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 December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 000-24187
HUDSON RIVER BANCORP, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 14-1803212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Hudson City Centre, Hudson New York 12534
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 828-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] YES [ ] NO
As of February 2, 1999, there were issued and outstanding 17,567,750
shares of the Registrant's Common Stock.
<PAGE>
FORM 10-Q
HUDSON RIVER BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets at December 31,
1998 and March 31, 1998
Consolidated Income Statements for the three
and nine months ended December 31, 1998 and
1997
Consolidated Statements of Cash Flows for
the nine months ended December 31, 1998 and
1997
Notes to Unaudited Consolidated Interim
Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
EXHIBIT INDEX
SIGNATURE PAGE
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
Item 1. Financial Statements (unaudited)
December 31, March 31,
Assets 1998 1998
- ------ --------- ---------
(In thousands, except share and per share data)
<S> <C> <C>
Cash and due from banks $ 12,480 $ 12,423
Federal funds sold 3,000 21,850
Securities purchased under agreements to resell 23,563 --
--------- ---------
Cash and cash equivalents 39,043 34,273
--------- ---------
Loans held for sale -- 1,286
Securities available for sale 197,667 42,471
Investment securities 34,363 65,194
Federal Home Loan Bank of New York stock 3,035 3,035
Loans receivable 539,948 506,978
Less: Allowance for loan losses (12,697) (8,227)
--------- ---------
Net loans receivable 527,251 498,751
--------- ---------
Accrued interest receivable 5,738 4,402
Premises and equipment, net 16,319 15,331
Other real estate owned and repossessed property 2,295 1,532
Other assets 8,000 4,939
--------- ---------
Total assets $ 833,711 $ 671,214
========= =========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits:
Savings 141,104 142,569
N.O.W. and money market 99,029 93,400
Time deposits 311,509 319,299
Non-interest bearing deposits 44,024 33,046
--------- ---------
Total deposits 595,666 588,314
--------- ---------
Short-term borrowings -- 2,000
Mortgagors' escrow balances 5,009 3,723
Other liabilities 5,685 8,873
--------- ---------
Total liabilities 606,360 602,910
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
Item 1. Financial Statements (continued)
December 31, March 31,
1998 1998
--------- ---------
(In thousands, except share and per share data)
<S> <C> <C>
Stockholders' Equity:
Preferred Stock, $.01 par value. Authorized 5,000,000 shares -- --
Common Stock, $.01 par value. Authorized 40,000,000 shares; 179 --
17,853,750 shares issued at December 31, 1998
Additional Paid in Capital 174,988 --
Common stock acquired by Employee Stock Ownership Plan (1,428,300 shares) (18,428) --
Retained Earnings, substantially restricted 70,252 68,308
Net unrealized gain (loss) on securities available for
sale, net of tax 360 (4)
--------- ---------
Total stockholders' equity 227,351 68,304
--------- ---------
Total liabilities and stockholders' equity $ 833,711 $ 671,214
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
For the Three For the Nine
Months Ended December 31, Months Ended December 31,
------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $11,913 $11,939 $36,190 $35,584
Securities available for sale 3,060 626 6,521 1,960
Investment securities 675 1,114 2,562 3,565
Federal funds sold 47 71 1,028 202
Securities purchased under agreements to resell 373 -- 1,571 --
Federal Home Loan Bank of New
York stock 53 51 164 142
------- ------- ------- -------
Total interest and dividend income 16,121 13,801 48,036 41,453
------- ------- ------- -------
Interest expense:
Deposits 6,338 6,551 19,931 19,364
Short-term borrowings 1 20 51 176
------- ------- ------- -------
Total interest expense 6,339 6,571 19,982 19,540
------- ------- ------- -------
Net interest income 9,782 7,230 28,054 21,913
Provision for loan losses 1,681 2,003 5,841 6,408
------- ------- ------- -------
Net interest income after
provision for loan losses 8,101 5,227 22,213 15,505
------- ------- ------- -------
Other operating income:
Service charges on deposit accounts 325 263 981 840
Loan servicing income 46 61 139 353
Net securities transactions 1 -- 33 12
Net gain on sale of loans -- 25 65 39
Other income 211 117 664 646
------- ------- ------- -------
Total other operating income 583 466 1,882 1,890
------- ------- ------- -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
(continued)
For the Three For the Nine
Months Ended December 31, Months Ended December 31,
------------------------- -------------------------
1998 1997 1998 1997
------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Other operating expenses:
Compensation and benefits 2,883 2,437 8,073 6,985
Occupancy 340 332 1,107 993
Equipment 388 378 1,136 1,232
Other real estate owned and
repossessed property expenses 199 41 497 274
Legal and other professional fees 157 502 491 843
Postage and item transportation 167 170 544 557
Charitable foundation contribution -- -- 5,200 --
Other expenses 1,572 1,114 3,964 3,304
------- ------- ------- -------
Total other operating
expenses 5,706 4,974 21,012 14,188
------- ------- ------- -------
Income before income tax expense 2,978 719 3,083 3,207
Income tax expense 1,098 302 1,139 1,321
------- ------- ------- -------
Net income $ 1,880 $ 417 $ 1,944 $ 1,886
======= ======= ======= =======
Basic earnings per share $ 0.11 N/A $ 0.06 N/A
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
For The Nine
Months Ended December 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 1,944 $ 1,886
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,051 1,021
Provision for loan losses 5,841 6,408
Charitable foundation contribution 5,200 --
Net securities transactions (33) (12)
Net gain on sale of loans held for sale (65) (39)
Net loans originated for sale (7,730) (2,342)
Proceeds from sale of loans held for sale 9,081 2,465
Net gain on sale of premises and equipment (71) --
Adjustments of other real estate owned and
repossessed property to fair value 178 217
Net gain on sale of other real estate owned
and repossessed property (388) (441)
Increase in accrued interest receivable (1,336) (66)
Increase in other assets (3,296) (2,807)
(Decrease) increase in other liabilities (3,188) 350
--------- ---------
Total adjustments 5,244 4,754
--------- ---------
Net cash provided by operating activities 7,188 6,640
--------- ---------
Cash flows from investing activities:
Proceeds from maturities, calls, and paydowns of securities available for sale 29,975 17,995
Purchases of securities available for sale (184,539) (15,010)
Proceeds from maturities, calls and paydowns
of investment securities 30,831 13,805
Purchase of investment securities -- (5,981)
Net loans made to customers (38,564) (27,506)
Proceeds from sales of and payments received on
other real estate owned and repossessed property 3,670 5,715
Proceeds from sale of premises and equipment 471 --
Purchases of premises and equipment (2,439) (1,896)
--------- ---------
Net cash used in investing activities (160,595) (12,878)
--------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(continued)
For The Nine
Months Ended December 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 7,352 21,632
Net increase in mortgagors' escrow balances 1,286 1,189
Net decrease in short-term borrowings (2,000) (10,585)
Repayment of UDAG Payable -- (835)
Net proceeds from stock offering 169,967 --
Acquisition of common stock by ESOP (18,428) --
--------- ---------
Net cash provided by financing activities 158,177 11,401
--------- ---------
Net increase in cash and cash equivalents 4,770 5,163
Cash and cash equivalents at beginning of period 34,273 10,457
--------- ---------
Cash and cash equivalents at end of period $ 39,043 $ 15,620
========= =========
Supplemental cash flow information:
Interest paid $ 19,982 $ 19,538
========= =========
Taxes paid $ 563 $ 4,012
========= =========
Supplemental disclosures of non-cash investing and financing
activities:
Loans transferred to other real estate owned and repossessed property $ 4,223 $ 3,103
========= =========
Adjustment of securities available for sale to fair value,
net of tax $ 364 $ 380
========= =========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements
<PAGE>
Hudson River Bancorp, Inc.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring accruals) considered necessary for a fair
presentation have been included. The accompanying unaudited consolidated
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K as of and for the year ended March 31, 1998. Operating
results for the three month and nine month periods ended December 31, 1998 are
not necessarily indicative of the results that may be expected for the full
year.
2. Hudson River Bancorp, Inc. ("the Company") was formed in March 1998
as part of the conversion of Hudson River Bank & Trust Company, formerly The
Hudson City Savings Institution ("the Bank"), from a New York State chartered
mutual savings bank to a New York State chartered stock savings bank (the
"Conversion"). The Conversion was completed on July 1, 1998. Concurrently with
the Conversion, the Company completed its initial public offering with the
issuance of 17,333,738 shares of common stock, receiving $173.3 million in gross
proceeds. An additional 520,012 shares were contributed to the Hudson River Bank
& Trust Company Foundation, resulting in a non-recurring charge of $5.2 million
which was reflected in the financial results for the nine month period ended
December 31, 1998. Subsequent to the initial public offering, 1,428,300 shares
of common stock were purchased for the benefit of the Bank's Employee Stock
Ownership Plan (ESOP). Fifty percent of the net proceeds from the offering were
utilized to acquire all of the outstanding common stock of the Bank. The
remaining proceeds were utilized by the Company for general corporate purposes,
including investments. The financial information presented herein prior to July
1, 1998 reflects the historical activity of the Bank. Earnings per share
information for periods prior to the initial public offering on July 1, 1998 is
not applicable.
3. On April 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income includes the reported net income
of a company adjusted for items that are currently accounted for as direct
entries to equity, such as the mark to market adjustment on securities available
for sale, foreign currency items and minimum pension liability adjustments. At
the Company, comprehensive income represents net income plus other comprehensive
income, which consists of the net change in unrealized gains or losses on
securities available for sale for the period, net of tax. Accumulated other
comprehensive income represents the net unrealized gains or losses on securities
available for sale, net of tax, as of the balance sheet dates. Comprehensive
income for the three month periods ended December 31, 1998 and 1997 was $1.4
million and $432 thousand, respectively. Comprehensive income for each of the
nine month periods ended December 31, 1998 and 1997 was $2.3 million.
<PAGE>
Hudson River Bancorp, Inc.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(continued)
4. On July 1, 1998, the Company adopted the provisions of SFAS No. 128,
"Earnings per Share", which establishes standards for computing and presenting
earnings per share (EPS). SFAS No. 128 requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the diluted EPS computation. Basic EPS excludes dilution and is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or resulted in
the issuance of common stock that then shared in the earnings of the entity.
Unallocated ESOP shares are not included in the weighted average number of
common shares outstanding for either the basic or diluted earnings per share
calculations.
The following sets forth certain information regarding the calculation
of basic earnings per share for the three and nine month periods ended December
31, 1998. Earnings of the Company prior to its initial public offering are not
included in the calculation of earnings per share. Earnings per share
information for periods ending prior to the Company's initial public offering is
not applicable. Diluted earnings per share calculations are not applicable as
the Company does not have any securities or other contracts that would effect
the calculation of earnings per share.
Restricted stock awarded under the Company's Recognition and Retention
Plan and stock option granted under the Company's Stock Option and Incentive
Plan could have a dilutive effect on the Company's earnings per share in future
periods. These plans were adopted by the Company's stockholders on January 5,
1999.
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
December 31, 1998 December 31, 1998
----------------- -----------------
(In thousands, except for share and per share data)
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS $1,880 16,425,450 $.11 $958 16,442,094 $.06
====== ========== ==== ==== ========== ====
</TABLE>
<PAGE>
Hudson River Bancorp, Inc.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
- -------
On July 1, 1998, Hudson River Bank & Trust Company (formerly The Hudson
City Savings Institution) (the "Bank") completed its conversion from a New York
chartered mutual savings bank to a New York chartered stock savings bank (the
"Conversion"). Concurrent with the Conversion, Hudson River Bancorp, Inc. (the
"Company") completed its initial public offering of common stock, receiving
approximately $173.3 million in gross proceeds in exchange for 17,333,738 shares
of its common stock. In addition, the Company purchased all of the common stock
of the Bank in exchange for 50% of the net Conversion proceeds. Prior to the
initial public offering, the Company had no results of operations, therefore
results of operations prior to July 1, 1998 principally reflect the operations
of the Bank.
The Company's primary market area, with 12 full-service branches,
consists of Columbia, Rensselaer, Albany, Schenectady, and Dutchess counties.
The Company has been, and intends to continue to be, a community-oriented
financial institution offering a variety of financial services. The Company's
principal business is attracting deposits from customers within its market area
and investing those funds primarily in residential mortgage loans, and to a
lesser extent, in manufactured housing and consumer loans, commercial and
commercial real estate loans, and government and corporate debt securities. The
financial condition and operating results of the Company are dependent on its
net interest income which is the difference between the interest and dividend
income earned on its assets, primarily loans and investments, and the interest
expense paid on its liabilities, primarily consisting of deposits and
borrowings. Net income is also affected by other operating income, such as loan
servicing income and fees on deposit related services; other operating expenses,
such as compensation and occupancy expenses; provisions for loan losses; and
Federal and state income taxes.
The Company's results of operations are significantly affected by
general economic and competitive conditions (particularly changes in market
interest rates), government policies, changes in accounting standards and
actions of regulatory agencies. Future changes in applicable laws, regulations
or government policies may have a material impact on the Company. Lending
activities are substantially influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates and the availability of
funds. The ability to gather deposits and the cost of funds are influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments, including mutual funds and stocks.
FORWARD-LOOKING STATEMENTS
- --------------------------
When used in this filing or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation's Reform Act of 1995. In addition, certain disclosures and
information customarily provided by financial institutions, such
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
as an analysis of the adequacy of the allowance for loan losses or an analysis
of the interest rate sensitivity of the Company's assets and liabilities, are
inherently based upon predictions of future events and circumstances.
Furthermore, from time to time, the Company may publish other forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Some of the risks and uncertainties that may affect
the operations, performance, development and results of the Company's business,
the interest rate sensitivity of its assets and liabilities, and the adequacy of
its allowance for loan losses, include but are not limited to the following:
a. Deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase in loan
delinquencies, a decrease in property values, or a change in the housing
turnover rate;
b. Changes in market interest rates or changes in the speed at which
market interest rates change;
c. Changes in laws and regulations affecting the financial service
industry;
d. Changes in competition; and
e. Changes in consumer preferences.
The Company wishes to caution readers not to place undue reliance on
any forward-looking statements, which speak only as of the date made, and to
advise readers that various factors, including those described above, could
affect the Company's financial performance and could cause the Company's actual
results or circumstances for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any
obligations, to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
OPERATING RESULTS
- -----------------
Comparison of three months ended December 31, 1998 and 1997
The Company realized net income for the three months ended December 31,
1998 amounting to $1.9 million, up $1.5 million from the $417 thousand earned
during the three months ended December 31, 1997. The increase was primarily a
result of higher net interest income (up $2.6 million) and a lower provision for
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
loan losses (down $322 thousand), partially offset by higher other operating
expenses (up $732 thousand) and higher income tax expense (up $796 thousand).
The Company earned $.11 per share for the three months ended December 31, 1998
and its return on average assets was .90%, up from .25% for the comparable
period a year earlier. The Company's return on average equity was 3.29% for the
three months ended December 31, 1998, up from 2.41% for the three months ended
December 31, 1997. See Table A, "Financial Highlights".
NET INTEREST INCOME. Net interest income for the three months ended
December 31, 1998 was $9.8 million, up from the $7.2 million for the three
months ended December 31, 1997. The increase was primarily the result of the
increase in average earning assets from $631.1 million for the three months
ended December 31, 1997 to $796.2 million for the same period in 1998. Average
interest-bearing liabilities increased only slightly during this same period, up
$1.3 million to $552.8 million from $551.5 million for the three months ended
December 31, 1997. Most of the increase in earning assets is attributed to the
proceeds received by the Company as part of its initial public offering. The
impact of these volume increases resulted in an increase in net interest income
of $2.6 million. The average yield on earning assets decreased from 8.68% to
8.03%, while the average rate paid on interest-bearing liabilities also declined
from 4.73% to 4.55%. The impact of these lower interest rates resulted in a
modest decrease in net interest income of $61 thousand. As a result of these
volume and rate fluctuations, the Company's net interest margin for the three
months ended December 31, 1998 was 4.87%, up from 4.55% for the three months
ended December 31, 1997. See Table B, "Average Balances, Interest and Yields"
and Table C, "Volume and Rate Analysis".
INTEREST AND DIVIDEND INCOME. Interest and dividend income for the
three months ended December 31, 1998 was $16.1 million, up from $13.8 million
for the comparable period in 1997. The largest component of interest and
dividend income is interest on loans. Interest on loans remained flat at $11.9
million for both the three months ended December 31, 1998 and 1997, a result of
an increase of $163 thousand in interest paid on loans due to volume increases
offset by a decrease of $189 thousand in interest paid on loans due to lower
rates. The average balance of loans increased $7.1 million, while the yield on
loans decreased from 9.16% to 9.02%. The interest on securities available for
sale increased $2.4 million from $626 thousand for the three months ended
December 31, 1997 to $3.1 million for the three months ended December 31, 1998.
This increase in interest on securities available for sale is the result of an
increase of $155.2 million in the average balance of securities available for
sale (from $38.2 million for the three months ended December 31, 1997 to $193.3
million for the three months ended December 31, 1998), while the yield on this
portfolio declined from 6.51% to 6.28%. A decrease in interest earned on
investment securities, from $1.1 million in 1997 to $675 thousand in 1998 was
substantially due to reductions in volume. The average balance of investment
securities decreased from $68.2 million for the three months ended December 31,
1997 to $43.3 million for the three months ended December 31, 1998, resulting in
a $390 thousand decrease in interest income from reduced volume. The change in
rates on investment securities resulted in an additional reduction in interest
income of $49 thousand. Management expects the average balance of investment
securities to continue to decrease as new purchases of securities are generally
classified as securities available for sale. Interest income on federal funds
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
sold and securities purchased under agreements to resell increased $349 thousand
from $71 thousand earned in 1997 to $420 thousand in 1998. This increase is due
to higher average balances, a combined $32.4 million for the three months ended
December 31, 1998, up from $4.9 million for the three months ended December 31,
1997. See Table B, "Average Balances, Interest and Yields" and Table C, "Volume
and Rate Analysis".
INTEREST EXPENSE. Interest expense decreased from $6.6 million during
the three months ended December 31, 1997 to $6.3 million for the comparable
period in 1998. Substantially all of the Company's interest expense is from the
Company's interest-bearing deposits. The largest category of interest-bearing
deposits is time deposits. Interest on time deposits for the three months ended
December 31, 1998 was $4.5 million, down slightly from $4.6 million in 1997.
This decrease is attributed to a decrease in the average balance of time
deposits, from $316.7 million in 1997 to $313.9 million in 1998. The remainder
of the decrease is the result of a decrease in the rates paid on time deposits
from 5.77% in 1997 to 5.73% in 1998. Interest expense paid on savings accounts
declined from $1.2 million for the three months ended December 31, 1997 to $1.1
million for the same period in 1998. The decrease in interest expense on savings
accounts is almost entirely attributed to a decrease in the average rates paid
on these accounts from 3.47% in 1997 to 3.12% in 1998. Fluctuations in interest
expense on other categories of interest-bearing liabilities were not
significant. See Table B, "Average Balances, Interest and Yields" and Table C,
"Volume and Rate Analysis".
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased
slightly from $2.0 million for the three months ended December 31, 1997 to $1.7
million for the three months ended December 31, 1998. The decrease in the
provision for loan losses is related to the reduction in non-performing loans
and net charge-offs experienced in the quarter ended December 31, 1998, in
comparison to the comparable quarter of the prior year. While there has been
some improvement in non-performing loan and net charge-off numbers, the level of
the Company's non-performing loans and delinquencies continue to require the
current level of provision for loan losses. In addition, the Company continues
to maintain certain portfolios of loans with higher credit risk, such as
manufactured housing loans and financed insurance premiums, relative to loans
secured by real estate. Net charge-offs, risk elements of the Company's loan
portfolio, economic conditions in the Company's market area and non-performing
loan balances are the primary factors which are considered in determining the
levels of the Company's provision for loan losses. Although the Company
anticipates that the provision for loan losses will continue at current levels
through at least the remainder of fiscal 1999, there can be no assurance that
loan losses will not exceed estimated amounts or that the provision for loan
losses will not increase in future periods. See Table E, "Non-Performing Assets"
and Table F, "Loan Loss Experience".
OTHER OPERATING INCOME. Total other operating income increased $117
thousand for the three months ended December 31, 1998 as compared to the same
period in 1997. Other operating income is composed primarily of service charges
on deposit accounts and loan servicing income. Income from service charges on
deposits accounts increased from $263 thousand for the three months ended
December 31, 1997 to $325 thousand for the three months ended December 31, 1998.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
This increase is attributed to the overall increase in the Company's deposit
accounts and fees on these accounts during this time period. Loan servicing
income decreased slightly from $61 thousand in the three months ended December
31, 1997 to $46 thousand in the three months ended December 31, 1998 resulting
from a reduction in the Company's loan servicing portfolio. Other income was
$211 thousand for the three months ended December 31, 1998, up from $117
thousand for the same period in 1997. The majority of this increase is related
to income recognized from the Company's November 1998 equity investment in
Homestead Funding Corp., the largest residential mortgage originator in the
Capital District area.
OTHER OPERATING EXPENSES. Total other operating expenses increased $732
thousand to $5.7 million for the three months ended December 31, 1998, up from
$5.0 million for the comparable period in 1997. Increases in compensation and
benefits (up $446 thousand), other real estate and repossessed property expenses
(up $158 thousand), and other expenses (up $458 thousand), offset by a decrease
in legal and other professional fees (down $345 thousand), were the primary
contributors to the overall increase.
The increase in compensation and benefits is the result of the growth
of our commercial services department and the costs of the Employee Stock
Ownership Plan, established in connection with the Bank's Conversion.
The increase in other real estate owned and repossessed property (OREO)
expense is directly attributed to an increase in the level of repossessed
property in 1998. In addition, a large gain recognized by the Company during the
three months ended December 31, 1997 related to the sale of an OREO property
reduced the overall expense in 1997 and contributed to the increase in 1998
expenses as compared to 1997.
The increase in other expenses is the result of general increases
associated with being a public company. These costs include Delaware franchise
tax fees, printing costs associated with public financial reporting, and costs
of the Company's Special Meeting of Stockholders' and related proxy expenses. In
addition, advertising and marketing expenses have generally been higher,
particularly in relation to our premium finance subsidiary.
The decrease in legal and other professional fees is the result of
external costs associated with the Company's consideration and evaluation of
strategic options during 1997. In addition, the Company experienced higher
consulting expenses during the three months ended December 31, 1997 as compared
to the same period in 1998. These expenses related to consulting firms engaged
by the Company to assist management in addressing certain strategic and
organizational issues as well as operational issues of the Company.
The remaining categories of other expenses and other operating expenses
did not experience significant fluctuations. In January 1999, the Company's
stockholders approved a Recognition and Retention Plan under which awards of
stock were made to directors and certain officers. These stock awards will
result in increased compensation expense for periods ending after December 31,
1998. Management estimates that the impact of this plan will increase the
Company's compensation and benefits expense in future periods by approximately
$880 thousand annually, or $220 thousand per quarter.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
INCOME TAX EXPENSE. Income tax expense increased from $302 thousand for
the three months ended December 31, 1997 to $1.1 million for the comparable
period in 1998. The increase is primarily the result of higher income before
income tax expense offset by an increase in tax exempt income realized by the
Company.
Comparison of nine months ended December 31, 1998 and 1997
Net income for the nine months ended December 31, 1998 was $1.9
million, up $58 thousand from the nine months ended December 31, 1997. Net
income for the nine months ended December 31, 1998 was significantly impacted by
the non-recurring charge of $5.2 million ($3.1 million after-tax) taken in
connection with the Company's contribution of stock to the Bank's charitable
foundation. Income for the nine months ended December 31, 1998 before the
non-recurring charge was $5.1 million, up $3.2 million from the same period a
year ago. This increase was primarily a result of higher net interest income (up
$6.1 million) and a lower provision for loan losses (down $567 thousand),
partially offset by higher other operating expenses (up $1.6 million) and higher
income tax expense before the tax benefit associated with the non-recurring
charge. The Company's return on average assets before the effect of the
non-recurring charge was .84% for the nine months ended December 31, 1998, up
from .38% for the comparable period a year earlier. The Company's return on
average equity before the effect of the non-recurring charge was 3.89% for the
nine months ended December 31, 1998, up from 3.71% for the nine months ended
December 31, 1997. See Table A, "Financial Highlights".
NET INTEREST INCOME. Net interest income for the nine months ended
December 31, 1998 was $28.1 million, up from the $21.9 million for the nine
months ended December 31, 1997. The increase was primarily the result of the
increase in average earning assets from $629.1 million for the nine months ended
December 31, 1997 to $771.5 million for the same period in 1998.
Interest-bearing liabilities also increased during this same period, up $26.7
million from $551.9 million for the nine months ended December 31, 1997. Most of
the increase in earning assets and interest-bearing liabilities is attributed to
the Bank's Conversion. The impact of these volume increases resulted in an
increase in net interest income of $6.1 million. The yield on average earning
assets decreased from 8.75% to 8.26%, while the rate paid on interest-bearing
liabilities also decreased from 4.70% to 4.58%. The impact of these lower
interest rates actually resulted in an increase in net interest income of $81
thousand, primarily due to the large increase in earning assets with no
associated increase in funding or funding costs. Because of this, the Company's
net interest margin for the nine months ended December 31, 1998 was 4.83%, up
from 4.62% for the nine months ended December 31, 1997. See Table B, "Average
Balances, Interest and Yields" and Table C, "Volume and Rate Analysis".
INTEREST AND DIVIDEND INCOME. Interest and dividend income for the nine
months ended December 31, 1998 was $48.0 million, up from $41.5 million for the
comparable period in 1997. The largest component of interest and dividend income
is interest on loans. Interest on loans increased from $35.6 million for the
nine months ended December 31, 1997 to $36.2 million for the nine months ended
December 31, 1998. This increase of $606 thousand is almost entirely the result
of volume increases. The average balance of loans increased $9.2 million, while
the average yield on loans remained almost flat. The interest on securities
available for sale increased $4.6 million from $2.0 million for the nine months
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
ended December 31, 1997 to $6.5 million for the nine months ended December 31,
1998. This increase in interest on securities available for sale is the result
of an increase in the average balance of securities available for sale (from
$39.7 million for the nine months ended December 31, 1997 to $134.6 million for
the nine months ended December 31, 1998), offset by a decrease in the average
yield on this portfolio (from 6.55% in 1997 to 6.43% in 1998). A decrease in
interest earned on investment securities, from $3.6 million in 1997 to $2.6
million in 1998, was primarily due to reductions in volume. The average balance
of investment securities decreased from $72.2 million for the nine months ended
December 31, 1997 to $53.5 million for the nine months ended December 31, 1998,
resulting in a $897 thousand decrease in interest income due to volume. The
change in the average yield on investment securities from 6.55% in 1997 to 6.35%
in 1998 resulted in a $106 thousand decline in interest income due to rates.
Management expects the average balance of investment securities to continue to
decrease as new purchases of securities are generally classified as securities
available for sale. Interest income on federal funds sold and securities
purchased under agreements to resell increased $2.4 million from the $202
thousand earned in 1997 to $2.6 million in 1998. This increase is due to higher
average balances, a combined $61.5 million for the nine months ended December
31, 1998, up from $4.7 million for the nine months ended December 31, 1997. See
Table B, "Average Balances, Interest and Yields" and Table C, "Volume and Rate
Analysis".
INTEREST EXPENSE. Interest expense increased during the nine months
ended December 31, 1998 to $20.0 million, up from $19.5 million for the
comparable period in 1997. Substantially all of the Company's interest expense
is from the Company's interest-bearing deposits. The largest category of
interest-bearing deposits is time deposits. Interest on time deposits for the
nine months ended December 31, 1998 was $13.8 million, up from $13.5 million in
1997. Most of this increase is the result of an increase in the average balance
of time deposits, from $310.5 million in 1997 to $315.4 million in 1998. The
remainder of the increase is the result of an increase in the average rates paid
on time deposits from 5.78% in 1997 to 5.80% in 1998. Interest expense paid on
savings accounts increased $382 thousand, from $3.6 million for the nine months
ended December 31, 1997 to $4.0 million for the nine months ended December 31,
1998. This increase is almost entirely attributed to an increase in the average
balance of savings accounts (up $22.2 million) resulting from proceeds received
for subscriptions in the Company's initial public offering. Interest expense
paid on NOW/Money Market accounts was relatively flat, decreasing only $102
thousand from 1997 to 1998. Interest expense paid on borrowings decreased from
$176 thousand in 1997 to $51 thousand in 1998 as a result of lower average
balances. Fluctuations in interest expense on other categories of
interest-bearing liabilities were not significant. See Table B, "Average
Balances, Interest and Yields" and Table C, "Volume and Rate Analysis".
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
PROVISION FOR LOAN LOSSES. The provision for loan losses decreased from
$6.4 million in the nine months ended December 31, 1997 to $5.8 million in the
nine months ended December 31, 1998. The decrease in the provision for loan
losses is related to the reduction in non-performing loans and net charge-offs
experienced in the nine months ended December 31, 1998, in comparison to the
comparable nine months of the prior year. While there has been some improvement
in non-performing loan and net charge-off numbers, the level of the Company's
non-performing loans and delinquencies continue to require the current level of
provision for loan losses. In addition, the Company continues to maintain
certain portfolios of loans with higher credit risk, such as manufactured
housing loans and financed insurance premiums, relative to loans secured by real
estate. Net charge-offs, risk elements of the Company's loan portfolio, economic
conditions in the Company's market area and non-performing loan balances are the
primary factors which are considered in determining the levels of the Company's
provision for loan losses. Although the Company anticipates that the provision
for loan losses will continue at current levels through at least the remainder
of fiscal 1999, there can be no assurance that loan losses will not exceed
estimated amounts or that the provision for loan losses will not increase in
future periods. See Table E, "Non-Performing Assets" antd Table F, "Loan Loss
Experience".
OTHER OPERATING INCOME. Total other operating income remained flat at
$1.9 million for both the nine months ended December 31, 1998 and 1997. Other
operating income is composed primarily of service charges on deposit accounts
and loan servicing income. Income from service charges on deposits accounts
increased from $840 thousand for the nine months ended December 31, 1997 to $981
thousand for the nine months ended December 31, 1998. This increase is
attributed to the overall increase in the Company's deposit accounts and fees on
these accounts during this time period. Loan servicing income decreased $214
thousand from $353 thousand in the nine months ended December 31, 1997 to $139
thousand in the nine months ended December 31, 1998. This decrease relates to
the decrease in the Company's loan servicing portfolio, particularly at the
Bank's premium finance subsidiary. Other income was $664 thousand for the nine
months ended December 31, 1998, up slightly from $646 thousand for the same
period in 1997. This increase is primarily due to the income recognized during
1998 from the Company's November 1998 equity investment in Homestead Funding
Corp., the largest residential mortgage originator in the Capital District area.
OTHER OPERATING EXPENSES. Total other operating expenses increased $6.8
million to $21.0 million for the nine months ended December 31, 1998, up from
$14.2 million for the comparable period in 1997. As discussed previously, the
most significant increase was the $5.2 million non-recurring charge associated
with the Company's stock contribution to the Bank's charitable foundation.
Increases in compensation and benefits (up $1.1 million), occupancy (up $114
thousand), other real estate owned and repossessed property expenses (up $223
thousand) and other expenses (up $660 thousand), offset by a decrease in
equipment (down $96 thousand) and legal and other professional fees (down $352
thousand) were the primary contributors to the overall increase.
The increase in compensation and benefits is the result of the growth
of our commercial services department and the costs of the Employee Stock
Ownership Plan, established in connection with the Conversion, as well as
general merit increases to the Company's employees during the nine months ended
December 31, 1998.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
The increase in occupancy expenses is due to higher depreciation
expense associated with the new addition to the Company's main office building
to accommodate current and future growth and increased maintenance expenses
associated with our branch network, including new signage resulting from the
Bank's name change.
The increase in other real estate owned and repossessed property (OREO)
expense is directly attributed to an increase in the level of repossessed
property in 1998. In addition, a large gain recognized by the Company during the
nine months ended December 31, 1997 related to the sale of an OREO property
reduced the overall expense in 1997 and contributed to the increase in 1998
expenses as compared to 1997.
The increase in other expenses is the result of general increases
associated with being a public company. These costs include Delaware franchise
tax fees, printing costs associated with public financial reporting, and costs
of the Company's Special Meeting of Stockholders' and related proxy expenses. In
addition, advertising and marketing expenses have generally been higher,
particularly in relation to the Bank's premium finance subsidiary.
The decrease in equipment expense is attributed to lower insurance
costs resulting from the movement of our Warren Street, Hudson branch to our
main office building and reduced data processing and maintenance costs
consistent with the upgrade of various aspects of the Company's technology
systems.
The decrease in legal and other professional fees is the result of
external costs associated with the Company's consideration and evaluation of
strategic options during 1997. In addition, the Company experienced higher
consulting expenses during the nine months ended December 31, 1997 as compared
to the same period in 1998. These expenses related to consulting firms engaged
by the Company to assist management in addressing certain strategic and
organizational issues as well as operational issues of the Company.
The remaining categories of other expenses and other operating expenses
did not experience significant fluctuations. In January 1999, the Company's
stockholders approved a Recognition and Retention Plan under which awards of
stock were made to directors and certain officers. These stock awards will
result in increased compensation expense for periods ending after December 31,
1998. Management estimates that the impact of this plan will increase the
Company's compensation and benefits expense in future periods by $880 thousand
annually, or $220 thousand per quarter.
INCOME TAX EXPENSE. Income tax expense decreased from $1.3 million for
the nine months ended December 31, 1997 to $1.1 million for the comparable
period in 1998. The decrease is primarily the result of lower income before
income tax expense, as well as increased amounts of tax exempt income realized
by the Company during 1998.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
FINANCIAL CONDITION
- -------------------
Comparison of December 31, 1998 and March 31, 1998
Total assets at December 31, 1998 were at $833.7 million, up $162.5
million, from the $671.2 million at March 31, 1998. Substantially all of the
increase was due to the investment of the proceeds received as part of the
Company's initial public offering, increasing federal funds sold and securities
purchased under agreements to resell from a combined $21.9 million at March 31,
1998 to $26.6 million at December 31, 1998. The remainder of the increase was
concentrated in the securities available for sale and loan portfolios, which
increased $155.2 million and $33.0 million, respectively. This growth in assets
was funded by the proceeds received from the public offering as well as an
increase in deposits, from $588.3 million at March 31, 1998 to $595.7 million at
December 31, 1998. These increases as well as fluctuations in other asset and
liability categories are discussed below.
LENDING. Loans receivable increased $33.0 million from $507.0 million
at March 31, 1998 to $539.9 million at December 31, 1998. The overall increase
in total loans is primarily made up of increases in residential real estate,
commercial real estate, and commercial loans, offset by a decline in
manufactured housing and financed insurance premiums. Although residential real
estate loans increased $16.4 million, the level of residential real estate
loans, as a percentage of total loans, remained flat. The growth in this
portfolio is primarily a result of the Bank's decision to portfolio fixed rate
products at a time when adjustable rate loans are less popular. Commercial real
estate loans increased from $76.6 million at March 31, 1998 or 15.1% of total
loans, to $86.8 million or 16.1% of total loans at December 31, 1998. Commercial
loans increased $20.3 million to $38.8 million at December 31, 1998 from $18.5
million at March 31, 1998. These increases in commercial real estate and
commercial loans are a result of management's strategic goals to increase these
portfolios as a percentage of total loans in order to improve yields.
Manufactured housing loans declined $4.9 million from $97.4 million or 19.2% of
total loans at March 31, 1998 to $92.5 million or 17.1% of total loans at
December 31, 1998 as a result of management's efforts to reduce this portfolio
and focus on commercial and commercial real estate loans. Financed insurance
premiums decreased from $28.0 million, or 5.5% of total loans at March 31, 1998
to $18.4 million, or 3.4% of total loans at December 31, 1998. This decline is
somewhat seasonal in nature and is a result of management's efforts to focus on
commercial insurance lines rather than personal assigned-risk insurance lines.
See Table D, "Loan Portfolio Analysis".
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses increased from
$8.2 million at March 31, 1998 to $12.7 million at December 31, 1998, an
increase of $4.5 million. This increase is the result of the $5.8 million
provision for loan losses taken in the nine months ended December 31, 1998
offset by $1.4 million in net charge-offs for the same period. The adequacy of
the allowance for loan losses is evaluated monthly by management based upon a
review of significant loans, with particular emphasis on non-performing and
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
delinquent loans that management believes warrant special attention, as well as
an analysis of the higher risk elements of the Company's loan portfolio. At
December 31, 1998 the allowance for loan losses provides coverage of 104.40% of
total non-performing loans, up from 52.32% at March 31, 1998. The balance of the
allowance is maintained at a level which is, in management's judgment,
representative of the amount of risk inherent in the loan portfolio. See Table
E, "Non-Performing Assets" and Table F, "Loan Loss Experience".
SECURITIES AVAILABLE FOR SALE AND INVESTMENT SECURITIES. The total
balance of securities available for sale and investment securities increased
from $107.7 million at March 31, 1998 to $232.0 million at December 31, 1998.
This increase was driven by purchases of securities totaling $184.5 million
during the nine months ended December 31, 1998, offset by maturities, calls and
paydowns of securities totaling $60.8 million. Management's intention is to
continue allowing investment securities to mature and paydown with the
reinvestment of the proceeds primarily in the securities available for sale or
loan portfolios.
FEDERAL FUNDS SOLD AND SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL.
The increase of $4.7 million of Federal funds sold and securities purchased
under agreements to resell is the result of proceeds received as part of the
Company's initial public offering. Management intends to reinvest the remainder
of these proceeds in various securities while maintaining sufficient liquidity
to meet loan growth and other expansion opportunities.
PREMISES AND EQUIPMENT. Premises and equipment increased $988 thousand
from $15.3 million at March 31, 1998 to $16.3 million at December 31, 1998. This
increase is related to the Company's efforts to upgrade technology, including a
new front end system for our branch network, new image-technology for our
backoffice operations, and new computers and network for many of our employees
throughout the Company. These upgrades in technology are intended to improve our
employees' ability to provide efficient but superior service to our customers.
OREO AND REPOSSESSED PROPERTY. The balance of OREO and repossessed
property increased from $1.5 million at March 31, 1998 to $2.3 million at
December 31, 1998, an increase of $763 thousand. This increase relates primarily
to management's efforts to aggressively reduce the level of non-performing
loans. The level of repossessed property, primarily repossessed manufactured
homes, comprise the majority of the increase as management has seen modest
deterioration in this lending category. Management believes that national and
local trends in increased bankruptcies and consumer debt has contributed to this
decline in credit quality. See Table E, "Non-Performing Assets".
OTHER ASSETS. The net growth in other assets from $4.9 million at March
31, 1998 to $8.0 million at December 31, 1998 is entirely attributed to the
Company's equity investment in Homestead Funding Corp. during November 1998.
Homestead Funding Corp. is the largest residential mortgage originator based in
the Capital District area. This investment reflects management's strategic
initiative to increase non-interest income from both traditional products
offered by the Company as well as through new sources.
DEPOSITS. Total deposits increased $7.4 million, from $588.3 million at
March 31, 1998 to $595.7 million at December 31, 1998. Of this overall increase,
increases in NOW/Money market accounts of $5.6 million and non-interest bearing
accounts of $11.0 million served to offset declines in savings accounts of $1.5
million and time deposits of $7.8 million. The growth of NOW and money market
balances and non-interest bearing balances is a result of the Company's
initiatives to increase commercial services. These sources of funds
traditionally have lower interest costs in comparison to time deposit or
non-retail funding.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
MORTGAGORS' ESCROW BALANCES. The balance of mortgagors' escrow balances
increased $1.3 million to $5.0 million at December 31, 1998. This increase is
attributed to both seasonal growth as these balances tend to increase until
taxes are paid in January, as well as the overall growth of our residential real
estate portfolio.
OTHER LIABILITIES. The balance of other liabilities declined from $8.9
million at March 31, 1998 to $5.7 million at December 31, 1998. This decrease is
largely due to the timing of payments from the Company's premium finance
subsidiary to insurance companies for premiums due under the terms of finance
agreements. At March 31, 1998 a large amount of premiums were due and were
funded shortly after the fiscal year end. This fluctuation is primarily seasonal
in nature.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity
- ---------
Liquidity is defined as the ability to generate sufficient cash flow to
meet all present and future funding commitments, depositor withdrawals and
operating expenses. Management monitors the Company's liquidity position on a
daily basis and evaluates its ability to meet depositor withdrawals or make new
loans or investments.
The Company's cash inflows result primarily from loan repayments,
maturities and calls of investment securities and securities available for sale,
new deposits, and to a lessor extent, drawings upon the Company's credit lines
with other financial institutions, including the Federal Home Loan Bank of New
York. The Company's cash outflows are substantially new loan originations,
investment purchases, deposit withdrawals and operating expenses. The timing of
cash inflows and outflows is closely monitored by management although changes in
interest rates, economic conditions, and competitive forces strongly impact the
predictability of these cash flows. The Company attempts to provide stable and
flexible sources of funding through the management of its liabilities, including
core deposit products offered through its branch network as well as with limited
use of borrowings. Management believes that the level of the Company's liquid
assets combined with daily monitoring of cash inflows and outflows provide
adequate liquidity to fund outstanding loan commitments, meet daily withdrawal
requirements of depositors, and meet all other daily obligations of the Company.
Capital
- -------
Consistent with its goals to operate a sound and profitable financial
organization, the Company actively seeks to maintain a "well capitalized"
institution in accordance with regulatory standards. Total equity was $227.4
million at December 31, 1998, 27.27% of total assets on that date. As of March
31, 1998, total equity was $68.3 million or 10.18% of total assets. This growth
in the equity to assets ratio is the result of the Company's stock offering that
closed on July 1, 1998. As of December 31, 1998, the Company and the Bank
exceeded all of the capital requirements of its regulators.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS
(continued)
YEAR 2000 READINESS STATEMENT
- -----------------------------
The Company has conducted a review of its computer systems to identify
applications that could be affected by the "Year 2000" issue, and has developed
an implementation plan to resolve the issue. The Company's data processing is
performed almost entirely in-house, however software and hardware utilized is
under maintenance agreements with third party vendors. Consequently, the Company
is very dependent on those vendors to conduct its business. The Company has
already contacted each vendor to request time tables for year 2000 compliance
and expected costs, if any, to be passed along to the Company. To date, the
Company has begun the testing phase to determine whether its hardware and
software is year 2000 compliant. Testing and renovation, if applicable, on all
"mission-critical" systems was substantially completed by December 31, 1998. In
connection with Year 2000, "mission-critical" systems are defined as those
systems in which the inability to perform necessary functions would cause
significant disruptions in the Company's ability to complete day-to-day
operations, seriously impacting the Company's financial results. If systems
which are not defined as "mission-critical" fail to perform necessary functions,
the Company's day-to-day operations would not be significantly impacted,
although the lack of efficiencies the Company enjoys through performing these
functions in an automated manner could result in additional time or expense to
carry out the operation. The Company's testing plans provide a strict time frame
to determine that the reprogramming efforts of its primary service providers are
year 2000 compliant and completed within the time requirements provided by its
regulators. Testing of systems which are not considered to be "mission-critical"
is scheduled to be completed by June 30, 1999.
In the normal course of keeping pace with changing technology, the
Company has in recent years, and continues to, perform upgrades of its hardware
and software. Because of these significant investments, management does not
expect that any additional costs to ensure its systems are year 2000 compliant
will have a significant impact on its financial position or results of
operations; however, there can be no assurance that the vendors systems will be
2000 compliant, consequently the Company could incur incremental costs to
convert to another vendor or purchase additional hardware or software to be year
2000 compliant.
The risks associated with this issue goes beyond the Company's own
ability to solve Year 2000 problems. Should significant commercial customers
fail to address Year 2000 issues effectively, their ability to meet debt service
requirements could be impaired, resulting in increased credit risk and potential
increases in loan charge-offs. Should significant depositors or other sources of
funds fail to address Year 2000 issues effectively, the Company could be forced
to utilize alternative funding vehicles, possibly at higher costs than it
currently incurs. In addition, should suppliers of critical services fail in
their efforts to become Year 2000 compliant, or if significant third party
interfaces fail to be compatible with the Company's systems or fail to be Year
2000 compliant, it could have significant adverse affects on the operations and
financial results of the Company. The Company has taken steps in identifying and
contacting 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 with
borrowers, depositors or suppliers Year 2000 preparedness identified.
<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 June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosure about
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
standards for reporting by public companies about operating segments of their
business. SFAS No. 131 also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement is
effective for periods beginning after December 15, 1997, however, the statement
need not be applied to interim financial statements in the initial year of
application. At this time, management does not anticipate that the adoption of
this Statement will significantly impact the Company's financial reporting.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which amends the disclosure
requirements of SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Statement No. 132
standardizes the disclosure requirements of Statements No. 87 and No. 106 to the
extent practicable and recommends a parallel format for presenting information
about pensions and other postretirement benefits. This statement is applicable
to all entities and addresses disclosure only. The Statement does not change any
of the measurement or recognition provisions provided for in Statements No. 87,
No. 88, or No. 106. The Statement is effective for fiscal years beginning after
December 15, 1997. Management anticipates providing the required disclosures in
the March 31, 1999 consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. This Statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management is currently evaluating 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 Nine Months Ended
December 31, December 31,
--------------------------- --------------------------
1998 1997 1998 1997
----------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Performance Ratios:
- -------------------
Earnings per share (1) $ 0.11 $ - $ 0.06 $ -
Return on average assets 0.90% 0.25% 0.32% 0.38%
Return on average equity 3.29% 2.41% 1.49% 3.71%
Net interest rate spread 3.48% 3.95% 3.68% 4.05%
Net interest margin 4.87% 4.55% 4.83% 4.62%
Yield on average earning assets 8.03% 8.68% 8.26% 8.75%
Rate on average interest-bearing liabilities 4.55% 4.73% 4.58% 4.70%
Average earning assets to average interest-bearing
liabilities 144.04% 114.43% 133.33% 113.97%
Efficiency ratio 53.14% 64.10% 51.22% 58.48%
Expense ratio 2.64% 2.95% 2.53% 2.80%
Weighted average shares outstanding, excluding
unallocated ESOP shares 16,425,450 - 16,442,094 -
Core earnings (2) $ 1,880 $ 417 $ 5,085 $ 1,886
Core earnings per share (1) $ 0.11 $ - $ 0.31 $ -
Core earnings return on average assets 0.90% 0.25% 0.84% 0.38%
Core earnings return on average equity 3.29% 2.41% 3.89% 3.71%
Price/Annualized Core Earnings ratio (1) 25.14 - 23.09 -
<CAPTION>
At Period Ended
------------------------------------------------------
December 31, September 30, March 31,
------------------------
1998 1998 1998 1997
----------- -------- ----------- ------
<S> <C> <C> <C> <C>
Share Information
- -----------------
Shares outstanding at period end, excluding unallocated ESOP shares 16,425,450 16,425,450 - -
Book value per share, excluding unallocated ESOP shares $ 13.84 $ 13.76 - -
Book value per share $ 12.73 $ 12.66 - -
Market price at period end $ 11.3125 $ 10.1250 - -
Asset Quality Ratios:
- ---------------------
Non-performing loans to total loans 2.25% 2.69% 3.10% 4.06%
Allowance for loan losses to non-performing loans 104.40% 81.74% 52.32% 29.37%
Allowance for loan losses to total loans 2.35% 2.20% 1.62% 1.19%
Non-performing assets to total assets 1.73% 1.91% 2.57% 3.60%
Capital Ratio:
- --------------
Equity to total assets 27.27% 27.19% 10.18% 10.00%
</TABLE>
(1) Includes net income since July 1, 1998 only.
(2) Core earnings excludes the July 1, 1998, $3.1 million after-tax expense
resulting from the establishment of a charitable foundation.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table B. Average Balances, Interest, and Yields
Three Months Ended December 31,
--------------------------------------------------------------------------------
1998 1997
------------------------------------------ -----------------------------------
Average Average Average Average
Balance Interest Yield/Rate(1) Balance Interest Yield/Rate(1)
----------------------------------------- -----------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal Funds sold $ 3,911 $ 47 4.77% $ 4,932 $ 71 5.71%
Securities purchased under agreements to resell 28,530 373 5.19% -- -- --
Securities available for sale (2) 193,326 3,060 6.28% 38,172 626 6.51%
Investment securities 43,303 675 6.18% 68,210 1,114 6.48%
Federal Home Loan Bank of NY stock 3,035 53 6.93% 2,812 51 7.20%
Loans receivable (3) 524,078 11,913 9.02% 516,974 11,939 9.16%
-------------------------------------- ------------------------------------
Total earning assets $ 796,183 $ 16,121 8.03% $ 631,100 $ 13,801 8.68%
---------------------- ----------------------
Cash and due from banks $ 13,135 $ 12,534
Allowance for loan losses (11,886) (7,566)
Other non-earning assets 29,804 26,280
--------- ---------
Total assets $ 827,236 $ 662,348
========= =========
Interest-bearing liabilities:
Savings accounts $ 139,691 $ 1,099 3.12% $ 138,584 $ 1,211 3.47%
N.O.W. and Money Market accounts 95,306 684 2.85% 91,521 717 3.11%
Time deposit accounts 313,894 4,533 5.73% 316,676 4,603 5.77%
Mortgagors' escrow balances 3,812 22 2.29% 3,380 20 2.35%
Short-term borrowings 65 1 6.10% 1,349 20 5.88%
-------------------------------------- ------------------------------------
Total interest-bearing liabilities $ 552,768 $ 6,339 4.55% $ 551,510 $ 6,571 4.73%
---------------------- ----------------------
Non-interest bearing deposits $ 41,760 $ 36,856
Other non-interest bearing liabilities 5,834 5,466
Stockholders' Equity 226,874 68,516
--------- ---------
Total liabilities and stockholders' equity $ 827,236 $ 662,348
========= =========
Net interest income $ 9,782 $ 7,230
========= =========
Net interest spread 3.48% 3.95%
==== ====
Net interest margin 4.87% 4.55%
==== ====
</TABLE>
(1) Annualized
(2) Includes SFAS No. 115 fair value adjustment
(3) Includes non-accrual loans (continued)
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table B.(continued)
Nine Months Ended December 31,
--------------------------------------------------------------------------------
1998 1997
------------------------------------------ -----------------------------------
Average Average Average Average
Balance Interest Yield/Rate(1) Balance Interest Yield/Rate(1)
----------------------------------------- -----------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning assets:
Federal Funds sold $ 24,314 $ 1,028 5.61% $ 4,710 $ 202 5.69%
Securities purchased under agreements to resell 37,165 1,571 5.61% -- -- --
Securities available for sale (2) 134,615 6,521 6.43% 39,703 1,960 6.55%
Investment securities 53,531 2,562 6.35% 72,208 3,565 6.55%
Federal Home Loan Bank of NY stock 3,035 164 7.17% 2,812 142 6.70%
Loans receivable (3) 518,820 36,190 9.26% 509,634 35,584 9.27%
-------------------------------------- ------------------------------------
Total earning assets $ 771,480 $ 48,036 8.26% $ 629,067 $ 41,453 8.75%
---------------------- ----------------------
Cash and due from banks $ 13,222 $ 11,048
Allowance for loan losses (10,252) (6,953)
Other non-earning assets 27,658 26,945
--------- ---------
Total assets $ 802,108 $ 660,107
========= =========
Interest-bearing liabilities:
Savings accounts $ 160,082 $ 3,966 3.29% $ 137,841 $ 3,584 3.45%
N.O.W. and Money Market accounts 96,495 2,076 2.86% 94,247 2,178 3.07%
Time deposit accounts 315,443 13,796 5.80% 310,499 13,513 5.78%
Mortgagors' escrow balances 5,463 93 2.26% 5,088 89 2.32%
Short-term borrowings 1,162 51 5.83% 4,266 176 5.48%
-------------------------------------- ------------------------------------
Total interest-bearing liabilities $ 578,645 $ 19,982 4.58% $ 551,941 $ 19,540 4.70%
---------------------- ----------------------
Non-interest bearing deposits $ 43,838 $ 35,638
Other non-interest bearing liabilities 6,191 5,106
Stockholders' Equity 173,434 67,422
--------- ---------
Total liabilities and stockholders' equity $ 802,108 $ 660,107
========= =========
Net interest income $ 28,054 $ 21,913
========= =========
Net interest spread 3.68% 4.05%
==== ====
Net interest margin 4.83% 4.62%
==== ====
</TABLE>
(1) Annualized
(2) Includes SFAS No. 115 fair value adjustment
(3) Includes non-accrual loans
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table C. Volume and Rate Analysis
1998 vs 1997
---------------------------------------------------------
Three Months Ended
December 31, Increase Due To
------------------- --------------------
1998 1997 (Decrease) Volume Rate
----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
- -----------------------------
Federal Funds sold $ 47 $ 71 $ (24) $ (13) $ (11)
Securities purchased under agreements to resell 373 -- 373 373 --
Securities available for sale 3,060 626 2,434 2,457 (23)
Investment securities 675 1,114 (439) (390) (49)
Federal Home Loan Bank of NY stock 53 51 2 4 (2)
Loans receivable 11,913 11,939 (26) 163 (189)
----------------------------------------------------------
Total interest income 16,121 13,801 2,320 2,593 (273)
----------------------------------------------------------
Interest expense:
- -----------------
Savings accounts 1,099 1,211 (112) 10 (122)
N.O.W. and Money Market accounts 684 717 (33) 29 (62)
Time deposit accounts 4,533 4,603 (70) (40) (30)
Mortgagors' escrow balances 22 20 2 3 (1)
Short-term borrowings 1 20 (19) (20) 1
----------------------------------------------------------
Total interest expense 6,339 6,571 (232) (19) (213)
----------------------------------------------------------
Net interest income $ 9,782 $ 7,230 $ 2,552 $ 2,613 $ (61)
==========================================================
</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 changes due to rate.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table C. Volume and Rate Analysis (continued)
1998 vs 1997
---------------------------------------------------------
Nine Months Ended
December 31, Increase Due To
------------------- --------------------
1998 1997 (Decrease) Volume Rate
----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest and dividend income:
- -----------------------------
Federal Funds sold $ 1,028 $ 202 $ 826 $ 829 $ (3)
Securities purchased under agreements to resell 1,571 -- 1,571 1,571 --
Securities available for sale 6,521 1,960 4,561 4,598 (37)
Investment securities 2,562 3,565 (1,003) (897) (106)
Federal Home Loan Bank of NY stock 164 142 22 12 10
Loans receivable 36,190 35,584 606 641 (35)
----------------------------------------------------------
Total interest income 48,036 41,453 6,583 6,754 (171)
----------------------------------------------------------
Interest expense:
- -----------------
Savings accounts 3,966 3,584 382 557 (175)
N.O.W. and Money Market accounts 2,076 2,178 (102) 51 (153)
Time deposit accounts 13,796 13,513 283 216 67
Mortgagors' escrow balances 93 89 4 6 (2)
Short-term borrowings 51 176 (125) (136) 11
----------------------------------------------------------
Total interest expense 19,982 19,540 442 695 (253)
----------------------------------------------------------
Net interest income $28,054 $21,913 $ 6,141 $ 6,060 $ 81
==========================================================
</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
December 31, March 31,
---------------------------------------------
1998 1998 1997
--------------------- --------------------- --------------------
Amount % Amount % Amount %
--------- ---- --------- ---- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential $ 285,791 52.9% $ 269,435 53.2% $ 274,092 55.6%
Commercial 86,768 16.1% 76,570 15.1% 67,697 13.7%
Construction 4,150 0.8% 4,621 0.9% 2,725 0.6%
--------- ----- --------- ----- --------- -----
Total loans secured by real estate $ 376,709 69.8% $ 350,626 69.2% $ 344,514 69.9%
--------- ----- --------- ----- --------- -----
Other loans:
Manufactured housing $ 92,483 17.1% $ 97,426 19.2% $ 92,651 18.8%
Commercial 38,758 7.2% 18,484 3.7% 19,713 4.0%
Financed insurance premiums 18,364 3.4% 27,976 5.5% 23,535 4.8%
Consumer 12,547 2.3% 11,857 2.3% 11,577 2.3%
--------- ----- --------- ----- --------- -----
Total other loans $ 162,152 30.0% $ 155,743 30.7% $ 147,476 29.9%
--------- ----- --------- ----- --------- -----
Net deferred loan origination costs and unearned
discount 1,087 0.2% 609 0.1% 1,029 0.2%
--------- ----- --------- ----- --------- -----
Total loans receivable $ 539,948 100.0% $ 506,978 100.0% $ 493,019 100.0%
===== ===== =====
Allowance for loan losses (12,697) (8,227) (5,872)
--------- --------- ---------
Net loans receivable $ 527,251 $ 498,751 $ 487,147
========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table E. Non-Performing Assets
December 31, March 31,
--------------------
1998 1998 1997
------- ------- -------
(In thousands)
<S> <C> <C> <C>
Non-accruing loans:
Residential real estate $ 3,522 $ 4,512 $ 4,553
Commercial real estate 2,969 5,253 3,239
Commercial loans -- -- 2,318
Manufactured housing 3,159 3,060 2,260
Financed insurance premiums 2,392 2,768 2,867
Consumer 120 114 45
------- ------- -------
Total $12,162 $15,707 $15,282
------- ------- -------
Accruing loans past due 90-days or more:
Residential real estate -- -- $ 570
Commercial real estate -- -- 3,874
Commercial loans -- -- 244
Manufactured housing -- 16 --
Financed insurance premiums -- -- --
Consumer -- -- 23
------- ------- -------
Total -- $ 16 $ 4,711
------- ------- -------
Total non-performing loans: $12,162 $15,723 $19,993
======= ======= =======
Foreclosed Assets:
Residential real estate $ 258 $ 145 $ 48
Commercial real estate 457 299 2,860
Repossessed property 1,580 1,088 539
------- ------- -------
Total $ 2,295 $ 1,532 $ 3,447
======= ======= =======
Total non-performing assets $14,457 $17,255 $23,440
======= ======= =======
Allowance for Loan Losses $12,697 $ 8,227 $ 5,872
======= ======= =======
Coverage of non-performing loans 104.40% 52.32% 29.37%
Non-performing assets as a percentage of
total assets 1.73% 2.57% 3.60%
Non-performing loans as a percentage of
total loans 2.25% 3.10% 4.06%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table F. Loan Loss Experience
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Total loans outstanding (end of period) $ 539,948 $ 511,898 $ 539,948 $ 511,898
========= ========= ========= =========
Average total loans outstanding
(period to date) $ 524,078 $ 516,974 $ 518,820 $ 509,634
========= ========= ========= =========
Allowance for loan loss at
beginning of period $ 11,560 $ 9,290 $ 8,227 $ 5,872
Loan charge-offs:
Residential real estate (102) (325) (186) (391)
Commercial real estate (39) (1,187) (95) (1,233)
Commercial loans (14) (2,253) (72) (2,309)
Manufactured housing (314) (184) (868) (331)
Consumer (11) (56) (94) (81)
Financed insurance premiums (292) (722) (1,028) (1,608)
--------- --------- --------- ---------
Total charge-offs (772) (4,727) (2,343) (5,953)
--------- --------- --------- ---------
Loan recoveries:
Residential real estate 1 8 331 8
Commercial real estate 2 -- 2 17
Commercial loans 1 5 16 7
Manufactured housing 10 50 50 82
Consumer 5 12 18 31
Financed insurance premiums 209 115 555 284
--------- --------- --------- ---------
Total recoveries 228 190 972 429
--------- --------- --------- ---------
Loan charge-offs, net of recoveries (544) (4,537) (1,371) (5,524)
Provision charged to operations 1,681 2,003 5,841 6,408
Allowance for loan losses
at end of period $ 12,697 $ 6,756 $ 12,697 $ 6,756
========= ========= ========= =========
Ratio of net charge-offs during
the period to average loans
outstanding during the period (1) 0.41% 3.48% 0.35% 1.44%
========= ========= ========= =========
Provision as a percentage
of average loans (1) 1.27% 1.54% 1.49% 1.67%
========= ========= ========= =========
Allowance as a percentage of
total loans (end of period) 2.35% 1.32% 2.35% 1.32%
========= ========= ========= =========
</TABLE>
(1) Annualized
<PAGE>
Hudson River Bancorp, Inc.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
- ------- ----------------------------------------------
MARKET RISK
-----------
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Company's
business activities.
Interest rate risk is defined as an exposure to a movement in interest
rates that could have an adverse effect on the Company's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when earning
assets mature or reprice more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management's
asset/liability committee meets weekly to review the Company's interest rate
risk position and profitability, and to recommend adjustments for consideration
by the Board of Directors. Management also reviews loan and deposit pricing, and
the Company's securities portfolio, formulates investment strategies, and
oversees the timing and implementation of transactions to assure attainment of
the Board's objectives in the most effective manner. Notwithstanding the
Company's interest rate risk management activities, the potential for changing
interest rates is an uncertainty that can have an adverse effect on net income.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long- and short-term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to increase
its net interest margin. The Company's results of operations and net portfolio
values remain vulnerable to changes in interest rates and to fluctuations in the
difference between long- and short-term interest rates.
Interest rate risk analyses performed by the Company indicate that the
Company is asset sensitive, or its earning assets mature or reprice more quickly
than its interest-bearing liabilities. As a result, falling interest rates could
result in a decrease in net income. Consistent with the asset/liability
management philosophy described above, the Company has taken steps to manage its
interest rate risk by attempting to match the repricing periods of its earning
assets to its interest-bearing liabilities. The Company's recent purchases of
securities, retention of certain fixed rate residential loan products, and
emphasis on lower cost, more stable non-certificate deposit accounts are methods
the Company has utilized to manage its interest rate risk. Management
continuously evaluates various alternatives to address interest rate risk
including, but not limited to, the purchase of interest rate swaps, caps, and
floors, leveraging scenarios, and changes in asset or funding mix.
<PAGE>
<PAGE>
HUDSON RIVER BANCORP, INC.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None
(b) None
(c) None
(d) None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(27) Financial Data Schedule (included in electronic
format only)
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the
quarter ended December 31, 1998
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON RIVER BANCORP, INC.
02/09/99 /s/Carl A. Florio
-------- -----------------
Date Carl A. Florio, Director, President and
Chief Executive Officer (Principal
Executive and Operating Officer)
02/09/99 /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> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1998
<CASH> 12,480
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 26,563
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 197,667
<INVESTMENTS-CARRYING> 37,398
<INVESTMENTS-MARKET> 37,681
<LOANS> 539,948
<ALLOWANCE> 12,697
<TOTAL-ASSETS> 833,711
<DEPOSITS> 595,666
<SHORT-TERM> 0
<LIABILITIES-OTHER> 10,694
<LONG-TERM> 0
0
0
<COMMON> 179
<OTHER-SE> 227,172
<TOTAL-LIABILITIES-AND-EQUITY> 833,711
<INTEREST-LOAN> 36,190
<INTEREST-INVEST> 9,083
<INTEREST-OTHER> 2,763
<INTEREST-TOTAL> 48,036
<INTEREST-DEPOSIT> 19,931
<INTEREST-EXPENSE> 19,982
<INTEREST-INCOME-NET> 28,054
<LOAN-LOSSES> 5,841
<SECURITIES-GAINS> 33
<EXPENSE-OTHER> 21,012
<INCOME-PRETAX> 3,083
<INCOME-PRE-EXTRAORDINARY> 3,083
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,944
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
<YIELD-ACTUAL> 4.83
<LOANS-NON> 12,162
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 8,227
<CHARGE-OFFS> 2,343
<RECOVERIES> 972
<ALLOWANCE-CLOSE> 12,697
<ALLOWANCE-DOMESTIC> 11,206
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,491
</TABLE>
