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, 2000
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 6, 2000, there were issued and outstanding 15,286,060
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, 2000
and March 31, 2000
Consolidated Income
Statements for the three
and six months ended September 30, 2000
and 1999
Consolidated Statements of
Cash Flows for the six months
ended September 30, 2000
and 1999
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
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(Unaudited)
September 30, March 31,
(In thousands, except share and per share data) 2000 2000
---------------- ----------------
<S> <C> <C>
Assets
Cash and due from banks $ 19,164 $ 16,612
Securities available for sale, at fair value 231,925 236,980
Securities held to maturity (fair value of $4,842 and $11,065) 4,856 11,144
Federal Home Loan Bank of New York (FHLB) stock, at cost 9,810 7,425
Loans receivable 857,631 823,855
Allowance for loan losses (21,045) (19,608)
---------------- ----------------
Net loans receivable 836,586 804,247
---------------- ----------------
Accrued interest receivable 6,990 6,470
Premises and equipment, net 18,796 18,719
Other real estate owned (OREO) and repossessed property 1,081 1,641
Goodwill and other intangibles 11,055 11,618
Other assets 33,487 34,691
---------------- ----------------
Total assets $1,173,750 $1,149,547
================ ================
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Savings 174,011 180,932
N.O.W. and money market 129,449 126,429
Time deposits 381,282 392,962
Non-interest bearing deposits 65,975 48,240
---------------- ----------------
Total deposits 750,717 748,563
---------------- ----------------
Securities sold under agreements to repurchase 4,635 4,214
Short-term FHLB advances 162,000 116,450
---------------- ----------------
Total short-term borrowings 166,635 120,664
---------------- ----------------
Long-term FHLB borrowings 30,600 30,600
Mortgagors' escrow deposits 4,061 5,500
Other liabilities 18,233 43,497
---------------- ----------------
Total liabilities 970,246 948,824
---------------- ----------------
Shareholders' Equity:
Preferred stock, $.01 par value, Authorized 5,000,000 shares - -
Common stock, $.01 par value, Authorized 40,000,000 shares;
Issued 17,853,750 shares 179 179
Additional paid-in capital 174,733 174,733
Unallocated common stock held by ESOP (15,583) (15,583)
Unvested restricted stock awards (5,911) (6,289)
Treasury stock, at cost (2,555,190 shares at September 30, 2000 and
2,235,190 shares at March 31, 2000) (27,340) (24,248)
Retained earnings, substantially restricted 83,521 79,555
Accumulated other comprehensive loss (6,095) (7,624)
---------------- ----------------
Total shareholders' equity 203,504 200,723
---------------- ----------------
Total liabilities and shareholders' equity $1,173,750 $1,149,547
================ ================
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(Unaudited)
For the Three For the Six
Months Ended September 30, Months Ended September 30,
------------------------------- -------------------------------
(In thousands, except per share data) 2000 1999 2000 1999
--------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 18,542 $ 14,092 $ 36,389 $ 27,023
Securities available for sale 3,976 3,701 7,984 7,217
Securities held to maturity 84 261 225 583
Federal funds sold - - 1 -
Federal Home Loan Bank of New York stock 171 68 316 123
--------------- ------------- -------------- -------------
Total interest income 22,773 18,122 44,915 34,946
--------------- ------------- -------------- -------------
Interest expense:
Deposits 7,127 6,082 14,094 11,842
Securities sold under agreements to repurchase 56 20 108 26
Short-term FHLB advances 2,642 496 4,834 969
Long-term FHLB borrowings 432 182 894 182
--------------- ------------- -------------- -------------
Total interest expense 10,257 6,780 19,930 13,019
--------------- ------------- -------------- -------------
Net interest income 12,516 11,342 24,985 21,927
Provision for loan losses 1,275 1,500 2,700 3,200
--------------- ------------- -------------- -------------
Net interest income after
provision for loan losses 11,241 9,842 22,285 18,727
--------------- ------------- -------------- -------------
Other operating income:
Service charges on deposit accounts 444 378 887 710
Loan servicing income 31 35 64 72
Net securities transactions 33 4 33 83
Other income 326 236 544 380
--------------- ------------- -------------- -------------
Total other operating income 834 653 1,528 1,245
--------------- ------------- -------------- -------------
Other operating expenses:
Compensation and benefits 3,400 3,403 6,848 6,501
Occupancy 506 418 1,009 805
Equipment 659 532 1,488 1,122
Other real estate owned and repossessed property 21 258 293 661
Advertising 242 199 610 398
Legal and other professional fees 1,060 124 1,430 356
Postage and item transportation 233 167 422 346
Goodwill and other intangibles amortization 282 433 563 524
Other expenses 1,303 1,342 2,623 2,464
--------------- ------------- -------------- -------------
Total other operating expenses 7,706 6,876 15,286 13,177
--------------- ------------- -------------- -------------
Income before tax expense 4,369 3,619 8,527 6,795
Tax expense 1,624 1,240 3,139 2,355
--------------- ------------- -------------- -------------
Net income $ 2,745 $ 2,379 $ 5,388 $ 4,440
=============== ============= ============== =============
Basic earnings per share $ 0.20 $ 0.16 $ 0.39 $ 0.29
=============== ============= ============== =============
Diluted earnings per share $ 0.20 $ 0.16 $ 0.39 $ 0.29
=============== ============= ============== =============
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
September 30,
---------------------------------
(In thousands) 2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 5,388 $ 4,440
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation 1,147 945
Goodwill and other intangibles amortization 563 524
Provision for loan losses 2,700 3,200
Amortization of restricted stock awards 378 434
Net securities transactions (33) (83)
Adjustments of OREO and repossessed property to fair value 408 595
Net gain on sales of OREO and repossessed property (854) (524)
Net loss on disposition of premises and equipment 100 253
Net (increase) decrease in accrued interest receivable (520) 340
Net decrease (increase) in other assets 185 (849)
Net decrease in other liabilities (25,264) (27,941)
-------------- --------------
Net cash used in operating activities (15,802) (18,666)
-------------- --------------
Cash flows from investing activities:
Net cash used in acquisition activity - (27,975)
Proceeds from sales of securities available for sale 107 3,009
Proceeds from maturities, calls and paydowns of securities available
for sale 7,563 30,097
Purchases of securities available for sale (34) (15,203)
Proceeds from maturities, calls and paydowns of securities held to
maturity 6,288 10,534
Purchase of FHLB stock (2,385) -
Net loans made to customers (36,921) (38,588)
Proceeds from sales of and payments received on OREO
and repossessed property 2,888 2,319
Purchases of premises and equipment (1,324) (1,373)
-------------- --------------
Net cash used in investing activities (23,818) (37,180)
-------------- --------------
Cash flows from financing activities:
Net increase in deposits 2,154 8,488
Net increase in short-term borrowings 45,971 32,448
Issuance of long-term FHLB borrowings 10,000 30,000
Repayment of long-term FHLB borrowings (10,000) -
Net decrease in mortgagors' escrow deposits (1,439) (1,778)
Dividends paid (1,422) (953)
Purchase of treasury stock (3,092) (11,956)
-------------- --------------
Net cash provided by financing activities 42,172 56,249
-------------- --------------
Net increase in cash and cash equivalents 2,552 403
Cash and cash equivalents at beginning of period 16,612 12,722
-------------- --------------
Cash and cash equivalents at end of period $ 19,164 $ 13,125
============== ==============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Supplemental cash flow information:
Interest paid $ 19,127 $ 13,012
Taxes paid 3,615 -
Supplemental disclosures of non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed property $ 1,882 $ 1,460
Adjustment of securities available for sale to fair value, net of tax 1,529 (3,845)
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, 2000. Operating
results for the three and six month periods ended September 30, 2000 are not
necessarily indicative of the results that may be expected for a full year or
other interim periods.
2. 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 income for the three month periods ended
September 30, 2000 and 1999 was $4.1 million and $717 thousand, respectively.
Comprehensive income for the six month periods ended September 30, 2000 and 1999
was $6.9 million and $595 thousand, respectively.
3. 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, 2000 and 1999. 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 2000 1999
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 earnings per share $ 2,745 13,531,328 $ 0.20 $ 2,379 14,811,229 $ 0.16
Dilutive effect of potential common
shares outstanding:
Stock options 33,893 6,065
Restricted stock awards 49,433 42,731
------------ ---------------- ----------- ----------- --------------- ------------
Diluted earnings per share $ 2,745 13,614,654 $ 0.20 $ 2,379 14,860,025 $ 0.16
============ ================ =========== =========== =============== ============
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended September 30,
--------------------------------------------------------------------------------------
2000 1999
------------------------------------------ -----------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------------ ---------------- ----------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 5,388 13,601,250 $ 0.39 $ 4,440 15,051,189 $ 0.29
Dilutive effect of potential common
shares outstanding:
Stock options 17,199 3,049
Restricted stock awards 25,271 21,482
------------ ---------------- ----------- ----------- --------------- ------------
Diluted earnings per share $ 5,388 13,643,720 $ 0.39 $ 4,440 15,075,720 $ 0.29
============ ================ =========== =========== =============== ============
</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, 2000, with comparisons to 1999 as applicable. The unaudited
consolidated interim financial statements and related notes, as well as the 2000
Annual Report on Form 10-K, 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.
The Company's primary market area, with 18 full-service branches,
consists of the New York counties of Columbia, Rensselaer, Albany, Schenectady,
Dutchess, and Saratoga. 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 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.
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 of approximately
$32 million was funded primarily by long-term FHLB borrowings. The transaction
was accounted for under the purchase method of accounting and goodwill
associated with this transaction totaling $9.1 million was recorded. The
goodwill is being 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. Its four branches within Schenectady County were added to the Bank's
branch network.
On April 25, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Cohoes Bancorp, Inc. ("Cohoes") to provide
for a merger between the Company and Cohoes. At a special meeting of
shareholders held by Cohoes on August 17, 2000, the merger was not approved by
the requisite vote of Cohoes shareholders. On September 28, 2000, the Company
terminated the Merger Agreement with Cohoes.
In June 2000, the Company received an unsolicited offer from TrustCo
Bank Corp NY ("TrustCo") to acquire the Company for TrustCo stock equivalent to
$14 per share of Company stock. This unsolicited offer was declined by the Board
of Directors on June 23, 2000 because, among other reasons, TrustCo's offer was
inadequate as to the price, the Company was not for sale, and the proposal was
subject to a number of conditions, some of which were out of TrustCo's and the
Company's control, and some of which were not likely to be met. TrustCo
subsequently announced its intentions to increase its offer to $17 per share. On
October 31, 2000, TrustCo commenced a tender offer for the Company's stock
offering $10.80 in cash and $6.20 in TrustCo stock for each share of Company
stock outstanding. The tender offer proposed by TrustCo contains many of the
same conditions which were contained in its original offer. The Board of
Directors is currently considering TrustCo's tender offer and intends to make a
formal recommendation to the Company's shareholders in regard to the offer.
7
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
OVERVIEW
--------
The Company realized net income for the three months ended September
30, 2000 amounting to $2.7 million, or $0.20 per share, up $366 thousand from
the $2.4 million realized during the three months ended September 30, 1999. Net
income for the six months ended September 30, 2000 was $5.4 million, or $0.39
per share, up $948 thousand from the $4.4 million earned during the same period
a year previous. Earnings for both the three and six month periods ended
September 30, 2000 were negatively impacted by $959 thousand ($566 thousand, net
of tax) of nonrecurring expenses associated with the Company's terminated merger
with Cohoes. The increases over the prior year results were primarily a result
of higher net interest income and a lower provision for loan losses, partially
offset by higher other operating expenses and higher tax expense. For the three
months ended September 30, 2000, the Company's return on average assets was
0.94% and its return on average equity was 5.39%, up from 4.49% for the three
months ended September 30, 1999. See Table A, "Financial Highlights".
ASSET/LIABILITY MANAGEMENT
--------------------------
The Company attempts to maximize net interest income, and net income,
while actively managing its liquidity and interest rate sensitivity through the
mix of various core deposits and other sources of funds, which in turn fund an
appropriate mix of earning assets. The changes in the Company's asset mix and
sources of funds, and the resultant impact on net interest income, are discussed
below.
Earning Assets
Total average earning assets increased to $1.1 billion for the three
months ended September 30, 2000, up from $896.1 million in the same period of
1999. 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, 2000, average earning assets were $1.1 billion, up from
$866.7 million in 1999. This increase is attributed to the SFS Acquisition.
Interest income for the three months ended September 30, 2000 was $22.8 million,
up $4.7 million from 1999. For the six months ended September 30, 2000, interest
income was $44.9 million, an increase of $10.0 million over the same period in
1999. The increase in average balances was the primary reason for the higher
income. The yield on earning assets rose from 8.05% for the three months ended
September 30, 1999 to 8.25% in 2000. For the six months ended September 30,
2000, yields rose from 8.06% in 1999 to 8.23% in 2000. Earning assets at
September 30, 2000 were $1.1 billion, up $24.8 million from March 31, 2000. The
increase was primarily due to the growth in loans receivable.
Loans
The average balance of loans increased to $848.3 million for the three
months ended September 30, 2000, up $196.2 million from the $652.1 million
average for the same period in the prior year. The yield on loans for the
quarter increased 7 basis points, from 8.60% in 1999 to 8.67% in 2000. Interest
income on loans for the three months ended September 30, 2000 increased to $18.5
million from $14.1 million in 1999. The increase in average balances for the
quarter, along with higher rates, resulted in a $4.5 million increase in
interest income. On a year to date basis, average loans were $841.1 million, up
from $621.5 million in 1999. The yield on loans for the six months ended
September 30, 2000 was 8.63%, down from 8.70% in 1999. The impact of higher
average balances resulted in an increase of $9.5 million in interest income.
This increase was partially offset by a $138 thousand decrease in interest
income due to lower rates.
Total loans were $857.6 million at September 30, 2000, up $33.8 million
from the $823.9 million at March 31, 2000. Loans secured by residential real
estate increased from $491.8 million, or 59.7% of total loans at March 31, 2000,
to $525.6 million, or 61.3% of total loans at September 30, 2000. Commercial
real estate loans increased $14.7 million to $153.6 million at September 30,
2000 from $138.9 million at March 31, 2000. Commercial loans increased to $42.5
million at September 30, 2000 from $37.2 million at March 31, 2000. These
increases were partially offset by decreases of $3.1 million in manufactured
housing loans and $20.5 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
8
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
this business is written during the quarter ending March 31 and is paid down
over the subsequent three quarters. See Table D, "Loan Portfolio Analysis".
Securities
The average balance of securities available for sale and securities
held to maturity (collectively "securities") decreased $3.0 million to $237.3
million for the three months ended September 30, 2000, down from $240.3 million
for the three months ended September 30, 1999. This decrease is the result of
the Company's continued efforts to change the asset mix from lower yielding
investments to higher yielding loans. Average securities for the six months
ended September 30, 2000 were $239.0 million, a decrease of $2.7 million from
the corresponding period in the previous year. Interest income earned on
securities was $4.1 million for the three months ended September 30, 2000, up
$100 thousand from the $4.0 million earned in 1999. On a year to date basis,
interest income on securities grew from $7.8 million in 1999 to $8.2 million in
2000.
Securities at September 30, 2000 were $236.8 million, down $11.3
million from the $248.1 million the Company held as of March 31, 2000. The
decrease was due to maturities and paydowns of securities. Reinvestment of the
proceeds were primarily directed to the loan portfolio to accommodate the growth
experienced in that asset category. Management is continuing to allow the
balance of securities held to maturity to decrease with new purchases of
securities directed to the securities available for sale classification.
Federal Funds Sold
The Company had no federal funds sold during the three months ended
September 30, and limited federal funds sold during the six months ended
September 30, 2000. 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. Other
sources such as short-term FHLB advances and long-term FHLB borrowings, however,
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 $883.5 million for the three months
ended September 30, 2000 from $659.8 million for the three months ended
September 30, 1999. For the six months ended September 30, 2000, the average
balance of interest-bearing liabilities was $879.0 million, up from $628.0
million for the same period in 1999. This increase in average balances is
attributed primarily to the completion of the SFS Acquisition. Interest expense
for the three months ended September 30, 2000 was $10.3 million, up $3.5 million
from the same period in 1999. The increase in volume along with an increase in
the average rate paid from 4.09% to 4.61% for the three month period and from
4.15% to 4.52% for the six month period, resulted in the overall increase in
interest expense. For the six months ended September 30, 2000, the increase in
the average balance resulted in a $6.9 million increase in interest expense.
Interest-bearing liabilities at September 30, 2000 were $886.0 million,
up from $857.1 million at March 31, 2000. This increase was a result of the need
to fund the growth in assets of the Company, primarily in the loan portfolio.
Deposits
The average balance of savings accounts increased $14.6 million to
$175.8 million for the three months ended September 30, 2000, up from $161.2
million for the same period in 1999. On a year to date basis, the average
balance of savings accounts was $177.1 million in 2000, up from $153.8 million
in 1999. These increases are the result of the impact of the SFS Acquisition
during the quarter ended September 30, 1999. The average rates paid on savings
accounts decreased in the three months ended September 30, 2000 from 2.73% in
1999 to 2.54% in 2000 but was mostly offset by the effect of the higher average
balances in the three months ended September 30, 2000. The decrease in average
rates paid on savings accounts for the six months ended September 30, 2000 from
2.87% in 1999 to 2.54% in 2000 was offset by the effect of the higher average
balances in 2000.
9
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
Interest expense on N.O.W. and money market accounts increased from
$726 thousand for the three months ended September 30, 1999 to $805 thousand for
the same period in 2000. The average balance of N.O.W. and money market accounts
increased to $127.1 million from $109.1 million for the three-month period ended
September 30, 1999. A decrease in average rates paid from 2.65 % to 2.51%
somewhat offset the effect of the higher average balances. For the six months
ended September 30, 2000, the average balance of N.O.W. and money market
accounts increased from $106.2 million in 1999 to $127.1 million in 2000. This
increase in average balance resulted in an increase in interest expense on
N.O.W. and money market accounts for the six months ended September 30, 2000
from 1999 of $270 thousand. This was offset by a $119 thousand reduction in
interest expense on N.O.W. and money market accounts for the six months ended
September 30, 2000 resulting from a 22 basis point decrease in rates paid on
these accounts.
The average balance of time deposits increased from $329.7 million for
the three months ended September 30, 1999 to $381.4 million for the three months
ended September 30, 2000. On a year to date basis, the average balance of time
deposits increased from $315.9 million in 1999 to $384.9 million in 2000.
Interest expense on time deposits increased a total of $942 thousand for the
three months ended September 30, 2000 from the comparable period in 1999. The
increase in volume, along with an increase in the average rate paid from 5.07%
to 5.35%, resulted in the overall increase in interest expense for the
three-month period. For the six months ended September 30, 2000, the increase in
average rates paid from 5.13% in 1999 to 5.26% in 2000, along with the increase
in average balances for this time period, resulted in the $2.0 million increase
in interest expense during the six months ended September 30, 2000.
Total deposits, including $66.0 million of noninterest-bearing
deposits, were $750.7 million at September 30, 2000, up from $748.6 million
($48.2 million of noninterest-bearing deposits) at March 31, 2000. These
increases were a result of the Company's continued focus on commercial services,
including commercial deposits, and the opening of our eighteenth branch in the
beginning of June 2000.
Short-term FHLB Advances and Long-term FHLB Borrowings
The average balance of short-term FHLB advances increased to $156.9
million for the three months ended September 30, 2000 from $37.2 million in
1999. For the six months ended September 30, 2000, the average balance of
short-term FHLB advances was $147.5 million, up from $37.8 million for the same
period in 1999. Interest expense on these borrowings was $2.6 million for the
three months ended September 30, 2000, up $2.1 million from 1999. On a year to
date basis, interest expense on short-term FHLB advances increased $3.9 million
for the six months ended September 30, 2000 from 1999, almost entirely due to
the increase in volume.
The average balance of long-term FHLB borrowings increased from $12.3
million for the three months ended September 30, 1999 to $28.0 million for the
three months ended September 30, 2000. On a year to date basis, the average
balance of long-term FHLB borrowings rose from $6.2 million in 1999 to $29.3
million in 2000. The increase for both the three and six month periods is
primarily attributed to the increase in volume along with an increase in rates
paid from 5.90% to 6.12% for the three month period and from 5.90% to 6.09% for
the six month period ended September 30, 2000.
Short-term FHLB advances were $162.0 million at September 30, 2000, up
from $116.5 million at March 31, 2000. This increase is a result of the funding
of amounts due to insurance companies relating to the Company's financed
insurance premium loans. These amounts due were accrued in other liabilities as
of March 31, 2000 and paid in April 2000. Long-term FHLB borrowings were $30.6
million at both September 30, 2000 and March 31, 2000. The interest rates on the
long-term FHLB borrowings are fixed with maturities ranging from one-to-five
years, with call options ranging from one-to-two years.
Net Interest Income
Net interest income for the three months ended September 30, 2000 was
$12.5 million, up from the $11.3 million for the three months ended September
30, 1999. For the six months ended September 30, 2000, net interest income
increased $3.1 million to $25.0 million from $21.9 million for the same period a
year previous. The increase was the result of the increase in average earning
assets and higher rates on those assets. The impact of these factors was offset
in part by higher balances of, and higher rates paid on, 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, 2000 was 4.53%,
down from 5.04% for the three months ended September 30, 1999. For the six
months ended September 30,
10
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
2000, the net interest margin was 4.58%, down from 5.06% for 1999. See Table B,
"Average Balances, Interest and Yields" and Table C, "Volume and Rate Analysis".
Noninterest Sensitive Assets and Liabilities
Noninterest sensitive assets include accrued interest receivable,
premises and equipment, other real estate owned and repossessed property,
goodwill and other intangibles, and other assets. Premises and equipment
amounted to $18.8 million at September 30, 2000, up from $18.7 million at March
31, 2000. The increase is primarily attributed to the opening of the Clifton
Park branch in June 2000. Other assets were $33.5 million at September 30, 2000,
down from $34.7 million at March 31, 2000. This decrease is associated with the
accrual of estimated income taxes, and the mark-to-market of the Company's
securities available for sale portfolio.
Noninterest sensitive liabilities include noninterest-bearing deposit
accounts (primarily checking accounts) and other liabilities.
Noninterest-bearing deposits increased from $48.2 million at March 31, 2000 to
$66.0 million at September 30, 2000. This increase is associated with a new
branch opening in June 2000 and growth in the Company's commercial accounts,
which are generally noninterest-bearing. Other liabilities decreased from $43.5
million at March 31, 2000 to $18.2 million at September 30, 2000. The decrease
is almost entirely related to the funding of amounts due to insurance companies
in April of each year for financed insurance premium loans. These amounts were
recorded as other liabilities as of March 31, 2000.
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.
Nonperforming Assets
--------------------
Nonperforming assets include nonperforming loans (loans in a nonaccrual
status, loans that have been restructured, and loans past due 90 days or more
and still accruing interest) and assets which have been foreclosed or
repossessed. Foreclosed assets typically represent residential or commercial
properties, while repossessed property is primarily manufactured homes abandoned
by their owners or repossessed by the Company.
Total nonperforming assets at September 30, 2000 were $13.9 million or
1.18% of total assets, up from $11.9 million or 1.04% at March 31, 2000. The
$2.0 million increase in total nonperforming assets is due to a $2.5 million
increase in nonperforming loans, offset by a $560 thousand decrease in
foreclosed and repossessed assets.
The increase in nonperforming loans was primarily the result of a $4.3
million increase in financed insurance premium loans placed on nonaccrual. These
loans are placed on nonaccrual 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 is a by-product of the Company's seasonal growth
in this lending category as of March 31, 2000 and is expected to be a temporary
increase based upon the Company's past experience with these loans. In addition,
increases of manufactured housing nonaccruals of $634 thousand were more than
offset by a $1.4 million decrease in commercial real estate nonaccruals and a
$856 thousand decrease in residential real estate nonaccruals.
The $560 thousand decrease in foreclosed and repossessed property was
made up of a $485 thousand reduction of repossessed manufactured homes and a $75
thousand decrease in foreclosed properties.
Allowance and Provision for Loan Losses
---------------------------------------
The allowance for loan losses at September 30, 2000 was $21.0 million,
up from $19.6 million at March 31, 2000. Although the allowance for loan losses
increased as of September 30, 2000 as compared with March 31, 2000, the
allowance as a percentage of nonperforming loans decreased from 190.5% at March
31, 2000 to 164.7% at September 30, 2000. The adequacy of the allowance for loan
losses is evaluated quarterly by management based upon a review of significant
loans, with particular emphasis on nonperforming and delinquent loans that
management
11
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
believes warrant special attention, as well as an analysis of the
higher risk elements of the Company's loan portfolio. Net charge-offs for the
three months ended September 30, 2000 were $754 thousand, up from $435 thousand
for the same period in 1999. For the six months ended September 30, 2000, net
charge-offs were $1.3 million, up from the $695 thousand in 1999.
As a result of management's analysis of the risk characteristics of the
lending portfolio, as well as the trends and levels of nonperforming and other
delinquent loans, a provision for loan losses of $1.3 million for the three
months ended September 30, 2000 was recorded. The $1.3 million provision is down
$225 thousand from the $1.5 million provision recorded for the three months
ended September 30, 1999. For the six months ended September 30, 2000, the
Company recorded a provision for loan losses of $2.7 million, down from $3.2
million in the prior year. 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. The growth in loan balances, net
charge-offs, risk elements of the Company's loan portfolio, economic conditions
in the Company's market area and nonperforming loan balances are the primary
factors which are considered in determining the levels of the Company's
provision for loan losses. 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.
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 margin. At times, depending on the level of general interest rates,
the relationship between long- and short-term interest rates, market conditions
and competitive factors, the Board and management may determine to increase the
Company's interest rate risk position somewhat in order to increase its net
interest margin. The Company's results of operations and net portfolio values
remain vulnerable to changes in interest rates and to fluctuations in the
difference between long- and short-term interest rates.
12
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
Interest rate risk analyses performed by the Company indicate that the
Company is slightly asset sensitive as of September 30, 2000. As a result,
rising interest rates projected over a 12-month horizon are estimated to have a
slightly positive effect on net interest income, while falling interest rates
projected over the same 12-month horizon are estimated to have a slightly
negative effect on net interest income. Management makes certain assumptions in
relation to prepayment speeds for loans, CMO's and mortgage-backed securities,
which would prepay much faster in a falling rate scenario, and slower in a
rising rate scenario. 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, while still allowing for maximization of net
interest income. The Company's 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.
The sensitivity analysis discussed above does not represent a Company
forecast and should not be relied upon as being indicative of expected operating
results. These hypothetical estimates are based upon numerous assumptions
including: the nature and timing of interest rate levels including yield curve
shape, prepayments on loans and securities, deposit decay rates, pricing
decisions on loans and deposits, and reinvestment/replacement of asset and
13
<PAGE>
liability cash flows. While assumptions are developed based upon current
economic and local market conditions, the Company cannot make assurances as to
the predicative nature of these assumptions including how customer preferences
or competitor influences might change. Also, as market conditions vary from
those assumed in the sensitivity analysis, actual results will differ due to:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate changes on caps and floors on adjustable rate assets,
the potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product preference
changes, and other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that management might take in responding to or
anticipating changes in interest rates.
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, principal payments, and calls of securities held to maturity and
securities available for sale; new deposits; and borrowings from 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. Management closely monitors the timing of cash inflows
and outflows 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.
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 $203.5
million at September 30, 2000, 17.34% of total assets on that date. As of March
31, 2000, total equity was $200.7 million or 17.46% of total assets. Ratios of
tangible equity to tangible assets were 16.55% and 16.62% as of September 30,
2000 and March 31, 2000, 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, and share repurchases. The Company is
currently executing a 10% share repurchase program. As of September 30, 2000 the
Company had an additional 97 thousand shares to acquire under its current
repurchase program. As of September 30, 2000, the Company and the Bank exceeded
all of its regulatory capital requirements and the Bank was classified as a
well-capitalized institution.
OTHER OPERATING INCOME AND EXPENSES
-----------------------------------
Other operating income is composed primarily of service charges on
deposit accounts, loan servicing income, net securities transactions and other
income. For the three months ended September 30, 2000, total other operating
income was $834 thousand, up from $653 thousand in 1999. For the six months
ended September 30, 2000, total other operating income was $1.5 million, up from
the $1.2 million earned in 1999. Income from service charges on deposit accounts
increased from $378 thousand for the three months ended September 30, 1999 to
$444 thousand in 2000. For the six months ended September 30, service charges on
deposit accounts increased from $710 thousand in 1999 to $887 thousand in 2000.
These increases were primarily a result of the SFS Acquisition and its resultant
increase in deposit accounts. Other income was $326 thousand for the three
months ended September 30, 2000 as compared to $236 thousand for the same period
in 1999. Other income increased $164 thousand to $544 thousand for the six
months ended September 30, 2000 from $380 thousand in 1999. These increases are
the result of earnings from the Company's investment during December 1999 in
bank owned life insurance, offset in part by losses recorded in the quarter
ended June 30, 2000 in relation to the Company's equity investment in a mortgage
company.
Total other operating expenses were $7.7 million for the three months
ended September 30, 2000, up from $6.9 million from the same period in 1999. For
the six months ended September 30, 2000, total other operating expenses were
$15.3 million, up $2.1 million from the same period a year earlier. The
increases in both time periods were due to higher expenses in occupancy,
14
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
equipment, advertising, legal and other professional fees, and postage and item
transportation, partially offset by a reduction in expenses on other real estate
owned and repossessed property. As noted previously, the Company incurred $959
thousand during the three months ended September 30, 2000 in nonrecurring
expenses associated with the Company's terminated merger with Cohoes.
Occupancy expense for the three months ended September 30, 2000 was
$506 thousand, up $88 thousand from the $418 thousand for the same period in the
prior year. On a year to date basis, occupancy expense increased to $1.0 million
in 2000 from $805 thousand in 1999. Equipment expenses for the three months
ended September 30, 2000 were $659 thousand, up from $532 thousand in 1999. For
the six months ended September 30, 2000, equipment expenses increased $366
thousand to $1.5 million as compared to 1999. These expenses were higher due to
the SFS Acquisition as well as the opening of the Company's eighteenth branch.
Expenses on other real estate owned and repossessed property decreased
from $258 thousand during the three months ended September 30, 1999 to $21
thousand during the same period in 2000. For the six months ended September 30,
2000, expenses on other real estate owned and repossessed property decreased
from $661 thousand in 1999 to $293 thousand in 2000. These decreases are
primarily due to gains recognized by the Company relating to several properties
that were sold during the three months ended September 30, 2000.
Advertising expenses were $242 thousand for the three months ended
September 30, 2000, up from $199 thousand for the same period in 1999. For the
six months ended September 30, 2000, advertising was $610 thousand in 2000, up
from $398 thousand in 1999. Advertising related to product sale campaigns and
the opening of the Company's eighteenth branch generally accounted for the
increase.
Legal and other professional fees increased to $1.1 million for the
three months ended September 30, 2000, up from $124 thousand in 1999. For the
six months ended September 30, 2000, legal and other professional fees were $1.4
million, up from $356 thousand for the same period in 1999. These increases are
attributed to expenses associated with the Company's defense of a hostile
takeover attempt discussed previously and the Company's terminated merger with
Cohoes. Management anticipates higher than normal levels of expenses in the next
quarter as it continues to evaluate and respond to TrustCo's tender offer for
the Company's outstanding stock.
Other expenses were $1.3 million in each of the three months ended
September 30, 2000 and 1999. For the six months ended September 30, 2000, other
expenses were $2.6 million, up from $2.5 million in 1999. The increase is the
result of general increases associated with the continued growth of the Company
through branch openings, acquisitions and loan growth.
TAX EXPENSE
-----------
Tax expense increased from $1.2 million for the three months ended
September 30, 1999 to $1.6 million for the comparable period in 2000. For the
six months ended September 30, 2000, tax expense was $3.1 million in 2000, up
from $2.4 million in 1999. These increases are primarily the result of higher
income before tax expense. The Company's effective tax rate has increased in the
periods ended September 30, 2000 as compared to the prior year as a result of
the increase in nondeductible goodwill amortization from the SFS acquisition,
partially offset by the impact of the Company's investment in bank-owned life
insurance.
IMPACT OF INFLATION AND CHANGING PRICES
---------------------------------------
The Company's consolidated financial statements are prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increasing cost of the Company's operations. Unlike most industrial companies,
nearly all assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent as the price of goods
and services.
IMPACT OF NEW ACCOUNTING STANDARDS
----------------------------------
In June 1998, the Financial Accounting Standards Board 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. It requires that an
entity recognize all derivatives as either assets or liabilities in
15
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
the balance sheet and measure those instruments at fair value. The accounting
for changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. 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.
FORWARD-LOOKING STATEMENTS
--------------------------
When used in this filing or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions are inherently based upon
predictions of future events and circumstances. Furthermore, from time to time,
the Company may publish other forward-looking statements relating to such
matters as anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Some of the risks and uncertainties that may affect
the operations, performance, development and results of the Company's business,
the interest rate sensitivity of its assets and liabilities, and the adequacy of
its allowance for loan losses, include but are not limited to the following:
a. Deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase
in loan delinquencies, a decrease in property values, or a change
in the housing turnover rate;
b. Changes in market interest rates or changes in
the speed at which market interest rates change;
c. Changes in laws and regulations affecting the
financial services 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.
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,
------------------------------ ---------------------------
2000 1999 2000 1999
--------------- ------------ ------------- ------------
Financial Ratios
----------------
<S> <C> <C> <C> <C>
Basic earnings per share $ 0.20 $ 0.16 $ 0.39 $ 0.29
Diluted earnings per share 0.20 0.16 0.39 0.29
Return on average assets(1) 0.94% 1.02% 0.93% 0.99%
Return on average equity(1) 5.39 4.49 5.35 4.15
Return on average tangible equity(1) 5.71 4.62 5.67 4.25
Net interest rate spread 3.64 3.96 3.71 3.91
Net interest margin(1) 4.53 5.04 4.58 5.06
Efficiency ratio(2) 48.39 51.58 50.87 51.94
Expense ratio(1)(2) 2.21 2.64 2.33 2.66
</TABLE>
<TABLE>
<CAPTION>
At Period Ended
-------------------------------------------------------------
September 30, June 30, March 31,
---------------------------
2000 2000 2000 1999
--------------- ------------ ------------- ------------
Share Information
-----------------
<S> <C> <C> <C> <C>
Book value per share $ 15.05 $ 14.78 $ 14.50 $ 14.02
Book value per share, including unallocated
ESOP shares and unvested RRP shares 13.30 13.07 12.85 12.39
Tangible book value per share 14.23 13.94 13.66 13.81
Tangible book value per share, including unallocated
ESOP shares and unvested RRP shares 12.58 12.33 12.11 12.21
Closing market price 13.06 11.88 10.00 10.94
Capital Ratios
--------------
Equity to total assets 17.34% 17.31% 17.46% 24.89%
Tangible equity to tangible assets 16.55 16.49 16.62 24.62
Asset Quality Ratios
--------------------
Non-performing loans to total loans 1.49% 1.54% 1.25% 1.72%
Non-performing assets to total assets 1.18 1.24 1.04 1.41
Allowance for loan losses to:
Loans 2.45 2.43 2.38 2.47
Nonperforming loans 164.67 158.28 190.50 143.77
</TABLE>
(1) Annualized for the three and six month periods.
(2) Ratio does not include other real estate owned and repossessed property
expenses, net securities transactions, goodwill and other intangibles
amortization for each period, and pre-tax nonrecurring merger expense of
$959 thousand for the periods ended September 30, 2000.
17
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
<TABLE>
<CAPTION>
Table B. Average Balances, Interest, and Yields
Three Months Ended September 30,
-------------------------------------------------------------------------
2000 1999
------------------------------------ ---------------------------------
Average Average Average Average
(In thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
------------------------------------ ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Federal funds sold $ - $ - -% $ - $ - -%
Securities available for sale (1) 232,352 3,976 6.79 224,571 3,701 6.56
Securities held to maturity 4,931 84 6.76 15,685 261 6.62
Federal Home Loan Bank of New York stock 9,428 171 7.20 3,745 68 7.22
Loans receivable (2) 848,321 18,542 8.67 652,078 14,092 8.60
------------------------------------ ---------------------------------
Total earning assets 1,095,032 22,773 8.25% 896,079 18,122 8.05%
------------------------- ------------------------
Cash and due from banks 14,912 12,018
Allowance for loan losses (20,633) (16,380)
Other nonearning assets 69,591 40,013
----------- ---------
Total assets $ 1,158,902 $ 931,730
=========== =========
Interest-bearing Liabilities
Savings accounts $ 175,813 $ 1,124 2.54% $ 161,183 $ 1,107 2.73%
N.O.W. and money market accounts 127,079 805 2.51 109,141 726 2.65
Time deposit accounts 381,368 5,144 5.35 329,710 4,202 5.07
Mortgagors' escrow deposits 10,235 54 2.09 8,431 47 2.22
Securities sold under agreements to repurchase 4,149 56 5.35 1,922 20 4.14
Short-term FHLB advances 156,905 2,642 6.68 37,157 496 5.31
Long-term FHLB borrowings 27,991 432 6.12 12,277 182 5.90
------------------------------------ ---------------------------------
Total interest-bearing liabilities 883,540 10,257 4.61% 659,821 6,780 4.09%
------------------------- ------------------------
Noninterest-bearing deposits 55,001 46,526
Other noninterest-bearing liabilities 18,274 14,564
Shareholders' equity 202,087 210,819
----------- ---------
Total liabilities and shareholders' equity $ 1,158,902 $ 931,730
=========== =========
Net interest income $ 12,516 $ 11,342
========= ========
Net interest spread 3.64% 3.96%
============= =============
Net interest margin 4.53% 5.04%
============= =============
</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,
---------------------------------------------------------------------------
2000 1999
----------------------------------- ------------------------------------
Average Average Average Average
(In thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Federal funds sold $ 34 $ 1 5.87% $ - $ - -
Securities available for sale (1) 232,351 7,984 6.85 224,158 7,217 6.44
Securities held to maturity 6,648 225 6.75 17,586 583 6.63
Federal Home Loan Bank of New York stock 9,024 316 6.98 3,524 123 6.98
Loans receivable (2) 841,116 36,389 8.63 621,460 27,023 8.70
------------------------------------ ----------------------------------
Total earning assets $ 1,089,173 44,915 8.23% $ 866,728 34,946 8.06%
--------------------- ----------------------
Cash and due from banks 14,675 12,579
Allowance for loan losses (20,258) (15,539)
Other nonearning assets 69,150 36,477
----------- ---------
Total assets $ 1,152,740 $ 900,245
=========== =========
Interest-bearing Liabilities
Savings accounts $ 177,095 $ 2,252 2.54% $ 153,757 $ 2,207 2.87%
N.O.W. and money market accounts 127,130 1,604 2.52 106,234 1,453 2.74
Time deposit accounts 384,896 10,144 5.26 315,862 8,106 5.13
Mortgagors' escrow deposits 8,918 94 2.10 6,925 76 2.19
Securities sold under agreements to repurchase 4,137 108 5.21 1,270 26 4.09
Short-term FHLB advances 147,514 4,834 6.54 37,809 969 5.13
Long-term FHLB borrowings 29,289 894 6.09 6,172 182 5.90
------------------------------------ ---------------------------------
Total interest-bearing liabilities 878,979 19,930 4.52% 628,029 13,019 4.15%
--------------------- ---------------------
Noninterest-bearing deposits 53,314 44,467
Other noninterest-bearing liabilities 19,467 14,026
Shareholders' equity 200,980 213,723
----------- ---------
Total liabilities and shareholders' equity $1,152,740 $ 900,245
=========== =========
Net interest income $ 24,985 $ 21,927
======== ========
Net interest spread 3.71% 3.91%
======== ======
Net interest margin 4.58% 5.06%
======== ======
</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>
<CAPTION>
Table C. Volume and Rate Analysis
Three Months Ended Six Months Ended
September 30, September 30,
------------------------------------- ------------------------------------
2000 vs 1999 2000 vs 1999
------------------------------------- ------------------------------------
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 Income
Federal funds sold $ - $ - $ - $ 1 $ - $ 1
Securities available for sale 131 144 275 270 497 767
Securities held to maturity (183) 6 (177) (370) 12 (358)
Federal Home Loan Bank of New York stock 103 - 103 193 - 193
Loans receivable 4,288 162 4,450 9,504 (138) 9,366
------------------------------------- -----------------------------------
Total interest and dividend income 4,339 312 4,651 9,598 371 9,969
------------------------------------- -----------------------------------
Interest Expense
Savings accounts $ 97 $ (80) $ 17 $ 313 $ (268) $ 45
N.O.W. and money market accounts 115 (36) 79 270 (119) 151
Time deposit accounts 686 256 942 1,814 224 2,038
Mortgagors' escrow deposits 10 (3) 7 21 (3) 18
Securities sold under agreements to repurchase 29 7 36 73 9 82
Short-term FHLB advances 1,985 161 2,146 3,526 339 3,865
Long-term FHLB borrowings 242 8 250 705 7 712
------------------------------------- ----------------------------------
Total interest expense 3,164 313 3,477 6,722 189 6,911
------------------------------------- -----------------------------------
Net interest income $ 1,175 $ (1) $ 1,174 $ 2,876 $ 182 $ 3,058
===================================== ===================================
</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>
<CAPTION>
Table D. Loan Portfolio Analysis
September 30, March 31,
-------------------------- ------------------------------------------------------
(In thousands) 2000 2000 1999
-------------------------- -------------------------- --------------------------
Amount % Amount % Amount %
------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential $ 525,600 61.3% $ 491,811 59.7% $ 295,466 51.1%
Commercial 153,601 17.9 138,891 16.9 91,480 15.8
Construction 9,635 1.1 9,144 1.1 3,401 0.6
------------ ----------- ------------ ----------- ------------ -----------
Total loans secured by real estate $ 688,836 80.3% $ 639,846 77.7% $ 390,347 67.5%
------------ ----------- ------------ ----------- ------------ -----------
Other loans:
Manufactured housing $ 78,417 9.1% $ 81,542 9.9% $ 90,354 15.6%
Commercial 42,475 5.0 37,167 4.5 29,024 5.0
Financed insurance premiums 31,268 3.6 51,796 6.3 57,901 10.0
Consumer 17,633 2.1 15,536 1.9 12,440 2.2
------------ ----------- ------------ ----------- ------------ -----------
Total other loans $ 169,793 19.8% $ 186,041 22.6% $ 189,719 32.8%
------------ ----------- ------------ ----------- ------------ -----------
Unearned discount and net deferred loan
origination fees and costs (998) (0.1) (2,032) (0.3) (1,967) (0.3)
------------ ----------- ------------ ----------- ------------ -----------
Total loans receivable $ 857,631 100.0% $ 823,855 100.0% $ 578,099 100.0%
=========== =========== ===========
Allowance for loan losses (21,045) (19,608) (14,296)
------------ ------------ ------------
Net loans receivable $ 836,586 $ 804,247 $ 563,803
============ ============ ============
</TABLE>
21
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
<TABLE>
<CAPTION>
Table E. Nonperforming Assets
September 30, March 31,
----------------------------
(In thousands) 2000 2000 1999
---------------- ------------- ------------
<S> <C> <C> <C>
Nonaccruing Loans
Residential real estate $ 2,343 $ 3,199 $ 2,253
Commercial real estate 1,064 2,536 2,669
Commercial loans 15 137 -
Manufactured housing 2,522 1,911 2,315
Financed insurance premiums 6,725 2,453 2,549
Consumer 63 57 158
---------------- ------------- ------------
Total $ 12,732 $ 10,293 $ 9,944
Accruing loans past due 90 days or more
and still accruing interest 48 - -
---------------- ------------- ------------
Total nonperforming loans $ 12,780 $ 10,293 $ 9,944
================ ============= ============
Foreclosed and Repossessed Property
Residential real estate $ 323 $ 85 $ 258
Commercial real estate 64 377 474
Repossessed property 694 1,179 1,776
---------------- ------------- ------------
Total $ 1,081 $ 1,641 $ 2,508
================ ============= ============
Total nonperforming assets $ 13,861 $ 11,934 $ 12,452
================ ============= ============
Allowance for loan losses $ 21,045 $ 19,608 $ 14,296
================ ============= ============
Allowance to nonperforming loans 164.67% 190.50% 143.77%
Nonperforming assets to total assets 1.18% 1.04% 1.41%
Nonperforming loans to total loans 1.49% 1.25% 1.72%
</TABLE>
22
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
<TABLE>
<CAPTION>
Table F. Loan Loss Experience
Three Months Ended Six Months Ended
(In thousands) September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Loans outstanding (end of period) $857,631 $756,865 $857,631 $756,865
=========== =========== ============ ===========
Average loans outstanding (period to date) $848,321 $652,078 $841,116 $621,460
=========== =========== ============ ===========
Allowance for loan losses at beginning of period $ 20,524 $ 15,736 $ 19,608 $ 14,296
Loan charge-offs:
Residential real estate (86) (46) (142) (70)
Commercial real estate (283) - (510) -
Commercial loans - - - -
Manufactured housing (384) (315) (682) (558)
Consumer (44) (73) (72) (150)
Financed insurance premiums (164) (125) (310) (242)
----------- ----------- ------------ -----------
Total charge-offs (961) (559) (1,716) (1,020)
----------- ----------- ------------ -----------
Loan recoveries:
Residential real estate 31 1 108 41
Commercial real estate 64 - 68 42
Commercial loans 10 1 10 3
Manufactured housing 39 19 80 32
Consumer 14 14 25 18
Financed insurance premiums 49 89 162 189
----------- ----------- ------------ -----------
Total recoveries 207 124 453 325
----------- ----------- ------------ -----------
Loan charge-offs, net of recoveries (754) (435) (1,263) (695)
Provision charged to operations 1,275 1,500 2,700 3,200
Allowance acquired - 1,008 - 1,008
----------- ----------- ------------ -----------
Allowance for loan losses at end of period $ 21,045 $ 17,809 $ 21,045 $ 17,809
=========== =========== ============ ===========
Ratio of net charge-offs to average loans
outstanding (annualized) 0.35% 0.27% 0.30% 0.22%
=========== =========== ============ ===========
Provision to average loans outstanding (annualized) 0.60% 0.92% 0.64% 1.03%
=========== =========== ============ ===========
Allowance to loans outstanding 2.45% 2.35% 2.45% 2.35%
=========== =========== ============ ===========
</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 17, 2000.
At the meeting, proposals to (i) Adopt an Agreement and Plan of Merger between
Cohoes Bancorp, Inc. and the Company, dated April 25, 2000 and the approval of
the issuance of shares of the Company's common stock in the merger, (ii) Approve
an amendment to the Hudson River 1998 Stock Option and Incentive Plan and the
Hudson River 1998 Recognition and Retention Plan, respectively, to increase the
number of shares of Hudson River common stock reserved for issuance thereunder
from 1,785,375 to 1,930,241 in the case of the Hudson River 1998 Stock Option
and Incentive Plan and from 714,150 to 918,324 in the case of the Hudson River
1998 Recognition and Retention Plan, (iii) Elect Directors Herrington, Giaquinto
and Bardwell M.D. for three year terms, and (iv) Ratify the appointment of KPMG
LLP as independent auditors for the Company for the fiscal year ending March 31,
2001 were approved. The votes cast for and against these proposals, and the
number of abstentions with respect to each of these proposals, were as follows:
Adoption of Agreement and Plan of Merger Between Cohoes
-------------------------------------------------------
Bancorp, Inc. and the Company
-----------------------------
For Against Abstentions
--- ------- -----------
8,303,999 3,163,157 77,959
Approval of an Amendment to the Hudson River 1998 Stock Option
--------------------------------------------------------------
and Incentive Plan and the Hudson River 1998 Recognition and
------------------------------------------------------------
Retention Plan
--------------
For Against Abstentions
--- ------- -----------
8,188,756 1,958,254 199,288
Election of Directors
---------------------
For Withheld
--- --------
MARILYN A. HERRINGTON 9,224,008 1,195,155
JOSEPH H. GIAQUINTO 9,226,366 1,200,844
STANLEY BARDWELL, M.D 9,221,806 1,190,545
24
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(Continued)
Ratification of KPMG LLP as Independent Auditors
------------------------------------------------
For Against Abstentions
--- ------- -----------
9,661,163 391,888 234,084
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
None
25
<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.
11/13/00 /s/Carl A. Florio
-------------------- ------------------------------
Date Carl A. Florio, Director, President and
Chief Executive Officer (Principal
Executive and Operating Officer)
11/13/00 /s/Timothy E. Blow
-------------------- ------------------------------
Date Timothy E. Blow, Chief Financial
Officer (Principal Financial and
Accounting Officer)
26
