EXHIBIT 13
2000 Annual Report to Shareholder
<PAGE>
On the Cover
------------
A recognized symbol of the bank today is its logo. Encased in a medallion, the
ship, is symbolic of the Bank's eloquent past while it sets sail into a
promising future.
Hudson River Bank & Trust Company celebrates its 150th anniversary during 2000.
Established in 1850, the Bank primarily served the community of Hudson, New York
for its first 120 years. Starting in 1970, branches were opened in other
locations throughout Columbia County and the neighboring counties of Albany,
Rensselaer, Schenectady, Dutchess and Saratoga. Over the past 150 years, the
Bank's products and services have seen remarkable changes to meet the demands of
its customers. In 1999, the Bank added personal and commercial insurance to its
list if available products through its affiliation with the Bostwick Group.
As the new millenium unfolds, Hudson River Bank & Trust Company is poised to
compete in a dynamic marketplace as a full service provider of financial
products.
<PAGE>
[GRAPHIC - 2 PAGE PULLOUT OF TIMELINE WITH PHOTOS AND ILLUSTRATIONS- TEXT
PORTION LISTED BELOW]
1850 - 1870
In 1850 the Hudson City Savings Institution is incorporated and opens for
business with the first deposit of $80. [GRAPHIC - ILLUSTRATION]
[GRAPHIC - PHOTO] During 1876 Alexander Graham Bell invents the telephone with
the help of Thomas A. Watson, a young repair mechanic.
Under the exigencies of the Civil War in 1862, the U.S. Government first issued
legal tender notes called "Greenbacks" which resemble our present day currency.
[GRAPHIC - ILLUSTRATION]
The first college football game in 1859 concluded with Rutgers victorious over
Princeton. [GRAPHIC - ILLUSTRATION]
Addressing a crowd of 15,000 on Cemetery Hill in Gettsburg, PA, in 1863 Abraham
Lincoln's infamous remarks began "Fourscore and seven years ago."
[GRAPHIC - ILLUSTRATION]
1880 - 1910
[GRAPHIC - ILLUSTRATION] In 1891 basketball started as a simple game at a YMCA
in Springfield, MA with thirteen rules carefully written by the game's inventor
Dr. James Naismith.
Henry Ford invents the Model T automobile and places it into mass assembly in
1908. The Model T can travel 25 miles per hour and sold for $850. [GRAPHIC -
PHOTO]
[GRAPHIC - ILLUSTRATION] The United States declare war on Germany as it enters
World War I in 1917.
[GRAPHIC - ILLUSTRATION] In 1910 a new main office was opened in Hudson to
accommodate the Bank's expanding customer base.
[GRAPHIC - ILLUSTRATION] Journalist, Charles H. Dow, in 1896 devised his 12
stock industrial average to help make sense of the daily jumble up and down of
the stocks.
1920 - 1940
The Bank's deposit numbers grew from $7 million in 1920 to $25 million in 1949,
typical of the growth the bank was experiencing. [GRAPHIC - ILLUSTRATION]
The New York Yankees won their first of 25 World Series in 1923 against the New
York Giants. [GRAPHIC - ILLUSTRATION]
[GRAPHIC - ILLUSTRATION] BLACK TUESDAY saw the stock market crash of 1929
sending Wall Street into chaos.
Japan attacks Pearl Harbor in 1941 forcing the United States to declare war and
officially enter into World War II. [GRAPHIC - ILLUSTRATION]
Weighing 30 tons, the first electronic computer was introduced in 1946.
[GRAPHIC - ILLUSTRATION]
<PAGE>
1950 - 1970
[GRAPHIC - ILLUSTRATION] In 1970 Hudson City Savings Institution begins its
expansion by opening its second branch in Chatham, NY.
[GRAPHIC - ILLUSTRATION] The Green Bay Packers won Super Bowl I in 1967 by
defeating the Kansas City Chiefs, 35-10.
[GRAPHIC - PHOTO] "I have a dream," Dr Martin Luther King Jr. told 200,000
non-violent protesters in Washington, D.C. in 1963.
The world listened in 1969 as Neil Armstrong spoke: "One small step for man, one
giant leap for mankind." [GRAPHIC - PHOTO]
During 1965 the U.S. Government sent the first combat troops to Vietnam in an
effort to surppress the spread of Communism. [GRAPHIC - PHOTO]
[GRAPHIC - PHOTO] [GRAPHIC - PHOTO] Secretariat wins the Belmont completing
the Triple Crown run in 1973.
In 1976 the trade name "Microsoft" was registered by 20-year old Bill Gates.
[GRAPHIC - PHOTO]
1980 - 2000
In 1980 on its way to winning the gold, the U.S. Olympic Hockey team defeated
the heavily favored Soviet Union. [GRAPHIC - PHOTO]
[GRAPHIC - PHOTO] The New York Stock exchange tumbles 508 points in 1987 marking
the largest single drop since the market crash in 1929.
In 1989 the Berlin Wall, separating East, and West Berlin, is demolished and
solidifies the unification movement of East and West Germany.
[GRAPHIC - ILLUSTRATION] Tiger Woods breaks the Masters Tournament record in
1997.
The term "internet" is used for the first time in 1982. Corporations begin to
use the internet to communicate with each other and with their customers.
[GRAPHIC - PHOTO]
During 1998 Hudson City Savings institution changed its name to Hudson River
Bank & Trust Company and converts from a mutual to a stock savings bank.
[GRAPHIC - PHOTO]
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data) March 31, 2000 1999
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<S> <C> <C>
For the Year Ended
Net income $ 9,526 $ 3,807
Basic earnings per share 0.65 0.17
Diluted earnings per share 0.65 0.17
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At Year End
Total assets $ 1,149,547 $ 881,139
Loans receivable 823,855 578,099
Deposits 748,563 591,814
Shareholders' equity 200,723 219,341
Book value at year end 14.50 14.02
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Significant Ratios
Return on average assets 0.96% 0.47%
Return on average equity 4.58 2.05
Net interest margin 4.83 4.82
Net interest spread 3.85 3.63
Efficiency ratio 52.61 50.48
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Asset Quality Ratios
Nonperforming loans to total loans 1.25% 1.72%
Nonperforming assets to total assets 1.04 1.41
Allowance for loan losses to:
Loans 2.38 2.47
Nonperforming loans 190.50 143.77
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</TABLE>
[Graphic of map showing branch locations]
Husdon River Bancorp has 18 full service
branches located in Columbia, Rensselaer
Albany, Schenectady, Dutchess and Saratoga counties.
<PAGE>
HUDSON RIVER BANCORP, INC.
TO OUR SHAREHOLDERS:
It is with great pride that we present to you our 2000 Annual Report for Hudson
River Bancorp, Inc. This, the first year of a new millennium, marks a
significant year in the history of our institution. Not only did we complete our
first full year as a publicly held institution on March 31, but we also will be
celebrating the Bank's 150th anniversary. Hudson River Bank & Trust Company,
formerly the Hudson City Savings Institution, has been an integral part of our
local market for a century and a half. On April 4, 1850, New York's Governor
signed into law a special act of the legislature incorporating the Hudson City
Savings Institution. Since the first account opened with an initial deposit of
$80 in October 1850, we have seen our institution grow to $1.1 billion in total
assets and $749 million in deposits with over 100,000 accounts throughout our 18
full-service branches located in Columbia, Rensselaer, Albany, Schenectady,
Dutchess, and Saratoga counties.
Expansion into New Markets and Services
Hudson River Bancorp, Inc. completed its first acquisition as a public company
in September 1999 increasing its market presence in the immediate Capital
District of New York. The Company acquired SFS Bancorp, Inc., the parent of
Schenectady Federal Savings Bank, in a cash deal valued at approximately $32
million (the SFS Acquisition). Schenectady Federal Savings had four branches in
Schenectady County with approximately 17,000 accounts, $177 million in total
assets and $150 million of deposits. The expansion in this market will provide
significant opportunities for developing commercial relationships and increasing
our market share.
Also in September 1999, the Company acquired an equity interest in The Bostwick
Group. Bostwick is a full-service insurance agency with a history as long as our
own serving the personal and business needs of the Hudson Valley and Capital
District region. This acquisition provides the Company the opportunity to add a
full array of insurance products to its already extensive list of diversified
financial products and services, while teaming with a company that shares in our
philosophy of high-quality and personalized customer service.
Finally, we are excited about our recent announcement to merge with Cohoes
Bancorp, Inc., parent company of Cohoes Savings Bank located in Cohoes, New
York. Through this union, we will form the largest savings bank based locally in
the Capital District. The merger is expected to be completed near year-end, at
which time our name will change to Cohoes-Hudson Bancorp, Inc. The two banks
will be merged and do business as Hudson River Bank & Trust Company. The
transaction is expected to be accretive to the combined company's earnings per
share in the first full year of operations.
2000 Financial Results
To evidence the ongoing success of Hudson River Bancorp, Inc., one must only
turn to our financial results for the fiscal year ended March 31, 2000. Net
income for the current year increased $5.7 million from 1999 to $9.5 million, an
increase of 150%. Factoring in a $5.2 million contribution to the Company's
charitable foundation in 1999, the Company's profits still rose 34%. Earnings
per share rose from $0.17 in 1999 to $0.65 this year. The increase in
profitability is due in part to the increase in net interest income generated
primarily by the SFS Acquisition. The Company has been able to sustain a
relatively high net interest margin over the past several years by managing the
growth of the balance sheet and utilizing appropriate funding strategies.
Total assets grew over $268 million from 1999 to $1.1 billion at year-end 2000.
The dramatic growth of 30% was primarily attributable to the SFS Acquisition. In
addition, strategic emphasis was placed on our commercial relationships
resulting in a net increase in commercial-related loans of over $55 million from
1999. Contrasting the growth in loans was the decrease in the amount of
nonperforming loans to total loans which ended the year at 1.25%, the lowest
year-end level in the past five years. The continued expansion of our commercial
lending portfolio will facilitate the growth of commercial deposit relationships
and enhance fee income for the Company.
Technological Accomplishments
Our Company can proudly report that we processed information through all
critical dates in relation to the Y2K issue without any instance of
noncompliance or interruption of information processing. We would be remiss if
the efforts and hard work of our staff and vendors were not recognized. Their
diligence as we approached the new millennium was critical and appreciated in
ensuring that our commitment to customer service was maintained.
During 2000, we also added internet banking to our list of products and
services. With the explosion of the information highway and our efforts to
provide customers with convenience, the introduction of internet banking has not
only provided our current customers with yet another means of transacting
business with us, but it will also provide the Bank with the potential to offer
our products and services to clients that normally would be outside our
geographic market. We are excited about this service and the significant
opportunity it provides.
Outlook for the Future
Although we are extremely proud of our distinguished 150 year history, we must
look to the future, energized with a strategic vision to carry on our pattern of
success. The future of the financial services industry will remain fiercely
competitive. We believe that Hudson River Bancorp, Inc. is uniquely positioned
to sustain our stature in the community as a strong, well-capitalized leader
among the financial institutions in our market. Our strategic initiatives will
include:
o evaluation and implementation of profitable expansion alternatives for
the Company;
o penetration of current and future markets through the opening of new
branches;
o focus on an expense discipline that will result in improved
efficiencies of operations; and
o maintenance of asset quality levels through sound underwriting and risk
management.
Our large capital base provides management and our Board of Directors with
exciting opportunities to explore new markets for expansion in their primary
effort to enhance the value of our franchise.
We would like to extend our sincerest appreciation to our shareholders for your
continued support, loyalty and confidence; to our customers for your business;
and to our employees for their hard work and for a job well done.
Carl A. Florio Earl Schram, Jr.
President & Chief Executive Officer Chairman of the Board
June 5, 2000
<PAGE>
[Graphic of building relationships]
Commercial Services
-------------------
Hudson River Bank & Trust Company's Commercial Services Division has played an
important role in the commercial development of the Greater Capital District in
recent years. As local businesses expand, many have turned to the Bank to
provide them with the advice, guidance, products and service which they have
grown accustomed to over the years.
Through the experience and relationships of our commercial officers,
commercial-related loans grew $55.6 million during the year ended March 31,
2000, a 46% increase. The Bank had the privilege of providing financing for such
high profile local projects as:
o FujiColor Processing photo lab, East Greenbush;
o SuperPower LLC, a subsidiary of Intermagnetics General Corp.,
Schenectady;
o The Hilton Garden Inn, Saratoga Springs; and
o New York State Healthcare Association headquarters, East Greenbush.
In addition, the Commercial Services Division offered several new products.
"Cash Flow Manager", an accounts receivable financing program, is designed to
assist businesses in managing their liquidity and working capital. Our leasing
program, kicked off late in the year, offers businesses an alternative to
traditional financing for their capital expenditures.
Commercial deposit accounts also increased in the past year as businesses moved
toward relationship banking. The growth has resulted in the introduction of new
products and services geared toward accommodating business relationships.
Internet cash management, sweep investment accounts and commercial money market
accounts are just a few of the many products offered to our customers. This
along with our many convenient branch locations makes Hudson River Bank & Trust
Company a superior alternative for the banking relationships of local
businesses.
Insurance Services
------------------
Recent legislation was passed that expanded the powers of banks to offer
insurance products to their customers. Accordingly, Hudson River Bancorp, Inc.
acquired an equity interest in The Bostwick Group. Our affiliation with
Bostwick, a full-service insurance agency, will provide the Company's and
Bostwick's customers with a convenient means of accessing a multitude of
financial products and services ranging from traditional banking products to a
full array of insurance products.
The Bostwick Group has been in existence for 150 years, meeting the personal and
business insurance needs of the Hudson Valley and Capital District region.
Bostwick has worked diligently over the years in creating strong relationships
with more than 25 major carriers of personal, group, and commercial insurance.
Bostwick is also committed to the use of the internet - www.bostwickgroup.com -
and a variety of modern technologies in providing a high-speed communication
link between their customers and the insurance carrier.
Bostwick offers a wide range of personal insurance to protect our customers'
lifestyles. Insurance for life, home and property is perhaps the most obvious
and important insurance. But equally important is the consideration of insurance
needs such as personal liability, long-term care, individual disability, and
annuities for retirement.
The Bostwick Group is also an experienced business insurer that delivers
superior asset coverage and exceptional value. Commercial lines include property
and casualty, commercial umbrella, professional liability, and directors and
officers to name a few. Bostwick also offers a full range of cost-effective
employee benefit insurance programs for commercial clients including employee
health and dental benefits, group life, 401(k), and other retirement benefits.
The longevity and success of Bostwick can be attributed to their personalized
service coupled with cost-effective insurance products that address the specific
needs of the client. The partnering of Hudson River Bancorp, Inc. and The
Bostwick Group, with our shared philosophies and the integration of our
products, will provide exciting opportunities for our combined customers.
<PAGE>
Investment Management & Trust
-----------------------------
Bringing professional investment advice to our clients, combined with a wide
breadth of products and services, has been instrumental in the dramatic growth
of the Investment Management & Trust Services Division of the Bank. Our staff of
professional advisors provides investment management, trust administration and
estate settlement services.
The primary goal of our investment management services is to provide our clients
with maximum investment return while employing prudent, time-tested investment
strategies. All investment decisions are made within the framework of our
clients' financial objectives, their tolerance toward risk, and appropriate
fiduciary standards. We believe investment return is best achieved through a
diversified portfolio of high quality securities. Assets are invested in
companies that are leaders in their industry and historically have generated
consistent earnings growth and have provided regular dividend appreciation. In
short, we are sensitive to our clients' income requirements, need for capital
appreciation, and level of comfort with the financial assets needed to achieve
their goals.
We provide administration and professional asset management through our trust
administration services. As trustee for our clients, we execute the legal
guidelines our clients set forth in their trust and respect their intentions. To
this end, we diligently attend to the personal needs of those for whom the trust
is intended to benefit.
Through our estate settlement services, we administer our clients' estates and
take them through the complexities of probate. Our resources let us settle
estates without unnecessary delays and with minimum disruption for their heirs.
We are experienced, professional executors with the skills to handle our
clients' entire estates settlement.
We believe that quality personalized attention combined with professional and
competent advice equates to a winning formula for our clients.
Technology & Internet Banking
-----------------------------
The importance of technology touches all our lives - both as businesses and as
individuals. The magnitude of information available over the internet and the
speed at which information is processed is commonly accepted in today's society.
Over the years, Hudson River Bancorp, Inc. has been a leader in effective
utilization of technology to benefit our customers and operational
functionality.
In 1999, the Bank was the first local community bank to introduce internet
banking to its customers. Through the internet banking icon at our website -
www.hudsonriverbank.com - customers can enjoy the convenience and ease of
banking 24 hours a day/7 days a week. As an individual account holder, internet
banking permits viewing accounts with up-to-the-minute information, transferring
money between accounts and paying bills. Business accounts are offered all the
services of personal accounts plus the enhanced features of our cash manager
module such as payroll/direct deposits, wire transfers and more. All these
services are offered within a state-of-the-art, secure on-line environment. For
those customers without a computer or access to the internet, the Bank continues
to offer a convenient means of conducting certain banking transactions through
our automated telephone banking service.
During the last several years, the Y2K data processing issue consumed much of
our attention. Defensive preparation occurred worldwide for the possibility that
the Y2K bug would somehow affect everyone's lives. Hudson River Bancorp, Inc. is
proud of its accomplishments in tackling the issues surrounding the Y2K issue.
Not only were all systems reviewed and modified to accurately process
information through critical date changes, but the Company took advantage of
this opportunity to upgrade certain applications in our continued efforts to
increase the efficiency of our systems.
With our commitment to keep pace with technology changes in the future and the
current foundation of a state-of-the-art system, Hudson River Bancorp, Inc. is
positioned to satisfy the ever-changing demands of our customers, challenge and
surpass local competitors, and improve operational efficiencies.
<PAGE>
Traditional Banking
-------------------
As we celebrate our 150th anniversary, it is important to understand and
appreciate what led to the longevity and success of our Bank. Hudson River Bank
& Trust Company has always provided competitively priced loans and deposits to
our retail customers backed by personalized and attentive service. This "basic
formula" is the foundation supporting all other ventures and opportunities
explored by the Bank for the benefit of our customers.
Residential mortgage lending has historically been a principal product in the
full line of loans offered to our customers. Hudson River Bank & Trust Company,
with its affiliates, Hudson River Mortgage Company and Homestead Funding
Corporation, ranked as one of the premier lending groups in the Capital District
both in volume and in breadth of products. We take pride in the experience of
our residential mortgage lenders in advising prospective homeowners on, what is
to be for most, the largest financing decision of their lives.
The Bank has grown from one branch in 1850 to 17 full- service branches located
throughout the Greater Capital District of New York. This branch network has
amassed total deposits of $749 million as of March 31, 2000. From our
certificate of deposit account to the school savings account, each is priced
competitively and serviced by friendly, well-trained employees. We are excited
about the opening of our newest location in Clifton Park in 2000, our initial
entrance into Saratoga County.
Hudson River Bancorp, Inc. will enter the new millennium with a renewed vision
to provide our customers with traditional products and services, as well as the
commitment to offer creative solutions to satisfy today's dynamic financial
services needs.
Community Responsiveness
------------------------
In addition to all the products and services the Bank provides, Hudson River
Bancorp, Inc. and the Bank take seriously our responsibility of being a good
neighbor in the many communities in which we operate. Of course, we are proud of
the fact that we have been meeting the banking needs of our local communities
for 150 years. But we are equally proud of the responsiveness of the Company and
its employees in meeting the civic responsibilities that ultimately define a
good neighbor.
The Company established the Hudson River Bank & Trust Company Foundation in 1998
as part of the Bank's conversion to a New York State chartered stock bank. The
purpose of the Foundation is to provide funding to support charitable causes and
community development activities in the counties of Columbia, Albany,
Rensselaer, Schenectady and Dutchess and their neighboring communities. During
the past year, the Foundation made grants in the areas of health care and human
services, community and economic development, education, the arts, historic
preservation, environmental protection, and youth development. The Foundation
continues the Bank's long-standing history of philanthropic efforts, to improve
the quality of life in our local communities.
Our desire to be a good neighbor in our local communities is rooted in the
efforts of the employees of the Company. The pride, spirit and dedication of
these individuals benefit many charitable organizations throughout the Capital
Region. Their involvement ranges from participation in fund raising events,
board seats, volunteer work for religious organizations, chambers of commerce,
boards of education for local school districts, Special Olympics, Girl Scouts
and many more. These many volunteered hours underscore their desire to improve
our local communities. It is with pride that these individuals are associated
with Hudson River Bancorp, Inc.
As we go beyond our 150th anniversary, we will remain committed to our
principals to prudently respond to and support our local communities.
<PAGE>
FIVE YEAR SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
At or for the Years Ended March 31, 2000 1999 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
Earnings
Interest income $ 76,423 $ 63,526 $55,387 $52,881 $49,082
Interest expense 30,509 26,000 25,977 25,426 24,086
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Net interest income 45,914 37,526 29,410 27,455 24,996
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Provision for loan losses 6,200 7,341 8,491 3,826 1,090
Other operating income 2,588 2,418 2,845 1,825 1,635
Other operating expenses 27,788 26,612 19,030 16,187 14,199
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Income before tax expense 14,514 5,991 4,734 9,267 11,342
Tax expense 4,988 2,184 1,903 3,607 4,298
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Net income $ 9,526 $ 3,807 $ 2,831 $ 5,660 $ 7,044
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Per Share Data
Basic earnings per share (1) $ 0.65 $ 0.17 - - -
Diluted earnings per share (1) 0.65 0.17 - - -
Book value at year end 14.50 14.02 - - -
Book value at year end, including
unallocated ESOP shares and
unvested RRP shares 12.85 12.39 - - -
Tangible book value per share at year end 13.66 13.81 - - -
Tangible book value per share, including
unallocated ESOP shares and
unvested RRP shares 12.11 12.21 - - -
Closing market price 10.00 10.94 - - -
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Average Balances and Shares
Total assets $996,448 $809,385 $659,984 $640,867 $597,435
Earning assets 950,380 778,691 628,747 612,296 571,263
Loans 698,403 522,974 507,293 471,295 444,645
Securities available for sale 231,931 156,405 39,357 53,445 26,889
Securities held to maturity 14,899 47,738 71,966 83,343 92,243
Deposits 682,029 608,936 577,721 562,922 530,339
Short-term FHLB advances 65,542 2,916 3,699 4,459 745
Long-term FHLB borrowings 18,386 - - - -
Shareholders' equity 207,953 185,770 67,780 63,322 56,261
Shares outstanding:
Basic 14,556,648 16,302,268 - - -
Diluted 14,577,742 16,302,268 - - -
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Financial Ratios
Return on average assets 0.96 % 0.47 % 0.43 % 0.88 % 1.18%
Return on average equity 4.58 2.05 4.18 8.94 12.52
Net interest margin 4.83 4.82 4.68 4.48 4.38
Efficiency ratio (2) 52.61 50.48 56.78 54.18 51.89
Expense ratio (2) 2.56 2.49 2.77 2.47 2.31
Equity to assets at year end 17.46 24.89 10.18 10.00 9.56
Tangible equity to tangible assets at year end 16.62 24.62 10.10 9.96 9.50
Allowance to nonperforming loans 190.50 143.77 52.32 29.37 32.57
Allowance to loans 2.38 2.47 1.62 1.19 0.79
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</TABLE>
(1) Earnings per share data only applies to periods since the Company's initial
public offering on July 1, 1998.
(2) Ratio does not include other real estate owned and repossessed property
expenses, net securities transactions, and goodwill and other intangibles
amortization for each period. The 1999 ratio does not include a charitable
contribution to the Hudson River Bank & Trust Company Foundation.
<PAGE>
Hudson River Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
-------
The financial review which follows focuses on the factors affecting the
consolidated financial condition and results of operations of Hudson River
Bancorp, Inc. and its subsidiary Hudson River Bank & Trust Company (the "Bank")
(combined, the "Company") during the year ended March 31, 2000 and the preceding
two years. The consolidated financial statements and related notes as of March
31, 2000 and 1999, and for the three years ended March 31, 2000 should be read
in conjunction with this review.
On July 1, 1998, the Bank completed its conversion from a New York chartered
mutual savings bank to a New York chartered stock savings bank (the
"Conversion"). Concurrent with the Conversion, Hudson River Bancorp, Inc.
completed its initial public offering of common stock, receiving approximately
$173.3 million in gross proceeds ($170.0 million net of offering expenses) in
exchange for 17,333,738 shares of its common stock. An additional 520,012 common
shares were contributed to Hudson River Bank & Trust Company Foundation. The
Company used a portion of the proceeds to purchase all of the common stock of
the Bank. Prior to the initial public offering, Hudson River Bancorp, Inc. had
no results of operations; therefore, results of operations prior to July 1, 1998
reflect the operations of the Bank.
The Company's primary market area, with 17 full-service branches, consists of
the New York counties of Columbia, Rensselaer, Albany, Schenectady, and
Dutchess. The Company has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services. The Company's principal business is attracting deposits from customers
within its market area and investing those funds primarily in 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 benefits, occupancy and equipment 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 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 announced that a definitive agreement had been
reached with Cohoes Bancorp, Inc. ("Cohoes") to provide for a merger between the
Company and Cohoes. Cohoes is a $700 million institution with 21 branches in 6
counties headquartered in Cohoes, New York. The Company will issue 1.185 shares
of Company common stock in exchange for each share of Cohoes common stock. The
total deal is valued at approximately $87 million based on the Company's stock
price immediately preceding the announcement. The transaction will be accounted
for under the purchase method of accounting, and pending regulatory and
shareholder approvals, is expected to close before year-end 2000. All 21 Cohoes
branches will be renamed as Hudson River Bank & Trust Company branches upon
completion of the merger, and the Company will be renamed Cohoes-Hudson Bancorp,
Inc. The combined company will have over $1.8 billion in total assets and $1.2
billion in deposits.
<PAGE>
OVERVIEW
--------
The Company earned net income for the year ended March 31, 2000, of $9.5
million, or $0.65 per share, compared with the $3.8 million earned during the
year ended March 31, 1999 and $2.8 million for the year ended March 31, 1998.
Net income for 2000 was enhanced by the Company's SFS Acquisition in September
1999. Net income in the 1999 period was negatively impacted by a $5.2 million
($3.1 million after tax) nonrecurring expense taken during July 1998 associated
with the contribution of stock to the Hudson River Bank & Trust Company
Foundation. Excluding this contribution, the increase over the prior year's
performance was 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 year ended March 31, 2000, the Company's return on average
assets was 0.96%, up from 0.47% in 1999. The Company's return on average equity
for the year ended March 31, 2000 was 4.58%, up from 2.05% in 1999.
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.
AVERAGE BALANCES, INTEREST, AND YIELDS
<TABLE>
<CAPTION>
Years Ended March 31, 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
Average Average
Average Yield/ Average Yield/
(In thousands) Balance Interest Rate Balance Interest Rate
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning assets
Federal funds sold $ 218 $ 12 5.50% $ 18,805 $ 1,054 5.60%
Securities purchased under
agreements to resell - - - 29,727 1,662 5.59
Securities available for sale (1) 231,931 15,432 6.65 156,405 9,997 6.39
Securities held to maturity 14,899 982 6.59 47,738 3,095 6.48
Federal Home Loan Bank
of New York stock 4,929 337 6.84 3,042 215 7.07
Loans receivable (2) 698,403 59,660 8.54 522,974 47,503 9.08
------------------------------------------------------------------------------------------------------------------------------------
Total earning assets 950,380 76,423 8.04 778,691 63,526 8.16
------------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 13,612 12,774
Allowance for loan losses (17,052) (10,916)
Other non-earning assets 49,508 28,836
------------------------------------------------------------ ---------------
Total assets $996,448 $809,385
============================================================ ===============
Interest-bearing liabilities
Savings accounts $167,145 $ 4,507 2.70% $155,885 $ 5,039 3.23%
N.O.W. and money
market accounts 115,037 2,968 2.58 97,006 2,762 2.85
Time deposit accounts 353,723 18,007 5.09 313,269 17,930 5.72
Mortgagors' escrow deposits 5,990 131 2.19 4,986 113 2.27
Securities sold under
agreements to repurchase 1,896 84 4.43 77 3 3.90
Short-term FHLB advances 65,542 3,700 5.65 2,916 153 5.25
Long-term FHLB borrowings 18,386 1,112 6.05 - - -
------------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 727,719 30,509 4.19 574,139 26,000 4.53
------------------------------------------------------------------------------------------------------------------------------------
Noninterest-bearing deposits 46,124 42,776
Other noninterest-bearing liabilities 14,652 6,700
Shareholders' equity 207,953 185,770
------------------------------------------------------------ ---------------
Total liabilities and shareholders' equity $996,448 $809,385
============================================================ ===============
Net interest income $ 45,914 $ 37,526
======================================================================== ==========
Net interest spread 3.85% 3.63%
====================================================================================================================================
Net interest margin 4.83% 4.82%
====================================================================================================================================
<CAPTION>
AVERAGE BALANCES, INTEREST, AND YIELDS
Years Ended March 31, 1998
--------------------------------------------------------------------------------------
Average
Average Yield/
(In thousands) Balance Interest Rate
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earning assets
Federal funds sold $ 7,298 $ 416 5.70%
Securities purchased under
agreements to resell - - -
Securities available for sale (1) 39,357 2,568 6.52
Securities held to maturity 71,966 4,727 6.57
Federal Home Loan Bank
of New York stock 2,833 194 6.85
Loans receivable (2) 507,293 47,482 9.36
--------------------------------------------------------------------------------------
Total earning assets 628,747 55,387 8.81
--------------------------------------------------------------------------------------
Cash and due from banks 11,669
Allowance for loan losses (6,768)
Other non-earning assets 26,336
-----------------------------------------------------------
Total assets $659,984
===========================================================
Interest-bearing liabilities
Savings accounts $138,074 $ 4,729 3.42%
N.O.W. and money
market accounts 94,904 2,850 3.00
Time deposit accounts 311,014 18,085 5.81
Mortgagors' escrow deposits 4,850 108 2.23
Securities sold under
agreements to repurchase - - -
Short-term FHLB advances 3,699 205 5.54
Long-term FHLB borrowings - - -
--------------------------------------------------------------------------------------
Total interest-bearing liabilities 552,541 25,977 4.70
--------------------------------------------------------------------------------------
Noninterest-bearing deposits 33,729
Other noninterest-bearing liabilities 5,934
Shareholders' equity 67,780
-----------------------------------------------------------
Total liabilities and shareholders' equity $659,984
===========================================================
Net interest income $ 29,410
=======================================================================
Net interest spread 4.11%
======================================================================================
Net interest margin 4.68%
======================================================================================
</TABLE>
(1) Average balances include fair value adjustment.
(2) Average balances include nonaccrual loans.
<PAGE>
Earning Assets
Total average earning assets increased to $950.4 million for the year ended
March 31, 2000, up from $778.7 million in 1999. This increase was primarily a
result of the completion of the SFS Acquisition in September 1999, as well as
the impact of the Company's initial public offering on July 1, 1998. Interest
income for the year ended March 31, 2000 was $76.4 million, up $12.9 million
from 1999. The increase in average balances was the primary reason for the
higher income, offset somewhat by lower yields on those assets. The yield on
earning assets fell from 8.16% for the year ended March 31, 1999, to 8.04% in
2000. The change in the Company's asset mix from lower yielding investments to
higher yielding loans has reduced the impact of a lower rate environment on its
earning assets. Earning assets at March 31, 2000 were $1.1 billion, up from
$847.1 million at March 31, 1999, primarily as a result of the SFS Acquisition.
Average earning assets for the year ended March 31, 1999 were $149.9 million
higher than the average for the previous year. This increase is primarily
attributed to the proceeds received by the Company in its initial public
offering. As a result of this increase in average earning assets, interest
income increased $8.1 million in 1999 from 1998. The increase in interest income
as a result of volume increases during 1999 was partially offset by declines in
yields on earning assets from 8.81% in 1998 to 8.16% in 1999.
Loans
The average balance of loans increased to $698.4 million for the year ended
March 31, 2000, up $175.4 million from the $523.0 million average for 1999. The
yield on loans for the year decreased 54 basis points, from 9.08% in 1999 to
8.54% in 2000. Interest income on loans for the year ended March 31, 2000
increased to $59.7 million from $47.5 million in 1999. The increase in average
balances for the year resulted in a $15.1 million increase in interest income on
loans that was partially offset by a $3.0 million decrease due to lower rates.
Interest income on loans in 1999 was flat with 1998. Increases in the average
balance of loans in 1999 of $15.7 million were offset by declines in rates from
9.36% in 1998 to 9.08% in 1999.
Total loans were $823.9 million at March 31, 2000, up $245.8 million from the
$578.1 million at March 31, 1999. Loans secured by residential real estate
increased from $295.5 million, or 51.1% of total loans at March 31, 1999, to
$491.8 million, or 59.7% of total loans at March 31, 2000. This increase was
primarily the result of the SFS Acquisition and new originations during the
current year. Commercial real estate loans increased $47.4 million to $138.9
million at March 31, 2000 from $91.5 million at March 31, 1999. Approximately
$4.8 million of the increase was a result of the SFS Acquisition. Commercial
loans increased to $37.2 million at March 31, 2000 from $29.0 million at March
31, 1999. These increases were offset in part by a decrease of $8.8 million in
manufactured housing loans. Management intends to continue 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.
LOAN PORTFOLIO ANALYSIS
<TABLE>
<CAPTION>
March 31, 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------
(In thousands) Amount % Amount % Amount %
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Residential $491,811 59.7% $ 295,466 51.1% $269,435 53.2%
Commercial 138,891 16.9 91,480 15.8 76,570 15.1
Construction 9,144 1.1 3,401 0.6 4,621 0.9
-----------------------------------------------------------------------------------------------------------------
Total loans secured by real estate 639,846 77.7 390,347 67.5 350,626 69.2
-----------------------------------------------------------------------------------------------------------------
Other loans:
Manufactured housing 81,542 9.9 90,354 15.6 97,426 19.2
Commercial 37,167 4.5 29,024 5.0 18,484 3.7
Financed insurance premiums 51,796 6.3 57,901 10.0 27,976 5.5
Consumer 15,536 1.9 12,440 2.2 11,857 2.3
-----------------------------------------------------------------------------------------------------------------
Total other loans 186,041 22.6 189,719 32.8 155,743 30.7
-----------------------------------------------------------------------------------------------------------------
Unearned discount and net deferred
loan origination fees and costs (2,032) (0.3) (1,967) (0.3) 609 0.1
-----------------------------------------------------------------------------------------------------------------
Total loans receivable $823,855 100.0% $ 578,099 100.0% $506,978 100.0%
Allowance for loan losses (19,608) (14,296) (8,227)
-----------------------------------------------------------------------------------------------------------------
Net loans receivable $804,247 $ 563,803 $498,751
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
March 31, 1997 1996
------------------------------------------------------------------------------------------------
(In thousands) Amount % Amount %
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loans secured by real estate:
Residential $ 274,092 55.6% $241,162 53.5%
Commercial 67,697 13.7 70,854 15.7
Construction 2,725 0.6 4,317 1.0
------------------------------------------------------------------------------------------------
Total loans secured by real estate 344,514 69.9 316,333 70.2
------------------------------------------------------------------------------------------------
Other loans:
Manufactured housing 92,651 18.8 80,399 17.8
Commercial 19,713 4.0 29,190 6.5
Financed insurance premiums 23,535 4.8 13,503 3.0
Consumer 11,577 2.3 10,155 2.3
------------------------------------------------------------------------------------------------
Total other loans 147,476 29.9 133,247 29.6
------------------------------------------------------------------------------------------------
Unearned discount and net deferred
loan origination fees and costs 1,029 0.2 1,091 0.2
------------------------------------------------------------------------------------------------
Total loans receivable $ 493,019 100.0% $450,671 100.0%
Allowance for loan losses (5,872) (3,546)
------------------------------------------------------------------------------------------------
Net loans receivable $ 487,147 $447,125
================================================================================================
</TABLE>
<PAGE>
VOLUME AND RATE ANALYSIS
<TABLE>
<CAPTION>
2000 vs 1999 1999 vs 1998
-----------------------------------------------------------------------------------------------------------------------------------
Due To Due To Net Due To Due To Net
(In thousands) Volume Rate Change Volume Rate Change
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest income
Federal funds sold $(1,023) $ (19) $ (1,042) $ 645 $ (7) $ 638
Securities purchased under
agreements to resell (1,662) - (1,662) 1,662 - 1,662
Securities available for sale 5,010 425 5,435 7,482 (53) 7,429
Securities held to maturity (2,164) 51 (2,113) (1,572) (60) (1,632)
Federal Home Loan Bank
of New York stock 129 (7) 122 15 6 21
Loans receivable 15,129 (2,972) 12,157 1,446 (1,425) 21
-----------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 15,419 $ (2,522) $ 12,897 $ 9,678 $ (1,539) $ 8,139
-----------------------------------------------------------------------------------------------------------------------------------
Interest expense
Savings accounts $ 346 $ (878) $ (532) $ 586 $ (276) $ 310
N.O.W. and money market accounts 481 (275) 206 62 (150) (88)
Time deposit accounts 2,177 (2,100) 77 130 (285) (155)
Mortgagors' escrow deposits 22 (4) 18 3 2 5
Securities sold under agreements
to repurchase 81 - 81 3 - 3
Short-term FHLB advances 3,535 12 3,547 (42) (10) (52)
Long-term FHLB borrowings 1,112 - 1,112 - - -
-----------------------------------------------------------------------------------------------------------------------------------
Total interest expense $ 7,754 $ (3,245) $ 4,509 $ 742 $ (719) $ 23
-----------------------------------------------------------------------------------------------------------------------------------
Net interest income $ 7,665 $ 723 $ 8,388 $ 8,936 $ (820) $ 8,116
===================================================================================================================================
</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.
Securities
The average balance of securities available for sale and securities held to
maturity (collectively "securities") increased $42.7 million to $246.8 million
for the year ended March 31, 2000, up from $204.1 million for the year ended
March 31, 1999. This increase is the result of the SFS Acquisition as well as
the reinvestment of the Company's federal funds sold and securities purchased
under agreements to resell into the securities available for sale portfolio that
took place towards the end of 1999. Interest income earned on securities of
$16.4 million for the year ended March 31, 2000, was up $3.3 million from the
$13.1 million earned in 1999 primarily as a result of the higher average
balances. The average balance of securities for the year ended March 31, 1999
were $92.8 million higher than the average balance of securities in 1998. This
increase was attributed to the investment of the proceeds received from the
Company's initial public offering and resulted in a growth of $5.8 million in
interest on securities in 1999 from 1998.
Securities at March 31, 2000 were $248.1 million, down $17.5 million from the
$265.7 million the Company held as of March 31, 1999. The decrease was almost
entirely due to calls, maturities and paydowns of securities (offset primarily
by the impact of the SFS Acquisition) as well as the increase in the net
unrealized loss on the securities available for sale portfolio. Reinvestment of
the proceeds were primarily directed to the loan portfolio to accommodate the
growth experienced in that asset category. Management is continuing to allow the
balance of securities held to maturity to decrease with new purchases of
securities directed to the securities available for sale classification.
Federal Funds Sold and Securities Purchased Under Agreements to Resell
The Company had limited federal funds sold and no securities purchased under
agreements to resell during the year ended March 31, 2000 as these asset
categories were reinvested in the higher yielding loan and securities portfolios
during the latter stages of the year ended March 31, 1999. For the immediate
future, the Company does not anticipate utilizing these asset categories for
significant investments other than on a temporary basis as market conditions
warrant. The average balance of federal funds sold and securities purchased
under agreements to resell of $48.5 million for the year ended March 31, 1999,
generated $2.7 million in interest income for that year and was $41.2 million
higher than the average balance in 1998. This increase was due to the temporary
investment of the proceeds from the Company's initial public offering.
<PAGE>
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 $727.7 million for the year ended
March 31, 2000 from $574.1 million for the year ended March 31, 1999. This
increase in average balance is attributed primarily to the SFS Acquisition.
Interest expense for the year ended March 31, 2000 was $30.5 million, up $4.5
million from the previous year. The increase in volume, partially offset by a
decrease in the average rate paid from 4.53% to 4.19%, resulted in the overall
increase in interest expense for the year. Average interest-bearing liabilities
for the year ended March 31, 1999 were $21.6 million higher than 1998. This
increase in volume was almost entirely offset by a decline in rates paid,
resulting in no significant changes in interest expense between the two years.
Interest-bearing liabilities at March 31, 2000 were $857.1 million, up from
$580.2 million at March 31, 1999. This increase was a result of the SFS
Acquisition as well as the necessity to fund the growth in assets of the
Company, primarily in the loan portfolio.
Deposits
The average balance of savings accounts increased $11.3 million to $167.1
million for the year ended March 31, 2000, up from $155.9 million for the
previous year. These fluctuations are the result of the impact of the SFS
Acquisition during the year ended March 31, 2000, offset in part by the impact
of the stock subscriptions received in the prior year relating to the Company's
initial public offering, which temporarily increased deposits during 1999.
Interest expense on savings accounts declined from $5.0 million for the year
ended March 31, 1999 to $4.5 million in 2000 as the decrease in average rates
paid from 3.23% to 2.70% more than offset the increase in average balances.
Rates paid on savings accounts declined from 3.42% in 1998 to the 3.23% in 1999.
This decline in rates was more than offset by the increase in the average
balance of savings accounts from $138.1 million in 1998 to $155.9 million in
1999, resulting in an overall increase in interest expense during 1999 of $310
thousand.
The average balance of N.O.W. and money market accounts increased to $115.0
million for the year ended March 31, 2000, up from $97.0 million in 1999. These
fluctuations are primarily the result of the impact of the SFS Acquisition
during the year ended March 31, 2000. Interest expense on N.O.W. and money
market accounts increased from $2.8 million in 1999 to $3.0 million in the year
ended March 31, 2000, as a decrease in average rates paid from 2.85% to 2.58%
somewhat offset the effect of the higher average balances. Rates paid on N.O.W.
and money market accounts declined from 3.00% in 1998 to the 2.85% in 1999. This
decline in rates was the primary reason for the decrease in interest expense
during 1999 from 1998.
Interest expense on time deposits was virtually flat for the year ended March
31, 2000 at $18.0 million, compared with $17.9 million in 1999. The average
balance of time deposits increased from $313.3 million for the year ended March
31, 1999 to $353.7 million for the year ended March 31, 2000, primarily due to
the SFS Acquisition. Lower average rates paid on time deposits of 5.09% for the
year ended March 31, 2000, down from 5.72% in 1999, almost completely offset the
effect of the higher average balances in 2000. For the year ended March 31,
1999, the decline in average rates paid from 5.81% in 1998 to 5.72% in 1999,
partially offset by a $2.3 million increase in average balances during 1999,
resulted in a decrease of $155 thousand in interest expense during 1999 from
1998.
Total deposits, including $48.2 million of noninterest-bearing deposits, were
$748.6 million at March 31, 2000, up from $591.8 million ($44.0 million of
noninterest-bearing deposits) at March 31, 1999. These increases were a result
of the SFS Acquisition, as well as the Company's continued focus on commercial
services, including commercial deposits, and the opening of the Bank's North
Greenbush branch at the end of March 1999.
Short-term FHLB Advances and Long-term FHLB Borrowings
The average balance of short-term FHLB advances increased to $65.5 million for
the year ended March 31, 2000, from $2.9 million in 1999 and $3.7 million in
1998. Interest expense on these borrowings increased $3.5 million for the year
ended March 31, 2000 when compared with 1999. This increase is almost entirely
attributed to the increase in volume with little impact of a change in rates
paid on the advances. The average balance of long-term FHLB borrowings was $18.4
million for the year ended March 31, 2000. The Company did not have any
long-term FHLB borrowings during the years ended March 31, 1999 or 1998.
<PAGE>
Short-term FHLB advances were $116.5 million at March 31, 2000, up from $27.6
million at March 31, 1999. This increase is primarily the result of the
Company's use of such borrowings to fund its growth in loans and the repurchase
of Company stock. Long-term FHLB borrowings were $30.6 million at March 31,
2000. The increase in this category is primarily attributed to the use of such
funds for the SFS Acquisition as well as management's continued monitoring of
the Company's interest rate risk profile. 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-three years.
Net Interest Income
Net interest income for the year ended March 31, 2000 was $45.9 million, up from
$37.5 million in 1999 and $29.4 million in 1998. The increase was the result of
the increase in average earning assets and lower rates paid on interest-bearing
liabilities. The impact of these factors was offset in part by lower rates
earned on average earning assets and higher balances of interest-bearing
liabilities. As a result of these volume and rate fluctuations, the Company's
net interest margin for the year ended March 31, 2000 was 4.83%, up from 4.82%
in 1999 and 4.68% in 1998.
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 $18.7 million
at March 31, 2000, up from $16.8 million at March 31, 1999. The increase is
primarily attributed to assets acquired as part of the SFS Acquisition and
upgrades of our computer mainframe during the year ended March 31, 2000.
Goodwill and other intangibles increased from $3.2 million at March 31, 1999 to
$11.6 million at March 31, 2000, essentially as a result of the SFS Acquisition.
Other assets were $34.7 million at March 31, 2000, up from $7.4 million at March
31, 1999. The increase is attributed to the Company's purchase of bank owned
life insurance on substantially all employees ($15 million), as well as deferred
taxes associated with the SFS Acquisition and the mark-to-market of the
Company's securities available for sale portfolio.
Noninterest sensitive liabilities include noninterest-bearing deposits
(primarily checking accounts) and other liabilities. Noninterest-bearing
deposits increased from $44.0 million at March 31, 1999 to $48.2 million at
March 31, 2000. This increase is associated with accounts acquired as part of
the SFS Acquisition, a new branch in 1999, and growth of the Company's
commercial accounts, which are generally noninterest-bearing. Other liabilities
increased from $37.7 million at March 31, 1999 to $43.5 million at March 31,
2000. The balance in both years is largely composed of amounts due to insurance
companies in April of each year for financed insurance premium loans. The
increase in 2000 is related to the timing of various payments to be made, as
well as the SFS Acquisition.
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 March 31, 2000 were $11.9 million or 1.04% of
total assets, compared with $12.5 million or 1.41% at March 31, 1999. The $518
thousand decrease in total nonperforming assets is due to a $867 thousand
decrease in foreclosed and repossessed property partially offset by a $349
thousand increase in nonperforming loans. The increase in nonperforming loans
was primarily a result of nonperforming loans acquired as part of the SFS
Acquisition. SFS had $937 thousand in nonperforming loans immediately prior to
the acquisition date.
The $867 thousand decrease in foreclosed and repossessed property was made up of
a $597 thousand reduction of repossessed manufactured homes with the remainder
made up of reductions in foreclosed residential and commercial properties,
partially offset by foreclosed properties acquired as part of the SFS
Acquisition.
<PAGE>
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
(In thousands) March 31, 2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccruing loans
Residential real estate $ 3,199 $ 2,253 $ 4,512 $ 4,553 $ 3,496
Commercial real estate 2,536 2,669 5,253 3,239 1,587
Commercial loans 137 - - 2,318 75
Manufactured housing 1,911 2,315 3,060 2,260 1,597
Financed insurance premiums 2,453 2,549 2,768 2,867 1,527
Consumer 57 158 114 45 4
----------------------------------------------------------------------------------------------------------------------------------
Total 10,293 9,944 15,707 15,282 8,286
----------------------------------------------------------------------------------------------------------------------------------
Loans past due 90-days or more
and still accruing interest
Residential real estate - - - 570 1,262
Commercial real estate - - - 3,874 1,316
Commercial loans - - - 244 -
Manufactured housing - - 16 - 22
Financed insurance premiums - - - - -
Consumer - - - 23 -
----------------------------------------------------------------------------------------------------------------------------------
Total - - 16 4,711 2,600
----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming loans $ 10,293 $ 9,944 $ 15,723 $ 19,993 $ 10,886
==================================================================================================================================
Foreclosed and repossessed property
Residential real estate $ 85 $ 258 $ 145 $ 48 $ 160
Commercial real estate 377 474 299 2,860 921
Repossessed property 1,179 1,776 1,088 539 635
----------------------------------------------------------------------------------------------------------------------------------
Total foreclosed and repossessed property $ 1,641 $ 2,508 $ 1,532 $ 3,447 $ 1,716
==================================================================================================================================
Total nonperforming assets $ 11,934 $ 12,452 $ 17,255 $ 23,440 $ 12,602
==================================================================================================================================
Allowance for loan losses $ 19,608 $ 14,296 $ 8,227 $ 5,872 $ 3,546
==================================================================================================================================
Allowance to nonperforming loans 190.50% 143.77% 52.32% 29.37% 32.57%
Nonperforming assets to total assets 1.04 1.41 2.57 3.60 2.02
Nonperforming loans to total loans 1.25 1.72 3.10 4.06 2.42
==================================================================================================================================
</TABLE>
Allowance and Provision For Loan Losses
---------------------------------------
The allowance for loan losses at March 31, 2000 was $19.6 million, up from $14.3
million at March 31, 1999. The allowance as a percentage of nonperforming loans
increased from 143.8% at March 31, 1999 to 190.5% at March 31, 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 believes warrant special
attention, as well as an analysis of the higher risk elements of the Company's
loan portfolio and growth in the loan portfolio. Net charge-offs for the year
ended March 31, 2000 were $1.9 million, up from $1.3 million in 1999. The
increase in net charge-offs in 2000 is primarily a result of the impact of a
recovery of a larger commercial real estate loan during 1999. Gross charge-offs
of $2.5 million for 2000 were down from $3.2 million for the year ended March
31, 1999.
As a result of management's analysis of the risk characteristics of the loan
portfolio, as well as the trends and levels of nonperforming and other
delinquent loans, a provision for loan losses of $6.2 million was recorded for
the year ended March 31, 2000. The $6.2 million provision is down $1.1 million
from the $7.3 million provision recorded in 1999. The provision as a percentage
of average loans declined from 1.40% in 1999 to 0.89% in 2000. This decline is
primarily a result of the reduction in gross loan charge-offs experienced in
2000 as compared to 1999 and 1998. The provision was, however, maintained at its
current level as a result of the significant growth in the loan portfolio, in
particular the growth in commercial-type loans. An additional allowance of $1.0
million was acquired during the year ended March 31, 2000 as part of the SFS
Acquisition.
The Company continues to maintain certain portfolios of loans with higher credit
risk, such as manufactured housing loans, commercial loans and financed
insurance premium loans. Net charge-offs, risk elements of the Company's loan
portfolio, economic conditions in the Company's market area and nonperforming
loan balances are the primary factors which are considered in determining the
level of the Company's provision for loan losses. The growth in loan balances is
also a factor in determining the level of the Company's provision for loan
losses.
<PAGE>
LOAN LOSS EXPERIENCE
<TABLE>
<CAPTION>
(In thousands) Years Ended March 31, 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans outstanding (end of year) $ 823,855 $ 578,099 $ 506,978 $ 493,019 $ 450,671
====================================================================================================================================
Average loans outstanding $ 698,403 $ 522,974 $ 507,293 $ 471,295 $ 444,645
====================================================================================================================================
Allowance for loan loss at beginning of year $ 14,296 $ 8,227 $ 5,872 $ 3,546 $ 3,187
Loan charge-offs:
Residential real estate (282) (251) (440) (162) (111)
Commercial real estate (14) (95) (1,298) (454) (95)
Commercial loans (150) (136) (2,309) (127) -
Manufactured housing (1,283) (1,331) (480) (216) (372)
Consumer (228) (139) (112) (41) (46)
Financed insurance premiums (586) (1,239) (2,091) (1,070) (573)
------------------------------------------------------------------------------------------------------------------------------------
Total charge-offs (2,543) (3,191) (6,730) (2,070) (1,197)
------------------------------------------------------------------------------------------------------------------------------------
Loan recoveries:
Residential real estate 54 341 8 3 21
Commercial real estate 184 777 17 11 16
Commercial loans 4 17 10 74 6
Manufactured housing 86 73 105 45 70
Consumer 38 25 38 51 49
Financed insurance premiums 281 686 416 386 261
------------------------------------------------------------------------------------------------------------------------------------
Total recoveries 647 1,919 594 570 423
------------------------------------------------------------------------------------------------------------------------------------
Loan charge-offs, net of recoveries (1,896) (1,272) (6,136) (1,500) (774)
Provision charged to operations 6,200 7,341 8,491 3,826 1,090
Allowance acquired 1,008 - - - 43
------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $ 19,608 $ 14,296 $ 8,227 $ 5,872 $ 3,546
====================================================================================================================================
Ratio of net charge-offs to average loans outstanding 0.27% 0.24% 1.21% 0.32% 0.17%
====================================================================================================================================
Provision to average loans outstanding 0.89% 1.40% 1.67% 0.81% 0.25%
====================================================================================================================================
Allowance to loans outstanding (end of year) 2.38% 2.47% 1.62% 1.19% 0.79%
====================================================================================================================================
</TABLE>
Market Risk
Interest rate risk is the most significant market risk affecting the Company.
Other types of market risk, such as foreign currency exchange rate risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Interest rate risk is defined as an exposure to a movement in interest rates
that could have an adverse effect on the Company's net interest income. Net
interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when earning
assets mature or reprice more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net interest income.
In an attempt to manage its exposure to changes in interest rates, management
monitors the Company's interest rate risk. Management's asset/liability
committee meets monthly to review the Company's interest rate risk position and
profitability, and to recommend strategies for consideration by the Board of
Directors. Management also reviews loan and deposit pricing, and the Company's
securities portfolio, formulates investment and funding strategies, and oversees
the timing and implementation of transactions to assure attainment of the
Board's objectives in the most effective manner. Notwithstanding the Company's
interest rate risk management activities, the potential for changing interest
rates is an uncertainty that can have an adverse effect on net 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.
<PAGE>
Interest rate risk analyses performed by the Company indicate that the Company
is virtually neutral to changes in interest rates as of March 31, 2000. As a
result, rising or falling interest rates projected over a 12-month horizon would
not have a significant impact on net interest income. Consistent with the
asset/liability management philosophy described above, the Company has taken
steps to manage its interest rate risk by attempting to match the repricing
periods of its earning assets to its interest-bearing liabilities, 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 primary tool utilized by management to measure interest rate risk is a
balance sheet/income statement simulation model. The model is used to execute
simulations of the Company's net interest income performance based upon
potential changes in interest rates over a selected period of time. The model's
input data includes earning assets and interest-bearing liabilities, their
associated cash flow characteristics, repricing opportunities, maturities and
current rates. In addition, management makes certain assumptions in relation to
prepayment speeds for all assets and liabilities that possess optionality,
including loans, mortgage-backed securities and collateralized mortgage
obligations. These assumptions are based on industry standards for prepayments.
The model is first run under an assumption of a flat rate scenario (i.e. no
change in current interest rates) over a 12-month period. A second and third
model are run in which a gradual increase and decrease, respectively, of 200
basis points takes place over a 12-month period. Under these scenarios, assets
subject to repricing or prepayment are adjusted to account for faster or slower
prepayment assumptions. The resultant changes in net interest income are then
measured against the flat rate scenario.
The following table summarizes the percentage change in interest income and
interest expense by major earning asset and interest-bearing liability
categories as of March 31, 2000 in the rising and declining rate scenarios from
the forecasted interest income and interest expense amounts in a flat rate
scenario. Under the declining rate scenario, net interest income is projected to
remain virtually level with the flat rate scenario, declining by 0.01% over a
12-month period. Under the rising rate scenario, net interest income is
projected to decrease by 0.25% from the flat rate scenario over a 12-month
period. This level of variability places the Company's interest rate risk
profile well within acceptable Company guidelines.
<TABLE>
<CAPTION>
Percentage Change in Net Interest Income From Flat Rate Scenario
---------------------------------------------------------------------------------------------------
Declining Rate Scenario Rising Rate Scenario
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Investment securities (1) (1.89)% 1.77%
Total loans (2.05) 2.16
---------------------------------------------------------------------------------------------------
Total interest income (2.12) 2.18
---------------------------------------------------------------------------------------------------
Core deposits (8.61) 10.62
Time deposits (2.04) 1.93
---------------------------------------------------------------------------------------------------
Total deposits (3.98) 4.62
Borrowings (8.22) 8.34
---------------------------------------------------------------------------------------------------
Total interest expense (5.05) 5.56
---------------------------------------------------------------------------------------------------
Net interest income (0.01)% (0.25)%
===================================================================================================
</TABLE>
(1) Includes all securities held to maturity, securities available for sale, and
money market investments.
<PAGE>
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. The timing of cash inflows and outflows is closely monitored by
management although changes in interest rates, economic conditions, and
competitive forces strongly impact the predictability of these cash flows. The
Company attempts to provide stable and flexible sources of funding through the
management of its liabilities, including core deposit products offered through
its branch network, and through the use of borrowings. Management believes that
the level of the Company's liquid assets combined with daily monitoring of cash
inflows and outflows provide adequate liquidity to fund outstanding loan
commitments, meet daily withdrawal requirements of depositors, and meet all
other daily obligations of the Company.
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 $200.7
million at March 31, 2000, or 17.46% of total assets on that date. As of March
31, 1999, total equity was $219.3 million, or 24.89% of total assets. Ratios of
tangible equity to tangible assets were 16.62% and 24.62% as of March 31, 2000
and 1999, respectively. These reductions in the equity to assets ratios are
reflective of management's objectives to leverage capital through asset growth,
mergers and acquisitions, and share repurchases. The Company completed a 5%
share repurchase program during July 1999 and is currently executing a 10% share
repurchase program. As of March 31, 2000, the Company had an additional 417
thousand shares to acquire under its current repurchase program. As of March 31,
2000, the Company and the Bank exceeded all of their regulatory capital
requirements and the Bank was classified as a well-capitalized institution.
OTHER OPERATING INCOME AND EXPENSES
-----------------------------------
Total other operating income was $2.6 million for the year ended March 31, 2000,
up slightly from the $2.4 million earned in 1999. Other operating income is
composed primarily of service charges on deposit accounts. Income from service
charges on deposit accounts increased from $1.3 million in 1999 to $1.5 million
in 2000, primarily as a result of the SFS Acquisition and its resultant increase
in deposit accounts. Total other operating income in 1999 was $427 thousand less
than the $2.8 million in 1998, primarily the result of a gain on the sale of a
former branch building that was recorded in 1998.
Total other operating expenses were $27.8 million for the year ended March 31,
2000, up $1.2 million from 1999. Total other operating expenses in 1999 included
a $5.2 million nonrecurring expense associated with a contribution of stock to
the Hudson River Bank & Trust Company Foundation. After adjusting for this
nonrecurring expense, other operating expenses in 2000 increased $6.4 million
from 1999. This increase was due primarily to higher expenses in compensation
and benefits, occupancy, equipment, advertising, goodwill and other intangibles
amortization and other expenses. Total other operating expenses increased $7.6
million in 1999 from 1998. Most of this increase was a result of the
nonrecurring expense recorded in 1999 noted above. The remainder was due to
increases in compensation and benefits and other real estate owned and
repossessed property expenses during 1999.
Compensation and benefits increased $2.8 million to $13.8 million for the year
ended March 31, 2000 up from $11.0 million in 1999. This increase is the result
of costs associated with the Company's Employee Stock Ownership Plan ("ESOP")
and stock awarded under the Company's Recognition and Retention Plan ("RRP").
Costs associated with these plans totaled $1.4 million and $943 thousand,
respectively, during the year ended March 31, 2000, while in 1999, the costs
totaled $1.1 million and $217 thousand, respectively. The SFS Acquisition
resulted in increased expenses as four additional branches were added to the
Company's branch network in September 1999. The opening of the Company's
thirteenth branch just prior to the beginning of the current fiscal year also
contributed to the increase in compensation and benefits during 2000.
Compensation and benefits increased $1.6 million in 1999 from 1998, primarily as
a result of the implementation of the ESOP and RRP plans during the year ended
March 31, 1999.
Occupancy expenses were $1.8 million for the year ended March 31, 2000, up $307
thousand from 1999. The increase is attributed to the growth in the Company's
branch network resulting from the SFS Acquisition and a branch opening as noted
above.
<PAGE>
Equipment expenses for the year ended March 31, 2000 were $2.5 million, up from
$1.6 million in 1999. These expenses, primarily depreciation and maintenance
charges, were higher due to the equipment purchases made during the second half
of 1999. These equipment purchases included a new teller system, new personal
computers, an upgraded network and new image-technology for back office
operations. The opening of our thirteenth branch as mentioned previously and the
SFS Acquisition also contributed to this increase.
Expenses on other real estate owned and repossessed property were $1.2 million
in 2000, $1.0 million in 1999, and $572 thousand in 1998. These increases are
the result of management's continued efforts to reduce the level of problem
assets. Higher levels of other real estate owned and repossessed property during
this period resulted in increased maintenance expenses associated with these
assets during 2000 and 1999 as compared with 1998.
Advertising during the year ended March 31, 2000 amounted to $922 thousand, up
from $529 thousand in 1999. This increase is primarily related to the
development of new products, including internet banking, branch openings, and
the SFS Acquisition and the resultant name change of the four SFS branches.
Goodwill and other intangibles amortization for the year ended March 31, 2000
was $1.1 million, up from $252 thousand for 1999. The increase relates to the
goodwill associated with the SFS Acquisition, equity investments in Homestead
Funding Corp., a mortgage company, in November 1998, and an equity investment in
The Bostwick Group, an insurance brokerage agency, in September 1999.
Other expenses were $5.0 million for the year ended March 31, 2000, up from $4.2
million during 1999. The increase is the result of general increases associated
with being a public company and the SFS Acquisition. The Company also recorded a
$253 thousand loss on the disposition of equipment as a result of an upgrade to
its existing mainframe that was necessitated by the SFS Acquisition.
TAX EXPENSE
-----------
Tax expense increased from $2.2 million for the year ended March 31, 1999 to
$5.0 million for 2000. The increase is primarily the result of higher income
before tax expense partially offset by an increase in tax exempt income realized
by the Company and the reduction of the deferred tax asset valuation allowance.
The valuation allowance was reduced when circumstances creating uncertainties
about the realization of certain Federal and state deferred tax assets were
resolved.
QUARTERLY FINANCIAL RESULTS
<TABLE>
<CAPTION>
Three Months Ended March 31, December 31, September 30, June 30, YTD
(In thousands, except per share data) 2000 1999 1999 1999 2000
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 21,009 $ 20,468 $ 18,122 $ 16,824 $ 76,423
Interest expense 8,969 8,521 6,780 6,239 30,509
----------------------------------------------------------------------------------------------------------------------------------
Net interest income 12,040 11,947 11,342 10,585 45,914
----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,500 1,500 1,500 1,700 6,200
Other operating income 729 614 653 592 2,588
Other operating expenses 7,453 7,158 6,876 6,301 27,788
----------------------------------------------------------------------------------------------------------------------------------
Income before tax expense 3,816 3,903 3,619 3,176 14,514
Tax expense 1,298 1,335 1,240 1,115 4,988
----------------------------------------------------------------------------------------------------------------------------------
Net income $ 2,518 $ 2,568 $ 2,379 $ 2,061 $ 9,526
==================================================================================================================================
Basic earnings per share $ 0.18 $ 0.18 $ 0.16 $ 0.13 $ 0.65
Diluted earnings per share 0.18 0.18 0.16 0.13 0.65
==================================================================================================================================
<CAPTION>
Three Months Ended March 31, December 31, September 30, June 30, YTD
(In thousands, except per share data) 1999 1998 1998 1998 1999
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 15,785 $ 16,012 $ 16,675 $ 15,054 $ 63,526
Interest expense 6,018 6,339 6,480 7,163 26,000
----------------------------------------------------------------------------------------------------------------------------------
Net interest income 9,767 9,673 10,195 7,891 37,526
----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 1,500 1,681 1,944 2,216 7,341
Other operating income 536 583 675 624 2,418
Other operating expenses 5,895 5,597 10,452 4,668 26,612
----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before tax expense (benefit) 2,908 2,978 (1,526) 1,631 5,991
Tax expense (benefit) 1,045 1,098 (604) 645 2,184
----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,863 $ 1,880 $ (922) $ 986 $ 3,807
==================================================================================================================================
Basic earnings (loss) per share(1) $ 0.12 $ 0.11 $ (0.06) $ - $ 0.17
Diluted earnings (loss) per share (1) 0.12 0.11 (0.06) - 0.17
==================================================================================================================================
</TABLE>
(1) Earnings per share data only applies to periods since the Company's initial
public offering on July 1, 1998.
<PAGE>
THE YEAR 2000 ISSUE
-------------------
During the past several quarters, the Company reported on potential concerns
relating to the Year 2000 issue which centered on the possible inability of
computer systems to recognize the century date change. The Company did not
experience any interruptions in any computer operations related to the Year 2000
issue. Additionally, the Company did not note any delays in loan payments from
its borrowers that may have been a result of problems encountered by them in
relation to the Year 2000 issue. The total costs incurred by the Company in
relation to the Year 2000 issue were not significant, and no further costs are
anticipated.
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 (FASB) issued Statement
of Financial Accounting Standards (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. It requires that an
entity recognize all derivatives as either assets or liabilities in 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", "should 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 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.
<PAGE>
Hudson River Bancorp, Inc.
Management's Statement of Responsibility
The management of Hudson River Bancorp, Inc. is responsible for the preparation,
content and integrity of the consolidated financial statements included in this
annual report. The consolidated financial statements and related notes have been
prepared in conformity with generally accepted accounting principles and, in the
judgment of management, present fairly Hudson River Bancorp, Inc.'s financial
position, results of operations and cash flows. Management also believes that
financial information presented elsewhere in this annual report is consistent
with that in the consolidated financial statements.
Management is also responsible for establishing and maintaining internal
controls designed to provide reasonable assurance of the accountability and
safeguarding of the Company's assets and, therefore, the integrity of the
consolidated financial statements. These corporate-wide controls include
self-monitoring mechanisms, written policies and procedures, proper delegation
of authority and organizational division of responsibility, and the careful
selection and training of qualified personnel. There are inherent limitations in
the effectiveness of any internal controls, including the possibility of human
error and the circumvention or overriding of controls. Management believes that
the Company's internal controls provide reasonable assurances that financial
transactions are recorded properly to permit the preparation of reliable
financial statements.
The Board of Directors discharges its responsibility for the Company's
consolidated financial statements through its Audit Committee. The Company's
Audit Committee, composed exclusively of outside directors, also has
responsibility for recommending the independent auditors. The Audit Committee
meets regularly with both the independent auditors and the internal auditors to
review the scope of their audits and audit reports and to discuss action to be
taken.
/s/ Carl A Florio /s/ Timothy E. Blow
----------------- -------------------
Carl A. Florio Timothy E. Blow
President and Chief Executive Officer Chief Financial Officer
Independent Auditors' Report
To the Shareholders and Board of Directors
Hudson River Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Hudson River
Bancorp, Inc. and subsidiary (the Company) as of March 31, 2000 and 1999, and
the related consolidated income statements, statements of changes in
shareholders' equity, and cash flows for each of the years in the three-year
period ended March 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Hudson River
Bancorp, Inc. and subsidiary as of March 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2000, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
-------------------
KPMG LLP
Albany, New York
May 5, 2000
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheets
(In thousands, except share and per share data) March 31, 2000 1999
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 16,612 $ 12,722
Securities available for sale, at fair value 236,980 242,611
Securities held to maturity (fair value of $11,065 and $23,235) 11,144 23,041
Federal Home Loan Bank of New York (FHLB) stock, at cost 7,425 3,299
Loans receivable 823,855 578,099
Allowance for loan losses (19,608) (14,296)
----------------------------------------------------------------------------------------------------------------------------
Net loans receivable 804,247 563,803
----------------------------------------------------------------------------------------------------------------------------
Accrued interest receivable 6,470 5,701
Premises and equipment, net 18,719 16,807
Other real estate owned (OREO) and repossessed property 1,641 2,508
Goodwill and other intangibles 11,618 3,215
Other assets 34,691 7,432
----------------------------------------------------------------------------------------------------------------------------
Total assets $1,149,547 $ 881,139
============================================================================================================================
Liabilities and Shareholders' Equity
Liabilities:
Deposits $ 748,563 $ 591,814
Securities sold under agreements to repurchase 4,214 845
Short-term FHLB advances 116,450 27,600
----------------------------------------------------------------------------------------------------------------------------
Total short-term borrowings 120,664 28,445
----------------------------------------------------------------------------------------------------------------------------
Long-term FHLB borrowings 30,600 -
Mortgagors' escrow deposits 5,500 3,869
Other liabilities 43,497 37,670
----------------------------------------------------------------------------------------------------------------------------
Total liabilities 948,824 661,798
----------------------------------------------------------------------------------------------------------------------------
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 174,733 174,894
Unallocated common stock held by ESOP (15,583) (17,200)
Unvested restricted stock awards (6,289) (7,996)
Treasury stock, at cost (2,235,190 and 157,500 shares) (24,248) (1,663)
Retained earnings, substantially restricted 79,555 71,893
Accumulated other comprehensive loss (7,624) (766)
----------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 200,723 219,341
----------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,149,547 $ 881,139
============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Income Statements
(In thousands, except per share data) Years ended March 31, 2000 1999 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Interest and fees on loans $59,660 $47,503 $47,482
Securities available for sale 15,432 9,997 2,568
Securities held to maturity 982 3,095 4,727
Federal funds sold 12 1,054 416
Securities purchased under agreements to resell - 1,662 -
Federal Home Loan Bank of New York stock 337 215 194
-------------------------------------------------------------------------------------------------------------------------
Total interest income 76,423 63,526 55,387
-------------------------------------------------------------------------------------------------------------------------
Interest expense
Deposits 25,613 25,844 25,772
Securities sold under agreements to repurchase 84 3 -
Short-term FHLB advances 3,700 153 205
Long-term FHLB borrowings 1,112 - -
-------------------------------------------------------------------------------------------------------------------------
Total interest expense 30,509 26,000 25,977
-------------------------------------------------------------------------------------------------------------------------
Net interest income 45,914 37,526 29,410
Provision for loan losses 6,200 7,341 8,491
-------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 39,714 30,185 20,919
-------------------------------------------------------------------------------------------------------------------------
Other operating income
Service charges on deposit accounts 1,519 1,274 1,103
Loan servicing income 142 199 398
Net securities transactions 83 36 15
Net gain on sales of loans held for sale - 65 96
Other income 844 844 1,233
-------------------------------------------------------------------------------------------------------------------------
Total other operating income 2,588 2,418 2,845
-------------------------------------------------------------------------------------------------------------------------
Other operating expenses
Compensation and benefits 13,763 10,982 9,394
Occupancy 1,805 1,498 1,395
Equipment 2,453 1,647 1,614
Other real estate owned and repossessed property 1,228 1,013 572
Advertising 922 529 445
Legal and other professional fees 791 600 950
Postage and item transportation 709 718 765
Charitable foundation contribution - 5,200 -
Goodwill and other intangibles amortization 1,087 252 151
Other expenses 5,030 4,173 3,744
-------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 27,788 26,612 19,030
-------------------------------------------------------------------------------------------------------------------------
Income before tax expense 14,514 5,991 4,734
Tax expense 4,988 2,184 1,903
-------------------------------------------------------------------------------------------------------------------------
Net income $ 9,526 $ 3,807 $ 2,831
=========================================================================================================================
Basic earnings per share $ 0.65 $ 0.17 -
=========================================================================================================================
Diluted earnings per share $ 0.65 $ 0.17 -
=========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Changes in Shareholders' Equity
Years Ended March 31,
----------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share and per share data) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common stock
Balance at beginning of year $ 179 $ -- $ --
Issuance of 17,333,738 shares of $.01 par value common stock
in initial public offering -- 174 --
Issuance of 520,012 shares of $.01 par value common stock to
the Hudson River Bank & Trust Company Foundation -- 5 --
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 179 $ 179 --
----------------------------------------------------------------------------------------------------------------------------------
Additional paid-in capital
Balance at beginning of year $ 174,894 -- --
Issuance of 17,333,738 shares of common stock in initial public
offering, net of offering costs of $3,370 -- 169,793
----------------------------------------------------------------------------------------------------------------------------------
Issuance of 520,012 shares of common stock to the Hudson
River Bank & Trust Company Foundation -- 5,195
Adjustment for ESOP shares released for allocation (161) (94) --
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 174,733 $ 174,894 --
----------------------------------------------------------------------------------------------------------------------------------
Unallocated common stock held by ESOP
Balance at beginning of year $ (17,200) -- --
Acquisition of 1,428,300 shares of common stock by ESOP -- (18,428) --
Shares of ESOP stock released for allocation (124,718 and
95,843 shares) 1,617 1,228 --
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (15,583) $ (17,200) --
----------------------------------------------------------------------------------------------------------------------------------
Unvested restricted stock awards
Balance at beginning of year $ (7,996) -- --
Grant of restricted stock awards (19,071 and 714,150 shares) (188) (8,213) --
Amortization of restricted stock awards 943 217 --
Forfeiture of restricted stock awards (82,765 shares) 952 -- --
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (6,289) $ (7,996) --
----------------------------------------------------------------------------------------------------------------------------------
Treasury stock
Balance at beginning of year $ (1,663) -- --
Purchase of common stock (2,013,996 and 871,650 shares) (21,841) (10,098) --
Grant of restricted stock awards 208 8,435 --
Forfeiture of restricted stock awards (952) -- --
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ (24,248) $ (1,663) --
----------------------------------------------------------------------------------------------------------------------------------
Retained earnings
Balance at beginning of year $ 71,893 $ 68,308 $65,477
Net income 9,526 $ 9,526 3,807 $3,807 2,831 $ 2,831
Cash dividends declared ($0.12 per share) (1,844) -- --
Adjustment for grant of restricted stock awards (20) (222) --
----------------------------------------------------------------------------------------------------------------------------------
Balance at end of year $ 79,555 $ 71,893 $68,308
----------------------------------------------------------------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
Balance at beginning of year $ (766) $ (4) $ (348)
Unrealized net holding gains (losses) on securities available for
sale arising during the year (pre-tax ($11,432), ($1,153), and $586) (6,811) (739) 353
Reclassification adjustment for net gains realized in net income
(pre-tax ($79), ($36) and ($15)) (47) (23) (9)
--- --- ---
Other comprehensive income (loss) (6,858) (6,858) (762) (762) 344 344
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 2,668 $ 3,045 $ 3,175
---------------------------------------------------------------------------------=========-------------=========---------=========
Balance at end of year (7,624) (766) (4)
----------------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity at March 31 $ 200,723 $ 219,341 $ 68,304
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
(In thousands) Years Ended March 31, 2000 1999 1998
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 9,526 $ 3,807 $ 2,831
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 2,002 1,519 1,359
Goodwill and other intangibles amortization 1,087 252 151
Provision for loan losses 6,200 7,341 8,491
Deferred tax benefit (1,844) (3,358) (2,004)
Charitable foundation contribution -- 5,200 --
Amortization of restricted stock awards 943 217 --
ESOP stock released for allocation 1,456 1,134 --
Net securities transactions (83) (36) (15)
Net gain on sales of loans held for sale -- (65) (96)
Net loans originated for sale -- (7,730) (11,423)
Proceeds from sales of loans held for sale -- 9,081 10,317
Net loss (gain) on sale of premises and equipment 262 (71) (452)
Adjustments of OREO and repossessed property to fair value 1,057 213 401
Net gain on sales of OREO and repossessed property (986) (522) (445)
Net decrease (increase) in accrued interest receivable 315 (1,299) 478
Net increase in other assets (3,336) (2,173) (762)
Net increase in other liabilities 2,439 28,797 3,898
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 19,038 42,307 12,729
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Net cash used in acquisition activity (27,975) -- --
Proceeds from sales of securities available for sale 3,009 -- --
Proceeds from maturities, calls and paydowns of securities available for sale 35,176 39,867 37,996
Purchases of securities available for sale (16,708) (241,162) (34,258)
Proceeds from maturities, calls and paydowns of securities held to maturity 11,901 42,153 21,890
Purchases of securities held to maturity -- -- (8,016)
Purchases of FHLB stock (2,660) (264) (223)
Net loans made to customers (108,404) (78,694) (24,555)
Proceeds from sales of and payments received on OREO and repossessed property 3,979 5,634 6,419
Proceeds from sale of premises and equipment -- 471 1,200
Purchase of bank owned life insurance (15,000) -- --
Purchases of premises and equipment (2,320) (3,395) (2,473)
----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (119,002) (235,390) (2,020)
----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net increase in deposits 6,126 3,500 23,715
Net increase (decrease) in short-term borrowings 92,119 26,445 (10,585)
Issuance of long-term FHLB borrowings 30,000 -- --
Net (decrease) increase in mortgagors' escrow deposits (706) 146 (23)
Net proceeds from stock offering -- 169,967 --
Purchases of treasury stock (21,841) (10,098) --
Dividends paid (1,844) -- --
Acquisition of common stock by ESOP -- (18,428) --
----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 103,854 171,532 13,107
----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 3,890 (21,551) 23,816
Cash and cash equivalents at beginning of year 12,722 34,273 10,457
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 16,612 $ 12,722 $ 34,273
==================================================================================================================================
Supplemental cash flow information
Interest paid $ 29,973 $ 25,998 $ 25,980
Taxes paid $ 8,188 $ 3,563 $ 4,012
==================================================================================================================================
Supplemental disclosures of noncash investing and financing activities:
Loans transferred to OREO and repossessed property $ 3,085 $ 6,301 $ 4,460
Adjustment of securities available for sale to fair value, net of tax $ (6,858) $ (762) $ 344
Acquisition activity:
Fair value of noncash assets acquired $ 175,959 $ -- $ --
Fair value of liabilities assumed $ 157,048 $ -- $ --
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
HUDSON RIVER BANCORP, INC.
Notes to Consolidated Financial Statements
(1) Summary of Significant Accounting Policies
------------------------------------------
The accounting and reporting policies of Hudson River Bancorp, Inc. ("Parent
Company") and its subsidiary (referred to together as the "Company") conform to
generally accepted accounting principles and reporting practices followed by the
banking industry. The more significant policies are described below.
Organization
------------
The Company is a bank-based financial services company. The Parent Company's
subsidiary, Hudson River Bank & Trust Company (the "Bank"), provides a wide
range of banking, financing, fiduciary and other financial services to
corporate, individual and institutional customers through its branch offices and
subsidiary companies. The Parent Company is regulated by the Office of Thrift
Supervision as a unitary savings and loan ("thrift") holding company. The Bank
is regulated by the Federal Deposit Insurance Corporation ("FDIC") and the New
York State Banking Department.
The Bank completed its conversion from a mutual savings bank to a stock savings
bank on July 1, 1998. Concurrent with the Bank's conversion, the Parent Company
completed its initial public offering of common stock and purchased all of the
outstanding common stock of the Bank. Prior to its initial public offering, the
Parent Company had no results of operations; therefore, financial information
prior to July 1, 1998 reflects the operations of the Bank.
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of Hudson River
Bancorp, Inc. and its subsidiary. All material intercompany accounts and
transactions have been eliminated. The Company utilizes the accrual method of
accounting for financial reporting purposes. Amounts in the prior years'
consolidated financial statements have been reclassified whenever necessary to
conform with the current year's presentation.
Use of Estimates
----------------
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
-------------------------
For purposes of the consolidated statements of cash flows, cash and cash
equivalents consists of cash on hand, due from banks, securities purchased under
agreements to resell, and federal funds sold.
Securities Financing Arrangements
---------------------------------
Securities purchased under agreements to resell (resale agreements) and
securities sold under agreements to repurchase (repurchase agreements) are
generally carried as short-term investments and borrowings, respectively, and
are carried at the amounts at which the securities were initially acquired or
sold. These transactions are usually overnight, fixed-coupon agreements and
require collateral to be delivered to the Company's custodial account (resale
agreements) or segregated at the Company's third party custodian (repurchase
agreements). In the case of resale agreements, the Company requires that the
fair value of the underlying securities received exceed the amount of the
agreement at all times. At March 31, 2000 and 1999, the Company did not have any
resale agreements.
Securities
----------
Management determines the appropriate classification of securities at the time
of purchase. If management has the positive intent and ability to hold debt
securities to maturity, they are classified as securities held to maturity and
carried at cost, adjusted for amortization of premiums and accretion of
discounts using an effective interest method. If securities are purchased for
the purpose of selling them in the near term, they are classified as trading
securities and are reported at fair value with unrealized holding gains and
losses reflected in current earnings. All other debt and marketable equity
securities are classified as securities available for sale and are reported at
fair value, with net unrealized gains or losses reported, net of income taxes,
in accumulated other comprehensive income or loss. As a member of the Federal
Home Loan Bank of New York (the "FHLB"), the Company is required to hold FHLB
stock which is carried at cost since there is no readily available market value.
At March 31, 2000 and 1999, the Company did not hold any securities considered
to be trading securities.
<PAGE>
Gains or losses on the disposition of securities are based on the net proceeds
and the adjusted carrying amount of the securities sold, using the specific
identification method. Unrealized losses on securities reflecting a decline in
value which is other than temporary, if any, are charged to income and reported
as a component of "net securities transactions" in the consolidated income
statements.
Net Loans Receivable
--------------------
Loans are carried at the principal amount outstanding net of unearned discount,
net deferred loan origination fees and costs, and the allowance for loan losses.
Certain nonrefundable loan fees and direct loan origination costs are deferred
and amortized over the estimated life of the loan as an adjustment to the yield.
Nonperforming loans include nonaccrual loans, loans which are contractually past
due 90 days or more and still accruing interest, and troubled debt
restructurings. Generally, loans are placed on nonaccrual status, either due to
the delinquency status of principal and/or interest payments, or a judgment by
management that, although payments of principal and/or interest are current,
such action is prudent. Loans are generally placed on nonaccrual status when
principal and/or interest payments are contractually past due 90 days or more.
When a loan is placed on nonaccrual status, all interest previously accrued but
not collected is reversed against current year interest income. Interest income
on nonaccrual loans is recognized only when received, if considered appropriate
by management. Loans are removed from nonaccrual status when they become current
as to principal and interest or when, in the opinion of management, the loans
are expected to be fully collectible as to principal and interest.
Loans are considered impaired when it is probable that the borrower will not
make principal and interest payments according to the original contractual terms
of the loan agreement. Smaller balance, homogeneous loans which are collectively
evaluated for impairment, such as consumer and residential mortgage loans, are
specifically excluded from the classification of impaired loans unless such
loans are restructured in a troubled debt restructuring. Impaired loans are
included in nonperforming loans, generally as nonaccrual commercial-type loans.
The impairment of a nonperforming loan is measured based on the present value of
the expected future cash flows, discounted at the loan's effective interest
rate, or on the underlying value of collateral for collateral dependent loans.
The impaired loan's carrying value in excess of expected cash flows or
collateral value is specifically reserved for or is charged to the allowance for
loan losses. The Company's impaired loans are generally collateral dependent.
The Company considers estimated costs to sell, on a discounted basis, when
determining the fair value of collateral in the measurement of impairment if
those costs are expected to reduce the cash flows available to repay or
otherwise satisfy the loans.
Allowance for Loan Losses
-------------------------
The allowance for loan losses is a reserve available for probable losses
inherent in the loan portfolio. Additions are made to the allowance through
periodic provisions, which are charged to expense. All losses of principal are
charged to the allowance when incurred or when a determination is made that a
loss is expected. Subsequent recoveries, if any, are credited to the allowance.
The adequacy of the allowance for loan losses is determined through a quarterly
review of outstanding loans. The impact of economic conditions on the
creditworthiness of the borrowers is considered, as well as loan loss
experience, changes in the composition and volume of the loan portfolio, and
management's assessment of the risks inherent in the loan portfolio.
Loans Held for Sale
-------------------
Loans are classified as held for investment purposes or held for sale when the
Company enters into interest rate lock agreements with the potential borrowers.
Loans held for sale are recorded at the lower of aggregate cost or fair value,
with unrealized losses, if any, recorded in a valuation allowance by a charge to
income. Fair value is determined based on quoted market rates or, in the case
where a firm commitment has been made to sell the loan, the firm committed
price. Gains and losses on the disposition of loans held for sale are determined
on the specific identification method. There were no loans held for sale at
March 31, 2000 and 1999.
Premises and Equipment
----------------------
Premises and equipment are carried at cost, less accumulated depreciation.
Depreciation is computed on a straight-line basis over the estimated useful
lives of the assets (up to fifty years for buildings and generally three-to-five
years for furniture and equipment). Leasehold improvements are depreciated over
the shorter of the term of the related leases or the estimated useful lives of
the assets.
<PAGE>
Other Real Estate Owned and Repossessed Property
------------------------------------------------
Other real estate owned, comprised of real estate acquired through foreclosure
and in-substance foreclosures, and repossessed property are recorded at the
lower of "cost" (defined as the fair value at initial foreclosure or
repossession) or the fair value of the asset acquired, less estimated disposal
costs. A loan is categorized as an in-substance foreclosure when the Company has
taken possession of the collateral, regardless of whether formal foreclosure
proceedings have taken place. At the time of foreclosure or repossession, or
when foreclosure occurs in-substance, the excess, if any, of the loan value over
the fair value of the property received is charged to the allowance for loan
losses. Subsequent declines in the value of foreclosed and repossessed property
and net operating expenses are charged directly to other operating expenses.
Properties are reappraised, as considered necessary by management, and written
down to the fair value less the estimated cost to sell the property, if
necessary. Repossessed property consists primarily of manufactured homes
abandoned by their owners or repossessed by the Company.
Goodwill and Other Intangibles
------------------------------
Goodwill and other intangibles represents the excess of the purchase price over
the fair value of net assets acquired for transactions accounted for using the
purchase method of accounting. Goodwill and other intangibles are amortized
using the straight-line method over the estimated period of benefit, not to
exceed fifteen years. Goodwill and other intangibles are periodically reviewed
by management for recoverability and any impairment is recognized by a charge to
income if a permanent loss in value is indicated.
Income Taxes
------------
Deferred tax assets and liabilities are recognized for the expected future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets are recognized subject to management's
judgment that those assets will more likely than not be realized. A valuation
allowance is recognized if, based on an analysis of available evidence,
management believes that all or a portion of the deferred tax assets will not be
realized. Adjustments to increase or decrease the valuation allowance are
charged or credited, respectively, to tax expense. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Employee Benefit Costs
----------------------
The Company maintains a noncontributory retirement pension plan covering
substantially all employees as well as a benefit restoration plan covering
certain executives. The costs of these plans, based on actuarial computations of
current and future benefits for employees, are charged to current operating
expenses. The Company also provides certain postretirement medical and life
insurance benefits to substantially all employees and retirees, as well as
dental benefits to a closed group of retirees. The cost of postretirement
benefits other than pensions is recognized on an accrual basis as employees
perform services to earn the benefits.
Stock-Based Compensation
------------------------
The Company accounts for its stock option plan in accordance with the provisions
of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees." Accordingly, compensation expense is recognized only if
the exercise price of the option is less than the fair value of the underlying
stock at the grant date. Statement of Financial Accounting Standards ("SFAS")
No. 123, "Accounting for Stock-Based Compensation", encourages entities to
recognize the fair value of all stock-based awards on the date of the grant as
compensation expense over the vesting period. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide
pro forma disclosures of net income and earnings per share as if the
fair-value-based method defined in SFAS No. 123 had been applied.
The Company's Recognition and Retention Plan ("RRP") is also accounted for in
accordance with APB Opinion No. 25. The fair value of the shares awarded,
measured as of the grant date, is recognized as unearned compensation (a
component of shareholders' equity) and amortized to compensation expense as the
shares become vested.
Compensation expense is recognized for the Company's Employee Stock Ownership
Plan ("ESOP") equal to the average fair value of shares committed to be released
for allocation to participant accounts. Any difference between the average fair
value of the shares committed to be released for allocation and the ESOP's
original acquisition cost is charged or credited to shareholders' equity
(additional paid-in capital). The cost of unallocated ESOP shares (shares not
yet committed to be released) is reflected as a reduction of shareholders'
equity.
<PAGE>
Earnings Per Share
------------------
Basic earnings per share is calculated by dividing net income by the
weighted-average number of common shares outstanding during the period. Shares
of restricted stock are not considered outstanding for the calculation of basic
earnings per share until they become fully vested. Diluted earnings per share is
computed in a manner similar to that of basic earnings per share except that the
weighted-average number of common shares outstanding is increased to include the
number of additional common shares that would have been outstanding if all
potentially dilutive common shares (such as stock options and unvested
restricted stock) were issued or became vested during the reporting period.
Unallocated common shares held by the ESOP are not included in the
weighted-average number of common shares outstanding for either the basic or
diluted earnings per share calculations.
Financial Instruments
---------------------
In the normal course of business, the Company is a party to certain financial
instruments with off-balance sheet risk such as commitments to extend credit,
unused lines of credit and standby letters of credit. The Company's policy is to
record such instruments when funded.
Trust Assets
------------
Assets held by the Company in a fiduciary or agency capacity for its customers
are not included in the consolidated balance sheets since these items are not
assets of the Company.
Comprehensive Income
--------------------
Comprehensive income represents the sum of net income and items of other
comprehensive income or loss, which are reported directly in shareholders'
equity, net of tax, such as the change in the net unrealized gain or loss on
securities available for sale. Accumulated other comprehensive income or loss,
which is a component of shareholders' equity, represents the net unrealized gain
or loss on securities available for sale, net of tax.
Segment Reporting
-----------------
The Company's operations are primarily in the financial services industry and
include providing to its customers traditional banking services. The Company
operates primarily in the geographical regions of Columbia, Rensselaer, Albany,
Schenectady and Dutchess counties of New York. Management makes operating
decisions and assesses performance based on an ongoing review of its traditional
banking operations, which constitute the Company's only reportable segment.
(2) Business Combinations
---------------------
The Company completed its acquisition of SFS Bancorp, Inc. ("SFS") on September
3, 1999, paying $25.10 in cash for each share of SFS common stock outstanding.
Total assets of $176.9 million and total deposits of $150.4 million were
acquired. The total consideration of approximately $32 million was funded
primarily by long-term borrowings with maturities ranging from one-to-five
years. In accordance with the purchase method of accounting for business
combinations, the assets acquired and the liabilities assumed were adjusted to
estimated fair value. Goodwill amounting to $9.1 million was recorded relating
to this transaction and is being amortized on a straight-line basis over fifteen
years. The results of SFS are included in the consolidated financial statements
only since the date of acquisition.
A summary of unaudited pro forma combined financial information for the Company
and SFS for the year ended March 31, 2000 as if the transaction had occurred on
April 1, 1999, and for the year ended March 31, 1999 as if the transaction had
occurred on April 1, 1998 is as follows:
Years ended March 31, 2000 1999
--------------------------------------------------------------------------------
Net interest income $ 47,780 $ 41,692
Other operating income 2,778 4,883
Net income 9,360 4,449
Basic and diluted earnings per share $ 0.64 $ 0.21
--------------------------------------------------------------------------------
The pro forma combined financial information does not reflect any potential cost
savings or revenue enhancements that are expected to result from the combination
of the operations of the Company and SFS other than the elimination of expenses
related to SFS's Employee Stock Ownership Plan and Recognition and Retention
Plan and, accordingly, may not be indicative of the results of operations that
would have been achieved had the acquisition in fact occurred on the dates
indicated, nor do they purport to be indicative of the results of operations
that may be achieved in the future by the combined company.
<PAGE>
Subsequent Event (unaudited)
On April 25, 2000, the Company entered into a definitive agreement with Cohoes
Bancorp, Inc. ("Cohoes") to provide for a merger between the Company and Cohoes.
Under the terms of the agreement, the Company will issue 1.185 shares of Company
common stock in exchange for each share of Cohoes common stock. Cohoes has 21
branches located in 6 counties of New York. The total deal value is
approximately $87 million based on the Company's stock price immediately
preceding the announcement. The transaction will be accounted for under the
purchase method of accounting and the resultant negative goodwill will be
allocated to reduce noncurrent, nonmonetary assets of Cohoes, with any remaining
amount classified as other liabilities upon the closing of the transaction. The
remaining negative goodwill, if any, will be accreted into income on a
straight-line method over the estimated period of benefit. Pending regulatory
and shareholder approvals, the transaction is expected to close prior to
year-end 2000.
(3) Securities
----------
The amortized cost, gross unrealized gains and losses and approximate fair value
of securities at March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
2000
------------------------------------------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Government and agency securities $ 58,221 $ -- $ (3,627) $ 54,594
Corporate debt securities 62,404 285 (2,119) 60,570
Tax-exempt securities 15,239 -- (1,407) 13,832
Collateralized mortgage obligations 80,636 11 (4,435) 76,212
Mortgage-backed securities 30,243 1 (1,209) 29,035
Equity securities 1,664 40 (247) 1,457
Other securities 1,280 -- -- 1,280
------------------------------------------------------------------------------------------------------------------
Total securities available for sale $249,687 $ 337 $(13,044) $236,980
==================================================================================================================
Securities Held to Maturity
Corporate debt securities $ 8,977 $ 1 $ (34) $ 8,944
Tax-exempt securities 10 -- -- 10
Collateralized mortgage obligations 546 2 (25) 523
Mortgage-backed securities 1,611 18 (41) 1,588
------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 11,144 $ 21 $ (100) $ 11,065
==================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Available for Sale
U.S. Government and agency securities $ 66,976 $ 47 $ (576) $ 66,447
Corporate debt securities 55,428 228 (644) 55,012
Tax-exempt securities 15,131 12 (90) 15,053
Collateralized mortgage obligations 85,434 314 (343) 85,405
Mortgage-backed securities 19,678 -- (180) 19,498
Equity securities 1,160 74 (38) 1,196
------------------------------------------------------------------------------------------------------------------
Total securities available for sale $243,807 $ 675 $ (1,871) $242,611
==================================================================================================================
Securities Held to Maturity
U.S. Government and agency securities $ 1,995 $ 17 $ -- $ 2,012
Corporate debt securities 17,931 158 -- 18,089
Tax-exempt securities 10 -- -- 10
Collateralized mortgage obligations 968 3 (31) 940
Mortgage-backed securities 2,137 50 (3) 2,184
------------------------------------------------------------------------------------------------------------------
Total securities held to maturity $ 23,041 $ 228 $ (34) $ 23,235
==================================================================================================================
</TABLE>
During the years ended March 31, 2000, 1999, and 1998, the Company realized
gross gains of $19 thousand, $36 thousand, and $15 thousand, respectively,
related to calls of securities, with no gross losses realized. The Company
received $3.0 million in proceeds from the sale of securities available for
sale, realizing gross gains of $64 thousand and no gross losses during the year
ended March 31, 2000. No securities were sold during the years ended March 31,
1999 and 1998.
Securities available for sale (exclusive of equity securities) and securities
held to maturity by remaining contractual maturity as of March 31, 2000 are
presented below. Expected maturities will differ from contractual maturities as
a result of prepayments and calls.
<TABLE>
<CAPTION>
Securities Securities
Available for Sale Held to Maturity
--------------------------------------------------------------------------------------------------
Approximate Approximate
Amortized Fair Amortized Fair
(In thousands) Cost Value Cost Value
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Within one year $ 5,479 $ 5,368 $ 6,986 $ 6,983
One through five years 34,948 34,385 3,050 2,986
Six through ten years 28,751 27,531 402 404
After ten years 178,845 168,239 706 692
--------------------------------------------------------------------------------------------------
Total $248,023 $235,523 $ 11,144 $ 11,065
--------------------------------------------------------------------------------------------------
</TABLE>
The carrying value of securities pledged as required by law and for other
purposes amounted to $52.2 million and $9.5 million at March 31, 2000 and 1999,
respectively.
<PAGE>
(4) Net Loans Receivable
--------------------
A summary of net loans receivable as of March 31 is as follows:
<TABLE>
<CAPTION>
(In thousands) 2000 1999
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans secured by real estate
Residential one-to-four family $ 491,811 $ 295,466
Commercial 138,891 91,480
Construction 9,144 3,401
---------------------------------------------------------------------------------------------------
Total loans secured by real estate 639,846 390,347
---------------------------------------------------------------------------------------------------
Other loans
Manufactured housing 81,542 90,354
Commercial 37,167 29,024
Financed insurance premiums 51,796 57,901
Consumer 15,536 12,440
---------------------------------------------------------------------------------------------------
Total other loans 186,041 189,719
---------------------------------------------------------------------------------------------------
Unearned discount and net deferred loan origination fees and costs (2,032) (1,967)
---------------------------------------------------------------------------------------------------
Total loans receivable 823,855 578,099
Allowance for loan losses (19,608) (14,296)
---------------------------------------------------------------------------------------------------
Net loans receivable $ 804,247 $ 563,803
---------------------------------------------------------------------------------------------------
</TABLE>
Changes in the allowance for loan losses during the years ended March 31 were as
follows:
<TABLE>
<CAPTION>
(In thousands) 2000 1999 1998
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses at beginning of year $ 14,296 $ 8,227 $ 5,872
Provision charged to operations 6,200 7,341 8,491
Loans charged-off (2,543) (3,191) (6,730)
Recoveries on loans charged-off 647 1,919 594
Allowance acquired 1,008 -- --
-------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of year $ 19,608 $ 14,296 $ 8,227
=======================================================================================================
The following table sets forth information with regard to nonperforming loans at March 31:
(In thousands) 2000 1999 1998
----------------------------------------------------------------------------------------------------
Loans in nonaccrual status $10,293 $ 9,944 $15,707
Loans contractually past due 90 days or more and still accruing
interest -- -- 16
----------------------------------------------------------------------------------------------------
Total nonperforming loans $10,293 $ 9,944 $15,723
=======================================================================================================
</TABLE>
At March 31, 2000, 1999 and 1998, there were no troubled debt restructurings or
material commitments to extend further credit to borrowers with nonperforming
loans.
Accumulated interest on nonaccrual loans, as shown above, of approximately $517
thousand, $411 thousand, and $599 thousand, was not recognized in interest
income during the years ended March 31, 2000, 1999, and 1998, respectively.
Approximately $466 thousand, $572 thousand, and $920 thousand of interest on
nonaccrual loans, as shown above, was collected and recognized in interest
income during the years ended March 31, 2000, 1999, and 1998, respectively.
At both March 31, 2000 and 1999, the recorded investment in loans that are
considered to be impaired under SFAS No. 114 totaled $2.7 million, for which the
related allowance for loan losses was $1.1 million at March 31, 2000 and $842
thousand at March 31, 1999. As of March 31, 2000 and 1999, there were no
impaired loans which did not have an allowance for loan losses determined in
accordance with SFAS No. 114. The average recorded investment in impaired loans
during the years ended March 31, 2000, 1999, and 1998 was $2.4 million, $3.7
million, and $5.8 million, respectively. The interest income accrued on those
impaired loans or recognized using the cash basis of income recognition was not
significant for the years ended March 31, 2000, 1999, and 1998.
<PAGE>
Certain executive officers of the Company were customers of and had other
transactions with the Company in the ordinary course of business. Loans to these
parties were made in the ordinary course of business at the Company's normal
credit terms, including interest rate and collateralization. The aggregate of
such loans totaled less than 1% of total shareholders' equity at both March 31,
2000 and 1999.
The Company has an unconsolidated equity investment in Homestead Funding Corp.,
a mortgage-banking company. The Company has a $20 million warehouse line of
credit relationship with Homestead which was made in the ordinary course of
business at the Company's normal credit terms, including interest rate and
collateralization. There was $4.6 million and $9.6 million outstanding on this
line as of March 31, 2000 and 1999, respectively.
(5) Premises and Equipment
----------------------
A summary of premises and equipment at March 31 is as follows:
(In thousands) 2000 1999
-------------------------------------------------------------------------
Buildings and land $ 16,952 $ 15,143
Furniture and equipment 9,773 7,969
Leasehold improvements 1,051 817
-------------------------------------------------------------------------
Total 27,776 23,929
Accumulated depreciation (9,057) (7,122)
-------------------------------------------------------------------------
Premises and equipment, net $ 18,719 $ 16,807
=========================================================================
Depreciation expense was approximately $2.0 million, $1.5 million and $1.4
million, for the years ended March 31, 2000, 1999, and 1998, respectively.
(6) Deposits
--------
Deposit account balances at March 31 are summarized as follows:
(In thousands) 2000 1999
------------------------------------------------------------------------
Savings $180,932 $145,985
N.O.W. and money market 126,429 99,390
Time deposits 392,962 302,479
Noninterest-bearing 48,240 43,960
------------------------------------------------------------------------
Total deposits $748,563 $591,814
=========================================================================
The aggregate amount of time deposit accounts with a balance of $100 thousand or
greater was $49.1 million and $39.9 million at March 31, 2000 and 1999,
respectively.
The approximate amounts of contractual maturities of time deposits at March 31,
2000 are as follows:
(In thousands)
--------------------------------------------------------------------------------
Years ending March 31,
2001 $289,541
2002 66,938
2003 23,326
2004 8,960
2005 3,489
Thereafter 708
--------------------------------------------------------------------------------
Total time deposits $392,962
================================================================================
<PAGE>
(7) Borrowings
----------
Securities Sold Under Agreements to Repurchase
The Company enters into repurchase agreements with certain commercial banking
clients. The agreements to repurchase assets correspond with the sale of the
Company's securities which are treated as financings for financial statement
purposes. The securities subject to repurchase agreements are segregated from
the portfolio of securities maintained by a third party until maturity of the
agreements. At March 31, 2000, the balance of securities sold under agreements
to repurchase was $4.2 million with a weighted-average rate of 5.15%. At March
31, 1999, the balance of securities sold under agreements to repurchase was $845
thousand with a weighted-average rate of 3.75%. The balance as of both dates was
due within 30 days.
Short-term FHLB Advances
The Bank has a line of credit with the FHLB totaling $100 million. This
short-term borrowing program is based upon either an overnight or thirty-day
borrowing period with interest based generally upon a spread above the current
Federal funds rate. In addition, short-term advances with a maturity of less
than one year are classified in this category. The rates on these borrowings can
be either fixed or floating.
(In thousands) As of March 31, 2000 1999
--------------------------------------------------------------------------------
Amount outstanding:
Line of credit advances $ 79,450 $ 27,600
Short-term advances 37,000 --
--------------------------------------------------------------------------------
Total short-term FHLB advances $ 116,450 $ 27,600
================================================================================
Weighted-average interest rate 6.28% 5.35%
================================================================================
For the years ended March 31, 2000 1999 1998
--------------------------------------------------------------------------------
Highest amount at month-end $ 119,589 $ 28,445 $ 15,460
Average amount outstanding 65,542 2,916 3,699
Weighted-average interest rate 5.65% 5.25% 5.54%
================================================================================
The maturities of line of credit advances do not exceed thirty days. As of March
31, 2000, the maturities of the short-term advances range from four-to-ten
months. Short-term FHLB advances are collateralized by FHLB stock and a blanket
lien on residential real estate mortgages.
Long-term FHLB Borrowings
Scheduled repayments of long-term FHLB borrowings as of March 31, 2000 are as
follows:
Weighted-Average
(In thousands) Amount Interest Rate
--------------------------------------------------------------------------------
Maturing in:
2000 $ 200 4.90%
2001 10,300 5.72
2002 10,000 6.09
2003 100 5.16
2004 10,000 6.16
--------------------------------------------------------------------------------
Total long-term FHLB borrowings $ 30,600 5.98%
================================================================================
Of the total long-term FHLB borrowings, $10.0 million is callable in each of
August 2000, 2001, and 2002. Long-term FHLB borrowings are collateralized by
securities available for sale.
<PAGE>
(8) Regulatory Capital
------------------
Regulations require banks to maintain a minimum leverage ratio of Tier 1 capital
to total adjusted quarterly average assets of 4.0%, and minimum ratios of Tier 1
capital and total capital to risk-weighted assets of 4.0% and 8.0%,
respectively.
Under their prompt corrective action regulations, regulatory authorities are
required to take certain supervisory actions (and may take additional
discretionary actions) with respect to an undercapitalized institution. Such
actions could have a direct material effect on an institution's financial
statements. The regulations establish a framework for the classification of
banks into five categories: well-capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well-capitalized if it
has a Tier 1 capital ratio of at least 5.0% (based on total adjusted quarterly
average assets); a Tier 1 risk-based capital ratio of at least 6.0%; and a total
risk-based capital ratio of at least 10.0%.
The foregoing capital ratios are based in part on specific quantitative measures
of assets, liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. Capital amounts and classifications are also
subject to qualitative judgments by the regulatory authorities about capital
components, risk weightings, and other factors.
As of March 31, 2000 and 1999, the Bank met all capital adequacy requirements to
which it was subject. Further, the most recent FDIC notification categorized the
Bank as a well-capitalized institution under the prompt corrective action
regulations. There have been no conditions or events since the notification that
management believes have changed the Bank's capital classification.
The following is a summary of actual capital amounts and ratios as of March 31,
2000 and 1999 for the Bank, compared to the requirements for minimum capital
adequacy and for classification as well-capitalized. Although the Office of
Thrift Supervision does not impose minimum capital requirements on thrift
holding companies, the Company's consolidated regulatory capital amounts and
ratios as of March 31, 2000 and 1999 are also presented.
<TABLE>
<CAPTION>
March 31, 2000 Required Amounts and Ratios
--------------------------------------------------------------------------------------------------------------------------
Minimum Capital Classification as
Actual Capital Adequacy Well-Capitalized
--------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (Leverage) Capital
Hudson River Bank & Trust Company $141,867 13.03% $ 43,541 4.00% $ 54,426 5.00%
Hudson River Bancorp, Inc. (consolidated) 196,805 17.98
Tier 1 Risk-Based Capital
Hudson River Bank & Trust Company 141,867 18.43 30,798 4.00 46,197 6.00
Hudson River Bancorp, Inc. (consolidated) 196,805 24.89
Total Risk-Based Capital
Hudson River Bank & Trust Company 151,615 19.69 61,596 8.00 76,994 10.00
Hudson River Bancorp, Inc. (consolidated) 206,808 26.16
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999 Required Amounts and Ratios
--------------------------------------------------------------------------------------------------------------------------
Minimum Capital Classification as
Actual Capital Adequacy Well-Capitalized
--------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 (Leverage) Capital
Hudson River Bank & Trust Company $140,517 17.04% $ 32,978 4.00% $ 41,222 5.00%
Hudson River Bancorp, Inc. (consolidated) 216,892 26.18
Tier 1 Risk-Based Capital
Hudson River Bank & Trust Company 140,517 23.18 24,244 4.00 36,367 6.00
Hudson River Bancorp, Inc. (consolidated) 216,892 35.53
Total Risk-Based Capital
Hudson River Bank & Trust Company 148,176 24.45 48,489 8.00 60,611 10.00
Hudson River Bancorp, Inc. (consolidated) 224,621 36.80
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(9) Stock-Based Compensation Plans
------------------------------
Employee Stock Ownership Plan
The Company established an ESOP on July 1, 1998 to provide substantially all
employees of the Company the opportunity to also become shareholders. The ESOP
borrowed $18.4 million from the Company and used the funds to purchase 1,428,300
shares of the common stock of the Company in the open market. The loan will be
repaid principally from the Bank's discretionary contributions to the ESOP with
annual principal payments due through March 31, 2014. Dividends on the
unallocated shares in the ESOP are utilized to reduce the Company's principal
payments. At March 31, 2000, the loan had an outstanding balance of $16.3
million and an interest rate of 8.00%. Shares purchased with the loan proceeds
are held in a suspense account for allocation among participants as the loan is
repaid. Shares are released for allocation among participants based on the total
principal and interest payments made as a percentage of all remaining principal
and interest payments. Contributions to the ESOP and shares released from the
suspense account are allocated among participants on the basis of compensation
in the year of allocation.
Unallocated ESOP shares are pledged as collateral for the loan and are reported
in shareholders' equity. The Company reports compensation expense during the
year based on the average market price of the shares to be released at year end.
The shares become outstanding for earnings per share computations when the
shares are released from collateral. Unallocated ESOP shares are not included in
the earnings per share computations. The Company recorded approximately $1.4
million and $1.1 million of compensation expense under the ESOP for the years
ended March 31, 2000 and 1999, respectively.
The ESOP shares as of March 31, 2000 were as follows:
--------------------------------------------------------------------------------
Allocated shares 95,843
Shares released for allocation 124,718
Unallocated shares 1,207,739
--------------------------------------------------------------------------------
Total ESOP shares 1,428,300
================================================================================
Market value of unallocated shares at March 31, 2000 (In thousands) $ 12,077
================================================================================
Stock Option Plan
On January 5, 1999, the Company's shareholders approved the Hudson River
Bancorp, Inc. 1998 Stock Option and Incentive Plan ("Stock Option Plan"). The
primary objective of the Stock Option Plan is to provide officers and directors
with a proprietary interest in the Company and an incentive to encourage such
persons to remain with the Company.
Under the Stock Option Plan, 1,785,375 shares of authorized but unissued common
stock are reserved for issuance upon option exercises. The Company also has the
alternative to fund the Stock Option Plan with treasury stock. Options under the
plan may be either nonqualified stock options or incentive stock options. Each
option entitles the holder to purchase one share of common stock at an exercise
price equal to the fair market value on the date of grant. Options expire ten
years following the date of grant. The options granted in 2000 and 1999 vest at
a rate of 20% per year from the grant date.
The Company applies APB Opinion No. 25 and related Interpretations in accounting
for its Stock Option Plan. Accordingly, no compensation cost has been recognized
for its Stock Option Plan. SFAS No. 123 requires companies not using a fair
value based method of accounting for stock options or similar plans, to provide
pro forma disclosure of net income and earnings per share as if that method of
accounting had been applied.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the years ended March 31, 2000 and 1999: dividend
yield of 1.22% and 1.10%; expected volatility of 16.86% and 24.12%; risk-free
interest rate of 6.42% and 4.73%; and expected lives of 5 years. The
weighted-average fair value of the options granted during 2000 and 1999 was
$2.37 and $2.98, respectively.
Pro forma disclosures for the years ended March 31, 2000 and 1999 utilizing the
estimated fair value of the options granted and an assumed 5% forfeiture rate
are as follows:
<PAGE>
<TABLE>
<CAPTION>
(In thousands, except per share data) For the Years Ended March 31, 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income:
As reported $ 9,526 $ 3,807
Pro forma 9,029 3,685
Basic earnings per share:
As reported 0.65 0.17
Pro forma 0.62 0.17
Diluted earnings per share:
As reported 0.65 0.17
Pro forma 0.62 0.17
=====================================================================================================
</TABLE>
Because the Company's stock options have characteristics significantly different
from those of traded options for which the Black-Scholes model was developed,
and because changes in the subjective input assumptions can materially affect
the fair value estimate, the existing model, in management's opinion, does not
necessarily provide a reliable single measure of the fair value of its stock
options. In addition, the pro forma effect on reported net income and earnings
per share for the years ended March 31, 2000 and 1999 may not be representative
of the pro forma effects on reported net income or earnings per share for future
years.
Recognition and Retention Plan
The Company's shareholders approved the Hudson River Bancorp, Inc. Recognition
and Retention Plan ("RRP") on January 5, 1999. The purpose of the plan is to
promote the long-term interests of the Company and its shareholders by providing
a stock-based compensation program to attract and retain officers and directors.
Under the RRP, 714,150 shares of authorized but unissued shares are reserved for
issuance under the plan. The Company also has the alternative to fund the RRP
with treasury stock.
Employees who were awarded shares (restricted stock) under this plan in 2000 and
1999 vest in those shares over periods of two, five or ten equal installments
commencing one year from the date of grant. The fair market value of the shares
awarded under the plan at the grant date is being amortized to compensation
expense on a straight-line basis over the vesting periods of the underlying
shares. Compensation expense of $943 thousand and $217 thousand was recorded in
the years ended March 31, 2000 and 1999, respectively. The remaining unearned
compensation cost of $6.3 million and $8.0 million was reported as a reduction
of shareholders' equity at March 31, 2000 and 1999, respectively. Shares awarded
under the RRP are transferred from treasury stock at cost with the difference
between the fair market value on the grant date and the cost of the shares
recorded as a reduction of retained earnings.
The following is a summary of the Company's Stock Option Plan and Recognition
and Retention Plan and changes since their approval on January 5, 1999.
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Average Average
Shares Price(1) Shares Price(1)
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
STOCK OPTION PLAN
Options outstanding, beginning of year 1,248,383 $ 11.50 -- $ --
Granted 64,686 9.88 1,249,772 11.50
Exercised -- -- -- --
Forfeited and expired (11,632) 11.50 (1,389) 11.50
---------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 1,301,437 $ 11.42 1,248,383 $ 11.50
===============================================================================================================
RECOGNITION AND RETENTION PLAN
Unvested shares, beginning of year 714,150 $ 11.50 -- $ --
Granted 19,071 9.88 714,150 11.50
Vested (84,311) 11.50 -- --
Forfeited (82,765) 11.50 -- --
---------------------------------------------------------------------------------------------------------------
Unvested shares, end of year 566,145 $ 11.45 714,150 $ 11.50
===============================================================================================================
</TABLE>
(1)The weighted-average price for stock options is the weighted-average
exercise price of the options, and for RRP shares (restricted stock), the
weighted-average fair value of the stock at the date of grant.
<PAGE>
The following table summarizes information about stock options at March 31,2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------ ----------------------------------
Weighted- Weighted-Average Weighted-
Range of Options Average Price Remaining Options Average Price
Exercise Prices Outstanding Per Option Life (Years) Exercisable Per Option
------------------------------------------------------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 9.88 64,686 $ 9.88 9.78 -- $ --
11.50 1,236,751 11.50 7.57 262,980 11.50
------------------------------------------------------------------------------- ----------------------------------
$ 9.88-11.50 1,301,437 $ 11.42 7.68 262,980 $ 11.50
------------------------------------------------------------------------------- ----------------------------------
</TABLE>
<PAGE>
(10) Employee Benefit Plans
----------------------
Pension Plan
The Company maintains a noncontributory pension plan ("the Plan") with
Retirement Systems Incorporated ("RSI") Retirement Trust, covering substantially
all of its employees meeting certain eligibility requirements. The benefits are
computed as a percentage of the highest three-year average annual earnings, as
defined by the Plan, multiplied by years of credited service. The Plan limits
credited service for benefit calculations to a maximum of thirty years. The
amounts contributed to the plan are determined annually on the basis of (a) the
maximum amount that can be deducted for federal income tax purposes or (b) the
amount certified by a consulting actuary as necessary to avoid an accumulated
funding deficiency as defined by the Employee Retirement Income Security Act of
1974. Contributions are intended to provide not only for benefits attributed to
service to date but also those expected to be earned in the future. Plan assets
consist primarily of investments in RSI Retirement Trust administered
fixed-income and equity funds.
Effective October 1, 1999, the Company merged the noncontributory pension plan
of SFS (the "SFS Plan") into the Plan. The terms of the acquisition provided
that the benefits vested in the SFS Plan immediately prior to the acquisition
remained unchanged. Employees of SFS retained by the Company after the
acquisition received credit for their years of service as it related to
eligibility and vesting, but not for the accrual of retirement benefits under
the Plan.
The following table sets forth the Plan's funded status and amounts recognized
in the Company's consolidated financial statements at March 31:
(In thousands) 2000 1999
--------------------------------------------------------------------------------
Reconciliation of projected benefit obligation
Obligation at beginning of year $ 10,038 $ 9,028
Service cost 472 431
Interest cost 663 619
Actuarial (gain) loss (1,306) 381
Business combination 1,902 --
Benefits paid (480) (421)
--------------------------------------------------------------------------------
Obligation at end of year $ 11,289 $ 10,038
================================================================================
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year $ 11,220 $ 10,422
Actual return on plan assets 1,428 1,157
Employer contributions -- 62
Business combination 2,294 --
Benefits paid (480) (421)
--------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 14,462 $ 11,220
================================================================================
Reconciliation of funded status
Funded status at end of year $ 3,173 $ 1,182
Unrecognized net actuarial gain (2,140) (287)
Unrecognized prior service cost 37 46
--------------------------------------------------------------------------------
Prepaid pension cost at end of year $ 1,070 $ 941
================================================================================
Net periodic pension cost included in the Company's consolidated income
statements for the years ended March 31 included the following components:
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Components of net periodic pension cost
Service cost $ 472 $ 431 $ 344
Interest cost 663 619 619
Expected return on plan assets (880) (819) (731)
Amortization of net transition asset -- (17) (54)
Net amortization and deferral 9 9 9
--------------------------------------------------------------------------------
Net periodic pension cost $ 264 $ 223 $ 187
================================================================================
<PAGE>
The actuarial assumptions used in determining the actuarial present value of the
projected benefit obligation as of March 31 were as follows:
2000 1999 1998
--------------------------------------------------------------------------------
Weighted-average assumptions:
Discount rate 8.00% 6.75% 7.00%
Rate of compensation increase 5.50 5.00 5.00
Expected return on plan assets 8.00 8.00 8.00
--------------------------------------------------------------------------------
Postretirement Benefits
The Company provides certain postretirement benefits to substantially all
employees and retirees. Active employees are eligible for retiree medical and
life insurance coverage upon reaching age 55 with 10 years of service. The
medical portion of the plan is contributory, with retiree contributions based on
years of service and their retirement date. The Company's contributions for
employees retiring on or after September 1, 1995 are limited to 150% of the
premium rates in effect at the time of retirement. The life insurance portion of
the plan is noncontributory, with the preretirement benefit equal to two times
annual earnings. The postretirement life insurance benefit is reduced based on
the retiree's age and the length of time since retirement, with a maximum
retiree benefit of $50,000. Postretirement dental coverage is in effect for a
closed group of retirees. The dental portion of the plan is noncontributory. The
funding policy of the plan is to pay claims and/or insurance premiums as they
come due.
The following table presents the amounts recognized in the Company's
consolidated financial statements at March 31:
<TABLE>
<CAPTION>
(In thousands) 2000 1999
-----------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of accumulated postretirement benefit obligation
Obligation at beginning of year $ 2,817 $ 2,764
Service cost 87 69
Interest cost 185 191
Actuarial (gain) loss (899) 176
Benefits paid (57) (152)
Business combination 137 --
Plan amendments -- (231)
-----------------------------------------------------------------------------------------------------
Obligation at end of year $ 2,270 $ 2,817
=====================================================================================================
Reconciliation of funded status
Unfunded postretirement benefit obligation at end of year $(2,270) $(2,817)
Unrecognized net actuarial (gain) loss (563) 341
Unrecognized transition obligation 1,772 1,890
Unrecognized prior service cost (206) (231)
-----------------------------------------------------------------------------------------------------
Accrued postretirement benefit liability $(1,267) $ (817)
=====================================================================================================
</TABLE>
Net periodic postretirement benefit cost included in the Company's consolidated
income statements for the years ended March 31 included the following
components:
<TABLE>
<CAPTION>
(In thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of net periodic postretirement benefit cost
Service cost $ 87 $ 69 $ 53
Interest cost 185 191 200
Amortization of transition obligation 118 118 118
Amortization of prior service cost (25) -- --
Amortization of unrecognized loss (gain) 4 -- (10)
-----------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 369 $ 378 $ 361
=====================================================================================================
</TABLE>
<PAGE>
The discount rate used in determining the accumulated postretirement benefit
obligation was 8.00%, 6.75%, and 7.00% at March 31, 2000, 1999, and 1998,
respectively.
For measurement purposes, a 6.50% annual rate of increase in the per capita cost
of covered health benefits was assumed for medical coverage for the year ended
March 31, 2000. This rate was assumed to decrease uniformly to 5.00% by 2002 and
to remain at that level thereafter. A 3.00% annual rate of increase in the per
capita cost of covered dental benefits was assumed for dental coverage. The
health care cost trend rate assumptions have a significant effect on the amounts
reported. To illustrate, increasing the assumed health care cost trend rates by
one percentage point in each year would increase the accumulated postretirement
benefit obligation as of March 31, 2000 by $252 thousand (11.1%) and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost for the year ended March 31, 2000 by $36 thousand
(13.2%). Decreasing the assumed health care cost trend rate one percentage point
in each year would decrease the accumulated postretirement benefit obligation as
of March 31, 2000 by $205 thousand (9.0%) and the aggregate of the service and
interest cost components of net periodic postretirement benefit cost for the
year ended March 31, 2000 by $30 thousand (11.0%).
401(k) Savings Plan
The Company also sponsors a defined contribution 401(k) Savings Plan covering
substantially all employees meeting certain eligibility requirements. The
Company matched 50% of employee pre-tax contributions up to a maximum
contribution by the Company of 3% of the employee's annual salary at March 31,
2000. The amount of 401(k) contribution expense was $145 thousand, $152
thousand, and $126 thousand for the years ended March 31, 2000, 1999, and 1998,
respectively.
Benefit Restoration Plan
During the year ended March 31, 1999, the Company adopted a Benefit Restoration
Plan for certain executive officers to restore benefits cut back in certain
employee benefit plans due to Internal Revenue Service regulations. The benefits
under this plan are unfunded, and, as of March 31, 2000 and 1999, the projected
benefit obligation was $85 thousand and $72 thousand, respectively. The Company
recorded an expense of $23 thousand and $21 thousand relating to this plan
during the years ended March 31, 2000 and 1999, respectively.
Supplemental Retirement Plan
During the year ended March 31, 2000, and as a result of the SFS Acquisition,
the Company assumed the obligation of a Supplemental Retirement Plan which had
been established for key management personnel of SFS. As of March 31, 2000, the
projected benefit obligation under this plan was $706 thousand. The Company
recorded an expense of $14 thousand during the year ended March 31, 2000
relating to this plan.
(11) Earnings Per Share
------------------
The following table sets forth certain information regarding the calculation of
basic and diluted earnings per share for the years ended March 31, 2000 and
1999. Earnings of the Company for the three-month period prior to its initial
public offering on July 1, 1998 are not included in the calculation of earnings
per share for the year ended March 31, 1999.
<TABLE>
<CAPTION>
For the Years Ended March 31,
------------------------------------------------------------------------
2000 1999
----------------------------------- ---------------------------------
Weighted- Weighted-
(In thousands, except Net Average Per Share Net Average Per Share
share and per share amounts) Income Shares Amount Income Shares Amount
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 9,526 14,556,648 $ 0.65 $2,821 16,302,268 $ 0.17
Dilutive effect of potential common shares
outstanding:
Stock options 1,865 --
Restricted stock awards 19,229 --
-------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 9,526 14,577,742 $ 0.65 $ 2,821 16,302,268 $ 0.17
===============================================================================================================================
</TABLE>
At March 31, 2000 and 1999, there were 1.1 million and 1.2 million stock
options, respectively, not included in the above table as potential common
shares outstanding because the effect was anti-dilutive. At March 31, 2000 and
1999, there were 547 thousand and 714 thousand unvested restricted stock awards,
respectively, not included in the above table as potential common shares
outstanding because the effect was anti-dilutive.
<PAGE>
(12) Income Taxes
------------
The components of tax expense for the years ended March 31 are as follows:
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------
Current tax expense:
Federal $ 6,137 $ 5,035 $ 3,030
State 695 507 877
Deferred tax benefit (1,844) (3,358) (2,004)
--------------------------------------------------------------------------------
Tax expense $ 4,988 $ 2,184 $ 1,903
================================================================================
The following is a reconciliation of the expected tax expense and the actual tax
expense for the years ended March 31. The expected tax expense has been computed
by applying the statutory Federal tax rate to income before tax expense:
<TABLE>
<CAPTION>
(In thousands) 2000 1999 1998
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax at applicable Federal statutory rate $ 4,935 $ 2,037 $ 1,610
Increase (decrease) in tax expense resulting from:
Tax-exempt income (312) (157) (10)
State income taxes, net of Federal tax benefit 229 232 207
Goodwill amortization 313 27 --
Decrease in deferred tax asset valuation allowance (141) -- --
Other (36) 45 96
-------------------------------------------------------------------------------------------------------
Tax expense $ 4,988 $ 2,184 $ 1,903
=======================================================================================================
</TABLE>
The tax effects of temporary differences and carryforwards that give rise to
significant portions of the deferred tax assets and deferred tax liabilities at
March 31 are presented below:
<TABLE>
<CAPTION>
(In thousands) 2000 1999
-------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 7,968 $ 5,553
Other real estate owned and repossessed property 492 235
Accrued post-retirement benefits 574 393
Deferred compensation 1,029 245
Charitable contribution carryforward for tax purposes 750 1,499
Net unrealized loss on securities available for sale 5,083 431
Other 436 471
-------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 16,332 8,827
Valuation allowance -- (141)
-------------------------------------------------------------------------------------------------------
Net deferred tax assets 16,332 8,686
-------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation (219) (235)
Bond discount accretion (82) (316)
Prepaid pension (419) (388)
Other (645) (343)
-------------------------------------------------------------------------------------------------------
Total deferred tax liabilities (1,365) (1,282)
-------------------------------------------------------------------------------------------------------
Net deferred tax asset at end of year $ 14,967 $ 7,404
=======================================================================================================
</TABLE>
A corporation's annual tax deduction for charitable contributions is subject to
a limitation based on a percentage of taxable income. Contributions in excess of
this limitation are carried forward and may be deducted in one or more of the
succeeding five tax years. As a result of the contribution of shares to the
Hudson River Bank & Trust Company Foundation, at March 31, 2000, the Company had
an unused charitable contribution carryforward of approximately $1.8 million
($750 thousand deferred tax asset), which is available for deduction through
March 31, 2004.
<PAGE>
The deferred tax asset valuation allowance, when established by the Company,
takes into consideration the nature and timing of the deferred tax items as well
as the amount of available open tax carrybacks. The valuation allowance at March
31, 1999 related to uncertainty about the realization of certain Federal and New
York State deferred tax assets. During the year ended March 31, 2000, the
circumstances creating the uncertainties were resolved, and the valuation
allowance was reversed. Based on recent historical and anticipated future
taxable income, management believes it is more likely than not that the Company
will realize its net deferred tax assets.
Deferred tax assets were increased in the amount of $4.7 million and $428
thousand with a corresponding increase to shareholders' equity in the years
ended March 31, 2000 and 1999, respectively, relating to unrealized losses on
securities available for sale. Deferred tax assets were reduced by $229 thousand
with a corresponding change to shareholders' equity in the year ended March 31,
1998 relating to unrealized gains on securities available for sale. A deferred
tax asset of $1.1 million was recorded with an offsetting reduction of goodwill
in the year ended March 31, 2000 in connection with the purchase accounting for
the SFS Acquisition.
As a thrift institution, the Bank is subject to special provisions in the
Federal and New York State tax laws regarding its allowable tax bad debt
deductions and related tax bad debt reserves. These deductions historically have
been determined using methods based on loss experience or a percentage of
taxable income. Tax bad debt reserves are maintained equal to the excess of
allowable deductions over actual bad debt losses and other reserve reductions.
These reserves consist of a defined base-year amount, plus additional amounts
("excess reserves") accumulated after the base year. Deferred tax liabilities
are recognized with respect to such excess reserves, as well as any portion of
the base-year amount which is expected to become taxable (or "recaptured") in
the foreseeable future.
In accordance with SFAS No. 109, deferred tax liabilities have not been
recognized with respect to the Federal base-year reserve of $7.3 million and
$2.7 million and "supplemental" reserve (as defined) of $14.8 million and $10.5
million at March 31, 2000 and 1999, respectively, and the New York State
base-year reserve of $29.7 million and $22.2 million at March 31, 2000 and 1999,
respectively, since the Bank does not expect that these amounts will become
taxable in the foreseeable future. The unrecognized deferred tax liability with
respect to the Federal base-year reserve and supplemental reserve was $2.6
million and $5.2 million, respectively, at March 31, 2000 and $945 thousand and
$3.5 million, respectively, at March 31, 1999. The unrecognized deferred tax
liability with respect to the New York State base-year reserve was $1.7 million
and $1.3 million (net of Federal benefit) at March 31, 2000 and 1999,
respectively.
(13) Commitments and Contingent Liabilities
--------------------------------------
Off-Balance Sheet Financing and Concentrations of Credit
The Company is a party to certain financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include the Company's commitments to
extend credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated financial
statements. The contract amounts of those instruments reflect the extent of
involvement the Company has in particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the commitments to extend credit is represented by the
contractual notional amount of those instruments. The Company uses the same
credit policies in making commitments as it does for on-balance sheet
instruments.
Unless otherwise noted, the Company does not require collateral or other
security to support financial instruments with credit risk.
Contract amounts of financial instruments that represent credit risk as of March
31 are as follows:
(In thousands) 2000 1999
-----------------------------------------------------------------------------
Commitments to extend credit $ 36,813 $ 49,681
Unused lines of credit 70,880 35,183
Standby letters of credit 6,987 6,935
-----------------------------------------------------------------------------
Total $114,680 $ 91,799
=============================================================================
<PAGE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since certain commitments are expected to expire
without being fully drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral, if any,
required by the Company upon the extension of credit is based on management's
credit evaluation of the customer.
Commitments to extend credit may be written on a fixed-rate basis exposing the
Company to interest rate risk given the possibility that market rates may change
between commitment and actual extension of credit.
Standby letters of credit are conditional commitments issued by the Company to
guarantee payment on behalf of a customer and guarantee the performance of a
customer to a third party. The credit risk involved in issuing these instruments
is essentially the same as that involved in extending loans to customers. Since
a portion of these instruments will expire unused, the total amounts do not
necessarily represent future cash requirements. Each customer is evaluated
individually for creditworthiness under the same underwriting standards used for
commitments to extend credit and on-balance sheet instruments. Company policies
governing loan collateral apply to standby letters of credit at the time of
credit extension.
Certain mortgage loans are written on an adjustable-rate basis and include
interest rate caps, which limit annual and lifetime increases in the interest
rates on such loans. Generally, adjustable-rate mortgages have an annual rate
increase cap of 2% and a lifetime rate increase cap of 5% to 6%. These caps
expose the Company to interest rate risk should market rates increase above
these limits. As of March 31, 2000 and 1999, residential real estate loans of
approximately $188.0 million and $135.4 million, respectively, had interest rate
caps.
Concentrations Of Credit
The Company originates residential loans (including home equity and construction
loans) and commercial-related loans primarily to customers located in the New
York State counties of Columbia, Albany, Rensselaer, Dutchess and Schenectady.
Manufactured home loans are originated primarily in New York State and in states
contiguous to New York. Financed insurance premiums are originated primarily in
New York, New Jersey and Pennsylvania. Although the Company has a diversified
loan portfolio, a substantial portion of its debtors' ability to honor their
contracts is dependent upon economic conditions in these areas.
Leases
The Company leases certain of its branches and equipment under various
noncancelable operating leases. Rental expense for premises and equipment was
$345 thousand, $243 thousand, and $236 thousand for the years ended March 31,
2000, 1999, and 1998, respectively. Aggregate future minimum payments under all
significant noncancelable operating leases with initial or remaining terms of
one year or more as of March 31, 2000 are as follows:
(In thousands)
-------------------------------------------------------------------------------
Years ending March 31,
2001 $ 311
2002 312
2003 295
2004 250
2005 195
Thereafter 1,911
-------------------------------------------------------------------------------
Total $ 3,274
-------------------------------------------------------------------------------
Serviced Loans
The total amount of loans serviced by the Company for unrelated third parties
was approximately $41.4 million and $46.6 million at March 31, 2000 and 1999,
respectively.
Reserve Requirement
The Company is required to maintain certain reserves of vault cash and/or
deposits with the Federal Reserve Bank. The amount of this reserve requirement,
included in cash and due from banks, was approximately $263 thousand and $279
thousand at March 31, 2000 and 1999, respectively.
Liquidation Account
As part of the Bank's conversion from a mutual savings bank to a stock savings
bank, the Bank established a liquidation account in an amount equal to its total
equity as of December 31, 1997. The liquidation account will be maintained for
the benefit of eligible depositors who continue to maintain their accounts at
the Bank after the conversion. The liquidation account will be reduced annually
to the extent that eligible depositors have reduced their qualifying deposits.
Subsequent increases will not restore an eligible account holder's interest in
the liquidation account. In the event of a complete liquidation, each eligible
depositor will be entitled to receive a distribution from the liquidation
account in an amount proportionate to the current adjusted qualifying balances
for accounts then held. Neither the Company nor the Bank may pay dividends that
would reduce shareholders' equity below the required liquidation account
balance.
Contingent Liabilities
In the ordinary course of business, there are various legal proceedings pending
against the Company. Based on consultation with outside counsel, management
believes that the aggregate exposure, if any, arising from such litigation would
not have a material adverse effect on the Company's consolidated financial
statements.
<PAGE>
(14) Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
that the Company disclose estimated fair values for its financial instruments.
The definition of a financial instrument includes many of the assets and
liabilities recognized in the Company's consolidated balance sheets, as well as
certain off-balance sheet items.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected net cash flows, current economic conditions, risk
characteristics of various financial instruments and other factors and would not
be indicative of the value negotiated in an actual sale. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in the estimates of fair value
under SFAS No. 107.
In addition, there are significant intangible assets that SFAS No. 107 does not
recognize, such as the value of "core deposits," the Company's branch network
and other items generally referred to as "goodwill."
Short-term Financial Instruments
--------------------------------
The fair value of certain financial instruments is estimated to approximate
their carrying value because the remaining term to maturity or period to
repricing of the financial instrument is less than 90 days. Such financial
instruments include cash and cash equivalents, accrued interest receivable,
securities sold under agreements to repurchase, short-term FHLB advances and
accrued interest payable.
Securities
----------
Securities available for sale and securities held to maturity are financial
instruments which are usually traded in broad markets. Fair values are generally
based upon market prices. If a quoted market price is not available for a
particular security, the fair value is determined by reference to quoted market
prices for securities with similar characteristics. The estimated fair value of
stock in the Federal Home Loan Bank of New York equals the carrying value since
the stock is nonmarketable but redeemable at its par value.
Loans
-----
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type including residential real estate,
commercial real estate, other commercial loans and consumer loans. The estimated
fair value of performing loans is calculated by discounting scheduled cash flows
through the estimated maturity using estimated market discount rates that
reflect the credit and interest rate risk inherent in the respective loan
portfolio.
Estimated fair value for nonperforming loans is based on estimated cash flows
discounted using a rate commensurate with the risk associated with the estimated
cash flows. Assumptions regarding credit risk, cash flows and discount rates are
judgmentally determined using available market information and specific borrower
information.
Deposit Liabilities and Long-term Borrowings
--------------------------------------------
The estimated fair value of deposits with no stated maturity, such as savings,
N.O.W., money market, noninterest-bearing accounts and mortgagors' escrow
deposits, is regarded to be the amount payable on demand. The estimated fair
value of time deposit accounts and long-term FHLB borrowings is based on the
discounted value of contractual cash flows. The discount rate is estimated using
the rates currently offered for deposits or available for borrowings with
similar remaining maturities. The fair value estimates for deposits do not
include the benefit that results from the low-cost funding provided by the
deposit liabilities compared with the cost of borrowing funds in the market.
<PAGE>
The carrying values and estimated fair values of financial assets and
liabilities (none of which were held for trading purposes) as of March 31 were
as follows:
<TABLE>
<CAPTION>
2000 1999
---------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(In thousands) Value Value Value Value
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 16,612 $ 16,612 $ 12,722 $ 12,722
Securities available for sale 236,980 236,980 242,611 242,611
Securities held to maturity 11,144 11,065 23,041 23,235
Federal Home Loan Bank of New York stock 7,425 7,425 3,299 3,299
Loans receivable 823,855 809,750 578,099 582,692
Allowance for loan losses (19,608) -- (14,296) --
---------------------------------------------------------------------------------------------------------------
Net loans receivable 804,247 809,750 563,803 582,692
---------------------------------------------------------------------------------------------------------------
Accrued interest receivable 6,470 6,470 5,701 5,701
Financial liabilities
Deposits:
Savings, N.O.W., money market and noninterest-
bearing accounts $ 355,601 $ 355,601 $ 289,335 $ 289,335
Time deposit accounts 392,962 394,503 302,479 304,961
Securities sold under agreements to repurchase 4,214 4,214 845 845
Short-term FHLB advances 116,450 116,450 27,600 27,600
Long-term FHLB borrowings 30,600 30,065 -- --
Mortgagors' escrow deposits 5,500 5,500 3,869 3,869
Accrued interest payable 658 658 122 122
===============================================================================================================
</TABLE>
The fair value of commitments to extend credit, unused lines of credit and
standby letters of credit is estimated using the fees currently charged to enter
into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness of the counterparties. For
fixed-rate commitments to extend credit and unused lines of credit, fair value
also considers the difference between current levels of interest rates and the
committed rates. Based upon the estimated fair value of commitments to extend
credit, unused lines of credit and standby letters of credit, there are no
significant unrealized gains or losses associated with these financial
instruments.
<PAGE>
(15) Condensed Financial Information of the Parent Company
-----------------------------------------------------
The Parent Company began operations on July 1, 1998, in conjunction with the
Bank's mutual-to-stock conversion and the Company's initial public offering of
its common stock. The following represents the Parent Company's balance sheets
as of March 31, 2000 and 1999, and its income statements and statements of cash
flows for the year ended March 31, 2000 and the period July 1, 1998 through
March 31, 1999.
<TABLE>
<CAPTION>
March 31,
Balance Sheets ---------------------------
(In thousands) 2000 1999
------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Interest-bearing deposit with subsidiary bank $ 603 $ 122
Securities purchased under agreements to resell to subsidiary bank 18,517 54,883
------------------------------------------------------------------------------------------------------
Cash and cash equivalents 19,120 55,005
------------------------------------------------------------------------------------------------------
Securities available for sale 1,457 1,196
Loan to ESOP 16,278 17,200
Other assets 21,678 5,907
Investment in equity of subsidiary bank 143,082 140,123
------------------------------------------------------------------------------------------------------
Total assets $201,615 $219,431
======================================================================================================
Liabilities and Shareholders' Equity
Other liabilities $ 892 $ 90
Total shareholders' equity 200,723 219,341
------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $201,615 $219,431
======================================================================================================
<CAPTION>
For the Year For the Period
Income Statements Ended July 1, 1998 through
(In thousands) March 31, 2000 March 31, 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income
Interest-bearing deposit with subsidiary bank $ 11 $ 4
Securities purchased under agreements to resell to subsidiary bank 2,052 2,577
Securities available for sale 38 12
Loan to ESOP 1,399 1,118
-------------------------------------------------------------------------------------------------------------------
Total interest income 3,500 3,711
-------------------------------------------------------------------------------------------------------------------
Other operating income 312 111
-------------------------------------------------------------------------------------------------------------------
Other operating expenses
Compensation and benefits 549 143
Legal and other professional fees 174 106
Postage and item transportation 32 15
Charitable foundation contribution -- 5,200
Goodwill and other intangibles amortization 542 80
Other expenses 683 261
-------------------------------------------------------------------------------------------------------------------
Total other operating expenses 1,980 5,805
-------------------------------------------------------------------------------------------------------------------
Income (loss) before tax expense (benefit) and
equity in undistributed earnings of subsidiary bank 1,832 (1,983)
Tax expense (benefit) 621 (812)
Equity in undistributed earnings of subsidiary bank 8,315 3,992
-------------------------------------------------------------------------------------------------------------------
Net income $ 9,526 $ 2,821
===================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Year For the Period
Statements of Cash Flows Ended July 1, 1998 through
(In thousands) March 31, 2000 March 31, 1999
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income $ 9,526 $ 2,821
Adjustments to reconcile net income to net cash provided by operating activities:
Charitable foundation contribution -- 5,200
Goodwill and other intangibles amortization 542 80
Amortization of restricted stock awards 943 217
ESOP stock released for allocation 1,456 1,134
Net increase in other assets (1,218) (6,000)
Net increase in other liabilities 802 90
Equity in undistributed earnings of subsidiary bank (8,315) (3,992)
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 3,736 (450)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Increase in investment in equity of subsidiary bank (1,355) (67,626)
Purchases of securities available for sale (503) (1,160)
Net decrease (increase) in loan to ESOP 922 (17,200)
Purchase of bank owned life insurance (15,000) --
--------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (15,936) (85,986)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Net proceeds from stock offering -- 169,967
Dividends paid (1,844) --
Purchases of treasury stock (21,841) (10,098)
Acquisition of common stock by ESOP -- (18,428)
--------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (23,685) 141,441
--------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (35,885) 55,005
Cash and cash equivalents at beginning of period 55,005 --
--------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 19,120 $ 55,005
================================================================================================================================
Supplemental disclosures of noncash investing and financing
activities
Recognition of subsidiary bank's total equity on date of Parent
Company's investment in equity of subsidiary bank $ -- $ 69,365
Adjustment of securities available for sale to fair value, net of tax $ (147) $ 23
Adjustment of subsidiary bank's securities available for
sale to fair value, net of tax $ (6,711) $ (860)
================================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HUDSON RIVER BANCORP, INC. AND
HUDSON RIVER BANK & TRUST COMPANY HUDSON RIVER BANK & TRUST COMPANY
BOARD OF DIRECTORS VICE PRESIDENTS
<S> <C> <C> <C>
Carl A. Florio, CPA President and
Chief Executive Officer Daniel F. Cheeseman Commercial Lending
Hudson River Bancorp, Inc. Susan M. Hollister Human Resources
David J. Jurczynski Finance and Risk Management
Earl Schram, Jr. Chairman of the Board Lawrence J. Longo, Jr. Mortgage Originations
Hudson River Bancorp, Inc. Michael J. Mackay Loan Servicing
Attorney and President James F. Mackerer Commercial Lending and Facilities
Connor, Curran & Schram, P.C. Ellen G. Miller Retail Banking
Paul Sherman Commercial Lending
Stanley Bardwell, M.D. Retired Physician
William E. Collins Retired President and
Chief Executive Officer
Hudson City Savings Institution
Marilyn A. Herrington Real Estate Developer
Joseph W. Phelan President
Taconic Farms, Inc.
William H. (Tony) Jones President and Publisher
Roe Jan Independent Publishing Co., Inc.
Marcia M. Race Retired
Assistant to the President
Hudson City Savings Institution
Joseph H. Giaquinto Retired President and
Chief Executive Officer,
SFS Bancorp, Inc.
DIRECTORS EMERTI
Morton A. Ginsberg Chairman of the Board
Ginsberg's Foods, Inc.
John E. Kelly Retired President
Berkshire Telephone Company
EXECUTIVE OFFICERS
Carl A. Florio, CPA President and
Chief Executive Officer
Sidney D. Richter Executive Vice President, Senior Lending Officer
Timothy E. Blow, CPA Chief Financial Officer
Carol J. Dube Senior Vice President, Operations
Richard J. Malena Senior Vice President, Retail Banking
</TABLE>
<PAGE>
Hudson River Bancorp, Inc.
--------------------------
CORPORATE INFORMATION
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of Hudson River Bancorp, Inc. will be held at 3:00 pm on
August , 2000, at the St. Charles Hotel & Restaurant, Hudson, NY.
STOCK TRANSFER AGENT & REGISTRAR
Shareholders wishing to change name, address, or ownership of stock, or to
report lost certificates and/or consolidate accounts are asked to contact the
Company's stock registrar and transfer agent directly at:
Registrar & Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
(800) 368-5948
ANNUAL REPORT ON FORM 10-K
For the 2000 fiscal year, Hudson River Bancorp, Inc. will file an Annual Report
on Form 10-K. Shareholders wishing a copy may obtain one free of charge by
writing:
Holly E. Rappleyea
Corporate Secretary
Hudson River Bancorp, Inc.
One Hudson City Centre
Hudson, NY 12534
STOCK LISTING
The common stock of Hudson River Bancorp, Inc. trades on the Nasdaq Stock Market
under the symbol HRBT. As of June , 2000, there were holders of record
of Hudson River Bancorp, Inc. common stock.
STOCK PRICE
The table below shows the reported closing prices of Hudson River Bancorp, Inc.
common stock during the periods indicated during the years ended March 31, 2000
and 1999.
Quarter Ending High Low Dividend
--------------------------------------------------------------------
September 31, 1998 $ 13.75 $ 9.38 --
December 31, 1998 11.75 8.75 --
March 31, 1999 12.00 10.06 --
--------------------------------------------------------------------
June 30, 1999 $ 11.75 $ 9.88 $ .03
September 30, 1999 12.13 10.75 .03
December 31, 1999 11.25 9.75 .03
March 31, 2000 10.56 9.50 .03
--------------------------------------------------------------------
<PAGE>
HUDSON RIVER BANCORP, INC.
ONE HUDSON CITY CENTRE
HUDSON, NY 12534
(518) 828-4600
www.hudsonriverbank.com
