UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 3, 1999, there were issued and outstanding 16,435,154
shares of the Registrant's Common Stock.
<PAGE>
FORM 10-Q
HUDSON RIVER BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30,
1999 and March 31, 1999
Consolidated Income Statements for the three
and six months ended September 30, 1999 and
1998
Consolidated Statements of Cash Flows for
the six months ended September 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
i
<PAGE>
Item 1. Financial Statements
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
(In thousands, except share and per share data) 1999 1999
---------------- ----------------
<S> <C> <C>
Assets
Cash and due from banks $ 13,125 $ 12,722
Securities available for sale, at fair value 245,580 242,611
Securities held to maturity (fair value of $12,531 and $23,235) 12,507 23,041
Federal Home Loan Bank of New York stock, at cost 4,765 3,299
Loans receivable 756,865 578,099
Allowance for loan losses (17,809) (14,296)
---------------- ----------------
Net loans receivable 739,056 563,803
---------------- ----------------
Accrued interest receivable 6,445 5,701
Premises and equipment, net 18,838 16,807
Other real estate owned and repossessed property 1,676 2,508
Goodwill and other intangibles 12,182 3,215
Other assets 13,350 7,432
---------------- ----------------
Total assets $1,067,524 $881,139
================ ================
</TABLE>
(continued)
<PAGE>
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
(In thousands, except share and per share data) 1999 1999
---------------- ----------------
<S> <C> <C>
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Savings 186,108 145,985
N.O.W. and money market 120,505 99,390
Time deposits 392,506 302,479
Non-interest bearing deposits 51,806 43,960
---------------- ----------------
Total deposits 750,925 591,814
---------------- ----------------
Securities sold under agreements to repurchase 2,693 845
Short-term borrowings 58,300 27,600
Long-term debt 30,600 -
Mortgagors' escrow balances 4,428 3,869
Other liabilities 13,117 37,670
---------------- ----------------
Total liabilities 860,063 661,798
---------------- ----------------
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 September 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 (7,562) (7,996)
Treasury stock, at cost (1,236,096 shares at September 30, 1999 and
157,500 shares at March 31, 1999) (13,619) (1,663)
Retained earnings, substantially restricted 75,380 71,893
Accumulated other comprehensive loss (4,611) (766)
---------------- ----------------
Total shareholders' equity 207,461 219,341
---------------- ----------------
Total liabilities and shareholders' equity $1,067,524 $881,139
================ ================
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
1
<PAGE>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended September 30, Months Ended September 30,
------------------------------- -------------------------------
(In thousands, except per share data) 1999 1998 1999 1998
--------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 14,092 $ 12,018 $ 27,023 $ 24,091
Securities available for sale 3,701 2,346 7,217 3,461
Securities held to maturity 261 870 583 1,887
Federal funds sold - 378 - 981
Securities purchased under agreements to resell - 1,009 - 1,198
Federal Home Loan Bank of New York stock 68 54 123 111
--------------- ------------- -------------- -------------
Total interest and dividend income 18,122 16,675 34,946 31,729
--------------- ------------- -------------- -------------
Interest expense:
Deposits 6,082 6,464 11,842 13,593
Securities sold under agreements to repurchase 20 - 26 -
Short-term borrowings 496 16 969 50
Long-term debt 182 - 182 -
--------------- ------------- -------------- -------------
Total interest expense 6,780 6,480 13,019 13,643
--------------- ------------- -------------- -------------
Net interest income 11,342 10,195 21,927 18,086
Provision for loan losses 1,500 1,944 3,200 4,160
--------------- ------------- -------------- -------------
Net interest income after
provision for loan losses 9,842 8,251 18,727 13,926
--------------- ------------- -------------- -------------
</TABLE>
(continued)
<PAGE>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
<TABLE>
<CAPTION>
For the Three For the Six
Months Ended September 30, Months Ended September 30,
------------------------------- -------------------------------
(In thousands, except per share data) 1999 1998 1999 1998
--------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Other operating income:
Service charges on deposit accounts 378 323 710 656
Loan servicing income 35 46 72 93
Net securities transactions 4 26 83 32
Net gain on sales of loans held for sale - 16 - 65
Other income 236 264 380 453
--------------- ------------- -------------- -------------
Total other operating income 653 675 1,245 1,299
--------------- ------------- -------------- -------------
Other operating expenses:
Compensation and benefits 3,403 2,769 6,501 5,190
Occupancy 418 384 805 767
Equipment 532 368 1,122 748
Other real estate owned and
repossessed property expenses 258 157 661 298
Legal and other professional fees 124 238 356 334
Postage and item transportation 167 183 346 377
Charitable foundation contribution - 5,200 - 5,200
Goodwill and other intangibles amortization 433 43 524 86
Other expenses 1,541 1,110 2,862 2,120
--------------- ------------- -------------- -------------
Total other operating expenses 6,876 10,452 13,177 15,120
--------------- ------------- -------------- -------------
Income (loss) before income tax expense (benefit) 3,619 (1,526) 6,795 105
Income tax expense (benefit) 1,240 (604) 2,355 41
--------------- ------------- -------------- -------------
Net income (loss) $ 2,379 $ (922) $ 4,440 $ 64
=============== ============= ============== =============
Basic earnings (loss) per share $ 0.16 $ (0.06) $ 0.29 $ (0.06)
=============== ============= ============== =============
Diluted earnings (loss) per share $ 0.16 $ (0.06) $ 0.29 $ (0.06)
=============== ============= ============== =============
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
2
<PAGE>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
September 30,
---------------------------------
(In thousands) 1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 4,440 $ 64
Adjustments to reconcile net income to net cash
used in and provided by operating activities:
Depreciation 945 911
Goodwill and other intangibles amortization 524 86
Provision for loan losses 3,200 4,160
Charitable foundation contribution - 5,200
Amortization of restricted stock awards 434 -
Net securities transactions (83) (32)
Net gain on sales of loans held for sale - (65)
Net loans originated for sale - (7,730)
Proceeds from sales of loans held for sale - 9,025
Adjustments of other real estate owned and
repossessed property to fair value 595 118
Net gain on sales of other real estate owned
and repossessed property (524) (281)
Net loss on disposition of premises and equipment 253 -
Net decrease (increase) in accrued interest receivable 340 (1,582)
Net (increase) decrease in other assets (849) 627
Net decrease in other liabilities (27,941) (4,346)
-------------- --------------
Total adjustments (23,106) 6,091
-------------- --------------
Net cash (used in) provided by operating activities (18,666) 6,155
-------------- --------------
</TABLE>
(continued)
<PAGE>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
September 30,
---------------------------------
(In thousands) 1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from investing activities:
Net cash used in acquisition activity (27,975) -
Proceeds from sales of securities available for sale 3,009 -
Proceeds from maturities, calls and paydowns of securities available
for sale 30,097 18,485
Purchases of securities available for sale (15,203) (162,433)
Proceeds from maturities, calls and paydowns of securities held to
maturity 10,534 16,441
Net loans made to customers (38,588) (22,718)
Proceeds from sales of and payments received on other real estate owned
and repossessed property 2,319 2,586
Purchases of premises and equipment (1,373) (945)
-------------- --------------
Net cash used in investing activities (37,180) (148,584)
-------------- --------------
Cash flows from financing activities:
Net increase in deposits 8,488 7,072
Net increase in securities sold under agreements to repurchase 1,848 -
Net increase (decrease) in short-term borrowings 30,600 (2,000)
Issuance of long-term debt 30,000 -
Net (decrease) increase in mortgagors' escrow balances (1,778) 1,388
Net proceeds from stock offering - 169,967
Acquisition of common stock by Employee Stock Ownership Plan - (18,428)
Dividends paid (953) -
Purchase of treasury stock (11,956) -
-------------- --------------
Net cash provided by financing activities 56,249 157,999
-------------- --------------
Net increase in cash and cash equivalents 403 15,570
Cash and cash equivalents at beginning of period 12,722 34,273
-------------- --------------
Cash and cash equivalents at end of period $ 13,125 $ 49,843
============== ==============
Supplemental cash flow information:
Interest paid $ 13,012 $ 13,646
Taxes paid - -
Supplemental disclosures of non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed property $ 1,460 $ 2,645
Adjustment of securities available for sale to fair value, net of tax (3,845) 835
Acquisition activity:
Fair value of noncash assets acquired 175,959 -
Fair value of liabilities assumed 157,048 -
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
4
<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 and six month periods ended September 30, 1999 are not
necessarily indicative of the results that may be expected for a full year.
2. The Company completed its acquisition of SFS Bancorp, Inc. (SFS) on
September 3, 1999, exchanging $25.10 in cash for each share of SFS common stock
outstanding. Total assets of $176.9 million and total deposits of $150.4 million
were acquired. The Company utilized long-term debt with maturities ranging from
one-to-five years to fund the transaction. Under purchase accounting rules, the
assets acquired and the liabilities assumed were adjusted to estimated fair
value. Goodwill amounting to $9.1 million was recorded relating to this
transaction and will be amortized on a straight line basis over fifteen years.
The results of SFS are included in the consolidated financial statements only
since the date of acquisition.
3. On April 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income (loss) includes the reported net
income (loss) 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 (loss) represents
net income (loss) plus other comprehensive income (loss), 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 (loss) 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 September 30, 1999 and 1998 was $717 thousand and $(162) thousand,
respectively. Comprehensive income for the six month periods ended September 30,
1999 and 1998 was $595 thousand and $899 thousand, respectively.
<PAGE>
Hudson River Bancorp, Inc.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
4. The following table sets forth certain information regarding the
calculation of basic and diluted earnings per share for the three and six month
periods ended September 30, 1999. Earnings of the Company prior to its initial
public offering on July 1, 1998 are not included in the calculation of earnings
per share for the six months ended September 30, 1998. 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.
5
<PAGE>
Hudson River Bancorp, Inc.
Notes to Unaudited Consolidated Interim Financial Statements
(continued)
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
-------------------------------------------------------------------------------------
(In thousands, except for 1999 1998
share and per share data) ------------------------------------------ -----------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Loss Shares Amount
------------ ---------------- ------------ ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss) per share $ 2,379 14,811,229 $ 0.16 $ (922) 16,458,738 $ (0.06)
Effect of potential common
shares outstanding:
Stock options 6,065 -
Restricted stock awards 42,731 -
---------------- ----------------
48,796 -
------------ ---------------- ------------ ------------ ---------------- -----------
Diluted earnings (loss) per share $ 2,379 14,860,025 $ 0.16 $ (922) 16,458,738 $ (0.06)
============ ================ ============ ============ ================ ===========
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended September 30,
-------------------------------------------------------------------------------------
1999 1998
------------------------------------------ -----------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Loss Shares Amount
------------ ---------------- ------------ ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss) per share $ 4,440 15,051,189 $ 0.29 $ (922) 16,458,738 $ (0.06)
Effect of potential common
shares outstanding:
Stock options 3,049 -
Restricted stock awards 21,482 -
---------------- ----------------
24,531 -
------------ ---------------- ------------ ------------ ---------------- -----------
Diluted earnings (loss) per share $ 4,440 15,075,720 $ 0.29 $ (922) 16,458,738 $ (0.06)
============ ================ ============ ============ ================ ===========
</TABLE>
6
<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 and six months
ended September 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 17 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:
7
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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.
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.
MERGER AND ACQUISITION ACTIVITY
- -------------------------------
On September 3, 1999 the Company completed its acquisition of SFS
Bancorp, Inc. ("SFS") paying $25.10 in cash for each share of SFS common stock
outstanding (the "SFS Acquisition"). The total consideration was approximately
$32 million. The transaction was accounted for under the purchase method of
accounting and is anticipated to be accretive to earnings immediately. The
Company recorded goodwill associated with this transaction totaling $9.1
million. The goodwill will be amortized straight line over fifteen years. SFS
had total assets of $176.9 million and total deposits of $150.4 million as of
September 3, 1999 and its four branches within Schenectady County were added to
the Hudson River Bank & Trust Company branch network.
OVERVIEW
- --------
The Company realized net income for the three months ended September
30, 1999 amounting to $2.4 million, or $0.16 per share, up $3.3 million from the
$922 thousand loss realized during the three months ended September 30, 1998.
Net income for the six months ended September 30, 1999 was $4.4 million, or
$0.29 per share, up $4.4 million from the $64 thousand earned during the same
period a year previous. Net income in the prior year was significantly impacted
by a $5.2 million ($3.1 million after-tax) nonrecurring expense taken during
July 1998 associated with the contribution of stock to the Hudson River Bank &
Trust Company Foundation. The increases over the prior year results were also a
result of higher net interest income and a lower provision for loan losses,
partially offset by higher other operating expenses after adjusting for the
nonrecurring expense, and higher income tax expense. For the three months ended
September 30, 1999, the Company's return on average assets was 1.02% and its
return on average equity was 4.49%. See Table A, "Financial Highlights".
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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 $896.1 million for the three
months ended September 30, 1999, up from $814.5 million in the same period of
1998. This increase was primarily a result of the completion of the SFS
Acquisition during the quarter ended September 30, 1999. For the six months
ended September 30, 1999, average earning assets were $866.7 million, up from
$759.1 million in 1998. This increase is attributed to the SFS Acquisition as
well as the impact of the Company's initial public offering on July 1, 1998.
Interest and dividend income for the three months ended September 30, 1999 was
$18.1 million, up $1.4 million from 1998. For the six months ended September 30,
1999, interest and dividend income was $34.9 million, an increase of $3.2
million over the same period in 1998. The increase in average balances was the
primary reason for the higher income, offset by lower yields on those assets.
The yield on earning assets fell from 8.12% for the three months ended September
30, 1998 to 8.05% in 1999. For the six months ended September 30, 1999, yields
declined from 8.34% in 1998 to 8.06% in 1999. The change in the Company's asset
mix from lower yielding investments to higher yielding loans has reduced the
impact of a lower rate environment on its earning assets. Earning assets at
September 30, 1999 were $1.0 billion, up from $847.1 million at March 31, 1999
primarily as a result of the SFS Acquisition.
8
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Loans
The average balance of loans increased to $652.1 million for the three
months ended September 30, 1999, up $133.9 million from the $518.2 million
average for the same period in the prior year. The yield on loans for the
quarter decreased 60 basis points, from 9.20% in 1998 to 8.60% in 1999. Interest
income on loans for the three months ended September 30, 1999 increased to $14.1
million from $12.0 million in 1998. The increase in average balances for the
quarter resulted in a $2.9 million increase in interest income that was
partially offset by an $863 thousand decrease in interest income due to lower
rates. On a year to date basis, average loans were $621.5 million, up from
$516.2 million in 1998. The yield on loans for the six months ended September
30, 1999 was 8.70%, down from 9.31% in 1998. The impact of higher average
balances resulted in an increase of $4.7 million in interest income. This
increase was partially offset by a $1.7 million decrease in interest income due
to lower rates.
Total loans were $756.9 million at September 30, 1999, up $178.8
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 $468.6 million, or 61.9% of total loans at September 30, 1999. This
increase was primarily the result of the SFS Acquisition. Commercial real estate
loans increased $27.3 million to $118.8 million at September 30, 1999 from $91.5
million at March 31, 1999. Commercial loans increased to $30.6 million at
September 30, 1999 from $29.0 million at March 31, 1999. These increases were
offset by decreases of $4.5 million in manufactured housing loans and $28.1
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".
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Securities
The average balance of securities available for sale and securities
held to maturity (collectively "securities") increased $43.7 million to $240.3
million for the three months ended September 30, 1999, up from $196.5 million
for the three months ended September 30, 1998. This increase is the result of
the SFS Acquisition as well as the reinvestment of the Company's federal funds
sold and securities purchased under agreements to resell into the securities
available for sale portfolio during the last six months of the fiscal year
ending March 31, 1999. Average securities for the six months ended September 30,
1999 were $241.7 million, an increase of $78.0 million from the corresponding
period in the previous year. Interest income earned on securities was $4.0
million for the three months ended September 30, 1999, up $746 thousand from the
$3.2 million earned in 1998. On a year to date basis, interest income on
securities grew from $5.3 million in 1998 to $7.8 million in 1999. 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 September 30, 1999 were $258.1 million, down $7.6 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 (offset by
the impact of the SFS Acquisition). 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.
9
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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 $96.7 million for the three months ended
September 30, 1998, generating $1.4 million in interest income for that period.
For the six months ended September 30, 1998, the average balance was $76.1
million, generating $2.2 million in interest income. The Company had no federal
funds sold or securities purchased under agreements to resell during the three
or six months ended September 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 and long-term debt 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
increased to $659.8 million for the three months ended September 30, 1999 from
$557.6 million for the three months ended September 30, 1998. For the six months
ended September 30, 1999, the average balance of interest-bearing liabilities
was $628.0 million, up from $591.8 million for the same period in 1998. This
increase in average balances is attributed primarily to the completion of the
SFS Acquisition. Interest expense for the three months ended September 30, 1999
was $6.8 million, up $300 thousand from the same period in 1998. The increase in
volume, offset by a decrease in the average rate paid from 4.61% to 4.09%,
resulted in the overall increase in interest expense for the three month period.
For the six months ended September 30, 1999, the increase in the average balance
resulted in a $991 thousand increase in interest expense. This was more than
offset by the $1.6 million reduction in interest expense resulting from lower
average interest rates, 4.60% in 1998 to 4.15% in 1999.
Interest-bearing liabilities at September 30, 1999 were $795.1 million,
up from $580.2 million at March 31, 1999. This increase was a result of the SFS
Acquisition as well as the necessity to fund the growth in assets of the
Company, primarily in the loan portfolio.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Deposits
The average balance of savings accounts increased $17.6 million to
$161.2 million for the three months ended September 30, 1999, up from $143.6
million for the same period in 1998. On a year to date basis, the average
balance of savings accounts was $153.8 million in 1999, down from $170.3 million
in 1998. These fluctuations are the result of the impact of the SFS Acquisition
during the period ended September 30, 1999, offset in part by the impact of 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 $1.2 million for the three months ended
September 30, 1998 to $1.1 million in 1999. The decrease in average rates paid
from 3.21% to 2.73% offset the effect of the higher average balances in the
quarter ending September 30, 1999 and resulted in the decrease in interest
expense for the quarter. The decline in average rates paid on savings accounts
for the six months ended September 30, 1999 from 3.36% to 2.87% as well as the
effect of the decline in average balances for this time period resulted in a
overall decline of $659 thousand in interest expense on savings accounts when
compared to the six months ended September 30, 1998.
The average balance of time deposits increased from $313.4 million for
the three months ended September 30, 1998 to $329.7 million for the three months
ended September 30, 1999. On a year to date basis, the average balance of time
deposits fell from $316.4 million in 1998 to $315.9 million in 1999. Interest
expense on time deposits declined a total of $400 thousand for the three months
ended September 30, 1999 from the comparable period in 1998. Lower average rates
paid on time deposits of 5.07% for the three months ended September 30, 1999,
down from 5.83% in 1998, offset the effect of the higher average balances and
contributed to the reduction in interest expense for the three months ended
September 30, 1999. For the six months ended September 30, 1999, the decline in
average rates paid from 5.84% in 1998 to 5.13% in 1999 resulted in almost all of
the $1.2 million decrease in interest expense during this time period.
10
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Total deposits, including $51.8 million of noninterest-bearing
deposits, were $750.9 million at September 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 SFS Acquisition, as well as the Company's
continued focus on commercial services, including commercial deposits, and the
opening of our thirteenth branch at the end of March 1999.
Short-term Borrowings and Long-term Debt
The average balance of short-term borrowings increased to $37.2 million
for the three months ended September 30, 1999 from $1.1 million in 1998. For the
six months ended September 30, 1999, the average balance of short-term
borrowings was $37.8 million, up from $1.7 million for the same period in 1998.
Interest expense on these borrowings was $496 thousand for the three months
ended September 30, 1999, up $480 thousand from 1998. On a year to date basis,
interest expense on short-term borrowings increased $919 thousand for the six
months ended September 30, 1999 from 1998, almost entirely due to the increase
in volume.
The average balance of long-term debt was $12.3 million and $6.2
million for the three month and six month periods, ended September 30, 1999,
respectively. The Company did not have any long-term debt during the periods
ended September 30, 1998. As a result, all the increase in interest expense on
long-term debt for both the three and six month periods ended September 30, 1999
is attributed to increases in volume.
Short-term borrowings were $58.3 million at September 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 reflected in other liabilities as of March
31, 1999 and paid in early April 1999, necessitating the need for additional
borrowings at that time. Long-term debt was $30.6 million at September 30, 1999.
The increase in this category was primarily attributed to the SFS Acquisition as
well as management's continued monitoring of the Company's interest rate risk
profile and investment opportunities afforded to it during the quarter ending
September 30, 1999. The interest rates on the long-term debt are fixed with
maturities ranging from one-to-five years, with call options ranging from
one-to-three years.
Net Interest Income
Net interest income for the three months ended September 30, 1999 was
$11.3 million, up from the $10.2 million for the three months ended September
30, 1998. For the six months ended September 30, 1999, net interest income
increased $3.8 million to $21.9 million from $18.1 million for the same period a
year previous. The increase was the result of the increase in average earning
assets 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 and
higher balances of interest-bearing liabilities. As a result of these volume and
rate fluctuations, the Company's net interest margin for the three months ended
September 30, 1999 was 5.04%, up from 4.97% for the three months ended September
30, 1998. For the six months ended September 30, 1999, the net interest margin
was 5.06%, up from 4.75% for 1998. See Table B, "Average Balances, Interest and
Yields" and Table C, "Volume and Rate Analysis".
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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.
11
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Total non-performing assets at September 30, 1999 were $16.5 million or
1.55% of total assets, up from $12.5 million or 1.41% at March 31, 1999. The
$4.0 million increase in total non-performing assets is due to a $4.9 million
increase in non-performing loans, partially offset by an $832 thousand decrease
in foreclosed and repossessed assets.
The increase in non-performing loans was primarily the result of a $4.4
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 is expected to be a seasonal
increase based upon the Company's past experience with these loans. In addition,
non-performing loans were also increased as a result of the SFS Acquisition. SFS
had $ 937 thousand in non-performing loans immediately prior to the acquisition
date.
The $832 thousand decrease in foreclosed and repossessed assets was
made up of a $719 thousand reduction of repossessed manufactured homes with the
remainder made up of reductions in foreclosed residential and commercial
properties, partially offset by foreclosed properties acquired as part of the
SFS Acquisition.
Allowance and Provision For Loan Losses
- ---------------------------------------
The allowance for loan losses at September 30, 1999 was $17.8 million,
up from $14.3 million at March 31, 1999. Although the allowance for loan losses
increased as of September 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 120.2% at September 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 September 30, 1999 resulted in the reduction of the
allowance to non-performing loans ratio. Net charge-offs for the three months
ended September 30, 1999 were $435 thousand, up from $31 thousand for the same
period in 1998. The increase was primarily a result of one large recovery in the
1998 period. Gross charge-offs were relatively consistent for the three month
periods ended September 30, 1999 and 1998. For the six months ended September
30, 1999, net charge-offs were $695 thousand, down from the $827 thousand in
1998. Gross charge-offs were down from $1.6 million for the six months ended
September 30, 1998 to $1.0 million for the same period in 1999.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
As a result of management's analysis of the risk characteristics of the
lending portfolio, as well as the trends and levels of non-performing and other
delinquent loans, a provision for loan losses of $1.5 million for the three
months ended September 30, 1999 was recorded. The $1.5 million provision is down
$444 thousand from the $1.9 million provision recorded for the three months
ended September 30, 1998. For the six months ended September 30, 1999, the
Company recorded a provision for loan losses of $3.2 million, down from $4.2
million in the prior year. An additional allowance of $1.0 million was acquired
as part of the SFS Acquisition. 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 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.
12
<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.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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 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. 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.
13
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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 $207.5
million at September 30, 1999, 19.43% of total assets on that date. As of March
31, 1999, total equity was $219.3 million or 24.89% of total assets. Tangible
equity to tangible assets were 18.50% and 24.62% as of September 30, 1999 and
March 31, 1999, respectively. These reductions in the equity to assets ratios
are reflective of management's objectives to leverage its capital through asset
growth, mergers and acquisitions, a dividend policy and a share repurchase
program. The Company completed a 5% share repurchase program during July 1999
and is currently executing a 10% share repurchase program. As of September 30,
1999 the Company had an additional 1.4 million shares to acquire under its
current repurchase program. As of September 30, 1999, the Company and the Bank
exceeded all of its regulatory capital requirements.
OTHER OPERATING INCOME AND EXPENSES
- -----------------------------------
Total other operating income was $653 thousand for the three months
ended September 30, 1999 down slightly from the $675 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 increased from
$323 thousand in 1998 to $378 thousand in 1999, primarily a result of the SFS
Acquisition and its resultant increase in deposit accounts. Loan servicing
income decreased slightly due to the reductions in the Company's loan servicing
portfolio as a result of paydowns. Other income was $236 thousand for the three
months ended September 30, 1999 as compared to $264 thousand for the same period
in 1998. For the six months ended September 30, 1999, total other operating
income was $1.2 million, down slightly from the $1.3 million earned in 1998.
Total other operating expenses were $6.9 million for the three months
ended September 30, 1999, down $3.6 million from the same period in 1998. For
the six months ended September 30, 1999, total other operating expenses were
$13.2 million, down $1.9 million from the same period a year earlier. The
decreases in both time periods were primarily a result of the $5.2 million
nonrecurring expense associated with a contribution of stock to the Hudson River
Bank & Trust Company Foundation in 1998, as well as higher expenses in
compensation and benefits, equipment, other real estate owned and repossessed
property, goodwill amortization and other expenses.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Compensation and benefits increased $634 thousand to $3.4 million for
the three months ended September 30, 1999 from $2.8 million in 1998. For the six
months ended September 30, 1999, compensation and benefits were $6.5 million, up
from $5.2 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 $578 thousand and $1.1 million, respectively, during the three months
and six months ended September 30, 1999, while in 1998, the costs totaled $380
thousand for both the three and six month periods. The SFS Acquisition resulted
in increased expenses as four additional branches were added to the Company's
branch network in September 1999. The opening of the Company's thirteenth branch
just prior to the beginning of the current fiscal year also contributed to the
increase in compensation and benefits.
Equipment expenses for the three months ended September 30, 1999 were
$532 thousand, up from $368 thousand in 1998. For the six months ended September
30, 1999, equipment expenses increased $374 thousand to $1.1 million as compared
to 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
teller system, new personal computers, an upgraded network and new
image-technology for backoffice operations. The opening of our thirteenth branch
as mentioned previously and the SFS Acquisition also contributed to this
increase.
Expenses on other real estate owned and repossessed property increased
from $157 thousand during the three months ended September 30, 1998 to $258
thousand during 1999. On a year to date basis, other real estate owned and
repossessed property expenses increased to $661 thousand in 1999 from $298
thousand in 1998. 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 maintenance expenses associated
with these assets during 1999 as compared with 1998.
Goodwill and other intangibles amortization for the three months ended
September 30, 1999 was $433 thousand, up from $43 thousand for the same period a
year earlier. For the six months ended September 30, 1999, goodwill amortization
was $524 thousand in 1999 and $86 thousand in 1998. The increases relate to the
goodwill associated with the Company's equity investments in Homestead Funding
Corp., a mortgage company, in November 1998, an equity investment in The
Bostwick Group, an insurance brokerage company, in September 1999, as well as
the SFS Acquisition.
Other expenses were $1.5 million for the three months ended September
30, 1999 up from $1.1 million during the same period in 1998. For the six months
ended September 30, 1999, other expenses were $2.9 million in 1999, up from $2.1
million in 1998. The increase is the result of general increases associated with
being a public company and the SFS Acquisition. The costs include Delaware
franchise tax fees, annual report printing expenses, and marketing of the
Company's thirteenth branch opening. The Company also recorded a $253 thousand
loss on the disposition of equipment as a result of an upgrade to its existing
mainframe which was necessitated by the SFS Acquisition.
14
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
INCOME TAX EXPENSE
- ------------------
Income tax expense increased from a benefit of $604 thousand for the three
months ended September 30, 1998 to an expense of $1.2 million for the comparable
period in 1999. For the six months ended September 30, 1999, tax expense was
$2.4 million in 1999, up from $41 thousand in 1998. 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.
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 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 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 provided
a strict timeframe to determine that the reprogramming efforts of its primary
service providers were Year 2000 compliant and completed within the time
requirements provided by its regulators. Testing of systems that are not
considered to be "mission-critical" was completed by September 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.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
The risks associated with this issue go beyond the Company's own
ability to solve Year 2000 problems. Should significant commercial customers
fail to address Year 2000 issues effectively, their ability to meet debt service
requirements could be impaired, resulting in increased credit risk and potential
increases in loan charge-offs. Should significant depositors or other sources of
funds fail to address Year 2000 issues effectively, the Company could be forced
to utilize alternative funding vehicles, possibly at higher costs than it
currently incurs. In addition, should suppliers of critical services fail in
their efforts to become Year 2000 compliant, or if significant third party
interfaces fail to be compatible with the Company's systems or fail to be Year
2000 compliant, it could have significant adverse 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 the
Company has 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. Recently the Company began a program to increase
awareness of Y2K issues for its branch personnel and will continue efforts to
improve customer awareness and their comfort level of the Company's Y2K
preparedness.
15
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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 September 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 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.
16
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table A. Financial Highlights
<TABLE>
<CAPTION>
At or At or
For the Three Months Ended For the Six Months Ended
September 30, September 30,
------------------------------- ---------------------------
1999 1998 1999 1998
---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Financial Ratios:
- -----------------
Return (loss) on average assets 1.02% (0.44%) 0.99% 0.02%
Return (loss) on average equity 4.49 (1.64) 4.15 0.09
Net interest rate spread 3.96 3.51 3.91 3.74
Net interest margin 5.04 4.97 5.06 4.75
Efficiency ratio(1) 51.58 46.59 51.94 49.27
Expense ratio(1) 2.64 2.38 2.66 2.41
Per Share Data:
- ---------------
Basic earnings (loss) per share(2) $ 0.16 $ (0.06) $ 0.29 $ (0.06)
Diluted earnings (loss) per share(2) 0.16 (0.06) 0.29 (0.06)
Book value at period end 14.24 13.76 14.24 13.76
Book value at period end, including
unallocated ESOP shares and
unvested RRP shares 12.48 12.66 12.48 12.66
Closing market price 11.063 10.125 11.063 10.125
</TABLE>
(continued)
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
<TABLE>
<CAPTION>
At Period Ended
--------------------------------------------------------------
September 30, June 30, March 31,
---------------------------
1999 1999 1999 1998
---------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Asset Quality Ratios:
- ---------------------
Non-performing loans to total loans 1.96% 2.59% 1.72% 3.10%
Non-performing assets to total assets 1.55 1.99 1.41 2.57
Allowance as a % of non-performing loans 120.15 100.47 143.77 52.32
Allowance as a % of loans 2.35 2.61 2.47 1.62
Capital Ratios:
- --------------
Equity to total assets 19.43 24.26 24.89 10.18
Tangible equity to tangible assets 18.50 23.98 24.62 10.10
</TABLE>
(1) Ratio does not include other real estate owned and repossessed property
expenses, net securities transactions and goodwill and other
intangibles amortization for each period. The ratio for the periods
ended September 30, 1998 does not include a charitable contribution to
the Hudson River Bank & Trust Company Foundation.
(2) Earnings (loss) per share data only applies to periods since the
Company's initial public offering on July 1, 1998.
17
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table B. Average Balances, Interest, and Yields
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------------------
1999 1998
-------------------------------------- ----------------------------------
Average Average Average Average
(In thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold $ - $ - - $ 27,230 $ 378 5.51%
Securities purchased under agreements to resell - - - 69,515 1,009 5.76
Securities available for sale (1) 224,571 3,701 6.56 142,486 2,346 6.53
Securities held to maturity 15,685 261 6.62 54,054 870 6.39
Federal Home Loan Bank of NY stock 3,745 68 7.22 3,035 54 7.06
Loans receivable (2) 652,078 14,092 8.60 518,220 12,018 9.20
-------------------------------------- ----------------------------------
Total earning assets 896,079 18,122 8.05% 814,540 16,675 8.12%
------------------------- -------------------
Cash and due from banks 12,018 9,391
Allowance for loan losses (16,380) (10,202)
Other non-earning assets 40,013 27,071
--------- ---------
Total assets $ 931,730 $ 840,800
========= =========
Interest-bearing liabilities:
Savings accounts $161,183 $ 1,107 2.73% $ 143,617 $ 1,163 3.21%
N.O.W. and money market accounts 109,141 726 2.65 92,269 658 2.83
Time deposit accounts 329,710 4,202 5.07 313,355 4,602 5.83
Mortgagors' escrow deposits 8,431 47 2.22 7,300 41 2.23
Securities sold under agreements to repurchase 1,922 20 4.14 - - -
Short-term borrowings 37,157 496 5.31 1,087 16 5.84
Long-term debt 12,277 182 5.90 - - -
-------------------------------------- ----------------------------------
Total interest-bearing liabilities 659,821 6,780 4.09% 557,628 6,480 4.61%
------------------------- ---------------------
Non interest-bearing deposits 46,526 54,553
Other non interest-bearing liabilities 14,564 5,481
Shareholders' equity 210,819 223,138
--------- ----------
Total liabilities and shareholders' equity $ 931,730 $ 840,800
========= ==========
Net interest income $ 11,342 $ 10,195
======== =========
Net interest spread 3.96% 3.51%
========== =======
Net interest margin 5.04% 4.97%
========== =======
</TABLE>
(1) Average balances include fair value adjustment.
(2) Average balances include non-accrual loans.
(continued)
18
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
<TABLE>
<CAPTION>
Table B. (continued)
Six Months Ended September 30,
-------------------------------------------------------------------------
1999 1998
------------------------------------ -----------------------------------
Average Average Average Average
(In thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
------------------------------------ -----------------------------------
<S> <C> <C> <C> <C> <C>
Earning assets:
Federal funds sold $ - $ - - $ 34,572 $ 981 5.66%
Securities purchased under agreements to resell - - - 41,505 1,198 5.76
Securities available for sale (1) 224,158 7,217 6.44 105,422 3,461 6.55
Securities held to maturity 17,586 583 6.63 58,350 1,887 6.45
Federal Home Loan Bank of NY stock 3,524 123 6.98 3,035 111 7.29
Loans receivable (2) 621,460 27,023 8.70 516,177 24,091 9.31
------------------------------------ ----------------------------------
Total earning assets $ 866,728 34,946 8.06% 759,061 31,729 8.34%
----------------------- ----------------------
Cash and due from banks 12,579 13,264
Allowance for loan losses (15,539) (9,431)
Other non-earning assets 36,477 26,581
------------ ----------
Total assets $ 900,245 $ 789,475
============ ==========
Interest-bearing liabilities:
Savings accounts $ 153,757 $ 2,207 2.87% $ 170,332 $ 2,866 3.36%
N.O.W. and money market accounts 106,234 1,453 2.74 97,093 1,392 2.86
Time deposit accounts 315,862 8,106 5.13 316,359 9,264 5.84
Mortgagors' escrow deposits 6,925 76 2.19 6,293 71 2.25
Securities sold under agreements to repurchase 1,270 26 4.09 - - -
Short-term borrowings 37,809 969 5.13 1,713 50 5.82
Long-term debt 6,172 182 5.90 - - -
------------------------------------ ----------------------------------
Total interest-bearing liabilities 628,029 13,019 4.15% 591,790 13,643 4.60%
----------------------- ----------------------
Non interest-bearing deposits 44,467 44,882
Other non interest-bearing liabilities 14,026 6,204
Shareholders' equity 213,723 146,599
------------ -----------
Total liabilities and shareholders' equity $ 900,245 $ 789,475
============ ===========
Net interest income $ 21,927 $ 18,086
========== ===========
Net interest spread 3.91% 3.74%
========== ==========
Net interest margin 5.06% 4.75%
========== ==========
</TABLE>
(1) Average balances include fair value adjustment.
(2) Average balances include non-accrual loans.
19
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table C. Volume and Rate Analysis
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------------- -----------------------------------
1999 vs 1998 1999 vs 1998
------------------------------------- -----------------------------------
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 $ (378) $ - $ (378) $ (981) $ - $ (981)
Securities purchased under agreements to resell (1,009) - (1,009) (1,198) - (1,198)
Securities available for sale 1,353 2 1,355 3,824 (68) 3,756
Securities held to maturity (638) 29 (609) (1,350) 46 (1,304)
Federal Home Loan Bank of NY stock 13 1 14 17 (5) 12
Loans receivable 2,937 (863) 2,074 4,662 (1,730) 2,932
------------------------------------- -----------------------------------
Total interest and dividend income 2,278 (831) 1,447 4,974 (1,757) 3,217
------------------------------------- -----------------------------------
Interest expense:
Savings accounts $ 133 $ (189) $ (56) $ (263) $ (396) $ (659)
N.O.W. and money market accounts 114 (46) 68 127 (66) 61
Time deposit accounts 231 (631) (400) (15) (1,143) (1,158)
Mortgagors' escrow deposits 6 - 6 7 (2) 5
Securities sold under agreements to repurchase 20 - 20 26 - 26
Short-term borrowings 482 (2) 480 926 (7) 919
Long-term debt 182 - 182 182 - 182
------------------------------------- -----------------------------------
Total interest expense 1,168 (868) 300 990 (1,614) (624)
------------------------------------- -----------------------------------
Net interest income $ 1,110 $ 37 $ 1,147 $ 3,984 $ (143) $ 3,841
===================================== ===================================
</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.
20
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table D. Loan Portfolio Analysis
<TABLE>
<CAPTION>
September 30, March 31,
-------------------------- ------------------------------------------------------
(In thousands) 1999 1999 1998
-------------------------- -------------------------- --------------------------
Amount % Amount % Amount %
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential $ 468,600 61.9% $ 295,466 51.1% $ 269,435 53.2%
Commercial 118,810 15.7 91,480 15.8 76,570 15.1
Construction 8,202 1.1 3,401 0.6 4,621 0.9
------------ ----------- ------------ ----------- ------------ -----------
Total loans secured by real estate $ 595,612 78.7% $ 390,347 67.5% $ 350,626 69.2%
------------ ----------- ------------ ----------- ------------ -----------
Other loans:
Manufactured housing $ 85,839 11.3% $ 90,354 15.6% $ 97,426 19.2%
Commercial 30,627 4.1 29,024 5.0 18,484 3.7
Financed insurance premiums 29,770 3.9 57,901 10.0 27,976 5.5
Consumer 14,973 2.0 12,440 2.2 11,857 2.3
------------ ----------- ------------ ----------- ------------ -----------
Total other loans $ 161,209 21.3% $ 189,719 32.8% $ 155,743 30.7%
------------ ----------- ------------ ----------- ------------ -----------
Unearned discount and net deferred loan
origination fees and costs 44 0.0 (1,967) (0.3) 609 0.1
------------ ------------ ------------ ----------- ------------ -----------
Total loans receivable $ 756,865 100.0% $ 578,099 100.0% $ 506,978 100.0%
=========== =========== ===========
Allowance for loan losses (17,809) (14,296) (8,227)
------------ ------------ ------------
Net loans receivable $ 739,056 $ 563,803 $ 498,751
============ ============ ============
</TABLE>
21
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table E. Non-Performing Assets
<TABLE>
<CAPTION>
March 31,
September 30, ----------------------------
(In thousands) 1999 1999 1998
---------------- ------------- ------------
<S> <C> <C> <C>
Non-accruing loans:
Residential real estate $ 3,268 $ 2,253 $ 4,512
Commercial real estate 2,274 2,669 5,253
Commercial loans 63 - -
Manufactured housing 2,239 2,315 3,060
Financed insurance premiums 6,905 2,549 2,768
Consumer 49 158 114
---------------- ------------- ------------
Total $ 14,798 $ 9,944 $ 15,707
Accruing loans past due 90 days or more
and still accruing interest 24 - 16
---------------- ------------- ------------
Total non-performing loans $ 14,822 $ 9,944 $ 15,723
================ ============= ============
Foreclosed and repossessed assets:
Residential real estate $ 129 $ 258 $ 145
Commercial real estate 490 474 299
Repossessed property 1,057 1,776 1,088
---------------- ------------- ------------
Total $ 1,676 $ 2,508 $ 1,532
================ ============= ============
Total non-performing assets $ 16,498 $ 12,452 $ 17,255
================ ============= ============
Allowance for loan losses $ 17,809 $ 14,296 $ 8,227
================ ============= ============
Allowance as a percentage of non-performing loans 120.15% 143.77% 52.32%
Non-performing assets as a percentage of
total assets 1.55% 1.41% 2.57%
Non-performing loans as a percentage of
total loans 1.96% 1.72% 3.10%
</TABLE>
22
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table F. Loan Loss Experience
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In thousands) September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Loans outstanding (end of period) $ 756,865 $ 526,224 $ 756,865 $ 526,224
========= ========= ========= =========
Average loans outstanding (period to date) $ 652,078 $ 518,220 $ 621,460 $ 516,177
========= ========= ========= =========
Allowance for loan losses at beginning of period $ 15,736 $ 9,647 $ 14,296 $ 8,227
Loan charge-offs:
Residential real estate (46) -- (70) (84)
Commercial real estate -- (29) -- (56)
Commercial loans -- (33) -- (58)
Manufactured housing (315) (168) (558) (554)
Consumer (73) (27) (150) (83)
Financed insurance premiums (125) (315) (242) (768)
--------- --------- --------- ---------
Total charge-offs (559) (572) (1,020) (1,603)
--------- --------- --------- ---------
Loan recoveries:
Residential real estate 1 303 41 330
Commercial real estate -- -- 42 --
Commercial loans 1 11 3 15
Manufactured housing 19 29 32 40
Consumer 14 7 18 13
Financed insurance premiums 89 191 189 378
--------- --------- --------- ---------
Total recoveries 124 541 325 776
--------- --------- --------- ---------
Loan charge-offs, net of recoveries (435) (31) (695) (827)
Provision charged to operations 1,500 1,944 3,200 4,160
Allowance acquired 1,008 -- 1,008 --
--------- --------- --------- ---------
Allowance for loan losses at end of period $ 17,809 $ 11,560 $ 17,809 $ 11,560
========= ========= ========= =========
Ratio of net charge-offs during the period to average
outstanding during the period (annualized) 0.27% 0.02% 0.22% 0.32%
========== ========== ========== ==========
Provision as a percentage of average loans
outstanding during the period (annualized) 0.92% 1.49% 1.03% 1.61%
========== ========== ========== ==========
Allowance as a percentage of loans outstanding (end of period) 2.35% 2.20% 2.35% 2.20%
========== ========== ========== ==========
</TABLE>
23
<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
The Company held an annual meeting of shareholders on August
19, 1999. At the meeting, proposals to (i) Elect Directors Schram, Florio and
Collins for three year terms, and (ii) ratify the appointment of KPMG LLP as
independent auditors for the Company for the fiscal year ending March 31, 2000
were approved. The votes cast for and against these proposals, and the number of
abstention and broker non-votes with respect to each of these proposals, were as
follows:
Election of Directors
---------------------
For Withheld
--- --------
Earl Schram, Jr. 14,510,889 94,762
Carl A. Florio 14,505,694 99,956
William E. Collins 14,510,352 95,298
Ratification of KPMG LLP as Independent Auditors
------------------------------------------------
For Against Abstentions
--- ------- -----------
14,552,059 29,544 24,047
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 September 16, 1999 to announce the completion of
the SFS Bancorp, Inc. acquisition on September 3,
1999.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON RIVER BANCORP, INC.
11/15/99 /s/ Carl A. Florio
-------- ----------------------------------------
Date Carl A. Florio, Director, President and
Chief Executive Officer (Principal
Executive and Operating Officer)
11/15/99 /s/ Timothy E. Blow
-------- ----------------------------------------
Date Timothy E. Blow, Chief Financial
Officer (Principal Financial and
Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> SEP-30-1999
<CASH> 13,125
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 245,580
<INVESTMENTS-CARRYING> 17,272
<INVESTMENTS-MARKET> 17,296
<LOANS> 756,865
<ALLOWANCE> 17,809
<TOTAL-ASSETS> 1,067,524
<DEPOSITS> 750,925
<SHORT-TERM> 60,993
<LIABILITIES-OTHER> 17,545
<LONG-TERM> 30,600
0
0
<COMMON> 179
<OTHER-SE> 207,282
<TOTAL-LIABILITIES-AND-EQUITY> 1,067,524
<INTEREST-LOAN> 27,023
<INTEREST-INVEST> 7,800
<INTEREST-OTHER> 123
<INTEREST-TOTAL> 34,946
<INTEREST-DEPOSIT> 11,842
<INTEREST-EXPENSE> 13,019
<INTEREST-INCOME-NET> 21,927
<LOAN-LOSSES> 3,200
<SECURITIES-GAINS> 83
<EXPENSE-OTHER> 13,177
<INCOME-PRETAX> 6,795
<INCOME-PRE-EXTRAORDINARY> 6,795
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,440
<EPS-BASIC> .29
<EPS-DILUTED> .29
<YIELD-ACTUAL> 5.06
<LOANS-NON> 14,798
<LOANS-PAST> 24
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,400
<ALLOWANCE-OPEN> 14,296
<CHARGE-OFFS> 1,020
<RECOVERIES> 325
<ALLOWANCE-CLOSE> 17,809
<ALLOWANCE-DOMESTIC> 15,396
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,413
</TABLE>
