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 June 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.
[ ] YES [X] NO
As of August 7, 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 June 30, 1998
and March 31, 1998
Consolidated Income Statements for the three months ended
June 30, 1998 and 1997
Consolidated Statements of Cash Flows for the three months
ended June 30, 1998 and 1997
Notes to Unaudited Consolidated Interim
Financial Statements
ITEM 2. Managements 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
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
Assets 1998 1998
- ------ ---- ----
(In thousands)
<S> <C> <C>
Cash and due from banks ................................... $ 11,270 $ 12,423
Federal funds sold ........................................ 192,409 21,850
Securities purchased under agreements to resell ........... 100,000 --
--------- ---------
Cash and cash equivalents ........................... 303,679 34,273
--------- ---------
Loans held for sale ....................................... 233 1,286
Securities available for sale ............................. 96,109 42,471
Investment securities ..................................... 57,963 65,194
Federal Home Loan Bank of New York stock .................. 3,035 3,035
Loans receivable .......................................... 515,511 506,978
Less: Allowance for loan losses ...................... (9,647) (8,227)
--------- ---------
Net loans receivable .......................... 505,864 498,751
--------- ---------
Accrued interest receivable ............................... 5,344 4,402
Premises and equipment, net ............................... 15,153 15,331
Other real estate owned and repossessed property .......... 1,767 1,532
Other assets .............................................. 4,908 4,939
--------- ---------
Total assets .................................. $ 994,055 $ 671,214
========= =========
Liabilities and Equity
- ----------------------
Liabilities:
Deposits:
Savings ......................................... 441,040 142,569
N.O.W. and money market ......................... 109,067 93,400
Time deposits ................................... 320,227 319,299
Non-interest bearing deposits ................... 41,418 33,046
--------- ---------
Total deposits ................................ 911,752 588,314
--------- ---------
Short-term borrowings ................................ 2,000 2,000
Mortgagors' escrow balances .......................... 6,424 3,723
Other liabilities .................................... 4,514 8,873
--------- ---------
Total liabilities ............................. 924,690 602,910
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
(continued)
June 30, March 31,
1998 1998
---- ----
(In thousands)
<S> <C> <C>
Equity:
Surplus .............................................. 13,839 13,839
Retained Earnings .................................... 55,455 54,469
Net unrealized gain (loss) on securities available for
sale, net of tax .............................. 71 (4)
--------- ---------
Total equity .................................. 69,365 68,304
--------- ---------
Total liabilities and equity .................. $ 994,055 $ 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
months ended June 30,
---------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans .................... $12,163 $11,724
Securities available for sale ................. 1,115 744
Investment securities ......................... 1,017 1,290
Federal funds sold ............................ 603 12
Securities purchased under agreements to resell 189 --
Federal Home Loan Bank of New
York stock ................................ 57 44
------- -------
Total interest and dividend income ..... 15,144 13,814
------- -------
Interest expense:
Deposits ...................................... 7,129 6,323
Short-term borrowings ......................... 34 128
------- -------
Total interest expense ................. 7,163 6,451
------- -------
Net interest income .................... 7,981 7,363
Provision for loan losses .......................... 2,216 2,360
------- -------
Net interest income after
provision for loan losses .......... 5,765 5,003
------- -------
Other operating income:
Service charges on deposit accounts ........... 333 317
Loan servicing income ......................... 47 166
Net securities transactions ................... 6 --
Net gain on sale of loans ..................... 49 5
Other income .................................. 189 174
------- -------
Total other operating income ........... 624 662
------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
(continued)
For the three
months ended June 30,
---------------------
1998 1997
------- -------
(In thousands)
<S> <C> <C>
Other operating expenses:
Compensation and benefits ..................... 2,421 2,259
Occupancy ..................................... 383 326
Equipment ..................................... 380 403
Other real estate owned and
repossessed property expenses ............ 141 46
Legal and other professional fees ............. 96 150
Postage and item transportation ............... 194 185
Other expenses ................................ 1,143 1,006
------- -------
Total other operating
expenses ......................... 4,758 4,375
------- -------
Income before income tax expense ................... 1,631 1,290
Income tax expense ................................. 645 516
------- -------
Net income ............................. $ 986 $ 774
======= =======
</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 Three
Months Ended June 30,
------------------------
Increase (decrease) in cash and cash equivalents: 1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 986 $ 774
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation .............................................................. 336 376
Provision for loan losses ................................................. 2,216 2,360
Net securities transactions ............................................... (6) --
Net gain on sale of loans held for sale ................................... (49) (5)
Net loans originated for sale ............................................. (7,223) (535)
Proceeds from sale of loans held for sale ................................. 8,325 624
Adjustments of other real estate owned and
repossessed property to fair value .............................. 77 56
Net gain on sale of other real estate owned
and repossessed property ........................................ (122) (135)
Increase in accrued interest receivable ................................... (942) (315)
Increase in other assets .................................................. (23) (984)
Decrease in other liabilities ............................................. (4,359) (800)
--------- ---------
Total adjustments ............................................... (1,770) 642
--------- ---------
Net cash (used in) provided by operating activities ............. (784) 1,416
--------- ---------
Cash flows from investing activities:
Proceeds from maturities, calls, and paydowns of securities available for sale 4,145 8,999
Purchases of securities available for sale ................................... (57,648) --
Proceeds from maturities, calls and paydowns
of investment securities .................................................. 7,231 3,454
Net loans made to customers .................................................. (10,846) (13,262)
Proceeds from sales of and payments received on
other real estate owned and repossessed property .......................... 1,327 937
Purchases of premises and equipment .......................................... (158) (204)
--------- ---------
Net cash used in investing activities ........................... (55,949) (76)
--------- ---------
Cash flows from financing activities:
Net increase in deposits ..................................................... 323,438 10,034
Net increase in mortgagors' escrow balances .................................. 2,701 2,748
Net decrease in short-term borrowings ........................................ -- (12,585)
--------- ---------
Net cash provided by financing activities ....................... 326,139 197
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(continued)
For the Three
Months Ended June 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net increase (decrease) in cash and cash equivalents .............................. 269,406 1,537
Cash and cash equivalents at beginning of period .................................. 34,273 10,457
--------- ---------
Cash and cash equivalents at end of period ........................................ $ 303,679 $ 11,994
========= =========
Supplemental cash flow information:
Interest paid ................................................................ $ 6,658 $ 6,452
========= =========
Taxes paid ................................................................... -- $ 1,375
========= =========
Supplemental disclosures of non-cash investing and financing
activities:
Loans transferred to other real estate owned ................................. $ 1,517 $ 1,289
========= =========
Adjustment of securities available for sale to fair value,
net of tax ................................................................ $ 75 $ 228
========= =========
</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 period ended June 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 Hudson River Bank &
Trust Company Foundation. Immediately following 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. Fifty percent of the net proceeds of the
offering were utilized to acquire all of the outstanding common stock of the
Bank. The remaining proceeds will be utilized by the Company for general
corporate purposes, including investments and deposits at the Bank. The
financial information presented herein 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 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 change in net 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. Comprehensive income for the three month
periods ended June 30, 1998 and 1997 was $1.1 million and $1.0 million,
respectively.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
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, 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 offering,
the Company had no results of operations, therefore, the following discussion
principally reflects 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.
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 analysis of
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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.
OPERATING RESULTS
- -----------------
Comparison of the three months ended June 30, 1998 and 1997
Net income for the three months ended June 30, 1998 was $986 thousand,
up $212 thousand from the $774 thousand earned during the three months ended
June 30, 1997. This increase was primarily a result of higher net interest
income (up $618 thousand), partially offset by higher other operating expenses
(up $383 thousand) and higher income tax expense (up $129 thousand). The
Company's return on average assets was .54% for the three months ended June 30,
1998, up from .47% for the comparable period a year earlier. The Company's
return on average equity was also higher, 5.71% for the three months ended June
30, 1998, up from 4.65% for the three months ended June 30, 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 three months ended
June 30, 1998 was $8.0 million, up from the $7.4 million for the three months
ended June 30, 1997. The increase was primarily the result of the increase in
average earning assets from $624.3 million for the three months ended June 30,
1997 to $702.9 million for the same period in 1997. Interest-bearing liabilities
also increased during this same period, up $73.6 million from $552.7 million.
Most of the increases 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 $728 thousand. The yield on average earning assets
decreased from 8.87% to 8.64%, while the rate paid on interest-bearing
liabilities also decreased slightly from 4.68% to 4.59%. The impact of lower
interest rates resulted in a decrease in net interest income of $110 thousand.
The Company's net interest margin for the three months ended June 30, 1998 was
4.55%, down from 4.73% for the three months ended June 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
three months ended June 30, 1998 was $15.1 million, up from $13.8 million for
the comparable period in 1997. The largest component of interest income is
interest on loans. Interest on loans increased from $11.7 million for the three
months ended June 30, 1997 to $12.2 million for the three months ended June 30,
1998. This increase of $439 thousand is the result of both volume increases and
rate increases. The average balance of loans increased $16.4 million, while the
yield on loans increased from 9.45% to 9.49%. The interest on securities
available for sale increased $371 thousand from $744 thousand for the three
months ended June 30, 1997 to $1.1 million for the three months ended June 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
$44.4 million for the three months ended June 30, 1997 to $68.0 million for the
three months ended June 30, 1998), offset by a decrease in the yield on this
portfolio (from 6.72% in 1997 to 6.58% in 1998). A decrease in interest earned
on investment securities, from $1.3 million in 1997 to $1.0 million in 1998 was
substantially due to reductions in volume. The average balance of investment
securities decreased from $78.5 million for the three months ended June 30, 1997
to $62.7 million for the three months ended June 30, 1998, resulting in a $257
thousand decrease in net interest income. Management expects the average balance
of investment securities to continue decreasing 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 $780 thousand
from the $12 thousand earned in 1997 to $792 thousand in 1998. This increase is
due to higher average balances, a combined $55.2 million for the three months
ended June 30, 1998, up from $857 thousand for the three months ended June 30,
1997. See Table B, "Average Balances, Interest and Yields" and Table C, "Volume
and Rate Analysis".
INTEREST EXPENSE. Interest expense increased during the three months
ended June 30, 1998 to $7.2 million, up from $6.5 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 three months ended
June 30, 1998 was $4.7 million, up from $4.4 million in 1997. Most of this
increase is the result of an increase in the average balance of time deposits,
from $306.5 million in 1997 to $319.4 million in 1998. The remainder of the
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
increase is the result of an increase in the rates paid on time deposits from
5.76% in 1997 to 5.85% in 1998. Interest expense on savings accounts increased
$534 thousand, from $1.2 million for the three months ended June 30, 1997 to
$1.7 million for the three months ended June 30, 1998. This increase is almost
entirely attributed to an increase in the average balance of savings accounts
(up $61.2 million) resulting from proceeds received for subscriptions in the
Company's initial public offering. Interest expense on NOW/Money Market accounts
was relatively flat, increasing only $11 thousand from 1997 to 1998. Interest
expense on borrowings decreased from $128 thousand in 1997 to $34 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 $2.4 million in the three months ended June 30, 1997 to $2.2
million in the three months ended June 30, 1998. 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 $38
thousand for the three months ended June 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 $317 thousand for the three months ended June
30, 1997 to $333 thousand for the three months ended June 30, 1998. This
increase is attributed to the overall increase in the Company's deposit accounts
during this time period. Loan servicing income decreased $119 thousand from $166
thousand in the three months ended June 30, 1997 to $47 thousand in the three
months ended June 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 $189 thousand for the three months ended June 30, 1998, up slightly from
$174 thousand for the same period in 1997. This increase is attributed to the
income generated by the Company's mortgage brokerage subsidiary, Hudson River
Mortgage Company. This subsidiary generates fee income on loan applications,
which applications are received and forwarded to other financial institutions,
resulting in brokerage fee income.
OTHER OPERATING EXPENSES. Total other operating expenses increased $383
thousand to $4.8 million for the three months ended June 30, 1998, up from $4.4
million for the comparable period in 1997. Increases in compensation and
benefits (up $162 thousand), occupancy (up $57 thousand), other real estate
owned and repossessed property expenses (up $95 thousand), and other expenses
(up $137 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 adding a new
branch (our Hillsdale location) in late May 1997, the growth of our commercial
services department and our mortgage brokerage subsidiary, as well as general
merit increases to the Company's employees during the three months ended June
30, 1998.
The increase in occupancy expenses is directly attributed to the
addition of a new branch as referenced above and the move of our mortgage
brokerage subsidiary to larger accommodations.
The increase in other real estate owned and repossessed property
expenses is the result of an increase in the balances of other real estate owned
and repossessed property and management's continuing efforts to aggressively
liquidate these properties.
The increase in other expenses is the result of increased goodwill
amortization from the Company's acquisition (through its premium finance
subsidiary) of a customer list of an unaffiliated premium finance company;
increases in advertising, telephone and supplies relating to our new branch; and
general increases in expenses relating to the servicing and collection of
non-performing and other delinquent loans. The remaining categories of other
expenses and other operating expenses did not experience significant
fluctuations.
INCOME TAX EXPENSE. Income tax expense increased from $516 thousand for
the three months ended June 30, 1997 to $645 thousand for the comparable period
in 1998. The increase is primarily the result of higher income before income tax
expense, $1.3 million in 1998 as compared to $1.6 million in 1997.
FINANCIAL CONDITION
- -------------------
Comparison of June 30, 1998 and March 31, 1998
Total assets at June 30, 1998 were $994.1 million, up $322.8 million,
from the $671.2 million at March 31, 1998. Most of the increase was due to
subscriptions 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 $292.4 million at June
30, 1998. The remainder of the increase was concentrated in the securities
available for sale and loan portfolios, which increased $53.6 million and $8.5
million, respectively. This growth in assets was funded by an increase in
deposits, primarily due to subscription proceeds, from $588.3 million at March
31, 1998 to $911.8 million at June 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. Although residential real estate increased $4.5 million, the level of
residential real estate, 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 product at a time when adjustable rate
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
loans are less popular. Commercial real estate increased from $76.6 million at
March 31, 1998 or 15.1% of total loans, to $79.4 million or 15.4% of total loans
at June 30, 1998. Commercial loans increased $2.4 million to a balance of $20.9
million at June 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.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased from
$8.2 million at March 31, 1998 to $9.6 million at June 30, 1998, an increase of
$1.4 million. This increase is the result of the $2.2 million provision for loan
losses taken in the three months ended June 30, 1998 offset by $796 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. At June 30, 1998 the allowance
for loan losses provides coverage of 65.35% 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 $154.1 million at June 30, 1998. This
increase was driven by purchases of securities totaling $57.6 million during the
three months ended June 30, 1998, offset by maturities, calls and paydowns of
securities totaling $11.4 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 $270.6 million of Federal funds sold and securities purchased
under agreements to resell is the result of subscription proceeds received as
part of the Company's initial public offering. A substantial portion of these
funds were returned to the subscribers in early July due to the over
subscription of the offering. 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 June
30, 1998, an increase of approximately $235 thousand. The majority of this
increase relates to an increased volume of repossessed manufactured homes and
management's efforts to aggressively reduce the level of non-performing loans.
See Table E, "Non-Performing Assets".
DEPOSITS. Total deposits increased $323.4 million, from $588.3 million
at March 31, 1998 to $911.8 million at June 30, 1998. Of this total increase,
savings accounts increased $298.5 million, time deposits increased $928
thousand, NOW/Money market accounts increased $15.7 million, and non-interest
bearing accounts increased $8.4 million. Substantially all of the increases
noted relate to the proceeds received for subscriptions in the Company's initial
public offering. The proceeds received were either returned to the subscribers
due to over subscriptions or were recorded as capital upon the closing of the
offering on July 1, 1998.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
MORTGAGORS' ESCROW BALANCES. The balance of mortgagors' escrow balances
increased $2.7 million to $6.4 million at June 30, 1998. This increase is
attributed to seasonal growth as these balances tend to grow until annual
property taxes are paid in September.
OTHER LIABILITIES. The balance of other liabilities declined from $8.9
million at March 31, 1998 to $4.5 million at June 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, drawing 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 $69.4
million at June 30, 1998, 6.98% of total assets on that date. As of March 31,
1998, total equity was $68.3 million or 10.18% of total assets. This temporary
reduction in the equity to assets ratio is the result of growth in assets of the
Company resulting from its stock offering which closed on July 1, 1998. As of
June 30, 1998, the Company exceeded all of the capital requirements of the FDIC.
The Company's regulatory capital ratios at June 30, 1998 were as follows: Tier I
(leverage) capital, 9.33%; Tier I risk-based capital, 12.64%; and Total
risk-based capital, 13.89%. The regulatory capital minimum requirements to be
considered well capitalized are 5.0%, 6.0%, and 10.0% respectively.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
IMPACT OF THE YEAR 2000
- -----------------------
The Company 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 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's primary service providers anticipate that
all reprogramming efforts will be completed by December 31, 1998, allowing the
Company adequate time for testing. Certain other vendors have not yet responded,
however, the Company 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 2000 compliant,
consequently the Company could incur incremental costs to convert to another
vendor.
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. 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 or fail to be
Year 2000 compliant, it could have significant adverse affects on the operations
and financial results of the Company.
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 February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share". SFAS No. 128 establishes standards for computing and presenting earnings
per share (EPS). This Statement supersedes Accounting Principles Board 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.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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,
1997, including interim periods. The Company will adopt this Statement effective
July 1, 1998. Earnings per share information prior to the Company's initial
public offering is not applicable.
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, 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.
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>
<TABLE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table A. Financial Highlights
<CAPTION>
For the Three Months Ended For the Years Ended
June 30, March 31,
-------------------------- ------------------------------
1998 1997 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance Ratios:
- -------------------
Return on average assets ................................ 0.54% 0.47% 0.43% 0.88% 1.18%
Return on average equity ................................ 5.71 4.65 4.18 8.94 12.52
Net interest rate spread ................................ 4.05 4.19 4.11 3.97 3.89
Net interest margin ..................................... 4.55 4.73 4.68 4.48 4.38
Yield on average earning assets ......................... 8.64 8.87 8.81 8.64 8.59
Rate on average interest-bearing liabilities ............ 4.59 4.68 4.70 4.67 4.70
Average earning assets to average interest-bearing
liabilities ........................................ 112.24 112.96 112.56 112.56 111.48
Efficiency ratio ........................................ 53.69 53.94 57.25 54.34 52.07
Expense ratio ........................................... 2.51 2.65 2.80 2.48 2.32
<CAPTION>
At Period Ended
----------------------------
June 30, March 31,
-------- ----------------
1998 1998 1997
-------- ----- -----
<S> <C> <C> <C>
Asset Quality Ratios:
- ---------------------
Non-performing loans to total loans ............. 2.86% 3.10% 4.06%
Allowance for loan losses to non-performing loans 65.35 52.32 29.37
Allowance for loan losses to total loans ........ 1.87 1.62 1.19
Non-performing assets to total assets ........... 1.66 2.57 3.60
Capital Ratio:
- --------------
Equity to total assets .......................... 6.98 10.18 10.00
</TABLE>
<PAGE>
<TABLE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table B. Average Balances, Interest, and Yields
<CAPTION>
Three Months Ended June 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 $41,994 $603 5.76% $857 $12 5.62%
Securities purchased under agreements to resell 13,187 189 5.75 - - -
Securities available for sale (2) 67,951 1,115 6.58 44,433 744 6.72
Investment securities 62,692 1,017 6.51 78,511 1,290 6.59
Federal Home Loan Bank of NY stock 3,035 57 7.53 2,812 44 6.28
Loans receivable (3) 514,111 12,163 9.49 497,720 11,724 9.45
-------- ------- ---- -------- ------- ----
Total earning assets $702,970 $15,144 8.64% $624,333 $13,814 8.87%
------- ----- ------- ----
Cash and due from banks $17,181 $11,468
Allowance for loan losses (8,651) (5,223)
Other non-earning assets 26,085 25,811
-------- --------
Total assets $737,585 $656,389
======== ========
Interest-bearing liabilities:
- -----------------------------
Savings accounts $197,342 $1,703 3.46% $136,118 $1,169 3.44%
N.O.W. and Money Market accounts 101,971 734 2.89 94,963 723 3.05
Time deposit accounts 319,395 4,662 5.85 306,473 4,402 5.76
Mortgagors' escrow balances 5,275 30 2.28 5,272 29 2.21
Short-term borrowings 2,347 34 5.81 9,894 128 5.19
-------- ------- ---- -------- ------- ----
Total interest-bearing liabilities $626,330 $7,163 4.59% $552,720 $6,451 4.68%
------- ---- ------- ----
Non-interest bearing deposits $35,104 $30,813
Other non-interest bearing liabilities 6,934 6,111
Equity 69,217 66,745
-------- --------
Total liabilities and equity $737,585 $656,389
======== ========
Net interest income $7,981 $7,363
====== ======
Net interest spread 4.05% 4.19%
==== ====
Net interest margin 4.55% 4.73%
==== ====
</TABLE>
(1) Annualized
(2) Includes SFAS No. 115 fair value adjustment
(3) Includes non-accrual loans
<PAGE>
<TABLE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table C. Volume and Rate Analysis
<CAPTION>
1998 vs 1997
-----------------------------------------------------------
Three Months Ended
June 30, Increase Due To
-----------------------------------------------------------
1998 1997 (Decrease) Volume Rate
-----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
- -----------------------------
Federal Funds sold $603 $12 $591 $591 -
Securities purchased under agreements to resell 189 - 189 189 -
Securities available for sale 1,115 744 371 473 (102)
Investment securities 1,017 1,290 (273) (257) (16)
Federal Home Loan Bank of NY stock 57 44 13 4 9
Loans receivable 12,163 11,724 439 388 51
------ ------ ---- ---- -----
Total interest income 15,144 13,814 1,330 1,388 (58)
------ ------ ---- ---- -----
Interest expense:
- -----------------
Savings accounts 1,703 1,169 534 528 6
N.O.W. and Money Market accounts 734 723 11 52 (41)
Time deposit accounts 4,662 4,402 260 188 72
Mortgagors' escrow balances 30 29 1 - 1
Short-term borrowings 34 128 (94) (108) 14
------ ------ ---- ---- -----
Total interest expense 7,163 6,451 712 660 52
------ ------ ---- ---- -----
Net interest income $7,981 $7,363 $618 $728 ($110)
====== ====== ==== ==== =====
</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>
<TABLE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table D. Loan Portfolio Analysis
<CAPTION>
June 30, March 31,
-------------------- --------------------------------------------------
1998 1998 1997
-------------------- --------------------- ----------------------
Amount % Amount % Amount %
------ --- ------ --- ------ ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential $273,947 53.1% $269,435 53.2% $274,092 55.6%
Commercial 79,355 15.4 76,570 15.1 67,697 13.7
Construction 4,436 0.9 4,621 0.9 2,725 0.6
-------- ---- -------- ---- -------- ----
Total loans secured by real estate $357,738 69.4% $350,626 69.2% $344,514 69.9%
-------- ---- -------- ---- -------- ----
Other loans:
Manufactured housing $97,264 18.9% $97,426 19.2% $92,651 18.8%
Commercial 20,933 4.0 18,484 3.7 19,713 4.0
Financed insurance premiums 26,699 5.2 27,976 5.5 23,535 4.8
Consumer 12,206 2.4 11,857 2.3 11,577 2.3
-------- ---- -------- ---- -------- ----
Total other loans $157,102 30.5% $155,743 30.7% $147,476 29.9%
-------- ---- -------- ---- -------- ----
Net deferred loan origination costs and unearned
discount 671 0.1 609 0.1 1,029 0.2
-------- ---- -------- ---- -------- ----
Total loans receivable $515,511 100.0% $506,978 100.0% $493,019 100.0%
===== ===== =====
Allowance for loan losses (9,647) (8,227) (5,872)
-------- -------- --------
Net loans receivable $505,864 $498,751 $487,147
======== ======== ========
</TABLE>
<PAGE>
<TABLE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table E. Non-Performing Assets
<CAPTION>
June 30, March 31,
-------- -----------------------------
1998 1998 1997
------- ------- -------
<S> <C> <C> <C>
Non-accruing Loans:
Residential real estate ...................... $ 3,416 $ 4,512 $ 4,553
Commercial real estate ....................... 4,466 5,253 3,239
Commercial loans ............................. 107 -- 2,318
Manufactured housing ......................... 2,118 3,060 2,260
Financed insurance premiums .................. 4,567 2,768 2,867
Consumer ..................................... 68 114 45
------- ------- -------
Total ............................................. $14,742 $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 ......................... 19 16 --
Financed insurance premiums .................. -- -- --
Consumer ..................................... -- -- 23
------- ------- -------
Total ............................................. $ 19 $ 16 $ 4,711
------- ------- -------
Total non-performing loans: ....................... $14,761 $15,723 $19,993
======= ======= =======
Foreclosed Assets:
Residential real estate ...................... $ 255 $ 145 $ 48
Commercial real estate ....................... 279 299 2,860
Repossessed property ......................... 1,233 1,088 539
------- ------- -------
Total ............................................. $ 1,767 $ 1,532 $ 3,447
======= ======= =======
Total non-performing assets ....................... $16,528 $17,255 $23,440
======= ======= =======
Allowance for Loan Losses ......................... $ 9,647 $ 8,227 $ 5,872
======= ======= =======
Coverage of non-performing loans .................. 65.35% 52.32% 29.37%
Non-performing assets as a percentage of
total assets ................................... 1.66% 2.57% 3.60%
Non-performing loans as a percentage of
total loans .................................. 2.86% 3.10% 4.06%
</TABLE>
<PAGE>
<TABLE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table F. Loan Loss Experience
<CAPTION>
Three Months Ended Years Ended
June 30, March 31,
------------------------- -------------------------
(In thousands)
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Total loans outstanding (end of period) .. $ 515,511 $ 504,622 $ 506,978 $ 493,019
========= ========= ========= =========
Average total loans outstanding
(period to date) ............ $ 514,111 $ 497,509 $ 510,430 $ 471,295
========= ========= ========= =========
Allowance for loan loss at
beginning of period ......... $ 8,227 $ 5,872 $ 5,872 $ 3,546
Loan charge-offs:
Residential real estate ..... (84) (16) (440) (162)
Commercial real estate ...... (27) (32) (1,298) (454)
Commercial loans ............ (25) -- (2,309) (127)
Manufactured housing ........ (386) (73) (480) (216)
Consumer .................... (56) (11) (112) (41)
Financed insurance premiums . (453) (374) (2,091) (1,070)
--------- --------- --------- ---------
Total charge-offs (1,031) (506) (6,730) (2,070)
--------- --------- --------- ---------
Loan recoveries:
Residential real estate ..... 27 -- 8 3
Commercial real estate ...... -- 17 17 11
Commercial loans ............ 4 1 10 74
Manufactured housing ........ 11 16 105 45
Consumer .................... 6 11 38 51
Financed insurance premiums . 187 91 416 386
--------- --------- --------- ---------
Total recoveries . 235 136 594 570
--------- --------- --------- ---------
Loan charge-offs, net of recoveries ...... (796) (370) (6,136) (1,500)
Provision charged to operations .......... 2,216 2,360 8,491 3,826
Allowance for loan losses
at end of period ............ $ 9,647 $ 7,862 $ 8,227 $ 5,872
========= ========= ========= =========
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.62% 0.30% 1.20% 0.32%
========= ========= ========= =========
Provision as a percentage
of average loans ............ 1.72% 1.90% 1.66% 0.81%
========= ========= ========= =========
Allowance as a percentage of
total loans (end of period) . 1.87% 1.56% 1.62% 1.19%
========= ========= ========= =========
</TABLE>
<PAGE>
Hudson River Bancorp, Inc.
Quantitative And Qualitative Disclosures About Market Risk
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,
following 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 increases in interest rates and to fluctuations in
the difference between long- and short-term interest rates.
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.
<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) On May 12, 1998, the Company's Registration on Form S-1 (File No.
333-47605) covering 17,853,750 shares to be issued in connection with the
Company's initial public offering was declared effective. The offering commenced
on May 22, 1998 and terminated on June 15, 1998. The offering closed on July 1,
1998 and 17,333,738 shares of Company common stock, $0.01 par value, were sold
at a price of $10.00 per share and 520,012 shares were contributed to the
Company's charitable foundation. Sandler O'Neill & partners, L.P. acted as
Investment Advisor to the Company and assisted in the sale of the Company's
common stock on a "best efforts" basis.
Since the effective date of the registration statement, the Company
incurred $3.4 million in expenses in connection with the issuance and
distribution of the securities registered. $1.8 million was paid to or on behalf
of Sandler O'Neill & Partners, L.P. and $1.6 million represented other expenses
of the offering. No such payments were made either directly or indirectly to
directors, officers, general partners of the Company or its associates, person
owning ten percent or more of any class of equity securities of the Company or
to affiliates of the Company.
In connection with the offering, the Company received $170.0 million in
proceeds after deducting expenses. The Company intends to utilize $66.6 million
of the net proceeds as working capital. Initially, the Company has invested
those funds in short-term liquid assets. The Company loaned $18.4 million of the
net proceeds to the Employer Stock Ownership Plan to purchase Company common
stock and $85.0 million of the net proceeds was used to purchase all of the
stock of the Company's wholly-owned subsidiary, Hudson River Bank & Trust
Company. No direct or indirect payments to directors, officers, general partners
of the Company or its associates or ten percent owners of the Company or its
affiliates were made by the Company from the net proceeds.
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
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the
quarter ended June 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.
8/14/98 /s/Carl A. Florio
- -------------------- ---------------------------------------------
Date Carl A. Florio, Director, President and
Chief Executive Officer (Principal Executive
and Operating Officer
8/14/98 /s/Timothy E. Blow
- -------------------- ---------------------------------------------
Date Timothy E. Blow, Chief Financial Officer
(Principal Financial and Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
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