -------
Total non-performing loans: ....................... $14,143 $15,723 $19,993
======= ======= =======
Foreclosed Assets:
Residential real estate ...................... $ 258 $ 145 $ 48
Commercial real estate ....................... 411 299 2,860
Repossessed property ......................... 1,085 1,088 539
------- ------- -------
Total ............................................. $ 1,754 $ 1,532 $ 3,447
======= ======= =======
Total non-performing assets ....................... $15,897 $17,255 $23,440
======= ======= =======
Allowance for Loan Losses ......................... $11,560 $ 8,227 $ 5,872
======= ======= =======
Coverage of non-performing loans .................. 81.74% 52.32% 29.37%
Non-performing assets as a percentage of
total assets ................................... 1.91% 2.57% 3.60%
Non-performing loans as a percentage of
total loans .................................. 2.69% 3.10% 4.06%
</TABLE>
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
<TABLE>
<CAPTION>
Table F. Loan Loss Experience
Three Months Ended Six Months Ended
September 30, September 30,
------------------------- -------------------------
(In thousands)
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total loans outstanding (end of period) .. $ 526,224 $ 515,069 $ 526,224 $ 515,069
========= ========= ========= =========
Average total loans outstanding
(period to date) ................. $ 521,384 $ 509,726 $ 516,177 $ 503,618
========= ========= ========= =========
Allowance for loan loss at
beginning of period .............. $ 9,647 $ 7,862 $ 8,227 $ 5,872
Loan charge-offs:
Residential real estate .......... -- (50) (84) (66)
Commercial real estate ........... (29) (15) (56) (46)
Commercial loans ................. (33) (56) (58) (56)
Manufactured housing ............. (168) (74) (554) (147)
Consumer ......................... (27) (13) (83) (25)
Financed insurance premiums ...... (315) (512) (736) (886)
--------- --------- --------- ---------
Total charge-offs ... (572) (720) (1,571) (1,226)
--------- --------- --------- ---------
Loan recoveries:
Residential real estate .......... 303 -- 330 --
Commercial real estate ........... -- -- -- 17
Commercial loans ................. 11 1 15 2
Manufactured housing ............. 29 16 40 32
Consumer ......................... 7 8 13 19
Financed insurance premiums ...... 191 78 346 169
--------- --------- --------- ---------
Total recoveries ..... 541 103 744 239
--------- --------- --------- ---------
Loan charge-offs, net of recoveries ...... (31) (617) (827) (987)
Provision charged to operations .......... 1,944 2,045 4,160 4,405
Allowance for loan losses
at end of period ................. $ 11,560 $ 9,290 $ 11,560 $ 9,290
========= ========= ========= =========
Ratio of net charge-offs during
the period to average loans
outstanding during the period .... 0.02% 0.48% 0.32% 0.39%
========= ========= ========= =========
Provision as a percentage
of average loans ................. 1.48% 1.59% 1.61% 1.74%
========= ========= ========= =========
Allowance as a percentage of
total loans (end of period) ...... 2.20% 1.80% 2.20% 1.80%
========= ========= ========= =========
</TABLE>
<PAGE>
Hudson River Bancorp, Inc.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
- -------------------------------------------------------
MARKET RISK
-----------
Interest rate risk is the most significant market risk affecting the
Company. 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 Company'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 Company's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest 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 Company's interest rate risk. Management's
asset/liability committee meets weekly to review the Company's interest rate
risk position and profitability, and to recommend adjustments for consideration
by the Board of Directors. Management also reviews loan and deposit pricing, and
the Company's securities portfolio, formulates investment strategies, and
oversees the timing and implementation of transactions to assure attainment of
the Board's objectives in the most effective manner. Notwithstanding the
Company's interest rate risk management activities, the potential for changing
interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company'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 Company's interest rate risk position somewhat in order to increase
its net interest margin. The Company'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.
Interest rate risk analyses performed by the Company indicate that the
Company is asset sensitive, or its earning assets mature or reprice more quickly
than its interest-bearing liabilities. As a result, falling interest rates could
result in a decrease in net income. There has been no significant change in the
Company's interest rate risk profile since March 31, 1998. Consistent with the
asset/liability management philosophy described above, the Company has taken
steps to manage its interest rate risk by attempting to match the repricing
periods of its earning assets to its interest-bearing liabilities. The Company's
recent purchases of securities, retention of certain fixed rate residential loan
products, and emphasis on lower cost, more stable non-certificate deposit
accounts are methods the Company has utilized to manage its interest rate risk.
In the current low rate environment, longer-term certificates are welcomed
although not particularly popular with our customer base. Management
continuously evaluates various alternatives to address interest rate risk
including, but not limited to, the purchase of interest rate swaps, caps, and
floors, leveraging scenarios, and changes in asset mix.
<PAGE>
HUDSON RIVER BANCORP, INC.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
(c) None
(d) None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(27) Financial Data Schedule (included in electronic
format only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the
quarter ended September 30, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON RIVER BANCORP, INC.
11/13/98 /s/Carl A. Florio
-------- -----------------
Date Carl A. Florio, Director, President and
Chief Executive Officer (Principal
Executive and Operating Officer)
11/13/98 /s/Timothy E. Blow
-------- ------------------
Date Timothy E. Blow, Chief Financial
Officer (Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> SEP-30-1998
<CASH> 10,380
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 39,463
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 187,823
<INVESTMENTS-CARRYING> 51,788
<INVESTMENTS-MARKET> 52,268
<LOANS> 526,224
<ALLOWANCE> 11,560
<TOTAL-ASSETS> 830,966
<DEPOSITS> 595,386
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,638
<LONG-TERM> 0
0
0
<COMMON> 179
<OTHER-SE> 225,763
<TOTAL-LIABILITIES-AND-EQUITY> 830,966
<INTEREST-LOAN> 24,277
<INTEREST-INVEST> 5,348
<INTEREST-OTHER> 2,290
<INTEREST-TOTAL> 31,915
<INTEREST-DEPOSIT> 13,593
<INTEREST-EXPENSE> 13,643
<INTEREST-INCOME-NET> 18,272
<LOAN-LOSSES> 4,160
<SECURITIES-GAINS> 32
<EXPENSE-OTHER> 15,306
<INCOME-PRETAX> 105
<INCOME-PRE-EXTRAORDINARY> 105
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64
<EPS-PRIMARY> (.06)
<EPS-DILUTED> 0
<YIELD-ACTUAL> 4.80
<LOANS-NON> 14,143
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,227
<CHARGE-OFFS> 1,571
<RECOVERIES> 744
<ALLOWANCE-CLOSE> 11,560
<ALLOWANCE-DOMESTIC> 9,544
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,016
</TABLE>
