UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 000-24187
HUDSON RIVER BANCORP, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware 14-1803212
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Hudson City Centre, Hudson New York 12534
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (518) 828-4600
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] YES [ ] NO
As of February 3, 2000, there were issued and outstanding 15,859,154
shares of the Registrant's Common Stock.
<PAGE>
FORM 10-Q
HUDSON RIVER BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets at December 31, 1999
and March 31, 1999
Consolidated Income Statements for the three and nine months
ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the nine months
ended December 31, 1999 and 1998
Notes to Unaudited Consolidated Interim
Financial Statements
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
ITEM 2. Changes in Securities and Use of Proceeds
ITEM 3. Defaults Upon Senior Securities
ITEM 4. Submission of Matters to a Vote of Security Holders
ITEM 5. Other Information
ITEM 6. Exhibits and Reports on Form 8-K
EXHIBIT INDEX
SIGNATURE PAGE
i
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<TABLE>
<CAPTION>
Item 1. Financial Statements
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
December 31, March 31,
(In thousands, except share and per share data) 1999 1999
----------- --------------
<S> <C> <C>
Assets
Cash and due from banks $ 15,836 $ 12,722
Securities available for sale, at fair value 237,485 242,611
Securities held to maturity (fair value of $12,253 and $23,235) 12,296 23,041
Federal Home Loan Bank of New York stock, at cost 6,788 3,299
Loans receivable 773,637 578,099
Allowance for loan losses (18,731) (14,296)
----------- -----------
Net loans receivable 754,906 563,803
----------- -----------
Accrued interest receivable 6,374 5,701
Premises and equipment, net 19,004 16,807
Other real estate owned and repossessed property 1,734 2,508
Goodwill and other intangibles 11,900 3,215
Other assets 32,179 7,432
----------- -----------
Total assets $ 1,098,502 $ 881,139
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Savings 180,275 145,985
N.O.W. and money market 122,307 99,390
Time deposits 391,131 302,479
Non-interest bearing deposits 50,323 43,960
----------- -----------
Total deposits 744,036 591,814
----------- -----------
Securities sold under agreements to repurchase 2,087 845
Short-term borrowings 105,060 27,600
Long-term debt 30,600 --
Mortgagors' escrow balances 7,212 3,869
Other liabilities 10,614 37,670
----------- -----------
Total liabilities 899,609 661,798
----------- -----------
Shareholders' Equity:
Preferred stock, $.01 par value, Authorized 5,000,000 shares - -
Common stock, $.01 par value, Authorized 40,000,000 shares;
17,853,750 shares issued at December 31, 1999 and March 31, 1999 179 179
Additional paid-in capital 174,894 174,894
Unallocated common stock held by ESOP (17,200) (17,200)
Unvested restricted stock awards (7,346) (7,996)
Treasury stock, at cost (1,929,596 shares at December 31, 1999 and
157,500 shares at March 31, 1999) (21,094) (1,663)
Retained earnings, substantially restricted 77,493 71,893
Accumulated other comprehensive loss (8,033) (766)
----------- -----------
Total shareholders' equity 198,893 219,341
----------- -----------
Total liabilities and shareholders' equity $ 1,098,502 $ 881,139
=========== ===========
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
1
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<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
For the Three For the Nine
Months Ended December 31, Months Ended December 31,
-------------------------- -------------------------
(In thousands, except per share data) 1999 1998 1999 1998
---------- ---------- ----------- ----------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $16,045 $11,803 $43,068 $35,894
Securities available for sale 4,113 3,061 11,330 6,522
Securities held to maturity 205 675 788 2,562
Federal funds sold 11 47 11 1,028
Securities purchased under agreements to resell -- 373 -- 1,571
Federal Home Loan Bank of New York stock 94 53 217 164
------- ------- ------- -------
Total interest income 20,468 16,012 55,414 47,741
------- ------- ------- -------
Interest expense:
Deposits 6,940 6,338 18,782 19,931
Securities sold under agreements to repurchase 25 -- 51 --
Short-term borrowings 1,085 1 2,054 51
Long-term debt 471 -- 653 --
------- ------- ------- -------
Total interest expense 8,521 6,339 21,540 19,982
------- ------- ------- -------
Net interest income 11,947 9,673 33,874 27,759
Provision for loan losses 1,500 1,681 4,700 5,841
------- ------- ------- -------
Net interest income after
provision for loan losses 10,447 7,992 29,174 21,918
------- ------- ------- -------
Other operating income:
Service charges on deposit accounts 414 325 1,124 981
Loan servicing income 37 46 109 139
Net securities transactions -- 1 83 33
Net gain on sales of loans held for sale -- -- -- 65
Other income 163 211 543 664
------- ------- ------- -------
Total other operating income 614 583 1,859 1,882
------- ------- ------- -------
Other operating expenses:
Compensation and benefits 3,591 2,883 10,092 8,073
Occupancy 445 340 1,250 1,107
Equipment 679 388 1,801 1,136
Other real estate owned and
repossessed property expenses 253 199 914 497
Legal and other professional fees 202 157 558 491
Postage and item transportation 168 167 514 544
Charitable foundation contribution -- -- -- 5,200
Goodwill and other intangibles amortization 282 75 806 161
Other expenses 1,538 1,388 4,400 3,508
------- ------- ------- -------
Total other operating expenses 7,158 5,597 20,335 20,717
------- ------- ------- -------
Income before income tax expense 3,903 2,978 10,698 3,083
Income tax expense 1,335 1,098 3,690 1,139
------- ------- ------- -------
Net income $ 2,568 $ 1,880 $ 7,008 $ 1,944
======= ======= ======= =======
Basic earnings per share $ 0.18 $ 0.11 $ 0.47 $ 0.06
======= ======= ======= =======
Diluted earnings per share $ 0.18 $ 0.11 $ 0.47 $ 0.06
======= ======= ======= =======
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
2
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<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
For the Nine Months Ended
December 31,
---------------------------------
1999 1998
(In thousands) -------------- --------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 7,008 $ 1,944
Adjustments to reconcile net income to net cash
used in and provided by operating activities:
Depreciation 1,474 1,051
Goodwill and other intangibles amortization 806 161
Provision for loan losses 4,700 5,841
Charitable foundation contribution -- 5,200
Amortization of restricted stock awards 650 --
Net securities transactions (83) (33)
Net gain on sales of loans held for sale -- (65)
Net loans originated for sale -- (7,730)
Proceeds from sales of loans held for sale -- 9,081
Adjustments of other real estate owned and
repossessed property to fair value 784 178
Net gain on sales of other real estate owned
and repossessed property (754) (388)
Net loss (gain) on disposition of premises and equipment 253 (71)
Net decrease (increase) in accrued interest receivable 411 (1,336)
Net increase in other assets (17,397) (3,457)
Net decrease in other liabilities (30,444) (3,188)
--------- ---------
Total adjustments (39,600) 5,244
--------- ---------
Net cash (used in) provided by operating activities (32,592) 7,188
--------- ---------
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 33,437 29,975
for sale
Purchases of securities available for sale (16,155) (184,539)
Proceeds from maturities, calls and paydowns of securities held to 10,749 30,831
maturity
Purchase of FHLB of New York stock (2,023) --
Net loans made to customers (56,924) (38,564)
Proceeds from sales of and payments received on other real estate owned
and repossessed property 3,288 3,670
Proceeds from sale of premises and equipment -- 471
Purchases of premises and equipment (2,068) (2,439)
--------- ---------
Net cash used in investing activities (54,662) (160,595)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 1,599 7,352
Net increase in securities sold under agreements to repurchase 1,242 --
Net increase (decrease) in short-term borrowings 77,360 (2,000)
Issuance of long-term debt 30,000 --
Net increase in mortgagors' escrow balances 1,006 1,286
Net proceeds from stock offering -- 169,967
Acquisition of common stock by Employee Stock Ownership Plan -- (18,428)
Dividends paid (1,408) --
Purchase of treasury stock (19,431) --
--------- ---------
Net cash provided by financing activities 90,368 158,177
--------- ---------
<CAPTION>
3
<PAGE>
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
(continued)
For the Nine Months Ended
December 31,
---------------------------------
(In thousands) 1999 1998
-------------- --------------
Net increase in cash and cash equivalents $ 3,114 $ 4,770
Cash and cash equivalents at beginning of period 12,722 34,273
--------- ---------
Cash and cash equivalents at end of period $ 15,836 $ 39,043
========= =========
Supplemental cash flow information:
Interest paid $ 21,001 $ 19,982
Taxes paid $ 4,186 $ 563
Supplemental disclosures of non-cash investing and financing activities:
Loans transferred to other real estate owned and repossessed property $ 2,446 $ 4,223
Adjustment of securities available for sale to fair value, net of tax (7,267) 364
Acquisition activity:
Fair value of noncash assets acquired 175,959 --
Fair value of liabilities assumed 157,048 --
</TABLE>
See accompanying notes to unaudited consolidated interim financial statements.
4
<PAGE>
Hudson River Bancorp, Inc.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. The accompanying unaudited consolidated interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring accruals) considered necessary for a fair
presentation have been included. The accompanying unaudited consolidated interim
financial statements should be read in conjunction with the Company's Annual
Report on Form 10-K as of and for the year ended March 31, 1999. Operating
results for the three and nine month periods ended December 31, 1999 are not
necessarily indicative of the results that may be expected for a full year.
2. The Company completed its acquisition of SFS Bancorp, Inc. (SFS) on
September 3, 1999, 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 Company utilized long-term debt with maturities ranging from
one-to-five years to fund the transaction. 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.
3. On April 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This statement establishes standards for reporting and display of comprehensive
income and its components. Comprehensive income (loss) includes the reported net
income (loss) of a company adjusted for certain items that are currently
accounted for as direct entries to equity, such as the mark to market adjustment
on securities available for sale, foreign currency items and minimum pension
liability adjustments. At the Company, comprehensive income (loss) represents
net income (loss) plus other comprehensive income (loss), which consists of the
net change in unrealized gains or losses on securities available for sale for
the period, net of tax. Accumulated other comprehensive income (loss) represents
the net unrealized gains or losses on securities available for sale, net of tax,
as of the balance sheet dates. Comprehensive (loss) income for the three month
periods ended December 31, 1999 and 1998 was $(854) thousand and $1.4 million,
respectively. Comprehensive (loss) income for the nine month periods ended
December 31, 1999 and 1998 was $(259) thousand and $2.3 million, respectively.
4. The following table sets forth certain information regarding the
calculation of basic and diluted earnings per share for the three and nine-month
periods ended December 31, 1999 and 1998. 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 nine months ended
December 31, 1998. Basic earnings per share is calculated by dividing net income
by the weighted-average number of common shares outstanding during the period.
Shares of restricted stock are not considered outstanding for the calculation of
basic earnings per share until they become fully vested. Diluted earnings per
share is computed in a manner similar to that of basic earnings per share except
that the weighted-average number of common shares outstanding is increased to
include the number of additional common shares that would have been outstanding
if all potentially dilutive common shares (such as stock options and unvested
restricted stock) were issued during the reporting period. Unallocated common
shares held by the Company's Employee Stock Ownership Plan are not included in
the weighted-average number of common shares outstanding for either the basic or
diluted earnings per share calculations.
5
<PAGE>
Hudson River Bancorp, Inc.
Notes to Unaudited Consolidated Interim Financial Statements
(continued)
<TABLE>
<CAPTION>
For the Three Months Ended December 31,
-------------------------------------------------------------------------------------
(In thousands, except for 1999 1998
share and per share data) ------------------------------------------ -----------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------------ ---------------- ------------ ------------ ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings per share $ 2,568 14,277,232 $ 0.18 $ 1,880 16,425,450 $ 0.11
Effect of potential common
shares outstanding:
Stock options - -
Restricted stock awards 33,500 -
--------------- -------------
33,500 -
------------ --------------- ------------ ------------ ------------- -----------
Diluted earnings per share $ 2,568 14,310,732 $ 0.18 $ 1,880 16,425,450 $ 0.11
============ ================ ============ ============ ================ ===========
For the Nine Months Ended December 31,
-------------------------------------------------------------------------------------
1999 1998
------------------------------------------ -----------------------------------------
Weighted Per Weighted Per
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------------ ---------------- ------------ ------------ ---------------- -----------
Basic earnings per share $ 7,008 14,792,265 $ 0.47 $ 958 16,442,094 $ 0.06
Effect of potential common
shares outstanding:
Stock options 2,021 -
Restricted stock awards 25,499 -
---------------- --------------
27,520 -
------------ ---------------- ------------ ------------ -------------- -----------
Diluted earnings per share $ 7,008 14,819,785 $ 0.47 $ 958 16,442,094 $ 0.06
============ ================ ============ ============ ================ ===========
</TABLE>
6
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
- -------
The financial review which follows focuses on the factors affecting the
consolidated financial condition and results of operations of Hudson River
Bancorp, Inc. and subsidiary (the "Company") during the three and nine months
ended December 31, 1999, with comparisons to 1998 as applicable. The unaudited
consolidated interim financial statements and related notes, as well as the 1999
Annual Report, should be read in conjunction with this review. Amounts in prior
periods' consolidated financial statements are reclassified whenever necessary
to conform to the current period's presentation.
On July 1, 1998, Hudson River Bank & Trust Company (the "Bank")
completed its conversion from a New York chartered mutual savings bank to a New
York chartered stock savings bank (the "Conversion"). Concurrent with the
Conversion, Hudson River Bancorp, Inc. completed its initial public offering of
common stock, receiving approximately $173.3 million in gross proceeds ($170.0
million net of offering expenses) in exchange for 17,333,738 shares of its
common stock. An additional 520,012 common shares were contributed to Hudson
River Bank & Trust Company Foundation. The Company used a portion of the
proceeds to purchase all of the common stock of the Bank. Prior to the initial
public offering, Hudson River Bancorp, Inc. had no results of operations,
therefore results of operations prior to July 1, 1998 reflect the operations of
the Bank.
The Company's primary market area, with 17 full-service branches,
consists of the New York counties of Columbia, Rensselaer, Albany, Schenectady,
and Dutchess. The Company has been, and intends to continue to be, a
community-oriented financial institution offering a variety of financial
services. The Company's principal business is attracting deposits from customers
within its market area and investing those funds in primarily loans, and to a
lesser extent, in marketable securities. The financial condition and operating
results of the Company are dependent on its net interest income which is the
difference between the interest income earned on its assets, and the interest
expense paid on its liabilities, primarily consisting of deposits and
borrowings. Net income is also affected by provisions for loan losses and other
operating income, such as loan servicing income and fees on deposit related
services; it is also impacted by other operating expenses, such as compensation
and occupancy expenses and federal and state income taxes.
The Company's results of operations are significantly affected by
general economic and competitive conditions (particularly changes in market
interest rates), government policies, changes in accounting standards and
actions of regulatory agencies. Future changes in applicable laws, regulations
or government policies may have a material impact on the Company. Lending
activities are substantially influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates and the availability of
funds. The ability to gather deposits and the cost of funds are influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments, including mutual funds and stocks.
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
<PAGE>
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions are inherently based upon
predictions of future events and circumstances. Furthermore, from time to time,
the Company may publish other forward-looking statements relating to such
matters as anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Some of the risks and uncertainties that may affect
the operations, performance, development and results of the Company's business,
the interest rate sensitivity of its assets and liabilities, and the adequacy of
its allowance for loan losses, include but are not limited to the following:
7
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
a. Deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase
in loan delinquencies, a decrease in property values, or a change
in the housing turnover rate;
b. Changes in market interest rates or changes in the speed at which
market interest rates change;
c. Changes in laws and regulations affecting the financial services
industry;
d. Changes in competition; 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.
MERGER AND ACQUISITION ACTIVITY
- -------------------------------
On September 3, 1999 the Company completed its acquisition of SFS
Bancorp, Inc. ("SFS") paying $25.10 in cash for each share of SFS common stock
outstanding (the "SFS Acquisition"). The total consideration was approximately
$32 million, funded primarily by long-term debt. 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 and its four branches
within Schenectady County were added to the Hudson River Bank & Trust Company
branch network.
OVERVIEW
- --------
The Company earned net income for the three months ended December 31,
1999 amounting to $2.6 million, or $0.18 per share, up $688 thousand from the
$1.9 million earned during the three months ended December 31, 1998. Net income
for the nine months ended December 31, 1999 was $7.0 million, or $0.47 per
share, up $5.1 million from the $1.9 million earned during the same period a
year previous. Net income in the 1998 period was significantly impacted by a
$5.2 million ($3.1 million after-tax) non-recurring expense taken during July
1998 associated with the contribution of stock to the Hudson River Bank & Trust
Company Foundation. The increases over the prior year results were also a result
of higher net interest income and a lower provision for loan losses, partially
offset by higher other operating expenses after adjusting for the nonrecurring
expense, and higher income tax expense. For the three months ended December 31,
1999, the Company's return on average assets was .95%, up from .90% in 1998. The
Company's return on average equity for the three months ended December 31, 1999
was 4.98%, up from 3.29% in 1998. See Table A, "Financial Highlights".
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
ASSET/LIABILITY MANAGEMENT
- --------------------------
The Company attempts to maximize net interest income, and net income,
while actively managing its liquidity and interest rate sensitivity through the
mix of various core deposits and other sources of funds, which in turn, fund an
appropriate mix of earning assets. The changes in the Company's asset mix and
sources of funds, and the resultant impact on net interest income are discussed
below.
Earning Assets
Total average earning assets increased to $1.0 billion for the three
months ended December 31, 1999, up from $796.2 million in the same period of
1998. This increase was primarily a result of the completion of the SFS
Acquisition during the quarter ended September 30, 1999. For the nine months
ended December 31, 1999, average earning assets were $920.7 million, up from
$771.5 million in 1998. This increase is attributed to the SFS
8
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Acquisition as well as the impact of the Company's initial public offering on
July 1, 1998. Interest income for the three months ended December 31, 1999 was
$20.5 million, up $4.5 million from 1998. For the nine months ended December 31,
1999, interest income was $55.4 million, an increase of $7.7 million over the
same period in 1998. The increase in average balances was the primary reason for
the higher income, offset by lower yields on those assets. The yield on earning
assets fell from 7.98% for the three months ended December 31, 1998 to 7.92% in
1999. For the nine months ended December 31, 1999, yields declined from 8.21% in
1998 to 8.01% in 1999. The change in the Company's asset mix from lower yielding
investments to higher yielding loans has reduced the impact of a lower rate
environment on its earning assets. Earning assets at December 31, 1999 were $1.0
billion, up from $847.1 million at March 31, 1999 primarily as a result of the
SFS Acquisition.
Loans
The average balance of loans increased to $766.2 million for the three
months ended December 31, 1999, up $242.1 million from the $524.1 million
average for the same period in the prior year. The yield on loans for the
quarter decreased 61 basis points, from 8.94% in 1998 to 8.33% in 1999. Interest
income on loans for the three months ended December 31, 1999 increased to $16.0
million from $11.8 million in 1998. The increase in average balances for the
quarter resulted in a $5.1 million increase in interest income that was
partially offset by an $879 thousand decrease in interest income due to lower
rates. On a year to date basis, average loans were $669.9 million, up from
$518.8 million in 1998. The yield on loans for the nine months ended December
31, 1999 was 8.56%, down from 9.18% in 1998. The impact of higher average
balances resulted in an increase of $9.9 million in interest income. This
increase was partially offset by a $2.7 million decrease in interest income due
to lower rates.
Total loans were $773.6 million at December 31, 1999, up $195.5 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 $480.2 million, or 62.1% of total loans at December 31, 1999. This increase
was primarily the result of the SFS Acquisition. Commercial real estate loans
increased $37.2 million to $128.7 million at December 31, 1999 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 $37.3 million at
December 31, 1999 from $29.0 million at March 31, 1999. These increases were
offset by decreases of $6.9 million in manufactured housing loans and $39.9
million in financed insurance premium 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. The decrease in financed
insurance premiums is a seasonal fluctuation as the majority of this business is
written during the quarter ending March 31 and is paid down over the subsequent
three quarters. See Table D, "Loan Portfolio Analysis".
Securities
The average balance of securities available for sale and securities
held to maturity (collectively "securities") increased $19.1 million to $255.7
million for the three months ended December 31, 1999, up from $236.6 million for
the three months ended December 31, 1998. This increase is the result of the SFS
Acquisition as well as the reinvestment of the Company's federal funds sold and
securities purchased under agreements to resell into the securities available
for sale portfolio during the last nine months of the fiscal year ending March
31, 1999. Average securities for the nine months ended December 31, 1999 were
$246.4 million, an increase of $58.3 million from the corresponding period in
the previous year. Interest income earned on securities was $4.3 million for the
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
three months ended December 31, 1999, up $582 thousand from the $3.7 million
earned in 1998. On a year to date basis, interest income on securities grew from
$9.1 million in 1998 to $12.1 million in 1999. The growth in the average
balances of securities resulted in the increase in interest income while the
fluctuations in average rates did not have a significant impact.
Securities at December 31, 1999 were $249.8 million, down $15.9 million
from the $265.7 million the Company held as of March 31, 1999. The decrease was
almost entirely due to calls, maturities and paydowns of securities (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.
9
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Federal Funds Sold and Securities Purchased Under Agreements to Resell
The average balance of federal funds sold and securities purchased
under agreements to resell was $32.4 million for the three months ended December
31, 1998, generating $420 thousand in interest income for that period. For the
nine months ended December 31, 1998, the average balance was $61.5 million,
generating $2.6 million in interest income. The Company had limited federal
funds sold and no securities purchased under agreements to resell during the
three and nine months ended December 31, 1999 as these asset categories were
reinvested in the higher yielding loan and securities portfolios during the
latter stages of the year ended March 31, 1999. For the immediate future, the
Company does not anticipate utilizing these asset categories for significant
investments other than on a temporary basis as market conditions warrant.
Funding Sources
The Company utilizes traditional deposit products such as time, savings
and N.O.W. and money market deposits as its primary source for funding. However,
other sources such as short-term borrowings and long-term debt are utilized as
necessary to support the Company's growth in assets and to achieve interest rate
sensitivity objectives. The average balance of interest-bearing liabilities
increased to $813.5 million for the three months ended December 31, 1999 from
$552.8 million for the three months ended December 31, 1998. For the nine months
ended December 31, 1999, the average balance of interest-bearing liabilities was
$690.1 million, up from $578.6 million for the same period in 1998. This
increase in average balances is attributed primarily to the completion of the
SFS Acquisition. Interest expense for the three months ended December 31, 1999
was $8.5 million, up $2.2 million from the same period in 1998. The increase in
volume, offset by a decrease in the average rate paid from 4.55% to 4.17%,
resulted in the overall increase in interest expense for the three month period.
For the nine months ended December 31, 1999, the increase in the average balance
resulted in a $4.2 million increase in interest expense. This was partially
offset by the $2.6 million reduction in interest expense resulting from lower
average interest rates, 4.58% in 1998 to 4.15% in 1999.
Interest-bearing liabilities at December 31, 1999 were $838.7 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 $43.3 million to
$183.0 million for the three months ended December 31, 1999, up from $139.7
million for the same period in 1998. On a year to date basis, the average
balance of savings accounts was $163.5 million in 1999, up from $160.1 million
in 1998. These fluctuations are the result of the impact of the SFS Acquisition
during 1999, offset in part by the impact of the stock subscriptions received in
the prior year relating to the Company's initial public offering, which
temporarily increased deposits during 1998. Interest expense on savings accounts
increased from $1.1 million for the three months ended December 31, 1998 to $1.2
million in 1999. The decrease in average rates paid from 3.12% to 2.55% was
offset by the effect of the higher average balances in the quarter ending
December 31, 1999 and resulted in the increase in interest expense for the
quarter. The decline in average rates paid on savings accounts for the nine
months ended December 31, 1999 from 3.29% to 2.75% was only partially offset by
the effect of the increase in average balances for this time period. This
resulted in an overall decline of $585 thousand in interest expense on savings
accounts in 1999 when compared to the nine months ended December 31, 1998.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
The average balance of time deposits increased from $313.9 million for
the three months ended December 31, 1998 to $391.1 million for the three months
ended December 31, 1999. On a year to date basis, the average balance of time
deposits increased from $315.4 million in 1998 to $341.0 million in 1999.
Interest expense on time deposits increased a total of $404 thousand for the
three months ended December 31, 1999 from the comparable period in 1998. Lower
average rates paid on time deposits of 5.02% for the three months ended December
31, 1999 down from 5.73% in 1998 only partially offset the effect of the higher
average balances resulting in the increase in interest expense for the three
months ended December 31, 1999. For the nine months ended December 31, 1999, the
decline in average rates paid from 5.80% in 1998 to 5.09% in 1999 resulted in a
$1.8 million decrease in interest
10
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
expense due to lower rates during this time period. This was offset by a $1.1
million increase in interest expense due to the increased average balances.
Total deposits, including $50.3 million of noninterest-bearing
deposits, were $744.0 million at December 31, 1999, up from $591.8 million
($44.0 million of noninterest-bearing deposits) at March 31, 1999. These
increases were a result of the SFS Acquisition, as well as the Company's
continued focus on commercial services, including commercial deposits, and the
opening of a branch at the end of March 1999.
Short-term Borrowings and Long-term Debt
The average balance of short-term borrowings increased to $76.4 million
for the three months ended December 31, 1999 from $65 thousand in 1998. For the
nine months ended December 31, 1999, the average balance of short-term
borrowings was $50.7 million, up from $1.2 million for the same period in 1998.
Interest expense on these borrowings increased $1.1 million for the three months
ended December 31, 1999 when compared with 1998. On a year to date basis,
interest expense on short-term borrowings increased $2.0 million almost entirely
due to the increase in volume.
The average balance of long-term debt was $30.6 million and $14.3
million for the three and nine-month periods ended December 31, 1999,
respectively. The Company did not have any long-term debt during the periods
ended December 31, 1998. As a result, all the increase in interest expense on
long-term debt for both the three and nine-month periods ended December 31, 1999
is attributed to increases in volume.
Short-term borrowings were $105.1 million at December 31, 1999, 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 debt was $30.6 million at December 31, 1999. 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 debt
are fixed with maturities ranging from one-to-five years, with call options
ranging from one-to-three years.
Net Interest Income
Net interest income for the three months ended December 31, 1999 was
$11.9 million, up from the $9.7 million for the three months ended December 31,
1998. For the nine months ended December 31, 1999, net interest income increased
$6.1 million to $33.9 million from $27.8 million for the same period a year
previous. The increase was the result of the increase in average earning assets
and lower rates paid on interest-bearing liabilities. The impact of these
factors was offset in part by lower rates earned on average earning assets and
higher balances of interest-bearing liabilities. As a result of these volume and
rate fluctuations, the Company's net interest margin for the three months ended
December 31, 1999 was 4.62%, down from 4.82% for the three months ended December
31, 1998. For the nine months ended December 31, 1999, the net interest margin
was 4.90%, up from 4.78% for 1998. See Table B, "Average Balances, Interest and
Yields" and Table C, "Volume and Rate Analysis".
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Non-Interest Sensitive Assets and Liabilities
Non-interest 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 $19.0 million at December 31, 1999, 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 1999. Goodwill and
other intangibles increased from $3.2 million at March 31, 1999 to $11.9 million
at December 31, 1999 essentially as a result of the SFS Acquisition. Other
assets were $32.2 million at December 31, 1999, 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) and an increase in
the level of the Company's tax receivable asset due to the timing of estimated
tax payments and deferred taxes associated with the SFS Acquisition and the
mark-to-market of the Company's securities available for sale portfolio.
Non-interest sensitive liabilities include non-interest bearing deposit
accounts (primarily checking accounts) and other liabilities. Non-interest
bearing deposits increased from $44.0 million at March 31, 1999 to $50.3 million
at December 31, 1999. 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 non-interest bearing.
11
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Other liabilities decreased from $37.8 million at March 31, 1999 to $10.6
million at December 31, 1999. The decrease is almost entirely related to the
funding of amounts due to insurance companies in April 1999 for financed
insurance premium loans. These amounts were recorded as other liabilities as of
March 31, 1999.
RISK MANAGEMENT
- ---------------
Credit Risk
Credit risk is managed through the interrelationship of loan officer
lending authorities, Board of Director oversight, loan policies, a credit
administration department, an internal loan review function, and a problem loan
committee. These components of the Company's underwriting and monitoring
functions are critical to the timely identification, classification and
resolution of problem credits.
Non-performing Assets
- ---------------------
Non-performing assets include non-performing loans (loans in a
non-accrual status, loans that have been restructured, and loans past due 90
days or more and still accruing interest) and assets which have been foreclosed
or repossessed. Foreclosed assets typically represent residential or commercial
properties while repossessed property is primarily manufactured homes abandoned
by their owners or repossessed by the Company.
Total non-performing assets at December 31, 1999 were $12.9 million or
1.18% of total assets, compared with $12.5 million or 1.41% at March 31, 1999.
The $490 thousand increase in total non-performing assets is due to a $1.3
million increase in non-performing loans, partially offset by a $774 thousand
decrease in foreclosed and repossessed assets.
The increase in non-performing loans was in part the result of a $753
thousand increase in financed insurance premium loans placed on non-accrual.
These loans are placed on non-accrual usually within 30 days of a missed payment
and collection procedures from insurance companies of the unearned premiums can
take 90 days or longer. The increase was a by-product of the Company's growth in
this lending category as of March 31, 1999 and is expected to be a seasonal
increase based upon the Company's past experience with these loans. In addition,
non-performing loans were also increased as a result of the SFS Acquisition. SFS
had $937 thousand in non-performing loans immediately prior to the acquisition
date.
The $774 thousand decrease in foreclosed and repossessed assets was
made up of a $451 thousand reduction of repossessed manufactured homes with the
remainder made up of reductions in foreclosed residential and commercial
properties, partially offset by foreclosed properties acquired as part of the
SFS Acquisition.
Allowance and Provision For Loan Losses
- ---------------------------------------
The allowance for loan losses at December 31, 1999 was $18.7 million,
up from $14.3 million at March 31, 1999. The allowance as a percentage of
non-performing loans increased from 143.8% at March 31, 1999 to 167.1% at
December 31, 1999. The adequacy of the allowance for loan losses is evaluated
monthly by management based upon a review of significant loans, with particular
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
emphasis on non-performing and delinquent loans that management believes warrant
special attention, as well as an analysis of the higher risk elements of the
Company's loan portfolio. Net charge-offs for the three months ended December
31, 1999 were $578 thousand, up from $544 thousand for the same period in 1998.
For the nine months ended December 31, 1999, net charge-offs were $1.3 million,
down from the $1.4 million in 1998. Gross charge-offs were down from $2.3
million for the nine months ended December 31, 1998 to $1.7 million for the same
period in 1999.
As a result of management's analysis of the risk characteristics of the
lending portfolio, as well as the trends and levels of non-performing and other
delinquent loans, a provision for loan losses of $1.5 million for the three
months ended December 31, 1999 was recorded. The $1.5 million provision is down
$181 thousand from the $1.7 million provision recorded for the three months
ended December 31, 1998. For the nine months ended December 31, 1999, the
Company recorded a provision for loan losses of $4.7 million, down from $5.8
million in the prior year. An additional allowance of $1.0 million was acquired
during the nine months ended December 31, 1999 as part of the SFS Acquisition.
The Company continues to maintain certain portfolios of loans with higher credit
risk, such as manufactured housing loans, commercial loans and financed
insurance premium loans. Net charge-offs, risk elements of the Company's loan
portfolio, economic conditions in the Company's market area and non-performing
12
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
loan balances are the primary factors which are considered in determining the
levels of the Company's provision for loan losses. The Company anticipates that
the provision for loan losses will continue to approximate current levels in the
near term to accommodate planned growth in loans and the portfolio's changing
risk profile, although there can be no assurance that loan losses will not
exceed estimated amounts or that the provision for loan losses will not increase
in future periods. See Table E, "Non-Performing Assets" and Table F, "Loan Loss
Experience".
Market Risk
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Company's
business activities.
Interest rate risk is defined as an exposure to a movement in interest
rates that could have an adverse effect on the Company's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when earning
assets mature or reprice more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net income.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management's
asset/liability committee meets monthly to review the Company's interest rate
risk position and profitability, and to recommend strategies for consideration
by the Board of Directors. Management also reviews loan and deposit pricing, and
the Company's securities portfolio, formulates investment and funding
strategies, and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
Notwithstanding the Company's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. At times, depending on the level of general interest
rates, the relationship between long- and short-term interest rates, market
conditions and competitive factors, the Board and management may determine to
increase the Company's interest rate risk position somewhat in order to increase
its net interest margin. The Company's results of operations and net portfolio
values remain vulnerable to changes in interest rates and to fluctuations in the
difference between long- and short-term interest rates.
Interest rate risk analyses performed by the Company indicate that the
Company is asset sensitive, or its earning assets mature or reprice more quickly
than its interest-bearing liabilities. As a result, falling interest rates could
result in a decrease in net interest income. Consistent with the asset/liability
management philosophy described above, the Company has taken steps to manage its
interest rate risk by attempting to match the repricing periods of its earning
assets to its interest-bearing liabilities. The Company's purchases of
securities, retention of fixed rate loan products, and emphasis on lower cost,
more stable non-certificate deposit accounts are methods the Company has
utilized to manage its interest rate risk. Management continuously evaluates
various alternatives to address interest rate risk including, but not limited
to, the purchase of interest rate swaps, caps, and floors, leveraging scenarios,
and changes in asset or funding mix. There have been no significant changes in
the Company's interest rate sensitivity since March 31, 1999.
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Liquidity Risk
Liquidity is defined as the ability to generate sufficient cash flow to
meet all present and future funding commitments, depositor withdrawals and
operating expenses. Management monitors the Company's liquidity position on a
daily basis and evaluates its ability to meet depositor withdrawals or make new
loans or investments.
The Company's cash inflows result primarily from loan repayments,
maturities and calls of securities held to maturity and securities available for
sale, new deposits, and drawings upon the Company's credit lines with the
Federal Home Loan Bank of New York. The Company's cash outflows consist of new
loan originations, security purchases, deposit withdrawals, operating expenses
and treasury stock purchases. The timing of cash inflows and outflows is closely
monitored by management although changes in interest rates, economic conditions,
and competitive forces strongly impact the predictability of these cash flows.
The Company attempts to provide stable and flexible sources of funding through
the management of its liabilities, including core deposit products offered
through its branch network, and through the use of borrowings. Management
believes that the level of the Company's liquid assets combined with daily
13
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
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 $198.9
million at December 31, 1999, or 18.11% 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 17.21% and 24.62% as of
December 31, 1999 and March 31, 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, a dividend policy 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
December 31, 1999 the Company had an additional 659 thousand shares to acquire
under its current repurchase program. As of December 31, 1999, the Company and
the Bank exceeded all of their regulatory capital requirements.
OTHER OPERATING INCOME AND EXPENSES
- -----------------------------------
Total other operating income was $614 thousand for the three months
ended December 31, 1999 up slightly from the $583 thousand earned for the same
period in 1998. Other operating income is composed primarily of service charges
on deposit accounts, loan servicing income and net securities transactions.
Income from service charges on deposit accounts increased from $325 thousand in
1998 to $414 thousand in 1999, primarily as a result of the SFS Acquisition and
its resultant increase in deposit accounts. Loan servicing income decreased
slightly due to the reductions in the Company's loan servicing portfolio as a
result of paydowns. Other income was $163 thousand for the three months ended
December 31, 1999 as compared to $211 thousand for the same period in 1998. For
both the nine months ended December 31, 1999 and 1998, total other operating
income was $1.9 million.
Total other operating expenses were $7.2 million for the three months
ended December 31, 1999, up $1.6 million from the same period in 1998. For the
nine months ended December 31, 1999, total other operating expenses were $20.3
million, down $382 thousand from the same period a year earlier. The decrease
for the nine months ended December 31, 1999 was primarily a result of the $5.2
million non-recurring expense associated with a contribution of stock to the
Hudson River Bank & Trust Company Foundation in 1998. This decrease was
substantially offset by higher expenses in compensation and benefits, equipment,
other real estate owned and repossessed property, goodwill and other intangibles
amortization and other expenses. Increases in these expense categories also
resulted in the increase in total operating expenses for the three months ended
December 31, 1999.
Compensation and benefits increased $708 thousand to $3.6 million for
the three months ended December 31, 1999 from $2.9 million in 1998. For the nine
months ended December 31, 1999, compensation and benefits were $10.1 million, up
from $8.1 million in 1998. This increase is the result of costs associated with
the Company's Employee Stock Ownership Plan and stock awarded under the
Company's Recognition and Retention Plan. Costs associated with these plans
totaled $552 thousand and $1.7 million, respectively, during the three months
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
and nine months ended December 31, 1999, while in 1998, the costs totaled $333
thousand and $713 thousand for the three and nine-month periods, 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.
Equipment expenses for the three months ended December 31, 1999 were
$679 thousand, up from $388 thousand in 1998. For the nine months ended December
31, 1999, equipment expenses increased $665 thousand to $1.8 million as compared
to 1998. These expenses were higher due to the equipment purchases made during
the second half of the last fiscal year in which depreciation and maintenance
charges were recorded during 1999. These equipment purchases included a new
teller system, new personal computers, an upgraded network and new
image-technology for 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 increased
from $199 thousand during the three months ended December 31, 1998 to $253
thousand during 1999. On a year to date basis, other real estate owned and
14
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
repossessed property expenses increased to $914 thousand in 1999 from $497
thousand in 1998. This increase is the result of management's continued efforts
to reduce the level of problem assets. The growth in this asset category during
the previous year resulted in increased maintenance expenses associated with
these assets during 1999 as compared with 1998.
Goodwill and other intangibles amortization for the three months ended
December 31, 1999 was $282 thousand, up from $75 thousand for the same period a
year earlier. For the nine months ended December 31, goodwill amortization was
$806 thousand in 1999 and $161 thousand in 1998. The increases relate to the
goodwill associated with the Company's equity investments in Homestead Funding
Corp., a mortgage company, in November 1998, an equity investment in The
Bostwick Group, an insurance brokerage company, in September 1999, as well as
the SFS Acquisition.
Other expenses were $1.5 million for the three months ended December
31, 1999 up from $1.4 million during the same period in 1998. For the nine
months ended December 31, 1999, other expenses were $4.4 million in 1999, up
from $3.5 million in 1998. The increase is the result of general increases
associated with being a public company and the SFS Acquisition. The costs
include Delaware franchise tax fees, annual report printing expenses, and
marketing of the Company's thirteenth branch opening. The Company also recorded
a $253 thousand loss on the disposition of equipment as a result of an upgrade
to its existing mainframe that was necessitated by the SFS Acquisition.
INCOME TAX EXPENSE
- ------------------
Income tax expense increased from $1.1 million for the three months
ended December 31, 1998 to $1.3 million for the comparable period in 1999. For
the nine months ended December 31, 1999, tax expense was $3.7 million, up from
$1.1 million in the 1998 period. The increase is primarily the result of higher
income before income tax expense partially offset by an increase in tax exempt
income realized by the Company. Management anticipates that the Company's
effective tax rate will decrease in future periods due to the effect of the
Company's recent investment in bank owned life insurance as well as the
implementation of other tax planning strategies.
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The Company has experienced no significant problems to date relating to
the year 2000 issue. Management will continually monitor its depositors, loan
customers, and third party vendors for the immediate future to determine if
there are any residual or delayed implications of the century date change.
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
The Company's consolidated financial statements are prepared in
accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering the changes in the relative purchasing power of
money over time due to inflation. The impact of inflation is reflected in the
increasing cost of the Company's operations. Unlike most industrial companies,
nearly all assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. In addition, interest rates do not
necessarily move in the direction, or to the same extent as the price of goods
and services.
IMPACT OF NEW ACCOUNTING STANDARDS
- ----------------------------------
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. As 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.
15
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table A. Financial Highlights
<TABLE>
<CAPTION>
At or At or
For the Three Months Ended For the Nine Months Ended
December 31, December 31,
--------------------------------- ----------------------------
1999 1998 1999 1998
---------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Financial Ratios
- ----------------
Basic earnings per share(1) $ 0.18 $ 0.11 $ 0.47 $ 0.06
Diluted earnings per share(1) 0.18 0.11 0.47 0.06
Return on average assets(2) 0.95% 0.90% 0.97% 0.32%
Return on average equity(2) 4.98 3.29 4.42 1.49
Return on average tangible equity(2) 5.29 3.29 4.58 1.49
Net interest rate spread 3.75 3.43 3.86 3.63
Net interest margin(2) 4.62 4.82 4.90 4.78
Efficiency ratio(3) 52.73 51.91 52.22 50.19
Expense ratio(2)(3) 2.44 2.55 2.58 2.46
</TABLE>
<TABLE>
<CAPTION>
At Period Ended
---------------------------------------------------------------
December 31, September 30, March 31,
----------------------------
1999 1999 1999 1998
---------------- --------------- ------------ --------------
<S> <C> <C> <C> <C>
Share Information
- -----------------
Book value per share $ 14.33 $ 14.24 $ 14.02 $ --
Tangible book value per share 13.47 13.40 13.81 --
Book value per share, including unallocated
ESOP shares and unvested RRP shares 12.49 12.48 12.39 --
Tangible book value per share, including unallocated
ESOP shares and unvested RRP shares 11.74 11.75 12.21 --
Closing market price 10.06 11.06 10.94 --
Capital Ratios
- --------------
Equity to total assets 18.11% 19.43% 24.89% 10.18%
Tangible equity to tangible assets 17.21 18.50 24.62 10.10
Asset Quality Ratios
- --------------------
Non-performing loans to total loans 1.45 1.96 1.72 3.10
Non-performing assets to total assets 1.18 1.55 1.41 2.57
Allowance as a % of non-performing loans 167.12 120.15 143.77 52.32
Allowance as a % of loans 2.42 2.35 2.47 1.62
(1) Earnings per share data only applies to periods since the Company's initial public offering on July 1, 1998.
(2) Annualized.
(3) Ratio does not include other real estate owned and repossessed property expenses, net securities transactions
and goodwill and other intangibles amortization for each period. The ratio for the nine months ended December
31, 1998 does not include a charitable contribution to the Hudson River Bank & Trust Company Foundation.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table B. Average Balances, Interest, and Yields
Three Months Ended December 31,
----------------------------------------------------------------------------
1999 1998
-------------------------------------- -------------------------------------
Average Average Average Average
(In thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
-------------------------------------- -------------------------------------
Earning assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 767 $ 11 5.71% $ 3,911 $ 47 4.77%
Securities purchased under agreements to resell - - - 28,530 373 5.19
Securities available for sale (1) 243,307 4,113 6.73 193,326 3,061 6.28
Securities held to maturity 12,386 205 6.58 43,303 675 6.18
Federal Home Loan Bank of NY stock 5,483 94 6.82 3,035 53 6.93
Loans receivable (2) 766,196 16,045 8.33 524,078 11,803 8.94
-------------------------------------- ------------------------------------
Total earning assets 1,028,139 20,468 7.92% 796,183 16,012 7.98%
------------------- --------------------
Cash and due from banks 15,319 13,135
Allowance for loan losses (18,093) (11,886)
Other non-earning assets 53,803 29,804
------------- -------------
Total assets $ 1,079,168 $ 827,236
============= =============
</TABLE>
<TABLE>
<CAPTION>
Interest bearing liabilities:
<S> <C> <C> <C> <C> <C> <C>
Savings accounts $ 182,981 $ 1,174 2.55% $ 139,691 $ 1,100 3.12%
N.O.W. and money market accounts 124,828 801 2.55 95,306 684 2.85
Time deposit accounts 391,078 4,936 5.02 313,894 4,532 5.73
Mortgagors' escrow deposits 5,294 29 2.18 3,812 22 2.29
Securities sold under agreements to repurchase 2,262 25 4.40 - - -
Short-term borrowings 76,436 1,085 5.65 65 1 6.10
Long-term debt 30,600 471 6.12 - -
-------------------------------------- ------------------------------------
Total interest bearing liabilities 813,479 8,521 4.17% 552,768 6,339 4.55%
------------------------- -------------------
Non-interest bearing deposits 47,665 41,760
Other non-interest bearing liabilities 12,783 5,834
Shareholders' equity 205,241 226,874
------------- -------------
Total liabilities and shareholders' equity $ 1,079,168 $ 827,236
============= =============
Net interest income $ 11,947 $ 9,673
============ ===========
Net interest spread 3.75% 3.43%
============= ============
Net interest margin 4.62% 4.82%
============= ============
(1) Average balances include fair value adjustment.
(2) Average balances include non-accrual loans.
(continued)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table B. (continued)
Nine Months Ended December 31,
--------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
Average Average Average Average
(In thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
------------------------------------ ------------------------------------
Earning assets:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ 257 $ 11 5.70% $ 24,314 $ 1,028 5.61%
Securities purchased under agreements to resell - - - 37,165 1,571 5.61
Securities available for sale (1) 230,564 11,330 6.54 134,615 6,522 6.43
Securities held to maturity 15,846 788 6.62 53,531 2,562 6.35
Federal Home Loan Bank of NY stock 4,179 217 6.91 3,035 164 7.17
Loans receivable (2) 669,881 43,068 8.56 518,820 35,894 9.18
------------------------------------ ------------------------------------
Total earning assets $ 920,727 55,414 8.01% 771,480 47,741 8.21%
----------------------- ----------------------
Cash and due from banks 13,495 13,222
Allowance for loan losses (16,394) (10,252)
Other non-earning assets 42,275 27,658
------------- ------------
Total assets $ 960,103 $ 802,108
============= ============
Interest bearing liabilities:
Savings accounts $ 163,533 $ 3,381 2.75% $ 160,082 $ 3,966 3.29%
N.O.W. and money market accounts 112,454 2,254 2.67 96,495 2,076 2.86
Time deposit accounts 341,025 13,042 5.09 315,443 13,796 5.80
Mortgagors' escrow deposits 6,379 105 2.19 5,463 93 2.26
Securities sold under agreements to repurchase 1,602 51 4.24 - - -
Short-term borrowings 50,732 2,054 5.39 1,162 51 5.83
Long-term debt 14,344 653 6.06 - - -
------------------------------------ ------------------------------------
Total interest bearing liabilities 690,069 21,540 4.15% 578,645 19,982 4.58%
-------------------- ---------------------
Non-interest bearing deposits 45,537 43,838
Other non-interest bearing liabilities 13,612 6,191
Shareholders' equity 210,885 173,434
------------- ------------
Total liabilities and shareholders' equity $ 960,103 $ 802,108
============= ============
Net interest income $ 33,874 $ 27,759
=========== ============
Net interest spread 3.86% 3.63%
============ ============
Net interest margin 4.90% 4.78%
============ ============
(1) Average balances include fair value adjustment.
(2) Average balances include non-accrual loans.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table C. Volume and Rate Analysis
Three Months Ended Nine Months Ended
December 31, December 31,
------------------------------------- -----------------------------------
1999 vs 1998 1999 vs 1998
------------------------------------- -----------------------------------
Due To Due To Net Due To Due To Net
(In thousands) Volume Rate Change Volume Rate Change
------------------------------------- -----------------------------------
Interest income:
<S> <C> <C> <C> <C> <C> <C>
Federal funds sold $ (44) $ 8 $ (36) $ (1,030) $ 13 $ (1,017)
Securities purchased under agreements to resell (373) - (373) (1,571) - (1,571)
Securities available for sale 834 218 1,052 4,714 94 4,808
Securities held to maturity (509) 39 (470) (1,870) 96 (1,774)
Federal Home Loan Bank of NY stock 42 (1) 41 60 (7) 53
Loans receivable 5,121 (879) 4,242 9,856 (2,682) 7,174
------------------------------------- -----------------------------------
Total interest income 5,071 (615) 4,456 10,159 (2,486) 7,673
------------------------------------- -----------------------------------
Interest expense:
Savings accounts $ 301 $ (227) $ 74 $ 84 $ (669) $ (585)
N.O.W. and money market accounts 195 (78) 117 327 (149) 178
Time deposit accounts 1,022 (618) 404 1,064 (1,818) (754)
Mortgagors' escrow deposits 8 (1) 7 15 (3) 12
Securities sold under agreements to repurchase 25 - 25 51 - 51
Short-term borrowings 1,084 - 1,084 2,007 (4) 2,003
Long-term debt 471 - 471 653 - 653
------------------------------------- -----------------------------------
Total interest expense 3,108 (924) 2,182 4,201 (2,643) 1,558
------------------------------------- -----------------------------------
Net interest income $ 1,965 $ 309 $ 2,274 $ 5,958 $ 157 $ 6,115
===================================== ===================================
</TABLE>
Note: Changes attributable to both rate and volume, which cannot be
segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
<PAGE>
<TABLE>
<CAPTION>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table D. Loan Portfolio Analysis
December 31, March 31,
-------------------------- ------------------------------------------------------
(In thousands) 1999 1999 1998
-------------------------- -------------------------- --------------------------
Amount % Amount % Amount %
------------ ----------- ------------ ----------- ------------ -----------
Loans secured by real estate:
<S> <C> <C> <C> <C> <C> <C>
Residential $ 480,212 62.1% $ 295,466 51.1% $ 269,435 53.2%
Commercial 128,654 16.6 91,480 15.8 76,570 15.1
Construction 10,504 1.4 3,401 0.6 4,621 0.9
------------ ----------- ------------ ----------- ------------ -----------
Total loans secured by real estate $ 619,370 80.1% $ 390,347 67.5% $ 350,626 69.2%
------------ ----------- ------------ ----------- ------------ -----------
Other loans:
Manufactured housing $ 83,465 10.8% $ 90,354 15.6% $ 97,426 19.2%
Commercial 37,270 4.8 29,024 5.0 18,484 3.7
Financed insurance premiums 18,026 2.3 57,901 10.0 27,976 5.5
Consumer 15,228 2.0 12,440 2.2 11,857 2.3
------------ ----------- ------------ ----------- ------------ -----------
Total other loans $ 153,989 19.9% $ 189,719 32.8% $ 155,743 30.7%
------------ ----------- ------------ ----------- ------------ -----------
Unearned discount and net deferred loan
origination fees and costs 278 0.0 (1,967) (0.3) 609 0.1
------------ ----------- ------------ ----------- ------------ -----------
Total loans receivable $ 773,637 100.0% $ 578,099 100.0% $ 506,978 100.0%
=========== =========== ===========
Allowance for loan losses (18,731) (14,296) (8,227)
------------ ------------ ------------
Net loans receivable $ 754,906 $ 563,803 $ 498,751
============ ============ ============
</TABLE>
20
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
<TABLE>
<CAPTION>
Table E. Non-Performing Assets
December 31, March 31,
----------------------------
(In thousands) 1999 1999 1998
---------------- ------------- ------------
Non-accruing loans:
<S> <C> <C> <C>
Residential real estate $ 3,395 $ 2,253 $ 4,512
Commercial real estate 2,213 2,669 5,253
Commercial loans 59 -- --
Manufactured housing 2,171 2,315 3,060
Financed insurance premiums 3,302 2,549 2,768
Consumer 68 158 114
------- ------- -------
Total $11,208 $ 9,944 $15,707
Accruing loans past due 90 days or more
and still accruing interest -- -- 16
------- ------- -------
Total non-performing loans $11,208 $ 9,944 $15,723
======= ======= =======
Foreclosed and repossessed assets:
Residential real estate $ -- $ 258 $ 145
Commercial real estate 409 474 299
Repossessed property 1,325 1,776 1,088
------- ------- -------
Total $ 1,734 $ 2,508 $ 1,532
======= ======= =======
Total non-performing assets $12,942 $12,452 $17,255
======= ======= =======
Allowance for loan losses $18,731 $14,296 $ 8,227
======= ======= =======
Allowance as a percentage of non-performing loans 167.12% 143.77% 52.32%
Non-performing assets as a percentage of
total assets 1.18% 1.41% 2.57%
Non-performing loans as a percentage of
total loans 1.45% 1.72% 3.10%
</TABLE>
21
<PAGE>
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
<TABLE>
<CAPTION>
Table F. Loan Loss Experience
Three Months Ended Nine Months Ended
(In thousands) December 31, December 31,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Loans outstanding (end of period) $773,637 $539,948 $773,637 $539,948
=========== =========== ============ ===========
Average loans outstanding (period to date) $766,196 $524,078 $669,881 $518,820
=========== =========== ============ ===========
Allowance for loan losses at beginning of period $17,809 $ 11,560 $14,296 $ 8,227
Loan charge-offs:
Residential real estate (28) (102) (98) (186)
Commercial real estate - (39) - (95)
Commercial loans (150) (14) (150) (72)
Manufactured housing (389) (314) (947) (868)
Consumer (32) (11) (182) (94)
Financed insurance premiums (82) (260) (324) (1,028)
----------- ----------- ------------ -----------
Total charge-offs (681) (740) (1,701) (2,343)
----------- ----------- ------------ -----------
Loan recoveries:
Residential real estate 13 1 54 331
Commercial real estate 1 2 43 2
Commercial loans 1 1 4 16
Manufactured housing 27 10 59 50
Consumer 12 5 30 18
Financed insurance premiums 49 177 238 555
----------- ----------- ------------ -----------
Total recoveries 103 196 428 972
----------- ----------- ------------ -----------
Loan charge-offs, net of recoveries (578) (544) (1,273) (1,371)
Provision charged to operations 1,500 1,681 4,700 5,841
Allowance acquired - - 1,008 -
----------- ----------- ------------ -----------
Allowance for loan losses at end of period $18,731 $12,697 $18,731 $12,697
=========== =========== ============ ===========
Ratio of net charge-offs during the period to average
outstanding during the period (annualized) 0.30% 0.41% 0.25% 0.35%
=========== =========== ============ ===========
Provision as a percentage of average loans
outstanding during the period (annualized) 0.78% 1.27% 0.93% 1.49%
=========== =========== ============ ===========
Allowance as a percentage of loans outstanding (end of period) 2.42% 2.35% 2.42% 2.35%
=========== =========== ============ ===========
</TABLE>
22
<PAGE>
Hudson River Bancorp, Inc.
Quantitative and Qualitative Disclosures About Market Risk
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See detailed discussion of market risk within the Risk Management
section of Management's Discussion and Analysis included in Item 2 of this Form
10-Q.
HUDSON RIVER BANCORP, INC.
PART II- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herein:
(27) Financial Data Schedule (included
in electronic format only)
(b) Reports on Form 8-K
A current report on Form 8-K/A was filed with the SEC
on November 12, 1999 to provide required pro forma
financial information relating to the Company's SFS
Bancorp, Inc. acquisition on September 3, 1999.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON RIVER BANCORP, INC.
2/11/00 /s/Carl A. Florio
------ ----------------------------------------
Date Carl A. Florio, Director, President and
Chief Executive Officer (Principal
Executive and Operating Officer)
2/11/00 /s/Timothy E. Blow
------ ----------------------------------------
Date Timothy E. Blow, Chief Financial
Officer (Principal Financial and
Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-2000
<CASH> 15,836
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 237,485
<INVESTMENTS-CARRYING> 19,084
<INVESTMENTS-MARKET> 19,041
<LOANS> 773,637
<ALLOWANCE> 18,731
<TOTAL-ASSETS> 1,098,502
<DEPOSITS> 744,036
<SHORT-TERM> 107,147
<LIABILITIES-OTHER> 17,826
<LONG-TERM> 30,600
0
0
<COMMON> 179
<OTHER-SE> 198,714
<TOTAL-LIABILITIES-AND-EQUITY> 1,098,502
<INTEREST-LOAN> 43,068
<INTEREST-INVEST> 12,346
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 55,414
<INTEREST-DEPOSIT> 18,782
<INTEREST-EXPENSE> 21,540
<INTEREST-INCOME-NET> 33,874
<LOAN-LOSSES> 4,700
<SECURITIES-GAINS> 83
<EXPENSE-OTHER> 20,335
<INCOME-PRETAX> 10,698
<INCOME-PRE-EXTRAORDINARY> 10,698
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,008
<EPS-BASIC> .47
<EPS-DILUTED> .47
<YIELD-ACTUAL> 4.90
<LOANS-NON> 11,208
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 5,657
<ALLOWANCE-OPEN> 14,296
<CHARGE-OFFS> 1,701
<RECOVERIES> 428
<ALLOWANCE-CLOSE> 18,731
<ALLOWANCE-DOMESTIC> 15,281
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,450
</TABLE>
