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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 June 30, 2002
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 August 7, 2002 there were issued and outstanding 15,191,659 shares
of the Registrant's Common Stock.
FORM 10-Q
HUDSON RIVER BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 2002
and March 31, 2002
Consolidated Income Statements for the three months
ended June 30, 2002 and 2001
Consolidated Statements of Cash Flows for the three months
ended June 30, 2002 and 2001
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
Item 1. Financial Statements
Hudson River Bancorp, Inc.
Consolidated Balance Sheets
(unaudited)
June 30, March 31,
(In thousands, except share and per share data) 2002 2002
----------- -----------
Assets
Cash and due from banks $ 45,573 $ 43,738
Federal funds sold 235,578 176,759
----------- -----------
Cash and cash equivalents 281,151 220,497
----------- -----------
Securities available for sale, at fair value 214,070 223,450
Federal Home Loan Bank of New York (FHLB) stock, at cost 23,473 22,788
Loans 1,881,298 1,904,204
Allowance for loan losses (37,370) (36,572)
----------- -----------
Net loans 1,843,928 1,867,632
----------- -----------
Accrued interest receivable 11,044 11,537
Premises and equipment, net 28,365 29,215
Other real estate owned (OREO) and repossessed property 1,073 1,252
Goodwill, net 62,414 62,414
Intangible assets, net 6,901 7,233
Other assets 46,156 62,789
----------- -----------
Total assets $ 2,518,575 $ 2,508,807
=========== ===========
Liabilities and Shareholders' Equity
Liabilities:
Deposits:
Savings 526,300 505,252
N.O.W. and money market 299,273 284,851
Time deposits 767,422 803,283
Noninterest-bearing 186,272 174,977
----------- -----------
Total deposits 1,779,267 1,768,363
----------- -----------
Securities sold under agreements to repurchase 18,995 16,972
Long-term FHLB borrowings 439,551 450,656
Mortgagors' escrow deposits 16,086 9,787
Other liabilities 26,117 32,112
----------- -----------
Total liabilities 2,280,016 2,277,890
----------- -----------
Shareholders' Equity:
Preferred stock, $.01 par value, Authorized 5,000,000 shares; none issued -- --
Common stock, $.01 par value, Authorized 40,000,000 shares;
Issued 17,853,750 shares 179 179
Additional paid-in capital 175,828 175,828
Unallocated common stock held by ESOP (12,552) (12,552)
Unvested restricted stock awards (4,386) (3,999)
Treasury stock, at cost (2,661,091 shares at June 30, 2002 and
March 31, 2002) (28,505) (28,751)
Retained earnings, substantially restricted 106,960 101,713
Accumulated other comprehensive income (loss) 1,035 (1,501)
----------- -----------
Total shareholders' equity 238,559 230,917
----------- -----------
Total liabilities and shareholders' equity $ 2,518,575 $ 2,508,807
=========== ===========
See accompanying notes to unaudited consolidated interim financial statements.
1
Hudson River Bancorp, Inc.
Consolidated Income Statements
(unaudited)
For the Three
Months Ended June 30,
---------------------
(In thousands, except per share data) 2002 2001
-------- -------
Interest income:
Loans, including fees $ 35,537 $28,425
Securities available for sale 3,020 3,324
Federal funds sold 858 116
Loans held for sale -- 89
Federal Home Loan Bank of New York stock 236 267
-------- -------
Total interest income 39,651 32,221
-------- -------
Interest expense:
Deposits 10,539 10,258
Securities sold under agreements to repurchase 89 177
Short-term FHLB advances -- 578
Long-term FHLB borrowings 5,048 2,688
-------- -------
Total interest expense 15,676 13,701
-------- -------
Net interest income 23,975 18,520
Provision for loan losses 1,500 1,400
-------- -------
Net interest income after
provision for loan losses 22,475 17,120
-------- -------
Other operating income:
Service charges on deposit accounts 1,528 1,007
Loan servicing income 27 41
Net securities transactions -- 30
Net gain on sales of loans held for sale -- 114
Insurance commissions 1,132 759
Trust and investment services income 123 107
Other income 728 539
-------- -------
Total other operating income 3,538 2,597
-------- -------
Other operating expenses:
Compensation and benefits 7,792 5,284
Occupancy 1,390 910
Equipment 2,124 1,111
OREO and repossessed property (154) 11
Advertising 366 390
Legal and other professional fees 490 271
Goodwill amortization -- 699
Intangible assets amortization 332 32
Other expenses 2,970 2,960
-------- -------
Total other operating expenses 15,310 11,668
-------- -------
Income before tax expense 10,703 8,049
Tax expense 4,262 3,345
-------- -------
Net income $ 6,441 $ 4,704
======== =======
Basic earnings per share $ 0.46 $ 0.34
======== =======
Diluted earnings per share $ 0.45 $ 0.33
======== =======
See accompanying notes to unaudited consolidated interim financial statements.
2
Hudson River Bancorp, Inc.
Consolidated Statements of Cash Flows
(unaudited)
For the Three Months Ended
June 30,
--------------------------
(In thousands) 2002 2001
--------- ---------
Cash flows from operating activities:
Net income $ 6,441 $ 4,704
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,338 925
Goodwill and other intangibles amortization 332 731
Provision for loan losses 1,500 1,400
Amortization of restricted stock awards 186 186
Net securities transactions -- (30)
Net gain on sales of loans held for sale -- (114)
Proceeds from sales of loans held for sale -- 15,222
Adjustments of OREO and repossessed property to fair value 225 186
Net gain on sales of OREO and repossessed property (804) (480)
Net loss on sales and disposals of premises and equipment 39 18
Net decrease (increase) in accrued interest receivable 493 (98)
Net decrease in other assets 4,422 9,127
Net decrease in other liabilities (5,995) (13,011)
--------- ---------
Net cash provided by operating activities 8,177 18,766
--------- ---------
Cash flows from investing activities:
Net cash used in acquisition activity -- (128,399)
Proceeds from sales of securities available for sale -- 56,934
Proceeds from maturities, calls and paydowns of securities available
for sale 13,607 12,774
Purchase of FHLB stock (986) --
Redemption of FHLB of New York stock 301 --
Net loans repaid by (made to) customers 21,645 (1,815)
Proceeds from sales of and payments received on OREO
and repossessed property 1,317 1,346
Proceeds from sale of premises and equipment -- 250
Surrender of bank-owned life insurance 10,520 --
Purchases of premises and equipment (527) (803)
--------- ---------
Net cash provided by (used in) investing activities 45,877 (59,713)
--------- ---------
Cash flows from financing activities:
Net increase in deposits 10,904 22,207
Net increase (decrease) in short-term borrowings 2,023 (45,855)
Issuance of long-term FHLB borrowings 75,000 110,000
Repayment of long-term FHLB borrowings (86,105) (159)
Net increase in mortgagors' escrow deposits 6,299 4,078
Net proceeds from exercise of stock options 81 124
Dividends paid (1,426) (994)
Purchases of treasury stock (176) (226)
--------- ---------
Net cash provided by investing activities 6,600 89,175
--------- ---------
Net increase in cash and cash equivalents 60,654 48,228
Cash and cash equivalents at beginning of period 220,497 38,638
--------- ---------
Cash and cash equivalents at end of period $ 281,151 $ 86,866
========= =========
3
Supplemental cash flow information:
Interest paid $ 16,056 $ 13,275
Income taxes paid $ 227 $ 1,030
Supplemental disclosures of non-cash investing and financing activities:
Loans transferred to OREO and repossessed property $ 559 $ 526
Securities held to maturity transferred to securities available for sale $ -- $ 3,602
Adjustment of securities available for sale to fair value, net of tax $ 2,536 $ (36)
Acquisition activity:
Fair value of noncash assets acquired $ -- $ 693,741
Fair value of liabilities assumed $ -- $ 596,375
See accompanying notes to unaudited consolidated interim financial statements.
4
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, 2002. Operating
results for the three month period ended June 30, 2002 are not necessarily
indicative of the results that may be expected for a full year or other interim
periods.
2. Comprehensive income includes the reported net income 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 represents net income plus other comprehensive
income or 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 or loss represents the net unrealized gains or losses on
securities available for sale, net of tax, as of the balance sheet dates.
Comprehensive income for the three month periods ended June 30, 2002 and 2001
was $9.0 million and $4.7 million, respectively.
3. Effective April 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, as well as all purchase method business combinations
completed after June 30, 2001. SFAS No. 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. SFAS No. 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. Acquired intangible assets (other than
goodwill) with definite useful lives are amortized over their respective
estimated useful live to their estimated residual values, and reviewed for
impairment.
In connection with the transitional goodwill impairment evaluation, SFAS
No. 142 requires the Company to perform an assessment of whether there is an
indication that goodwill was impaired as of the date of adoption. Any
transitional impairment loss will be recognized as the cumulative effect of a
change in accounting principle in the Company's consolidated income statement
for the year ending March 31, 2003.
As of April 1, 2002, the Company had unamortized goodwill in the amount of
$62.4 million, which will be subject to the transition provisions of SFAS No.
142. The Company is in the process of evaluating whether any transitional
impairment losses will be required to be recognized as the cumulative effect of
a change in accounting principle. Management believes that the amount of
transitional impairment losses, if any, will not be significant.
5
Hudson River Bancorp, Inc.
Notes to Unaudited Consolidated Interim Financial Statements
(continued)
The following table represents the Company's net income and earnings per
share, as well as net income and earnings per share excluding goodwill
amortization, for the three months ended June 30, 2002 and 2001:
Three Months Ended June 30,
(In thousands) 2002 2001
------------------------------------------------------------------------
Reported net income $ 6,441 $ 4,704
Add: Goodwill amortization (net of tax) -- 674
------------------------------------------------------------------------
Net income, as adjusted $ 6,441 $ 5,378
========================================================================
Three Months Ended June 30,
(In thousands) 2002 2001
------------------------------------------------------------------------
Reported basic earnings per share $ 0.46 $ 0.34
Add: Goodwill amortization (net of tax) -- 0.05
------------------------------------------------------------------------
Basic earnings per share, as adjusted $ 0.46 $ 0.39
========================================================================
Three Months Ended June 30,
(In thousands) 2002 2001
------------------------------------------------------------------------
Reported diluted earnings per share $ 0.45 $ 0.33
Add: Goodwill amortization (net of tax) -- 0.05
------------------------------------------------------------------------
Diluted earnings per share, as adjusted $ 0.45 $ 0.38
========================================================================
The following table shows the gross carrying amount and accumulated
amortization of intangible assets that are subject to amortization:
June 30, 2002
Gross Carrying Accumulated
(In thousands) Amount Amortization
---------------------------------------------------------------------------
Intangible assets subject to amortization:
Core deposit intangible $6,781 $305
Other intangible assets 571 146
---------------------------------------------------------------------------
Total $7,352 $451
===========================================================================
The Company recorded $332 thousand in amortization expense for the three
months ended June 30, 2002. Estimated amortization expense for the year ending
March 31, 2003 and each of the next four years is as follows:
Year ending March 31, 2003 $ 1,245
2004 982
2005 806
2006 673
2007 587
4. In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 143, "Accounting for Asset Retirement Obligations." The new
standard takes effect for fiscal years beginning after June 15, 2002. SFAS No.
143 addresses the accounting for obligations associated with the retirement of
tangible long-lived assets and requires a liability to be recognized for the
fair value of these obligations in the period they are incurred. Related costs
are capitalized as part of the carrying amounts of the assets to be retired and
amortized over the assets' useful lives. The Company will adopt SFAS No. 143 as
of April 1, 2003. The Company does not expect that SFAS No. 143 will have a
material impact on its consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The new standard maintains the
previous accounting for the impairment or disposal of long-lived assets, but
also establishes more restrictive criteria that have to be met to classify such
an asset as "held for sale." SFAS No. 144 also increases the range of
dispositions that qualify for reporting as discontinued operations, and changes
the manner in which expected future operating losses from such operations are to
be reported. The Company adopted SFAS No. 144 as of April 1, 2002. There was no
material impact on the Company's consolidated financial statements from adopting
this statement.
6
Hudson River Bancorp, Inc.
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(CONTINUED)
5. The following table sets forth certain information regarding the
calculation of basic and diluted earnings per share for the three month periods
ended June 30, 2002 and 2001. 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 using the
treasury stock method. 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.
For the Three Months Ended June 30,
--------------------------------------------------------------------------------------------
(In thousands, except for share and per share data) 2002 2001
--------------------------------------------------------------------------------------------
Net income $ 6,441 $ 4,704
=========== ===========
Weighted average common shares outstanding 13,857,462 13,694,450
Dilutive effect of potential common shares outstanding:
Stock options 335,217 242,744
Restricted stock awards 135,917 110,021
--------------------------------------------------------------------------------------------
Weighted average common shares and potential
common shares outstanding 14,328,596 14,047,215
=========== ===========
Earnings per share amounts:
Basic earnings per share $ 0.46 $ 0.34
============================================================================================
Diluted earnings per share $ 0.45 $ 0.33
============================================================================================
6. On March 8, 2002, the Company completed its acquisition of Ambanc
Holding Co., Inc. ("Ambanc") paying $21.50 per share in cash for each share of
Ambanc common stock outstanding. The total consideration of approximately $100.5
million was funded through the usage of the Company's Federal funds sold.
Goodwill associated with this transaction approximated $23.2 million. In
accordance with the provisions of SFAS No. 142, goodwill acquired after June 30,
2001 is not amortized but will instead be evaluated at least annually for
impairment. The Company also recorded a core deposit intangible associated with
the transaction of $6.8 million. The core deposit intangible is being amortized
over its estimated useful life of approximately ten years on an accelerated
basis. Ambanc had total assets of $654.1 million and total deposits of $480.9
million as of March 8, 2002. Its 14 branches located in the Capital District
area of New York State were added to the Bank's branch network.
A summary of pro forma combined financial information for the Company
and Ambanc for the three months ended June 30, 2001 as if the transaction had
occurred on April 1, 2001 is as follows:
Net interest income $ 23,225
Other operating income 3,296
Net income 5,234
Basic earning per share $ 0.38
Diluted earning per share $ 0.37
These results combine the historical results of Ambanc into the
Company's consolidated income statements; and, while certain adjustments were
made for the estimated impact of purchase accounting adjustments and other
acquisition-related activity, they are not necessarily indicative of what would
have occurred had the acquisitions actually taken place at that time. In
particular, the Company expects to achieve operating cost savings as a result of
the mergers, which are not reflected in the pro forma amounts presented.
7
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 its subsidiaries, Hudson River Bank & Trust Company (the
"Bank") and C. W. Bostwick, Inc. ("Bostwick") (combined, the "Company"), during
the three months ended June 30, 2002, with comparisons to 2001 as applicable.
The unaudited consolidated interim financial statements and related notes, as
well as the 2002 Annual Report on Form 10-K, 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.
The Company's primary market area, with 51 full-service branches as of
June 30, 2002, is the Capital District region of New York state. 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 of the Company is also
affected by provisions for loan losses and other operating income, such as fees
on deposit related services and insurance commissions; it is also impacted by
other operating expenses, such as compensation and benefits, occupancy and
equipment expenses, and federal and state income taxes.
The Company's results of operations are significantly affected by general
economic and competitive conditions (particularly changes in market interest
rates), government policies, changes in accounting standards and actions of
regulatory agencies. Future changes in applicable laws, regulations or
government policies may have a material impact on the Company. Lending
activities are substantially influenced by the demand for and supply of housing,
competition among lenders, the level of interest rates, and the availability of
funds. The ability to gather deposits and the cost of funds are influenced by
prevailing market interest rates, fees and terms on deposit products, as well as
the availability of alternative investments including mutual funds and stocks.
MERGER AND ACQUISITION ACTIVITY
On March 8, 2002, the Company completed its acquisition of Ambanc Holding
Co., Inc. ("Ambanc") paying $21.50 per share in cash for each share of Ambanc
common stock outstanding (the "Ambanc Acquisition"). The total consideration of
approximately $100.5 million was funded through the usage of the Company's
Federal funds sold. Goodwill associated with this transaction approximated $23.2
million. In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, goodwill acquired after June 30, 2001 is not
amortized but will instead be evaluated at least annually for impairment. The
Company also recorded a core deposit intangible associated with the transaction
of $6.8 million. The core deposit intangible is being amortized over its
estimated useful life of approximately ten years on an accelerated basis. Ambanc
had total assets of $654.1 million and total deposits of $480.9 million as of
March 8, 2002. Its 14 branches located in the Capital District area of New York
state were added to the Bank's branch network.
On April 25, 2000, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Cohoes Bancorp, Inc. ("Cohoes") to provide
for a merger of equals between the Company and Cohoes. At a special meeting of
shareholders held by Cohoes on August 17, 2000, the merger was not approved by
the requisite vote of Cohoes shareholders. On September 28, 2000, the Company
terminated the Merger Agreement with Cohoes. On November 24, 2000, the Company
entered into a new agreement to acquire Cohoes for $19.50 in cash for each share
of Cohoes common stock outstanding (the "Cohoes Acquisition"). On April 20,
2001, the Company completed the Cohoes Acquisition. The total consideration of
approximately $151.0 million was funded through the sale of securities and loans
held for sale, and by long-term FHLB borrowings. Goodwill associated with this
transaction approximated $31.0 million and was being amortized over twenty years
on a straight line basis through March 31, 2002. Upon the Company's adoption of
SFAS No. 142 as of April 1, 2002, this goodwill is no longer being amortized but
will instead be evaluated at least annually for impairment. Cohoes had total
assets of $705.4
8
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
million and total deposits of $502.1 million as of April 20, 2001. Its 20
branches located in the Capital District area of New York state were added to
the Bank's branch network.
During January 2002 and 2001, the Company acquired additional equity
interests in Bostwick, an insurance agency in which the Company had originally
made an equity investment during September 1999. The Company's total investment
in the equity of Bostwick exceeded 50% with the January 2001 investment, and as
a result, the results of Bostwick's operations have been consolidated with those
of the Company since January 1, 2001.
OVERVIEW
The Company earned net income for the three months ended June 30, 2002 of
$6.4 million, or $0.45 diluted earnings per share, up $1.7 million from the $4.7
million, or $0.33 diluted earnings per share, earned during the three months
ended June 30, 2001. The increase was primarily a result of the Ambanc
Acquisition resulting in higher net interest income and other operating income,
partially offset by a higher provision for loan losses, higher other operating
expenses and higher tax expense. In accordance with the provisions of Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets", which requires that goodwill no longer be amortized, the Company did
not amortize goodwill for the quarter ended June 30, 2002. Goodwill amortization
for the quarter ended June 30, 2001 was approximately $674 thousand, net of
taxes. Without the effect of this goodwill amortization, net income for the
quarter ended June 30, 2001 would have been $5.4 million, or $0.38 diluted
earnings per share. For the three months ended June 30, 2002, the Company's
return on average assets was 1.04%, down from 1.11% for the same period in 2001.
The Company's return on average equity for the three months ended June 30, 2002
was 10.92%, up from 8.62% in 2001. The Company's return on average tangible
equity for the three months ended June 30, 2002 was 15.47%, up from 10.24% for
the same period in 2001. See Table A, "Financial Highlights".
ASSET/LIABILITY MANAGEMENT
The Company attempts to maximize net interest income, and net income,
while actively managing its liquidity and interest rate sensitivity through the
mix of various core deposits and other sources of funds, which in turn, fund an
appropriate mix of earning assets. The changes in the Company's asset mix and
sources of funds, and the resultant impact on net interest income are discussed
below.
Earning Assets
Total average earning assets increased to $2.3 billion for the three
months ended June 30, 2002, up from $1.6 billion in the same period of 2001.
This increase was primarily a result of the completion of the Ambanc Acquisition
during March 2002. Interest income for the three months ended June 30, 2002 was
$39.7 million, up $7.4 million from the same period in 2001. The increase in
average balances from the Ambanc Acquisition was the primary reason for the
higher income, partially offset by lower yields on those assets. The yield on
earning assets declined from 8.02% for the three months ended June 30, 2001 to
6.84% for the same period in 2002. The decline in the yield on earning assets
was primarily due to the declining rate environment in the marketplace and the
larger amount of lower yielding Federal funds sold held during the quarter.
Earning assets were $2.4 billion and $2.3 billion at June 30, 2002 and March 31,
2002, respectively. The increase in earning assets was largely a result of
increases Federal funds sold during the three months ended June 30, 2002, offset
by decreases in securities available for sale and loans.
Loans
The average balance of loans increased to $1.9 billion for the three
months ended June 30, 2002, up $512.0 million from the $1.4 billion average for
the same period in the prior year. The yield on loans for the quarter decreased
73 basis points, from 8.27% in 2001 to 7.54% in 2002. The decrease is attributed
to the impact of adding loans, which were generally originated at lower rates
relative to the Company's loan portfolio, as a result of the Ambanc Acquisition,
and decreases in market interest rates during the current year. Interest income
on loans for the three months ended June 30, 2002 increased to $35.5 million
from $28.4 million for the same period in 2001. The
9
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
increase in average balances for the quarter resulted in a $9.8 million
increase in interest income earned on loans that was partially offset by a $2.7
million decrease in interest income earned due to lower rates.
Total loans were $1.9 billion at both June 30, 2002 and March 31, 2002.
Loans secured by commercial real estate increased from $429.7 million, or 22.6%
of total loans at March 31, 2002, to $433.6 million, or 23.0% of total loans at
June 30, 2002. Financed insurance premiums increased $4.4 million to $35.2
million at June 30, 2002 from $30.7 million at March 31, 2002. These increases
were offset by a decrease of $24.9 million in loans secured by residential real
estate to $1.2 billion at June 30, 2002, a decrease of $1.9 million in
commercial loans to $107.1 million at June 30, 2002, and a decrease of $1.2
million in manufactured housing loans to $66.4 million at June 30, 2002.
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.
Prepayments as a result of the lower rate environment of other loan types,
particularly in residential loans, also reduced loans during the three months
ended June 30, 2002. See Table D, "Loan Portfolio Analysis".
Securities
The average balance of securities available for sale ("securities")
increased $15.2 million to $216.2 million for the three months ended June 30,
2002, up from $200.9 million for the three months ended June 30, 2001. This
increase is attributed primarily to the Ambanc Acquisition in March 2002.
Interest income earned on securities was $3.0 million for the three months ended
June 30, 2002, down $304 thousand from the $3.3 million earned in the three
months ended June 30, 2001. The increase in average balances for the quarter
resulted in a $239 thousand increase in interest income earned on securities
that was more than offset by a $543 thousand decrease in interest income earned
due to lower rates. The yield on securities decreased 104 basis points to 5.60%
for the three months ended June 30, 2002 from 6.64% for the three months ended
June 30, 2001.
Securities at June 30, 2002 were $214.1 million, down $9.4 million from
the $223.5 million the Company held as of March 31, 2002. The decrease was due
to maturities, calls and paydowns of securities. Management anticipates that
securities will increase in the future as the level of Federal funds sold is
reduced and reinvested in securities and loans.
Federal Funds Sold
The average balance of Federal funds sold of $194.0 million for the three
months ended June 30, 2002 generated $858 thousand in interest income for the
quarter. The average balance was up $183.7 million from the $10.3 million
reported for the three months ended June 30, 2001. At June 30, 2002, Federal
funds sold amounted to $235.6 million. The Company is currently utilizing
Federal funds for short-term liquidity and for asset/liability management
purposes, including the locking in of favorable rates on longer term borrowings.
As noted above, the balance of Federal funds should decrease in the future as
management redeploys some Federal funds sold into higher yielding securities and
as loan demand increases.
Funding Sources
The Company utilizes traditional deposit products such as time, savings,
and N.O.W. and money market deposits as its primary source for funding. Other
sources such as short-term FHLB advances and long-term FHLB borrowings, however,
are utilized as necessary to support the Company's growth in assets and to
achieve interest rate sensitivity objectives. Interest-bearing liabilities at
June 30, 2002 and March 31, 2002 were $2.1 billion. The average balance of
interest-bearing liabilities increased to $2.1 billion for the three months
ended June 30, 2002 from $1.3 billion for the three months ended June 30, 2001.
This increase in average balances is attributed primarily to the completion of
the Ambanc Acquisition. Interest expense for the three months ended June 30,
2002 was $15.7 million, up $2.0 million from the same period in 2001. The
increase in volume, partially offset by a decline in the average rate paid from
4.09% to 3.06%, resulted in the overall increase in interest expense for the
three month period.
10
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Deposits
The average balance of savings accounts increased $220.4 million to $515.1
million for the three months ended June 30, 2002, up from $294.7 million for the
same period in 2001. This fluctuation was primarily the result of the
consummation of the Ambanc Acquisition during March 2002. Interest expense on
savings accounts increased accordingly from $1.9 million for the quarter ended
June 30, 2001 to $2.7 million for the quarter ended June 30, 2002. The increase
in the average balance of savings accounts was offset somewhat by a decrease in
the yield paid on these deposits to 2.07% from 2.57% for the quarters ended June
30, 2002 and 2001, respectively.
Interest expense on N.O.W. and money market accounts increased from $966
thousand for the three months ended June 30, 2001 to $1.0 million for the same
period in 2002. The average balance of N.O.W. and money market accounts
increased to $293.3 million from $173.5 million for the three month period ended
June 30, 2001. A decrease in average rates paid due to market conditions from
2.23% to 1.42% almost entirely offset the effect of the higher average balances.
The average balance of time deposits increased from $581.5 million for the
three months ended June 30, 2001 to $780.6 million for the three months ended
June 30, 2002. Interest expense on time deposits decreased a total of $563
thousand for the three months ended June 30, 2002 from the comparable period in
2001. Lower average rates paid on time deposits of 3.48% for the three months
ended June 30, 2002 were down from 5.06% in 2001 and more than offset the effect
of the higher average balances resulting in the decrease in interest expense in
2002.
Total deposits, including $186.3 million of noninterest-bearing deposits,
were $1.8 billion at June 30, 2002, up $10.9 million from March 31, 2002.
Noninterest bearing deposits were up $11.3 million for this time period, offset
slightly by declines in interest bearing deposits. Increases were generally the
result of the Company's continued focus on commercial services, including
commercial deposits.
Short-term FHLB Advances and Long-term FHLB Borrowings
The Company had no short-term FHLB advances during the quarter ended June
30, 2002. As a result, interest expense on these advances decreased $578
thousand for the three months ended June 30, 2002 from the same period in 2001.
This decrease is primarily the result of the Company taking advantage of
opportunities to enhance its interest rate risk profile by shifting shorter-term
FHLB advances into long-term funding, at generally lower rates than were
available in the local time deposit market. The average balance of long-term
FHLB borrowings was $435.1 million for the three months ended June 30, 2002, an
increase of $220.3 million from the $214.9 million during the three months ended
June 30, 2001. The increase in this category was primarily attributed to the
movement of short-term advances into long-term borrowings at generally lower
rates, the need to fund the Cohoes Acquisition, and management's continued
monitoring of the Company's interest rate risk profile.
There were no short-term FHLB advances at June 30, 2002 or March 31, 2002.
Long-term FHLB borrowings were $439.6 million at June 30, 2002 down from $450.7
million at March 31, 2002. The decrease in this category was primarily
attributed to the calls and repayments of borrowings. The interest rates on the
long-term borrowings are generally fixed with maturities ranging from two months
to ten years, with call options ranging from one month to four years.
Net Interest Income
Net interest income for the three months ended June 30, 2002 was $24.0
million, up from $18.5 million for the three months ended June 30, 2001. The
increase was the result of the increase in average earning assets from the
Ambanc Acquisition, and lower rates paid on interest-bearing liabilities, offset
in part by higher balances of interest-bearing liabilities and lower rates
earned on earning assets. As a result of these volume and rate fluctuations, the
Company's net interest margin for the three months ended June 30, 2002 was
4.14%, down from 4.61% for the three months ended June 30, 2001. See Table B,
"Average Balances, Interest and Yields" and Table C, "Volume and Rate Analysis".
Noninterest Sensitive Assets and Liabilities
Noninterest sensitive assets include accrued interest receivable, premises
and equipment, other real estate owned and repossessed property, goodwill and
other intangibles, and other assets. Total noninterest sensitive assets amounted
to $156.0 million at June 30, 2002, down $18.5 million from the March 31, 2002
level. The decrease is primarily attributed to a $10.5 million surrender of a
bank-owned life insurance policy acquired in the Ambanc
11
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Acquisition, as well as a $4.5 million decrease in the level of the Company's
net taxes receivable primarily due to the fluctuation in timing and amount of
income tax payments made.
Noninterest sensitive liabilities include noninterest-bearing deposit
accounts (primarily checking accounts) and other liabilities.
Noninterest-bearing deposits increased from $175.0 million at March 31, 2002 to
$186.3 million at June 30, 2002. This increase is a result of the growth in the
Company's commercial accounts, which are generally noninterest-bearing. Other
liabilities decreased from $32.1 million at March 31, 2002 to $26.1 million at
June 30, 2002. The decrease is attributed to the continued redemption of Ambanc
Holding Co., Inc. shares in connection with the Ambanc Acquisition.
RISK MANAGEMENT
Credit Risk
Credit risk is managed through the interrelationship of loan officer
lending authorities, Board of Director oversight, loan policies, a credit
administration department, an internal loan review function, and a problem loan
committee. These components of the Company's underwriting and monitoring
functions are critical to the timely identification, classification and
resolution of problem credits.
Nonperforming Assets
Nonperforming assets include nonperforming loans (loans in a nonaccrual
status, loans that have been restructured in a troubled debt restructuring, and
loans past due 90 days or more and still accruing interest) and assets which
have been foreclosed or repossessed. Foreclosed assets typically represent
residential or commercial properties, while repossessed property is primarily
manufactured homes abandoned by their owners or repossessed by the Company.
Total nonperforming assets were $19.8 million at June 30, 2002 and
represented 0.79% of total assets at June 30, 2002, up slightly from 0.77% at
March 31, 2002. Nonperforming loans at June 30, 2002 increased $760 thousand
from March 31, 2002. This increase is primarily a function of increases of
commercial real estate and financed insurance premium nonaccruals of $1.2
million and $335 thousand, respectively, offset by a decrease of $715 thousand
in manufactured housing loan nonaccruals. Financed insurance premium nonaccruals
did not increase during the quarter ended June 30, 2002 to the same extent as in
the same period of the prior year due to the lower level of loans of this type
originated during the current year.
A $179 thousand reduction in foreclosed and repossessed property was made
up of a $201 thousand reduction in repossessed property, offset partially by an
increase of $47 thousand in foreclosed residential properties.
Allowance and Provision For Loan Losses
The allowance for loan losses at June 30, 2002 was $37.4 million, up from
$36.6 million at March 31, 2002. The allowance as a percentage of nonperforming
loans decreased from 203.5% at March 31, 2002 to 199.5% at June 30, 2002. The
adequacy of the allowance for loan losses is evaluated quarterly by management
based upon a review of significant loans, with particular emphasis on
nonperforming and delinquent loans that management believes warrant special
attention, as well as an analysis of the higher risk elements of the Company's
loan portfolio. Net charge-offs for the three months ended June 30, 2002 were
$702 thousand, up from $407 thousand for the same period in 2001.
As a result of management's analysis of the risk characteristics of the
loan portfolio, as well as the trends and levels of nonperforming and other
delinquent loans and general economic uncertainty, a provision for loan losses
of $1.5 million and $1.4 million for the three months ended June 30, 2002 and
2001, respectively, was recorded. The provision as a percentage of average loans
declined from 0.41% for the three months ended June 30, 2001 to 0.32% in 2002.
The decline is primarily a result of the increase in average balances of loans
outstanding from $1.4 billion for the three months ended June 30, 2001 to $1.9
billion for the three months ended June 30, 2002, primarily in residential real
estate loans. 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,
nonperforming loan balances and non-portfolio growth are the primary factors
which are considered in
12
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
determining the level of the Company's provision for loan losses. See Table E,
"Non-Performing Assets" and Table F, "Loan Loss Experience".
Market Risk
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk, do not arise in the normal course of the Company's
business activities.
Interest rate risk is defined as an exposure to a movement in interest
rates that could have an adverse effect on the Company's net interest income.
Net interest income is susceptible to interest rate risk to the degree that
interest-bearing liabilities mature or reprice on a different basis than earning
assets. When interest-bearing liabilities mature or reprice more quickly than
earning assets in a given period, a significant increase in market rates of
interest could adversely affect net interest income. Similarly, when earning
assets mature or reprice more quickly than interest-bearing liabilities, falling
interest rates could result in a decrease in net interest income.
In an attempt to manage its exposure to changes in interest rates,
management monitors the Company's interest rate risk. Management's
asset/liability committee meets monthly to review the Company's interest rate
risk position and profitability, and to recommend strategies for consideration
by the Board of Directors. Management also reviews loan and deposit pricing, and
the Company's securities portfolio, formulates investment and funding
strategies, and oversees the timing and implementation of transactions to assure
attainment of the Board's objectives in the most effective manner.
Notwithstanding the Company's interest rate risk management activities, the
potential for changing interest rates is an uncertainty that can have an adverse
effect on net income.
In adjusting the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margin. At times, depending on the level of general interest rates,
the relationship between long- and short-term interest rates, market conditions
and competitive factors, the Board and management may determine to increase the
Company's interest rate risk position somewhat in order to increase its net
interest margin. The Company's results of operations and net portfolio values
remain vulnerable to changes in interest rates and to fluctuations in the
difference between long- and short-term interest rates.
Interest rate risk analyses performed by the Company indicate that the
Company is asset sensitive as of June 30, 2002. As a result, rising interest
rates projected over a 12 month horizon would have a positive impact on net
interest income; conversely, falling interest rates would have a negative impact
on net interest income. Consistent with the asset/liability management
philosophy described above, the Company has taken steps to manage its interest
rate risk by attempting to match the repricing periods of its earning assets to
its interest-bearing liabilities, while still allowing for maximization of net
interest income. The Company's purchases of securities, retention or sale of
fixed rate loan products, utilization of longer term borrowings, and emphasis on
lower cost, more stable non-certificate deposit accounts are methods the Company
has utilized to manage its interest rate risk. Management continuously evaluates
various alternatives to address interest rate risk including, but not limited
to, the purchase of interest rate swaps, caps, and floors, leveraging scenarios,
and changes in asset or funding mix.
The sensitivity analysis performed by the Company does not represent a
Company forecast and should not be relied upon as being indicative of expected
operating results. The results are based upon numerous assumptions including:
the nature and timing of interest rate levels including yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits, and reinvestment/replacement of asset and liability cash
flows. While assumptions are developed based upon current economic and local
market conditions, the Company cannot make assurances as to the predicative
nature of these assumptions including how customer preferences or competitor
influences might change. Also, as market conditions vary from those assumed in
the sensitivity analysis, actual results will differ due to:
prepayment/refinancing levels likely deviating from those assumed, the varying
impact of interest rate changes on caps and floors on adjustable rate assets,
the potential effect of changing debt service levels on customers with
adjustable rate loans, depositor early withdrawals and product preference
changes, and other internal/external variables. Furthermore, the sensitivity
analysis does not reflect actions that management might take in responding to or
anticipating changes in interest rates.
13
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; sales,
maturities, principal payments, and calls of securities; new deposits; and
borrowings from the Federal Home Loan Bank of New York. The Company's cash
outflows consist of new loan originations; security purchases; deposit
withdrawals; operating expenses; and treasury stock purchases. The timing of
cash inflows and outflows is closely monitored by management although changes in
interest rates, economic conditions, and competitive forces strongly impact the
predictability of these cash flows. The Company attempts to provide stable and
flexible sources of funding through the management of its liabilities, including
core deposit products offered through its branch network, and through the use of
borrowings. Management believes that the level of the Company's liquid assets
combined with daily monitoring of cash inflows and outflows provide adequate
liquidity to fund outstanding loan commitments, meet daily withdrawal
requirements of depositors, and meet all other daily obligations of the Company.
CAPITAL RESOURCES
Consistent with its goal to operate a sound and profitable financial
organization, the Company actively seeks to maintain a "well-capitalized"
institution in accordance with regulatory standards. Total equity was $238.6
million at June 30, 2002 or 9.47% of total assets on that date. As of March 31,
2002, total equity was $230.9 million or 9.20% of total assets. Ratios of
tangible equity to tangible assets were 6.91% and 6.61% as of June 30, 2002 and
March 31, 2002, respectively. As of June 30, 2002, the Company and the Bank
exceeded all of its regulatory capital requirements and the Bank was classified
as a well-capitalized institution.
OTHER OPERATING INCOME AND EXPENSES
Total other operating income was $3.5 million for the three months ended
June 30, 2002, up from the $2.6 million earned for the same period in 2001.
Other operating income is composed primarily of service charges on deposit
accounts, insurance commissions, trust and investment services income, and other
income. Income from service charges on deposit accounts increased from $1.0
million in 2001 to $1.5 million in 2002, primarily as a result of the Ambanc
Acquisition and its resultant increase in deposit accounts. Income from
insurance commissions from the Company's insurance agency subsidiary (Bostwick)
increased $373 thousand to $1.1 million for the quarter ended June 30, 2002 from
the $759 thousand earned for the same period in 2001. Income from trust and
investment services was $123 thousand for the quarter ended June 30, 2002, up
$16 thousand from 2001. These increases can be attributed to the expansion of
the Company's market area and customer base. Other income was $728 thousand for
the three months ended June 30, 2002, as compared to $539 thousand for the same
period in 2001. This increase is primarily the result of earnings from the
Company's investment in Homestead Funding, a mortgage banking company, as well
as higher broker fees realized from the Company's own mortgage brokerage
subsidiary.
Total other operating expenses were $15.3 million for the three months
ended June 30, 2002, up $3.6 million from the same period in 2001. This increase
was due to higher expenses in compensation and benefits, occupancy, equipment,
and legal and other professional fees, partially offset by a reduction in
goodwill and other intangibles amortization.
Compensation and benefits increased $2.5 million to $7.8 million for the
three months ended June 30, 2002 from $5.3 million in 2001. This increase is
substantially the result of the Ambanc Acquisition with the addition of 14
branches in March 2002. In addition, expenses relating to the Company's ESOP
increased $187 thousand from the same period in 2001 due to the increase in the
Company's stock price. Management believes that compensation and benefits may
fluctuate in future periods, as costs related to the Company's ESOP are
dependent on the Company's average stock price.
Occupancy expense for the three months ended June 30, 2002 was $1.4
million, up $480 thousand from the $910 thousand for the same period in the
prior year. Equipment expenses for the three months ended June 30, 2002 were
$2.1 million, up from $1.1 million in 2001. These expenses were higher primarily
due to the growth in the Company's branch network resulting from the Ambanc
Acquisition.
14
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Legal and other professional fees increased from $271 thousand during the
three months ended June 30, 2001 to $490 thousand during the same period in
2002. The increase can be attributed to the growth of the Company, as well as
consultants utilized by the Company to assist in certain technology initiatives.
Goodwill amortization declined $699 thousand as a result of the Company's
adoption of SFAS No. 142 on April 1, 2002 as discussed previously. Intangible
assets amortization increased from $32 thousand to $332 thousand as a result of
the recognition of the core deposit intangible from the Ambanc Acquisition.
TAX EXPENSE
Tax expense increased from $3.3 million for the three months ended June
30, 2001 to $4.3 million for the comparable period in 2002. The increase is
primarily the result of higher income before tax expense. The increase is
partially offset by a reduction in the Company's effective tax rate as a result
of the adoption of SFAS No. 142, which requires that the Company's goodwill no
longer be amortized but instead be evaluated annually for impairment. The
Company's goodwill is almost entirely nondeductible.
IMPACT OF INFLATION AND CHANGING PRICES
The Company's consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States of America
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.
FORWARD-LOOKING STATEMENTS
When used in this filing or future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "will likely
result", "are expected to", "should continue", "is anticipated", "estimate",
"project", "believe", or similar expressions are intended to identify
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. In addition, certain disclosures and information
customarily provided by financial institutions are inherently based upon
predictions of future events and circumstances. Furthermore, from time to time,
the Company may publish other forward-looking statements relating to such
matters as anticipated financial performance, business prospects, and similar
matters.
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements. In order to comply with the terms of the
safe harbor, the Company notes that a variety of factors could cause the
Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. Some of the risks and uncertainties that may affect
the operations, performance, development and results of the Company's business,
the interest rate sensitivity of its assets and liabilities, and the adequacy of
its allowance for loan losses, include but are not limited to the following:
a. Deterioration in local, regional, national or global economic
conditions which could result, among other things, in an increase in
loan delinquencies, a decrease in property values, or a change in
the housing turnover rate;
b. Changes in market interest rates or changes in the speed at which
market interest rates change;
c. Changes in laws and regulations affecting the financial services
industry;
d. Changes in competition;
15
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
e. Changes in consumer preferences; and
f. The Company's ability to successfully integrate acquired companies.
The Company wishes to caution readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including those described above, could affect the
Company's financial performance and could cause the Company's actual results or
circumstances for future periods to differ materially from those anticipated or
projected.
The Company does not undertake, and specifically disclaims any
obligations, to publicly release the result of any revisions that may be made to
any forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.
16
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table A. Financial Highlights
At or At or
For the Three Months Ended For the Years Ended
June 30, March 31,
-------------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Financial Ratios
- ----------------
Basic earnings per share $ 0.46 $ 0.34 $ 1.42 $ 0.86
Diluted earnings per share 0.45 0.33 1.38 0.85
Return on average assets(1) 1.04% 1.11% 1.03% 1.00%
Return on average equity(1) 10.92 8.62 8.68 5.68
Return on average tangible equity(1) 15.47 10.24 10.62 6.01
Dividend payout ratio 22.14 21.13 25.38 26.66
Net interest rate spread 3.78 3.93 3.74 3.68
Net interest margin(1) 4.14 4.61 4.29 4.58
Efficiency ratio(2) 55.00 52.10 51.81 51.94
Expense ratio(1)(2) 2.43 2.57 2.40 2.44
At Period Ended
------------------------------------
March 31,
June 30, ----------------------
2002 2002 2001
-------- -------- --------
Share Information
- -----------------
Book value per share $ 17.22 $ 16.66 $ 15.78
Book value per share, including unallocated
ESOP shares and unvested RRP shares 15.70 15.20 14.15
Tangible book value per share 12.21 11.64 14.95
Tangible book value per share, including unallocated
ESOP shares and unvested RRP shares 11.14 10.61 13.40
Closing market price 26.99 24.13 13.94
Capital Ratios
- --------------
Equity to total assets 9.47% 9.20% 17.88%
Tangible equity to tangible assets 6.91 6.61 17.10
Asset Quality Ratios
- --------------------
Nonperforming loans to total loans 1.00 0.94 0.97
Nonperforming assets to total assets 0.79 0.77 0.77
Allowance for loan losses to:
Loans 1.99 1.92 2.53
Nonperforming loans 199.51 203.51 259.96
(1) Annualized for the three month periods.
(2) Ratio does not include other real estate owned and repossessed property
expenses, net securities transactions, goodwill amortization and
intangible assets amortization. The year ended March 31, 2001 ratio
excludes pre-tax nonrecurring merger expenses and other nonrecurring
expenses.
17
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table B. Average Balances, Interest, and Yields
Three Months Ended June 30,
-------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
Average Average Average Average
(Dollars in thousands) Balance Interest Yield/Rate Balance Interest Yield/Rate
----------------------------------- -----------------------------------
Earning assets
Federal funds sold $ 194,004 $ 858 1.77% $ 10,268 $ 116 4.53%
Loans held for sale -- -- -- 5,299 89 6.74
Securities available for sale (1) 216,153 3,020 5.60 200,920 3,324 6.64
Federal Home Loan Bank of New York stock 22,870 236 4.14 16,767 267 6.39
Loans (2) 1,890,565 35,537 7.54 1,378,597 28,425 8.27
----------------------------------- -----------------------------------
Total earning assets 2,323,592 39,651 6.84% 1,611,851 32,221 8.02%
-------------------- --------------------
Cash and due from banks 41,965 15,311
Allowance for loan losses (36,615) (27,285)
Other nonearning assets 164,088 103,375
----------- -----------
Total assets $ 2,493,030 $ 1,703,252
=========== ===========
Interest-bearing liabilities
Savings accounts $ 515,131 $ 2,657 2.07% $ 294,704 $ 1,891 2.57%
N.O.W. and money market accounts 293,279 1,039 1.42 173,521 966 2.23
Time deposit accounts 780,551 6,767 3.48 581,542 7,330 5.06
Mortgagors' escrow deposits 13,169 76 2.31 11,637 71 2.45
Securities sold under agreements to repurchase 19,206 89 1.86 18,392 177 3.86
Short-term FHLB advances -- -- -- 48,058 578 4.82
Long-term FHLB borrowings 435,127 5,048 4.65 214,867 2,688 5.02
----------------------------------- -----------------------------------
Total interest-bearing liabilities 2,056,463 15,676 3.06% 1,342,721 13,701 4.09%
-------------------- --------------------
Noninterest-bearing deposits 172,944 103,135
Other noninterest-bearing liabilities 27,121 38,498
Shareholders' equity 236,502 218,898
----------- -----------
Total liabilities and shareholders' equity $ 2,493,030 $ 1,703,252
=========== ===========
Net interest income $23,975 $18,520
======= =======
Net interest spread 3.78% 3.93%
===== =====
Net interest margin 4.14% 4.61%
===== =====
(1) Average balances include fair value adjustment.
(2) Average balances include nonaccrual loans.
18
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table C. Volume and Rate Analysis
Three Months Ended
June 30,
----------------------------------
2002 vs 2001
----------------------------------
Due To Due To Net
(In thousands) Volume Rate Change
----------------------------------
Interest income
Federal funds sold $ 854 $ (112) $ 742
Loans held for sale (89) -- (89)
Securities available for sale 239 (543) (304)
Federal Home Loan Bank of New York stock 80 (111) (31)
Loans 9,803 (2,691) 7,112
----------------------------------
Total interest income 10,887 (3,457) 7,430
----------------------------------
Interest expense
Savings accounts $ 1,195 $ (429) $ 766
N.O.W. and money market accounts 508 (435) 73
Time deposit accounts 2,099 (2,662) (563)
Mortgagors' escrow deposits 9 (4) 5
Securities sold under agreements to repurchase 8 (96) (88)
Short-term FHLB advances (578) -- (578)
Long-term FHLB borrowings 2,569 (209) 2,360
----------------------------------
Total interest expense 5,810 (3,835) 1,975
----------------------------------
Net interest income $ 5,077 $ 378 $ 5,455
==================================
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.
19
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table D. Loan Portfolio Analysis
June 30, March 31,
--------------------- -------------------------------------------
(Dollars in thousands) 2002 2002 2001
--------------------- -------------------- -----------------
Amount % Amount % Amount %
----------- ----- ----------- ----- --------- -----
Loans secured by real estate:
Residential $ 1,179,000 62.6% $ 1,203,866 63.2% $ 515,584 58.4%
Commercial 433,588 23.0 429,692 22.6 167,344 19.0
Construction 17,962 1.0 18,378 1.0 9,306 1.1
----------- ----- ----------- ----- --------- -----
Total loans secured by real estate $ 1,630,550 86.6% $ 1,651,936 86.8% $ 692,234 78.5%
----------- ----- ----------- ----- --------- -----
Other loans:
Manufactured housing $ 66,423 3.5% $ 67,660 3.6% $ 75,287 8.6%
Commercial 107,145 5.7 109,083 5.7 60,311 6.9
Financed insurance premiums 35,150 2.0 30,727 1.6 38,216 4.3
Consumer 36,184 1.9 38,416 2.0 17,943 2.0
----------- ----- ----------- ----- --------- -----
Total other loans $ 244,902 13.1% $ 245,886 12.9% $ 191,757 21.8%
----------- ----- ----------- ----- --------- -----
Unearned discount, net deferred loan
origination fees and costs, and
purchase accounting adjustments 5,846 0.3 6,382 0.3 (2,579) (0.3)
----------- ----- ----------- ----- --------- -----
Total loans $ 1,881,298 100.0% $ 1,904,204 100.0% $ 881,412 100.0%
===== ===== =====
Allowance for loan losses (37,370) (36,572) (22,325)
----------- ----------- ---------
Net loans $ 1,843,928 $ 1,867,632 $ 859,087
=========== =========== =========
20
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table E. Nonperforming Assets
March 31,
June 30, --------------------
(In thousands) 2002 2002 2001
-------- ------- -------
Nonaccruing loans
Residential real estate $ 7,330 $ 7,431 $ 2,050
Commercial real estate 5,112 3,905 849
Commercial loans 808 751 --
Manufactured housing 2,165 2,880 3,169
Financed insurance premiums 2,780 2,445 2,439
Consumer 536 559 81
------- ------- -------
Total nonaccruing loans $18,731 $17,971 $ 8,588
======= ======= =======
Foreclosed and repossessed property
Residential real estate $ 143 $ 96 $ 161
Commercial real estate 110 135 --
Repossessed property 820 1,021 615
------- ------- -------
Total foreclosed and repossessed property $ 1,073 $ 1,252 $ 776
======= ======= =======
Total nonperforming assets $19,804 $19,223 $ 9,364
======= ======= =======
Allowance for loan losses $37,370 $36,572 $22,325
======= ======= =======
Allowance to nonperforming loans 199.51% 203.51% 259.96%
Nonperforming assets to total assets 0.79% 0.77% 0.77%
Nonperforming loans to total loans 1.00% 0.94% 0.97%
21
Hudson River Bancorp, Inc.
Management's Discussion and Analysis
(continued)
Table F. Loan Loss Experience
Three Months Ended Years Ended
(In thousands) June 30, March 31,
----------------------------- ---------------------------
2002 2001 2002 2001
----------- ----------- ----------- ---------
Loans outstanding (end of period) $ 1,881,298 $ 1,511,562 $ 1,904,204 $ 881,412
=========== =========== =========== =========
Average loans outstanding (period to date) $ 1,890,565 $ 1,378,597 $ 1,490,547 $ 849,283
=========== =========== =========== =========
Allowance for loan losses at beginning of period $ 36,572 $ 22,325 $ 22,325 $ 19,608
Loan charge-offs:
Residential real estate (15) (13) (457) (312)
Commercial real estate (80) -- (395) (643)
Commercial loans (272) -- (34) --
Manufactured housing (355) (368) (1,553) (1,494)
Consumer (84) (61) (383) (166)
Financed insurance premiums (112) (231) (1,566) (865)
----------- ----------- ----------- ---------
Total charge-offs (918) (673) (4,388) (3,480)
----------- ----------- ----------- ---------
Loan recoveries:
Residential real estate 35 5 198 188
Commercial real estate 5 5 85 187
Commercial loans 6 -- -- 10
Manufactured housing 34 31 113 125
Consumer 37 22 75 59
Financed insurance premiums 99 203 804 528
----------- ----------- ----------- ---------
Total recoveries 216 266 1,275 1,097
----------- ----------- ----------- ---------
Loan charge-offs, net of recoveries (702) (407) (3,113) (2,383)
Provision charged to operations 1,500 1,400 5,675 5,100
Allowance acquired -- 5,833 11,685 --
----------- ----------- ----------- ---------
Allowance for loan losses at end of period $ 37,370 $ 29,151 $ 36,572 $ 22,325
=========== =========== =========== =========
Ratio of net charge-offs to average loans
outstanding (annualized) 0.15% 0.12% 0.21% 0.28%
=========== =========== =========== =========
Provision to average loans outstanding (annualized) 0.32% 0.41% 0.38% 0.60%
=========== =========== =========== =========
Allowance to loans outstanding 1.99% 1.93% 1.92% 2.53%
=========== =========== =========== =========
22
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) Reports on Form 8-K
An amendment to the March 22, 2002 current report on Form 8-K was
filed with the SEC on May 24, 2002 for the purpose of including the
pro forma financial information required for the completion of the
Ambanc Acquisition.
23
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.
8/13/02 /s/ Carl A. Florio
- ------------------------- ----------------------------------------
Date Carl A. Florio, Director, President and
Chief Executive Officer (Principal
Executive and Operating Officer)
8/13/02 /s/ Timothy E. Blow
- ------------------------- ----------------------------------------
Date Timothy E. Blow, Chief Financial
Officer (Principal Financial and
Accounting Officer)
CERTIFICATION
Each of the undersigned hereby certifies in his capacity as an officer of Hudson
River Bancorp, Inc. (the "Company") that the Quarterly Report of the Company on
Form 10-Q for the period ended June 30, 2002 fully complies with the
requirements of Section 13(a) and Section 15(d) of the Securities Exchange Act
of 1934 and that the information contained in such report fairly presents, in
all material respects, the financial condition of the Company at the end of such
period and the results of operations of the Company for such period.
8/13/02 /s/ Carl A. Florio
- ------------------------- ----------------------------------------
Date Carl A. Florio
Chief Executive Officer
8/13/02 /s/ Timothy E. Blow
- ------------------------- ----------------------------------------
Date Timothy E. Blow
Chief Financial Officer
24