UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1999
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
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 twelve 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of June 14, 1999, there were issued and outstanding 17,090,250
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant, computed by reference to
the average of the closing bid and asked prices of such stock on the Nasdaq
National Market System as of June 14, 1999, was approximately $191.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Annual Report to Shareholders for the fiscal
year ended March 31, 1999. Part III of Form 10-K - Portions of Proxy
Statement for 1999 Annual Meeting of Shareholders.
<PAGE>
PART I
Item 1. Description of Business
-----------------------
BUSINESS OF THE COMPANY
General
The Company, a Delaware corporation, was organized on March 5, 1998 at
the direction of the Board of Trustees of the Hudson River Bank & Trust Company
(the Bank) (formerly Hudson City Savings Institution) for the purpose of owning
all of the outstanding capital stock of the Bank upon consummation of the Bank's
conversion from a mutual savings bank to a stock savings bank. The Company, as
the sole shareholder of the Bank, is a savings and loan holding company
regulated by the OTS.
The Company is an operating company. The Company directs, plans and
coordinates the business activities of the Bank. In the future, the Company may
acquire or organize other operating subsidiaries, including other financial
institutions, or it may merge with or acquire other financial institutions and
financial services related companies. The Company neither owns nor leases any
property but instead uses the premises and equipment of the Bank. The Company
does not currently employ any persons other than certain officers of the Bank
who are not separately compensated by the Company. The Company utilizes the
support staff of the Bank from time to time, if needed. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
Throughout this Annual Report on Form 10K for the year ended March 31,
1999, references to the Company include both the Company and the Bank, unless
otherwise noted. For additional information on the business of the Company, see
page 10 of the Company's Annual Report to Shareholders attached hereto by
Exhibit 13 and incorporated herein by reference.
Market Area
The Bank's primary market area is comprised of Columbia, Albany and
Rensselaer Counties in New York and portions of Dutchess and Schenectady
Counties in New York.
The Company's primary market area consists principally of suburban and
rural communities with service, wholesale/retail trade, government and
manufacturing serving as the basis of the local economy. Service jobs represent
the largest type of employment in the Company's primary market area, with jobs
in wholesale/retail trade accounting for the second largest employment sector.
<PAGE>
Lending Activities
General. The Company primarily originates and retains fixed- and
adjustable-rate residential mortgage loans, including home equity loans, secured
by the borrower's primary residence. Generally, the term of the loans originated
ranges from 15 to 30 years. The Company also originates to a lesser extent
commercial real estate loans, commercial loans, manufactured housing loans,
financed insurance premiums and other consumer loans. In-market loan
originations are generated by the Company's marketing efforts, which include
print, radio and television advertising, lobby displays and direct contact with
local civic and religious organizations, as well as by the Company's present
customers, walk-in customers and referrals from real estate agents, brokers and
builders. The marketing for manufactured housing loans is conducted through
Tammac Corporation with which the Company has an agreement relating to such
loans. The marketing for financed insurance premiums is conducted through the
Company's premium finance subsidiary. See "Consumer Lending." At March 31, 1999,
the Company's total loan portfolio totaled approximately $578.1 million.
Loan applications are initially considered and approved at various
levels of authority, depending on the type and amount of the loan. Company
employees with lending authority are designated, and their lending limit
authority defined, by the Board of Directors of the Company. The approval of the
Company's Board of Directors is required for any loans over $500,000. Pursuant
to the Company's lending policy, senior lending officers may approve loans up to
$200,000 individually and up to $500,000 as a committee. The Company generally
requires personal guarantees for all commercial and commercial real estate
loans.
The types of loans that the Company may originate are subject to
federal and state laws and regulations. Interest rates charged by the Company on
loans are affected by the demand for such loans, the supply of money available
for lending purposes and the rates offered by competitors. These factors are in
turn affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board ("FRB"), and tax
policies. For a description of the Company's lending portfolio, see page 17 of
the Company's 1999 Annual Report to Shareholders attached hereto by Exhibit 13
and incorporated herein by reference.
The following table illustrates the contractual maturity of the
Company's construction, commercial real estate, and commercial loans at March
31, 1999. Mortgages which have adjustable or renegotiable interest rates are
shown as maturing in the period during which the contract is due. The schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Construction Commercial Commercial Total
Loans Real Estate Loans Loans
Loans
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Amounts Due:
0 months to 1 year.... $ 650 $ 10,593 $ 20,182 $ 31,425
After 1 year:
1 to 5 years........ - 43,694 6,790 50,484
Over 5 years........ 4,310 37,193 2,052 43,555
------------- ------------- ------------- ------------
Total due after one year 4,310 80,887 8,842 94,039
------------- ------------- ------------- ------------
Total amount due...... $ 4,960 $ 91,480 $ 29,024 $ 125,464
============ ============ ============ ============
</TABLE>
The following table sets forth the dollar amounts in the respective
loan category at March 31, 1999 that are contractually due after March 31, 2000,
and whether such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due after March 31, 2000
-------------------------------------
(In thousands) Fixed Adjustable Total
------- ---------- -----
<S> <C> <C> <C>
Construction loans ................ $ -- $ 4,310 $ 4,310
Commercial real estate loans ...... 40,196 40,691 80,887
Commercial loans .................. 1,721 7,121 8,842
------- ------- -------
Total ......................... $41,917 $52,122 $94,039
======= ======= =======
</TABLE>
<PAGE>
Residential Real Estate Lending
The Company's residential real estate loans consist of primarily one-
to four-family, owner occupied mortgage loans, including home equity loans. At
March 31, 1999, $293.9 million, or 50.8% of the Company's total loans consisted
of residential mortgage loans and home equity loans. The Company does not
originate fixed-rate loans for terms longer than 30 years. The Company's
residential real estate loans are priced competitively with the market.
Accordingly, the Company attempts to distinguish itself from its competitors
based on quality of service.
The Company generally underwrites its fixed-rate residential mortgage
loans using accepted secondary market standards. In underwriting residential
mortgage loans, the Company evaluates, among other things, the borrower's
ability to make monthly payments and the value of the property securing the
loan. Properties securing real estate loans made by the Company are appraised by
independent fee appraisers approved by the Company's Board of Directors. The
Company requires borrowers to obtain title insurance, and fire and property
insurance (including flood insurance, if necessary) in an amount not less than
the amount of the loan.
The Company currently offers one- and three-year residential
adjustable-rate mortgage (ARM) loans with an interest rate that adjusts annually
in the case of one-year ARM loans, and every three years in the case of
three-year ARM loans based on the change in the relevant United States Treasury
index. These loans generally provide for up to a 2.0% periodic cap and a
lifetime cap of 6.0% over the initial rate. As a consequence of using caps, the
interest rates on these loans may not be as rate sensitive as the Company's cost
of funds. Borrowers of one-year residential ARM loans are generally qualified at
a rate of 2.0% above the initial interest rate. The Company offers ARM loans
that are convertible into fixed-rate loans with interest rates based upon the
then current market rates. ARM loans generally pose greater credit risks than
fixed-rate loans, primarily because as interest rates rise, the required
periodic payment by the borrower rises, increasing the potential for default.
However, as of March 31, 1999, the Company had not experienced higher default
rates on these loans relative to its other loans.
The Company's residential mortgage loans do not contain prepayment
penalties and do not permit negative amortization of principal. Real estate
loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the security property. The Company has waived the due on sale
clause on loans held in its portfolio from time to time to permit assumptions of
the loans by qualified borrowers.
Generally, the Company does not originate residential mortgage loans
where the ratio of the loan amount to the value of the property securing the
loan (i.e., the "loan-to-value" ratio) exceeds 95%, although on occasion, the
Company may lend up to 97% of the value of the property securing the loan. If
the loan-to-value ratio exceeds 80%, the Company generally requires that the
borrower obtain private mortgage insurance in amounts intended to reduce the
Company's exposure to 80% or less of the lower of the appraised value or the
purchase price of the property securing the loan.
<PAGE>
The Company's home equity loans and lines of credit are secured by a
lien on the borrower's residence and generally do not exceed $250,000. The
Company uses the same underwriting standards for home equity loans as it uses
for residential mortgage loans. Home equity loans are generally originated in
amounts, which together with all prior liens on such residence, do not exceed
80% of the appraised value of the property securing the loan. The interest rates
for home equity loans and lines of credit either float at a stated margin over
the prime rate or have fixed interest rates. Home equity lines of credit require
interest and principal payments on the outstanding balance for the term of the
loan. The terms of the Company's home equity lines of credit are generally five
to ten years, with a payback period ranging from five to twenty years.
Commercial Real Estate Lending
The Company has engaged in commercial real estate lending secured
primarily by apartment buildings, office buildings, motels, nursing homes, strip
shopping centers and manufactured housing parks located in the Company's primary
market area. At March 31, 1999, the Company had $91.5 million of commercial real
estate loans, representing 15.8% of the Company's total loan portfolio.
Commercial real estate loans have either fixed or adjustable rates and
terms to maturity that do not exceed 25 years. The Company's current lending
guidelines generally require that the property securing a loan generate net cash
flows of at least 125% of debt service after the payment of all operating
expenses, excluding depreciation, and the loan-to-value ratio not exceed 75% on
loans secured by such properties. As a result of a decline in the value of some
properties in the Company's primary market area and due to economic conditions,
the current loan-to-value ratio of some commercial real estate loans in the
Company's portfolio may exceed the initial loan-to-value ratio, and the current
debt service ratio may exceed the initial debt service ratio. Adjustable rate
commercial real estate loans provide for interest at a margin over a designated
index, often a designated prime rate, with periodic adjustments, generally at
frequencies of up to five years. In underwriting commercial real estate loans,
the Company analyzes the financial condition of the borrower, the borrower's
credit history, the reliability and predictability of the net income generated
by the property securing the loan and the value of the property itself. The
Company generally requires personal guarantees of the borrowers in addition to
the security property as collateral for such loans. Appraisals on properties
securing commercial real estate loans originated by the Company are performed by
independent fee appraisers approved by the Board of Directors.
Commercial real estate loans generally present a higher level of risk
than loans secured by one- to four-family residences. This greater risk is due
to several factors, including the concentration of principal in a limited number
of loans and borrowers, the effect of general economic conditions on income
producing properties and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced (for example,
if leases are not obtained or renewed, or a bankruptcy court modifies a lease
term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired and the value of the
property may be reduced.
<PAGE>
Consumer Lending
The Company offers a variety of secured and unsecured consumer loans,
including manufactured housing loans (loans secured by prefabricated or mobile
homes which serve as the borrower's dwelling), financed insurance premiums and,
to a lesser extent, lines of credit and loans secured by automobiles.
Substantially all of the Company's manufactured housing loans and financed
insurance premium loans are originated outside the Company's primary market
area. The balance of the Company's consumer loans are originated inside the
Company's market area.
The underwriting standards employed by the Company for consumer loans
other than financed insurance premiums generally include a determination of the
applicant's payment history on other debts and an assessment of ability to meet
existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is the primary consideration, the underwriting
process also includes a comparison of the value of the property securing the
loan, if any, in relation to the proposed loan amount. For information regarding
underwriting of financed insurance premiums, see "- Financed Insurance
Premiums."
Manufactured Housing Loans. In order to expand its origination of
manufactured housing lending, the Company is party to an agreement with Tammac
Corporation ("Tammac"), pursuant to which Tammac solicits manufactured housing
loan applications on behalf of the Company. Under the agreement, the Company may
refuse to accept for any reason any application referred to it by Tammac. Tammac
provides certain collection services to the Company, which include, for any loan
that is more than 30 days past due, attempting to cause the borrower to pay
delinquent installments and to bring his or her delinquent loan payments up to
date. Tammac also provides repossession and liquidation services, at the
direction of the Company, for certain delinquent loans. Tammac is paid a fixed
percentage of the amount financed by the borrower and does not receive
additional compensation for collection, repossession, or any other services
provided to the Company. Substantially all of the manufactured housing loans
originated by the Company have been referred to it by Tammac.
Manufactured housing loans represent the largest component of the
Company's consumer loan portfolio. At March 31, 1999, the Company's portfolio of
manufactured housing loans totaled $90.4 million, or 15.6% of its total loan
portfolio. The Company's manufactured housing loans are typically originated at
a higher rate than residential first mortgage loans, and generally have terms of
up to 20 years. Historically, the Company's manufactured housing loans have been
made with both fixed and adjustable rates of interest. Currently, however, the
Company originates only fixed rate manufactured housing loans. The Company's
adjustable-rate manufactured housing loans typically have an interest rate of
4.0% above the one year United States Treasury index, adjusted annually, with a
2.0% maximum annual adjustment and a 16.0% interest rate cap. The initial
interest rate represents the floor. Because the loan may be based on the cost of
the manufactured housing as well as improvements and because manufactured
housing may decline in value due to wear and tear following their initial sale,
the value of the collateral securing a manufactured housing loan may be
substantially less than the loan balance. At the time of origin, inspections are
made to substantiate current market values on all manufactured homes.
<PAGE>
Financed Insurance Premiums. The second largest component of the
Company's consumer loan portfolio is financed insurance premiums. The Company
conducts such lending through a general partnership known as Premium Payment
Plan ("PPP") in which Hudson City Associates, Inc., a wholly owned subsidiary of
the Bank, holds a 65% ownership interest. The remaining 35% interest is held by
F.G.O. Corporation, which is responsible for the marketing of PPP's business.
Hudson City Associates receives 65% of any profits but absorbs 100% of any
losses of PPP. No profit distributions are made to F.G.O. Corporation until any
past losses have been recouped. PPP is currently licensed to provide insurance
premium financing in nine states, but does business primarily in New York, New
Jersey and Pennsylvania. Management estimates that approximately 8.0% of
premiums financed are for non-standard and sub-standard (assigned risk) personal
automobile insurance and the remaining 92% are for various commercial lines of
insurance. Interest rates charged on these loans are substantially higher than
those charged on other types of loans. Terms on these loans are primarily for
eight months.
The Company has experienced a relatively high level of delinquencies in
its financed insurance premium portfolio resulting in higher charge-offs. The
Company may continue to experience a high level of delinquencies and charge-offs
in this class of loans due to the nature of this type of lending. The
underwriting of these loans is generally not based upon the credit risk of the
borrower. In the typical case, funds are advanced to the insurance company for
the full amount of the premium upon receipt of a down payment from the insured.
If the insured defaults on the loan, the Company sustains a loss to the extent
the premium has been earned by (and is therefore unrecoverable from) the
insurance company. The Company's most significant exposure to loss occurs when
the initial insurance premium quoted by an insurance broker, and used as the
basis for the loan and the related down payment, is increased by the
underwriting insurance company subsequent to making the loan. In these
instances, if the borrower decides not to pay the increased premium amount, the
Company is left with an insufficient down payment, relative to the increased
premium, and little or no collateral in the way of insurance premiums refundable
by the insurance company. Accordingly, writing financed insurance premiums
through insurance brokers who accurately quote the initial insurance premium is
critical to this type of lending. At March 31, 1999, the Company had $57.9
million of financed insurance premiums through PPP, representing 10.0% of the
Company's total loan portfolio.
Consumer loans may entail greater credit risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by assets which may decline in value. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of high initial
loan-to-value ratios, repossession, rehabilitation and carrying costs, and the
greater likelihood of damage, loss or depreciation of the property, and thus are
more likely to be affected by adverse personal circumstances. In the case of
manufactured home loans, which may have loan balances in excess of the resale
value of the collateral, borrowers may abandon the collateral property making
repossession by the Company and subsequent losses more likely. The application
of various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on consumer loans, including
manufactured home loans.
<PAGE>
Commercial Loans
At March 31, 1999, commercial loans comprised $29.0 million, or 5.0% of
the Company's total loan portfolio. Most of the Company's commercial loans have
been extended to finance local businesses and include primarily short-term loans
to finance machinery and equipment purchases, inventory, and accounts
receivable. Commercial loans also involve the extension of revolving credit for
a combination of equipment acquisitions and working capital needs as well as
warehouse lines of credit.
The terms of loans extended on machinery and equipment are based on the
projected useful life of such machinery and equipment, generally not to exceed
seven years. Lines of credit are available to borrowers provided that the
outstanding balance is paid in full (i.e., the credit line has a zero balance)
for at least 30 days every year. All lines of credit are reviewed on an annual
basis. In the event the borrower does not meet this 30 day requirement, the line
of credit may be terminated and the outstanding balance may be converted into a
fixed term loan. The Company has a few standby letters of credit outstanding
which are offered at competitive rates and terms and are generally on a secured
basis.
Unlike residential mortgage loans, commercial loans are typically made
on the basis of the borrower's ability to make repayment from the cash flow of
the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself (which, in turn, is often dependent in part upon general
economic conditions). The Company's commercial loans are usually, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
The Company's commercial lending policy includes credit file
documentation and analysis of the borrower's background, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of other conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
the Company's current credit analysis. The Company generally obtains personal
guarantees on its commercial loans. Nonetheless, such loans are believed to
carry higher credit risk than more traditional savings bank loans.
The Company maintains a $20.0 million warehouse line of credit with
Homestead Funding Corp., a mortgage company located in the Capital District area
of New York. Homestead primarily originates residential real estate loans in the
Company's market area. The line of credit is secured by assignments of the
underlying mortgages. At March 31, 1999, the Company had $9.6 million
outstanding under this warehouse line of credit which is included with
commercial loans. During the year ended March 31, 1999, the Company made an
equity investment in Homestead Funding Corp. as a strategic initiative. The line
of credit to Homestead was made in the ordinary course of business at the
Company's normal credit terms, including interest rate and collateralization.
<PAGE>
Asset Quality
Delinquency Procedures. When a borrower fails to make a required
payment on a residential mortgage loan, the Company attempts to cure the
deficiency by contacting the borrower. Written contacts are made after payment
is 15 days past due and, in most cases, deficiencies are cured promptly. If the
delinquency is not cured by the 30th day, the Company attempts to contact the
borrower by telephone to arrange payment of the delinquency. If these efforts
have not resolved the delinquency within 45 days after the due date, a second
written notice is sent to the borrower, and on the 60th day a notice is sent to
the borrower warning that foreclosure proceedings will be commenced unless the
delinquent amount is paid. If the delinquency has not been cured within a
reasonable period of time after the foreclosure notice has been sent, the
Company may obtain a forbearance agreement or may institute appropriate legal
action to foreclose upon the property. If foreclosed, property collateralizing
the loan is sold at a public sale and may be purchased by the Company. If the
Company is in fact the successful bidder at the foreclosure sale, upon receipt
of a deed to the property, the Company generally sells the property at the
earliest possible date.
Collection efforts on consumer and commercial real estate loans are
similar to efforts on residential mortgage loans, except that collection efforts
on consumer and commercial real estate loans generally begin within 15 days
after the payment date is missed. In the case of manufactured home loans, the
Company's agreement with Tammac requires Tammac to provide collection services
on any loan that is more than 30 days past due. The Company also maintains
periodic contact with commercial loan customers and monitors and reviews the
borrowers' financial statements and compliance with debt covenants on a regular
basis.
Real estate and other assets acquired by the Company as a result of
foreclosure or by deed-in-lieu of foreclosure or repossession are classified as
Other Real Estate Owned ("OREO") and Repossessed Property until sold. When
property is classified as OREO and Repossessed Property, it is recorded at the
lower of cost or fair value (net of disposition costs) at that date and any
writedown resulting therefrom is charged to the allowance for loan losses.
Subsequent writedowns are charged to operating expenses. Net expenses from OREO
and repossessed properties are expensed as incurred. See the "Nonperforming
Assets" table on page 18 of the Company's 1999 Annual Report to Shareholders
attached hereto by Exhibit 13 and incorporated herein by reference.
Other Loans of Concern. As of March 31, 1999, there were $4.3 million
of other loans not included in the category of non-performing loans where known
information about the possible credit or other problems of borrowers caused
management to have doubts as to the ability of the borrower to comply with
present loan repayment terms.
There were no other loans in excess of $1.0 million being specially
monitored by the Company as of March 31, 1999. These loans have been considered
by management in conjunction with the analysis of the adequacy of the allowance
for loan losses.
<PAGE>
Allowance for Loan Losses. The allowance for loan losses is replenished
through a provision for loan losses charged to operations. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Recoveries on loans previously
charged-off are credited to the allowance for loan losses. The allowance is an
amount that management believes will be adequate to absorb losses on existing
loans that may become uncollectible. Management's evaluation of the adequacy of
the allowance for loan losses is performed on a periodic basis and takes into
consideration such factors as the historical loan loss experience, changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that may affect
borrowers' ability to pay.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in determining the level of the
allowance. Future additions to the Company's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. In addition, regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based upon their judgment of the information available to them at the
time of their examination. At March 31, 1999, the Company had a total allowance
for loan losses of $14.3 million, representing 143.8% of total non-performing
loans. See the "Loan Loss Experience" table on page 13 of the Company's 1999
Annual Report to Shareholders attached hereto by Exhibit 13 and incorporated
herein by reference.
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Company. This allocation is based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is not indicative of either the specific amounts or the loan
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category.
<PAGE>
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------ ------------------
Allowance Percent Allowance Percent Allowance Percent Allowance Percent Allowance Percent
For Loan Of Loans For Loan Of Loans For Loan Of Loans For Loan Of Loans For Loan Of Loans
(Dollars in thousands) Losses In Each Losses In Each Losses In Each Losse In Each Losses In Each
Category Category Category Category Category
To Total To Total To Total To Total To Total
Loans Loans Loans Loans Loans
--------- ------- -------- -------- --------- ------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Allocation of allowance for
loan losses:
Residential real estate (1) $ 2,989 51.7% $ 1,457 54.1% $ 998 56.2% $ 846 54.5% $ 815 59.2%
Commercial real estate 2,782 15.8 1,756 15.1 758 13.7 658 15.7 538 16.0
Manufactured home loans 3,147 15.6 2,550 19.2 1,040 18.8 1,049 17.8 699 16.5
Commercial loans 871 5.0 517 3.7 1,833 4.0 213 6.5 275 4.2
Financed insurance premiums 2,332 10.0 1,027 5.5 1,127 4.8 442 3.0 272 2.0
Consumer loans 346 2.2 225 2.3 52 2.3 25 2.3 24 1.9
Net deferred loan costs
and unearned discount - (0.3) - 0.1 - 0.2 - 0.2 - 0.2
Unallocated 1,829 - 695 - 64 - 313 - 564 -
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 14,296 100.0% $ 8,227 100.0% $ 5,872 100.0% $ 3,546 100.0% $ 3,187 100.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
- -------------
(1) Includes construction loans.
Investment Activities
The Company is authorized to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements and federal
funds. Subject to various restrictions, the Company may also invest its assets
in investment grade commercial paper, mortgage-backed securities, collateralized
mortgage obligations (CMO's), corporate debt securities and mutual funds whose
assets conform to the investments that the Company is otherwise authorized to
make directly. As of March 31, 1999, the Company did not hold any securities to
one issuer which exceeded 10% of equity, excluding securities issued by U.S.
Government agencies.
<PAGE>
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon the Company's
need for liquidity, to fulfill the Company's asset/liability management policies
to achieve the proper balance between its desire to minimize risk and maximize
yield, and, to a much lesser extent, to provide collateral for borrowings. To
date, the Company's investment strategy has been directed toward high-quality
assets (primarily federal agency obligations, mortgage-backed securities, CMO's,
and high-grade corporate debt securities).
Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. If securities are
purchased for the purpose of selling them in the near term, they are classified
as trading securities and are reported at fair value with unrealized holding
gains and losses reflected in current earnings. All other debt and marketable
equity securities are classified as securities available for sale and are
reported at fair value, with net unrealized gains or losses reported, net of
income taxes, as a separate component of equity. As a member of the FHLB of New
York, the Company is required to hold FHLB of New York stock which is carried at
cost since there is no readily available market value. Historically, the Company
has not held any securities considered to be trading securities.
<PAGE>
The following table sets forth information regarding the scheduled
maturities, amortized cost, and weighted average yields for the Company's
securities portfolios at March 31, 1999 by contractual maturity. The table does
not take into consideration the effects of scheduled repayments or possible
prepayments.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
Less than 1 year 1 to 5 years 5 to 10 years Over 10 years
---------------------------------------------------------------------------------
Amortized Weighted Amortized Weighted Amortized Weighted Amortized Weighted
Cost Average Cost Average Cost Average Cost Average
Yield Yield Yield Yield
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Securities Available-for-
Sale:
U.S. Government and
Agency securities ........ $ - --% 6,998 6.31% $ 39,792 6.52% $ 20,186 7.00%
Corporate debt securities .. 1,999 7.43 11,198 6.32 6,043 6.44 36,188 6.51
Tax-exempt securities ...... - -- - -- - -- 15,131 4.90
Collateralized mortgage
obligations .............. - -- - -- - -- 85,434 6.57
Mortgage-backed securities . - -- - -- - -- 19,678 6.53
Equity securities .......... - -- - -- - -- 1,160 6.42
-------- -------- -------- -------- -------- -------- -------- --------
Total securities
available for sale .. $ 1,999 7.43% $ 18,196 6.31% $ 45,835 6.51% $177,777 6.46%
======== ======== ======== ======== ======== ======== ======== ========
Securities Held-to-Maturity:
U.S. Government and
Agency securities........ $ - --% $ 1,995 7.06% $ - --% $ - --%
Corporate debt securities .. 8,989 6.80 8,942 6.67 - -- - --
Tax-exempt securities - -- - -- 10 9.31 - --
Collateralized mortgage
obligations .............. - -- - -- - -- 968 6.34
Mortgage-backed securities
- -- 189 6.07 1,746 6.81 202 9.39
-------- -------- -------- -------- -------- -------- -------- --------
Total securities held
to maturity....... $ 8,989 6.80% $ 11,126 6.73% 1,756 6.77% $ 1,170 6.87%
======== ======== ======== ======== ======== ======== ======== ========
(continued)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-----------------------------
Total Securities
-----------------------------
Amortized Weighted Fair
Cost Average Value
Yield
-------- -------- --------
<S> <C> <C> <C>
(Dollars in Thousands)
Securities Available-for-
Sale:
U.S. Government and
Agency securities ........ $ 66,976 6.64% $66,447
Corporate debt securities .. 55,428 6.49 55,012
Tax-exempt securities ...... 15,131 4.90 15,053
Collateralized mortgage ....
obligations .............. 85,434 6.57 85,405
Mortgage-backed securities . 19,678 6.53 19,498
Equity securities ..........
1,160 -- 1,196
-------- -------- --------
Total securities
available for sale .. $243,807 6.43% $242,611
======== ======== ========
Securities Held-to-Maturity:
U.S. Government and
Agency securities........ $ 1,995 7.06% $ 2,012
Corporate debt securities .. 17,931 6.74 18,088
Tax-exempt securities 10 9.31 10
Collateralized mortgage
obligations .............. 968 6.34 940
Mortgage-backed securities
2,137 6.99 2,185
-------- -------- --------
Total securities held
to maturity....... $ 23,041 6.77% $ 23,235
======== ======== ========
</TABLE>
<PAGE>
Sources of Funds
General. The Company's primary sources of funds are deposits,
amortization and prepayment of loan principal, maturities of securities,
short-term investments, funds provided from operations and borrowings.
Deposits. The Company offers a variety of deposit accounts having a
range of interest rates and terms. The Company's deposits consist of passbook
and statement savings accounts, money market and N.O.W accounts, and time
deposits generally ranging in terms from three months to five years. The Company
only solicits deposits from its primary market area and does not have brokered
deposits. The Company relies primarily on competitive pricing policies,
advertising and customer service to attract and retain these deposits. At March
31, 1999, the Company's deposits totaled $591.8 million, of which $547.9 million
were interest-bearing deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition. The variety of deposit accounts offered by the Company has allowed
it to be competitive in obtaining funds and to respond with flexibility to
changes in consumer demand. The Company has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Company manages the pricing of its deposits in keeping with
its asset/liability management, liquidity and profitability objectives. Based on
its experience, the Company believes that its passbook and statement savings,
money market accounts and N.O.W accounts are relatively stable sources of
deposits. However, the ability of the Company to attract and maintain time
deposits and the rates paid on these deposits has been and will continue to be
significantly affected by market conditions.
The following table indicates, as of March 31, 1999, the amount of the
Company's time deposits of $100,000 or more by time remaining until maturity.
<TABLE>
<CAPTION>
Maturity
------------------------------------------------------------
3 Months 3 to 6 6 to 12 Over
(In thousands) or Less Months Months 12 Months Total
------- ------ ------ --------- -----
<S> <C> <C> <C> <C> <C>
Time Deposits of $100,000 or more........ $ 9,538 $ 5,313 $ 9,391 $ 15,635 $ 39,877
</TABLE>
Borrowings. Although deposits are the Company's primary source of
funds, the Company's practice has been to utilize borrowings when they are a
less costly source of funds, can be invested at a positive interest rate spread
or when the Company needs additional funds to satisfy loan demand.
The Company's borrowings historically have consisted of advances from
the FHLB of New York. Such advances can be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The Company currently maintains available lines of credit and is
currently authorized to borrow up to $99.4 million on lines of credit with the
FHLB of New York. At March 31, 1999, the Company had outstanding $27.6 million
in borrowings from the FHLB of New York. See Note 6 of the Notes to Consolidated
Financial Statements included in the Company's 1999 Annual Report to
Shareholders incorporated herein by reference as Exhibit 13. The Company may
increase its borrowings in order to fund the acquisition of additional
securities or other assets in the future or as part of merger and acquisition
activities.
<PAGE>
Subsidiary Activities
Hudson City Associates, Inc. Hudson City Associates, Inc. ("HCAI"), a
wholly owned subsidiary of the Bank, was incorporated in 1984 but remained
inactive until 1990. In 1990, HCAI formed a partnership known as Premium Payment
Plan (referred to herein as "PPP"), pursuant to which the Company provides
premium financing for non-standard and sub-standard personal automobile
insurance and certain lines of commercial insurance.
Hudson City Centre, Inc. A wholly owned subsidiary of the Bank, Hudson
City Centre, Inc. ("HCCI"), was organized in 1985 to facilitate the construction
of the Bank's main office building. Pursuant to this objective, HCCI formed a
partnership known as Sixth Street Development Associates to build and hold as
its primary asset the Bank's main office building at One Hudson City Centre,
Hudson, New York.
Hudson River Mortgage Corporation. A wholly owned subsidiary of the
Company, Hudson River Mortgage Corporation ("HRMC") was organized in 1996 to
broker mortgages to the Company and other financial institutions.
Hudson River Funding Corp. Hudson River Funding Corp. ("HRFC") is a
Real Estate Investment Trust formed in 1997 to enhance liquidity, portfolio
yields and capital growth. The Bank funded HRFC with approximately $185.0
million of earning assets consisting of residential mortgage loans, commercial
real estate loans, home equity loans, home improvement loans, and debt
securities. Interest income earned on the assets held by HRFC is passed through
to the Bank in the form of dividends.
Competition
The Company faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other savings institutions, commercial banks,
credit unions and mortgage bankers making loans secured by real estate located
in the Company's primary market area. Other savings institutions, commercial
banks, credit unions, and finance companies provide vigorous competition in
consumer lending. The Company also faces strong competition in its efforts to
provide insurance premium financing through PPP from a variety of other lenders,
some of which have much greater assets and resources than the Company.
The Company attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from mutual funds and
other savings institutions, commercial banks and credit unions located in the
same communities. The Company competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges.
Automated teller machine facilities are also available.
Employees
At March 31, 1999, the Company had 257 full-time employees and 44
part-time employees. The Company's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
<PAGE>
REGULATION
Set forth below is a brief description of the laws and regulations
applicable to the Company and the Bank. No assurance can be given, however, that
under certain circumstances, other laws and regulations will not be applicable
to and materially affect the Company and the Bank. The description of the laws
and regulations hereunder, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
The Company
General. The Company is subject to regulation as a savings and loan
holding company under the Home Owners Loan Act, as amended ("HOLA"), instead of
being subject to regulation as a bank holding company under the Bank Company Act
of 1956 because the Bank has made an election under Section 10(1) of HOLA to be
treated as a "savings bank" for purposes of Section 10(e) of HOLA. As a result,
the Company will be required to register with the OTS and will be subject to OTS
regulations, examinations, supervision and reporting requirements relating to
savings and loan holding companies. The Company will also be required to file
certain reports with, and otherwise comply with the rules and regulations of,
the New York State Banking Board (the "NYBB" or the "Board") and the Securities
and Exchange Commission ("SEC"). As a subsidiary of a savings and loan holding
company, the Bank will be subject to certain restrictions in its dealings with
the Company and affiliates thereof.
Activities Restrictions. The Bank is presently the sole savings and
loan subsidiary of the Company. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company, of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, he or she
may impose such restrictions as are deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the Company and its affiliates may be imposed on the savings
institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company.
<PAGE>
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity other than: (i) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the FRB as permissible for bank holding companies. Those
activities described in clause (vii) above also must be approved by the Director
of the OTS prior to being engaged in by a multiple savings and loan holding
company.
Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended. A savings bank subsidiary of a savings and loan holding
company that does not comply with the QTL test must comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank, (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to meet the QTL test, it must
cease any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
The QTL test set forth in the HOLA requires that qualified thrift
investments ("QTLs") represent 65% of portfolio assets of the savings
institution and its consolidated subsidiaries. Portfolio assets are defined as
total assets less intangibles, property used by a savings association in its
business and liquidity investments in an amount not exceeding 20% of assets.
Generally, QTLs are residential housing related assets. The 1996 amendments
allow small business loans, credit card loans, student loans and loans for
personal, family and household purposes to be included without limitation as
qualified investments. At March 31, 1999, the Bank's assets invested in QTLs
were in excess of the percentage required to qualify the Bank under the QTL test
in effect at that time.
<PAGE>
Limitations on Transactions with Affiliates. Transactions between
savings institutions and their affiliates are governed by Sections 23A and 23B
of the Federal Reserve Act. An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent company of a
savings institution (such as the Company) and any companies which are controlled
by such parent company are affiliates of the savings institution. Generally,
Sections 23A and 23B (i) limit the extent to which the savings institution or
its subsidiaries may engage in "covered transactions" with any one affiliate to
an amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (ii) require that all
such transactions be on terms substantially the same, or, at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and other similar transactions.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22 (h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At March 31, 1999, the Company was in compliance with the
above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the OTS, (i) control of any other savings institution or savings and
loan holding company or substantially all the assets thereof or (ii) more than
5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Except with the prior approval of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
<PAGE>
The OTS may only approve acquisitions resulting in the formation of a
multiple savings and loan holding company which controls savings institutions in
more than one state if (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
located in the state of the institution to be acquired as of March 5, 1987; (ii)
the acquirer is authorized to acquire control of the savings institution
pursuant to the emergency acquisition provisions of the Federal Deposit
Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state chartered savings institutions).
Federal Securities Laws. The Company's Common Stock is registered with
the SEC under Section 12(g) of the Exchange Act. The Company is subject to the
proxy and tender offer rules, insider trading reporting requirements and
restrictions, and certain other requirements under the Exchange Act.
Shares of Common Stock purchased by persons who are not affiliates of
the Company may generally be sold without registration. Shares purchased by an
affiliate of the Company generally may not be resold without complying with the
resale restrictions of Rule 144 under the Securities Act. If the Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Company or (ii)
the average weekly volume of trading in such shares during the preceding four
calendar weeks.
The Bank
General. The Bank is subject to extensive regulation and examination by
the NYSBD, as its chartering authority, and by the FDIC, as the insurer of its
deposits and is subject to certain requirements established by the OTS as a
result of the Company's savings and loan holding company status. The federal and
state laws and regulations which are applicable to banks and their holding
companies regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for certain loans.
The Bank must file reports with the NYSBD and the FDIC concerning its activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as establishing branches and mergers
with, or acquisitions of, other depository institutions. There are periodic
examinations by the NYSBD and the FDIC to test the Bank's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the NYSBD, the FDIC or as a result of the
enactment of legislation, could have a material adverse impact on the Company,
the Bank and their operations.
<PAGE>
Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks,
which, like the Bank, are not members ("non-members") of the Federal Reserve
System. See Footnote 7 of the March 31, 1999 consolidated financial statements
included in the Company's 1999 Annual Report to Shareholders incorporated herein
by reference as Exhibit 13.
Activities and Investments of New York-Chartered Savings Banks. The
Bank derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and regulations, as limited
by FDIC regulations and other federal laws and regulations.The New York laws and
regulations authorize savings banks, including the Bank, to invest in real
estate mortgages, consumer and commercial loans, certain types of debt
securities, including certain corporate debt securities and obligations of
federal, State and local governments and agencies, certain types of corporate
equity securities and certain other assets. Under the statutory authority for
investing in equity securities, a savings bank may directly invest up to 7.5% of
its assets in certain corporate stock and may also invest up to 7.5% of its
assets in certain mutual fund securities. Investment in stock of a single
corporation is limited to the lesser of 2% of the outstanding stock of such
corporation or 1% of the savings bank's assets, except as set forth below. Such
equity securities must meet certain tests of financial performance. A savings
bank's lending powers are not subject to percentage of asset limitations,
although there are limits applicable to single borrowers. A savings bank may
also, pursuant to the "leeway" authority, make investments not otherwise
permitted under the New York State Banking Law. This authority permits
investments in otherwise impermissible investments of up to 1% of the savings
bank's assets in any single investment, subject to certain restrictions and to
an aggregate limit for all such investments of up to 5% of assets. Additionally,
in lieu of investing in such securities in accordance with the reliance upon the
specific investment authority set forth in the New York State Banking Law,
savings banks are authorized to elect to invest under a "prudent person"
standard in a wider range of debt and equity securities as compared to the types
of investments permissible under such specific investment authority. However, in
the event a savings bank elects to utilize the "prudent person" standard, it
will be unable to avail itself of the other provisions of the New York State
Banking Law and regulations which set forth specific investment authority. A New
York chartered stock savings bank may also exercise trust powers upon approval
of the Department.
New York-chartered savings banks may also invest in subsidiaries under
their service corporation investment power. A savings bank may use this power to
invest in corporations that engage in various activities authorized for savings
banks, plus any additional activities which may be authorized by the NYBB.
Investment by a savings bank in the stock, capital notes and debentures of its
service corporations is limited to 3% of the bank's assets, and such
investments, together with the bank's loans to its service corporations, may not
exceed 10% of the savings bank's assets.
With certain limited exceptions, a New York-chartered savings bank may
not make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the bank's net worth. The bank currently complies
with all applicable loans-to-one-borrower limitations.
<PAGE>
Activities and Investments of FDIC-Insured State-Chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an
FDIC-insured state-chartered bank may not directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
Under the New York State Banking Law, the Department may issue an order
to a New York-chartered banking institution to appear and explain an apparent
violation of law, to discontinue unauthorized or unsafe practices and to keep
prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Department to
discontinue such practices, such director, trustee or officer may be removed
from office by the Department after notice and an opportunity to be heard. The
bank does not know of any past or current practice, condition or violation that
might lead to any proceeding by the Department against the bank or any of its
directors or officers. The Department also may take possession of a banking
organization under specified statutory criteria.
<PAGE>
Prompt Corrective Action. Section 38 of the Federal Deposit Insurance
Act ("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well-capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure, (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well-capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The regulations also
provide that a federal banking regulator may, after notice and an opportunity
for a hearing, reclassify a "well-capitalized" institution as "adequately
capitalized" and may require an "adequately capitalized" institution or an
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with an appropriate federal banking
regulator within 45 days of the date that the institution receives notice or is
deemed to have notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Immediately upon becoming
undercapitalized, an institution becomes subject to statutory provisions which,
among other things, set forth various mandatory and discretionary restrictions
on the operations of such an institution.
At March 31, 1999, the Bank had capital levels which qualified it as a
"well-capitalized" institution.
FDIC Insurance Premiums. The Bank is a member of the Bank Insurance
Fund ("BIF") administered by the FDIC but has accounts insured by both the BIF
and the Savings Association Insurance Fund ("SAIF"). The SAIF-insured accounts
are held by the Bank as a result of certain acquisitions and branch purchases.
As insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC.
<PAGE>
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Community Investment and Consumer Protection Laws. In connection with
its lending activities, the Bank is subject to a variety of federal laws
designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the federal Home Mortgage
Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act,
Equal Credit Opportunity Act, Fair Credit Reporting Act and Community
Reinvestment Act ("CRA").
The CRA requires insured institutions to define the communities that
they serve, identify the credit needs of those communities and adopt and
implement a "Community Reinvestment Act Statement" pursuant to which they offer
credit products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the Bank,
the FDIC) must conduct regular CRA examinations of insured financial
institutions and assign to them a CRA rating of "outstanding," "satisfactory,"
"needs improvement" or "unsatisfactory." The Bank's current CRA rating is
"satisfactory."
The Bank is also subject to provisions of the New York State Banking
Law which impose continuing and affirmative obligations upon banking
institutions organized in New York State to serve the credit needs of its local
community ("NYCRA"), which are similar to those imposed by the CRA. Pursuant to
the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA
reports with the Department. The NYCRA requires the Department to make an annual
written assessment of a bank's compliance with the NYCRA, utilizing a
four-tiered rating system, and make such assessment available to the public. The
NYCRA also requires the Department to consider a bank's NYCRA rating when
reviewing a bank's application to engage in certain transactions, including
mergers, asset purchases and the establishment of branch offices or automated
teller machines, and provides that such assessment may serve as a basis for the
denial of any such application. The Bank's latest NYCRA rating received from the
Department was "satisfactory."
Limitations on Dividends. The Company is a legal entity separate and
distinct from the Bank. The Company's principal source of revenue consists of
dividends from the Bank. The payment of dividends by the Bank is subject to
various regulatory requirements including a requirement, as a result of the
Company's savings and loan holding company status, that the Bank notify the
Director of the OTS not less than 30 days in advance of any proposed declaration
by its directors of a dividend.
<PAGE>
Under New York State Banking Law, a New York-chartered stock savings
bank may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Department is required if the total
of all dividends declared in a calendar year would exceed the total of its net
profits for that year combined with its retained net profits of the preceding
two years, subject to certain adjustments.
Miscellaneous. The Bank is subject to certain restrictions on loans to
the bank or its non-bank subsidiaries, on investments in the stock or securities
thereof, on the taking of such stock or securities as collateral for loans to
any borrower, and on the issuance of a guarantee or letter of credit on behalf
of the Company or its non-Company subsidiaries. The Company also is subject to
certain restrictions on most types of transactions with the Company or its
non-Company subsidiaries, requiring that the terms of such transactions be
substantially equivalent to terms of similar transactions with non-affiliated
firms.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. The Bank had
$27.6 million of FHLB advances at March 31, 1999.
As an FHLB member, the Bank is required to purchase and maintain stock
in the FHLB of New York in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of its advances from the FHLB of
New York, whichever is greater. At March 31, 1999, the Bank had approximately
$3.3 million in FHLB stock, which resulted in its compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily checking
accounts, including NOW and Super NOW accounts) and non-personal time deposits.
As of March 31, 1999, the Company was in compliance with applicable
requirements. However, because required reserves must be maintained in the form
of vault cash or a non-interest bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce an institution's earning assets.
<PAGE>
Federal Taxation
General. The Company and the Bank will be subject to federal income
taxation in the same general manner as other corporations with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Company. The
Company's federal income tax returns have been audited or closed without audit
by the Internal Revenue Service through December 31, 1996.
Method of Accounting. For federal income tax purposes, the Company
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending March 31 for filing its consolidated federal income
tax returns. For further information about the Federal income tax consequences
for the Company, see footnote 11 of the consolidated financial statements within
the Company's 1999 Annual Report to Shareholders incorporated herein by
reference as Exhibit 13.
State and Local Taxation
New York State Taxation. The Company and the Bank will report income on
a combined basis utilizing a fiscal year. New York State Franchise Tax on
corporations is imposed in an amount equal to the greater of (a) 9% of "entire
net income" allocable to New York State (b) 3% of "alternative entire net
income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000.
Executive Officers
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. Each executive
officer of the Company is also an executive officer of the Bank. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.
<TABLE>
<CAPTION>
Name Age Position Held with the Bank
------------------------- ----------- -------------------------------------
<S> <C> <C>
Timothy E. Blow 32 Chief Financial Officer
Sidney D. Richter 59 Senior Vice President
Pamela M. Wood 51 Senior Vice President
</TABLE>
<PAGE>
The business experience of each executive officer who is not also a
Director of the Company is set forth below.
Timothy E. Blow, CPA. Mr. Blow became Chief Financial Officer of the
Company in May 1997. Prior to his appointment as Chief Financial Officer, Mr.
Blow was a senior manager at the accounting firm of KPMG LLP. Mr.
Blow also serves as a director of Hudson City Associates, Inc. and as Secretary
and Treasurer of Hudson River Funding Corp., wholly owned subsidiaries of the
Bank.
Sidney D. Richter. Mr. Richter has served as the Company's Senior Vice
President of Lending since 1993. From 1990 to 1993, Mr. Richter served as the
Company's Vice President for Commercial Lending. Mr. Richter also serves as a
director of each of the Bank's wholly owned subsidiaries.
Pamela M. Wood. Ms. Wood has been employed by the Company since 1969
and has served as Senior Vice President since 1993. She also serves as Secretary
of Hudson River Mortgage Corporation, Hudson City Center, Inc. and Hudson City
Associates, Inc. She served as Vice President from 1990 to 1993 and Corporate
Secretary from 1990 to 1998. From 1984 to 1990 she served as Assistant Vice
President. From 1969 to 1984 she served as Administrative Assistant and
Executive Secretary.
Item 2. Description of Properties
-------------------------
The Company conducts its business at its main office and twelve other
banking offices. The net book value of the Company's premises and equipment
(including land, building and leasehold improvements and furniture, fixtures and
equipment) at March 31, 1999 was $16.8 million. The Company believes that its
current facilities are adequate to meet the present and foreseeable needs of the
Company and the Bank, subject to possible future expansion.
Item 3. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal
actions arising in the normal course of its business. While the ultimate outcome
of these proceedings cannot be predicted with certainty, management, after
consultation with counsel representing the Company in the proceedings, does not
expect that the resolution of these proceedings will have a material effect on
the Company's financial condition or results of operations.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held a special meeting of shareholders on January 5, 1999.
At the meeting, proposals to (i) ratify the Company's 1998 Stock Option and
Incentive Plan, and (ii) ratify the Company's 1998 Recognition and Retention
Plan were approved. The votes cast for and against these proposals, and the
number of abstentions and broker non-votes with respect to each of these
proposals, were as follows:
Approval of 1998 Stock Option and Incentive Plan
------------------------------------------------
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
9,036,197 1,453,321 165,641 147,105
Approval of 1998 Recognition and Retention Plan
-----------------------------------------------
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
9,088,903 1,556,265 157,096 -
PART II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters
------------------------------------------
Inside back cover of the attached 1999 Annual Report to Shareholders is
herein incorporated by reference as Exhibit 13.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
-------------------------------------------------
Pages 10 through 23 of the attached 1999 Annual Report to
Shareholders are herein incorporated by reference as Exhibit 13.
<PAGE>
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Shareholders for the year ended March 31, 1999, is incorporated by reference in
this Annual Report on Form 10-K as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Report
--------
<S> <C>
Independent Auditors Report........................................................................... 24
Consolidated Balance Sheets as of March 31, 1999 and 1998............................................. 25
Consolidated Income Statements for the Years Ended March 31, 1999, 1998 and 1997..................... 26
Consolidated Statements of Changes in Shareholders' Equity for Years Ended March 31, 1999, 1998
and 1997 ............................................................................................ 27
Consolidated Statements of Cash Flows for Years Ended March 31, 1999, 1998 and 1997................... 28
Notes to Consolidated Financial Statements............................................................ 29 to 48
</TABLE>
With the exception of the aforementioned information, the Company's
Annual Report to Shareholders for the year ended March 31, 1999, is not deemed
filed as part of this Annual Report on Form 10-K.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
------------------------------------------------
None.
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act
---------------------------------------------
Directors
- ---------
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Executive Officers
- ------------------
Information concerning Executive Officers of the Company is
incorporated herein by reference from Part I of this Annual Report on Form 10-K.
Compliance with Section 16(a)
- -----------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 31, 1999, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were complied with.
Item 10. Executive Compensation
----------------------
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
<PAGE>
Item 11. Security Ownership of Certain Beneficial
Owners and Management
----------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held in 1999, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held in 1999, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Regulation Reference to
S-K Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
<S> <C> <C>
3(i) Certificate of Incorporation *
3(ii) Bylaws 3(ii)
4 Instruments defining the rights of security holders, *
including debentures
10 Material Contracts
Employment Agreement between Hudson River Bank & *
Trust Company and certain executive officers
Employment Agreement between Hudson River Bancorp., *
Inc. and certain executive officers
Change-In-Control Severance Agreement with certain *
officers of Hudson River Bank & Trust Company
Hudson River Bank & Trust Company Employee *
Severance Compensation Plan
Employee Stock Ownership Plan *
Form of Hudson City Savings Institution 401(k) **
Savings Plan
Benefit Restoration Plan **
1998 Stock Option and Incentive Plan ***
1998 Recognition and Retention Plan ***
13 Annual Report to Shareholders 13
21 Subsidiaries of Registrant 21
23 Consents of Experts and Counsel *
27 Financial Data Schedule 27
</TABLE>
- ----------
* Filed as exhibits to the Company's Form S-1 registration statement
filed on March 9, 1998 (File No. 333-47605) of the Securities Act of
1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
** Filed as exhibits to the Company's Pre-effective Amendment No. One to
Form S-1 filed on May 1, 1998 (File No. 333-47605) of the Securities
Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
*** Filed as exhibits to the Company's Proxy Statement filed on November
13, 1998 in connection with the Company's Special Meeting for
Shareholders and hereby incorporated by reference.
(b) Reports on Form 8-K
On May 25, 1999, a current report on Form 8-K was filed with the SEC to
announce the execution of a definitive agreement to acquire SFS Bancorp, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
By: /s/ Carl A. Florio
-----------------------------------------------------
Carl A. Florio, President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Carl A. Florio /s/ Earl Schram, Jr.
- ------------------------------------ ------------------------------------
Carl A. Florio, Director, Earl Schram, Jr., Chairman of the
President and Chief Executive Board
Officer (Principal Executive and
Operating Officer)
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------
/s/ Stanley Bardwell, M.D. /s/ Joseph W. Phelan
- ------------------------------------ ------------------------------------
Stanley Bardwell, M.D. Joseph W. Phelan, Director
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------
/s/ Willam E. Collins /s/ William H. Jones
- ------------------------------------ ------------------------------------
William E. Collins William H. Jones
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------
/s/ John E. Kelly /s/ Marcia M. Race
- ------------------------------------ ------------------------------------
John E. Kelly, Director Marcia M. Race, Director
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------
/s/ Marilyn A. Herrington /s/ Timothy E. Blow
- ------------------------------------ ------------------------------------
Marilyn A. Herrington, Director Timothy E. Blow, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------
EXHIBIT 3(ii)
BY-LAWS
<PAGE>
HUDSON RIVER BANCORP, INC.
THE BOARD OF DIRECTORS
RESOLUTIONS
WHEREAS, the Board of Directors of Hudson River Bancorp, Inc. (the
"Corporation") believes that it is in the best interest of shareholders for the
Corporation to implement a change in retirement age;
NOW THEREFORE, after full discussion and consideration of this matter, be it
RESOLVED, the Corporation's Bylaws be, and they hereby are, amended and
restated, to add the following:
"ARTICLE III. BOARD OF DIRECTORS, Section 3 Age of Directors.
-------------------
Effective January 1, 1999 the retirement age applicable to new Board
members shall be 65 years of age."
I have signed my name and affixed the seal of the Corporation this 6th day of
May, 1999.
/s/Holly E. Rappleyea
---------------------
Holly E. Rappleyea
Corporate Secretary
<PAGE>
HUDSON RIVER BANCORP, INC.
THE BOARD OF DIRECTORS
RESOLUTIONS
WHEREAS, the Board of Directors of Hudson River Bancorp, Inc. (the
"Corporation") believes that it is in the best interest of shareholders for the
Corporation to continue to follow its community oriented strategy; and
WHEREAS, the Board of Directors believes that the implementation of this
strategy could be enhanced by requiring that all directors reside within the
local community;
NOW THEREFORE, after full discussion and consideration of these matters, be it
RESOLVED, the Corporation's Bylaws be, and they hereby are, amended and
restated, to add the following:
"Section 10 Qulaifications.
---------------
Any person first appointed or elected to the Board of Directors after
February 1, 1999 shall, in order to qualify as such, reside in or have
his or her primary place of business located within a 25 mile radius of
any operating office of the Corporation or any subsidiary."
I have signed my name and affixed the seal of the Corporation this 18th day of
February, 1999.
/s/Holly E. Rappleyea
---------------------
Holly E. Rappleyea
Corporate Secretary
<PAGE>
EXHIBIT 3(ii)
HUDSON RIVER BANCORP, INC.
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
---------------
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix.
Section 2. Special Meetings.
-----------------
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, special meetings of stockholders of the
Corporation may be called only by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of directors which the
Corporation would have if there were no vacancies on the Board of Directors
(hereinafter the "Whole Board").
Section 3. Notice of Meetings.
-------------------
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten nor more than 60 days before the
date on which the meeting is to be held, to each stockholder entitled to vote at
such meeting, except as otherwise provided herein or required by law (meaning,
here and hereinafter, as required from time to time by the Delaware General
Corporation Law or the Certificate of Incorporation of the Corporation).
When a meeting is adjourned to another place, date or time, written
notice need not be given of the adjourned meeting if the place, date and time
thereof are announced at the meeting at which the adjournment is taken;
provided, however, that if the date of any adjourned meeting is more than 30
days after the date for which the meeting was originally noticed, or if a new
record date is fixed for the adjourned meeting, written notice of the place,
date and time of the adjourned meeting shall be given in conformity herewith. At
any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
-------
At any meeting of the stockholders, the holders of at least one-third
of all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may be required by law. Where
a separate vote by a class or classes is required, a majority of the shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter.
<PAGE>
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time.
If a notice of any adjourned special meeting of stockholders is sent to
all stockholders entitled to vote thereat, stating that it will be held with
those present constituting a quorum, then except as otherwise required by law,
those present at such adjourned meeting shall constitute a quorum, and all
matters shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
-------------
Such person as the Board of Directors may have designated or, in the
absence of such a person, the President of the Corporation or, in his or her
absence, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, shall call to order any
meeting of the stockholders and act as chairman of the meeting. In the absence
of the Secretary of the Corporation, the secretary of the meeting shall be such
person as the chairman appoints.
Section 6. Conduct of Business.
--------------------
(a) The chairman of any meeting of stockholders shall
determine the order of business and the procedure at the meeting, including such
regulation of the manner of voting and the conduct of discussion as seem to him
or her in order.
(b) At any annual meeting of the stockholders, only such
business shall be conducted as shall have been brought before the meeting (i) by
or at the direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be delivered or mailed to and received
at the principal executive offices of the Corporation not less than 90 days
prior to the anniversary of the preceding year's annual meeting; provided,
however, that in the event that the date of the annual meeting is advanced by
more than 20 days, or delayed by more than 60 days from such anniversary date,
notice by the stockholder to be timely must be so delivered not later than the
close of business on the later of the 90th day prior to such annual meeting or
the tenth day following the day on which notice of the date of the annual
meeting was mailed or public announcement of the date of such meeting is first
made. A stockholder's notice to the Secretary shall set forth as to each matter
such stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the Corporation's books, of the stockholder who
proposed such business, (iii) the class and number of shares of the
Corporation's capital stock that are beneficially owned by such stockholder and
(iv) any material interest of such stockholder in such business. Notwithstanding
<PAGE>
anything in these By-laws to the contrary, no business shall be brought before
or conducted at an annual meeting except in accordance with the provisions of
this Section 6(b). The officer of the Corporation or other person presiding over
the annual meeting shall, if the facts so warrant, determine and declare to the
meeting that business was not properly brought before the meeting in accordance
with the provisions of this Section 6(b) and, if he or she should so determine,
he or she shall so declare to the meeting and any such business so determined to
be not properly brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the
procedures set forth in these By-laws shall be eligible for election as
directors. Nominations of persons for election to the Board of Directors of the
Corporation may be made at a meeting of stockholders at which directors are to
be elected only (i) by or at the direction of the Board of Directors or (ii) by
any stockholder of the Corporation entitled to vote for the election of
directors at the meeting who complies with the notice procedures set forth in
this Section 6(c). Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made by timely notice in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered or mailed to and received at the principal executive offices of the
Corporation not less than 90 days prior to the date of the meeting; provided,
however, that in the event that less than 100 days' notice or public
announcement of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the date of
the meeting was mailed. Such stockholder's notice shall set forth (x) as to each
person whom such stockholder proposes to nominate for election or re-election as
a director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to being named
in the proxy statement as a nominee and to serving as a director if elected);
and (y) as to the stockholder giving the notice: (A) the name and address, as
they appear on the Corporation's books, of such stockholder and (B) the class
and number of shares of the Corporation's capital stock that are beneficially
owned by such stockholder. At the request of the Board of Directors, any person
nominated by the Board of Directors for election as a director shall furnish to
the Secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the provisions of this Section 6(c). The officer of the
Corporation or other person presiding at the meeting shall, if the facts so
warrant, determine that a nomination was not made in accordance with such
provisions and, if he or she should so determine, he or she shall so declare to
the meeting and the defective nomination shall be disregarded.
<PAGE>
Section 7. Proxies and Voting.
-------------------
At any meeting of the stockholders, every stockholder entitled to vote
may vote in person or by proxy authorized by an instrument in writing (or as
otherwise permitted under applicable law) by the stockholder or his duly
authorized attorney-in-fact filed in accordance with the procedure established
for the meeting. Proxies solicited on behalf of the management shall be voted as
directed by the stockholder or in the absence of such direction, as determined
by a majority of the Board of Directors. No proxy shall be valid after eleven
months from the date of its execution except for a proxy coupled with an
interest.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballot, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballot shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. Stock List.
-----------
The officer who has charge of the stock transfer books of the
Corporation shall prepare and make, in the time and manner required by
applicable law, a list of stockholders entitled to vote and shall make such list
available for such purposes, at such places, at such times and to such persons
as required by applicable law. The stock transfer books shall be the only
evidence as to the identity of the stockholders entitled to examine the stock
transfer books or to vote in person or by proxy at any meeting of stockholders.
Section 9. Consent of Stockholders in Lieu of Meeting.
-------------------------------------------
Subject to the rights of the holders of any class or series of
preferred stock of the Corporation, any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
Section 10. Inspectors of Election
----------------------
The Board of Directors shall, in advance of any meeting of
stockholders, appoint one or more persons as inspectors of election, to act at
the meeting or any adjournment thereof and make a written report thereof, in
accordance with applicable law.
<PAGE>
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
------------------------------------------
The business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The number of directors shall be
as provided for in the Certificate of Incorporation. The Board of Directors
shall annually elect a Chairman of the Board and a President from among its
members and shall designate, when present, either the Chairman of the Board or
the President to preside at its meetings.
The directors, other than those who may be elected by the holders of
any class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of stockholders
after their election or for such shorter period of time as the Board of
Directors may determine, with each director to hold office until his or her
successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
------------------------------------------
Subject to the rights of the holders of any class or series of
preferred stock then outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled only by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected expires,
and until such director's successor shall have been duly elected and qualified.
No decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent director.
Section 3. Regular Meetings.
-----------------
Regular meetings of the Board of Directors shall be held at such place
or places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
<PAGE>
Section 4. Special Meetings.
-----------------
Special meetings of the Board of Directors may be called by one-third
(1/3) of the directors then in office (rounded up to the nearest whole number)
or by the President and shall be held at such place, on such date, and at such
time as they or he or she shall fix. Notice of the place, date, and time of each
such special meeting shall be given to each director by whom it is not waived by
mailing written notice not less than five days before the meeting or by
telegraphing or telexing or by facsimile transmission of the same not less than
24 hours before the meeting. Unless otherwise indicated in the notice thereof,
any and all business may be transacted at a special meeting.
Section 5. Quorum.
-------
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
--------------------------------------------------
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
--------------------
At any meeting of the Board of Directors, business shall be transacted
in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
-------
The Board of Directors may, except as otherwise required by law,
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, including, without limiting the generality of the
foregoing, the unqualified power:
(i) To declare dividends from time to time in accordance
with law;
(ii) To purchase or otherwise acquire any property, rights or
privileges on such terms as it shall determine;
<PAGE>
(iii) To authorize the creation, making and issuance, in such
form as it may determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(iv) To remove any officer of the Corporation with or
without cause, and from time to time to devolve the powers and duties of any
officer upon any other person for the time being;
(v) To confer upon any officer of the Corporation the power to
appoint, remove and suspend subordinate officers, employees and agents;
(vi) To adopt from time to time such stock, option, stock
purchase, bonus or other compensation plans for directors, officers, employees
and agents of the Corporation and its subsidiaries as it may determine;
(vii) To adopt from time to time such insurance, retirement,
and other benefit plans for directors, officers, employees and agents of the
Corporation and its subsidiaries as it may determine; and,
(viii) To adopt from time to time regulations, not
inconsistent with these By-laws, for the management of the Corporation's
business and affairs.
Section 9. Compensation of Directors.
--------------------------
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
Section 10. Age of Directors.
-----------------
No person who has attained seventy-five (75) years of age may be
appointed or elected as a director of the Corporation. This restriction shall
not apply to any person who was serving as a trustee of The Hudson City Savings
Institution immediately prior to the mutual-to-stock conversion of such
institution.
<PAGE>
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
-------------------------------------
The Board of Directors, by a vote of a majority of the Board of
Directors, may from time to time designate committees of the Board, with such
lawfully delegable powers and duties as it thereby confers, to serve at the
pleasure of the Board and shall, for those committees and any others provided
for herein, elect a director or directors to serve as the member or members,
designating, if it desires, other directors as alternate members who may replace
any absent or disqualified member at any meeting of the committee. Any committee
so designated may exercise the power and authority of the Board of Directors to
declare a dividend, to authorize the issuance of stock or to adopt a certificate
of ownership and merger pursuant to Section 253 of the Delaware General
Corporation Law if the resolution which designated the committee or a
supplemental resolution of the Board of Directors shall so provide. In the
absence or disqualification of any member of any committee and any alternate
member in his or her place, the member or members of the committee present at
the meeting and not disqualified from voting, whether or not he or she or they
constitute a quorum, may by unanimous vote appoint another member of the Board
of Directors to act at the meeting in the place of the absent or disqualified
member.
Section 2. Conduct of Business.
--------------------
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one or two members, in
which event one member shall constitute a quorum; and all matters shall be
determined by a majority vote of the members present. Action may be taken by any
committee without a meeting if all members thereof consent thereto in writing,
and the writing or writings are filed with the minutes of the proceedings of
such committee.
Section 3. Nominating Committee.
---------------------
The Board of Directors may appoint a Nominating Committee of the Board,
consisting of not less than three members, one of which shall be the President
if, and only so long as, the President remains in office as a member of the
Board of Directors. The Nominating Committee shall have authority (i) to review
any nominations for election to the Board of Directors made by a stockholder of
the Corporation pursuant to Section 6(c)(ii) of Article I of these By-laws in
order to determine compliance with such By-law and (ii) to recommend to the
Whole Board nominees for election to the Board of Directors to replace those
directors whose terms expire at the annual meeting of stockholders next ensuing.
<PAGE>
ARTICLE IV
OFFICERS
Section 1. Generally.
----------
(a) The Board of Directors as soon as may be practicable after
the annual meeting of stockholders shall choose a President, a Secretary and a
Treasurer and from time to time may choose such other officers as it may deem
proper. The President shall be chosen from among the directors. Any number of
offices may be held by the same person.
(b) The term of office of all officers shall be until the next
annual election of officers and until their respective successors are chosen,
but any officer may be removed from office at any time by the affirmative vote
of a majority of the authorized number of directors then constituting the Board
of Directors.
(c) All officers chosen by the Board of Directors shall each
have such powers and duties as generally pertain to their respective offices,
subject to the specific provisions of this Article IV. Such officers shall also
have such powers and duties as from time to time may be conferred by the Board
of Directors or by any committee thereof.
Section 2. President.
----------
The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administration and operation of the Corporation's business
and general supervisory power and authority over its policies and affairs. The
President shall see that all orders and resolutions of the Board of Directors
and of any committee thereof are carried into effect.
Each meeting of the stockholders and of the Board of Directors shall be
presided over by such officer as has been designated by the Board of Directors
or, in his or her absence, by such officer or other person as is chosen at the
meeting. The Secretary or, in his or her absence, the General Counsel of the
Corporation or such officer as has been designated by the Board of Directors or,
in his or her absence, such officer or other person as is chosen by the person
presiding, shall act as secretary of each such meeting.
Section 3. Vice President.
---------------
The Vice President or Vice Presidents, if any, shall perform the duties
of the President in the President's absence or during his or her disability to
act. In addition, the Vice Presidents shall perform the duties and exercise the
powers usually incident to their respective offices and/or such other duties and
powers as may be properly assigned to them from time to time by the Board of
Directors, the Chairman of the Board or the President.
Section 4. Secretary.
----------
The Secretary or an Assistant Secretary shall issue notices of
meetings, shall keep their minutes, shall have charge of the seal and the
corporate books, shall perform such other duties and exercise such other powers
as are usually incident to such offices and/or such other duties and powers as
are properly assigned thereto by the Board of Directors, the Chairman of the
Board or the President.
<PAGE>
Section 5. Treasurer.
----------
The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer appointed by the Board of Directors,
and shall keep regular books of account. The funds of the Corporation shall be
deposited in the name of the Corporation by the Treasurer with such banks or
trust companies or other entities as the Board of Directors from time to time
shall designate. The Treasurer shall sign or countersign such instruments as
require his or her signature, shall perform all such duties and have all such
powers as are usually incident to such office and/or such other duties and
powers as are properly assigned to him or her by the Board of Directors, the
Chairman of the Board or the President, and may be required to give bond,
payable by the Corporation, for the faithful performance of his duties in such
sum and with such surety as may be required by the Board of Directors.
Section 6. Assistant Secretaries and Other Officers.
-----------------------------------------
The Board of Directors may appoint one or more assistant secretaries
and one or more assistants to the Treasurer, or one appointee to both such
positions, which officers shall have such powers and shall perform such duties
as are provided in these By-laws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
Section 7. Action with Respect to Securities of Other Corporations.
--------------------------------------------------------
Unless otherwise directed by the Board of Directors, the President, or
any officer of the Corporation authorized by the President, shall have power to
vote and otherwise act on behalf of the Corporation, in person or by proxy, at
any meeting of stockholders of or with respect to any action of stockholders of
any other corporation in which this Corporation may hold securities and
otherwise to exercise any and all rights and powers which this Corporation may
possess by reason of its ownership of securities in such other Corporation.
<PAGE>
ARTICLE V
STOCK
Section 1. Certificates of Stock.
----------------------
Each stockholder shall be entitled to a certificate signed by, or in
the name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
-------------------
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefore.
Section 3. Record Date.
------------
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
60 nor less than ten days before the date of any meeting of stockholders, nor
more than 60 days prior to the time for such other action as hereinbefore
described; provided, however, that if no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held, and, for determining stockholders entitled to receive payment of any
dividend or other distribution or allotment of rights or to exercise any rights
of change, conversion or exchange of stock or for any other purpose, the record
date shall be at the close of business on the day on which the Board of
Directors adopts a resolution relating thereto.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
---------------------------------------
In the event of the loss, theft or destruction of any certificate of
stock, another may be issued in its place pursuant to such regulations as the
Board of Directors may establish concerning proof of such loss, theft or
destruction and concerning the giving of a satisfactory bond or bonds of
indemnity.
Section 5. Regulations.
------------
The issue, transfer, conversion and registration of certificates of
stock shall be governed by such other regulations as the Board of Directors may
establish.
<PAGE>
ARTICLE VI
NOTICES
Section 1. Notices.
--------
Except as otherwise specifically provided herein or required by law,
all notices required to be given to any stockholder, director, officer, employee
or agent shall be in writing and may in every instance be effectively given by
hand delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.
Section 2. Waivers.
--------
A written waiver of any notice, signed by a stockholder, director,
officer, employee or agent, whether before or after the time of the event for
which notice is to be given, shall be deemed equivalent to the notice required
to be given to such stockholder, director, officer, employee or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
<PAGE>
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures.
---------------------
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
Section 2. Corporate Seal.
---------------
The Board of Directors may provide a suitable seal, containing the name
of the Corporation, which seal shall be in the charge of the Secretary. If and
when so directed by the Board of Directors or a committee thereof, duplicates of
the seal may be kept and used by the Treasurer or by an Assistant Secretary or
Assistant Treasurer.
Section 3. Reliance upon Books, Reports and Records.
-----------------------------------------
Each director, each member of any committee designated by the Board of
Directors, and each officer of the Corporation shall, in the performance of his
or her duties, be fully protected in relying in good faith upon the books of
account or other records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of its officers or
employees, or committees of the Board of Directors so designated, or by any
other person as to matters which such director or committee member reasonably
believes are within such other person's professional or expert competence and
who has been selected with reasonable care by or on behalf of the Corporation.
Section 4. Fiscal Year.
------------
The fiscal year of the Corporation shall be as fixed by the Board of
Directors.
Section 5. Time Periods.
-------------
In applying any provision of these By-laws which requires that an act
be done or not be done a specified number of days prior to an event or that an
act be done during a period of a specified number of days prior to an event,
calendar days shall be used, the day of the doing of the act shall be excluded
and the day of the event shall be included.
<PAGE>
ARTICLE VIII
AMENDMENTS
The By-laws of the Corporation may be adopted, amended or repealed as
provided in Article SEVENTH of the Certificate of Incorporation of the
Corporation.
EXHIBIT 13
1999 ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
- -------------------------
ANNUAL REPORT 1999
Hudson River Bancorp, Inc.
[Full page Picture depicting Hudson River Bank & Trust Co.]
<PAGE>
Hudson River Bancorp, Inc.
=========================================
HUDSON AT A GLANCE
Hudson River Bank &Trust Company, formerly the Hudson City Savings Institution,
has been in existence for almost a century and a half. Established in 1850, the
Bank primarily served the community of Hudson, New York for its first 120 years.
Starting in 1970, branches were opened in other locations throughout Columbia
County and the neighboring counties of Albany, Rensselaer, Schenectady and
Dutchess. In 1998, the Hudson City Savings Institution, with the support of its
depositors, converted from a New York State chartered mutual savings bank to a
New York State chartered stock savings bank.
At the same time, the name of the Bank was changed to Hudson River Bank
& Trust Company. All of the stock of the bank was then acquired by Hudson River
Bancorp, Inc., a holding company formed by the Bank in connection with its
conversion.
[Graphic of Company Logo omitted]
For nearly 135 years the Bank used various versions of a logo. It was not until
the late 1980's, as the Bank continued to grow and expand that it was decided a
recognizable symbol was needed for the Bank.
In celebrating Hudson City Saving's Institution's 110th Anniversary, the history
of the Bank is referred to as the story of two symbols. One was the Half Moon,
the ship of Henry Hudson. It was symbolic of the courageous and far-sighted
explorer, whose name is forever commemorated by our beautiful city and majestic
river. The other was the Bank, which was a living symbol of the growth and
prosperity of the Upper Hudson River Valley and a reminder of the faith and
confidence her people have placed in the future.
Drawing from this analogy an updated version of the ship, encased in a
medallion, was created. Remaining through the Bank's name change from Hudson
City Savings Institution to Hudson River Bank and Trust Company, the ship is
symbolic of the Bank's eloquent past while it sets sail into a promising future.
<PAGE>
Hudson River Bancorp, Inc.
=========================================
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(In thousands, except per share data) March 31, 1999 1998
=========================================================================================
<S> <C> <C>
For the Year Ended
Net income $ 3,807 $ 2,831
Basic earnings per share 0.17 --
Diluted earnings per share 0.17 --
=========================================================================================
At Year End
Total assets $ 881,139 $ 671,214
Loans receivable 578,099 506,978
Deposits 591,814 588,314
Shareholders' equity 219,341 68,304
Book value at year end 14.02 --
=========================================================================================
Significant Ratios
Return on average assets 0.47% 0.43%
Return on average equity 2.05 4.18
Net interest margin 4.82 4.68
Net interest spread 3.63 4.11
Efficiency ratio 51.12 57.25
=========================================================================================
Asset Quality Ratios
Non-performing loans to total loans 1.72% 3.10%
Non-performing assets to total assets 1.41 2.57
Allowance for loan losses to:
Loans receivable 2.47 1.62
Non-performing loans 143.77 52.32
=========================================================================================
</TABLE>
CONTENTS
Hudson at a Glance Inside Front Cover
Letter to Shareholders Page 2
Financial Section Page 8
Corporate Information Inside Back Cover
[GRAPHIC -- 3 bar graphs depicting Total Loans, Net Interest Margin % and Non-
Performing Assets to Total Assets % omitted]
1
<PAGE>
Hudson River Bancorp, Inc.
=========================================
TO OUR SHAREHOLDERS
[GRAPHIC -- picture of Carl A. Florio, President and Chief Executive Officer and
Earl Schram, Jr., Chairman of the Board]
Hudson River Bancorp, Inc. ended its fiscal year, but more importantly, its
first nine months as a public company on March 31, 1999, completing one of the
most exciting periods in the nearly 150 year history of the institution.
During late 1997, the Board of Directors and the Bank's senior management
determined that in order to continue our success as a community bank in the ever
changing financial services industry, we would need to make some significant
changes to remain competitive. The most important step was our decision to
convert the Bank to public ownership. Mutual ownership in the past had limited
the Bank's ability to grow through acquisitions, leaving branch expansion as our
only viable alternative. We have always been active in opening new branches to
meet the needs of our growing customer base. From 1993 through 1997, our branch
network grew from 7 branches to 12. This growth, however, enabled us to expand
only gradually, as it usually takes several years for a branch to attain
profitability. Our conversion raised over $170 million in new capital and
provided us with the ability to compete with other financial institutions in
maintaining, and where appropriate, growing our market presence.
In addition, we have continued to find new ways to grow internally. The
Bank's Board recognized that with shrinking margins on traditional savings bank
products (primarily residential mortgage loans and deposits), the Bank needed to
develop other non-traditional products to compete. The formation of our trust
and investment management department and the investment in our commercial
services department in recent years were two methods we identified to accomplish
our goals. The capital raised in our initial public offering has enabled us to
continue our efforts in offering a wider variety of products and services to
meet our customers' needs and provides the Company with the foundation for
future success.
FINANCIAL RESULTS
During the year ended March 31, 1999, we made outstanding progress in a
number of areas as follows:
o Net income for the year ended March 31, 1999 was $3.8 million, up $1.0 million
from a year earlier, despite a $5.2 million ($3.1 million, net of tax)
nonrecurring charge to establish the Bank's charitable foundation.
o The Company's net interest margin grew from 4.68% for the year ended March 31,
1998 to 4.82% for the year just ended, as a result of the proceeds received
from the Company's initial public offering.
o Non-performing assets were reduced to $12.5 million at March 31, 1999 from
$17.3 million at March 31, 1998.
o Non-performing loans were reduced even more dramatically, down 36.8% from the
level at March 31, 1998, ending the current fiscal year at $9.9 million, or
1.72% of total loans.
o The allowance for loan losses as a percentage of non-performing loans
increased from 52.3% at March 31, 1998 to 143.8% at March 31, 1999, a
reflection not only of the increase in the allowance for loan losses, but more
importantly, the reduction of non-performing loans.
A more detailed review of our financial information is included in the
Management's Discussion and Analysis section of this annual report.
2
<PAGE>
THE YEAR 2000
Foremost on our minds, as well as the minds of our customers and
shareholders, has been the potential impact of the century date change, the Year
2000, or Y2K for short. The Company began focusing on Y2K as long ago as 1995
when a decision was made to upgrade our mainframe technology that contained many
years of custom coding. A full system conversion of both hardware and software
was done in late 1996, dramatically reducing the potential impact of the century
date change. During mid-1997, a team of employees representing each department
of the Company was organized into the Y2K Project Team. This group of
individuals met at least every other week to assess the potential impact of the
Year 2000 on the Company and put into motion any required changes. Throughout
the remainder of 1997 and early 1998, all operating systems or processes that we
determined could be impacted by the Year 2000 were identified and prioritized.
Third party service providers were contacted in order to assess their Y2K
preparedness and the consequences to the Company should one or more of these
service providers, or the hardware or software they provide, fail to operate
after the century date change.
During the last half of 1998, all "mission-critical" systems (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) were tested
with only minor problems identified. These problems were easily corrected. All
other systems not deemed to be mission-critical have been or are scheduled to be
tested by mid-1999. Any necessary changes as well as detailed contingency plans
will also be completed by mid-1999. We remain dedicated to meeting our goal of
business as usual with no interruptions in the high quality services we provide
to our customers when the calendar turns to January 1, 2000.
[SIDEBAR] Y2K "... the overwhelming majority of institutions remain on track for
being prepared for the century date change...the Year 2000 date change is the
highest safety and soundness priority for the FDIC. No insured depositor need
worry. The FDIC will protect insured deposits." --FDIC Chairman, Donna Tanoue
TECHNOLOGY ADVANCEMENTS
In addition to ensuring that all our systems are Y2K compliant, we've made
several upgrades in technology that have increased our efficiency while enabling
us to improve our customer service. During the recent year, the Company has
installed a new front-end system primarily for our branch network; upgraded our
wide-area network connecting each employee, whether in the main office or in our
branch network; placed into service a new check image processing system, and
implemented new "cold storage" technology.
Our new front-end software utilizes technology that greatly enhances the
user-friendliness and flexibility of this software. It features in-depth product
information screens and cross selling prompts to support our efforts to promote
a sales culture. The new front-end system has also improved the speed of
processing transactions.
Our upgraded wide-area network was implemented at the same time as the
front-end system, and enhances the ability of our employees to access and store
vital information. It has enabled the Company to provide E-mail capabilities as
well as Internet access to our employees. These capabilities have had
significant impact improving the speed and effectiveness of communication within
the
3
<PAGE>
Company in addition to opening up all of the world's information resources at
the click of a button.
The Company's new check image processing system has resulted in savings in
both labor and postage. This new system takes each check or other transaction
ticket processed through the Bank and creates a computerized image of the item.
Key information such as amount and account numbers are recognized and
automatically recorded by the software. Manual processing of the checks is no
longer necessary. In addition, the system provides condensed images of the
checks that are returned to our customers in lieu of the physical checks. The
reduction of the manual efforts to process daily work and return the physical
checks to our customers, as well as the reduced postage expenses from not
mailing the checks is a significant benefit of this software.
The Company began implementing cold storage technology in mid-1998. This
technology is similar to the check image system. It takes all system reports
utilized by the employees each day and makes them available in electronic
format. These electronic files are then able to be stored and retrieved whenever
necessary at each employee's PC. Reducing reports to microfiche or hardcopy form
is no longer necessary and the Company's expenses have already been reduced in
these areas.
Technology has been and will continue to be an important facet of our
business. As technology changes, our customers' demands change, and so must our
ability to provide solutions to these demands. Keeping pace with technology is
an important aspect of our business plan as we move into the next millennium.
[PICTURE WITH SIDEBAR]
Advancements in technology are viewed as critical success factors for the
Company to succeed. During fiscal 1999, the Company made great strides in
improving technology and in laying the groundwork for the future.
NEW PRODUCTS AND SERVICES
In November 1998, we unveiled our new MasterMoney[TM] Debit Card. This
product enables a customer to have purchases deducted directly from his or her
checking account, avoiding the inconvenience of writing a check or utilizing a
credit card that can have high interest rates. While our customers benefit from
the ease of using this product, the Company also benefits from fees received
from the merchants where the customer shops. Usage of this product has steadily
increased and has proven to be very popular with our customers.
[PICTURE WITH SIDEBAR]
Bringing new products to market during the last year has enabled the Company to
satisfy existing customers as well as to expand its market presence. The
MasterMoney[TM} debit card is just one of a series of new products offered by
the Company.
<PAGE>
In keeping with our focus to grow non-traditional savings bank products,
we have introduced three new products which should prove beneficial to our
commercial customers.
The first is cash flow manager, a product which enables a business to
improve its cash flows and reduce some of the administrative overhead involved
in billing and collections. For a fee that is negotiated with the business, the
Company will provide the business immediate cash up front in exchange for the
accounts receivable due the business. We will then perform monthly billing and
collection services to collect the outstanding accounts receivable. The Company
also receives interest on accounts which are not collected within a 60 day time
frame. This product is designed to assist businesses with potential liquidity or
cash flow problems in continuing to meet its customers' demands while providing
additional fee income to our Company.
4
<PAGE>
During the fourth quarter of our fiscal year, we introduced a commercial
leasing product. This product provides a customer the advantages of leasing a
product rather than purchasing it. It is geared towards agricultural,
manufacturing and service-oriented customers and provides the customer with an
alternative financing solution.
A final product, also introduced during the fourth quarter, is a
commercial electronic sweep account. This product, provided through a securities
repurchase agreement, enables a commercial customer to invest funds from a
noninterest-bearing demand account into an overnight interest-bearing account.
This product is critical to the success of the Company as it competes with
larger national or regional banks.
In addition to these new products, we anticipate rolling out on-line
banking capabilities accessed through our website www.hudsonriverbank.com during
our first fiscal quarter ending June 30, 1999. These on-line banking
capabilities should attract both retail and commercial users. Users will enjoy
the advantages of reviewing account activity, making transfers, sending and
receiving wires and paying bills on-line from the quiet confines of their home
or office. This product will serve as an alternative delivery channel, which
will make proximity to our branch network less of a factor in the future. Our
customers will enjoy some of the perceived benefits a large super-regional bank
can provide while maintaining the community bank, customer service atmosphere we
promote every day.
[PICTURE WITH SIDEBAR] The Company's new website offers a look inside the
Company, outlining its products and services, offers on-line banking
capabilities and provides a direct line of communication to the Company about
the users' needs or questions.
In recognizing trends which have been developing for several years in the
banking industry, senior management and the Board identified an opportunity to
provide the full service brokerage services that our customers demand through a
recognized and respected brokerage firm. In late 1998, the Company reached an
agreement in which customers of the Company would be given complete access to
the resources of Salomon Smith Barney, one of the nation's largest brokerage
firms, without relinquishing our customer relationships. This service enables
our customers to address all of their financial needs, whether it is traditional
banking or access to the capital markets, without having to leave our branch.
The Company receives a share of the commissions earned by Salomon Smith Barney,
but more importantly, we maintain a contact with our customers.
[PICTURE WITH SIDEBAR] The Company's new relationship with Salomon Smith Barney
offers full service brokerage services to its customers. The availability of
bonds, stocks, annuities, mutual funds and other non-deposit products through a
recognized broker complement the Company's existing trust and investment
management services.
Introducing new products and services to our existing business would be
difficult if these products and services were not adequately and appropriately
presented to our customers. To this end, during 1998, the Company began to
emphasize a bank-wide sales culture. An extensive training program for our
employees and managers throughout the Company was developed to build customer
relationships through improved listening and customer service skills. By the end
of our fiscal year, cross-sale ratios had improved by 70%. While we acknowledge
that developing a sales culture is an ongoing process, we feel that our efforts
in this area will strengthen customer relationships, assist in loan and deposit
growth, improve the utilization of our trust, investment management, and other
non-traditional services, and above all, increase customer satisfaction while
generating returns for our shareholders.
5
<PAGE>
COMMUNITY FOCUS - COMMUNITY INVESTMENT
A significant aspect of our conversion from a mutual to stock organization
was the establishment of the Hudson River Bank & Trust Company Foundation. The
Foundation was established with a stock contribution of 3% of the shares issued
in the initial public offering, a value of $5.2 million. As a community bank,
the Board of Directors felt strongly that the growth and success of Hudson River
Bank & Trust Company was tied to both its employees and the communities we
serve. The establishment of the Foundation is the vehicle in which we will be
able to share the success of our progress and growth with those communities that
made it happen. The Foundation's purpose is to provide funding to support
charitable causes and community development activities in our local communities.
Under IRS regulations governing charitable foundations, 5% of the foundation
assets must be contributed each year to eligible recipients. Using the value of
the stock at March 31, 1999, this means approximately $275 thousand will be
contributed to the communities we serve during the next fiscal year. We believe
that over the long term, the Foundation will have a positive impact in promoting
the Company and fostering new customer relationships, in addition to fulfilling
the benevolent purpose originally intended with the establishment of the
Foundation.
ENHANCING SHAREHOLDER VALUE
The most significant objective of the Board and senior management is to
improve shareholder value. Our focus is to provide for steady, long-term growth.
The decisions we make each day are designed to ensure that the plans we put into
place will support both the short-term and long-term growth of shareholder
value. In November 1998, we announced that we had acquired an equity interest in
Homestead Funding Corp., upstate New York's largest mortgage broker. In 1998,
Homestead generated over $650 million in mortgage production. This strategic
partnership provides a source of non-interest revenue through the recognition of
our share of Homestead's profits. The alliance also provides access to a volume
of mortgage production that many community banks do not possess.
[PICTURE WITH SIDEBAR] Residential lending has always been a significant part of
the Company's profile. We view our relationship with Homestead Funding Corp. as
a further step in expanding our geographic presence to deliver products and
services familiar to us markets we serve.
In December 1998, we announced the intention to open our thirteenth branch
in North Greenbush, NY. This branch officially opened in April 1999. In May
1999, we announced plans to open our fourteenth branch in Clifton Park, NY. We
believe that we have had success in opening branches as evidenced by the two
branches we opened in early 1996 which each have over $22 million in deposits in
just over three years. We anticipate similar results for both our North
Greenbush and Clifton Park locations.
[MAP WITH SIDEBAR] After the completion of our SFS Bancorp, Inc. acquisition and
the opening of our Clifton Park branch, we will have 18 branches operating
throughout 6 counties in the New York Capital District area.
In our prospectus, we stated that one of our goals was to grow through
mergers and acquisitions. After careful and thoughtful consideration, on May 17,
1999, we announced the signing of a definitive agreement to acquire SFS Bancorp,
Inc., the holding company for Schenectady Federal Savings Bank, a $176.1 million
6
<PAGE>
savings bank located in Schenectady, NY. This acquisition, valued at $32
million, will be a cash transaction and is anticipated to be immediately
accretive to earnings per share and return on shareholders' equity. We are very
excited about this transaction and we will continue to focus on acquisition
targets that will make economic sense to the Company and our shareholders.
[GRAPH WITH SIDEBAR] Using a $100 investment as of July 1, 1998, this chart
indicates how the total return on HRBT stock compares with both the S&P 500 and
Nasdaq Bank Indexes for the periods shown.
In January 1999, following the approval by the shareholders of the
Recognition and Retention Plan, we began a program to acquire 4% of our
outstanding shares to fund this plan. In March 1999, we announced our plans to
acquire an additional 5% of the outstanding shares. We intend to continue
consideration of share repurchase programs to the extent appropriate to enhance
shareholder value.
Finally, in April 1999, we announced our first quarterly dividend of $.03
per share. It is currently the Board's intention to pay regular quarterly
dividends that are a reflection of our earnings success and dedication to
returning value to our shareholders.
We are very pleased with the accomplishments of the last twelve months. It
has been a very exciting period in the long history of Hudson River Bank & Trust
Company, and we would be remiss to not recognize the hard work of our dedicated
officers and employees. We look forward to continuing along the path we have set
for the Company and anticipate that next year will be as exciting and eventful
as last year.
/s/ Carl A. Florio
------------------
Carl A. Florio
President and Chief Executive Officer
/s/ Earl Schram, Jr.
--------------------
Earl Schram, Jr.
Chairman of the Board
June 1, 1999
7
<PAGE>
Hudson River Bancorp, Inc.
=========================================
FINANCIAL SECTION
FIVE YEAR SELECTED FINANCIAL DATA 9
MANAGEMENT'S DISCUSSION & ANALYSIS 10
MANAGEMENT'S STATEMENT OF RESPONSIBILITY 24
INDEPENDENT AUDITORS' REPORT 24
CONSOLIDATED BALANCE SHEETS 25
CONSOLIDATED INCOME STATEMENTS 26
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY 27
CONSOLIDATED STATEMENTS OF CASH FLOWS 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29
8
<PAGE>
Hudson River Bancorp, Inc.
=========================================
FIVE YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In thousands, except for share and per share data)
At or for the Years Ended March 31, 1999 1998 1997 1996 1995
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Earnings
Interest and dividend income $ 63,526 $ 55,387 $ 52,881 $ 49,082 $ 43,059
Interest expense 26,000 25,977 25,426 24,086 19,309
- -----------------------------------------------------------------------------------------------------------
Net interest income 37,526 29,410 27,455 24,996 23,750
- -----------------------------------------------------------------------------------------------------------
Provision for loan losses 7,341 8,491 3,826 1,090 1,169
Other operating income 2,418 2,845 1,825 1,635 1,532
Other operating expense 26,612 19,030 16,187 14,199 15,223
- -----------------------------------------------------------------------------------------------------------
Income before income tax expense 5,991 4,734 9,267 11,342 8,890
Income tax expense 2,184 1,903 3,607 4,298 2,917
- -----------------------------------------------------------------------------------------------------------
Net income $ 3,807 $ 2,831 $ 5,660 $ 7,044 $ 5,973
===========================================================================================================
Per Share Data
Basic earnings per share(1) $ 0.17 -- -- -- --
Diluted earnings per share(1) 0.17 -- -- -- --
Book value at year end 14.02 -- -- -- --
Book value at year end, including
unallocated ESOP shares and
unvested RRP shares 12.39 -- -- -- --
Closing market price 10.9375 -- -- -- --
===========================================================================================================
Average Balances
Total assets $809,385 $659,984 $640,867 $597,435 $566,443
Earning assets 778,691 628,747 612,296 571,263 539,765
Loans 522,974 507,293 471,295 444,645 424,187
Securities available for sale 156,405 39,357 53,445 26,889 12,307
Securities held to maturity 47,738 71,966 83,343 92,243 94,001
Deposits 608,936 577,721 562,922 530,339 504,444
Other short-term borrowings 2,916 3,699 4,459 745 2,145
Shareholders' equity 185,770 67,780 63,322 56,261 49,511
Shares outstanding:
Basic 16,302,268 -- -- -- --
Diluted 16,302,268 -- -- -- --
===========================================================================================================
</TABLE>
<PAGE>
(continued)
<TABLE>
<CAPTION>
(In thousands, except for share and per share data)
At or for the Years Ended March 31, 1999 1998 1997 1996 1995
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Financial Ratios
Return on average assets 0.47% 0.43% 0.88% 1.18% 1.05%
Return on average equity 2.05 4.18 8.94 12.52 12.06
Net interest margin 4.82 4.68 4.48 4.38 4.40
Efficiency ratio(2) 51.12 57.25 54.34 52.07 56.81
Expense ratio(2) 2.52 2.80 2.48 2.32 2.54
Equity to assets at year end 24.89 10.18 10.00 9.56 9.05
Allowance as a % of non-performing loans 143.77 52.32 29.37 32.57 43.36
Allowance as a % of loans 2.47 1.62 1.19 0.79 0.73
===========================================================================================================
</TABLE>
(1) Earnings per share data only applies to periods since the Company's initial
public offering on July 1, 1998.
(2) Ratio does not include other real estate owned and repossessed property
expenses and net securities transactions for each year. The 1999 ratio does
not include a charitable contribution to the Hudson River Bank & Trust
Company Foundation.
9
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
==================
GENERAL
The financial review which follows focuses on the factors affecting the
consolidated financial condition and results of operations of Hudson River
Bancorp, Inc. and subsidiary (the "Company") during the year ended March 31,
1999 and, in summary form, the preceding two years. The consolidated financial
statements and related notes as of and for the three years ended March 31, 1999
should be read in conjunction with this review.
On July 1, 1998, Hudson River Bank & Trust Company (the "Bank") completed its
conversion from a mutual savings bank to a stock savings bank (the
"Conversion"). Concurrent with the Conversion, Hudson River Bancorp, Inc.
completed its initial public offering of common stock, receiving approximately
$173.3 million in gross proceeds ($170.0 million net of offering expenses) in
exchange for 17,333,738 shares of its common stock. The Company used a portion
of the proceeds to purchase all of the common stock of the Bank. Prior to the
initial public offering, the Company had no results of operations; therefore
financial information prior to July 1, 1998 reflects the operations of the Bank.
The Company's primary market area, with 13 full-service branches, consists of
the New York counties of Columbia, Rensselaer, Albany, Schenectady, and
Dutchess. The Company has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services to the communities it serves. The Company's principal business is
attracting deposits from customers within its market area and investing those
funds in primarily loans, and to a lesser extent, in marketable investment
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, and the interest expense on
its liabilities, primarily consisting of deposits and borrowings. Net income of
the Company is also affected by provisions for loan losses and its other
operating income which includes loan servicing income and fees on deposit
related services; it is also impacted by other operating expenses, such as
compensation and occupancy expenses 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.
==================
MERGER AND
ACQUISTITION
ACTIVITY
On May 17, 1999, the Company entered into a definitive agreement to acquire SFS
Bancorp, Inc. ("SFS") for $25.10 in cash for each share of SFS common stock
outstanding. The total deal is valued at approximately $32 million. The
transaction will be accounted for under the purchase method of accounting and is
anticipated to be accretive to earnings in the first year of operations after
consummation of the transaction. SFS had total assets of $176.1 million as of
March 31, 1999 and operates four branches within Schenectady County.
<PAGE>
==================
OPERATING
RESULTS
COMPARISON OF THE YEARS ENDED MARCH 31, 1999 AND 1998
The Company's net income for the year ended March 31, 1999 was $3.8 million, up
$976 thousand from the $2.8 million earned during the year ended March 31, 1998.
The increase was primarily a result of higher net interest income (up $8.1
million) and a lower provision for loan losses (down $1.2 million), partially
offset by higher other operating expenses (up $7.6 million), including a $5.2
million nonrecurring expense associated with the contribution of stock to a
charitable foundation and higher income tax expense (up $281 thousand). The
Company earned $0.17 per share for the year ended March 31, 1999 and its return
on average assets was 0.47% compared with 0.43% for the prior year. The
Company's return on average equity was 2.05% for the year ended March 31, 1999,
down from 4.18% for the prior year, primarily a result of the aforementioned
nonrecurring charge as well as the Company's initial public offering which
greatly increased the Company's capital.
10
<PAGE>
NET INTEREST INCOME
Net interest income for the year ended March 31, 1999 was $37.5 million, up from
the $29.4 million for the year ended March 31, 1998. The increase was primarily
the result of the increase in average earning assets from $628.7 million for the
year ended March 31, 1998 to $778.7 million for the year ended March 31, 1999.
Average interest-bearing liabilities also increased during this same period,
rising $21.6 million to $574.1 million from $552.5 million for the year ended
March 31, 1998. Most of the increase in earning assets was attributed to the
proceeds received by the Company in its initial public offering. The impact of
these changes resulted in an increase in net interest income of $8.9 million due
to volume changes. The average yield on earning assets decreased from 8.81% to
8.16%, while the average rate paid on interest-bearing liabilities declined from
4.70% to 4.53%. The net impact of these lower interest rates resulted in a
decrease in net interest income of $820 thousand. As a result of these volume
and rate fluctuations, the Company's net interest margin for the year ended
March 31, 1999 was 4.82%, up from 4.68% for the year ended March 31, 1998.
AVERAGE BALANCES, INTEREST, AND YIELDS
<TABLE>
<CAPTION>
Years Ended March 31, 1999 1998 1997
===============================================================================================================================
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 18,805 $ 1,054 5.60% $ 7,298 $ 416 5.70% $ 1,638 $ 89 5.43%
Securities purchased under
agreements to resell 29,727 1,662 5.59 -- -- -- -- -- --
Securities available for sale(1) 156,405 9,997 6.39 39,357 2,568 6.52 53,445 3,658 6.84
Securities held to maturity 47,738 3,095 6.48 71,966 4,727 6.57 83,343 5,385 6.46
Federal Home Loan Bank
of New York stock 3,042 215 7.07 2,833 194 6.85 2,575 164 6.37
Loans receivable(2) 522,974 47,503 9.08 507,293 47,482 9.36 471,295 43,585 9.25
- ----------------------------------------------------- ------------------- -----------------
Total earning assets 778,691 63,526 8.16 628,747 55,387 8.81 612,296 52,881 8.64
- ----------------------------------------------------- ------------------- -----------------
Cash and due from banks 12,774 11,669 6,860
Allowance for loan losses (10,916) (6,768) (3,886)
Other non-earning assets 28,836 26,336 25,597
- -------------------------------------------- -------- --------
Total assets $809,385 $659,984 $640,867
============================================ ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Years Ended March 31, 1999 1998 1997
===============================================================================================================================
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
===============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-bearing liabilities
Savings accounts $155,885 $ 5,039 3.23% $138,074 $ 4,729 3.42% $133,209 $ 4,523 3.40%
N.O.W. and money
market accounts 97,006 2,762 2.85 94,904 2,850 3.00 93,972 2,831 3.01
Time deposit accounts 313,269 17,930 5.72 311,014 18,085 5.81 307,757 17,727 5.76
Mortgagors' escrow deposits 4,986 113 2.27 4,850 108 2.23 4,579 106 2.31
Securities sold under
agreements to repurchase 77 3 3.90 -- -- -- -- -- --
Other short-term borrowings 2,916 153 5.25 3,699 205 5.54 4,459 239 5.36
- ----------------------------------------------------- ------------------- -----------------
Total interest-bearing liabilities 574,139 26,000 4.53 552,541 25,977 4.70 543,976 25,426 4.67
- ----------------------------------------------------- ------------------- -----------------
Non interest-bearing deposits 42,776 33,729 27,984
Other non interest-bearing
liabilities 6,700 5,934 5,585
Shareholders' equity 185,770 67,780 63,322
- -------------------------------------------- -------- --------
Total liabilities and
shareholders' equity $809,385 $659,984 $640,867
================================================================================================================================
Net interest income $37,526 $29,410 $27,455
================================================================================================================================
Net interest spread 3.63% 4.11% 3.97%
================================================================================================================================
Net interest margin 4.82% 4.68% 4.48%
================================================================================================================================
</TABLE>
(1) Average balances include fair value adjustment.
(2) Average balances include non-accrual loans.
11
<PAGE>
VOLUME AND RATE ANALYSIS
<TABLE>
<CAPTION>
1999 vs 1998 1998 vs 1997
===========================================================================================================
Due To Due To Net Due To Due To Net
(In thousands) Volume Rate Change Volume Rate Change
===========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Interest and dividend income
Federal funds sold $ 645 $ (7) $ 638 $ 322 $ 5 $ 327
Securities purchased under
agreements to resell 1,662 -- 1,662 -- -- --
Securities available for sale 7,482 (53) 7,429 (926) (164) (1,090)
Securities held to maturity (1,572) (60) (1,632) (746) 88 (658)
Federal Home Loan Bank
of New York stock 15 6 21 17 13 30
Loans receivable 1,446 (1,425) 21 3,364 533 3,897
- -----------------------------------------------------------------------------------------------------------
Total interest and dividend income 9,678 (1,539) 8,139 2,031 475 2,506
- -----------------------------------------------------------------------------------------------------------
Interest expense
Savings accounts 586 (276) 310 166 40 206
N.O.W. and money market accounts 62 (150) (88) 28 (9) 19
Time deposit accounts 130 (285) (155) 189 169 358
Mortgagors' escrow deposits 3 2 5 6 (4) 2
Securities sold under agreements
to repurchase 3 -- 3 -- -- --
Other short-term borrowings (42) (10) (52) (42) 8 (34)
- -----------------------------------------------------------------------------------------------------------
Total interest expense 742 (719) 23 347 204 551
- -----------------------------------------------------------------------------------------------------------
Net interest income $ 8,936 $ (820) $ 8,116 $1,684 $ 271 $ 1,955
===========================================================================================================
</TABLE>
Note: Changes attributable to both volume and rate which cannot be segregated
have been allocated proportionately to the change due to volume and the change
due to rate.
INTEREST AND DIVIDEND INCOME
Interest and dividend income for the year ended March 31, 1999 was $63.5
million, up from $55.4 million for the year ended March 31, 1998. The largest
component of interest and dividend income is interest on loans. Interest on
loans remained unchanged at $47.5 million for each of the years ended March 31,
1999 and 1998, as an increase of $1.4 million in interest earned on loans due to
volume growth was offset by the effect of lower interest rates earned. The
average balance of loans increased $15.7 million, while the yield on loans
decreased from 9.36% to 9.08%. The interest on securities available for sale
increased $7.4 million from $2.6 million for the year ended March 31, 1998 to
$10.0 million for fiscal 1999. This increase in interest on securities available
for sale was the result of an increase of $117.0 million in the average balance
of securities available for sale (from $39.4 million for the year ended March
31, 1998, to $156.4 million for the year ended March 31, 1999), while the yield
on this portfolio declined from 6.52% to 6.39%.
<PAGE>
The increase in the average balance of securities available for sale is the
result of the Company's initial public offering. Management intends to redeploy
these funds into alternative asset categories, including acquisitions, as
appropriate opportunities present themselves. A decrease in interest earned on
securities held to maturity, from $4.7 million for the year ended March 31,
1998, to $3.1 million for the year ended March 31, 1999, was almost entirely due
to reductions in volume. The average balance of securities held to maturity
decreased from $72.0 million for the year ended March 31, 1998 to $47.7 million
for the year ended March 31, 1999, resulting in a $1.6 million decrease in
interest income. Management expects the average balance of securities held to
maturity to continue to decrease as new purchases of securities are generally
classified as securities available for sale. Interest income on federal funds
sold and securities purchased under agreements to resell increased $2.3 million
from $416 thousand earned for the year ended March 31, 1998 to $2.7 million for
the year ended March 31, 1999. This increase was due to higher average balances,
a combined $48.5 million for the year ended March 31, 1999, up from $7.3 million
in 1998.
12
<PAGE>
INTEREST EXPENSE
Interest expense remained virtually flat at $26.0 million for both the years
ended March 31, 1999 and 1998. Substantially all of the Company's interest
expense is from the Company's interest-bearing deposits. The largest category of
interest-bearing deposits is time deposits. Interest on time deposits for the
year ended March 31, 1999 was $17.9 million, down slightly from the $18.1
million recorded in the prior year. This decrease was attributed to a decrease
in the average rates paid on time deposits, from 5.81% for the year ended March
31, 1998 to 5.72% for 1999. This decrease was somewhat offset by higher average
balances in fiscal year 1999 compared with 1998. Interest expense on savings
accounts increased from $4.7 million for the year ended March 31, 1998 to $5.0
million for the year ended March 31, 1999. The increase in interest expense on
savings accounts was attributed to an increase in the average balance of savings
of approximately $17.8 million, offset by a decrease in the average rates paid
on these accounts from 3.42% in the year ended March 31, 1998 to 3.23% in 1999.
Fluctuations in interest expense on other categories of interest-bearing
liabilities were not significant.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased from $8.5 million in 1998 to $7.3
million for the year ended March 31, 1999. The decrease in the provision for
loan losses was principally related to the reduction in non-performing loans and
in net charge-offs experienced during the year ended March 31, 1999 in
comparison with the prior year. The level of the Company's non-performing loans
(1.72% of total loans at March 31, 1999) 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, commercial loans and financed insurance premium
loans. Net charge-offs, risk elements of the Company's loan portfolio, economic
conditions in the Company's market area, loan growth and non-performing loan
balances are the primary factors which are considered in determining the levels
of the Company's provision for loan losses. The Company anticipates that the
provision for loan losses will continue at current levels to accommodate loan
growth, although 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.
<PAGE>
LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(In thousands) Years Ended March 31, 1999 1998 1997 1996 1995
==========================================================================================================
Loans outstanding (end of year) $578,099 $506,978 $493,019 $450,671 $438,875
==========================================================================================================
Average loans outstanding $522,974 $507,293 $471,295 $444,645 $424,187
==========================================================================================================
<S> <C> <C>
Allowance for loan losses at
beginning of year $ 8,227 $ 5,872 $ 3,546 $ 3,187 $ 2,917
Loan charge-offs:
Residential real estate (251) (440) (162) (111) (88)
Commercial real estate (95) (1,298) (454) (95) (36)
Commercial loans (136) (2,309) (127) -- (86)
Manufactured housing (1,331) (480) (216) (372) (288)
Consumer (139) (112) (41) (46) (711)
Financed insurance premiums (1,239) (2,091) (1,070) (573) (54)
- ----------------------------------------------------------------------------------------------------------
Total charge-offs (3,191) (6,730) (2,070) (1,197) (1,263)
- ----------------------------------------------------------------------------------------------------------
Loan recoveries:
Residential real estate 341 8 3 21 93
Commercial real estate 777 17 11 16 7
Commercial loans 17 10 74 6 4
Manufactured housing 73 105 45 70 33
Consumer 25 38 51 49 161
Financed insurance premiums 686 416 386 261 66
- ----------------------------------------------------------------------------------------------------------
Total recoveries 1,919 594 570 423 364
- ----------------------------------------------------------------------------------------------------------
Loan charge-offs, net of recoveries (1,272) (6,136) (1,500) (774) (899)
Provision charged to operations 7,341 8,491 3,826 1,090 1,169
Allowance acquired -- -- -- 43 --
- ----------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $ 14,296 $ 8,227 $ 5,872 $ 3,546 $ 3,187
==========================================================================================================
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.24% 1.21% 0.32% 0.17% 0.21%
==========================================================================================================
Provision as a percentage of average loans
outstanding during the year 1.40% 1.67% 0.81% 0.25% 0.28%
==========================================================================================================
Allowance as a percentage of loans
outstanding (end of year) 2.47% 1.62% 1.19% 0.79% 0.73%
==========================================================================================================
</TABLE>
13
<PAGE>
OTHER OPERATING INCOME
Total other operating income decreased $427 thousand for the year ended March
31, 1999 compared with the prior year. Other operating income is composed
primarily of service charges on deposit accounts and loan servicing income.
Income from service charges on deposit accounts increased from $1.1 million for
the year ended March 31, 1998 to $1.3 million for fiscal 1999. This increase was
attributed to the increase in the Company's deposit transaction accounts and
fees on these accounts during the current year as well as increased ATM service
charge income. Loan servicing income decreased from $398 thousand in the year
ended March 31, 1998 to $199 thousand in 1999 as a direct result of a reduction
in the Company's loan servicing portfolio. Other income was $844 thousand for
the year ended March 31, 1999, down from $1.2 million for the prior year. This
decrease was related to a recovery recorded in 1998 on an asset which was
written down in a prior year as well as a gain of $452 thousand recorded during
1998 relating to the sale of a building in which the Company's main branch was
formerly located. Other income for the year ended March 31, 1999 was positively
impacted by income recognized from the Company's November 1998 equity investment
in Homestead Funding Corp., the largest residential mortgage originator in the
Capital District area.
OTHER OPERATING EXPENSES
Total other operating expenses increased $7.6 million to $26.6 million for the
year ended March 31, 1999, up from $19.0 million for the year ended March 31,
1998. The most significant increase relates to a $5.2 million nonrecurring
expense associated with the contribution of stock to a charitable foundation.
The charitable foundation was formed as part of the Bank's Conversion. Increases
in compensation and benefits (up $1.6 million), other real estate owned and
repossessed property expenses (up $441 thousand), and other expenses (up $614
thousand), offset by a decrease in legal and other professional fees (down $350
thousand), were also contributors to the overall increase.
The increase in compensation and benefits was primarily the result of the costs
associated with the Employee Stock Ownership Plan ("ESOP") established in
connection with the Bank's Conversion, and the Recognition and Retention Plan
("RRP") approved by the Company's shareholders in January 1999 under which
awards of stock were made to directors and certain officers. During the year
ended March 31, 1999, the Company recorded $1.1 million in expense in connection
with the Bank's ESOP. Amortization expense associated with the Company's RRP for
the year ended March 31, 1999 was $217 thousand. This amount represents
amortization for three months. Annual RRP expense for the year ended March 31,
2000 is expected to be approximately $875 thousand.
The increase in other real estate owned ("OREO") and repossessed property
expenses was due to an increase in the level of repossessed property in the
current year as well as a large commercial OREO property which was foreclosed on
and sold during the fourth quarter ended March 31, 1999. In addition, a large
gain ($170 thousand) recognized by the Company during the year ended March 31,
1998 related to the sale of an OREO property reduced the overall expense in the
prior year and contributed to the increase in current year expenses compared
with the year ended March 31, 1998.
The increase in other expenses was the result of general increases associated
with being a public company. These costs include Delaware franchise tax fees,
printing costs associated with public financial reporting, and costs of the
Company's Special Meeting of Shareholders and related proxy expenses that was
held in conjunction with the approval of the Company's 1998 Recognition and
Retention Plan and 1998 Stock Option and Incentive Plan. In addition,
<PAGE>
advertising and marketing expenses have generally been higher due to the
expansion of the Company's market area, including branch expansion and loan
growth. Other expenses in the future could be higher as a result of current
discussions at the Financial Accounting Standards Board ("FASB") with regard to
stock options issued to non-employees. The Company issued approximately 375
thousand stock options to outside directors in January 1999 which could result
in additional expenses for the Company beginning in September 1999 if the
tentative decisions reached by the FASB become final.
The decrease in legal and other professional fees was the result of external
costs associated with the Company's consideration and evaluation of strategic
options during the prior year. In addition, the Company experienced higher
consulting expenses during 1998 compared with 1999. These expenses related to
assistance provided to management in addressing certain strategic planning
ideas, tax minimization solutions, and operational efficiencies.
INCOME TAX EXPENSE
Income tax expense increased from $1.9 million for the year ended March 31, 1998
to $2.2 million for the year ended March 31, 1999. The increase was primarily
the result of higher pre-tax income partially offset by an increase in
tax-exempt income realized by the Company.
14
<PAGE>
SELECTED QUARTERLY DATA
<TABLE>
<CAPTION>
Three Months Ended Mar. 31, Dec. 31, Sept. 30, June 30,Z` Mar. 31, Dec. 31, Sept. 30, June 30,
(In thousands, except per share data) 1999 1998 1998 1998 1998 1997 1997 1997
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $15,785 $16,012 $16,675 $15,054 $13,934 $13,801 $13,838 $13,814
Interest expense 6,018 6,339 6,480 7,163 6,437 6,571 6,518 6,451
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 9,767 9,673 10,195 7,891 7,497 7,230 7,320 7,363
- ---------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,500 1,681 1,944 2,216 2,083 2,003 2,045 2,360
Other operating income 536 583 675 624 955 466 762 662
Other operating expense 5,895 5,597 10,452 4,668 4,842 4,974 4,839 4,375
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax
expense (benefit) 2,908 2,978 (1,526) 1,631 1,527 719 1,198 1,290
Income tax expense (benefit) 1,045 1,098 (604) 645 582 302 503 516
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,863 $ 1,880 $ (922) $ 986 $ 945 $ 417 $ 695 $ 774
===========================================================================================================================
Basic earnings (loss) per share(1) $ 0.12 $ 0.11 $(0.06) -- -- -- -- --
Diluted earnings (loss) per share(1) 0.12 0.11 (0.06) -- -- -- -- --
===========================================================================================================================
</TABLE>
(1) Earnings per share data only applies to periods since the Company's initial
public offering on July 1, 1998.
COMPARISON OF THE YEARS ENDED MARCH 31, 1998 AND 1997
Net income for the year ended March 31, 1998 was $2.8 million, down from $5.7
million for the year ended March 31, 1997. This decrease was primarily a result
of a higher provision for loan losses (up $4.7 million) and higher other
operating expenses (up $2.8 million), partially offset by higher net interest
income (up $2.0 million), higher other operating income (up $1.0 million) and
lower income tax expense (down $1.7 million). The Company's return on average
assets was 0.43% for the year ended March 31, 1998, down from 0.88% for the year
previous. The Company's return on average equity was 4.18% for the year ended
March 31, 1998, down from 8.94% for the year ended March 31, 1997.
NET INTEREST INCOME
Net interest income for the year ended March 31, 1998 was $29.4 million, up from
the $27.5 million for the year ended March 31, 1997. The increase was primarily
the result of the increase in average earning assets from $612.3 million in 1997
to $628.7 million in 1998. Interest-bearing liabilities also increased during
the same period, rising $8.6 million to $552.5 million for 1998. The net impact
of these volume increases resulted in an increase in net interest income of $1.7
million. The yield on average earning assets increased from 8.64% to 8.81%,
while the rate paid on interest-bearing liabilities increased from 4.67% to
4.70%. The net impact of these higher interest rates resulted in an increase in
net interest income of $271 thousand. Because of the above changes in volume and
rates, the Company's net interest margin for the year ended March 31, 1998 was
4.68%, compared with 4.48% for 1997.
<PAGE>
INTEREST AND DIVIDEND INCOME
Interest and dividend income for the year ended March 31, 1998 was $55.4
million, up from $52.9 million for the year ended March 31, 1997. Interest on
loans increased from $43.6 million for the year ended March 31, 1997 to $47.5
million for the year ended March 31, 1998. This increase of $3.9 million was
primarily the result of volume increases. The average balance of loans increased
$36.0 million, while the average yield on loans increased to 9.36%, up from
9.25% for the year ended March 31, 1997. The interest on securities available
for sale decreased $1.1 million from $3.7 million for the year ended March 31,
1997 to $2.6 million for the year ended March 31, 1998. This decrease in
interest on securities available for sale was the result of a decrease in the
average balance of securities available for sale (from $53.4 million for the
year ended March 31, 1997 to $39.4 million for the year ended March 31, 1998)
and a decrease in the average yield on this portfolio from 6.84% in 1997 to
6.52% in 1998. A decrease in interest earned on securities held to maturity,
from $5.4 million for the year ended March 31, 1997 to $4.7 million for the year
ended March 31, 1998, was primarily the result of reductions in volume as the
average balance decreased from $83.3 million in 1997 to $72.0 million in 1998.
The rise in interest income on federal funds sold of $327 thousand to the $416
thousand in 1998 was primarily the result of higher average balances.
INTEREST EXPENSE
Interest expense increased slightly during the year ended March 31, 1998 to
$26.0 million, up from $25.4 million for the year ended March 31, 1997. Interest
on time deposits for the year ended March 31, 1998 was $18.1 million, up from
$17.7 million for the year prior. This increase was the result of both increases
in the average balance of time deposits, from $307.8 million in 1997 to $311.0
million for the year ended March 31, 1998, as well as an increase in the average
rates paid, up 5 basis points for the year ended March 31, 1998. Interest
expense on savings accounts increased $206 thousand, to $4.7 million for the
year ended March 31, 1998. This increase was largely attributed to an increase
in the average balance of savings accounts (up $4.9 million). Interest expense
on N.O.W. and money market accounts was flat for the year ended March 31, 1998,
compared with the prior year. Fluctuations in interest expense on other
categories of interest-bearing liabilities were not significant.
15
<PAGE>
PROVISION FOR LOAN LOSSES
The provision for loan losses increased from $3.8 million for the year ended
March 31, 1997 to $8.5 million for the year ended March 31, 1998. This increase
was primarily the result of increases in net charge-offs from $1.5 million in
1997 to $6.1 million in 1998 principally due to one large lending relationship.
This increase in net charge-offs combined with continued growth in the higher
risk elements of the Company's loan portfolio, continued economic weakness in
the Company's market area, declining real estate values securing much of the
loan portfolio as well as management's evaluation of the prospects for its
market area resulted in the increase in the provision recorded in the year ended
March 31, 1998.
OTHER OPERATING INCOME
Total other operating income increased from $1.8 million for the year ended
March 31, 1997 to $2.8 million for the year ended March 31, 1998. Other
operating income is composed primarily of service charges on deposit accounts
and loan servicing income. Income from service charges on deposit accounts was
flat at $1.1 million for each of the years ended March 31, 1998 and 1997. Loan
servicing income decreased to $398 thousand in the year ended March 31, 1998 as
a result of a lower loan servicing portfolio, particularly at the Bank's premium
finance subsidiary. Other income was $1.2 million for the year ended March 31,
1998, up from $237 thousand for the prior year. The increase was related to a
recovery recorded in the year ended March 31, 1998 on an asset which was written
down in a prior year as well as a gain of $452 thousand recorded during the year
ended March 31, 1998 relating to the sale of a building in which the Company's
main branch was formerly located. The remainder of the increase in other income
was generated by the Company's mortgage brokerage subsidiary that began
operations in the latter part of the year ended March 31, 1997.
OTHER OPERATING EXPENSES
Total other operating expenses increased $2.8 million to $19.0 million for the
year ended March 31, 1998, up from $16.2 million for the year prior. Increases
in compensation and benefits (up $802 thousand), equipment (up $384 thousand),
other real estate owned and repossessed property expenses (up $280 thousand),
legal and other professional fees (up $553 thousand) and other expenses (up $604
thousand) were the primary contributors to the overall increase.
The increase in compensation and benefits was the result of opening the
Company's Hillsdale branch in May 1997, the growth of the Bank's premium finance
and mortgage brokerage subsidiaries as well as general merit increases paid to
the Company's employees during the year ended March 31, 1998.
The increase in equipment expense was due to the acquisition and integration of
a new mainframe data processing system in November 1996, as well as the addition
of the new branch as referenced above.
The increase in OREO and repossessed property expenses were attributed to higher
levels of writedowns to estimated fair value of OREO and repossessed properties
during the year ended March 31, 1998 and higher maintenance expenses associated
with these properties. The overall expense for the year ended March 31, 1998 was
reduced by a large gain recognized by the Company during the year relating to
the sale of an OREO property.
<PAGE>
The increase in legal and other professional fees was the result of external
costs associated with the Company's consideration and evaluation of strategic
options, including merger and acquisition opportunities. In addition, the
Company experienced higher consulting expenses during fiscal 1998 compared
with 1997. These expenses related to assistance provided to management in
addressing certain strategic planning ideas, tax minimization solutions and
operational efficiencies for the Company.
The increase in other expenses was the result of general increases associated
with the opening the new branch referenced above, increased expenses relating to
the servicing and collection of non-performing and other delinquent loans, and a
one-time charge-off of an asset deemed uncollectible. The remaining categories
of other expenses and other operating expenses did not experience significant
fluctuations.
INCOME TAX EXPENSE
Income tax expense decreased from $3.6 million for the year ended March 31, 1997
to $1.9 million for the year ended March 31, 1998. The decrease was primarily
the result of lower pre-tax income.
16
<PAGE>
================
FINANCIAL
CONDITION
COMPARISON OF MARCH 31, 1999 AND 1998
Total assets at March 31, 1999 were at $881.1 million up $209.9 million from the
$671.2 million at March 31, 1998. Substantially all of the increase was due to
the proceeds received as part of the Company's initial public offering, as well
as increased borrowings at March 31, 1999 to fund loan growth. The increase in
assets was concentrated in the securities available for sale and loan
portfolios, which increased $200.1 million and $71.1 million, respectively. The
growth in these asset categories was partially offset by a reduction in the
securities held to maturity portfolio of $42.2 million. These changes as well as
fluctuations in other asset and liability categories are discussed below.
LENDING
Loans receivable increased $71.1 million from $507.0 million at March 31, 1998
to $578.1 million at March 31, 1999. The overall growth in total loans was
primarily made up of increases in residential real estate, commercial real
estate, commercial loans and financed insurance premiums, somewhat offset by a
decline in manufactured housing. Although residential real estate loans
increased $24.5 million, the level of residential real estate loans as a
percentage of total loans decreased from 53.2% to 50.8%. The growth in this
portfolio was primarily a result of the Bank's decision to hold fixed-rate
products for portfolio investment at a time when adjustable-rate loans were less
popular. Commercial real estate loans increased from $76.6 million at March 31,
1998, or 15.1% of total loans, to $91.5 million, or 15.8% of total loans at
March 31, 1999. Commercial loans increased $10.5 million to $29.0 million at
March 31, 1999 from $18.5 million at March 31, 1998. These increases in
commercial real estate and commercial loans are a result of management's
continuing strategy of increasing these portfolios as a percentage of total
loans. Financed insurance premiums increased from $28.0 million, or 5.5% of
total loans at March 31, 1998 to $57.9 million, or 10.0% of total loans at March
31, 1999. This increase was seasonal in nature and was a result of management's
efforts to focus on commercial insurance lines rather than personal
assigned-risk insurance lines. The commercial insurance lines are primarily
policies on limousines and other commercial vehicles. These policies are almost
entirely written in late February and early March of each year and typically
have 8 or 9 month terms. The Company's participation in financing these programs
significantly increased as management made a concerted effort to attract new
relationships with brokers and agents during the current year. Manufactured
housing loans declined $7.1 million from $97.4 million or 19.2% of total loans
at March 31, 1998 to $90.4 million or 15.6% of total loans at March 31, 1999 as
a result of management's efforts to reduce this portfolio and focus on
commercial and commercial real estate loans.
<PAGE>
LOAN PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
March 31, 1999 1998 1997 1996 1995
===================================================================================================================================
(In thousands) Amount % Amount % Amount % Amount % Amount %
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential $293,907 50.8% $269,435 53.2% $274,092 55.6% $241,162 53.5% $253,375 57.7%
Commercial 91,480 15.8 76,570 15.1 67,697 13.7 70,854 15.7 70,328 16.0
Construction 4,960 0.9 4,621 0.9 2,725 0.6 4,317 1.0 6,446 1.5
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans secured
by real estate 390,347 67.5 350,626 69.2 344,514 69.9 316,333 70.2 330,149 75.2
- ------------------------------------------------------------------------------------------------------------------------------------
Other loans:
Manufactured housing 90,354 15.6 97,426 19.2 92,651 18.8 80,399 17.8 72,184 16.5
Commercial 29,024 5.0 18,484 3.7 19,713 4.0 29,190 6.5 18,420 4.2
Financed insurance
premiums 57,901 10.0 27,976 5.5 23,535 4.8 13,503 3.0 8,674 2.0
Consumer 12,440 2.2 11,857 2.3 11,577 2.3 10,155 2.3 8,448 1.9
- ------------------------------------------------------------------------------------------------------------------------------------
Total other loans 189,719 32.8 155,743 30.7 147,476 29.9 133,247 29.6 107,726 24.6
- ------------------------------------------------------------------------------------------------------------------------------------
Unearned discount and
net deferred loan
origination costs (1,967) (0.3) 609 0.1 1,029 0.2 1,091 0.2 1,000 0.2
- ------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable $578,099 100.0% $506,978 100.0% $493,019 100.0% $450,671 100.0% $438,875 100.0%
Allowance for loan losses (14,296) (8,227) (5,872) (3,546) (3,187)
- ------------------------------------------------------------------------------------------------------------------------------------
Net loans receivable $563,803 $498,751 $487,147 $447,125 $435,688
====================================================================================================================================
</TABLE>
17
<PAGE>
NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
(In thousands) March 31, 1999 1998 1997 1996 1995
=======================================================================================================================
<S> <C> <C> <C> <C> <C>
Non-accruing loans
Residential real estate $ 2,253 $ 4,512 $ 4,553 $ 3,496 $1,900
Commercial real estate 2,669 5,253 3,239 1,587 1,884
Commercial loans -- -- 2,318 75 27
Manufactured housing 2,315 3,060 2,260 1,597 1,581
Financed insurance premiums 2,549 2,768 2,867 1,527 819
Consumer 158 114 45 4 10
- -----------------------------------------------------------------------------------------------------------------------
Total 9,944 15,707 15,282 8,286 6,221
- -----------------------------------------------------------------------------------------------------------------------
Accruing loans past due 90-days or more
and still accruing interest
Residential real estate -- -- 570 1,262 400
Commercial real estate -- -- 3,874 1,316 591
Commercial loans -- -- 244 -- --
Manufactured housing -- 16 -- 22 16
Financed insurance premiums -- -- -- -- --
Consumer -- -- 23 -- 122
- -----------------------------------------------------------------------------------------------------------------------
Total -- 16 4,711 2,600 1,129
- -----------------------------------------------------------------------------------------------------------------------
Total non-performing loans $ 9,944 $15,723 $19,993 $10,886 $7,350
=======================================================================================================================
Foreclosed and repossessed assets
Residential real estate $ 258 $ 145 $ 48 $ 160 $ 49
Commercial real estate 474 299 2,860 921 726
Repossessed property 1,776 1,088 539 635 503
- -----------------------------------------------------------------------------------------------------------------------
Total 2,508 1,532 3,447 1,716 1,278
=======================================================================================================================
Total non-performing assets $12,452 $17,255 $23,440 $12,602 $8,628
=======================================================================================================================
Allowance for loan losses $14,296 $ 8,227 $ 5,872 $ 3,546 $3,187
=======================================================================================================================
Allowance as a percentage of non-performing loans 143.77% 52.32% 29.37% 32.57% 43.36%
Non-performing assets as a percentage of total assets 1.41 2.57 3.60 2.02 1.50
Non-performing loans as a percentage of total loans 1.72 3.10 4.06 2.42 1.67
=======================================================================================================================
</TABLE>
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses increased from $8.2 million at March 31, 1998 to
$14.3 million at March 31, 1999, an increase of $6.1 million. This increase was
the result of the $7.3 million provision for loan losses taken in the year ended
March 31, 1999, offset by $1.3 million in net charge-offs for the year. 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 March 31, 1999, the allowance for loan losses provides
coverage of 143.77% of total non-performing loans, up from 52.32% at March 31,
1998. The balance of the allowance is maintained at a level that is, in
management's judgment, representative of the amount of risk inherent in the loan
portfolio.
SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY
The total balance of securities available for sale and securities held to
maturity increased from $107.7 million at March 31, 1998 to $265.7 million at
March 31, 1999. This increase was driven by purchases of securities totaling
$241.2 million during the year ended March 31, 1999, partially offset by
maturities, calls and paydowns of securities totaling $82.0 million.
Management's intention is to continue allowing securities held to maturity to
mature and paydown with the reinvestment of the proceeds primarily in securities
available for sale or the loan portfolio.
FEDERAL FUNDS SOLD
The decrease of $21.9 million in Federal funds sold was the result of the
reinvestment of these funds into higher yielding, longer term assets, including
loans and securities available for sale.
18
<PAGE>
PREMISES AND EQUIPMENT
Premises and equipment increased $1.5 million from $15.3 million at March 31,
1998 to $16.8 million at March 31, 1999. This increase was related to the
Company's efforts to upgrade technology including a new front end system for its
branch network, new image-technology for its backoffice operations and new
computers for employees throughout the Company. These upgrades in technology are
intended to improve the employees' ability to efficiently provide superior
service to the Company's customers.
OREO AND REPOSSESSED PROPERTY
The balance of OREO and repossessed property increased from $1.5 million at
March 31, 1998 to $2.5 million at March 31, 1999, an increase of $976 thousand.
This increase relates primarily to management's efforts to aggressively reduce
the level of non-performing loans during the year. Repossessed manufactured
homes make up the majority of the increase. Management believes that the current
trend in increased bankruptcies and consumer debt has contributed significantly
to the decline in manufactured housing credit quality.
OTHER ASSETS
The net growth in other assets from $4.9 million at March 31, 1998 to $10.6
million at March 31, 1999 was attributed primarily to the Company's equity
investment in Homestead Funding Corp. during November 1998. Homestead Funding
Corp. is the largest residential mortgage originator based in the Capital
District area. This investment reflects management's strategic initiative to
increase non-interest income from both traditional products offered by the
Company as well as through new sources.
DEPOSITS
Total deposits increased $3.5 million, from $588.3 million at March 31, 1998 to
$591.8 million at March 31, 1999. Increases in savings accounts of $3.4 million,
N.O.W. and money market accounts of $6.0 million and non interest-bearing
accounts of $10.9 million more than offset a decline in time deposits of $16.8
million. The growth of N.O.W. and money market balances and non interest-bearing
balances was in part a result of the Company's success in growing commercial
services. These sources of funds traditionally have lower interest costs in
comparison to time deposits or non-retail funding.
OTHER SHORT-TERM BORROWINGS
Other short-term borrowings increased $25.6 million from $2.0 million to $27.6
million. These borrowings were necessary to supplement deposit growth and fund
the increases in the loan and securities portfolios.
OTHER LIABILITIES
The balance of other liabilities increased significantly from $8.9 million at
March 31, 1998 to $37.7 million at March 31, 1999. This increase was largely due
to the timing of payments from the Bank's premium finance subsidiary to
insurance companies for premiums due under the terms of finance agreements. At
March 31, 1999, a large amount of premiums were due and were funded shortly
after the fiscal year end. This fluctuation is primarily seasonal in nature and
mirrors the growth experienced within the loan portfolio relating to financed
insurance premiums.
<PAGE>
SHAREHOLDERS' EQUITY
The balance of shareholders' equity increased from $68.3 million at March 31,
1998 to $219.3 million at March 31, 1999. The Company's initial public offering
which resulted in net proceeds received of $170.0 million was the primary factor
for this increase. Total shareholders' equity was further impacted by the
establishment of the Company's ESOP, the purchase of treasury stock, the grant
of restricted stock awards and net income. Shareholders' equity will be impacted
in future periods as the Company continues its current share repurchase program.
The Company will also consider future share repurchase programs if they enhance
shareholder value. In addition, in April 1999, the Company declared its first
quarterly cash dividend of $.03 per share. This dividend, as well as future
dividend declarations, will also impact shareholders' equity.
19
<PAGE>
=====================
QUANTITIVE
AND
QUALITIVE
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 interest 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 monthly to review the Company's interest rate risk position and
profitability, and to recommend strategies for consideration by the Board of
Directors. Management also reviews loan and deposit pricing and the Company's
securities portfolio, formulates investment and funding 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 interest 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
margin. 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 interest income. 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. 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 or funding mix.
<PAGE>
The primary tool utilized by management to measure interest rate risk is a
balance sheet/income statement simulation model. The model is used to execute
simulations of the Company's net interest income performance based upon
potential changes in interest rates over a selected period of time. The model's
input data includes earning assets and interest-bearing liabilities, their
associated cash flow characteristics, repricing opportunities, maturities and
current rates. In addition, management makes certain assumptions in relation to
prepayment speeds for all assets and liabilities which possess optionality,
including loans, mortgage-backed securities and collateralized mortgage
obligations. These assumptions are based on industry standards for prepayments.
The model is first run under an assumption of a flat rate scenario (i.e. no
change in current interest rates) over a 12 month period. A second and third
model are run in which a gradual increase and decrease, respectively, of 200
basis points takes place over a 12 month period. Under these scenarios, assets
subject to repricing or prepayment are adjusted to account for faster or slower
prepayment assumptions. The resultant changes in net interest income are then
measured against the flat rate scenario.
20
<PAGE>
The following table summarizes the percentage change in interest income and
interest expense by major earning asset and interest-bearing liability
categories as of March 31, 1999 in the rising and declining rate scenarios from
the forecasted interest income and interest expense amounts in a flat rate
scenario. Under the declining rate scenario, net interest income is expected to
decrease from the flat rate scenario by 1.28% over a 12 month period. Under the
rising rate scenario, net interest income is expected to increase by 2.57% from
the flat rate scenario over a 12 month period. This level of variability places
the Company's interest rate risk profile well within acceptable Company
guidelines.
<TABLE>
<CAPTION>
INTEREST RATE RISK Percentage Change in Net Interest Income From Flat Rate Scenario
===========================================================================================================================
Declining Rate Scenario Rising Rate Scenario
===========================================================================================================================
<S> <C> <C>
Investment securities (include all held to maturity,
available for sale and money market investments) (4.54)% 4.09%
Total loans (2.74) 3.92
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income (3.21) 3.97
- ---------------------------------------------------------------------------------------------------------------------------
Core deposits (13.33) 13.38
Time deposits (2.31) 2.42
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits (5.84) 5.92
Borrowings (22.40) 17.20
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense (6.75) 6.54
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income (1.28)% 2.57%
===========================================================================================================================
</TABLE>
===========================
LIQUIDITY
AND CAPITAL
RESOURCES
LIQUIDITY
Liquidity is defined as the ability to generate sufficient cash flows 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 securities held to maturity and securities available for sale, new
deposits, and to a lesser extent, drawings upon the Company's credit lines with
the Federal Home Loan Bank of New York ("FHLB"). During the year ended March 31,
1999, the Company's initial public offering served as a significant
non-recurring source of cash inflows. The Company's cash outflows are
substantially new loan originations, security purchases, deposit withdrawals,
operating expenses and treasury stock purchases. 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 and through usage of FHLB
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.
<PAGE>
CAPITAL
Consistent with its goals to operate a sound and profitable financial
organization, the Company actively seeks to maintain the Bank as a "well-
capitalized" institution in accordance with regulatory standards. Consolidated
shareholders' equity was $219.3 million at March 31, 1999, 24.89% 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 was the result
of the Company's stock offering that closed on July 1, 1998. As of March 31,
1999, the Bank exceeded all of the capital requirements of its regulators. For a
detailed discussion of the Company's and Bank's capital ratios, see note 7 to
the consolidated financial statements.
21
<PAGE>
====================
IMPACT OF
INFLATION
AND
CHANGING
PRICES
The Company's consolidated financial statements are prepared in conformity 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
same direction, or to the same extent, as the prices of goods and services.
====================
YEAR 2000
READINESS
STATEMENT
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
contacted each vendor during late 1997 and early 1998 to request timetables for
Year 2000 compliance and expected costs, if any, to be passed along to the
Company. The Company began the testing phase to determine whether its hardware
and software is Year 2000 compliant in mid-1998. Testing and any necessary
modifications on all mission-critical systems were substantially completed by
December 31, 1998 in accordance with regulatory guidelines. Testing of systems
that are not considered to be mission-critical is scheduled to be completed by
June 30, 1999. 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. To date, the results of the Company's testing, after all necessary
modifications, have indicated that the systems used by the Company are Year 2000
compliant.
In the normal course of keeping pace with changing technology, the Company has
performed upgrades of its hardware and software in recent years, as well as
during the current year. The Company has spent less than $100 thousand to date
in making any necessary upgrades to its systems solely as a result of the Year
2000 issue. Because of the Company's investments in technology over the last
three years, management does not anticipate that any additional costs to ensure
its systems are Year 2000 compliant will have a significant impact on the
Company's financial position or the results of its operations. These costs do
not include internal personnel time involved with the installation and testing
of the Company's systems. The Company has funded, and intends to fund, its Year
2000 related expenditures out of general operating sources and expense them as
incurred.
<PAGE>
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 effects on the operations and
financial results of the Company.
The Company has taken steps to identify and contact significant borrower,
depositor and supplier relationships 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, there have been no significant issues that have been
identified with respect to the Year 2000 readiness of significant borrowers,
depositors or suppliers. The Company has developed contingency plans and
strategies to address possible instances in which a system or resource fails to
be compliant. The contingency plans vary with the affected systems. These
contingency plans include details for performing some key procedures or
functions manually, utilizing alternative energy and/or communication systems,
identifying Company personnel to be on standby to address problems if, and when
they arise, and drawing on additional liquidity sources if the need for such
funds arise. Based upon testing results, communication with significant
borrowers, depositors, and suppliers, and contingency plans in place, the
Company believes that the failure of its critical software systems as a result
of the Year 2000 is unlikely.
22
<PAGE>
====================
IMPACT
OF NEW
ACCOUNTING
STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This Statement currently is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. Management is currently
evaluating what impact, if any, this Statement will have on the Company's
consolidated financial statements.
====================
FORWARD-
LOOKING
STATEMENTS
When used in this annual report 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 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 services
industry;
d. Changes in competition;
e. Changes in consumer preferences; and
f. Uncertainties relating to the impact of the Year 2000 on the Company,
its suppliers, borrowers and depositors.
<PAGE>
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.
23
<PAGE>
Hudson River Bancorp, Inc.
=========================================
MANAGEMENT'S STATEMENT OF RESPONSIBILITY
The management of Hudson River Bancorp, Inc. is responsible for the preparation,
content and integrity of the consolidated financial statements included in this
annual report. The consolidated financial statements and related notes have been
prepared in conformity with generally accepted accounting principles and, in the
judgment of management, present fairly Hudson River Bancorp, Inc.'s financial
position, results of operations and cash flows. Management also believes that
financial information presented elsewhere in this annual report is consistent
with that in the consolidated financial statements.
Management is also responsible for establishing and maintaining internal
controls designed to provide reasonable assurance of the accountability and
safeguarding of the Company's assets and of the integrity of the consolidated
financial statements. These corporate-wide controls include self-monitoring
mechanisms, written policies and procedures, proper delegation of authority and
organizational division of responsibility, and the careful selection and
training of qualified personnel. There are inherent limitations in the
effectiveness of any internal controls, including the possibility of human error
and the circumvention or overriding of controls. Management believes that the
Company's internal controls provide reasonable assurances that financial
transactions are recorded properly to permit the preparation of reliable
financial statements.
The Board of Directors discharges its responsibility for the Company's
consolidated financial statements through its Audit Committee. The Company's
Audit Committee, composed exclusively of outside directors, also has
responsibility for recommending the independent auditors. The Audit Committee
meets regularly with both the independent auditors and the internal auditors to
review the scope of their audits and audit reports and to discuss action to be
taken.
/s/ Carl A. Florio /s/ Timothy E. Blow
- ------------------ -------------------
Carl A. Florio Timothy E. Blow
President and Chief Executive Officer Chief Financial Officer
=========================================
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
Hudson River Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Hudson River
Bancorp, Inc. and subsidiary (the Company) as of March 31, 1999 and 1998, and
the related consolidated income statements, statements of changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hudson River
Bancorp, Inc. and subsidiary as of March 31, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 1999, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
- --------------
KPMG LLP
Albany, New York
May 14, 1999
24
<PAGE>
===============================
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(In thousands, except share and per share data) March 31, 1999 1998
===========================================================================================================================
<S> <C> <C>
Assets
Cash and due from banks $ 12,722 $ 12,423
Federal funds sold -- 21,850
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 12,722 34,273
- ---------------------------------------------------------------------------------------------------------------------------
Loans held for sale -- 1,286
Securities available for sale, at fair value 242,611 42,471
Securities held to maturity (fair value of $23,235 and $65,482) 23,041 65,194
Federal Home Loan Bank of New York stock, at cost 3,299 3,035
Loans receivable 578,099 506,978
Allowance for loan losses (14,296) (8,227)
- ---------------------------------------------------------------------------------------------------------------------------
Net loans receivable 563,803 498,751
- ---------------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 5,701 4,402
Premises and equipment, net 16,807 15,331
Other real estate owned and repossessed property 2,508 1,532
Other assets 10,647 4,939
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $881,139 $671,214
===========================================================================================================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits $591,814 $588,314
Securities sold under agreements to repurchase 845 --
Other short-term borrowings 27,600 2,000
Mortgagors' escrow deposits 3,869 3,723
Other liabilities 37,670 8,873
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 661,798 602,910
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Preferred stock, $.01 par value, Authorized 5,000,000 shares -- --
Common stock, $.01 par value, Authorized 40,000,000 shares;
17,853,750 shares issued at March 31, 1999 179 --
Additional paid-in capital 174,894 --
Unallocated common stock held by ESOP (17,200) --
Unvested restricted stock awards (7,996) --
Treasury stock, at cost (157,500 shares at March 31, 1999) (1,663) --
Retained earnings, substantially restricted 71,893 68,308
Accumulated other comprehensive loss (766) (4)
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 219,341 68,304
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $881,139 $671,214
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
======================================
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
(In thousands, except per share data)
Years Ended March 31, 1999 1998 1997
===========================================================================================================================
<S> <C> <C> <C>
Interest and dividend income
Interest and fees on loans $47,503 $47,482 $43,585
Securities available for sale 9,997 2,568 3,658
Securities held to maturity 3,095 4,727 5,385
Federal funds sold 1,054 416 89
Securities purchased under agreements to resell 1,662 -- --
Federal Home Loan Bank of New York stock 215 194 164
- ---------------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 63,526 55,387 52,881
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 25,844 25,772 25,187
Securities sold under agreements to repurchase 3 -- --
Other short-term borrowings 153 205 239
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 26,000 25,977 25,426
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income 37,526 29,410 27,455
Provision for loan losses 7,341 8,491 3,826
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 30,185 20,919 23,629
- ---------------------------------------------------------------------------------------------------------------------------
Other operating income
Service charges on deposit accounts 1,274 1,103 1,063
Loan servicing income 199 398 480
Net securities transactions 36 15 28
Net gain on sales of loans held for sale 65 96 17
Other income 844 1,233 237
- ---------------------------------------------------------------------------------------------------------------------------
Total other operating income 2,418 2,845 1,825
- ---------------------------------------------------------------------------------------------------------------------------
Other operating expenses
Compensation and benefits 10,982 9,394 8,592
Occupancy 1,498 1,395 1,285
Equipment 1,647 1,614 1,230
Other real estate owned and repossessed
property expenses 1,013 572 292
Legal and other professional fees 600 950 397
Postage and item transportation 718 765 655
Charitable foundation contribution 5,200 -- --
Other expenses 4,954 4,340 3,736
- ---------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 26,612 19,030 16,187
- ---------------------------------------------------------------------------------------------------------------------------
Income before income tax expense 5,991 4,734 9,267
Income tax expense 2,184 1,903 3,607
- ---------------------------------------------------------------------------------------------------------------------------
Net income $ 3,807 $ 2,831 $ 5,660
===========================================================================================================================
Basic earnings per share $ 0.17 -- --
===========================================================================================================================
Diluted earnings per share $ 0.17 -- --
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
================================================================
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(In thousands, except share and per share data)
Years Ended March 31, 1999 1998 1997
===========================================================================================================================
<S> <C> <C> <C>
Common stock
Balance at beginning of year $ -- $ -- $ --
Issuance of 17,333,738 shares of $.01 par value
common stock in initial public offering 174 -- --
Issuance of 520,012 shares of $.01 par value
common stock to the Hudson River Bank & Trust
Company Foundation 5 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 179 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital
Balance at beginning of year $ -- -- --
Issuance of 17,333,738 shares of common stock in
initial public offering, net of offering costs of $3,370 169,793 -- --
Issuance of 520,012 shares of common stock to the
Hudson River Bank & Trust Company Foundation 5,195 -- --
Adjustment for ESOP shares released for allocation (94) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $174,894 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Unallocated common stock held by ESOP
Balance at beginning of year $ -- -- --
Acquisition of 1,428,300 shares of common
stock by ESOP (18,428) -- --
Shares of ESOP stock released for allocation
(95,843 shares) 1,228 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $(17,200) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Unvested restricted stock awards
Balance at beginning of year $ -- -- --
Grant of restricted stock awards (714,150 shares) (8,213) -- --
Amortization of restricted stock awards 217 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (7,996) -- --
- ------------------------------------------------------------------------------------------------------------------------------
Treasury stock
Balance at beginning of year $ -- -- --
Purchase of 871,650 shares of common stock (10,098) -- --
Grant of restricted stock awards (714,150 shares) 8,435 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (1,663) -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except share and per share data)
Years Ended March 31, 1999 1998 1997
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Retained earnings
Balance at beginning of year $ 68,308 $65,477 $59,817
Net income 3,807 $3,807 2,831 $2,831 5,660 $5,660
5,660 Adjustment for grant of restricted stock awards (222) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 71,893 $68,308 $65,477
- -----------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance at beginning of year $ (4) (348) (211)
Unrealized net holding gains (loss) on securities
available for sale arising during the year
(pre-tax ($1,153), $586 and ($191), respectively) (739) 353 (115)
Reclassification adjustment for net gains realized
in net income (pre-tax ($36), ($15) and ($36),
respectively) (23) (9) (22)
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (762) (762) 344 344 (137) (137)
- -----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $3,045 $3,175 $5,523
====== ====== ======
Balance at end of year (766) (4) (348)
- -----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity at March 31, $219,341 $68,304 $65,129
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(In thousands) Years Ended March 31, 1999 1998 1997
===========================================================================================================================
Cash flows from operating activities
<S> <C> <C> <C>
Net income $ 3,807 $ 2,831 $ 5,660
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 1,519 1,359 1,183
Provision for loan losses 7,341 8,491 3,826
Deferred tax benefit (3,358) (2,004) (933)
Charitable foundation contribution 5,200 -- --
Amortization of restricted stock awards 217 -- --
ESOP stock released for allocation 1,134 -- --
Net securities transactions (36) (15) (28)
Net gain on sales of loans held for sale (65) (96) (17)
Net loans originated for sale (7,730) (11,423) (2,539)
Proceeds from sales of loans held for sale 9,081 10,317 2,673
Net gain on sale of premises and equipment (71) (452) --
Adjustments of other real estate owned and
repossessed property to fair value 213 401 169
Net gain on sales of other real estate owned
and repossessed property (522) (445) (556)
Net (increase) decrease in accrued interest
receivable (1,299) 478 374
Net (increase) decrease in other assets (1,921) (611) 905
Net increase in other liabilities 28,797 3,898 1,323
- ---------------------------------------------------------------------------------------------------------------------------
Total adjustments 38,500 9,898 6,380
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 42,307 12,729 12,040
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Proceeds from sales of securities available
for sale -- -- 7,025
Proceeds from maturities, calls and paydowns
of securities available for sale 39,867 37,996 21,564
Purchases of securities available for sale (241,162) (34,258) (22,975)
Proceeds from sales of securities held
to maturity -- -- 2,979
Proceeds from maturities, calls and paydowns
of securities held to maturity 42,153 21,890 8,860
Purchases of securities held to maturity -- (8,016) (7,911)
Purchase of FHLB of New York stock (264) (223) (309)
Redemption of FHLB of New York stock -- -- 93
Net loans made to customers (78,694) (24,555) (49,875)
Proceeds from sales of and payments received on
other real estate owned and repossessed
property 5,634 6,419 4,817
Proceeds from sale of premises and equipment 471 1,200 --
Purchases of premises and equipment (3,395) (2,473) (1,799)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (235,390) (2,020) (37,531)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
(In thousands) Years Ended March 31, 1999 1998 1997
===========================================================================================================================
<S> <C> <C> <C>
Cash flows from financing activities
Net increase in deposits 3,500 23,715 9,411
Net increase in securities sold under agreements
to repurchase 845 -- --
Net increase (decrease) in other short-term
borrowings 25,600 (10,585) 12,585
Net increase (decrease) in mortgagors'
escrow deposits 146 (23) (281)
Net proceeds from stock offering 169,967 -- --
Purchases of treasury stock (10,098) -- --
Acquisition of common stock by ESOP (18,428) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 171,532 13,107 21,715
- ---------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash
equivalents (21,551) 23,816 (3,776)
Cash and cash equivalents at beginning of year 34,273 10,457 14,233
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 12,722 $ 34,273 $ 10,457
===========================================================================================================================
Supplemental cash flow information
Interest paid $ 25,998 $ 25,980 $ 25,305
Taxes paid $ 3,563 $ 4,012 $ 4,593
===========================================================================================================================
Supplemental disclosures of non-cash investing
and financing activities
Loans transferred to other real estate owned
and repossessed property $ 6,301 $ 4,460 $ 6,027
Adjustment of securities available for sale
to fair value, net of tax $ (762) $ 344 $ (137)
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
28
<PAGE>
==================
NOTE 1.
SUMMARY OF
SIGNIFICANT
ACCOUNTING
POLICIES
The accounting and reporting policies of Hudson River Bancorp, Inc. ("Parent
Company") and its subsidiary (referred to together as the "Company") conform to
generally accepted accounting principles and reporting practices followed by the
banking industry. The more significant policies are described below.
ORGANIZATION
The Company is a bank-based financial services company. The Parent Company's
subsidiary, Hudson River Bank & Trust Company (the "Bank") (formerly Hudson City
Savings Institution), provides a wide range of banking, financing, fiduciary and
other financial services to corporate, individual and institutional customers
through its branch offices and subsidiary companies. The Parent Company is
regulated by the Office of Thrift Supervision as a unitary savings and loan
holding company. The Bank is regulated by the Federal Deposit Insurance
Corporation ("FDIC") and the New York State Banking Department.
The Bank completed its conversion from a mutual savings bank to a stock savings
bank on July 1, 1998. Concurrent with the Bank's conversion, the Parent Company
completed its initial public offering of common stock and purchased all of the
outstanding common stock of the Bank. Prior to its initial public offering, the
Parent Company had no results of operations; therefore, financial information
prior to July 1, 1998 reflects the operations of the Bank.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Hudson River
Bancorp, Inc. and its subsidiary. All material intercompany accounts and
transactions have been eliminated. The Company utilizes the accrual method of
accounting for financial reporting purposes. Amounts in the prior years'
consolidated financial statements have been reclassified whenever necessary to
conform with the current year's presentation.
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consists of cash on hand, due from banks, securities purchased under
agreements to resell and federal funds sold.
<PAGE>
SECURITIES FINANCING ARRANGEMENTS
Securities purchased under agreements to resell (resale agreements) and
securities sold under agreements to repurchase (repurchase agreements) are
generally carried as short-term investments or borrowings and are carried at the
amounts at which the securities were initially acquired or sold. These
transactions are usually overnight, fixed-coupon agreements and require
collateral to be delivered to the Company's securities custodial account (resale
agreements) or segregated at the Company's third party custodian (repurchase
agreements). In the case of resale agreements, the Company requires that the
fair value of the underlying securities received exceed the amount of the
agreement at all times.
SECURITIES
Management determines the appropriate classification of securities at the time
of purchase. If management has the positive intent and ability to hold debt
securities to maturity, they are classified as securities held to maturity and
carried at cost, adjusted for amortization of premiums and accretion of
discounts using an effective interest method. If securities are purchased for
the purpose of selling them in the near term, they are classified as trading
securities and are reported at fair value with unrealized holding gains and
losses reflected in current earnings. All other debt and marketable equity
securities are classified as securities available for sale and are reported at
fair value, with net unrealized gains or losses reported, net of income taxes,
in accumulated other comprehensive income or loss. As a member of the Federal
Home Loan Bank of New York (the "FHLB"), the Company is required to hold FHLB
stock which is carried at cost since there is no readily available market value.
At March 31, 1999 and 1998, the Company did not hold any securities considered
to be trading securities.
Gains or losses on the disposition of securities are based on the net proceeds
and the adjusted carrying amount of the securities sold, using the specific
identification method. Unrealized losses on securities reflecting a decline in
value which is other than temporary are charged to income and reported as a
component of "net securities transactions" in the consolidated income
statements.
29
<PAGE>
NET LOANS RECEIVABLE
Loans are carried at the principal amount outstanding net of unearned discount,
net deferred loan origination fees and costs, and the allowance for loan losses.
Certain nonrefundable loan fees and related direct loan costs are deferred and
amortized over the estimated life of the loan as an adjustment to the yield.
Non-performing loans include non-accrual loans, loans which are contractually
past due 90 days or more and still accruing interest and troubled debt
restructurings. Generally, loans are placed on non-accrual status, either due to
the delinquency status of principal and/or interest payments, or a judgment by
management that, although payments of principal and/or interest are current,
such action is prudent. Loans are generally placed on non-accrual status when
principal and/or interest payments are contractually past due 90 days or more.
When a loan is placed on non-accrual status, all interest previously accrued but
not collected is reversed against current year interest income. Interest income
on non-accrual loans is recognized only when received, if considered appropriate
by management. Loans are removed from non-accrual status when they become
current as to principal and interest or when, in the opinion of management, the
loans are expected to be fully collectible as to principal and interest.
Loans are considered impaired when it is probable that the borrower will not
make principal and interest payments according to the original contractual terms
of the loan agreement. Smaller balance, homogeneous loans which are collectively
evaluated for impairment, such as consumer and residential mortgage loans, are
specifically excluded from the classification of impaired loans unless such
loans are restructured in a troubled debt restructuring. Impaired loans are
included in non-performing loans, generally as non-accrual commercial-type
loans.
The impairment of a non-performing loan is measured based on the present value
of the expected future cash flows, discounted at the loan's effective interest
rate, or on the underlying value of collateral for collateral dependent loans.
The impaired loan's carrying value in excess of expected cash flows or
collateral value is specifically reserved for or is charged to the allowance for
loan losses. The Company's impaired loans are generally collateral dependent.
The Company considers estimated costs to sell, on a discounted basis, when
determining the fair value of collateral in the measurement of impairment if
those costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loans.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a reserve available for losses inherent in the
loan portfolio. Additions are made to the allowance through periodic provisions,
which are charged to expense. All losses of principal are charged to the
allowance when incurred or when a determination is made that a loss is expected.
Subsequent recoveries, if any, are credited to the allowance.
The adequacy of the allowance for loan losses is determined through a quarterly
review of outstanding loans. The impact of economic conditions on the
creditworthiness of the borrowers is considered, as well as loan loss
experience, changes in the composition and volume of the loan portfolio and
management's assessment of the risks inherent in the loan portfolio. These and
other factors are considered in assessing the overall adequacy of the allowance
for loan losses and the related provisions for loan losses.
<PAGE>
LOANS HELD FOR SALE
Loans are classified as held for investment purposes or held for sale when the
Company enters into interest rate lock agreements with the potential borrowers.
Loans held for sale are recorded at the lower of aggregate cost or fair value,
with unrealized losses, if any, recorded in a valuation allowance by a charge to
income. Fair value is determined based on quoted market rates or, in the case
where a firm commitment has been made to sell the loan, the firm committed
price. Gains and losses on the disposition of loans held for sale are determined
on the specific identification method. There were no loans held for sale at
March 31, 1999. Loans held for sale at March 31, 1998 were comprised of
residential mortgage loans.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets (up to fifty years for buildings and generally five years
for furniture and equipment). Leasehold improvements are depreciated over the
shorter of the term of the related leases or the estimated useful lives of the
assets.
30
<PAGE>
OTHER REAL ESTATE OWNED AND REPOSSESSED PROPERTY
Other real estate owned, comprised of real estate acquired through foreclosure
and in-substance foreclosures, and repossessed property are recorded at the
lower of "cost" (defined as the fair value at initial foreclosure or
repossession) or fair value of the asset acquired, less estimated disposal
costs. A loan is categorized as an in-substance foreclosure when the Company has
taken possession of the collateral, regardless of whether formal foreclosure
proceedings have taken place. At the time of foreclosure or repossession, or
when foreclosure occurs in-substance, the excess, if any, of the loan value over
the fair value of the property received is charged to the allowance for loan
losses. Subsequent declines in the value of foreclosed and repossessed property
and net operating expenses are charged directly to other operating expenses.
Properties are reappraised, as considered necessary by management, and written
down to the fair value less the estimated cost to sell the property, if
necessary. Repossessed property consists primarily of manufactured homes
abandoned by their owners or repossessed by the Company.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets are recognized subject to management's
judgment that those assets will more likely than not be realized. A valuation
allowance is recognized if, based on an analysis of available evidence,
management believes that all or a portion of the deferred tax assets will not be
realized. Adjustments to increase or decrease the valuation allowance are
charged or credited, respectively, to income tax expense. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
EMPLOYEE BENEFIT COSTS
The Company maintains a non-contributory retirement pension plan covering
substantially all employees as well as a benefit restoration plan covering
certain executives. The costs of these plans, based on actuarial computations of
current and future benefits for employees, are charged to current operating
expenses. The Company also provides certain post-retirement medical and life
insurance benefits to substantially all employees and retirees, as well as
dental benefits to a closed group of retirees. The cost of post-retirement
benefits other than pensions is recognized on an accrual basis as employees
perform services to earn the benefits.
STOCK-BASED COMPENSATION
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation expense is recognized only if
the exercise price of the option is less than the fair value of the underlying
stock at the grant date. Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation", encourages entities to
recognize the fair value of all stock-based awards on the date of the grant as
compensation expense over the vesting period. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma disclosures of net income and earnings per share as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company
has elected to apply the provisions of APB Opinion No. 25 and provide the pro
forma disclosures required by SFAS No. 123.
<PAGE>
The Company's Recognition and Retention Plan is also accounted for in accordance
with APB Opinion No. 25. The fair value of the shares awarded, measured as of
the grant date, is recognized as unearned compensation (a component of
shareholders' equity) and amortized to compensation expense as the shares become
vested.
Compensation expense is recognized for the Company's Employee Stock Ownership
Plan ("ESOP") equal to the average fair value of shares committed to be released
for allocation to participant accounts. Any difference between the average fair
value of the shares committed to be released for allocation and the ESOP's
original acquisition cost is charged or credited to shareholders' equity
(additional paid-in capital). The cost of unallocated ESOP shares (shares not
yet committed to be released) is reflected as a reduction of shareholders'
equity.
EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income by the weighted-
average number of common shares outstanding during the period. Shares of
restricted stock are not considered outstanding for the calculation of basic
earnings per share until they become fully vested. Diluted earnings per share is
computed in a manner similar to that of basic earnings per share except that the
weighted-average number of common shares outstanding is increased to include the
number of additional common shares that would have been outstanding if all
potentially dilutive common shares (such as stock options and unvested
restricted stock) were issued during the reporting period. Unallocated common
shares held by the ESOP are not included in the weighted-average number of
common shares outstanding for either the basic or diluted earnings per share
calculations.
31
<PAGE>
FINANCIAL INSTRUMENTS
In the normal course of business, the Company is a party to certain financial
instruments with off-balance-sheet risk such as commitments to extend credit,
unused lines of credit and standby letters of credit. The Company's policy is to
record such instruments when funded.
TRUST ASSETS
Assets held by the Company in a fiduciary or agency capacity for its customers
are not included in the consolidated balance sheets since these items are not
assets of the Company.
COMPREHENSIVE INCOME
The Company has adopted SFAS No. 130, "Reporting Comprehensive Income", which
establishes standards for the reporting and display of comprehensive income and
its components in financial statements. Comprehensive income represents the sum
of net income and items of "other comprehensive income," which are reported
directly in shareholders' equity, net of tax, such as the change in the net
unrealized gain or loss on securities available for sale. While SFAS No. 130
does not require a specific reporting format, it does require that an enterprise
display an amount representing total comprehensive income for each period for
which an income statement is presented. In accordance with SFAS No. 130, the
Company has reported comprehensive income and its components for each period
required in the consolidated statements of changes in shareholders' equity.
Accumulated other comprehensive income or loss, which is a component of
shareholders' equity, represents the net unrealized gain or loss on securities
available for sale, net of tax.
SEGMENT REPORTING
During the year ended March 31, 1999, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". This
Statement requires the Company to report certain financial and other information
about significant revenue-producing segments of the business for which such
information is available and is utilized by the chief operating decision makers,
if the segment meets certain quantitative requirements as defined by this
Statement. The Company's operations are solely in the financial services
industry and include providing to its customers traditional banking services.
The Company operates primarily in the geographical regions of Columbia,
Rensselaer, Albany, Schenectady and Dutchess counties of New York. Management
makes operating decisions and assesses performance based on an ongoing review of
its traditional banking operations, which constitute the Company's only
reportable segment under SFAS No. 131.
<PAGE>
================
NOTE 2.
SECURITIES
The amortized cost, gross unrealized gains and losses and approximate fair value
of securities at March 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999
===========================================================================================================================
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
===========================================================================================================================
Securities Available for Sale
<S> <C> <C> <C> <C>
U.S. Government and Agency securities $ 66,976 $ 47 $ (576) $ 66,447
Corporate debt securities 55,428 228 (644) 55,012
Tax-exempt securities 15,131 12 (90) 15,053
Collateralized mortgage obligations 85,434 314 (343) 85,405
Mortgage-backed securities 19,678 -- (180) 19,498
Equity securities 1,160 74 (38) 1,196
- ---------------------------------------------------------------------------------------------------------------------------
Total securities available for sale $243,807 $675 $(1,871) $242,611
===========================================================================================================================
Securities Held to Maturity
U.S. Government and Agency securities $ 1,995 $ 17 $ -- $ 2,012
Corporate debt securities 17,931 158 -- 18,089
Tax-exempt securities 10 -- -- 10
Collateralized mortgage obligations 968 3 (31) 940
Mortgage-backed securities 2,137 50 (3) 2,184
- ---------------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 23,041 $228 $ (34) $ 23,235
===========================================================================================================================
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
1998
==========================================================================================================
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
==========================================================================================================
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Government and Agency securities $33,261 $ 41 $(115) $33,187
Corporate debt securities 8,200 65 (12) 8,253
Mortgage-backed securities 1,018 13 -- 1,031
- ----------------------------------------------------------------------------------------------------------
Total securities available for sale $42,479 $119 $(127) $42,471
==========================================================================================================
Securities Held to Maturity
U.S. Government and Agency securities $18,977 $ 71 $ (16) $19,032
Corporate debt securities 41,779 285 (7) 42,057
Tax-exempt securities 10 -- -- 10
Mortgage-backed securities 4,428 59 (104) 4,383
- ----------------------------------------------------------------------------------------------------------
Total securities held to maturity $65,194 $415 $(127) $65,482
==========================================================================================================
</TABLE>
During the years ended March 31, 1999 and 1998, the Company realized gross gains
of $36 thousand and $15 thousand, respectively, related to calls of securities,
with no gross losses realized. No securities were sold during the years ended
March 31, 1999 and 1998. The Company received $7.0 million in proceeds from the
sale of securities available for sale, realizing gross gains of $36 thousand and
no gross losses during the year ended March 31, 1997. During the year ended
March 31, 1997, the Company received $3.0 million in proceeds from the sale of a
security held to maturity, realizing a gross loss of $8 thousand. This security
was sold due to significant deterioration in the issuer's creditworthiness.
Securities available for sale (exclusive of equity securities) and securities
held to maturity by remaining contractual maturity as of March 31, 1999 are
presented below. Expected maturities will differ from contractual maturities as
a result of prepayments and calls.
<PAGE>
<TABLE>
<CAPTION>
Securities Available for Sale Securities Held to Maturity
==============================================================================================================
Approximate Approximate
Amortized Cost Fair Value Amortized Cost Fair Value
==============================================================================================================
<S> <C> <C> <C> <C>
Within one year $ 1,999 $ 2,011 $ 8,989 $ 9,026
One through five years 18,196 18,269 11,126 11,264
Five through ten years 45,835 45,643 1,756 1,789
After ten years 176,617 175,492 1,170 1,156
- --------------------------------------------------------------------------------------------------------------
Total $242,647 $241,415 $23,041 $23,235
==============================================================================================================
</TABLE>
The carrying value of securities pledged as required by law and for other
purposes amounted to $9.5 million and $5.0 million at March 31, 1999 and 1998,
respectively.
33
<PAGE>
================
NOTE 3.
NET LOANS
RECIVABLE
<TABLE>
<CAPTION>
A summary of net loans receivable as of March 31 is as follows:
(In thousands) 1999 1998
============================================================================================================
<S> <C> <C>
Loans secured by real estate
Residential one- to four-family $293,907 $269,435
Commercial 91,480 76,570
Construction 4,960 4,621
- ------------------------------------------------------------------------------------------------------------
Total loans secured by real estate 390,347 350,626
- ------------------------------------------------------------------------------------------------------------
Other loans
Manufactured housing 90,354 97,426
Commercial 29,024 18,484
Financed insurance premiums 57,901 27,976
Consumer 12,440 11,857
- ------------------------------------------------------------------------------------------------------------
Total other loans 189,719 155,743
- ------------------------------------------------------------------------------------------------------------
Unearned discount and net deferred loan origination
fees and costs (1,967) 609
- ------------------------------------------------------------------------------------------------------------
Total loans receivable 578,099 506,978
Allowance for loan losses (14,296) (8,227)
- ------------------------------------------------------------------------------------------------------------
Net loans receivable $563,803 $498,751
============================================================================================================
</TABLE>
Changes in the allowance for loan losses during the years ended March 31 were as
follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
============================================================================================================
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $ 8,227 $ 5,872 $ 3,546
Provision charged to operations 7,341 8,491 3,826
Loans charged-off (3,191) (6,730) (2,070)
Recoveries on loans charged-off 1,919 594 570
- ------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $14,296 $ 8,227 $ 5,872
============================================================================================================
</TABLE>
<PAGE>
The following table sets forth information with regard to non-performing loans
at March 31:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
============================================================================================================
<S> <C> <C> <C>
Loans in non-accrual status $9,944 $15,707 $15,282
Loans contractually past due 90 days or more
and still accruing interest -- 16 4,711
- ------------------------------------------------------------------------------------------------------------
Total $9,944 $15,723 $19,993
============================================================================================================
</TABLE>
At March 31, 1999, 1998 and 1997, there were no troubled debt restructurings or
material commitments to extend further credit to borrowers with non-performing
loans.
Accumulated interest on non-accrual loans, as shown above, of approximately $411
thousand, $599 thousand and $586 thousand, was not recognized in interest income
during the years ended March 31, 1999, 1998 and 1997, respectively.
Approximately $572 thousand, $920 thousand and $937 thousand of interest on
non-accrual loans, as shown above, was collected and recognized in interest
income during the years ended March 31, 1999, 1998 and 1997, respectively.
At March 31, 1999 and 1998, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 totaled $2.7 million and $5.3 million,
respectively, for which the related allowance for loan losses was $842 thousand
and $1.0 million, respectively. As of March 31, 1999 and 1998, there were no
impaired loans which did not have an allowance for loan losses determined in
accordance with SFAS No. 114. The average recorded investment in impaired loans
during the years ended March 31, 1999, 1998 and 1997 was $3.7 million, $5.8
million and $1.6 million, respectively. The interest income accrued on those
impaired loans or recognized using the cash basis of income recognition was not
significant for the years ended March 31, 1999, 1998 and 1997.
34
<PAGE>
Certain executive officers of the Company were customers of and had other
transactions with the Company in the ordinary course of business. Loans to these
parties were made in the ordinary course of business at the Company's normal
credit terms, including interest rate and collateralization. The aggregate of
such loans totaled less than 5% of total shareholders' equity at March 31, 1999
and 1998.
The Company has an unconsolidated equity investment in Homestead Funding Corp.,
a mortgage-banking company. The Company has a $20 million warehouse line of
credit relationship with Homestead which was made in the ordinary course of
business at the Company's normal credit terms, including interest rate and
collateralization. There was $9.6 million and $3.5 million outstanding on this
line as of March 31, 1999 and 1998, respectively.
======================
NOTE 4.
PREMISES AND
EQUIPMENT
A summary of premises and equipment at March 31 is as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
=============================================================================================================
<S> <C> <C>
Buildings and land $15,143 $15,370
Furniture and equipment 7,969 5,208
Leasehold improvements 817 829
- -------------------------------------------------------------------------------------------------------------
Total 23,929 21,407
Accumulated depreciation (7,122) (6,076)
- -------------------------------------------------------------------------------------------------------------
Premises and equipment, net $16,807 $15,331
=============================================================================================================
</TABLE>
Depreciation expense was approximately $1.5 million, $1.4 million and $1.2
million, for the years ended March 31, 1999, 1998 and 1997, respectively.
======================
NOTE 5.
DEPOSITS
Deposit account balances at March 31 are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
=============================================================================================================
<S> <C> <C>
Savings $145,985 $142,569
N.O.W. and money market 99,390 93,400
Time deposits 302,479 319,299
Non interest-bearing 43,960 33,046
- -------------------------------------------------------------------------------------------------------------
Total deposits $591,814 $588,314
=============================================================================================================
</TABLE>
The aggregate amount of time deposit accounts with a balance of $100 thousand or
greater was $39.9 million and $42.1 million at March 31, 1999 and 1998,
respectively.
<PAGE>
<TABLE>
<CAPTION>
The approximate amounts of contractual maturities of time deposit accounts at
March 31, 1999 are as follows:
(In thousands)
=============================================================================================================
Years ending March 31,
<S> <C>
2000 $187,315
2001 76,880
2002 11,097
2003 22,798
2004 1,863
Thereafter 2,526
- -------------------------------------------------------------------------------------------------------------
Total $302,479
=============================================================================================================
</TABLE>
<PAGE>
==============
NOTE 6.
OTHER
SHORT-TERM
BORROWINGS
The Bank has a line of credit with the Federal Home Loan Bank of New York in the
amount of $99.4 million at March 31, 1999. This short-term borrowing facility is
based upon either an overnight or thirty-day borrowing period with interest
based generally upon a spread above the current Federal funds rate. As of March
31, 1999, there was approximately $27.6 million outstanding under the line of
credit, which carried an interest rate of 5.35%. As of March 31, 1998, the Bank
had $2.0 million of short-term borrowings from the Federal Home Loan Bank of New
York, which carried an interest rate of 5.88%. Borrowings from the Federal Home
Loan Bank of New York are secured by Federal Home Loan Bank stock and real
estate mortgages.
==============
NOTE 7.
REGULATORY
CAPITAL
Regulations require banks to maintain a minimum leverage ratio of Tier 1 capital
to total adjusted quarterly average assets of 4.0%, and minimum ratios of Tier 1
capital and total capital to risk-weighted assets of 4.0% and 8.0%,
respectively.
Under their prompt corrective action regulations, regulatory authorities are
required to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized institution. Such
actions could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification of
banks into five categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well-capitalized if it
has a Tier 1 capital ratio of at least 5.0% (based on total adjusted quarterly
average assets); a Tier 1 risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the regulators about capital components,
risk weightings and other factors.
As of March 31, 1999 and 1998, the Bank met all capital adequacy requirements to
which it was subject. Further, the most recent FDIC notification categorized the
Bank as a well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since the notification that
management believes have changed the Bank's capital classification.
The following is a summary of actual capital amounts and ratios as of March 31,
1999 and 1998 for the Bank, compared to the requirements for minimum capital
adequacy and for classification as well-capitalized. Although the Office of
Thrift Supervision does not impose minimum capital requirements on thrift
holding companies, the Company's consolidated capital amounts and ratios as of
March 31, 1999 are also presented.
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999 Required Ratios and Amounts
===============================================================================================================
Minimum Capital Classification as
Actual Capital Adequacy Well-Capitalized
===============================================================================================================
(In thousands) Amount Ratio Amount Ratio Amount Ratio
===============================================================================================================
Tier 1 (Leverage) Capital
<S> <C> <C> <C> <C> <C> <C>
Hudson River Bank & Trust Company $140,517 17.04% $32,978 4.00% $41,222 5.00%
Hudson River Bancorp, Inc.
(consolidated) 216,892 26.18
Tier 1 Risk-Based Capital
Hudson River Bank & Trust Company 140,517 23.18 24,244 4.00 36,367 6.00
Hudson River Bancorp, Inc.
(consolidated) 216,892 35.53
Total Risk-Based Capital
Hudson River Bank & Trust Company 148,176 24.45 48,489 8.00 60,611 10.00
Hudson River Bancorp, Inc.
(consolidated) 224,621 36.80
===============================================================================================================
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
March 31, 1999 Required Ratios and Amounts
===============================================================================================================
Minimum Capital Classification as
Actual Capital Adequacy Well-Capitalized
===============================================================================================================
(In thousands) Amount Ratio Amount Ratio Amount Ratio
===============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (Leverage) Capital
Hudson River Bank & Trust Company $67,741 10.23% $26,476 4.00% $33,095 5.00%
Tier 1 Risk-Based Capital
Hudson River Bank & Trust Company 67,741 14.43 18,777 4.00 28,165 6.00
Total Risk-Based Capital
Hudson River Bank & Trust Company 73,638 15.69 37,553 8.00 46,941 10.00
===============================================================================================================
</TABLE>
===================
NOTE 8.
STOCK-BASED
COMPENSATION
PLANS
EMPLOYEE STOCK OWNERSHIP PLAN
The Company established an ESOP to provide substantially all employees of the
Company the opportunity to also become shareholders. The ESOP borrowed $18.4
million from the Company and used the funds to purchase 1,428,300 shares of the
common stock of the Company in the open market. The loan will be repaid
principally from the Bank's discretionary contributions to the ESOP over a
period of fifteen years. At March 31, 1999, the loan had an outstanding balance
of $17.2 million and an interest rate of 8.00%. Both the loan obligation and the
unearned compensation are reduced by the amount of loan repayments made by the
ESOP. Shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. Contributions to the ESOP
and shares released from the suspense account are allocated among participants
on the basis of compensation in the year of allocation.
Unallocated ESOP shares are pledged as collateral on the loan and are reported
in shareholders' equity. As shares are released from collateral, the Company
reports compensation expense equal to the average market price of the shares,
and the shares become outstanding for earnings per share computations.
Unallocated ESOP shares are not included in the earnings per share computations.
The Company recorded approximately $1.1 million of compensation expense under
the ESOP for the year ended March 31, 1999.
<PAGE>
The ESOP shares as of March 31, 1999 were as follows:
<TABLE>
<CAPTION>
==========================================================================================================
<S> <C>
Allocated shares --
Shares released for allocation 95,843
Unallocated shares 1,332,457
- ----------------------------------------------------------------------------------------------------------
Total ESOP shares 1,428,300
==========================================================================================================
Market value of unallocated shares at March 31, 1999 (In thousands) $ 14,574
==========================================================================================================
</TABLE>
STOCK OPTION PLAN
On January 5,1999, the Company's shareholders approved the Hudson River Bancorp,
Inc. 1998 Stock Option and Incentive Plan ("Stock Option Plan"). The primary
objective of the Stock Option Plan is to provide officers and directors with a
proprietary interest in the Company and an incentive to encourage such persons
to remain with the Company.
Under the Stock Option Plan, 1,785,375 shares of authorized but unissued common
stock are reserved for issuance upon option exercises. The Company also has the
alternative to fund the Stock Option Plan with treasury stock. Options under the
plan may be either non-qualified stock options or incentive stock options. Each
option entitles the holder to purchase one share of common stock at an exercise
price equal to the fair market value on the date of grant. Options expire no
later than ten years following the date of grant. On January 5, 1999, 1,249,763
shares were awarded at an exercise price of $11.50 per share. These shares have
a ten-year term and vest at a rate of 20% per year from the grant date.
37
<PAGE>
A summary of the status of the Company's Stock Option Plan as of March 31, 1999
and changes during the year ended March 31, 1999 is presented below:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
==============================================================================================================
<S> <C> <C>
Options
Outstanding at beginning of year -- $ --
Granted 1,249,763 11.50
Exercised -- --
Forfeited (1,389) 11.50
- --------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,248,374 $11.50
==============================================================================================================
Exercisable at end of year -- --
==============================================================================================================
Estimated weighted-average fair value of options granted on
January 5, 1999 $ 2.98
==============================================================================================================
</TABLE>
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its Stock Option Plan. Accordingly, no compensation cost has been recognized
for its Stock Option Plan. SFAS No. 123 requires companies not using a fair
value based method of accounting for stock options or similar plans, to provide
pro forma disclosure of net income and earnings per share as if that method of
accounting had been applied. The fair value of each option grant is estimated on
the dates of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in the year ended March
31, 1999: dividend yield of 1.10%; expected volatility of 24.12%; risk free
interest rate of 4.73%; expected lives of five years. Pro forma disclosures for
the Company for the year ended March 31, 1999 utilizing the estimated fair value
of the options granted and an assumed 5% forfeiture rate are as follows:
<TABLE>
<CAPTION>
Basic Diluted
Net Earnings Earnings
(In thousands, except per share data) Income Per Share Per Share
==========================================================================================================
<S> <C> <C> <C>
As reported $3,807 $0.17 $0.17
Pro forma 3,685 0.17 0.17
==========================================================================================================
</TABLE>
Because the Company's stock options have characteristics significantly different
from those of traded options for which the Black-Scholes model was developed,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, the existing models, in management's opinion, do not
necessarily provide a reliable single measure of the fair value of its stock
options. In addition, the effect on reported net income and earnings per share
for the year ended March 31, 1999 may not be representative of the effects on
reported net income or earnings per share for future years.
<PAGE>
RECOGNITION AND RETENTION PLAN
The Company's shareholders also approved the Hudson River Bancorp, Inc.
Recognition and Retention Plan ("RRP") on January 5, 1999. The purpose of the
plan is to promote the long-term interests of the Company and its shareholders
by providing a stock-based compensation program to attract and retain officers
and directors. Under the RRP, 714,150 shares of authorized but unissued shares
are reserved for issuance under the plan. The Company also has the alternative
to fund the RRP with treasury stock.
On January 5, 1999, 714,150 shares were awarded under the RRP. The shares vest
over a period of either five or ten equal installments commencing one year from
the date of grant. The fair market value of the shares awarded under the plan
was $8.2 million at the grant date, and is being amortized to compensation
expense on a straight-line basis over the vesting periods of the underlying
shares. Compensation expense of $217 thousand was recorded in fiscal 1999, with
the remaining unearned compensation cost of $8.0 million shown as a reduction of
shareholders' equity at March 31, 1999. The shares awarded under the RRP were
transferred from treasury stock at cost with the difference between the fair
market value on the grant date and the cost of the shares recorded as a
reduction of retained earnings.
38
<PAGE>
====================
NOTE 9.
EMPLOYEE
BENEFIT
PLANS
PENSION PLAN
The Company maintains a non-contributory pension plan ("the Plan") with
Retirement Systems Incorporated ("RSI") Retirement Trust, covering substantially
all of its employees meeting certain eligibility requirements. The benefits are
computed as a percentage of the highest three-year average annual earnings, as
defined by the Plan, multiplied by years of credited service. The Plan limits
credited service for benefit calculations to a maximum of thirty years. The
amounts contributed to the Plan are determined annually on the basis of (a) the
maximum amount that can be deducted for federal income tax purposes or (b) the
amount certified by a consulting actuary as necessary to avoid an accumulated
funding deficiency as defined by the Employee Retirement Income Security Act of
1974. Contributions are intended to provide not only for benefits attributed to
service to date but also those expected to be earned in the future. Plan assets
consist primarily of investments in RSI Retirement Trust administered
fixed-income and equity funds.
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated financial statements at March 31:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
===========================================================================================================
<S> <C> <C>
Reconciliation of projected benefit obligation
Obligation at beginning of year $ 9,028 $ 8,183
Service cost 431 344
Interest cost 619 619
Actuarial loss 381 165
Benefits paid (421) (283)
- -----------------------------------------------------------------------------------------------------------
Obligation at end of year $10,038 $ 9,028
===========================================================================================================
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year $10,422 $ 9,272
Actual return on plan assets 1,157 1,376
Employer contributions 62 57
Benefits paid (421) (283)
- -----------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $11,220 $10,422
===========================================================================================================
Reconciliation of funded status
Funded status at end of year $ 1,182 $ 1,394
Unrecognized net transition asset -- (17)
Unrecognized net actuarial gain (287) (299)
Unrecognized prior service cost 46 55
- -----------------------------------------------------------------------------------------------------------
Prepaid pension cost at end of year $ 941 $ 1,133
===========================================================================================================
</TABLE>
<PAGE>
Net periodic pension cost included in the Company's consolidated income
statements for the years ended March 31 included the following components:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
===========================================================================================================
Components of net periodic pension cost
<S> <C> <C> <C>
Service cost $ 431 $ 344 $ 353
Interest cost 619 619 573
Expected return on plan assets (819) (731) (668)
Amortization of net transition asset (17) (54) (54)
Net amortization and deferral 9 9 9
- -----------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 223 $ 187 $ 213
===========================================================================================================
</TABLE>
39
<PAGE>
The actuarial assumptions used in determining the actuarial present value of the
projected benefit obligation as of March 31 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
==============================================================================================================
<S> <C> <C> <C>
Weighted-average assumptions
Discount rate 6.75% 7.00% 7.75%
Rate of compensation increase 5.00 5.00 5.50
Expected return on plan assets 8.00 8.00 8.00
==============================================================================================================
</TABLE>
POST-RETIREMENT BENEFITS
The Company provides certain post-retirement benefits to substantially all
employees and retirees. Active employees are eligible for retiree medical and
life insurance coverage upon reaching age 55 with 10 years of service. The
medical portion of the plan is contributory, with retiree contributions based on
years of service and their retirement date. The Company's contributions for
employees retiring on or after September 1, 1995 are limited to 150% of the
premium rates in effect at the time of retirement. The life insurance portion of
the plan is non-contributory, with the pre-retirement benefit equal to two times
annual earnings. The post-retirement life insurance benefit is reduced based on
the retiree's age and the length of time since retirement, with a maximum
retiree benefit of $50,000. Post-retirement dental coverage is in effect for a
closed group of retirees. The dental portion of the plan is non-contributory.
The funding policy of the plan is to pay claims and/or insurance premiums as
they come due.
The following table presents the amounts recognized in the Company's
consolidated financial statements at March 31:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
============================================================================================================
<S> <C> <C>
Reconciliation of accumulated post-retirement benefit obligation
Obligation at beginning of year $ 2,764 $ 2,579
Service cost 69 53
Interest cost 191 200
Actuarial loss 176 123
Benefits paid (152) (191)
Plan amendments (231) --
- ------------------------------------------------------------------------------------------------------------
Obligation at end of year $ 2,817 $ 2,764
============================================================================================================
Reconciliation of funded status
Unfunded post-retirement benefit obligation at end of year $(2,817) $(2,764)
Unrecognized net actuarial loss 341 164
Unrecognized transition obligation 1,890 2,008
Unrecognized prior service cost (231) --
- ------------------------------------------------------------------------------------------------------------
Accrued post-retirement benefit liability $ (817) $ (592)
============================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Net periodic post-retirement benefit cost included in the Company's consolidated
income statements for the years ended March 31 included the following
components:
(In thousands) 1999 1998 1997
============================================================================================================
<S> <C> <C> <C>
Components of net periodic post-retirement
benefit cost
Service cost $ 69 $ 53 $ 60
Interest cost 191 200 188
Amortization of transition obligation 118 118 118
Amortization of unrecognized gain -- (10) --
- ------------------------------------------------------------------------------------------------------------
Net periodic post-retirement benefit cost $378 $361 $366
============================================================================================================
</TABLE>
The discount rate used in determining the accumulated post-retirement benefit
obligation was 6.75%, 7.00% and 7.75% at March 31, 1999, 1998 and 1997,
respectively.
40
<PAGE>
For measurement purposes, a 6.50% annual rate of increase in the per capita cost
of covered health benefits was assumed for medical coverage for the year ended
March 31, 1999. This rate was assumed to decrease uniformly to 5.00% by 2002 and
to remain at that level thereafter. A 3.00% annual rate of increase in the per
capita cost of covered dental benefits was assumed for dental coverage. The
health care cost trend rate assumptions have a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated post-retirement
benefit obligation as of March 31, 1999 by $305 thousand (or 10.8%) and the
aggregate of the service and interest cost components of net periodic
post-retirement benefit cost for the year ended March 31, 1999 would increase by
$22 thousand (or 8.5%). Decreasing the assumed health care cost trend rate one
percentage point in each year would decrease the accumulated post-retirement
benefit obligation as of March 31, 1999 by $265 thousand (or 9.4%) and the
aggregate of the service and interest cost components of net periodic
post-retirement benefit cost for the year ended March 31, 1999 by $20 thousand
(or 7.7%).
401(K) SAVINGS PLAN
The Company also sponsors a defined contribution 401(k) Savings Plan covering
substantially all employees meeting certain eligibility requirements. The
Company matches 50% of employee pre-tax contributions up to a maximum
contribution by the Company of 4% of the employee's annual salary. The amount of
401(k) contribution expense was $152 thousand, $126 thousand and $117 thousand
for the years ended March 31, 1999, 1998 and 1997, respectively.
BENEFIT RESTORATION PLAN
During the year ended March 31, 1999, the Company adopted a Benefit Restoration
Plan for certain executive officers to restore benefits cut back in certain
employee benefit plans due to Internal Revenue Service regulations. The benefits
under this plan are unfunded, and as of March 31, 1999, the projected benefit
obligation was $72 thousand. The Company recorded an expense of $21 thousand
relating to this plan during the year ended March 31, 1999.
=================
NOTE 10.
EARNINGS
PER SHARE
The following table sets forth certain information regarding the calculation of
basic and diluted earnings per share for the year ended March 31, 1999. Earnings
of the Company prior to its initial public offering on July 1, 1998 are not
included in the calculations of earnings per share for the year ended March 31,
1999. Earnings per share information for years prior to the Company's initial
public offering is not applicable.
<TABLE>
<CAPTION>
Weighted-
Net Average Per Share
(In thousands, except share and per share amounts) Income Shares Amount
=======================================================================================================================
<S> <C> <C> <C>
Basic earnings per share $2,821 16,302,268 $0.17
Effect of potential common shares outstanding --
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $2,821 16,302,268 $0.17
=======================================================================================================================
</TABLE>
<PAGE>
At March 31, 1999, there were 1.2 million stock options and 714 thousand
unvested restricted stock awards not included in the above table as potential
common shares outstanding because the effect was anti-dilutive.
=================
NOTE 11.
INCOME TAXES
The components of income tax expense for the years ended March 31 are as
follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
===========================================================================================================================
<S> <C> <C> <C>
Current tax expense:
Federal $ 5,035 $ 3,030 $3,702
State 507 877 838
Deferred tax benefit (3,358) (2,004) (933)
- ---------------------------------------------------------------------------------------------------------------------------
Income tax expense $ 2,184 $ 1,903 $3,607
===========================================================================================================================
</TABLE>
41
<PAGE>
The following is a reconciliation of the expected income tax expense and the
actual income tax expense for the years ended March 31. The expected income tax
expense has been computed by applying the statutory federal tax rate to income
before income tax expense:
<TABLE>
<CAPTION>
(In thousands) 1999 1998 1997
===========================================================================================================
<S> <C> <C> <C>
Income tax at applicable federal statutory rate $2,037 $1,610 $3,151
Increase (decrease) in income tax expense
resulting from:
Tax exempt interest income (157) (10) (14)
State income taxes, net of federal tax benefit 232 207 459
Other 72 96 11
- -----------------------------------------------------------------------------------------------------------
Income tax expense $2,184 $1,903 $3,607
===========================================================================================================
</TABLE>
The tax effects of temporary differences and carryforwards that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
March 31 are presented below:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
===========================================================================================================
Deferred tax assets:
<S> <C> <C>
Allowance for loan losses $ 5,553 $ 3,632
Other real estate owned and repossessed property 235 237
Accrued post-retirement benefits 393 289
Deferred compensation 245 195
Charitable contribution carryforward for tax purposes 1,499 --
Unrealized loss on securities available for sale 431 3
Other 471 515
- -----------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 8,827 4,871
Valuation allowance (141) (141)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax assets 8,686 4,730
- -----------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (235) (250)
Bond discount accretion (316) (222)
Prepaid pension (388) (449)
Other (343) (191)
- -----------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (1,282) (1,112)
- -----------------------------------------------------------------------------------------------------------
Net deferred tax asset at end of year $ 7,404 $ 3,618
===========================================================================================================
</TABLE>
<PAGE>
A corporation's annual tax deduction for charitable contributions is subject to
a limitation based on a percentage of taxable income. Contributions in excess of
this limitation are carried forward and may be deducted in one or more of the
succeeding five tax years. As a result of the contribution of shares to the
Hudson River Bank & Trust Company Foundation, at March 31, 1999, the Company had
an unused charitable contribution carryforward of approximately $3.7 million
($1.5 million after tax), which is available for deduction through March 31,
2004.
The valuation allowance, as established by the Company at March 31, 1999 and
1998, takes into consideration the nature and timing of the deferred tax items
as well as the amount of available open tax carrybacks. The valuation allowance
relates to uncertainty about the realization of certain Federal and New York
State deferred tax assets. Based on recent historical and anticipated future
taxable income, management believes it is more likely than not that the Company
will realize its net deferred tax assets.
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically have
been determined using methods based on loss experience or a percentage of
taxable income. Tax bad debt reserves are maintained equal to the excess of
allowable deductions over actual bad debt losses and other reserve reductions.
These reserves consist of a defined base-year amount, plus additional amounts
("excess reserves") accumulated after the base year. Deferred tax liabilities
are recognized with respect to such excess reserves, as well as any portion of
the base-year amount which is expected to become taxable (or "recaptured") in
the foreseeable future.
42
<PAGE>
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal base-year reserve of $2.7 million and
"supplemental" reserve (as defined) of $10.5 million at both March 31, 1999 and
1998, respectively, and the state base-year reserve of $22.2 million and $21.9
million at March 31, 1999 and 1998, respectively, since the Bank does not expect
that these amounts will become taxable in the foreseeable future. The
unrecognized deferred tax liability with respect to the Federal base-year
reserve and supplemental reserve was $933 thousand and $3.5 million,
respectively, at both March 31, 1999 and 1998. The unrecognized deferred tax
liability with respect to the state base-year reserve was $1.3 million (net of
Federal benefit) at both March 31, 1999 and 1998.
=================
NOTE 12.
COMMITMENTS
AND CONTINGENT
LIABILITIES
A. OFF-BALANCE-SHEET FINANCING AND CONCENTRATIONS OF CREDIT
The Company is a party to certain financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include the Company's commitments to
extend credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated financial
statements. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments as it does for on-balance sheet
instruments.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
Contract amounts of financial instruments that represent credit risk as of March
31 are as follows:
<TABLE>
<CAPTION>
(In thousands) 1999 1998
==========================================================================================================
<S> <C> <C>
Commitments to extend credit $49,681 $28,552
Unused lines of credit 35,183 29,583
Standby letters of credit 6,935 3,298
- ----------------------------------------------------------------------------------------------------------
Total $91,799 $61,433
==========================================================================================================
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since certain commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral, if any,
required by the Company upon the extension of credit is based on management's
credit evaluation of the customer.
<PAGE>
Commitments to extend credit may be written on a fixed-rate basis exposing the
Company to interest rate risk given the possibility that market rates may change
between commitment and actual extension of credit.
Standby letters of credit are conditional commitments issued by the Company to
guarantee payment on behalf of a customer and guarantee the performance of a
customer to a third party. The credit risk involved in issuing these instruments
is essentially the same as that involved in extending loans to customers. Since
a portion of these instruments will expire unused, the total amounts do not
necessarily represent future cash requirements. Each customer is evaluated
individually for creditworthiness under the same underwriting standards used for
commitments to extend credit for on-balance sheet instruments. Company policies
governing loan collateral apply to standby letters of credit at the time of
credit extension.
Certain mortgage loans are written on an adjustable-rate basis and include
interest rate caps, which limit annual and lifetime increases in the interest
rates on such loans. Generally, adjustable-rate mortgages have an annual rate
increase cap of 2% and a lifetime rate increase cap of 5% to 6%. These caps
expose the Company to interest rate risk should market rates increase above
these limits. As of March 31, 1999 and 1998, approximately $135.4 million and
$185.4 million, respectively, of residential real estate loans had interest rate
caps.
43
<PAGE>
The Company generally enters into rate lock agreements at the time that
residential real estate loan applications are taken. These rate lock agreements
fix the interest rate at which the loan, if ultimately made, will be originated.
Such agreements may exist with borrowers with whom commitments to extend loans
have been made, as well as with individuals who have not yet received a
commitment. The Company makes its determination of whether or not to identify a
loan as held for sale at the time rate lock agreements are entered into.
Accordingly, the Company is exposed to interest rate risk to the extent that a
rate lock agreement is associated with a loan application or a loan commitment
which is intended to be held for sale, as well as with respect to loans held for
sale.
The Company had no rate lock agreements on loans intended to be held for sale or
conventional mortgage loans held for sale at March 31, 1999. At March 31, 1998,
the Company had rate lock agreements (certain of which relate to loan
applications for which no formal commitment had been made) and conventional
mortgage loans held for sale amounting to approximately $1.4 million.
In order to reduce the interest rate risk associated with the portfolio of
conventional mortgage loans held for sale, as well as outstanding loan
commitments and uncommitted loan applications with rate lock agreements which
are intended to be held for sale, the Company enters into agreements to sell
loans in the secondary market to unrelated investors on a loan-by-loan basis.
The Company did not have any commitments to sell conventional mortgage loans at
March 31, 1999. At March 31, 1998, the Company had commitments to sell
conventional fixed-rate mortgage loans amounting to approximately $1.2 million.
The remaining conventional mortgage loans held for sale, as well as the
outstanding loan commitments and uncommitted loan applications with rate lock
agreements which are intended to be held for sale, exposed the Company to
interest rate risk.
B. CONCENTRATIONS OF CREDIT
The Company originates residential loans (including home equity and construction
loans) and commercial-related loans primarily to customers located in the New
York State counties of Columbia, Albany, Rensselaer, Dutchess and Schenectady.
Manufactured home loans are originated primarily in New York State and in states
contiguous to New York. Financed insurance premiums are originated primarily in
New York, New Jersey and Pennsylvania. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon economic conditions in these areas.
C. LEASES
The Company leases certain of its branches and equipment under various
noncancelable operating leases. Rental expense for premises and equipment was
$243 thousand, $236 thousand and $204 thousand for the years ended March 31,
1999, 1998 and 1997, respectively. The future minimum payments by year and in
the aggregate under all significant noncancelable operating leases with initial
or remaining terms of one year or more as of March 31, 1999 are as follows:
<PAGE>
<TABLE>
<CAPTION>
(In thousands)
==========================================================================================================
<S> <C>
Years ending March 31,
2000 $ 279
2001 283
2002 255
2003 239
2004 198
Thereafter 1,975
- ----------------------------------------------------------------------------------------------------------
Total $3,229
==========================================================================================================
</TABLE>
D. SERVICED LOANS
The total amount of loans serviced by the Company for unrelated third parties
was approximately $46.6 million and $61.7 million at March 31, 1999 and 1998,
respectively.
E. RESERVE REQUIREMENT
The Company is required to maintain certain reserves of vault cash and/or
deposits with the Federal Reserve Bank. The amount of this reserve requirement,
included in cash and due from banks, was approximately $279 thousand and $388
thousand at March 31, 1999 and 1998, respectively.
44
<PAGE>
F. LIQUIDATION ACCOUNT
As part of the Bank's conversion from a mutual savings bank to a stock savings
bank, the Bank established a liquidation account in an amount equal to its total
equity as of December 31, 1997. The liquidation account will be maintained for
the benefit of eligible depositors who continue to maintain their accounts at
the Bank after the conversion. The liquidation account will be reduced annually
to the extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. Neither the Company nor the Bank may pay dividends that
would reduce shareholders' equity below the required liquidation account
balance.
G. CONTINGENT LIABILITIES
In the ordinary course of business, there are various legal proceedings pending
against the Company. Based on consultation with outside counsel, management
believes that the aggregate exposure if any, arising from such litigation would
not have a material adverse effect on the Company's consolidated financial
statements.
================
NOTE 13.
DISCLOSURES
ABOUT THE
FAIR VALUE
OF FINANCIAL
INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
that the Company disclose estimated fair values for its financial instruments.
The definition of a financial instrument includes many of the assets and
liabilities recognized in the Company's consolidated balance sheets, as well as
certain off-balance sheet items.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates of fair value
under SFAS No. 107.
<PAGE>
In addition, there are significant intangible assets that SFAS No. 107 does not
recognize, such as the value of "core deposits," the Company's branch network
and other items generally referred to as "goodwill."
SHORT-TERM FINANCIAL INSTRUMENTS
The fair value of certain financial instruments is estimated to approximate
their carrying value because the remaining term to maturity or period to
repricing of the financial instrument is less than 90 days. Such financial
instruments include cash and cash equivalents, accrued interest receivable,
securities sold under agreements to repurchase, other short-term borrowings and
accrued interest payable.
LOANS HELD FOR SALE
The estimated fair value of loans held for sale is based on quoted market rates
or, in the case where a firm commitment has been made to sell the loan, the firm
committed price.
SECURITIES
Securities available for sale and securities held to maturity are financial
instruments which are usually traded in broad markets. Fair values are generally
based upon market prices. If a quoted market price is not available for a
particular security, the fair value is determined by reference to quoted market
prices for securities with similar characteristics. The estimated fair value of
stock in the Federal Home Loan Bank of New York equals the carrying value since
the stock is non-marketable but redeemable at its par value.
LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type including residential real estate,
commercial real estate, other commercial loans and consumer loans. The estimated
fair value of performing loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the respective loan
portfolio.
45
<PAGE>
Estimated fair value for non-performing loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market information and specific borrower
information.
Management has made estimates of fair value discount rates that it believes to
be reasonable. However, because there is no market for many of these financial
instruments, management has no basis to determine whether the estimated fair
value would be indicative of the value negotiated in an actual sale.
DEPOSIT LIABILITIES
The estimated fair value of deposits with no stated maturity, such as savings,
N.O.W., money market, noninterest-bearing accounts and mortgagors' escrow
deposits, is regarded to be the amount payable on demand. The estimated fair
value of time deposit accounts is based on the discounted value of contractual
cash flows. The discount rate is estimated using the rates currently offered for
deposits of similar remaining maturities. The fair value estimates for deposits
do not include the benefit that results from the low-cost funding provided by
the deposit liabilities compared with the cost of borrowing funds in the market.
The carrying values and estimated fair values of financial assets and
liabilities (none of which were held for trading purposes) as of March 31 were
as follows:
<TABLE>
<CAPTION>
1999 1998
===========================================================================================================
Estimated Estimated
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
===========================================================================================================
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 12,722 $ 12,722 $ 34,273 $ 34,273
Loans held for sale -- -- 1,286 1,316
Securities available for sale 242,611 242,611 42,471 42,471
Securities held to maturity 23,041 23,235 65,194 65,482
Federal Home Loan Bank of New York stock 3,299 3,299 3,035 3,035
Loans receivable 578,099 582,692 506,978 506,615
Allowance for loan losses (14,296) -- (8,227) --
- -----------------------------------------------------------------------------------------------------------
Net loans receivable $563,803 $582,692 $498,751 $506,615
- -----------------------------------------------------------------------------------------------------------
Accrued interest receivable 5,701 5,701 4,402 4,402
Financial liabilities
Deposits:
Savings, N.O.W., money market and
noninterest-bearing accounts 289,335 289,335 269,015 269,015
Time deposit accounts 302,479 304,961 319,299 321,021
Securities sold under agreements to repurchase 845 845 -- --
Other short-term borrowings 27,600 27,600 2,000 2,000
Mortgagors' escrow deposits 3,869 3,869 3,723 3,723
Accrued interest payable 122 122 120 120
===========================================================================================================
</TABLE>
The fair value of commitments to extend credit, unused lines of credit and
standby letters of credit is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate commitments to extend credit and unused lines of credit, fair value
also considers the difference between current levels of interest rates and the
committed rates. Based upon the estimated fair value of commitments to extend
credit, unused lines of credit and standby letters of credit, there are no
significant unrealized gains or losses associated with these financial
instruments.
46
<PAGE>
====================
NOTE 14.
CONDENSED FINANCIAL
INFORMATION
OF THE
PARENT
COMPANY
The Parent Company began operations on July 1, 1998 in conjunction with the
Bank's mutual-to-stock conversion and the Parent Company's initial public
offering of its common stock. The following represents the Parent Company's
balance sheet as of March 31, 1999, and its income statement and statement of
cash flows for the period July 1, 1998 through March 31, 1999.
<TABLE>
<CAPTION>
BALANCE SHEET
(In thousands) March 31, 1999
===========================================================================================================
<S> <C>
Assets
Interest-bearing deposit with subsidiary bank $ 122
Securities purchased under agreements to resell to subsidiary bank 54,883
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 55,005
- -----------------------------------------------------------------------------------------------------------
Securities available for sale 1,196
Loan to ESOP 17,200
Other assets 5,907
Investment in equity of subsidiary bank 140,123
- -----------------------------------------------------------------------------------------------------------
Total assets $219,431
===========================================================================================================
Liabilities and Shareholders' Equity
Other liabilities $ 90
Total shareholders' equity 219,341
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $219,431
===========================================================================================================
For the Period
INCOME STATEMENT July 1, 1998 through
(In thousands) March 31, 1999
===========================================================================================================
Interest and dividend income
Interest-bearing deposit with subsidiary bank $ 4
Securities purchased under agreements to resell to subsidiary bank 2,577
Securities available for sale 12
Loan to ESOP 1,118
- -----------------------------------------------------------------------------------------------------------
Total interest and dividend income 3,711
- -----------------------------------------------------------------------------------------------------------
Other operating income 111
- -----------------------------------------------------------------------------------------------------------
Other operating expenses
Compensation and benefits 143
Legal and other professional fees 106
Postage and item transportation 15
Charitable foundation contribution 5,200
Other expenses 341
- -----------------------------------------------------------------------------------------------------------
Total other operating expenses 5,805
- -----------------------------------------------------------------------------------------------------------
Loss before income tax benefit and equity in undistributed earnings of subsidiary bank (1,983)
Income tax benefit 812
Equity in undistributed earnings of subsidiary bank 3,992
- -----------------------------------------------------------------------------------------------------------
Net income $ 2,821
===========================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Period
STATEMENT OF CASH FLOWS July 1, 1998 through
(In thousands) March 31, 1999
===========================================================================================================
<S> <C>
Cash flows from operating activities
Net income $ 2,821
Adjustments to reconcile net income to net cash used in operating activities:
Charitable foundation contribution 5,200
Amortization of restricted stock awards 217
ESOP stock released for allocation 1,134
Net increase in other assets (5,920)
Net increase in other liabilities 90
Equity in undistributed earnings of subsidiary bank (3,992)
- -----------------------------------------------------------------------------------------------------------
Total adjustments (3,271)
- -----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (450)
- -----------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Investment in equity of subsidiary bank (67,626)
Purchases of securities available for sale (1,160)
Net increase in loan receivable from ESOP (17,200)
- -----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (85,986)
- -----------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from stock offering 169,967
Purchase of treasury stock (10,098)
Acquisition of common stock by ESOP (18,428)
- -----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 141,441
- -----------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 55,005
Cash and cash equivalents at beginning of period --
- -----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 55,005
===========================================================================================================
Supplemental disclosures of non-cash investing and financing activities
Recognition of subsidiary bank's total equity on date of Parent Company's
investment in equity of subsidiary bank $ 69,365
Adjustment of securities available for sale to fair value, net of tax $ 23
Adjustment of subsidiary bank's securities available for sale to fair value, net of tax $ (860)
===========================================================================================================
</TABLE>
48
<PAGE>
Hudson River Bancorp, Inc.
===============================
CORPORATE INFORMATION
HUDSON RIVER BANCORP, INC. AND
HUDSON RIVER BANK & TRUST COMPANY
BOARD OF DIRECTORS
Carl A. Florio, CPA President and
Chief Executive Officer
Earl Schram, Jr. Chairman of the Board
Attorney and President
Connor, Curran & Schram, P.C.
Stanley Bardwell, M.D. Retired Physician
William E. Collins Retired President and
Chief Executive Officer
Hudson City Savings Institution
John E. Kelly Chairman of the Board
Berkshire Telephone Corp.
Joseph W. Phelan President
Taconic Farms, Inc.
William H. (Tony) Jones President and Publisher
Roe Jan Independent Publishing Co., Inc.
Marilyn A. Herrington Vice President and Secretary
Herrington-Yaffe Auto Center
Marcia M. Race Retired
Assistant to the President
Hudson City Savings Institution
Trustee Emeritus Warren H. Bohnsack
Morton A. Ginsberg
EXECUTIVE OFFICERS
Carl A. Florio, CPA President and
Chief Executive Officer
Timothy E. Blow, CPA Chief Financial Officer
Sidney D. Richter Senior Vice President, Lending
Pamela M. Wood Senior Vice President, Operations
HUDSON RIVER BANK & TRUST COMPANY
OFFICERS
Daniel Cheeseman Commercial Lending
Carol Dube Information Technology
Susan Hollister Human Resources
Lawrence Longo, Jr. Mortgage Originations
Michael Mackay Loan Servicing
James Mackerer Commercial Lending and Facilities
Ellen Miller Retail Banking
<PAGE>
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of Hudson River Bancorp, Inc. will
be held at 3:00 pm on August 19, 1999 at the St. Charles
Hotel & Restaurant, Hudson, NY.
STOCK TRANSFER AGENT & REGISTRAR
Shareholders wishing to change name, address, or ownership of stock, or to
report lost certificates and/or consolidate accounts are asked to contact the
Company's stock registrar and transfer agent directly at:
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948
ANNUAL REPORT ON FORM 10K
For the 1999 fiscal year, Hudson River Bancorp, Inc. will file an Annual Report
on Form 10K. Shareholders wishing a copy may obtain one free of charge by
writing:
Holly E. Rappleyea
Corporate Secretary
Hudson River Bancorp, Inc.
One Hudson City Centre
Hudson, NY 12534
STOCK LISTING
The common stock of Hudson River Bancorp, Inc. trades
on the Nasdaq Stock Market under the symbol HRBT.
<TABLE>
<CAPTION>
STOCK PRICE
Quarter Ending High Low Dividend
- ----------------------------------------------------------------------
<S> <C> <C> <C>
September 30, 1998 $13.75 $9.38 --
- ----------------------------------------------------------------------
December 31, 1998 11.75 8.75 --
- ----------------------------------------------------------------------
March 31, 1999 12.00 10.06 --
- ----------------------------------------------------------------------
</TABLE>
<PAGE>
===========================
HUDSON RIVER BANCORP, INC.
ONE HUDSON CITY CENTRE
HUDSON, NY 12534
(518) 828-4600
www.hudsonriverbank.com
[GRAPHIC OMITTED]
BRANCH LOCATIONS
Albany
Chatham
Copake
East Greenbush
Greenport-Fairview Plaza
Greenport-Towne Center
Hillsdale
Hudson
Millerton
Nassau
North Greenbush
Rotterdam
Valatie
EXHIBIT 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
State of
Incorporation
Percent of or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S> <C> <C> <C>
Hudson River Bancorp, Inc. Hudson River Bank & Trust 100% Delaware
Company
Hudson River Bank & Trust Company Hudson City Associates, Inc. 100% New York
Hudson River Bank & Trust Company Hudson River Mortgage 100% New York
Corporation
Hudson River Bank & Trust Company Hudson River Funding Corp. 99.9% New York
Hudson River Bank & Trust Company Hudson City Centre, Inc. 100% New York
</TABLE>
EXHIBIT 23
CONSENTS OF EXPERTS AND COUNSEL
The Board of Directors
Hudson River Bancorp, Inc.:
We consent to incorporation by reference in the Registration Statement (No.
333-58615) on Form S-8 of Hudson River Bancorp, Inc. of our report dated May 14,
1999, relating to the consolidated balance sheets of Hudson River Bancorp, Inc.
and subsidiary as of March 31, 1999 and 1998, and the related consolidated
income statements, statements of changes in shareholders' equity and cash flows
for each of the years in the three-year period ended March 31, 1999, which
report appears in the March 31, 1999 annual report on Form 10-K of Hudson River
Bancorp, Inc.
/s/KPMG LLP
- ---------------
KPMG LLP
Albany, New York
June 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 12,722
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 242,611
<INVESTMENTS-CARRYING> 26,341
<INVESTMENTS-MARKET> 26,535
<LOANS> 578,099
<ALLOWANCE> 14,296
<TOTAL-ASSETS> 881,139
<DEPOSITS> 591,814
<SHORT-TERM> 28,445
<LIABILITIES-OTHER> 41,539
<LONG-TERM> 0
0
0
<COMMON> 179
<OTHER-SE> 219,162
<TOTAL-LIABILITIES-AND-EQUITY> 881,139
<INTEREST-LOAN> 47,503
<INTEREST-INVEST> 13,307
<INTEREST-OTHER> 2,716
<INTEREST-TOTAL> 63,526
<INTEREST-DEPOSIT> 25,844
<INTEREST-EXPENSE> 26,000
<INTEREST-INCOME-NET> 37,526
<LOAN-LOSSES> 7,341
<SECURITIES-GAINS> 36
<EXPENSE-OTHER> 26,612
<INCOME-PRETAX> 5,991
<INCOME-PRE-EXTRAORDINARY> 5,991
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,807
<EPS-BASIC> .17
<EPS-DILUTED> .17
<YIELD-ACTUAL> 4.82
<LOANS-NON> 9,944
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,300
<ALLOWANCE-OPEN> 8,227
<CHARGE-OFFS> 3,191
<RECOVERIES> 1,919
<ALLOWANCE-CLOSE> 14,296
<ALLOWANCE-DOMESTIC> 12,467
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,829
</TABLE>
