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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 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
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 twelve 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. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of June 14, 1999, there were issued and outstanding 17,090,250
shares of the Registrant's Common Stock. The aggregate market value of the
voting stock held by non-affiliates of the Registrant, computed by reference to
the average of the closing bid and asked prices of such stock on the Nasdaq
National Market System as of June 14, 1999, was approximately $191.2 million.
DOCUMENTS INCORPORATED BY REFERENCE
Part II of Form 10-K - Annual Report to Shareholders for the fiscal
year ended March 31, 1999. Part III of Form 10-K - Portions of Proxy
Statement for 1999 Annual Meeting of Shareholders.
PART I
Item 1. Description of Business
-----------------------
BUSINESS OF THE COMPANY
General
The Company, a Delaware corporation, was organized on March 5, 1998 at
the direction of the Board of Trustees of the Hudson River Bank & Trust Company
(the Bank) (formerly Hudson City Savings Institution) for the purpose of owning
all of the outstanding capital stock of the Bank upon consummation of the Bank's
conversion from a mutual savings bank to a stock savings bank. The Company, as
the sole shareholder of the Bank, is a savings and loan holding company
regulated by the OTS.
The Company is an operating company. The Company directs, plans and
coordinates the business activities of the Bank. In the future, the Company may
acquire or organize other operating subsidiaries, including other financial
institutions, or it may merge with or acquire other financial institutions and
financial services related companies. The Company neither owns nor leases any
property but instead uses the premises and equipment of the Bank. The Company
does not currently employ any persons other than certain officers of the Bank
who are not separately compensated by the Company. The Company utilizes the
support staff of the Bank from time to time, if needed. Additional employees
will be hired as appropriate to the extent the Company expands its business in
the future.
Throughout this Annual Report on Form 10K for the year ended March 31,
1999, references to the Company include both the Company and the Bank, unless
otherwise noted. For additional information on the business of the Company, see
page 10 of the Company's Annual Report to Shareholders attached hereto by
Exhibit 13 and incorporated herein by reference.
Market Area
The Bank's primary market area is comprised of Columbia, Albany and
Rensselaer Counties in New York and portions of Dutchess and Schenectady
Counties in New York.
The Company's primary market area consists principally of suburban and
rural communities with service, wholesale/retail trade, government and
manufacturing serving as the basis of the local economy. Service jobs represent
the largest type of employment in the Company's primary market area, with jobs
in wholesale/retail trade accounting for the second largest employment sector.
Lending Activities
General. The Company primarily originates and retains fixed- and
adjustable-rate residential mortgage loans, including home equity loans, secured
by the borrower's primary residence. Generally, the term of the loans originated
ranges from 15 to 30 years. The Company also originates to a lesser extent
commercial real estate loans, commercial loans, manufactured housing loans,
financed insurance premiums and other consumer loans. In-market loan
originations are generated by the Company's marketing efforts, which include
print, radio and television advertising, lobby displays and direct contact with
local civic and religious organizations, as well as by the Company's present
customers, walk-in customers and referrals from real estate agents, brokers and
builders. The marketing for manufactured housing loans is conducted through
Tammac Corporation with which the Company has an agreement relating to such
loans. The marketing for financed insurance premiums is conducted through the
Company's premium finance subsidiary. See "Consumer Lending." At March 31, 1999,
the Company's total loan portfolio totaled approximately $578.1 million.
Loan applications are initially considered and approved at various
levels of authority, depending on the type and amount of the loan. Company
employees with lending authority are designated, and their lending limit
authority defined, by the Board of Directors of the Company. The approval of the
Company's Board of Directors is required for any loans over $500,000. Pursuant
to the Company's lending policy, senior lending officers may approve loans up to
$200,000 individually and up to $500,000 as a committee. The Company generally
requires personal guarantees for all commercial and commercial real estate
loans.
The types of loans that the Company may originate are subject to
federal and state laws and regulations. Interest rates charged by the Company on
loans are affected by the demand for such loans, the supply of money available
for lending purposes and the rates offered by competitors. These factors are in
turn affected by, among other things, economic conditions, monetary policies of
the federal government, including the Federal Reserve Board ("FRB"), and tax
policies. For a description of the Company's lending portfolio, see page 17 of
the Company's 1999 Annual Report to Shareholders attached hereto by Exhibit 13
and incorporated herein by reference.
The following table illustrates the contractual maturity of the
Company's construction, commercial real estate, and commercial loans at March
31, 1999. Mortgages which have adjustable or renegotiable interest rates are
shown as maturing in the period during which the contract is due. The schedule
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
(In thousands) Construction Commercial Commercial Total
Loans Real Estate Loans Loans
Loans
------------- ------------- ------------- ------------
Amounts Due:
0 months to 1 year.... $ 650 $ 10,593 $ 20,182 $ 31,425
After 1 year:
1 to 5 years........ - 43,694 6,790 50,484
Over 5 years........ 4,310 37,193 2,052 43,555
------------- ------------- ------------- ------------
Total due after one year 4,310 80,887 8,842 94,039
------------- ------------- ------------- ------------
Total amount due...... $ 4,960 $ 91,480 $ 29,024 $ 125,464
============ ============ ============ ============
The following table sets forth the dollar amounts in the respective
loan category at March 31, 1999 that are contractually due after March 31, 2000,
and whether such loans have fixed interest rates or adjustable interest rates.
Due after March 31, 2000
-------------------------------------
(In thousands) Fixed Adjustable Total
------- ---------- -----
Construction loans ................ $ -- $ 4,310 $ 4,310
Commercial real estate loans ...... 40,196 40,691 80,887
Commercial loans .................. 1,721 7,121 8,842
------- ------- -------
Total ......................... $41,917 $52,122 $94,039
======= ======= =======
Residential Real Estate Lending
The Company's residential real estate loans consist of primarily one-
to four-family, owner occupied mortgage loans, including home equity loans. At
March 31, 1999, $293.9 million, or 50.8% of the Company's total loans consisted
of residential mortgage loans and home equity loans. The Company does not
originate fixed-rate loans for terms longer than 30 years. The Company's
residential real estate loans are priced competitively with the market.
Accordingly, the Company attempts to distinguish itself from its competitors
based on quality of service.
The Company generally underwrites its fixed-rate residential mortgage
loans using accepted secondary market standards. In underwriting residential
mortgage loans, the Company evaluates, among other things, the borrower's
ability to make monthly payments and the value of the property securing the
loan. Properties securing real estate loans made by the Company are appraised by
independent fee appraisers approved by the Company's Board of Directors. The
Company requires borrowers to obtain title insurance, and fire and property
insurance (including flood insurance, if necessary) in an amount not less than
the amount of the loan.
The Company currently offers one- and three-year residential
adjustable-rate mortgage (ARM) loans with an interest rate that adjusts annually
in the case of one-year ARM loans, and every three years in the case of
three-year ARM loans based on the change in the relevant United States Treasury
index. These loans generally provide for up to a 2.0% periodic cap and a
lifetime cap of 6.0% over the initial rate. As a consequence of using caps, the
interest rates on these loans may not be as rate sensitive as the Company's cost
of funds. Borrowers of one-year residential ARM loans are generally qualified at
a rate of 2.0% above the initial interest rate. The Company offers ARM loans
that are convertible into fixed-rate loans with interest rates based upon the
then current market rates. ARM loans generally pose greater credit risks than
fixed-rate loans, primarily because as interest rates rise, the required
periodic payment by the borrower rises, increasing the potential for default.
However, as of March 31, 1999, the Company had not experienced higher default
rates on these loans relative to its other loans.
The Company's residential mortgage loans do not contain prepayment
penalties and do not permit negative amortization of principal. Real estate
loans originated by the Company generally contain a "due on sale" clause
allowing the Company to declare the unpaid principal balance due and payable
upon the sale of the security property. The Company has waived the due on sale
clause on loans held in its portfolio from time to time to permit assumptions of
the loans by qualified borrowers.
Generally, the Company does not originate residential mortgage loans
where the ratio of the loan amount to the value of the property securing the
loan (i.e., the "loan-to-value" ratio) exceeds 95%, although on occasion, the
Company may lend up to 97% of the value of the property securing the loan. If
the loan-to-value ratio exceeds 80%, the Company generally requires that the
borrower obtain private mortgage insurance in amounts intended to reduce the
Company's exposure to 80% or less of the lower of the appraised value or the
purchase price of the property securing the loan.
The Company's home equity loans and lines of credit are secured by a
lien on the borrower's residence and generally do not exceed $250,000. The
Company uses the same underwriting standards for home equity loans as it uses
for residential mortgage loans. Home equity loans are generally originated in
amounts, which together with all prior liens on such residence, do not exceed
80% of the appraised value of the property securing the loan. The interest rates
for home equity loans and lines of credit either float at a stated margin over
the prime rate or have fixed interest rates. Home equity lines of credit require
interest and principal payments on the outstanding balance for the term of the
loan. The terms of the Company's home equity lines of credit are generally five
to ten years, with a payback period ranging from five to twenty years.
Commercial Real Estate Lending
The Company has engaged in commercial real estate lending secured
primarily by apartment buildings, office buildings, motels, nursing homes, strip
shopping centers and manufactured housing parks located in the Company's primary
market area. At March 31, 1999, the Company had $91.5 million of commercial real
estate loans, representing 15.8% of the Company's total loan portfolio.
Commercial real estate loans have either fixed or adjustable rates and
terms to maturity that do not exceed 25 years. The Company's current lending
guidelines generally require that the property securing a loan generate net cash
flows of at least 125% of debt service after the payment of all operating
expenses, excluding depreciation, and the loan-to-value ratio not exceed 75% on
loans secured by such properties. As a result of a decline in the value of some
properties in the Company's primary market area and due to economic conditions,
the current loan-to-value ratio of some commercial real estate loans in the
Company's portfolio may exceed the initial loan-to-value ratio, and the current
debt service ratio may exceed the initial debt service ratio. Adjustable rate
commercial real estate loans provide for interest at a margin over a designated
index, often a designated prime rate, with periodic adjustments, generally at
frequencies of up to five years. In underwriting commercial real estate loans,
the Company analyzes the financial condition of the borrower, the borrower's
credit history, the reliability and predictability of the net income generated
by the property securing the loan and the value of the property itself. The
Company generally requires personal guarantees of the borrowers in addition to
the security property as collateral for such loans. Appraisals on properties
securing commercial real estate loans originated by the Company are performed by
independent fee appraisers approved by the Board of Directors.
Commercial real estate loans generally present a higher level of risk
than loans secured by one- to four-family residences. This greater risk is due
to several factors, including the concentration of principal in a limited number
of loans and borrowers, the effect of general economic conditions on income
producing properties and the increased difficulty of evaluating and monitoring
these types of loans. Furthermore, the repayment of loans secured by commercial
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced (for example,
if leases are not obtained or renewed, or a bankruptcy court modifies a lease
term, or a major tenant is unable to fulfill its lease obligations), the
borrower's ability to repay the loan may be impaired and the value of the
property may be reduced.
Consumer Lending
The Company offers a variety of secured and unsecured consumer loans,
including manufactured housing loans (loans secured by prefabricated or mobile
homes which serve as the borrower's dwelling), financed insurance premiums and,
to a lesser extent, lines of credit and loans secured by automobiles.
Substantially all of the Company's manufactured housing loans and financed
insurance premium loans are originated outside the Company's primary market
area. The balance of the Company's consumer loans are originated inside the
Company's market area.
The underwriting standards employed by the Company for consumer loans
other than financed insurance premiums generally include a determination of the
applicant's payment history on other debts and an assessment of ability to meet
existing obligations and payments on the proposed loan. Although
creditworthiness of the applicant is the primary consideration, the underwriting
process also includes a comparison of the value of the property securing the
loan, if any, in relation to the proposed loan amount. For information regarding
underwriting of financed insurance premiums, see "- Financed Insurance
Premiums."
Manufactured Housing Loans. In order to expand its origination of
manufactured housing lending, the Company is party to an agreement with Tammac
Corporation ("Tammac"), pursuant to which Tammac solicits manufactured housing
loan applications on behalf of the Company. Under the agreement, the Company may
refuse to accept for any reason any application referred to it by Tammac. Tammac
provides certain collection services to the Company, which include, for any loan
that is more than 30 days past due, attempting to cause the borrower to pay
delinquent installments and to bring his or her delinquent loan payments up to
date. Tammac also provides repossession and liquidation services, at the
direction of the Company, for certain delinquent loans. Tammac is paid a fixed
percentage of the amount financed by the borrower and does not receive
additional compensation for collection, repossession, or any other services
provided to the Company. Substantially all of the manufactured housing loans
originated by the Company have been referred to it by Tammac.
Manufactured housing loans represent the largest component of the
Company's consumer loan portfolio. At March 31, 1999, the Company's portfolio of
manufactured housing loans totaled $90.4 million, or 15.6% of its total loan
portfolio. The Company's manufactured housing loans are typically originated at
a higher rate than residential first mortgage loans, and generally have terms of
up to 20 years. Historically, the Company's manufactured housing loans have been
made with both fixed and adjustable rates of interest. Currently, however, the
Company originates only fixed rate manufactured housing loans. The Company's
adjustable-rate manufactured housing loans typically have an interest rate of
4.0% above the one year United States Treasury index, adjusted annually, with a
2.0% maximum annual adjustment and a 16.0% interest rate cap. The initial
interest rate represents the floor. Because the loan may be based on the cost of
the manufactured housing as well as improvements and because manufactured
housing may decline in value due to wear and tear following their initial sale,
the value of the collateral securing a manufactured housing loan may be
substantially less than the loan balance. At the time of origin, inspections are
made to substantiate current market values on all manufactured homes.
Financed Insurance Premiums. The second largest component of the
Company's consumer loan portfolio is financed insurance premiums. The Company
conducts such lending through a general partnership known as Premium Payment
Plan ("PPP") in which Hudson City Associates, Inc., a wholly owned subsidiary of
the Bank, holds a 65% ownership interest. The remaining 35% interest is held by
F.G.O. Corporation, which is responsible for the marketing of PPP's business.
Hudson City Associates receives 65% of any profits but absorbs 100% of any
losses of PPP. No profit distributions are made to F.G.O. Corporation until any
past losses have been recouped. PPP is currently licensed to provide insurance
premium financing in nine states, but does business primarily in New York, New
Jersey and Pennsylvania. Management estimates that approximately 8.0% of
premiums financed are for non-standard and sub-standard (assigned risk) personal
automobile insurance and the remaining 92% are for various commercial lines of
insurance. Interest rates charged on these loans are substantially higher than
those charged on other types of loans. Terms on these loans are primarily for
eight months.
The Company has experienced a relatively high level of delinquencies in
its financed insurance premium portfolio resulting in higher charge-offs. The
Company may continue to experience a high level of delinquencies and charge-offs
in this class of loans due to the nature of this type of lending. The
underwriting of these loans is generally not based upon the credit risk of the
borrower. In the typical case, funds are advanced to the insurance company for
the full amount of the premium upon receipt of a down payment from the insured.
If the insured defaults on the loan, the Company sustains a loss to the extent
the premium has been earned by (and is therefore unrecoverable from) the
insurance company. The Company's most significant exposure to loss occurs when
the initial insurance premium quoted by an insurance broker, and used as the
basis for the loan and the related down payment, is increased by the
underwriting insurance company subsequent to making the loan. In these
instances, if the borrower decides not to pay the increased premium amount, the
Company is left with an insufficient down payment, relative to the increased
premium, and little or no collateral in the way of insurance premiums refundable
by the insurance company. Accordingly, writing financed insurance premiums
through insurance brokers who accurately quote the initial insurance premium is
critical to this type of lending. At March 31, 1999, the Company had $57.9
million of financed insurance premiums through PPP, representing 10.0% of the
Company's total loan portfolio.
Consumer loans may entail greater credit risk than residential mortgage
loans, particularly in the case of consumer loans which are unsecured or are
secured by assets which may decline in value. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of high initial
loan-to-value ratios, repossession, rehabilitation and carrying costs, and the
greater likelihood of damage, loss or depreciation of the property, and thus are
more likely to be affected by adverse personal circumstances. In the case of
manufactured home loans, which may have loan balances in excess of the resale
value of the collateral, borrowers may abandon the collateral property making
repossession by the Company and subsequent losses more likely. The application
of various federal and state laws, including bankruptcy and insolvency laws, may
limit the amount which can be recovered on consumer loans, including
manufactured home loans.
Commercial Loans
At March 31, 1999, commercial loans comprised $29.0 million, or 5.0% of
the Company's total loan portfolio. Most of the Company's commercial loans have
been extended to finance local businesses and include primarily short-term loans
to finance machinery and equipment purchases, inventory, and accounts
receivable. Commercial loans also involve the extension of revolving credit for
a combination of equipment acquisitions and working capital needs as well as
warehouse lines of credit.
The terms of loans extended on machinery and equipment are based on the
projected useful life of such machinery and equipment, generally not to exceed
seven years. Lines of credit are available to borrowers provided that the
outstanding balance is paid in full (i.e., the credit line has a zero balance)
for at least 30 days every year. All lines of credit are reviewed on an annual
basis. In the event the borrower does not meet this 30 day requirement, the line
of credit may be terminated and the outstanding balance may be converted into a
fixed term loan. The Company has a few standby letters of credit outstanding
which are offered at competitive rates and terms and are generally on a secured
basis.
Unlike residential mortgage loans, commercial loans are typically made
on the basis of the borrower's ability to make repayment from the cash flow of
the borrower's business. As a result, the availability of funds for the
repayment of commercial loans may be substantially dependent on the success of
the business itself (which, in turn, is often dependent in part upon general
economic conditions). The Company's commercial loans are usually, but not
always, secured by business assets. However, the collateral securing the loans
may depreciate over time, may be difficult to appraise and may fluctuate in
value based on the success of the business.
The Company's commercial lending policy includes credit file
documentation and analysis of the borrower's background, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of other conditions affecting the borrower. Analysis of the
borrower's past, present and future cash flows is also an important aspect of
the Company's current credit analysis. The Company generally obtains personal
guarantees on its commercial loans. Nonetheless, such loans are believed to
carry higher credit risk than more traditional savings bank loans.
The Company maintains a $20.0 million warehouse line of credit with
Homestead Funding Corp., a mortgage company located in the Capital District area
of New York. Homestead primarily originates residential real estate loans in the
Company's market area. The line of credit is secured by assignments of the
underlying mortgages. At March 31, 1999, the Company had $9.6 million
outstanding under this warehouse line of credit which is included with
commercial loans. During the year ended March 31, 1999, the Company made an
equity investment in Homestead Funding Corp. as a strategic initiative. The line
of credit to Homestead was made in the ordinary course of business at the
Company's normal credit terms, including interest rate and collateralization.
Asset Quality
Delinquency Procedures. When a borrower fails to make a required
payment on a residential mortgage loan, the Company attempts to cure the
deficiency by contacting the borrower. Written contacts are made after payment
is 15 days past due and, in most cases, deficiencies are cured promptly. If the
delinquency is not cured by the 30th day, the Company attempts to contact the
borrower by telephone to arrange payment of the delinquency. If these efforts
have not resolved the delinquency within 45 days after the due date, a second
written notice is sent to the borrower, and on the 60th day a notice is sent to
the borrower warning that foreclosure proceedings will be commenced unless the
delinquent amount is paid. If the delinquency has not been cured within a
reasonable period of time after the foreclosure notice has been sent, the
Company may obtain a forbearance agreement or may institute appropriate legal
action to foreclose upon the property. If foreclosed, property collateralizing
the loan is sold at a public sale and may be purchased by the Company. If the
Company is in fact the successful bidder at the foreclosure sale, upon receipt
of a deed to the property, the Company generally sells the property at the
earliest possible date.
Collection efforts on consumer and commercial real estate loans are
similar to efforts on residential mortgage loans, except that collection efforts
on consumer and commercial real estate loans generally begin within 15 days
after the payment date is missed. In the case of manufactured home loans, the
Company's agreement with Tammac requires Tammac to provide collection services
on any loan that is more than 30 days past due. The Company also maintains
periodic contact with commercial loan customers and monitors and reviews the
borrowers' financial statements and compliance with debt covenants on a regular
basis.
Real estate and other assets acquired by the Company as a result of
foreclosure or by deed-in-lieu of foreclosure or repossession are classified as
Other Real Estate Owned ("OREO") and Repossessed Property until sold. When
property is classified as OREO and Repossessed Property, it is recorded at the
lower of cost or fair value (net of disposition costs) at that date and any
writedown resulting therefrom is charged to the allowance for loan losses.
Subsequent writedowns are charged to operating expenses. Net expenses from OREO
and repossessed properties are expensed as incurred. See the "Nonperforming
Assets" table on page 18 of the Company's 1999 Annual Report to Shareholders
attached hereto by Exhibit 13 and incorporated herein by reference.
Other Loans of Concern. As of March 31, 1999, there were $4.3 million
of other loans not included in the category of non-performing loans where known
information about the possible credit or other problems of borrowers caused
management to have doubts as to the ability of the borrower to comply with
present loan repayment terms.
There were no other loans in excess of $1.0 million being specially
monitored by the Company as of March 31, 1999. These loans have been considered
by management in conjunction with the analysis of the adequacy of the allowance
for loan losses.
Allowance for Loan Losses. The allowance for loan losses is replenished
through a provision for loan losses charged to operations. Loans are charged
against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely. Recoveries on loans previously
charged-off are credited to the allowance for loan losses. The allowance is an
amount that management believes will be adequate to absorb losses on existing
loans that may become uncollectible. Management's evaluation of the adequacy of
the allowance for loan losses is performed on a periodic basis and takes into
consideration such factors as the historical loan loss experience, changes in
the nature and volume of the loan portfolio, overall portfolio quality, review
of specific problem loans and current economic conditions that may affect
borrowers' ability to pay.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in determining the level of the
allowance. Future additions to the Company's allowance will be the result of
periodic loan, property and collateral reviews and thus cannot be predicted in
advance. In addition, regulatory agencies, as an integral part of the
examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance based upon their judgment of the information available to them at the
time of their examination. At March 31, 1999, the Company had a total allowance
for loan losses of $14.3 million, representing 143.8% of total non-performing
loans. See the "Loan Loss Experience" table on page 13 of the Company's 1999
Annual Report to Shareholders attached hereto by Exhibit 13 and incorporated
herein by reference.
Allocation of the Allowance for Loan Losses
The following table sets forth the allocation of the allowance for loan
losses by category as prepared by the Company. This allocation is based on
management's assessment as of a given point in time of the risk characteristics
of each of the component parts of the total loan portfolio and is subject to
changes as and when the risk factors of each such component part change. The
allocation is not indicative of either the specific amounts or the loan
categories in which future charge-offs may be taken, nor should it be taken as
an indicator of future loss trends. The allocation of the allowance to each
category does not restrict the use of the allowance to absorb losses in any
category.
At March 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------ ------------------ ------------------ ------------------ ------------------
Allowance Percent Allowance Percent Allowance Percent Allowance Percent Allowance Percent
For Loan Of Loans For Loan Of Loans For Loan Of Loans For Loan Of Loans For Loan Of Loans
(Dollars in thousands) Losses In Each Losses In Each Losses In Each Losse In Each Losses In Each
Category Category Category Category Category
To Total To Total To Total To Total To Total
Loans Loans Loans Loans Loans
--------- ------- -------- -------- --------- ------- --------- ------- --------- -------
Allocation of allowance for
loan losses:
Residential real estate (1) $ 2,989 51.7% $ 1,457 54.1% $ 998 56.2% $ 846 54.5% $ 815 59.2%
Commercial real estate 2,782 15.8 1,756 15.1 758 13.7 658 15.7 538 16.0
Manufactured home loans 3,147 15.6 2,550 19.2 1,040 18.8 1,049 17.8 699 16.5
Commercial loans 871 5.0 517 3.7 1,833 4.0 213 6.5 275 4.2
Financed insurance premiums 2,332 10.0 1,027 5.5 1,127 4.8 442 3.0 272 2.0
Consumer loans 346 2.2 225 2.3 52 2.3 25 2.3 24 1.9
Net deferred loan costs
and unearned discount - (0.3) - 0.1 - 0.2 - 0.2 - 0.2
Unallocated 1,829 - 695 - 64 - 313 - 564 -
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total $ 14,296 100.0% $ 8,227 100.0% $ 5,872 100.0% $ 3,546 100.0% $ 3,187 100.0%
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
- -------------
(1) Includes construction loans.
Investment Activities
The Company is authorized to invest in various types of liquid assets,
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements and federal
funds. Subject to various restrictions, the Company may also invest its assets
in investment grade commercial paper, mortgage-backed securities, collateralized
mortgage obligations (CMO's), corporate debt securities and mutual funds whose
assets conform to the investments that the Company is otherwise authorized to
make directly. As of March 31, 1999, the Company did not hold any securities to
one issuer which exceeded 10% of equity, excluding securities issued by U.S.
Government agencies.
Generally, the investment policy of the Company is to invest funds
among various categories of investments and maturities based upon the Company's
need for liquidity, to fulfill the Company's asset/liability management policies
to achieve the proper balance between its desire to minimize risk and maximize
yield, and, to a much lesser extent, to provide collateral for borrowings. To
date, the Company's investment strategy has been directed toward high-quality
assets (primarily federal agency obligations, mortgage-backed securities, CMO's,
and high-grade corporate debt securities).
Management determines the appropriate classification of securities at
the time of purchase. If management has the intent and ability to hold debt
securities to maturity, they are stated at amortized cost. 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, as a separate component of equity. As a member of the FHLB of New
York, the Company is required to hold FHLB of New York stock which is carried at
cost since there is no readily available market value. Historically, the Company
has not held any securities considered to be trading securities.
The following table sets forth information regarding the scheduled
maturities, amortized cost, and weighted average yields for the Company's
securities portfolios at March 31, 1999 by contractual maturity. The table does
not take into consideration the effects of scheduled repayments or possible
prepayments.
---------------------------------------------------------------------------------
Less than 1 year 1 to 5 years 5 to 10 years Over 10 years
---------------------------------------------------------------------------------
Amortized Weighted Amortized Weighted Amortized Weighted Amortized Weighted
Cost Average Cost Average Cost Average Cost Average
Yield Yield Yield Yield
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in thousands)
Securities Available-for-
Sale:
U.S. Government and
Agency securities ........ $ - --% 6,998 6.31% $ 39,792 6.52% $ 20,186 7.00%
Corporate debt securities .. 1,999 7.43 11,198 6.32 6,043 6.44 36,188 6.51
Tax-exempt securities ...... - -- - -- - -- 15,131 4.90
Collateralized mortgage
obligations .............. - -- - -- - -- 85,434 6.57
Mortgage-backed securities . - -- - -- - -- 19,678 6.53
Equity securities .......... - -- - -- - -- 1,160 6.42
-------- -------- -------- -------- -------- -------- -------- --------
Total securities
available for sale .. $ 1,999 7.43% $ 18,196 6.31% $ 45,835 6.51% $177,777 6.46%
======== ======== ======== ======== ======== ======== ======== ========
Securities Held-to-Maturity:
U.S. Government and
Agency securities........ $ - --% $ 1,995 7.06% $ - --% $ - --%
Corporate debt securities .. 8,989 6.80 8,942 6.67 - -- - --
Tax-exempt securities - -- - -- 10 9.31 - --
Collateralized mortgage
obligations .............. - -- - -- - -- 968 6.34
Mortgage-backed securities
- -- 189 6.07 1,746 6.81 202 9.39
-------- -------- -------- -------- -------- -------- -------- --------
Total securities held
to maturity....... $ 8,989 6.80% $ 11,126 6.73% 1,756 6.77% $ 1,170 6.87%
======== ======== ======== ======== ======== ======== ======== ========
(continued)
-----------------------------
Total Securities
-----------------------------
Amortized Weighted Fair
Cost Average Value
Yield
-------- -------- --------
(Dollars in Thousands)
Securities Available-for-
Sale:
U.S. Government and
Agency securities ........ $ 66,976 6.64% $66,447
Corporate debt securities .. 55,428 6.49 55,012
Tax-exempt securities ...... 15,131 4.90 15,053
Collateralized mortgage ....
obligations .............. 85,434 6.57 85,405
Mortgage-backed securities . 19,678 6.53 19,498
Equity securities ..........
1,160 -- 1,196
-------- -------- --------
Total securities
available for sale .. $243,807 6.43% $242,611
======== ======== ========
Securities Held-to-Maturity:
U.S. Government and
Agency securities........ $ 1,995 7.06% $ 2,012
Corporate debt securities .. 17,931 6.74 18,088
Tax-exempt securities 10 9.31 10
Collateralized mortgage
obligations .............. 968 6.34 940
Mortgage-backed securities
2,137 6.99 2,185
-------- -------- --------
Total securities held
to maturity....... $ 23,041 6.77% $ 23,235
======== ======== ========
Sources of Funds
General. The Company's primary sources of funds are deposits,
amortization and prepayment of loan principal, maturities of securities,
short-term investments, funds provided from operations and borrowings.
Deposits. The Company offers a variety of deposit accounts having a
range of interest rates and terms. The Company's deposits consist of passbook
and statement savings accounts, money market and N.O.W accounts, and time
deposits generally ranging in terms from three months to five years. The Company
only solicits deposits from its primary market area and does not have brokered
deposits. The Company relies primarily on competitive pricing policies,
advertising and customer service to attract and retain these deposits. At March
31, 1999, the Company's deposits totaled $591.8 million, of which $547.9 million
were interest-bearing deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates, and
competition. The variety of deposit accounts offered by the Company has allowed
it to be competitive in obtaining funds and to respond with flexibility to
changes in consumer demand. The Company has become more susceptible to
short-term fluctuations in deposit flows, as customers have become more interest
rate conscious. The Company manages the pricing of its deposits in keeping with
its asset/liability management, liquidity and profitability objectives. Based on
its experience, the Company believes that its passbook and statement savings,
money market accounts and N.O.W accounts are relatively stable sources of
deposits. However, the ability of the Company to attract and maintain time
deposits and the rates paid on these deposits has been and will continue to be
significantly affected by market conditions.
The following table indicates, as of March 31, 1999, the amount of the
Company's time deposits of $100,000 or more by time remaining until maturity.
Maturity
------------------------------------------------------------
3 Months 3 to 6 6 to 12 Over
(In thousands) or Less Months Months 12 Months Total
------- ------ ------ --------- -----
Time Deposits of $100,000 or more........ $ 9,538 $ 5,313 $ 9,391 $ 15,635 $ 39,877
Borrowings. Although deposits are the Company's primary source of
funds, the Company's practice has been to utilize borrowings when they are a
less costly source of funds, can be invested at a positive interest rate spread
or when the Company needs additional funds to satisfy loan demand.
The Company's borrowings historically have consisted of advances from
the FHLB of New York. Such advances can be made pursuant to several different
credit programs, each of which has its own interest rate and range of
maturities. The Company currently maintains available lines of credit and is
currently authorized to borrow up to $99.4 million on lines of credit with the
FHLB of New York. At March 31, 1999, the Company had outstanding $27.6 million
in borrowings from the FHLB of New York. See Note 6 of the Notes to Consolidated
Financial Statements included in the Company's 1999 Annual Report to
Shareholders incorporated herein by reference as Exhibit 13. The Company may
increase its borrowings in order to fund the acquisition of additional
securities or other assets in the future or as part of merger and acquisition
activities.
Subsidiary Activities
Hudson City Associates, Inc. Hudson City Associates, Inc. ("HCAI"), a
wholly owned subsidiary of the Bank, was incorporated in 1984 but remained
inactive until 1990. In 1990, HCAI formed a partnership known as Premium Payment
Plan (referred to herein as "PPP"), pursuant to which the Company provides
premium financing for non-standard and sub-standard personal automobile
insurance and certain lines of commercial insurance.
Hudson City Centre, Inc. A wholly owned subsidiary of the Bank, Hudson
City Centre, Inc. ("HCCI"), was organized in 1985 to facilitate the construction
of the Bank's main office building. Pursuant to this objective, HCCI formed a
partnership known as Sixth Street Development Associates to build and hold as
its primary asset the Bank's main office building at One Hudson City Centre,
Hudson, New York.
Hudson River Mortgage Corporation. A wholly owned subsidiary of the
Company, Hudson River Mortgage Corporation ("HRMC") was organized in 1996 to
broker mortgages to the Company and other financial institutions.
Hudson River Funding Corp. Hudson River Funding Corp. ("HRFC") is a
Real Estate Investment Trust formed in 1997 to enhance liquidity, portfolio
yields and capital growth. The Bank funded HRFC with approximately $185.0
million of earning assets consisting of residential mortgage loans, commercial
real estate loans, home equity loans, home improvement loans, and debt
securities. Interest income earned on the assets held by HRFC is passed through
to the Bank in the form of dividends.
Competition
The Company faces strong competition, both in originating real estate
and other loans and in attracting deposits. Competition in originating real
estate loans comes primarily from other savings institutions, commercial banks,
credit unions and mortgage bankers making loans secured by real estate located
in the Company's primary market area. Other savings institutions, commercial
banks, credit unions, and finance companies provide vigorous competition in
consumer lending. The Company also faces strong competition in its efforts to
provide insurance premium financing through PPP from a variety of other lenders,
some of which have much greater assets and resources than the Company.
The Company attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from mutual funds and
other savings institutions, commercial banks and credit unions located in the
same communities. The Company competes for these deposits by offering a variety
of deposit accounts at competitive rates, convenient business hours, and
convenient branch locations with interbranch deposit and withdrawal privileges.
Automated teller machine facilities are also available.
Employees
At March 31, 1999, the Company had 257 full-time employees and 44
part-time employees. The Company's employees are not represented by any
collective bargaining group. Management considers its employee relations to be
good.
REGULATION
Set forth below is a brief description of the laws and regulations
applicable to the Company and the Bank. No assurance can be given, however, that
under certain circumstances, other laws and regulations will not be applicable
to and materially affect the Company and the Bank. The description of the laws
and regulations hereunder, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to applicable laws and regulations.
The Company
General. The Company is subject to regulation as a savings and loan
holding company under the Home Owners Loan Act, as amended ("HOLA"), instead of
being subject to regulation as a bank holding company under the Bank Company Act
of 1956 because the Bank has made an election under Section 10(1) of HOLA to be
treated as a "savings bank" for purposes of Section 10(e) of HOLA. As a result,
the Company will be required to register with the OTS and will be subject to OTS
regulations, examinations, supervision and reporting requirements relating to
savings and loan holding companies. The Company will also be required to file
certain reports with, and otherwise comply with the rules and regulations of,
the New York State Banking Board (the "NYBB" or the "Board") and the Securities
and Exchange Commission ("SEC"). As a subsidiary of a savings and loan holding
company, the Bank will be subject to certain restrictions in its dealings with
the Company and affiliates thereof.
Activities Restrictions. The Bank is presently the sole savings and
loan subsidiary of the Company. There are generally no restrictions on the
activities of a savings and loan holding company which holds only one subsidiary
savings institution. However, if the Director of the OTS determines that there
is reasonable cause to believe that the continuation by a savings and loan
holding company, of an activity constitutes a serious risk to the financial
safety, soundness or stability of its subsidiary savings institution, he or she
may impose such restrictions as are deemed necessary to address such risk,
including limiting (i) payment of dividends by the savings institution; (ii)
transactions between the savings institution and its affiliates; and (iii) any
activities of the savings institution that might create a serious risk that the
liabilities of the Company and its affiliates may be imposed on the savings
institution. Notwithstanding the above rules as to permissible business
activities of unitary savings and loan holding companies, if the savings
institution subsidiary of such a holding company fails to meet the qualified
thrift lender ("QTL") test, then such unitary holding company also shall become
subject to the activities restrictions applicable to multiple savings and loan
holding companies and, unless the savings institution requalifies as a QTL
within one year thereafter, shall register as, and become subject to the
restrictions applicable to, a bank holding company.
If the Company were to acquire control of another savings institution,
other than through merger or other business combination with the Bank, the
Company would thereupon become a multiple savings and loan holding company.
Except where such acquisition is pursuant to the authority to approve emergency
thrift acquisitions and where each subsidiary savings institution meets the QTL
test, as set forth below, the activities of the Company and any of its
subsidiaries (other than the Bank or other subsidiary savings institutions)
would thereafter be subject to further restrictions. Among other things, no
multiple savings and loan holding company or subsidiary thereof which is not a
savings institution shall commence or continue for a limited period of time
after becoming a multiple savings and loan holding company or subsidiary thereof
any business activity other than: (i) furnishing or performing management
services for a subsidiary savings institution; (ii) conducting an insurance
agency or escrow business; (iii) holding, managing, or liquidating assets owned
by or acquired from a subsidiary savings institution; (iv) holding or managing
properties used or occupied by a subsidiary savings institution; (v) acting as
trustee under deeds of trust; (vi) those activities authorized by regulation as
of March 5, 1987 to be engaged in by multiple savings and loan holding
companies; or (vii) unless the Director of the OTS by regulation prohibits or
limits such activities for savings and loan holding companies, those activities
authorized by the FRB as permissible for bank holding companies. Those
activities described in clause (vii) above also must be approved by the Director
of the OTS prior to being engaged in by a multiple savings and loan holding
company.
Qualified Thrift Lender Test. Under Section 2303 of the Economic Growth
and Regulatory Paperwork Reduction Act of 1996, a savings association can comply
with the QTL test by either meeting the QTL test set forth in the HOLA and
implementing regulations or qualifying as a domestic building and loan
association as defined in Section 7701(a)(19) of the Internal Revenue Code of
1986, as amended. A savings bank subsidiary of a savings and loan holding
company that does not comply with the QTL test must comply with the following
restrictions on its operations: (i) the institution may not engage in any new
activity or make any new investment, directly or indirectly, unless such
activity or investment is permissible for a national bank; (ii) the branching
powers of the institution shall be restricted to those of a national bank, (iii)
the institution shall not be eligible to obtain any advances from its FHLB; and
(iv) payment of dividends by the institution shall be subject to the rules
regarding payment of dividends by a national bank. Upon the expiration of three
years from the date the savings institution ceases to meet the QTL test, it must
cease any activity and not retain any investment not permissible for a national
bank and immediately repay any outstanding FHLB advances (subject to safety and
soundness considerations).
The QTL test set forth in the HOLA requires that qualified thrift
investments ("QTLs") represent 65% of portfolio assets of the savings
institution and its consolidated subsidiaries. Portfolio assets are defined as
total assets less intangibles, property used by a savings association in its
business and liquidity investments in an amount not exceeding 20% of assets.
Generally, QTLs are residential housing related assets. The 1996 amendments
allow small business loans, credit card loans, student loans and loans for
personal, family and household purposes to be included without limitation as
qualified investments. At March 31, 1999, the Bank's assets invested in QTLs
were in excess of the percentage required to qualify the Bank under the QTL test
in effect at that time.
Limitations on Transactions with Affiliates. Transactions between
savings institutions and their affiliates are governed by Sections 23A and 23B
of the Federal Reserve Act. An affiliate of a savings institution is any company
or entity which controls, is controlled by or is under common control with the
savings institution. In a holding company context, the parent company of a
savings institution (such as the Company) and any companies which are controlled
by such parent company are affiliates of the savings institution. Generally,
Sections 23A and 23B (i) limit the extent to which the savings institution or
its subsidiaries may engage in "covered transactions" with any one affiliate to
an amount equal to 10% of such institution's capital stock and surplus, and
contain an aggregate limit on all such transactions with all affiliates to an
amount equal to 20% of such capital stock and surplus and (ii) require that all
such transactions be on terms substantially the same, or, at least as favorable,
to the institution or subsidiary as those provided to a non-affiliate. The term
"covered transaction" includes the making of loans, purchase of assets, issuance
of a guarantee and other similar transactions.
In addition, Sections 22(g) and (h) of the Federal Reserve Act place
restrictions on loans to executive officers, directors and principal
stockholders. Under Section 22 (h), loans to a director, an executive officer
and to a greater than 10% stockholder of a savings institution, and certain
affiliated interests of either, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the savings
institution's loans to one borrower limit (generally equal to 15% of the
institution's unimpaired capital and surplus). Section 22(h) also requires that
loans to directors, executive officers and principal stockholders be made on
terms substantially the same as offered in comparable transactions to other
persons unless the loans are made pursuant to a benefit or compensation program
that (i) is widely available to employees of the institution and (ii) does not
give preference to any director, executive officer or principal stockholder, or
certain affiliated interests of either, over other employees of the savings
institution. Section 22(h) also requires prior board approval for certain loans.
In addition, the aggregate amount of extensions of credit by a savings
institution to all insiders cannot exceed the institution's unimpaired capital
and surplus. Furthermore, Section 22(g) places additional restrictions on loans
to executive officers. At March 31, 1999, the Company was in compliance with the
above restrictions.
Restrictions on Acquisitions. Except under limited circumstances,
savings and loan holding companies are prohibited from acquiring, without prior
approval of the OTS, (i) control of any other savings institution or savings and
loan holding company or substantially all the assets thereof or (ii) more than
5% of the voting shares of a savings institution or holding company thereof
which is not a subsidiary. Except with the prior approval of the OTS, no
director or officer of a savings and loan holding company or person owning or
controlling by proxy or otherwise more than 25% of such company's stock, may
acquire control of any savings institution, other than a subsidiary savings
institution, or of any other savings and loan holding company.
The OTS may only approve acquisitions resulting in the formation of a
multiple savings and loan holding company which controls savings institutions in
more than one state if (i) the multiple savings and loan holding company
involved controls a savings institution which operated a home or branch office
located in the state of the institution to be acquired as of March 5, 1987; (ii)
the acquirer is authorized to acquire control of the savings institution
pursuant to the emergency acquisition provisions of the Federal Deposit
Insurance Act ("FDIA"); or (iii) the statutes of the state in which the
institution to be acquired is located specifically permit institutions to be
acquired by the state-chartered institutions or savings and loan holding
companies located in the state where the acquiring entity is located (or by a
holding company that controls such state chartered savings institutions).
Federal Securities Laws. The Company's Common Stock is registered with
the SEC under Section 12(g) of the Exchange Act. The Company is subject to the
proxy and tender offer rules, insider trading reporting requirements and
restrictions, and certain other requirements under the Exchange Act.
Shares of Common Stock purchased by persons who are not affiliates of
the Company may generally be sold without registration. Shares purchased by an
affiliate of the Company generally may not be resold without complying with the
resale restrictions of Rule 144 under the Securities Act. If the Company meets
the current public information requirements of Rule 144 under the Securities
Act, each affiliate of the Company who complies with the other conditions of
Rule 144 (including those that require the affiliate's sale to be aggregated
with those of certain other persons) would be able to sell in the public market,
without registration, a number of shares not to exceed, in any three-month
period, the greater of (i) 1% of the outstanding shares of the Company or (ii)
the average weekly volume of trading in such shares during the preceding four
calendar weeks.
The Bank
General. The Bank is subject to extensive regulation and examination by
the NYSBD, as its chartering authority, and by the FDIC, as the insurer of its
deposits and is subject to certain requirements established by the OTS as a
result of the Company's savings and loan holding company status. The federal and
state laws and regulations which are applicable to banks and their holding
companies regulate, among other things, the scope of their business, their
investments, their reserves against deposits, the timing of the availability of
deposited funds and the nature and amount of and collateral for certain loans.
The Bank must file reports with the NYSBD and the FDIC concerning its activities
and financial condition, in addition to obtaining regulatory approvals prior to
entering into certain transactions such as establishing branches and mergers
with, or acquisitions of, other depository institutions. There are periodic
examinations by the NYSBD and the FDIC to test the Bank's compliance with
various regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the NYSBD, the FDIC or as a result of the
enactment of legislation, could have a material adverse impact on the Company,
the Bank and their operations.
Capital Requirements. The FDIC has promulgated regulations and adopted
a statement of policy regarding the capital adequacy of state-chartered banks,
which, like the Bank, are not members ("non-members") of the Federal Reserve
System. See Footnote 7 of the March 31, 1999 consolidated financial statements
included in the Company's 1999 Annual Report to Shareholders incorporated herein
by reference as Exhibit 13.
Activities and Investments of New York-Chartered Savings Banks. The
Bank derives its lending, investment and other authority primarily from the
applicable provisions of New York State Banking Law and regulations, as limited
by FDIC regulations and other federal laws and regulations.The New York laws and
regulations authorize savings banks, including the Bank, to invest in real
estate mortgages, consumer and commercial loans, certain types of debt
securities, including certain corporate debt securities and obligations of
federal, State and local governments and agencies, certain types of corporate
equity securities and certain other assets. Under the statutory authority for
investing in equity securities, a savings bank may directly invest up to 7.5% of
its assets in certain corporate stock and may also invest up to 7.5% of its
assets in certain mutual fund securities. Investment in stock of a single
corporation is limited to the lesser of 2% of the outstanding stock of such
corporation or 1% of the savings bank's assets, except as set forth below. Such
equity securities must meet certain tests of financial performance. A savings
bank's lending powers are not subject to percentage of asset limitations,
although there are limits applicable to single borrowers. A savings bank may
also, pursuant to the "leeway" authority, make investments not otherwise
permitted under the New York State Banking Law. This authority permits
investments in otherwise impermissible investments of up to 1% of the savings
bank's assets in any single investment, subject to certain restrictions and to
an aggregate limit for all such investments of up to 5% of assets. Additionally,
in lieu of investing in such securities in accordance with the reliance upon the
specific investment authority set forth in the New York State Banking Law,
savings banks are authorized to elect to invest under a "prudent person"
standard in a wider range of debt and equity securities as compared to the types
of investments permissible under such specific investment authority. However, in
the event a savings bank elects to utilize the "prudent person" standard, it
will be unable to avail itself of the other provisions of the New York State
Banking Law and regulations which set forth specific investment authority. A New
York chartered stock savings bank may also exercise trust powers upon approval
of the Department.
New York-chartered savings banks may also invest in subsidiaries under
their service corporation investment power. A savings bank may use this power to
invest in corporations that engage in various activities authorized for savings
banks, plus any additional activities which may be authorized by the NYBB.
Investment by a savings bank in the stock, capital notes and debentures of its
service corporations is limited to 3% of the bank's assets, and such
investments, together with the bank's loans to its service corporations, may not
exceed 10% of the savings bank's assets.
With certain limited exceptions, a New York-chartered savings bank may
not make loans or extend credit for commercial, corporate or business purposes
(including lease financing) to a single borrower, the aggregate amount of which
would be in excess of 15% of the bank's net worth. The bank currently complies
with all applicable loans-to-one-borrower limitations.
Activities and Investments of FDIC-Insured State-Chartered Banks. The
activities and equity investments of FDIC-insured, state-chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things, (i) acquiring or retaining a
majority interest in a subsidiary, (ii) investing as a limited partner in a
partnership the sole purpose of which is direct or indirect investment in the
acquisition, rehabilitation or new construction of a qualified housing project,
provided that such limited partnership investments may not exceed 2% of the
bank's total assets, (iii) acquiring up to 10% of the voting stock of a company
that solely provides or reinsures directors', trustees' and officers' liability
insurance coverage or bankers' blanket bond group insurance coverage for insured
depository institutions, and (iv) acquiring or retaining the voting shares of a
depository institution if certain requirements are met. In addition, an
FDIC-insured state-chartered bank may not directly, or indirectly through a
subsidiary, engage as "principal" in any activity that is not permissible for a
national bank unless the FDIC has determined that such activities would pose no
risk to the insurance fund of which it is a member and the bank is in compliance
with applicable regulatory capital requirements.
Regulatory Enforcement Authority. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other things, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe or unsound practices. Other
actions or inactions may provide the basis for enforcement action, including
misleading or untimely reports filed with regulatory authorities.
Under the New York State Banking Law, the Department may issue an order
to a New York-chartered banking institution to appear and explain an apparent
violation of law, to discontinue unauthorized or unsafe practices and to keep
prescribed books and accounts. Upon a finding by the Department that any
director, trustee or officer of any banking organization has violated any law,
or has continued unauthorized or unsafe practices in conducting the business of
the banking organization after having been notified by the Department to
discontinue such practices, such director, trustee or officer may be removed
from office by the Department after notice and an opportunity to be heard. The
bank does not know of any past or current practice, condition or violation that
might lead to any proceeding by the Department against the bank or any of its
directors or officers. The Department also may take possession of a banking
organization under specified statutory criteria.
Prompt Corrective Action. Section 38 of the Federal Deposit Insurance
Act ("FDIA") provides the federal banking regulators with broad power to take
"prompt corrective action" to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well-capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." Under regulations adopted by the federal banking regulators,
an institution shall be deemed to be (i) "well-capitalized" if it has total
risk-based capital ratio of 10.0% or more, has a Tier I risk-based capital ratio
of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not
subject to specified requirements to meet and maintain a specific capital level
for any capital measure, (ii) "adequately capitalized" if it has a total
risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of
4.0% or more and a Tier I leverage capital ratio of 4.0% or more (3.0% under
certain circumstances) and does not meet the definition of "well-capitalized,"
(iii) "undercapitalized" if it has a total risk-based capital ratio that is less
than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I
leverage capital ratio that is less than 4.0% (3.0% under certain
circumstances), (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital
ratio that is less than 3.0% or a Tier I leverage capital ratio that is less
than 3.0%, and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. The regulations also
provide that a federal banking regulator may, after notice and an opportunity
for a hearing, reclassify a "well-capitalized" institution as "adequately
capitalized" and may require an "adequately capitalized" institution or an
"undercapitalized" institution to comply with supervisory actions as if it were
in the next lower category if the institution is in an unsafe or unsound
condition or engaging in an unsafe or unsound practice. The federal banking
regulator may not, however, reclassify a "significantly undercapitalized"
institution as "critically undercapitalized."
An institution generally must file a written capital restoration plan
which meets specified requirements, as well as a performance guaranty by each
company that controls the institution, with an appropriate federal banking
regulator within 45 days of the date that the institution receives notice or is
deemed to have notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Immediately upon becoming
undercapitalized, an institution becomes subject to statutory provisions which,
among other things, set forth various mandatory and discretionary restrictions
on the operations of such an institution.
At March 31, 1999, the Bank had capital levels which qualified it as a
"well-capitalized" institution.
FDIC Insurance Premiums. The Bank is a member of the Bank Insurance
Fund ("BIF") administered by the FDIC but has accounts insured by both the BIF
and the Savings Association Insurance Fund ("SAIF"). The SAIF-insured accounts
are held by the Bank as a result of certain acquisitions and branch purchases.
As insurer, the FDIC is authorized to conduct examinations of, and to require
reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious threat to the FDIC.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the Bank's deposit insurance.
Community Investment and Consumer Protection Laws. In connection with
its lending activities, the Bank is subject to a variety of federal laws
designed to protect borrowers and promote lending to various sectors of the
economy and population. Included among these are the federal Home Mortgage
Disclosure Act, Real Estate Settlement Procedures Act, Truth-in-Lending Act,
Equal Credit Opportunity Act, Fair Credit Reporting Act and Community
Reinvestment Act ("CRA").
The CRA requires insured institutions to define the communities that
they serve, identify the credit needs of those communities and adopt and
implement a "Community Reinvestment Act Statement" pursuant to which they offer
credit products and take other actions that respond to the credit needs of the
community. The responsible federal banking regulator (in the case of the Bank,
the FDIC) must conduct regular CRA examinations of insured financial
institutions and assign to them a CRA rating of "outstanding," "satisfactory,"
"needs improvement" or "unsatisfactory." The Bank's current CRA rating is
"satisfactory."
The Bank is also subject to provisions of the New York State Banking
Law which impose continuing and affirmative obligations upon banking
institutions organized in New York State to serve the credit needs of its local
community ("NYCRA"), which are similar to those imposed by the CRA. Pursuant to
the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA
reports with the Department. The NYCRA requires the Department to make an annual
written assessment of a bank's compliance with the NYCRA, utilizing a
four-tiered rating system, and make such assessment available to the public. The
NYCRA also requires the Department to consider a bank's NYCRA rating when
reviewing a bank's application to engage in certain transactions, including
mergers, asset purchases and the establishment of branch offices or automated
teller machines, and provides that such assessment may serve as a basis for the
denial of any such application. The Bank's latest NYCRA rating received from the
Department was "satisfactory."
Limitations on Dividends. The Company is a legal entity separate and
distinct from the Bank. The Company's principal source of revenue consists of
dividends from the Bank. The payment of dividends by the Bank is subject to
various regulatory requirements including a requirement, as a result of the
Company's savings and loan holding company status, that the Bank notify the
Director of the OTS not less than 30 days in advance of any proposed declaration
by its directors of a dividend.
Under New York State Banking Law, a New York-chartered stock savings
bank may declare and pay dividends out of its net profits, unless there is an
impairment of capital, but approval of the Department is required if the total
of all dividends declared in a calendar year would exceed the total of its net
profits for that year combined with its retained net profits of the preceding
two years, subject to certain adjustments.
Miscellaneous. The Bank is subject to certain restrictions on loans to
the bank or its non-bank subsidiaries, on investments in the stock or securities
thereof, on the taking of such stock or securities as collateral for loans to
any borrower, and on the issuance of a guarantee or letter of credit on behalf
of the Company or its non-Company subsidiaries. The Company also is subject to
certain restrictions on most types of transactions with the Company or its
non-Company subsidiaries, requiring that the terms of such transactions be
substantially equivalent to terms of similar transactions with non-affiliated
firms.
Federal Home Loan Bank System. The Bank is a member of the FHLB of New
York, which is one of 12 regional FHLBs that administers the home financing
credit function of savings institutions. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. The Bank had
$27.6 million of FHLB advances at March 31, 1999.
As an FHLB member, the Bank is required to purchase and maintain stock
in the FHLB of New York in an amount equal to at least 1% of its aggregate
unpaid residential mortgage loans, home purchase contracts or similar
obligations at the beginning of each year or 5% of its advances from the FHLB of
New York, whichever is greater. At March 31, 1999, the Bank had approximately
$3.3 million in FHLB stock, which resulted in its compliance with this
requirement.
The FHLBs are required to provide funds for the resolution of troubled
savings institutions and to contribute to affordable housing programs through
direct loans or interest subsidies on advances targeted for community investment
and low- and moderate-income housing projects. These contributions have
adversely affected the level of FHLB dividends paid in the past and could
continue to do so in the future. These contributions also could have an adverse
effect on the value of FHLB stock in the future.
Federal Reserve System. The FRB requires all depository institutions to
maintain reserves against their transaction accounts (primarily checking
accounts, including NOW and Super NOW accounts) and non-personal time deposits.
As of March 31, 1999, the Company was in compliance with applicable
requirements. However, because required reserves must be maintained in the form
of vault cash or a non-interest bearing account at a Federal Reserve Bank, the
effect of this reserve requirement is to reduce an institution's earning assets.
Federal Taxation
General. The Company and the Bank will be subject to federal income
taxation in the same general manner as other corporations with some exceptions
discussed below. The following discussion of federal taxation is intended only
to summarize certain pertinent federal income tax matters and is not a
comprehensive description of the tax rules applicable to the Company. The
Company's federal income tax returns have been audited or closed without audit
by the Internal Revenue Service through December 31, 1996.
Method of Accounting. For federal income tax purposes, the Company
currently reports its income and expenses on the accrual method of accounting
and uses a tax year ending March 31 for filing its consolidated federal income
tax returns. For further information about the Federal income tax consequences
for the Company, see footnote 11 of the consolidated financial statements within
the Company's 1999 Annual Report to Shareholders incorporated herein by
reference as Exhibit 13.
State and Local Taxation
New York State Taxation. The Company and the Bank will report income on
a combined basis utilizing a fiscal year. New York State Franchise Tax on
corporations is imposed in an amount equal to the greater of (a) 9% of "entire
net income" allocable to New York State (b) 3% of "alternative entire net
income" allocable to New York State (c) 0.01% of the average value of assets
allocable to New York State or (d) nominal minimum tax. Entire net income is
based on federal taxable income, subject to certain modifications.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $150,000.
Executive Officers
The executive officers of the Company are elected annually and hold
office until their respective successors have been elected and qualified or
until death, resignation or removal by the Board of Directors. Each executive
officer of the Company is also an executive officer of the Bank. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.
Name Age Position Held with the Bank
------------------------- ----------- -------------------------------------
Timothy E. Blow 32 Chief Financial Officer
Sidney D. Richter 59 Senior Vice President
Pamela M. Wood 51 Senior Vice President
The business experience of each executive officer who is not also a
Director of the Company is set forth below.
Timothy E. Blow, CPA. Mr. Blow became Chief Financial Officer of the
Company in May 1997. Prior to his appointment as Chief Financial Officer, Mr.
Blow was a senior manager at the accounting firm of KPMG LLP. Mr.
Blow also serves as a director of Hudson City Associates, Inc. and as Secretary
and Treasurer of Hudson River Funding Corp., wholly owned subsidiaries of the
Bank.
Sidney D. Richter. Mr. Richter has served as the Company's Senior Vice
President of Lending since 1993. From 1990 to 1993, Mr. Richter served as the
Company's Vice President for Commercial Lending. Mr. Richter also serves as a
director of each of the Bank's wholly owned subsidiaries.
Pamela M. Wood. Ms. Wood has been employed by the Company since 1969
and has served as Senior Vice President since 1993. She also serves as Secretary
of Hudson River Mortgage Corporation, Hudson City Center, Inc. and Hudson City
Associates, Inc. She served as Vice President from 1990 to 1993 and Corporate
Secretary from 1990 to 1998. From 1984 to 1990 she served as Assistant Vice
President. From 1969 to 1984 she served as Administrative Assistant and
Executive Secretary.
Item 2. Description of Properties
-------------------------
The Company conducts its business at its main office and twelve other
banking offices. The net book value of the Company's premises and equipment
(including land, building and leasehold improvements and furniture, fixtures and
equipment) at March 31, 1999 was $16.8 million. The Company believes that its
current facilities are adequate to meet the present and foreseeable needs of the
Company and the Bank, subject to possible future expansion.
Item 3. Legal Proceedings
-----------------
The Company is involved as plaintiff or defendant in various legal
actions arising in the normal course of its business. While the ultimate outcome
of these proceedings cannot be predicted with certainty, management, after
consultation with counsel representing the Company in the proceedings, does not
expect that the resolution of these proceedings will have a material effect on
the Company's financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held a special meeting of shareholders on January 5, 1999.
At the meeting, proposals to (i) ratify the Company's 1998 Stock Option and
Incentive Plan, and (ii) ratify the Company's 1998 Recognition and Retention
Plan were approved. The votes cast for and against these proposals, and the
number of abstentions and broker non-votes with respect to each of these
proposals, were as follows:
Approval of 1998 Stock Option and Incentive Plan
------------------------------------------------
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
9,036,197 1,453,321 165,641 147,105
Approval of 1998 Recognition and Retention Plan
-----------------------------------------------
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
9,088,903 1,556,265 157,096 -
PART II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters
------------------------------------------
Inside back cover of the attached 1999 Annual Report to Shareholders is
herein incorporated by reference as Exhibit 13.
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operation
-------------------------------------------------
Pages 10 through 23 of the attached 1999 Annual Report to
Shareholders are herein incorporated by reference as Exhibit 13.
Item 7. Financial Statements
The following information appearing in the Company's Annual Report to
Shareholders for the year ended March 31, 1999, is incorporated by reference in
this Annual Report on Form 10-K as Exhibit 13.
Pages in
Annual
Report
--------
Independent Auditors Report........................................................................... 24
Consolidated Balance Sheets as of March 31, 1999 and 1998............................................. 25
Consolidated Income Statements for the Years Ended March 31, 1999, 1998 and 1997..................... 26
Consolidated Statements of Changes in Shareholders' Equity for Years Ended March 31, 1999, 1998
and 1997 ............................................................................................ 27
Consolidated Statements of Cash Flows for Years Ended March 31, 1999, 1998 and 1997................... 28
Notes to Consolidated Financial Statements............................................................ 29 to 48
With the exception of the aforementioned information, the Company's
Annual Report to Shareholders for the year ended March 31, 1999, is not deemed
filed as part of this Annual Report on Form 10-K.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
------------------------------------------------
None.
PART III
Item 9. Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act
---------------------------------------------
Directors
- ---------
Information concerning Directors of the Company is incorporated herein
by reference from the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Executive Officers
- ------------------
Information concerning Executive Officers of the Company is
incorporated herein by reference from Part I of this Annual Report on Form 10-K.
Compliance with Section 16(a)
- -----------------------------
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Company's equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish the Company with
copies of all Section 16(a) forms they file.
To the Company's knowledge, based solely on a review of the copies of
such reports furnished to the Company and written representations that no other
reports were required, during the fiscal year ended March 31, 1999, all Section
16(a) filing requirements applicable to its officers, directors and greater than
10 percent beneficial owners were complied with.
Item 10. Executive Compensation
----------------------
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held in 1999, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial
Owners and Management
----------------------------------------
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held in 1999, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held in 1999, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Regulation Reference to
S-K Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
------ -------- ---------------
3(i) Certificate of Incorporation *
3(ii) Bylaws 3(ii)
4 Instruments defining the rights of security holders, *
including debentures
10 Material Contracts
Employment Agreement between Hudson River Bank & *
Trust Company and certain executive officers
Employment Agreement between Hudson River Bancorp., *
Inc. and certain executive officers
Change-In-Control Severance Agreement with certain *
officers of Hudson River Bank & Trust Company
Hudson River Bank & Trust Company Employee *
Severance Compensation Plan
Employee Stock Ownership Plan *
Form of Hudson City Savings Institution 401(k) **
Savings Plan
Benefit Restoration Plan **
1998 Stock Option and Incentive Plan ***
1998 Recognition and Retention Plan ***
13 Annual Report to Shareholders 13
21 Subsidiaries of Registrant 21
23 Consents of Experts and Counsel *
27 Financial Data Schedule 27
- ----------
* Filed as exhibits to the Company's Form S-1 registration statement
filed on March 9, 1998 (File No. 333-47605) of the Securities Act of
1933. All of such previously filed documents are hereby incorporated
herein by reference in accordance with Item 601 of Regulation S-K.
** Filed as exhibits to the Company's Pre-effective Amendment No. One to
Form S-1 filed on May 1, 1998 (File No. 333-47605) of the Securities
Act of 1933. All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of
Regulation S-K.
*** Filed as exhibits to the Company's Proxy Statement filed on November
13, 1998 in connection with the Company's Special Meeting for
Shareholders and hereby incorporated by reference.
(b) Reports on Form 8-K
On May 25, 1999, a current report on Form 8-K was filed with the SEC to
announce the execution of a definitive agreement to acquire SFS Bancorp, Inc.
SIGNATURES
Pursuant to the requirements of Section 15(d) 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.
By: /s/ Carl A. Florio
-----------------------------------------------------
Carl A. Florio, President and Chief Executive Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Carl A. Florio /s/ Earl Schram, Jr.
- ------------------------------------ ------------------------------------
Carl A. Florio, Director, Earl Schram, Jr., Chairman of the
President and Chief Executive Board
Officer (Principal Executive and
Operating Officer)
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------
/s/ Stanley Bardwell, M.D. /s/ Joseph W. Phelan
- ------------------------------------ ------------------------------------
Stanley Bardwell, M.D. Joseph W. Phelan, Director
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------
/s/ Willam E. Collins /s/ William H. Jones
- ------------------------------------ ------------------------------------
William E. Collins William H. Jones
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------
/s/ John E. Kelly /s/ Marcia M. Race
- ------------------------------------ ------------------------------------
John E. Kelly, Director Marcia M. Race, Director
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------
/s/ Marilyn A. Herrington /s/ Timothy E. Blow
- ------------------------------------ ------------------------------------
Marilyn A. Herrington, Director Timothy E. Blow, Chief Financial
Officer (Principal Financial and
Accounting Officer)
Date June 25, 1999 Date: June 25, 1999
------------------------------ ------------------------------