UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
As of August 3, 1999, there were issued and outstanding 16,951,063
shares of the Registrant's Common Stock.
<PAGE>
FORM 10-Q
HUDSON RIVER BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 1999
and March 31, 1999
Consolidated Income Statements for the three
months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows for
the three months ended June 30, 1999 and
1998
Notes to Unaudited Consolidated Interim
Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
EXHIBIT INDEX
SIGNATURE PAGE
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
Item 1. Financial Statements (unaudited)
June 30, March 31,
(In thousands, except share and per share data) 1999 1999
--------- ---------
<S> <C> <C>
Assets
Cash and due from banks .............................................. $ 12,312 $ 12,722
--------- ---------
Cash and cash equivalents ...................................... 12,312 12,722
--------- ---------
Securities available for sale, at fair value ......................... 215,017 242,611
Securities held to maturity (fair value of $18,859 and $23,235) ...... 18,785 23,041
Federal Home Loan Bank of New York stock, at cost .................... 3,299 3,299
Loans receivable ..................................................... 603,807 578,099
Allowance for loan losses ............................................ (15,736) (14,296)
--------- ---------
Net loans receivable ............................................ 588,071 563,803
--------- ---------
Accrued interest receivable .......................................... 5,290 5,701
Premises and equipment, net .......................................... 16,738 16,807
Other real estate owned and repossessed property ..................... 1,683 2,508
Other assets ......................................................... 11,844 10,647
--------- ---------
Total assets .................................................... $ 873,039 $ 881,139
========= =========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Savings ......................................................... 148,136 145,985
N.O.W. and money market ......................................... 100,206 99,390
Time deposits ................................................... 303,195 302,479
Noninterest-bearing deposits .................................... 47,206 43,960
--------- ---------
Total deposits ............................................. 598,743 591,814
--------- ---------
Securities sold under agreements to repurchase ..................... 1,263 845
Other short-term borrowings ........................................ 44,900 27,600
Mortgagors' escrow balances ........................................ 6,683 3,869
Other liabilities .................................................. 9,684 37,670
--------- ---------
Total liabilities .......................................... 661,273 661,798
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
(continued)
June 30, March 31,
(In thousands, except share and per share data) 1999 1999
--------- ---------
<S> <C> <C>
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 June 30, 1999 and March 31, 1999 179 179
Additional paid-in capital ......................................... 174,894 174,894
Unallocated common stock held by ESOP .............................. (17,200) (17,200)
Unvested restricted stock awards ................................... (7,779) (7,996)
Treasury stock, at cost (823,500 shares at June 30, 1999 and
157,500 shares at March 31, 1999) .......................... (8,849) (1,663)
Retained earnings, substantially restricted ........................ 73,470 71,893
Accumulated other comprehensive loss ............................... (2,949) (766)
--------- ---------
Total shareholders' equity ................................. 211,766 219,341
--------- ---------
Total liabilities and shareholders' equity ................. $ 873,039 $ 881,139
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
For the three
months ended June 30,
---------------------
(In thousands, except per share data) 1999 1998
------- -------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans ........................ $12,931 $12,073
Securities available for sale ..................... 3,516 1,115
Securities held to maturity ....................... 322 1,017
Federal funds sold ................................ -- 603
Securities purchased under agreements to resell ... -- 189
Federal Home Loan Bank of New York stock .......... 55 57
------- -------
Total interest and dividend income ........ 16,824 15,054
------- -------
Interest expense:
Deposits .......................................... 5,760 7,129
Securities sold under agreements to repurchase .... 6 --
Other short-term borrowings ....................... 473 34
------- -------
Total interest expense .................... 6,239 7,163
------- -------
Net interest income ....................... 10,585 7,891
Provision for loan losses .............................. 1,700 2,216
------- -------
Net interest income after
provision for loan losses ............. 8,885 5,675
------- -------
Other operating income:
Service charges on deposit accounts ............... 332 333
Loan servicing income ............................. 37 47
Net securities transactions ....................... 79 6
Net gain on sales of loans held for sale .......... -- 49
Other income ...................................... 144 189
------- -------
Total other operating income .............. 592 624
------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
(continued)
For the three
months ended June 30,
---------------------
(In thousands, except per share data) 1999 1998
------- -------
<S> <C> <C>
Other operating expenses:
Compensation and benefits ......................... 3,098 2,421
Occupancy ......................................... 387 383
Equipment ......................................... 590 380
Other real estate owned and
repossessed property expenses ................ 403 141
Legal and other professional fees ................. 232 96
Postage and item transportation ................... 179 194
Other expenses .................................... 1,412 1,053
------- -------
Total other operating
expenses ............................ 6,301 4,668
------- -------
Income before income tax expense ....................... 3,176 1,631
Income tax expense ..................................... 1,115 645
------- -------
Net income ................................ $ 2,061 $ 986
======= =======
Basic earnings per share ............................... $ 0.13 $ --
======= =======
Diluted earnings per share ............................. $ 0.13 $ --
======= =======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
For The Three Months Ended June 30,
-----------------------------------
(In thousands) 1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 2,061 $ 986
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation .............................................................. 486 336
Provision for loan losses ................................................. 1,700 2,216
Amortization of restricted stock awards ................................... 217 --
Net securities transactions ............................................... (79) (6)
Net gain on sales of loans held for sale .................................. -- (49)
Net loans originated for sale ............................................. -- (7,223)
Proceeds from sales of loans held for sale ................................ -- 8,325
Adjustments of other real estate owned and
repossessed property to fair value ..................................... 320 77
Net gain on sales of other real estate owned
and repossessed property ............................................... (212) (122)
Net decrease (increase) in accrued interest receivable .................... 411 (942)
Net decrease (increase) in other assets ................................... 339 (23)
Net decrease in other liabilities ......................................... (27,986) (4,359)
--------- ---------
Total adjustments ...................................................... (24,804) (1,770)
--------- ---------
Net cash used in operating activities .................................. (22,743) (784)
--------- ---------
Cash flows from investing activities:
Proceeds from sales of securities available for sale ........................ 2,959 --
Proceeds from maturities, calls and paydowns of securities available for sale 25,983 4,145
Purchases of securities available for sale .................................. (4,988) (57,648)
Proceeds from maturities, calls and paydowns of securities held to maturity . 4,256 7,231
Net loans made to customers ................................................. (26,666) (10,846)
Proceeds from sales of and payments received on
other real estate owned and repossessed property .......................... 1,415 1,327
Purchases of premises and equipment ......................................... (417) (158)
--------- ---------
Net cash provided by (used in) investing activities .................... 2,542 (55,949)
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(continued)
For The Three Months Ended June 30,
-----------------------------------
(In thousands) 1999 1998
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits .................................................... 6,929 323,438
Net increase in securities sold under agreements to repurchase .............. 418 --
Net increase in other short-term borrowings ................................. 17,300 --
Net increase in mortgagors' escrow balances ................................. 2,814 2,701
Dividends paid .............................................................. (484)
Purchase of treasury stock .................................................. (7,186) --
--------- ---------
Net cash provided by financing activities .............................. 19,791 326,139
--------- ---------
Net (decrease) increase in cash and cash equivalents ............................. (410) 269,406
Cash and cash equivalents at beginning of period ................................. 12,722 34,273
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 12,312 $ 303,679
========= =========
Supplemental cash flow information:
Interest paid ............................................................... $ 6,244 $ 6,658
========= =========
Taxes paid .................................................................. $ -- $ --
========= =========
Supplemental disclosures of non-cash investing and financing
activities:
Loans transferred to other real estate owned and repossessed property ....... $ 698 $ 1,517
========= =========
Adjustment of securities available for sale to fair value, net of tax ....... $ (2,183) $ 75
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
Hudson River Bancorp, Inc.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring accruals) considered necessary for a fair
presentation have been included. The accompanying unaudited consolidated interim
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K as of and for the year ended March 31, 1999. Operating
results for the three month period ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the full year.
2. On April 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income includes the reported net income
of a company adjusted for certain items that are currently accounted for as
direct entries to equity, such as the mark to market adjustment on securities
available for sale, foreign currency items and minimum pension liability
adjustments. At the Company, comprehensive income represents net income plus
other comprehensive income, which consists of the net change in unrealized gains
or losses on securities available for sale for the period, net of tax.
Accumulated other comprehensive income represents the net unrealized gains or
losses on securities available for sale, net of tax, as of the balance sheet
dates. Comprehensive (loss) income for the three month periods ended June 30,
1999 and 1998 was $(122) thousand and $1.1 million, respectively.
3. The following table sets forth certain information regarding the
calculation of basic and diluted earnings per share for the three month period
ended June 30, 1999. Earnings per share information for periods ending prior to
the Company's initial public offering on July 1, 1998 is not applicable. 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 Company's Employee Stock Ownership Plan are not included in
the weighted-average number of common shares outstanding for either the basic or
diluted earnings per share calculations.
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended
June 30, 1999
-------------
(In thousands, except for share and per share data)
Weighted Per
Net Average Share
Income Shares Amount
---------- ---------- --------
<S> <C> <C> <C>
Basic earnings per share .................... $ 2,061 15,293,786 $ 0.13
Effect of potential common shares outstanding --
---------- ---------- --------
Diluted earnings per share .................. $ 2,061 15,293,786 $ 0.13
========== ========== ========
</TABLE>
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
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 three months ended June
30, 1999, with comparisons to 1998 as applicable. The unaudited consolidated
interim financial statements and related notes, as well as the 1999 Annual
Report to Shareholders should be read in conjunction with this review. Amounts
in prior period consolidated financial statements are reclassified whenever
necessary to conform to the current period's presentation.
On July 1, 1998, Hudson River Bank & Trust Company (the "Bank")
completed its conversion from a New York chartered mutual savings bank to a New
York chartered stock savings bank (the "Conversion"). Concurrent with the
Conversion, Hudson River Bancorp, Inc. 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. An additional 520,012 common shares were contributed to Hudson
River Bank & Trust Company Foundation. The Company used a portion of the
proceeds to purchase all of the common stock of the Bank. Prior to the initial
public offering, Hudson River Bancorp, Inc. had no results of operations,
therefore results of operations prior to July 1, 1998 reflect 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. 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 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 paid on its liabilities, primarily consisting of deposits
and borrowings. Net income is also affected by provisions for loan losses and
other operating income, such as 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.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
FORWARD-LOOKING STATEMENTS
- --------------------------
When used in this filing or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation 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 service
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.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
affect the Company's financial performance and could cause the Company's actual
results or circumstances for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligations, to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
MERGER AND ACQUISITION 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 consideration 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. The transaction is expected to
close in the Company's second fiscal quarter subject to regulatory and SFS
shareholder approval. SFS had total assets of $176.1 million as of March 31,
1999 and operates four branches within Schenectady County.
OVERVIEW
- --------
The Company realized net income for the three months ended June 30,
1999 amounting to $2.1 million, up $1.1 million from the $986 thousand earned
during the three months ended June 30, 1998. The increase was primarily a result
of higher net interest income (up $2.7 million) and a lower provision for loan
losses (down $516 thousand), partially offset by higher other operating expenses
(up $1.6 million) and higher income tax expense (up $470 thousand). The Company
earned $.13 per share for the three months ended June 30, 1999 and its return on
average assets was .95%, up from .54% for the comparable period a year earlier.
The Company's return on average equity was 3.82% for the three months ended June
30, 1999, down from 5.71% for the three months ended June 30, 1998. See Table A,
"Financial Highlights".
ASSET/LIABILITY MANAGEMENT
- --------------------------
The Company attempts to maximize net interest income, and net income,
while actively managing its liquidity and interest rate sensitivity through the
mix of various core deposits and other sources of funds, which in turn, fund an
appropriate mix of earning assets. The changes in the Company's asset mix and
sources of funds, and the resultant impact on net interest income are discussed
below.
Earning Assets
Total average earning assets increased to $837.1 million for the three
months ended June 30, 1999, up from $703.0 million in 1998. This increase was
primarily funded by the Company's initial public offering. Interest and dividend
income for the three months ended June 30, 1999 was $16.8 million, up $1.8
million from 1998. The increase in average balances was the primary reason for
this increase, offset by lower yields on these assets, 8.06% in 1999 down from
8.59% in 1998. Earning assets at June 30, 1999 were $840.9 million, down
slightly from $847.1 million at March 31, 1999.
Loans
The average balance of loans increased to $590.5 million for the three
months ended June 30, 1999, up $76.4 million from the $514.1 million average in
the prior year. The yield on loans decreased 64 basis points, from 9.42% in 1998
to 8.78% in 1999. Interest income on loans increased to $12.9 million for the
three months ended June 30, 1999 from $12.1 million in 1998. The increase in
average balances resulted in a $1.7 million increase in interest income which
was partially offset by an $853 thousand decrease in interest income due to
lower rates.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Total loans were $603.8 million at June 30, 1999, up $25.7 million from
the $578.1 million at March 31, 1999. Loans secured by residential real estate
increased from $295.5 million, or 51.1% of total loans at March 31, 1999, to
$311.6 million, or 51.6% of total loans at June 30, 1999. Commercial real estate
loans increased $12.9 million to $104.4 million at June 30, 1999 from $91.5
million at March 31, 1999. Commercial loans increased to $33.0 million at June
30, 1999 from $29.0 million at March 31, 1999. These increases were offset by
decreases of $2.3 million in manufactured housing loans and $8.1 million in
financed insurance premium loans. Management intends on continuing to reduce the
portfolio of manufactured housing loans gradually through normal paydown
activity while it continues its focus on commercial real estate and commercial
lending, as well as residential lending. The decrease in financed insurance
premiums is a seasonal fluctuation as the majority of this business is written
during the quarter ending March 31 and is paid down over the subsequent three
quarters. See Table D, "Loan Portfolio Analysis".
Securities
The average balance of securities available for sale and securities
held to maturity (collectively "securities") increased $112.6 million to $243.2
million for the three months ended June 30, 1999, up from $130.6 million for the
three months ended June 30, 1998. This increase was a direct result of the
Company's initial public offering. Interest income earned on securities was $3.8
million in 1999, up $1.7 million from the $2.1 million earned in 1998. The
growth in the average balances of securities resulted in the increase in
interest and dividend income while the fluctuations in average rates did not
have a significant impact.
Securities at June 30, 1999 were $233.8 million, down $31.9 million
from the $265.7 million the Company held as of March 31, 1999. The decrease was
almost entirely due to calls, maturities and paydowns of securities.
Reinvestment of the proceeds were primarily directed to the loan portfolio to
accommodate the growth experienced in that asset category. Management is
continuing to allow the balance of securities held to maturity to decrease with
new purchases of securities directed to the securities available for sale
classification.
Federal Funds Sold and Securities Purchased Under Agreements to Resell
The average balance of federal funds sold and securities purchased
under agreements to resell was $55.2 million for the three months ended June 30,
1998, generating $792 thousand in interest income for that time period. The
Company had no federal funds sold or securities purchased under agreements to
resell during the quarter ended June 30, 1999 as these asset categories were
reinvested in the higher yielding loan and securities portfolios during the
latter stages of the year ended March 31, 1999. For the immediate future, the
Company does not anticipate utilizing this asset category for significant
investments other than on a temporary basis as market conditions warrant.
Funding Sources
The Company utilizes traditional deposit products such as time, savings
and N.O.W. and money market deposits as its primary source for funding, however,
other sources such as short-term borrowings are utilized as necessary to support
the Company's growth in assets and to achieve interest rate sensitivity
objectives. The average balance of interest-bearing liabilities decreased to
$595.9 million for the three months ended June 30, 1999 from $626.3 million for
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
the three months ended June 30, 1998. This overall decrease in interest-bearing
liabilities is attributed to the Company's initial public offering which raised
$170 million in net proceeds as well as an increase in noninterest-bearing
liabilities from $35.1 million for the three months ended June 30, 1998 to $42.4
million in 1999. This decrease in average balances, as well as a decline in the
average rates paid on interest-bearing liabilities from 4.59% for the three
months ended June 30, 1998 to 4.20% in 1999, resulted in a decline in interest
expense to $6.2 million in 1999, down from $7.2 million in 1998.
Interest-bearing liabilities at June 30, 1999 were $604.4 million, up
from $580.2 million at March 31, 1999. This increase was a result of the need to
fund the growth in assets of the Company, primarily in the loan portfolio.
Deposits
The average balance of savings accounts decreased $51.1 million to
$146.2 million for the three months ended June 30, 1999, down from $197.3
million for the same period in 1998. This decrease is due to the stock
subscriptions received in the prior year relating to the Company's initial
public offering, which temporarily increased deposits. Interest expense on
savings accounts decreased from $1.7 million for the three months ended June 30,
1998 to $1.1 million in 1999. The decrease in the average balance resulted in a
$403 thousand decrease in interest expense for 1999, while the decline in
average rates paid from 3.46% to 3.02% resulted in the remainder of the total
decrease in interest expense for 1999.
The average balance of time deposits decreased from $319.4 million for
the three months ended June 30, 1998 to $301.9 million for the three months
ended June 30, 1999. Interest expense on time deposits declined a total of $758
thousand in 1999 as compared to 1998. In addition to the decrease in average
balances, lower average rates paid on time deposits of 5.19% in 1999 down from
5.85% in 1998 contributed to the reduction in interest expense.
Total deposits, including $47.2 million of noninterest-bearing
deposits, were $598.7 million at June 30, 1999, up from $591.8 million ($44.0
million of noninterest-bearing deposits) at March 31, 1999. These increases were
a result of the Company's continued focus on commercial services, including
commercial deposits, as well as the opening of our thirteenth branch at the end
of March 1999. The opening of the Company's fourteenth branch is currently
planned for the third fiscal quarter ending December 31, 1999.
Other Short-term Borrowings
The average balance of other short-term borrowings increased to $38.5
million for the three months ended June 30, 1999 from $2.3 million in 1998.
Interest expense on these borrowings was $473 thousand in 1999, up $439 thousand
from 1998. Short-term borrowings were $44.9 million at June 30, 1999, up from
$27.6 million at March 31, 1999. This increase is a result of the funding of
amounts due to insurance companies relating to the Company's financed insurance
premium loans. These amounts due were accrued in other liabilities as of March
31, 1999 and paid in early April 1999. Management expects borrowings to increase
in future periods when the pending SFS acquisition is consummated.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Net Interest Income
Net interest income for the three months ended June 30, 1999 was $10.6 million,
up from the $7.9 million for the three months ended June 30, 1998. The increase
was the result of the increase in average earning assets, the decrease in
average interest-bearing liabilities, and lower rates paid on interest-bearing
liabilities. The impact of these factors was offset in part by lower rates
earned on average earning assets. As a result of these volume and rate
fluctuations, the Company's net interest margin for the three months ended June
30, 1999 was 5.07%, up from 4.50% for the three months ended June 30, 1998. See
Table B, "Average Balances, Interest and Yields" and Table C, "Volume and Rate
Analysis".
RISK MANAGEMENT
- ---------------
Credit Risk
Credit risk is managed through the interrelationship of loan officer
lending authorities, Board of Director oversight, loan policies, a credit
administration department, an internal loan review function, and a problem loan
committee. These components of the Company's underwriting and monitoring
functions are critical to the timely identification, classification and
resolution of problem credits.
Non-performing Assets
- ---------------------
Non-performing assets include non-performing loans (loans in a
non-accrual status, loans that have been restructured, and loans past due 90
days or more and still accruing interest) and assets which have been foreclosed
or repossessed. Foreclosed assets typically represent residential or commercial
properties while repossessed property is primarily manufactured homes abandoned
by their owners or repossessed by the Company.
Total non-performing assets at June 30, 1999 were $17.3 million or
1.99% of total assets, up from $12.5 million or 1.41% at March 31, 1999. The
$4.9 million increase in total non-performing assets is due to a $5.7 million
increase in non-performing loans, offset by an $825 thousand decrease in
foreclosed and repossessed assets.
The increase in non-performing loans was the result of a $6.1 million
increase in financed insurance premium loans placed on non-accrual. These loans
are placed on non-accrual usually within 30 days of a missed payment and
collection procedures from insurance companies of the unearned premiums can take
90 days or longer. The increase was a by-product of the Company's growth in this
lending category as of March 31, 1999 and should be a seasonal increase based
upon the Company's past experience with these loans.
The $825 thousand decrease in foreclosed and repossessed assets was
made up of a $545 thousand reduction of repossessed manufactured homes with the
remainder made up of reductions in foreclosed residential and commercial
properties.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Allowance and Provision For Loan Losses
- ---------------------------------------
The allowance for loan losses at June 30, 1999 was $15.7 million, up
from $14.3 million at March 31, 1999. Although the allowance for loan losses
increased as of June 30, 1999 as compared with March 31, 1999 the allowance as a
percentage of non-performing loans decreased from 143.8% at March 31, 1999 to
100.5% at June 30, 1999. 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. The increase in the level of
non-performing loans at June 30, 1999 resulted in the reduction of the allowance
to non-performing loans ratio. Net charge-offs for the three months ended June
30, 1999 were $260 thousand, down from $796 thousand for the same period in
1998.
As a result of management's analysis of the risk characteristics of the
lending portfolio, trends and levels of non-performing and other delinquent
loans, a provision for loan losses of $1.7 million for the three months ended
June 30, 1999 was recorded. The $1.7 million provision is down $516 thousand
from the $2.2 million provision recorded for the three months ended June 30,
1998. The Company continues to maintain certain portfolios of loans with higher
credit risk, such as manufactured housing loans, commercial loans and financed
insurance premiums loans. Net charge-offs, risk elements of the Company's loan
portfolio, economic conditions in the Company's market area and non-performing
loan balances are the primary factors which are considered in determining the
levels of the Company's provision for loan losses. The Company anticipates that
the provision for loan losses will continue to approximate current levels in the
near term to accommodate planned growth in loans and the portfolio's changing
risk profile, 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. See Table E, "Non-Performing Assets" and Table F, "Loan Loss
Experience".
Market Risk
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Company's
business activities.
Interest rate risk is defined as an exposure to a movement in interest
rates that could have an adverse effect on the Company's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when earning
assets mature or reprice more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net income.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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 income.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long- and short-term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to increase
its net interest margin. The Company's results of operations and net portfolio
values remain vulnerable to changes in interest rates and to fluctuations in the
difference between long- and short-term interest rates.
Interest rate risk analyses performed by the Company indicate that the
Company is asset sensitive, or its earning assets mature or reprice more quickly
than its interest-bearing liabilities. As a result, falling interest rates could
result in a decrease in net 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 fixed rate 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. There have been no significant changes in
the Company's interest rate sensitivity since March 31, 1999.
Liquidity Risk
Liquidity is defined as the ability to generate sufficient cash flow to meet all
present and future funding commitments, depositor withdrawals and operating
expenses. Management monitors the Company's liquidity position on a daily basis
and evaluates its ability to meet depositor withdrawals or make new loans or
investments.
The Company's cash inflows result primarily from loan repayments,
maturities and calls of securities held to maturity and securities available for
sale, new deposits, and to a lessor extent, drawings upon the Company's credit
lines with the Federal Home Loan Bank of New York. The Company's cash outflows
consist of 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 the use of borrowings.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Management believes that the level of the Company's liquid assets combined with
daily monitoring of cash inflows and outflows provide adequate liquidity to fund
outstanding loan commitments, meet daily withdrawal requirements of depositors,
and meet all other daily obligations of the Company.
CAPITAL RESOURCES
- -----------------
Consistent with its goal to operate a sound and profitable financial
organization, the Company actively seeks to maintain a "well-capitalized"
institution in accordance with regulatory standards. Total equity was $211.8
million at June 30, 1999, 24.26% of total assets on that date. As of March 31,
1999, total equity was $219.3 million or 24.89% of total assets. This reduction
in the equity to assets ratio is reflective of management's objectives to
leverage its capital through asset growth, a dividend policy ($0.03 per share
cash dividend declared and paid during the quarter ended June 30, 1999) and a
share repurchase program. The Company completed a 5% share repurchase program
during July 1999 and announced intentions to begin a 10% share repurchase
program over the succeeding 12 months. As of June 30, 1999, the Company and the
Bank exceeded all of the capital requirements of its regulators.
OTHER OPERATING INCOME AND EXPENSES
- -----------------------------------
Total other operating income was $592 thousand for the three months
ended June 30, 1999 down slightly from the $624 thousand earned for the same
period in 1998. Other operating income is composed primarily of service charges
on deposit accounts, loan servicing income and net securities transactions.
Income from service charges on deposit accounts remained stable at approximately
$332 thousand for both 1999 and 1998. Loan servicing income decreased slightly
due to the reductions in the Company's loan servicing portfolio as a result of
paydowns. The Company realized gains amounting to $79 thousand from net
securities transactions during the three months ended June 30, 1999, up $73
thousand from the amounts realized during the same period in 1998. The majority
of this increase is the result of the sale of one security during the three
months ended June 30, 1999. Other income was $144 thousand for the three months
ended June 30, 1999 as compared to $189 thousand for the same period in 1998.
Total other operating expenses were $6.3 million for the three months
ended June 30, 1999, up $1.6 million from the same period in 1998. The increase
was a result of higher expenses in compensation and benefits, equipment, other
real estate owned and repossessed property, and legal and other professional
fees.
Compensation and benefits increased $677 thousand to $3.1 million for
the three months ended June 30, 1999 from $2.4 million in 1998. This increase is
the result of costs associated with the Company's Employee Stock Ownership Plan
and stock awarded under the Company's Recognition and Retention Plan. Costs
associated with these plans totaled $559 thousand during the three months ended
June 30, 1999 while there were no such expenses during the comparable period in
1998. The opening of the Company's thirteenth branch just prior to the beginning
of the quarter ended June 30, 1999 also contributed to the increase in
compensation and benefits.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Equipment expenses for the three months ended June 30, 1999 were $590
thousand, up from $380 thousand in 1998. These expenses were higher due to the
equipment purchases made during the second half of the last fiscal year in which
depreciation and maintenance charges were recorded during 1999. These equipment
purchases included a new front-end system, new personal computers, an upgraded
network and new image-technology for backoffice operations. The opening of our
thirteenth branch as mentioned previously also contributed to this increase.
Expenses on other real estate owned and repossessed property increased
from $141 thousand during the three months ended June 30, 1998 to $403 thousand
during 1999. This increase is the result of management's continued efforts to
reduce the level of its problem assets. The growth in this asset category during
the previous year resulted in increased levels of writedowns as well as higher
maintenance expenses associated with these assets during 1999 as compared with
1998.
Legal and other professional fees were $232 thousand during the three
months ended June 30, 1999 up from $96 thousand for the comparable period in the
prior year. Most of this increase is attributed to higher expenses associated
with legal, accounting, tax and other professional fees due to the public nature
of the Company's business. In addition, the Company recorded professional
consulting expenses associated with an analysis of the Company's mainframe
technology and potential upgrades to its hardware. These upgrades will take
place during the Company's second fiscal quarter and should result in increased
equipment expenses in future periods.
Other expenses were $1.4 million for the three months ended June 30,
1999 up from $1.1 million during 1998. The increase is the result of general
increases associated with being a public company. These costs include Delaware
franchise tax fees, annual report printing expenses, and marketing of the
Company's thirteenth branch opening. Other expenses may increase in the future
under a current proposal of the Financial Accounting Standards Board ("FASB")
with regard to recognition of compensation cost for stock options issued to
non-employees. The Company issued 375,000 stock options to non-employee
directors in January 1999 which could result in additional expenses for the
Company beginning as early as September 1999 if the FASB proposal becomes final.
INCOME TAX EXPENSE
- ------------------
Income tax expense increased from $645 thousand for the three months ended June
30, 1998 to $1.1 million for the comparable period in 1999. The increase is
primarily the result of higher income before income tax expense partially offset
by an increase in tax exempt income realized by the Company.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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
and executed 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 1997 and 1998 to request time tables 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 during mid-1998. Testing and any necessary
modifications on all "mission-critical" systems were substantially completed by
December 31, 1998. In connection with Year 2000, "mission-critical" systems are
defined as those systems in which the inability to perform necessary functions
would cause significant disruptions in the Company's ability to complete
day-to-day operations, seriously impacting the Company's financial results. If
systems which are not defined as "mission-critical" fail to perform necessary
functions, the Company's day-to-day operations would not be significantly
impacted, although the lack of efficiencies the Company enjoys through
performing these functions in an automated manner could result in additional
time or expense to carry out the operation. The Company's testing plans provide
a strict timeframe to determine that the reprogramming efforts of its primary
service providers are Year 2000 compliant and completed within the time
requirements provided by its regulators. Testing of systems which are not
considered to be "mission-critical" was substantially completed by June 30,
1999. The Company will continue testing its systems during the remainder of 1999
to ensure that any recent program or hardware modifications continue to be Year
2000 compliant. 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, and
continues to do so. The Company has spent less than $100 thousand to date in
making any necessary modifications 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 expect that any additional costs to ensure its
systems are Year 2000 compliant will have a significant impact on its financial
position or results of operations. 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.
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.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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 and tested 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 arises. Based upon testing results, communication with 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.
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The Company's consolidated financial statements are prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increasing cost of the Company's operations. Unlike most industrial companies,
nearly all assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent as the price of goods
and services.
IMPACT OF NEW ACCOUNTING STANDARDS
- ----------------------------------
In June 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. As recently amended, this Statement is
currently effective for all fiscal quarters of fiscal years beginning after June
15, 2000. Management is currently evaluating what impact, if any, this Statement
will have on the Company's consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table A. Financial Highlights
For the Three Months Ended For the Years Ended
June 30, March 31,
-------------------------- ----------------------------------
1999 1998 1999 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial Ratios:
- -----------------
Return on average assets ........ 0.95% 0.54% 0.47% 0.43% 0.88%
Return on average equity ........ 3.82 5.71 2.05 4.18 8.94
Net interest rate spread ........ 3.86 4.00 3.63 4.11 3.97
Net interest margin ............. 5.07 4.50 4.82 4.68 4.48
Efficiency ratio(1) ............. 53.14 53.20 51.12 57.25 54.34
Expense ratio(1) ................ 2.72 2.46 2.52 2.80 2.48
Per Share Data:
- ---------------
Basic earnings per share(2) ..... $ 0.13 -- $ 0.17 -- --
Diluted earnings per share(2) ... 0.13 -- 0.17 -- --
Book value at year end .......... 14.13 -- 14.02 -- --
Book value at year end, including
unallocated ESOP shares and
unvested RRP shares ........ 12.43 -- 12.39 -- --
Closing market price ............ 11.1250 -- 10.9375 -- --
<CAPTION>
At Period Ended
-----------------------------------------
June 30, March 31,
-----------------------------
1999 1999 1998 1997
------ ------- ------ -------
<S> <C> <C> <C> <C>
Asset Quality Ratios:
- ---------------------
Non-performing loans to total loans .... 2.59% 1.72% 3.10% 4.06%
Non-performing assets to total assets .. 1.99 1.41 2.57 3.60
Allowance as a % of non-performing loans 100.47 143.77 52.32 29.37
Allowance as a % of loans .............. 2.61 2.47 1.62 1.19
Capital Ratio:
- --------------
Equity to total assets ................. 24.26 24.89 10.18 10.00
</TABLE>
(1) Ratio does not include other real estate owned and repossessed property
expenses and net securities transactions for each period. The March 31,
1999 ratio does not include a charitable contribution to the Hudson River
Bank & Trust Company Foundation.
(2) Earnings per share data only applies to periods since the Company's initial
public offering on July 1, 1998.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table B. Average Balances, Interest, and Yields
Three Months Ended June 30,
--------------------------------------------------------------------------------
1999 1998
--------------------------------------- --------------------------------------
Average Average Average Average
(In thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold ............................ $ -- $ -- -- % $ 41,994 $ 603 5.76%
Securities purchased under agreements to resell -- -- -- 13,187 189 5.75
Securities available for sale (1) ............. 223,741 3,516 6.30 67,951 1,115 6.58
Securities held to maturity ................... 19,508 322 6.62 62,692 1,017 6.51
Federal Home Loan Bank of NY stock ............ 3,299 55 6.69 3,035 57 7.53
Loans receivable (2) .......................... 590,507 12,931 8.78 514,111 12,073 9.42
--------- --------- ---- --------- --------- ----
Total earning assets ..................... $ 837,055 $ 16,824 8.06% $ 702,970 $ 15,054 8.59%
--------- ---- --------- ----
Cash and due from banks ....................... 13,147 17,181
Allowance for loan losses ..................... (14,689) (8,651)
Other non-earning assets ...................... 32,902 26,085
--------- ---------
Total assets ............................. $ 868,415 $ 737,585
========= =========
Interest-bearing liabilities:
Savings accounts .............................. $ 146,249 $ 1,100 3.02% $ 197,342 $ 1,703 3.46%
N.O.W. and money market accounts .............. 103,294 727 2.82 101,971 734 2.89
Time deposit accounts ......................... 301,863 3,904 5.19 319,395 4,662 5.85
Mortgagors' escrow deposits ................... 5,402 29 2.15 5,275 30 2.28
Securities sold under agreements to repurchase 610 6 3.95 -- -- --
Other short-term borrowings ................... 38,469 473 4.93 2,347 34 5.81
--------- --------- ---- --------- --------- ----
Total interest-bearing liabilities ....... $ 595,887 $ 6,239 4.20% $ 626,330 $ 7,163 4.59%
--------- ---- --------- ----
</TABLE>
(1) Average balances include fair value adjustment.
(2) Average balances include non-accrual loans.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table B. Average Balances, Interest, and Yields (continued)
Three Months Ended June 30,
------------------------------------------------------------------------------
1999 1998
--------------------------------------- --------------------------------------
Average Average Average Average
(In thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
--------- --------- ---------- --------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing deposits .................. $ 42,386 $ 35,104
Other noninterest-bearing liabilities ......... 13,484 6,934
Shareholders' equity .......................... 216,658 69,217
--------- ---------
Total liabilities and shareholders' equity $ 868,415 $ 737,585
========= =========
Net interest income ........................... $ 10,585 $ 7,891
========= =========
Net interest spread ........................... 3.86% 4.00%
==== ====
Net interest margin ........................... 5.07% 4.50%
==== ====
</TABLE>
(1) Average balances include fair value adjustment.
(2) Average balances include non-accrual loans.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table C. Volume and Rate Analysis
1999 vs 1998
---------------------------------
Due To Due to Net
(In thousands) Volume Rate Change
---------------------------------
<S> <C> <C>
Interest and dividend income:
Federal funds sold ............................ $ (603) -- $ (603)
Securities purchased under agreements to resell (189) -- (189)
Securities available for sale ................. 2,450 (49) 2,401
Securities held to maturity ................... (712) 17 (695)
Federal Home Loan Bank of NY stock ............ 5 (7) (2)
Loans receivable .............................. 1,711 (853) 858
------- ------- -------
Total interest and dividend income ............ $ 2,662 (892) $ 1,770
------- ------- -------
Interest expense:
Savings accounts .............................. $ (403) $ (200) $ (603)
N.O.W. and money market accounts .............. 9 (16) (7)
Time deposit accounts ......................... (246) (512) (758)
Mortgagors' escrow deposits ................... 1 (2) (1)
Securities sold under agreements to repurchase 6 -- 6
Other short-term borrowings ................... 445 (6) 439
------- ------- -------
Total interest expense ........................ $ (188) $ (736) $ (924)
------- ------- -------
Net interest income ................................ $ 2,850 $ (156) $ 2,694
======= ======= =======
</TABLE>
Note: Changes attributable to both rate and volume, which cannot be segregated,
have been allocated proportionately to the change due to volume and the change
due to rate.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table D. Loan Portfolio Analysis
June 30, March 31,
-------------------------------------------------
(In thousands) 1999 1999 1998
--------------------- --------------------- -----------------------
Amount % Amount % Amount %
--------- ----- --------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential ........................... $ 311,635 51.6% $ 295,466 51.1% $ 269,435 53.2%
Commercial ............................ 104,364 17.3 91,480 15.8 76,570 15.1
Construction .......................... 5,033 0.8 3,401 0.6 4,621 0.9
--------- ----- --------- ----- --------- -----
Total loans secured by real estate $ 421,032 69.7% $ 390,347 67.5% $ 350,626 69.2%
--------- ----- --------- ----- --------- -----
Other loans:
Manufactured housing .................. $ 88,104 14.6% $ 90,354 15.6% $ 97,426 19.2%
Commercial ............................ 32,981 5.5 29,024 5.0 18,484 3.7
Financed insurance premiums ........... 49,794 8.2 57,901 10.0 27,976 5.5
Consumer .............................. 13,252 2.2 12,440 2.2 11,857 2.3
--------- ----- --------- ----- --------- -----
Total other loans ................ $ 184,131 30.5% $ 189,719 32.8% $ 155,743 30.7%
--------- ----- --------- ----- --------- -----
Unearned discount and net deferred loan
origination fees and costs ............ (1,355) (0.2) (1,967) (0.3) 609 0.1
--------- ----- --------- ----- --------- -----
Total loans receivable ................ $ 603,808 100.0% $ 578,099 100.0% $ 506,978 100.0%
===== ===== ======
Allowance for loan losses .......................... (15,736) (14,296) (8,227)
--------- --------- ---------
Net loans receivable ............. $ 588,072 $ 563,803 $ 498,751
========= ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table E. Non-Performing Assets
June 30, March 31,
-------------------
(In thousands) 1999 1999 1998
------- ------- -------
<S> <C> <C> <C>
Non-accruing loans
Residential real estate .................... $ 2,387 $ 2,253 $ 4,512
Commercial real estate ..................... 2,403 2,669 5,253
Commercial loans ........................... -- -- --
Manufactured housing ....................... 2,114 2,315 3,060
Financed insurance premiums ................ 8,651 2,549 2,768
Consumer ................................... 107 158 114
------- ------- -------
Total ........................................... $15,662 $ 9,944 $15,707
------- ------- -------
Accruing loans past due 90 days or more
------- ------- -------
and still accruing interest ..................... -- -- 16
------- ------- -------
Total non-performing loans ...................... $15,662 $ 9,944 $15,723
======= ======= =======
Foreclosed and repossessed assets
Residential real estate .................... $ 200 $ 258 $ 145
Commercial real estate ..................... 252 474 299
Repossessed property ....................... 1,231 1,776 1,088
------- ------- -------
Total ........................................... $ 1,683 $ 2,508 $ 1,532
======= ======= =======
Total non-performing assets ..................... $17,345 $12,452 $17,255
======= ======= =======
Allowance for loan losses ....................... $15,736 $14,296 $ 8,227
======= ======= =======
Allowance as a percentage of non-performing loans 100.47% 143.77% 52.32%
Non-performing assets as a percentage of
total assets ................................. 1.99% 1.41% 2.57%
Non-performing loans as a percentage of
total loans ................................ 2.59% 1.72% 3.10%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table F. Loan Loss Experience
Three Months Ended Years Ended
(In thousands) June 30, March 31,
-------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loans outstanding (end of period) ...................... $ 603,808 $ 515,511 $ 578,098 $ 506,978
========= ========= ========= =========
Average loans outstanding
(period to date) ......................... $ 590,507 $ 514,111 $ 522,974 $ 507,293
========= ========= ========= =========
Allowance for loan losses at
beginning of period ...................... $ 14,296 $ 8,227 $ 8,227 $ 5,872
Loan charge-offs:
Residential real estate .................. (24) (84) (251) (440)
Commercial real estate ................... -- (27) (95) (1,298)
Commercial loans ......................... -- (25) (136) (2,309)
Manufactured housing ..................... (243) (386) (1,331) (480)
Consumer ................................. (77) (56) (139) (112)
Financed insurance premiums .............. (117) (453) (1,239) (2,091)
--------- --------- --------- ---------
Total charge-offs ............ (461) (1,031) (3,191) (6,730)
--------- --------- --------- ---------
Loan recoveries:
Residential real estate .................. 40 27 341 8
Commercial real estate ................... 42 -- 777 17
Commercial loans ......................... 2 4 17 10
Manufactured housing ..................... 13 11 73 105
Consumer ................................. 4 6 25 38
Financed insurance premiums .............. 100 187 686 416
--------- --------- --------- ---------
Total recoveries ............. 201 235 1,919 594
--------- --------- --------- ---------
Loan charge-offs, net of recoveries .................... (260) (796) (1,272) (6,136)
Provision charged to operations ........................ 1,700 2,216 7,341 8,491
--------- --------- --------- ---------
Allowance for loan losses
at end of period ......................... $ 15,736 $ 9,647 $ 14,296 $ 8,227
========= ========= ========= =========
Ratio of net charge-offs during
the period to average loans
outstanding during the period (annualized) 0.18% 0.62% 0.24% 1.21%
========= ========= ========= =========
Provision as a percentage of average loans
outstanding during the period (annualized) 1.15% 1.73% 1.40% 1.67%
========= ========= ========= =========
Allowance as a percentage of loans
outstanding (end of period) .............. 2.61% 1.87% 2.47% 1.62%
========= ========= ========= =========
</TABLE>
<PAGE>
Hudson River Bancorp, Inc.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See detailed discussion of market risk within the Risk Management
section of Management's Discussion and Analysis included in Item 2 of this Form
10-Q.
HUDSON RIVER BANCORP, INC.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(27) Financial Data Schedule (included in electronic
format only)
(b) Reports on Form 8-K
A current report on Form 8-K was filed with the SEC
on May 25, 1999 to announce the execution of a
definitive agreement to acquire SFS Bancorp, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON RIVER BANCORP, INC.
08/13/99 /s/Carl A. Florio
-------- -----------------
Date Carl A. Florio, Director, President and
Chief Executive Officer (Principal
Executive and Operating Officer)
08/13/99 /s/Timothy E. Blow
-------- ------------------
Date Timothy E. Blow, Chief Financial
Officer (Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> JUN-30-1999
<CASH> 12,312
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 215,017
<INVESTMENTS-CARRYING> 22,084
<INVESTMENTS-MARKET> 22,158
<LOANS> 603,807
<ALLOWANCE> 15,736
<TOTAL-ASSETS> 873,039
<DEPOSITS> 598,743
<SHORT-TERM> 46,163
<LIABILITIES-OTHER> 16,367
<LONG-TERM> 0
0
0
<COMMON> 179
<OTHER-SE> 211,587
<TOTAL-LIABILITIES-AND-EQUITY> 873,039
<INTEREST-LOAN> 12,931
<INTEREST-INVEST> 3,893
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 16,824
<INTEREST-DEPOSIT> 5,760
<INTEREST-EXPENSE> 6,239
<INTEREST-INCOME-NET> 10,585
<LOAN-LOSSES> 1,700
<SECURITIES-GAINS> 79
<EXPENSE-OTHER> 6,301
<INCOME-PRETAX> 3,176
<INCOME-PRE-EXTRAORDINARY> 3,176
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,061
<EPS-BASIC> .13
<EPS-DILUTED> .13
<YIELD-ACTUAL> 5.07
<LOANS-NON> 15,662
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 4,670
<ALLOWANCE-OPEN> 14,296
<CHARGE-OFFS> 461
<RECOVERIES> 201
<ALLOWANCE-CLOSE> 15,736
<ALLOWANCE-DOMESTIC> 13,362
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,374
</TABLE>
