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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended: DECEMBER 31, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________________ to __________________
Commission File Number: 0-26001
HUDSON CITY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3640393
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
West 80 Century Road
Paramus, New Jersey 07652
(Address of Principal Executive Offices) (Zip Code)
(201) 967-1900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(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 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.
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 the registrant's knowledge, in definitive proxy or information
statements or any amendment to this Form 10-K.
Yes [ ] No [X]
As of March 25, 2002, the registrant had 115,638,300 shares of common
stock, $0.01 par value, issued and 98,541,910 shares outstanding. Of such
shares outstanding, 61,288,300 shares were held by Hudson City, MHC, the
registrant's mutual holding company and 37,253,610 shares were held by the
public and directors, officers and employees of the registrant. The aggregate
market value of voting stock held by non-affiliates of the registrant as of
March 25, 2002 was $961,755,000. This figure was based on the closing price by
the Nasdaq National Market for a share of the registrant's common stock, which
was $31.50 as reported in the Wall Street Journal on March 26, 2002.
Documents Incorporated by Reference: Portions of the definitive Proxy
Statement dated April 10, 2002 in connection with the Annual Meeting of
Stockholders to be held on May 10, 2002 and any adjournment thereof and which is
expected to be filed with the Securities and Exchange Commission on or about
April 10, 2002, are incorporated by reference into Part III.
HUDSON CITY BANCORP, INC.
2001 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
----
PART I
Item 1 Business ................................................... 2
Item 2 Properties ................................................. 44
Item 3 Legal Proceedings .......................................... 44
Item 4 Submission of Matters to a Vote of Security Holders ........ 44
PART II
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters..................................................... 45
Item 6 Selected Financial Data .................................... 46
Item 7 Management's Discussion and Analysis of Financial Condition
and Results Of Operations .................................. 48
Item 7a Quantitative and Qualitative Disclosures About Market
Risk ....................................................... 70
Item 8 Financial Statements and Supplementary Data ................ 71
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................... 102
PART III
Item 10 Directors and Executive Officers of the Registrant ......... 102
Item 11 Executive Compensation ..................................... 102
Item 12 Security Ownership of Certain Beneficial Owners and
Management ................................................. 102
Item 13 Certain Relationships and Related Transactions ............. 103
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K ........................................................ 104
SIGNATURES ................................................................ 107
Page 1
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
This Annual Report on Form 10-K contains certain "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, and may be identified by the use of such words as "believe," "expect,"
"anticipate," "should," "planned," "estimated" and "potential." Examples of
forward looking statements include, but are not limited to, estimates with
respect to the financial condition, results of operations and business of Hudson
City Bancorp, Inc. that are subject to various factors which could cause actual
results to differ materially from these estimates. These factors include:
changes in general, economic and market conditions, and legislative and
regulatory conditions, or the development of an interest rate environment that
adversely affects Hudson City Bancorp's interest rate spread or other income
anticipated from operations and investments. As used in this Form 10-K, "we" and
"us" and "our" refer to Hudson City Bancorp, Inc. and its consolidated
subsidiary, Hudson City Savings Bank, depending on the context.
PART I
ITEM 1. BUSINESS.
Hudson City Bancorp is a Delaware corporation organized in 1999 and is
registered as a bank holding company with the Federal Reserve Board ("FRB").
Hudson City Bancorp serves as the holding company of its only subsidiary, Hudson
City Savings Bank. A majority of the outstanding shares of Hudson City Bancorp's
common stock are owned by Hudson City, MHC. Hudson City Bancorp's executive
offices are located at West 80 Century Road, Paramus, New Jersey 07652 and our
telephone number is (201) 967-1900.
On July 13, 1999, Hudson City Savings converted and reorganized from a New
Jersey chartered mutual savings bank into a two-tiered mutual savings bank
holding company structure and became a wholly-owned subsidiary of Hudson City
Bancorp. Hudson City Bancorp sold 54,350,000 shares of its common stock to the
public, representing 47% of the then outstanding shares, at $10.00 per share and
received net proceeds of $527.6 million. Hudson City Bancorp contributed 50% of
the net proceeds from the initial public offering ("IPO") to Hudson City
Savings. An additional 61,288,300 shares, or 53% of the then outstanding shares
of Hudson City Bancorp, were issued to Hudson City, MHC. At December 31, 2001,
as a result of stock repurchases, Hudson City, MHC owned 61.8% of Hudson City
Bancorp.
As part of our reorganization in structure, Hudson City Savings organized
Hudson City, MHC as a New Jersey chartered mutual savings bank holding company
which is registered as a bank holding company with the Federal Reserve Board.
Hudson City, MHC's principal assets are the shares of common stock of Hudson
City Bancorp it received in the reorganization, the $200,000 it received as its
initial capitalization and the cash dividends it receives on the shares of
Hudson City Bancorp common stock it owns. Hudson City, MHC does not engage in
any business activity other than its investment in a majority of the common
stock of Hudson City Bancorp and the management of any cash dividends received
from Hudson City Bancorp. Federal and state law and regulations require that as
long as Hudson City, MHC is in existence it must own a majority of Hudson City
Bancorp's common stock.
Hudson City Savings is a New Jersey chartered stock savings bank,
chartered in 1868. We are the largest savings bank by asset size headquartered
in New Jersey. Our deposits are insured by the Federal Deposit Insurance
Corporation ("FDIC"). We are examined and regulated by the Department of
Banking and Insurance of the State of New Jersey and the FDIC.
Page 2
Hudson City Savings is a community and customer-oriented retail savings
bank offering traditional deposit products, residential real estate mortgage
loans and consumer loans. In addition, Hudson City Savings purchases mortgages,
mortgage-backed securities, securities issued by the U.S. government and
agencies and other investments permitted by applicable laws and regulations.
Except for community-related investments, we have not recently originated or
invested in commercial real estate loans, loans secured by multi-family
residences or commercial/industrial business loans, although we have the legal
authority to make such loans. We retain substantially all of the loans we
originate.
Our revenues are derived principally from interest on our mortgage loans
and mortgage-backed securities and interest and dividends on our investment
securities. Our primary sources of funds are deposits, borrowings, scheduled
amortization and prepayments of loan principal and mortgage-backed securities,
maturities and calls of investment securities and funds provided by operations.
MARKET AREA
We conduct our operations out of our executive office in Paramus, Bergen
County, New Jersey, and 81 branches located in 14 counties throughout the State
of New Jersey: Atlantic, Bergen, Burlington, Camden, Essex, Gloucester, Hudson,
Middlesex, Monmouth, Morris, Ocean, Passaic, Union and Warren. We operate in
three primary markets: northern New Jersey, the New Jersey shore, and
southwestern New Jersey in the suburbs of Philadelphia. Overall, the counties in
which we operate reflect approximately 80% of the entire population of New
Jersey, providing us with access to a large base of potential customers.
Our market areas provide distinct differences in demographics and economic
characteristics. The northern New Jersey market (including Bergen, Essex,
Hudson, Middlesex, Morris, Passaic, Union and Warren Counties) represents the
greatest concentration of population, deposits and income in the State. The
combination of these counties represents more than half of the entire New Jersey
population and more than half of New Jersey households. The northern New Jersey
market also represents the greatest concentration of Hudson City Savings retail
operations - both lending and deposit gathering -- and based on its high level
of economic activity, we believe that the northern New Jersey market provides
significant opportunities for future growth. The New Jersey shore market
(including Atlantic, Monmouth and Ocean counties) represents a strong
concentration of population and income, and is an increasingly popular resort
and retirement economy -- providing healthy opportunities for deposit growth and
residential lending. The southwestern New Jersey market (including Burlington,
Camden and Gloucester counties) consists of communities adjacent to the
Philadelphia metropolitan area and represents the smallest concentration of
deposits for Hudson City Savings.
Our future growth opportunities will be influenced by the growth and
stability of the statewide and regional economies, other demographic population
trends and the competitive environment. The slower economic conditions and
periods of recession experienced during 2001 did not impact our recent loan
demand or growth opportunities, but has moderately affected our loan
delinquencies. We believe that we have developed lending products and marketing
strategies to address the diverse credit-related needs of the residents in our
market area.
Page 3
COMPETITION
We face intense competition both in making loans and attracting deposits.
New Jersey has a high concentration of financial institutions, many of which are
branches of large money center and regional banks which have resulted from the
consolidation of the banking industry in New Jersey and surrounding states. Some
of these competitors have greater resources than we do and may offer services
that we do not provide such as insurance products, trust services or investment
services. Customers who seek "one stop shopping" may be drawn to these
institutions.
Our competition for loans comes principally from commercial banks, savings
institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies and brokerage and investment banking firms. Our most
direct competition for deposits has historically come from commercial banks,
savings banks, savings and loan associations and credit unions. We face
additional competition for deposits from short-term money market funds and other
corporate and government securities funds and from brokerage firms and insurance
companies.
LENDING ACTIVITIES
Loan Portfolio Composition. Our loan portfolio primarily consists of
one-to four-family residential first mortgage loans. To a lesser degree, the
loan portfolio includes consumer and other loans, including home equity credit
lines and fixed-rate second mortgage loans. We have not originated commercial
real estate loans or loans secured by multi-family residences since the early
1980's and we do not originate construction loans. We stopped originating
commercial/industrial business loans in 1993, although we have the legal
authority to make such loans. From time-to-time, we purchase participation
interests in multi-family and commercial first mortgage loans, and commercial
loans through community-based organizations. These loans amounted to $2.5
million at December 31, 2001.
At December 31, 2001, we had total loans of $5.97 billion, of which $5.82
billion, or 97.5%, were first mortgage loans. Of residential mortgage loans
outstanding at that date, 72.2% were fixed-rate mortgage loans and 27.8% were
variable-rate, or ARM, loans. Commercial real estate and multi-family mortgage
loans outstanding at December 31, 2001 totaled $2.5 million, or 0.04% of total
loans. The remainder of our loans at December 31, 2001, amounting to $149.4
million, or 2.5% of total loans, consisted of consumer and other loans,
primarily fixed-rate second mortgage loans and home equity credit lines. We also
offer guaranteed student loans through the Student Loan Marketing Association
("SallieMae") "Loan Referral Program."
Our loans are subject to federal and state laws and regulations. The
interest rates we charge on loans are affected principally by the demand for
loans, the supply of money available for lending purposes and the interest rates
offered by our competitors. These factors are, in turn, affected by general and
local economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, legislative tax policies and governmental
budgetary matters.
Page 4
The following table presents the composition of our loan portfolio in
dollar amounts and in percentages of the total portfolio at the dates indicated.
AT DECEMBER 31,
-----------------------------------------------------------------------
2001 2000 1999
--------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to
four-family .......... $5,664,973 94.93% $4,607,891 94.56% $4,126,153 95.82%
FHA/VA ............... 151,203 2.53 112,937 2.32 66,150 1.54
Multi-family and
commercial ....... 2,548 0.04 2,380 0.05 2,131 0.05
--------- --------- --------- --------- --------- ---------
Total first
mortgage
loans ......... 5,818,724 97.50 4,723,208 96.93 4,194,434 97.41
--------- --------- --------- --------- --------- ---------
CONSUMER AND OTHER LOANS:
Fixed-rate second
mortgages ........ 115,244 1.93 118,319 2.43 82,913 1.93
Home equity credit
lines ............ 32,715 0.55 29,119 0.60 26,321 0.61
Guaranteed student ... -- -- -- -- 146 --
Other ................ 1,488 0.02 2,094 0.04 2,061 0.05
--------- --------- --------- --------- --------- ---------
Total consumer and
other loans ... 149,447 2.50 149,532 3.07 111,441 2.59
--------- --------- --------- --------- --------- ---------
Total loans ... 5,968,171 100.00% 4,872,740 100.00% 4,305,875 100.00%
========= ========= =========
LESS:
Deferred loan fees ... 12,060 9,555 10,631
Allowance for loan
losses ........... 24,010 22,144 20,010
------ ------ ------
Net loans ........ $5,932,101 $4,841,041 $4,275,234
=========== ========== ==========
AT DECEMBER 31,
-----------------------------------------------
1998 1997
--------------------- ---------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
FIRST MORTGAGE LOANS:
One- to
four-family .......... $3,516,947 96.10% $3,327,371 96.07%
FHA/VA ............... 52,958 1.45 45,868 1.32
Multi-family and
commercial ....... 2,911 0.08 3,553 0.10
--------- --------- --------- ---------
Total first
mortgage
loans ......... 3,572,816 97.63 3,376,792 97.49
--------- --------- --------- ---------
CONSUMER AND OTHER LOANS:
Fixed-rate second
mortgages ........ 56,118 1.53 50,198 1.45
Home equity credit
lines ............ 28,045 0.77 30,211 0.87
Guaranteed student ... 216 0.01 4,315 0.12
Other ................ 2,212 0.06 2,287 0.07
--------- --------- --------- ---------
Total consumer and
other loans ... 86,591 2.37 87,011 2.51
--------- --------- --------- ---------
Total loans ... 3,659,407 100.00% 3,463,803 100.00%
========= =======
LESS:
Deferred loan fees ... 11,146 12,076
Allowance for loan
losses ........... 17,712 15,625
------ ------
Net loans ........ $3,630,549 $3,436,102
========== ==========
Page 5
Loan Maturity. The following table presents the contractual maturity of
our loans at December 31, 2001. The table does not include the effect of
prepayments or scheduled principal amortization. Prepayments and scheduled
principal amortization on first mortgage loans totaled $1.28 billion for 2001,
$475.9 million for 2000 and $720.7 million for 1999.
AT DECEMBER 31, 2001
-----------------------------------------
FIRST MORTGAGE CONSUMER AND
LOANS OTHER LOANS TOTAL
----- ----------- -----
(IN THOUSANDS)
AMOUNTS DUE:
One year or less ......... $ 1,254 $ 953 $ 2,207
------------ ------------ ------------
After one year:
One to three years ... 6,282 8,409 14,691
Three to five years .. 17,220 15,113 32,333
Five to ten years .... 409,587 38,464 448,051
Ten to twenty years .. 950,323 86,508 1,036,831
Over twenty years .... 4,434,058 -- 4,434,058
------------ ------------ -----------
Total due after one
year ............... 5,817,470 148,494 5,965,964
------------ ------------ -----------
Total loans ....... $ 5,818,724 $ 149,447 5,968,171
============ ============
LESS:
Deferred loan fees ....... 12,060
Allowance for loan losses 24,010
------------
Net loans ......... $ 5,932,101
============
The following table presents, as of December 31, 2001, the dollar
amount of all loans due after December 31, 2002, and whether these loans have
fixed interest rates or adjustable interest rates.
DUE AFTER DECEMBER 31, 2002
-------------------------------------
FIXED ADJUSTABLE TOTAL
---------- ---------- ----------
(IN THOUSANDS)
First mortgage loans ................... $4,197,913 $1,619,557 $5,817,470
Consumer and other loans ............... 115,025 33,469 148,494
---------- ---------- ----------
Total loans due after one year $4,312,938 $1,653,026 $5,965,964
========== ========== ==========
Page 6
The following table presents our loan originations, purchases, sales
and principal payments for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
TOTAL LOANS:
Balance outstanding at beginning of period $4,872,740 $4,305,875 $3,659,407
---------- ---------- ----------
ORIGINATIONS:
First mortgage loans ..................... 1,523,192 895,074 1,268,875
Consumer and other loans ................. 64,238 73,799 59,687
---------- ---------- ----------
Total originations ................... 1,587,430 968,873 1,328,562
---------- ---------- ----------
PURCHASES:
One- to four-family first mortgage loans . 794,881 55,372 53,279
FHA/VA first mortgage loans .............. 62,356 54,931 21,528
Other first mortgage loans ............... 401 430 162
---------- ---------- ----------
Total purchases ...................... 857,638 110,733 74,969
---------- ---------- ----------
LESS:
Principal payments:
First mortgage loans ................. 1,281,989 475,905 720,671
Consumer and other loans ............. 64,323 35,447 34,468
---------- ---------- ----------
Total principal payments .......... 1,346,312 511,352 755,139
---------- ---------- ----------
Transfers to foreclosed real estate ...... 747 1,126 1,555
Loan sales ............................... 2,578 263 369
---------- ---------- ----------
Balance outstanding at end of period . $5,968,171 $4,872,740 $4,305,875
========== ========== ==========
Residential Mortgage Lending. Our primary lending emphasis is the
origination of first mortgage loans secured by one- to four-family properties
that serve as the primary or secondary residence of the owner. We do not allow
any borrower to have more than two outstanding first mortgage loans with us at
any one time. We do not offer loans secured by cooperative apartment units or
interests therein. Since the early 1980's, we have originated and purchased
substantially all of our one- to four-family first mortgage loans for retention
in our portfolio.
Late in 2000, we established a wholesale loan purchase program designed
principally to supplement our retail loan origination production, which is
currently being done solely within the state of New Jersey. An additional
benefit from the purchase of whole loans involves our desire to diversify assets
outside our local market area, thus providing a safeguard against economic
trends that might affect one particular area of the nation. Through this
program, we expect to obtain assets with a relatively low overhead cost,
minimize related servicing costs, and supplement loan demand in our local
lending areas. We have developed written standard operating guidelines relating
to the purchasing of these assets. These guidelines include the evaluation and
approval process of the various sellers, primarily large national mortgage loan
seller/servicers, from whom we choose to buy whole loans, the types of whole
loans, acceptable property locations and maximum interest rate variances. We
have also developed
Page 7
comprehensive due diligence procedures, which include substantially the same
underwriting standards employed in our own loan origination process, to be
utilized in evaluating the loan quality of the various packages.
The servicing of purchased loans are governed by the servicing
agreement entered into with each servicer. Oversight of the servicer is
maintained by us through review of all reports, remittances and non-performing
loan ratios with appropriate further action taken as required. These operating
guidelines should provide a means of evaluating and monitoring the quality of
mortgage loan purchases and the servicing abilities of the loan servicers. We
purchased first mortgage loans of $857.6 million in 2001.
Most of our loan originations are from existing or past customers,
members of our local communities or referrals from local real estate agents,
attorneys and builders. We believe that our extensive branch network is a
significant source of new loan generation. We also employ a small staff of
representatives who call on real estate professionals to disseminate information
regarding our loan programs and take applications directly from their clients.
These representatives are paid for each origination. In addition, we use the
services of licensed mortgage bankers and brokers for mortgage loan
originations.
We currently offer loans that conform to underwriting standards that
are based on standards specified by FannieMae ("conforming loans"),
non-conforming loans, and loans processed as limited documentation loans, as
described below. These loans may be fixed-rate one- to four-family mortgage
loans or adjustable-rate one- to four-family mortgage loans with maturities up
to 30 years. The non-conforming loans generally follow FannieMae guidelines
except for the loan amounts. FannieMae guidelines limit loans to $300,700; our
non-conforming loans may exceed such limits. The average size of our one- to
four-family mortgage loans originated in 2001 was approximately $298,000. The
overall average size of our one- to four-family first mortgage loans was
approximately $186,000 at December 31, 2001. We are an approved seller/servicer
for FannieMae and an approved servicer for FreddieMac. We generally hold loans
for our portfolio. However, from time to time, we have sold loans in the
secondary market. We sold $2.6 million of first mortgage loans in 2001.
Our originations of first mortgage loans amounted to $1.52 billion in
2001, $895.1 million in 2000 and $1.27 billion in 1999. In 2001 and 1999, a
significant number of our first mortgage loan originations were the result of
refinancing of our existing loans due to the relatively low interest rate levels
during those times. In 2000, with relatively higher interest rates, refinancing
of existing mortgages declined. Total refinancing of our existing first mortgage
loans were as follows:
PERCENT OF
FIRST MORTGAGE
AMOUNT LOAN ORIGINATIONS
-------------- -----------------
(IN MILLIONS)
2001........ $ 272.4 17.9%
2000........ 20.1 2.2
1999........ 212.3 16.7
In April 2001, we began to allow certain customers to modify their
existing mortgage loans with the intent of maintaining customer relationships in
periods of extensive refinancing due to a low interest rate environment. The
modification allows adjustment of the existing interest rate to the currently
offered fixed interest rate product with a similar term, for a fee, after past
payment performance is reviewed. In
Page 8
general, all other terms and conditions of the existing mortgage remain the
same. In 2001, we modified $169.5 million of existing mortgage loans.
We offer a variety of variable-rate and fixed-rate one- to four-family
mortgage loans with maximum loan-to-value ratios that depend on the type of
property and the size of loan involved. The loan-to-value ratio is the loan
amount divided by the appraised value of the property. The loan-to-value ratio
is a measure commonly used by financial institutions to determine exposure to
risk. Except for loans to low- to moderate-income home mortgage applicants,
described below, loans on owner-occupied one-to four-family homes of up to
$500,000 are subject to a maximum loan-to-value ratio of 80%. However, we make
loans in amounts up to $400,000 with a 95% loan-to-value ratio and loans in
excess of $400,000 and less than $500,000 with a 90% loan-to-value ratio if the
borrower obtains private mortgage insurance. Loan-to-value ratios of 80% or less
are also required for one- to four-family loans in excess of $500,000 and less
than $750,000. Loans in excess of $750,000 and up to $1,000,000 are subject to a
maximum 70% loan-to-value ratio. Loan-to-value ratios of 60% or less are
required for one- to four-family loans in excess of $1,000,000 and less than
$1,500,000.
We currently offer fixed-rate mortgage loans in amounts up to $1.5
million with a maximum term of 30 years secured by one- to four-family
residences. We price our interest rates on fixed rate loans to be competitive in
light of market conditions.
We currently offer a variety of ARM loans secured by one- to
four-family residential properties that initially adjust after one year, five
years or ten years. After the initial adjustment period, ARM loans adjust on an
annual basis. The ARM loans that we currently originate have a maximum 30-year
amortization period and are subject to the same loan-to-value ratios applicable
to fixed-rate mortgage loans described above. The interest rates on ARM loans
fluctuate based upon a fixed spread above the monthly average yield on United
States treasury securities, adjusted to a constant maturity of one year
("constant treasury maturity index") and generally are subject to a maximum
increase of 2% per adjustment period and a limitation on the aggregate
adjustment of 5% over the life of the loan. In the current rate environment,
where the yield curve is relatively steep, the ARM loans we offer have initial
interest rates above the fully indexed rate. The loans originated with initial
interest rates above the fully indexed rate may reprice down at their initial
interest reset date, which could adversely effect our net interest income. As of
December 31, 2001, the initial offered rate on these loans was 125 to 200 basis
points above the current fully indexed rate. We originated $152.4 million of
one- to four-family ARM loans in 2001. At December 31, 2001, 27.8% of our one-
to four-family mortgage loans consisted of ARM loans.
The retention of ARM loans in our loan portfolio helps reduce our
exposure to increases in interest rates. However, ARM loans can pose credit
risks different from the risks inherent in fixed-rate loans, primarily because
as interest rates rise, the underlying payments of the borrower may rise, which
increases the potential for default. The marketability of the underlying
property also may be adversely affected. In order to minimize risks, we evaluate
borrowers of one-year ARM loans based on their ability to repay the loans at the
higher of the initial interest rate or the fully indexed rate. All other loan
products are evaluated at the offered rate. In an effort to further reduce
interest rate risk, we have not in the past, nor do we currently, originate ARM
loans which provide for negative amortization of principal.
In addition to our full documentation loan program, we process some
loans as limited documentation loans. We have originated these loans for over 10
years. Loans eligible for limited documentation processing are ARM loans and
15-, 20- and 30-year fixed-rate loans to owner-occupied primary and second home
applicants. These loans are available in amounts up to 75% of the lower of the
appraised value or purchase price of the property. The maximum loan amount for
limited documentation
Page 9
loans is $500,000. We do not charge borrowers additional fees for limited
documentation loans. We require applicants for limited documentation loans to
complete a FreddieMac/FannieMae loan application and request income, assets and
credit history information from the borrower. Additionally, we obtain credit
reports from outside vendors on all borrowers. We also look at other information
to ascertain the credit history of the borrower. Applicants with delinquent
credit histories usually do not qualify for the limited documentation
processing, although relatively minor delinquencies which are adequately
explained will not prohibit processing as a limited documentation loan. We
reserve the right to verify income and asset information and verify such
information where we believe circumstances require verification.
Limited documentation loans involve higher risks compared to loans with
full documentation as there is a greater opportunity for borrowers to falsify
their income and ability to service their debt. We believe that the limited
documentation program has not had a material adverse effect on our asset
quality. See "-- Asset Quality." Unseasoned limited documentation loans are not
readily salable in the secondary market as whole loans. In addition, these loans
may not readily be pooled or securitized. We do not believe that an inability to
sell such loans will have a material adverse impact on our liquidity needs,
because internally generated sources of liquidity are expected to be sufficient
to meet our liquidity needs. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "-- Sources of Funds."
In addition to our standard mortgage and consumer credit products,
since 1992, we have developed mortgage programs designed to address the credit
needs of low- to moderate-income home mortgage applicants, first-time home
buyers and low- to moderate-income home improvement loan applicants. We define
low- to moderate-income applicants as borrowers residing in low- to
moderate-income census tracts or households with income not greater than 80% of
the median income in the county where the subject property is located. Our low-
to moderate-income home improvement loans are discussed under "-- Consumer
Loans." Among the features of the low- to moderate-income home mortgage and
first-time home buyer's programs are reduced rates, lower down payments, reduced
fees and closing costs, and generally less restrictive requirements for
qualification compared with our traditional one- to four-family mortgage loans.
For instance, certain of these programs currently provide for loans with up to
95% loan-to-value ratios and rates which are 50 to 75 basis points lower than
our traditional mortgage loans. In 2001, we provided $80.2 million in mortgage
loans to home buyers under these programs.
Consumer Loans. At December 31, 2001, $149.4 million, or 2.5%, of our
total loans consisted of consumer and other loans, primarily home equity credit
lines and fixed-rate second mortgage loans. Consumer loans generally have
shorter terms to maturity, which reduces our exposure to changes in interest
rates. Consumer loans also carry higher rates of interest than do one- to
four-family residential mortgage loans. In addition, we believe that offering
consumer loan products helps to expand and create stronger ties to our existing
customer base by increasing the number of customer relationships and providing
cross-marketing opportunities.
We offer fixed-rate second mortgage loans in amounts up to $200,000
secured by owner-occupied one- to four-family residences for terms of up to 20
years. At December 31, 2001 these loans totaled $115.2 million, or 1.9% of total
loans. Interest rates on fixed-rate second mortgage loans are periodically set
by our Consumer Loan Department based on market conditions. The underwriting
standards applicable to these loans generally are the same as one- to
four-family first mortgage loans, except that the combined loan-to-value ratio,
including the balance of the first mortgage, cannot exceed 80% of the appraised
value of the property.
Page 10
We also offer fixed-rate second mortgage loans to low- to
moderate-income borrowers in amounts up to $20,000. The borrower must use a
portion of the loan proceeds for home improvements or the satisfaction of an
existing obligation. The underwriting standards under this program are similar
to those for standard second mortgage loans, except that the combined maximum
loan-to-value ratio is 90%.
Our home equity credit line loans, which totaled $32.7 million, or 0.6%
of total loans at December 31, 2001, are adjustable-rate loans secured by a
second mortgage on owner-occupied one-to four-family residences located in the
State of New Jersey. Current interest rates on home equity credit lines are
based on the "prime rate" as published in the "Money Rates" section of The Wall
Street Journal (the "Index"). Interest rates on home equity credit lines are
adjusted monthly based upon changes in the Index. Minimum monthly principal
payments on currently offered home equity lines of credit are based on 1/240th
of the outstanding principal balance or $100 whichever is greater. The maximum
credit line available is $200,000. The underwriting terms and procedures
applicable to these loans are substantially the same as for our fixed-rate
second mortgage loans.
In the past, we offered commercial/industrial loans primarily for
business investment, business expansion and working capital requirements,
generally to businesses located within our market areas. We do not originate
such loans, except occasionally to community-based organizations. At December
31, 2001 we had commercial/industrial loans totaling $393,000. Other consumer
loans totaled $1.1 million at December 31, 2001 and consisted of collateralized
passbook loans, overdraft protection loans, automobile loans and unsecured
personal loans. We no longer originate student loans, but offer guaranteed
student loans through the SallieMae "Loan Referral Program."
Loan Approval Procedures and Authority. Our lending policies provide
that loans up to $500,000 can be approved by two officers of the Mortgage
Origination department, one of whom must have the title of at least Vice
President. Loans in excess of $500,000 require the approval of two officers, one
of whom must have the title of at least Vice President, as well as our Senior
Vice President-Lending, Chief Executive Officer or Chief Operating Officer. Home
equity credit lines and fixed-rate second mortgage loans in principal amounts of
$25,000 or less are approved by one of our designated loan underwriters. Home
equity loans in excess of $25,000, up to the $200,000 maximum, are approved by
an underwriter and either our Consumer Loan Officer, Senior Vice
President-Lending, Chief Executive Officer or Chief Operating Officer. A listing
of loan approvals is entered into the minutes of the Executive Committee of the
Board of Directors.
The following describes our current lending procedures. Upon receipt of
a completed loan application from a prospective borrower, we order a credit
report and, except for loans originated as limited documentation loans, we
verify certain other information. If necessary, we obtain additional financial
or credit-related information. We require an appraisal for all mortgage loans,
except for some loans made to refinance existing mortgage loans. Appraisals may
be performed by our in-house appraisal department or by licensed or certified
third-party appraisal firms. Currently most appraisals are performed by
third-party appraisers and are reviewed by our in-house appraisal department. We
require title insurance on all mortgage loans, except for home equity credit
lines and fixed-rate second mortgage loans. For these loans, we require evidence
of previous title insurance. We require borrowers to obtain hazard insurance and
we may require borrowers to obtain flood insurance prior to closing. We require
borrowers to advance funds on a monthly basis together with each payment of
principal and interest to a mortgage escrow account from which we make
disbursements for items such as real estate taxes, flood insurance and private
mortgage insurance premiums, if required.
Page 11
ASSET QUALITY
One of our key operating objectives has been and continues to be to
maintain a high level of asset quality. Through a variety of strategies,
including, but not limited to, borrower workout arrangements and aggressive
marketing of owned properties, we have been proactive in addressing problem and
non-performing assets. These strategies, as well as our concentration on one- to
four-family mortgage lending, our maintenance of sound credit standards for new
loan originations and relatively favorable real estate market conditions have
resulted in relatively low delinquency ratios. These factors have helped
strengthen our financial condition.
Delinquent Loans and Foreclosed Assets. When a borrower fails to make
required payments on a loan, we take a number of steps to induce the borrower to
cure the delinquency and restore the loan to a current status. In the case of
mortgage loans, our mortgage servicing department is responsible for collection
procedures from the 15th day up to the 90th day of delinquency. Specific
procedures include a late charge notice being sent at the time a payment is over
15 days past due. Telephone contact is attempted on approximately the 20th day
of the month to avoid a 30 day delinquency. A second written notice is sent at
the time the payment becomes 30 days past due. We send additional letters if no
contact is established by approximately the 45th day of delinquency. On the 60th
day of delinquency, we send another letter followed by continued telephone
contact. Between the 30th and the 60th day of delinquency, if telephone contact
has not been established, an independent contractor makes a physical inspection
of the property. When contact is made with the borrower at any time prior to
foreclosure, we attempt to obtain full payment or work out a repayment schedule
with the borrower in order to avoid foreclosure. It has been our experience that
most loan delinquencies are cured within 90 days and no legal action is taken.
We send foreclosure notices when a loan is 90 days delinquent and we
transfer the loan to the foreclosure/bankruptcy section for referral to legal
counsel. We commence foreclosure proceedings if the loan is not brought current
between the 90th and 120th day of delinquency unless specific limited
circumstances warrant an exception. We hold property foreclosed upon as
foreclosed real estate. We carry foreclosed real estate at the lower of fair
market value less estimated selling costs, or at cost. If a foreclosure action
is commenced and the loan is not brought current, paid in full or refinanced
before the foreclosure sale, we either sell the real property securing the loan
by a foreclosure sale, or sell the property as soon thereafter as practicable.
The collection procedures for Federal Housing Administration (FHA) and Veterans'
Administration (VA) one- to four-family mortgage loans follow the collection
guidelines outlined by those agencies.
The collection procedures for consumer and other loans include our
sending periodic late notices to a borrower once a loan is past due. We attempt
to make direct contact with a borrower once a loan becomes 30 days past due.
Supervisory personnel in our Consumer Loan Collection Department review loans 60
days or more delinquent on a regular basis. If collection activity is
unsuccessful after 90 days, we may refer the matter to our legal counsel for
further collection effort or charge-off the loan. Loans we deem to be
uncollectible are proposed for charge-off by our Collection Department.
Charge-offs of consumer loans require the approval of our Consumer Loan Officer
and our Chief Executive Officer or Chief Operating Officer.
Our policies require that management continuously monitor the status of
the loan portfolio and report to the Board of Directors on a monthly basis.
These reports include information on delinquent loans and foreclosed real
estate.
Page 12
At December 31, 2001, 2000 and 1999, loans delinquent 60 days to 89
days and 90 days or more were as follows:
2001 2000
------------------------------------------- ------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- ------------------- ------------------- -------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
------- --------- ------- --------- ------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
One- to four-family
first mortgages .......... 58 $ 7,289 72 $10,556 53 $ 5,552 89 $11,004
FHA/VA first mortgages ..... 36 2,402 55 5,007 28 1,544 36 1,941
Consumer and other loans ... -- -- 3 85 4 10 2 30
------- ------- ------- ------- ------- ------- ------- -------
Total delinquent loans
(60 days and over) ....... 94 $ 9,691 130 $15,648 85 $ 7,106 127 $12,975
======= ======= ======= ======= ======= ======= ======= =======
Delinquent loans (60 days
and over) to total loans . 0.16% 0.26% 0.15% 0.27%
1999
-----------------------------------------
60-89 DAYS 90 DAYS OR MORE
------------------ -------------------
PRINCIPAL PRINCIPAL
NO. OF BALANCE NO. OF BALANCE
LOANS OF LOANS LOANS OF LOANS
------- --------- ------- ---------
(DOLLARS IN THOUSANDS)
One- to four-family
first mortgages .......... 49 $ 5,565 99 $11,955
FHA/VA first mortgages ..... 23 732 46 2,070
Consumer and other loans ... 2 8 1 2
------- ------- ------- -------
Total delinquent loans
(60 days and over) ....... 74 $ 6,305 146 $14,027
======= ======= ======= =======
Delinquent loans (60 days
and over) to total loans . 0.15% 0.33%
Page 13
Non-performing assets, which include foreclosed real estate, net,
non-accrual loans and accruing loans delinquent 90 days or more, increased
$2.5 million, or 18.7%, to $15.9 million at December 31, 2001 from $13.4 million
at December 31, 2000 primarily due to the growth of the loan portfolio and the
slower economy during 2001. The increase in accruing loans delinquent 90 days or
more is primarily due to the increase in purchases of FHA/VA loans. The accrual
of income on FHA/VA loans is generally not discontinued as they are guaranteed
by a federal agency. Our $15.6 million in loans delinquent 90 days or more at
December 31, 2001 were comprised primarily of 127 one- to four-family first
mortgage loans (including FHA/VA first mortgage loans). At December 31, 2001,
our largest loan delinquent 90 days or more had a balance of $478,000.
The following table presents information regarding non-accrual mortgage
and consumer and other loans, accruing loans delinquent 90 days or more, and
foreclosed real estate as of the dates indicated.
AT DECEMBER 31,
-------------------------------------------------------------------
2001 2000 1999 1998 1997
------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Non-accrual first mortgage loans .......... $ 8,177 $10,422 $11,301 $13,212 $15,103
Non-accrual consumer and other loans ...... 85 30 2 4 325
Accruing loans delinquent 90 days or more . 7,386 2,523 2,724 2,123 706
------- ------- ------- ------- -------
Total non-performing loans .......... 15,648 12,975 14,027 15,339 16,134
Foreclosed real estate, net ............... 250 438 367 1,026 1,410
------- ------- ------- ------- -------
Total non-performing assets ......... $15,898 $13,413 $14,394 $16,365 $17,544
======= ======= ======= ======= =======
Non-performing loans to total loans ....... 0.26% 0.27% 0.33% 0.42% 0.47%
Non-performing assets to total assets ..... 0.14 0.14 0.17 0.21 0.24
The total amount of interest income received during the year on
non-accrual loans outstanding at December 31, 2001, 2000 and 1999 amounted to
$154,000, $179,000 and $242,000, respectively. Additional interest income
totaling $483,000, $652,000 and $625,000 on non-accrual loans would have been
recognized in 2001, 2000 and 1999, respectively, if interest on all such loans
had been recorded based upon original contract terms. We are not committed to
lend additional funds to borrowers on non-accrual status.
With the exception of first mortgage loans insured or guaranteed by the
FHA or VA or for which the borrower has obtained private mortgage insurance, we
stop accruing income on loans when interest or principal payments are 90 days in
arrears or earlier when the timely collectibility of such interest or principal
is doubtful. We designate loans on which we stop accruing income as non-accrual
loans and we reverse outstanding interest that we previously credited to income.
We may recognize income in the period that we collect it when the ultimate
collectibility of principal is no longer in doubt. We return a non-accrual loan
to accrual status when factors indicating doubtful collection no longer exist.
We define the population of impaired loans to be all non-accrual
commercial real estate and multi-family loans. Impaired loans are individually
assessed to determine whether a loan's carrying value is not in excess of the
fair value of the collateral or the present value of the loan's cash flows.
Smaller balance homogeneous loans that are collectively evaluated for
impairment, such as residential mortgage loans and consumer loans, are
specifically excluded from the impaired loan portfolio. We had no loans
classified as
Page 14
impaired at December 31, 2001 and 2000. In addition, at December 31, 2001 and
2000, we had no loans classified as troubled debt restructurings, as defined in
SFAS No. 15.
Foreclosed real estate consists of property we acquired through
foreclosure or deed in lieu of foreclosure. After foreclosure, foreclosed
properties held for sale are carried at the lower of fair value minus estimated
cost to sell, or at cost. A valuation allowance account is established through
provisions charged to income, which results from the ongoing periodic valuations
of foreclosed real estate properties. Fair market value is generally based on
recent appraisals.
Allowance for Loan Losses. The following table presents the activity in
our allowance for loan losses at or for the periods indicated.
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
Balance at beginning of period ... $ 22,144 $ 20,010 $ 17,712 $ 15,625 $ 13,045
-------- -------- -------- -------- --------
Provision for loan losses ........ 1,875 2,130 2,350 2,400 2,850
-------- -------- -------- -------- --------
Charge-Offs:
First mortgage loans ....... (6) (18) (64) (283) (288)
Consumer and other loans ... (14) -- (9) (53) (42)
-------- -------- -------- -------- --------
Total charge-offs ...... (20) (18) (73) (336) (330)
Recoveries ....................... 11 22 21 23 60
-------- -------- -------- -------- --------
Net (charge-offs) recoveries (9) 4 (52) (313) (270)
-------- -------- -------- -------- --------
Balance at end of period ......... $ 24,010 $ 22,144 $ 20,010 $ 17,712 $ 15,625
======== ======== ======== ======== ========
Net charge-offs to average loans . - % -% 0.001% 0.01% 0.01%
Allowance for loan losses to
total loans ................ 0.40 0.45 0.46 0.48 0.45
Allowance for loan losses to
non-performing loans ....... 153.44 170.67 142.65 115.47 96.85
The allowance for loan losses has been determined in accordance with
accounting principles generally accepted in the United States of America, under
which we are required to maintain adequate allowances for loan losses. We are
responsible for the timely and periodic determination of the amount of the
allowance required. We believe that our allowance for loan losses is adequate to
cover specifically identifiable loan losses, as well as estimated losses
inherent in our portfolio for which certain losses are probable but not
specifically identifiable.
As part of our evaluation of the adequacy of our allowance for loan
losses, each month we prepare a worksheet. This worksheet categorizes the entire
loan portfolio by certain risk characteristics such as loan type (one- to
four-family, multi-family, etc.) and payment status (i.e., current or number of
days delinquent). Loans with known potential losses are categorized separately.
We assign potential loss factors to the payment status categories on the basis
of our assessment of the potential risk inherent in each loan type. We use this
worksheet, together with loan portfolio balances and delinquency reports, to
Page 15
evaluate the adequacy of the allowance for loan losses. Other key factors we
consider in this process are current real estate market conditions, changes in
the trend of non-performing loans, the current state of the local and national
economy and loan portfolio growth.
We establish the provision for loan losses after considering the
results of our review of delinquency and charge-off trends, the allowance for
loan loss worksheet, the amount of the allowance for loan losses in relation to
the total loan balance, loan portfolio growth, accounting principles generally
accepted in the United States of America and regulatory guidance. We have
applied this process consistently and we have made minimal changes in the
estimation methods and assumptions that we have used. We maintain the allowance
for loan losses through provisions for loan losses that we charge to income. We
charge losses on loans against the allowance for loan losses when we believe the
collection of loan principal is unlikely.
Our primary lending emphasis is the origination of one- to four-family
first mortgage loans on residential properties and, to a lesser extent, second
mortgage loans on one- to four-family residential properties. As a result of our
lending emphasis, we had a loan concentration in residential first mortgage
loans at December 31, 2001, the majority of which are secured by real property
located in New Jersey. Of residential first mortgage loans outstanding at
December 31, 2001, 27.8% or $1.62 billion were adjustable-rate mortgages. The
ability of borrowers to make payments on their adjustable-rate mortgages may
decrease if interest rates rise.
Based on the composition of our loan portfolio and the growth in our
loan portfolio over the past five years, we believe the primary risks inherent
in our portfolio are possible increases in interest rates, a possible decline in
the economy, generally, and a possible decline in real estate market values. Any
one or a combination of these events may adversely affect our loan portfolio
resulting in increased delinquencies and loan losses. Accordingly, we have
maintained our provision for loan losses at the current level to primarily
address the actual growth in our loan portfolio. We consider it important to
maintain the ratio of our allowance for loan losses to total loans within an
acceptable range. At December 31, 2001, the allowance for loan losses as a
percentage of total loans was 0.40% compared with 0.45% at December 31, 1997.
Because of the primary emphasis of our lending practices and the current market
conditions, we consider 0.40% to be within an acceptable range. Furthermore, the
increase in the allowance for loan losses each year from 1997 to 2001 reflected
the continued growth in the loan portfolio, the relatively low levels of loan
charge-offs, the stability in the economy during those years and the resulting
stability in our overall loan quality.
Although we believe that we have established and maintained the
allowance for loan losses at adequate levels, future additions may be necessary
if economic and other conditions in the future differ substantially from the
current operating environment. Although management uses the best information
available, the level of the allowance for loan losses remains an estimate which
is subject to significant judgement and short-term change.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Comparison of Operating Results for the Years Ended
December 31, 2001 and 2000-- Provision for Loan Losses."
Page 16
The following table presents our allocation of the allowance for loan
losses by loan category and the percentage of loans in each category to total
loans at December 31, 2001, 2000, 1999, 1998, and 1997.
AT DECEMBER 31,
----------------------------------------------------
2001 2000
------------------------- ------------------------
PERCENTAGE PERCENTAGE
OF LOANS IN OF LOANS IN
CATEGORY CATEGORY
TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS
------- ------ ------- ------
(DOLLARS IN THOUSANDS)
First mortgage loans:
One- to four-family
conventional ..... $18,114 94.93% $13,628 94.56%
Other first mortgages 28 2.57 24 2.37
------ ------ ------- -------
Total first
mortgage loans ... 18,142 97.50 13,652 96.93
Consumer and other loans . 1,247 2.50 1,233 3.07
Unallocated .............. 4,621 -- 7,259 --
------- ------ ------- ------
Total allowance for
loan losses ..... $24,010 100.00% $22,144 100.00%
======= ====== ======= ======
AT DECEMBER 31,
------------------------------------------------- -----------------------
1999 1998 1997
------------------------- --------------------- -----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
OF LOANS IN OF LOANS IN OF LOANS IN
CATEGORY CATEGORY CATEGORY
TO TOTAL TO TOTAL TO TOTAL
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
------- ------ ------- ------ ------- --------
(DOLLARS IN THOUSANDS)
First mortgage loans:
One- to four-family
conventional ..... $12,340 95.82% $11,168 96.10% $9,409 96.07%
Other first mortgages 21 1.59 29 1.53 48 1.42
------- ------ ------ ----- ------ -----
Total first
mortgage
loans ......... 12,361 97.41 11,197 97.63 9,457 97.49
Consumer and other loans . 957 2.59 656 2.37 662 2.51
Unallocated .............. 6,692 -- 5,859 -- 5,506 --
------- ------ ------- ------ ------- ------
Total allowance for
loan losses ..... $20,010 100.00% $17,712 100.00% $15,625 100.00%
======= ====== ======= ====== ======= ======
Page 17
INVESTMENT ACTIVITIES
Investment Securities. The Board of Directors reviews and approves our
investment policy on an annual basis. The Chief Executive Officer, Chief
Operating Officer and Investment Officer, as authorized by the Board of
Directors, implement this policy. Management reports securities transactions to
the Executive Committee of the Board of Directors twice a month. The Board of
Directors reviews our investment activity on a monthly basis.
Our investment policy is designed primarily to manage the interest rate
sensitivity of our assets and liabilities, to generate a favorable return
without incurring undue interest rate and credit risk, to complement our lending
activities and to provide and maintain liquidity within established guidelines.
In establishing our investment strategies, we consider our interest rate
sensitivity position, the types of securities to be held, liquidity and other
factors. New Jersey chartered savings banks have authority to invest in various
types of assets, including U.S. Treasury obligations, securities of various
federal agencies, mortgage-backed securities, certain time deposits of insured
banks and savings institutions, certain bankers' acceptances, repurchase
agreements, loans of federal funds, and, subject to certain limits, corporate
debt and equity securities, commercial paper and mutual funds.
Our investment policy currently does not authorize participation in
hedging programs, options or futures transactions or interest rate swaps and
also prohibits the purchase of non-investment grade bonds. In the future we may
amend our policy to allow us to engage in hedging transactions. Our investment
policy also provides that we will not engage in any practice that the FFIEC
considers to be an unsuitable investment practice. In addition, the policy
provides that we shall attempt to maintain primary liquidity, which consists of
investments in cash, cash in banks, money market investments, securities with
remaining maturities of less than five years and GNMA mortgage-backed securities
classified as available for sale, in an amount equal to 4% of total deposits and
short-term borrowings. At December 31, 2001, our primary liquidity ratio was
8.5%. For information regarding the carrying values, yields and maturities of
our investment securities and mortgage-backed securities, see "-- Carrying
Values, Yields and Maturities."
We classify securities as held to maturity or available for sale at the
date of purchase. Held to maturity securities are reported at cost, adjusted for
amortization of premium and accretion of discount. Available for sale securities
are reported at fair market value. We classify obligations of the U.S.
government and federal agencies, corporate bonds and equity securities as
available for sale. We classify municipal bonds as held to maturity. We have
both the ability and positive intent to hold these investments to maturity. We
currently have no securities classified as trading.
Mortgage-backed Securities. All of our mortgage-backed securities are
directly or indirectly insured or guaranteed by GNMA, FannieMae or FreddieMac.
We classify mortgage-backed securities as held to maturity or available for sale
at the date of purchase based on our assessment of our internal liquidity
requirements. Held to maturity mortgage-backed securities are reported at cost,
adjusted for amortization of premium and accretion of discount. We have both the
ability and positive intent to hold these investments to maturity. Available for
sale mortgage-backed securities are reported at fair market value. We currently
have no mortgage-backed securities classified as trading.
At December 31, 2001, mortgage-backed securities classified as held to
maturity totaled $4.48 billion, or 39.2% of total assets, while $530.7 million,
or 4.6% of total assets, were classified as available for sale. At December 31,
2001, the mortgage-backed securities portfolio had a weighted average rate of
6.40% and a market value of approximately $5.06 billion. Of the mortgage-backed
securities we held at December 31, 2001, $2.88 billion, or 57.4% of total
mortgage-backed securities, had fixed rates and $2.13
Page 18
billion, or 42.6% of total mortgage-backed securities, had adjustable-rates.
Mortgage-backed securities at December 31, 2001 included real estate mortgage
investment conduits ("REMICs"), which are securities derived by reallocating
cash flows from mortgage pass-through securities or from pools of mortgage loans
held by a trust. REMICs are a form of, and are often referred to as,
collateralized mortgage obligations ("CMOs"). The volume of our mortgage-backed
security purchases increased during 2001, compared to 2000, due to the lower
interest rate environment which caused an increase in prepayment activity.
Of the mortgage-backed securities purchased in 2001, $2.17 billion were
REMICs. The REMIC purchases in 2001 had fixed interest rates and generally had
shorter average lives compared with alternate mortgage-backed security
investments available at the time of purchase. Our REMICs have fixed coupon
rates ranging from 6.00% to 6.50% and a weighted average rate of 6.36% at
December 31, 2001. At December 31, 2001, REMICs totaled $1.99 billion, which
constituted 39.8% of the mortgage-backed securities portfolio. Our REMICs had an
expected average life of 4.27 years at December 31, 2001. Purchases of
mortgage-backed securities may decline in the future to offset any significant
increase in demand for one- to four-family mortgage loans. We did not sell any
of our mortgage-backed securities during 2001.
Mortgage-backed securities generally yield less than the loans that
underlie such securities because of the cost of payment guarantees or credit
enhancements that reduce credit risk. However, mortgage-backed securities are
more liquid than individual mortgage loans and are used to collateralize certain
borrowings. In general, mortgage-backed securities issued or guaranteed by GNMA,
FannieMae and FreddieMac are weighted at no more than 20% for risk-based capital
purposes, compared to the 50% risk weighting assigned to most non-securitized
residential mortgage loans.
While mortgage-backed securities carry a reduced credit risk as
compared to whole loans, they remain subject to the risk of a fluctuating
interest rate environment. Along with other factors, such as the geographic
distribution of the underlying mortgage loans, changes in interest rates may
alter the prepayment rate of those mortgage loans and affect both the prepayment
rates and value of mortgage-backed securities.
Page 19
The following table presents our investment securities activities for
the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
INVESTMENT SECURITIES:
Carrying value at beginning of period .......... $ 878,148 $ 813,437 $ 786,424
--------- --------- ---------
Purchases:
Held to maturity ..................... -- 252 --
Available for sale ................... 130,430 25,000 913,976
Equity securities..................... 10,000 -- --
Calls:
Held to maturity ..................... (40) (150) (15)
Available for sale ................... (855,614) (211) (433,141)
Maturities:
Available for sale ................... -- (325) (300,013)
Sales:
Available for sale ................... -- -- (109,774)
Premium amortization and discount accretion, net -- 39 2,167
Change in unrealized gain or loss .............. 5,944 40,106 (46,187)
--------- --------- ---------
Net (decrease) increase in investment securities (709,280) 64,711 27,013
--------- --------- ---------
Carrying value at end of period ................ $ 168,868 $ 878,148 $ 813,437
========= ========= =========
The following table presents our mortgage-backed securities activity
for the periods indicated.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS)
MORTGAGE-BACKED SECURITIES:
Carrying value at beginning of period .......... $ 3,262,035 $ 3,097,072 $ 3,070,931
----------- ----------- -----------
Purchases:
Held to maturity ...................... 2,804,215 862,546 1,094,073
Available for sale .................... 560,228 -- --
Principal payments:
Held to maturity ...................... (1,584,372) (693,241) (1,059,577)
Available for sale .................... (35,996) -- --
Premium amortization and discount accretion, net (3,797) (4,342) (8,355)
Change in unrealized gain or loss .............. 6,865 -- --
---------- --------- -----------
Net increase in mortgage-backed securities ..... 1,747,143 164,963 26,141
----------- ----------- -----------
Carrying value at end of period ................ $ 5,009,178 $ 3,262,035 $ 3,097,072
=========== =========== ===========
Page 20
The following table presents the composition of our money market
investments, investment securities and mortgage-backed securities portfolios in
dollar amount and in percentage of each investment type at the dates indicated.
It also presents the coupon type for the mortgage-backed securities portfolio.
AT DECEMBER 31,
------------------------------- ------------------------------- -------------------------------
2001 2000 1999
------------------------------- ------------------------------- -------------------------------
PERCENT PERCENT PERCENT
CARRYING OF FAIR CARRYING OF FAIR CARRYING OF FAIR
VALUE TOTAL(1) VALUE VALUE TOTAL(1) VALUE VALUE TOTAL(1) VALUE
---------- ------ ---------- ---------- ------ ---------- ---------- ------ ----------
(DOLLARS IN THOUSANDS)
MONEY MARKET INVESTMENTS:
Federal funds sold ..... $ 17,600 100.00% $ 17,600 $ 121,700 100.00% $ 121,700 $ 116,600 100.00% $ 116,600
========== ====== ========== ========== ====== ========== ========== ====== ==========
INVESTMENT SECURITIES:
HELD TO MATURITY:
Municipal bonds ........ $ 1,441 0.85% $ 1,474 $ 1,481 0.17% $ 1,496 $ 1,379 0.17% $ 1,348
---------- ------ ---------- ---------- ------ ---------- ---------- ------ ----------
AVAILABLE FOR SALE:
United States government
and agencies ......... 156,408 92.62 156,408 875,202 99.66 875,202 810,078 99.59 810,078
Corporate bonds ........ 1,044 0.62 1,044 1,465 0.17 1,465 1,980 0.24 1,980
Equity securities ...... 9,975 5.91 9,975 -- -- -- -- -- --
---------- ------ ---------- ---------- ------ ---------- ---------- ------ ----------
Total available for
sale ................... 167,427 99.15 167,427 876,667 99.83 876,667 812,058 99.83 812,058
---------- ------ ---------- ---------- ------ ---------- ---------- ------ ----------
Total investment
securities ............. $ 168,868 100.00% $ 168,901 $ 878,148 100.00% $ 878,163 $ 813,437 100.00% $ 813,406
========== ====== ========== ========== ====== ========== ========== ====== ==========
MORTGAGE-BACKED
SECURITIES
BY ISSUER:
HELD TO MATURITY:
GNMA pass-through
certificates ......... $1,704,584 34.03% $1,730,296 $2,457,168 75.32% $2,474,259 $2,208,007 71.30% $2,216,980
FNMA pass-through
certificates ......... 642,457 12.83 656,063 635,691 19.49 641,715 673,328 21.74 654,915
FHLMC pass-through
certificates ......... 139,149 2.78 142,856 161,684 4.96 164,099 189,258 6.11 187,580
FHLMC, FNMA and
GNMA REMICs .......... 1,992,298 39.77 2,001,477 7,492 0.23 7,431 26,479 0.85 26,121
---------- ------ ---------- ---------- ------ ---------- ---------- ------ ----------
Total held to
maturity ............. 4,478,488 89.41 4,530,692 3,262,035 100.00 3,287,504 3,097,072 100.00 3,085,596
AVAILABLE FOR SALE:
GNMA pass-through
certificates ......... 530,690 10.59 530,690 -- -- -- -- -- --
---------- ------ ---------- ---------- ------ ---------- ---------- ------ ----------
Total mortgage-backed
securities ............. $5,009,178 100.00% $5,061,382 $3,262,035 100.00% $3,287,504 $3,097,072 100.00% $3,085,596
========== ====== ========== ========== ====== ========== ========== ====== ==========
BY COUPON TYPE:
Adjustable-rate ........ $2,131,492 42.55% $2,151,018 $2,391,200 73.30% $2,401,842 $2,276,037 73.49% $2,281,060
Fixed-rate ............. 2,877,686 57.45 2,910,364 870,835 26.70 885,662 821,035 26.51 804,536
---------- ------ ---------- ---------- ------ ---------- ---------- ------ ----------
Total mortgage-backed
securities ........... $5,009,178 100.00% $5,061,382 $3,262,035 100.00% $3,287,504 $3,097,072 100.00% $3,085,596
========== ====== ========== ========== ====== ========== ========== ====== ==========
TOTAL INVESTMENT PORTFOLIO . $5,195,646 $5,247,883 $4,261,883 $4,287,367 $4,027,109 $4,015,602
========== ========== ========== ========== ========== ==========
- ----------------
(1) Based on carrying value for each investment type.
Page 21
Carrying Values, Rates and Maturities. The table below presents
information regarding the carrying values, weighted-average rates and
contractual maturities of our money market investments, investment securities
and mortgage-backed securities at December 31, 2001. Mortgage-backed securities
are presented by issuer and by coupon type. Equity securities have been excluded
from this table.
AT DECEMBER 31, 2001
---------------------------------------------------------------------------------
MORE THAN ONE YEAR MORE THAN FIVE YEARS
ONE YEAR OR LESS TO FIVE YEARS TO TEN YEARS
----------------------- ----------------------- ------------------------
WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE VALUE RATE
------- ---- ------- ---- -------- ----
(Dollars in thousands)
MONEY MARKET
INVESTMENTS:
Federal funds
sold ................ $17,600 1.50% $ -- - % $ -- - %
======= ======= ========
INVESTMENT SECURITIES:
HELD TO MATURITY:
Municipal bonds ....... $ -- -- $ 265 5.94 $ 924 6.22
------- ------- --------
AVAILABLE FOR SALE:
United States
government agencies ... -- -- 25,070 7.21 131,338 5.92
Corporate bonds ....... 653 7.41 266 4.16 125 5.35
------- ------- --------
Total available for
sale .................. 653 7.41 25,336 7.18 131,463 5.92
------- ------- --------
Total investment
securities ............ $ 653 7.41 $25,601 7.17 $132,387 5.92
======= ======= ========
MORTGAGE-BACKED
SECURITIES
BY ISSUER:
HELD TO MATURITY:
GNMA pass-through
certificates ......... $ -- -- $ 2,550 8.05 $ 10,462 8.65
FNMA pass-through
certificates ........ -- -- 269 6.92 91,855 6.73
FHLMC pass-through
certificates ........ 32 9.79 2,987 9.41 37,566 7.27
FHLMC, FNMA and
GNMA REMIC's ....... -- -- -- -- -- --
------- ------- --------
Total held to
maturity ............ 32 9.79 5,806 8.69 139,883 7.02
AVAILABLE FOR SALE:
GNMA pass-through
certificates ........ -- -- -- -- -- --
------- ------- --------
Total mortgage-backed
securities .......... $ 32 9.79 $ 5,806 8.69 $139,883 7.02
======= ======= ========
BY COUPON TYPE:
Adjustable-rate ....... $ -- -- $ 269 6.92 $ -- --
Fixed-rate ............ 32 9.79 5,537 8.78 139,883 7.02
------- ------- --------
Total mortgage-backed
securities .......... $ 32 9.79 $ 5,806 8.69 $139,883 7.02
======= ======= ========
TOTAL INVESTMENT PORTFOLIO $18,285 1.73 $31,407 7.45 $272,270 6.49
======= ======= ========
AT DECEMBER 31, 2001
--------------------------------------------------------
MORE THAN TEN YEARS TOTAL
------------------------- ------------------------
WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE
========== ==== ========== ====
MONEY MARKET
INVESTMENTS: ( Dollars in thousands )
Federal funds
sold ................ $ -- -- % $ 17,600 1.50%
========== ==========
INVESTMENT SECURITIES:
HELD TO MATURITY:
Municipal bonds ....... $ 252 5.84 $ 1,441 6.10
---------- ----------
AVAILABLE FOR SALE:
United States
government agencies ... -- -- 156,408 6.13
Corporate bonds ....... -- -- 1,044 6.34
---------- ----------
Total available for
sale .................. -- -- 157,452 6.13
---------- ----------
Total investment
securities ............ $ 252 5.84 $ 158,893 6.13
========== ==========
MORTGAGE-BACKED
SECURITIES
BY ISSUER:
HELD TO MATURITY:
GNMA pass-through
certificates ......... $1,691,572 6.50 $1,704,584 6.52
FNMA pass-through
certificates ........ 550,333 6.95 642,457 6.92
FHLMC pass-through
certificates ........ 98,564 6.88 139,149 7.04
FHLMC, FNMA and
GNMA REMIC's ....... 1,992,298 6.36 1,992,298 6.36
---------- ----------
Total held to
maturity ............ 4,332,767 6.50 4,478,488 6.52
AVAILABLE FOR SALE:
GNMA pass-through
certificates ........ 530,690 5.33 530,690 5.33
---------- ----------
Total mortgage-backed
securities .......... $4,863,457 6.37 $5,009,178 6.40
========== ==========
BY COUPON TYPE:
Adjustable-rate ....... $2,131,223 6.16 $2,131,492 6.16
Fixed-rate ............ 2,732,234 6.54 2,877,686 6.57
---------- ----------
Total mortgage-backed
securities .......... $4,863,457 6.37 $5,009,178 6.40
========== ==========
TOTAL INVESTMENT PORTFOLIO $4,863,709 6.37 $5,185,671 6.38
========== ==========
Page 22
SOURCES OF FUNDS
General. Deposits, borrowings, scheduled amortization and prepayments of
loan principal and mortgage-backed securities, maturities and calls of
investment securities and funds provided by operations are our primary sources
of funds for use in lending, investing and for other general purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Deposits. We offer a variety of deposit accounts having a range of
interest rates and terms. We currently offer regular savings deposits
(consisting of passbook and statement savings accounts), NOW accounts, checking
accounts, money market accounts and time deposits. We also offer IRA accounts
and qualified retirement plans.
Deposit flows are influenced significantly by general and local economic
conditions, changes in prevailing interest rates, pricing of deposits and
competition. Our deposits are primarily obtained from market areas surrounding
our offices. We rely primarily on paying competitive rates, providing strong
customer service and maintaining long-standing relationships with customers to
attract and retain these deposits. We do not use brokers to obtain deposits. We
believe the increase in total deposits in 2001 was due in part to the volatility
in the equity markets, our offering competitive rates on our time deposit
products and deposit movement among financial institutions due to consolidation
within our industry.
When we determine our deposit rates, we consider local competition, U.S.
Treasury securities offerings and the rates charged on other sources of funds.
Core deposits (defined as regular savings deposits, money market accounts and
noninterest-bearing transaction accounts) represented 21.6% of total deposits on
December 31, 2001. At December 31, 2001, time deposits with remaining terms to
maturity of less than one year amounted to $5.52 billion. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Analysis of Net Interest Income" for information relating to the average
balances and costs of our deposit accounts for the years ended December 31,
2001, 2000 and 1999.
Page 23
The following table presents our deposit activity for the periods
indicated:
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
---------- ----------- -----------
(DOLLARS IN THOUSANDS)
Total deposits at beginning of period $6,604,121 $ 6,688,044 $ 6,807,339
Net deposits ........................ 1,001,634 (394,436) (415,012)
Interest credited, net penalties .... 307,007 310,513 295,717
---------- ----------- -----------
Total deposits at end of period ..... $7,912,762 $ 6,604,121 $ 6,688,044
========== =========== ===========
Net increase (decrease) ............. $1,308,641 $ (83,923) $ (119,295)
========== =========== ===========
Percent increase (decrease) ......... 19.82% (1.25)% (1.75)%
At December 31, 2001, we had $923.8 million in time deposits with balances
of $100,000 and over maturing as follows:
MATURITY PERIOD AMOUNT
--------------- ------
(IN THOUSANDS)
Three months or less .................................... $410,695
Over three months through six months .................... 193,749
Over six months through 12 months ....................... 255,656
Over 12 months .......................................... 63,730
--------
Total ......................................... $923,830
========
Page 24
The following table presents the distribution of our deposit accounts at
the dates indicated by dollar amount and percent of portfolio, and the weighted
average nominal interest rate on each category of deposits.
AT DECEMBER 31,
-----------------------------------------------------------------------------------------------
2001 2000 1999
-----------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
PERCENT AVERAGE PERCENT AVERAGE PERCENT AVERAGE
OF TOTAL NOMINAL OF TOTAL NOMINAL OF TOTAL NOMINAL
AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS RATE
---------- ------ ---- ---------- ------ ---- ---------- ------ ----
(DOLLARS IN THOUSANDS)
Savings ..................... $ 814,367 10.29% 2.05% $ 757,607 11.47% 2.29% $ 804,105 12.02% 2.50%
Interest-bearing demand ..... 102,185 1.29 1.24 96,611 1.46 1.49 96,828 1.45 2.00
Money market ................ 516,700 6.53 2.12 448,860 6.80 2.40 486,794 7.28 2.68
Noninterest-bearing demand .. 375,659 4.75 -- 332,177 5.03 -- 308,115 4.61 --
---------- ------ ---------- ------ ---------- ------
Total .................... 1,808,911 22.86 1.60 1,635,255 24.76 1.81 1,695,842 25.36 2.07
---------- ------ ---------- ------ ---------- ------
Time deposits:
Time deposits $100,000
and over ............... 923,830 11.68 4.07 600,605 9.09 5.99 536,664 8.02 5.18
Time deposits less than
$100,000 with original
maturities of:
Three months or less ... 709,409 8.97 3.33 567,746 8.60 6.06 545,068 8.15 5.35
Over three months to
twelve months ........ 2,114,885 26.73 4.03 1,929,952 29.22 6.11 1,178,064 17.61 5.06
Over twelve months to
twenty-four months ... 1,382,543 17.47 4.37 1,049,847 15.90 5.56 1,919,050 28.70 5.12
Over twenty-four months
to thirty-six months . 324,533 4.10 5.22 263,955 4.00 5.82 242,325 3.62 5.38
Over thirty-six months
to forty-eight months 56,831 0.72 5.04 31,350 0.47 5.53 33,880 0.51 5.50
Over forty-eight months
to sixty months ...... 8,878 0.11 4.60 2,989 0.05 5.29 3,730 0.06 5.30
Over sixty months ...... 15,891 0.20 4.88 11,547 0.17 5.11 14,130 0.21 5.21
IRA and Keogh
accounts ............. 567,051 7.16 4.59 510,875 7.74 5.84 519,291 7.76 5.22
---------- ------ ---------- ------ ---------- ------
Total time deposits .... 6,103,851 77.14 4.16 4,968,866 75.24 5.92 4,992,202 74.64 5.16
---------- ------ ---------- ------ ---------- ------
Total deposits ......... $7,912,762 100.00% 3.57 $6,604,121 100.00% 4.90 $6,688,044 100.00% 4.38
========== ====== ========== ====== ========== ======
Page 25
The following table presents, by rate category, the amount of our time
deposit accounts outstanding at December 31, 2001, 2000 and 1999.
AT DECEMBER 31,
----------------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)
TIME DEPOSIT ACCOUNTS:
3.00% or less...... $ 1,441 $ 1,479 $ 1,642
3.01% to 3.50% .... 1,670,805 -- --
3.51% to 4.00% .... 1,022,767 -- --
4.01% to 4.50% .... 1,149,054 -- 9
4.51% to 5.00% .... 1,750,701 87,211 1,914,559
5.01% to 5.50% .... 181,584 1,317,649 2,305,200
Over 5.50%... 327,499 3,562,527 770,792
---------- ---------- ----------
Total ....... $6,103,851 $4,968,866 $4,992,202
========== ========== ==========
The following table presents, by rate category, the remaining period to
maturity of time deposit accounts outstanding as of December 31, 2001.
PERIOD TO MATURITY FROM DECEMBER 31, 2001
--------------------------------------------------------------------------------------------------------
OVER OVER SIX OVER TWO
WITHIN THREE MONTHS OVER ONE TO OVER
THREE TO SIX TO TO TWO THREE THREE
MONTHS MONTHS ONE YEAR YEARS YEARS YEARS TOTAL
------ ------ -------- ----- ----- ----- -----
(IN THOUSANDS)
TIME DEPOSIT ACCOUNTS:
3.00% or less $ 1,441 $ -- $ -- $ -- $ -- $ -- $ 1,441
3.01% to 3.50% . .. 715,423 312,230 593,171 49,981 -- -- 1,670,805
3.51% to 4.00% .... 190,001 325,355 396,421 102,187 6,589 2,214 1,022,767
4.01% to 4.50% .... 595,834 161,320 268,335 106,360 7,859 9,346 1,149,054
4.51% to 5.00% .... 668,644 394,021 425,008 207,086 44,425 11,517 1,750,701
5.01% to 5.50% .... 113,945 653 46,108 18,114 2,044 720 181,584
Over 5.50% . 130,903 74,909 106,262 12,739 1,255 1,431 327,499
---------- ---------- ---------- -------- ------- ---------- ----------
Total ....... $2,416,191 $1,268,488 $1,835,305 $496,467 $62,172 $ 25,228 $6,103,851
========== ========== ========== ======== ======= ========== ==========
Borrowings. Hudson City enters into sales of securities under agreements
to repurchase with selected brokers and the FHLB. These agreements are
recorded as financing transactions as Hudson City maintains effective control
over the transferred securities. The dollar amount of the securities underlying
the agreements continues to be carried in Hudson City's securities portfolio.
The obligations to repurchase the securities are reported as a liability in the
consolidated statements of financial condition.
The securities underlying the agreements are delivered to the party with
whom each transaction is executed. They agree to resell to Hudson City the same
securities at the maturity or call of the agreement. Hudson City retains the
right of substitution of the underlying securities throughout the terms of the
agreements.
Page 26
Hudson City has also obtained advances from the FHLB, which are generally
secured by a blanket lien against our mortgage portfolio. Borrowings with the
FHLB are generally limited to twenty times the amount of FHLB stock owned.
Borrowed funds at December 31 are summarized as follows:
2001 2000
------------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PRINCIPAL RATE PRINCIPAL RATE
---------- ---- ---------- -----
(DOLLARS IN THOUSANDS)
Securities sold under agreements to repurchase:
FHLB ..................................... $ 700,000 5.22% $ 300,000 5.71%
Other brokers ............................ 850,000 5.17 950,000 6.20
---------- ----------
Total securities sold under 1,550,000 5.19 1,250,000 6.08
agreements to repurchase ........
Advances from the FHLB ........................ 600,000 4.48 -- --
---------- ----------
Total borrowed funds ................. $2,150,000 4.99 $1,250,000 6.08
========== ==========
At December 31, 2001, borrowed funds had scheduled maturities and
potential call dates as follows:
BORROWINGS BY SCHEDULED BORROWINGS BY NEXT
MATURITY DATE POTENTIAL CALL DATE
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
YEAR PRINCIPAL RATE PRINCIPAL RATE
----------- ---- ----------- ----
2002......... $ -- --% $ 500,000 5.76%
2003......... 50,000 4.73 200,000 5.07
2004......... 50,000 5.00 500,000 4.84
2005......... 150,000 5.35 475,000 4.58
2006......... 50,000 4.50 475,000 4.74
2008......... 100,000 4.75 -- --
2009......... 200,000 5.72 -- --
2010......... 350,000 5.58 -- --
2011......... 1,200,000 4.71 -- --
--------- -----------
Total.. $ 2,150,000 4.99 $ 2,150,000 4.99
=========== ===========
Page 27
The amortized cost and fair value of the underlying securities used as
collateral for securities sold under agreements to repurchase, the average
balances and the maximum outstanding at any month-end at or for the years ended
December 31, 2001 and 2000 are as follows:
AT OR FOR THE YEAR
ENDED
DECEMBER 31,
2001 2000
---------- ----------
(IN THOUSANDS)
Amortized cost of collateral:
United States government agency securities $ 75,012 $ 392,612
Mortgage-backed securities ............... 1,237,740 995,764
REMIC's .................................. 315,193 --
---------- ----------
Total amortized cost of collateral .. $1,627,945 $1,388,376
========== ==========
Fair value of collateral:
United States government agency securities $ 75,864 $ 390,550
Mortgage-backed securities ............... 1,253,531 1,002,669
REMIC's .................................. 321,140 --
---------- ----------
Total fair value of collateral ...... $1,650,535 $1,393,219
========== ==========
Average balance of outstanding borrowings
during the year .......................... $1,731,918 $ 797,966
========== ==========
Maximum balance of outstanding borrowings
at any month-end during the year ......... $2,150,000 $1,250,000
========== ==========
SUBSIDIARY
Hudson City Savings has one active, wholly-owned and consolidated
subsidiary: Hudson City Preferred Funding Corp. This subsidiary qualifies as a
real estate investment trust, pursuant to the Internal Revenue Code of 1986, as
amended, and holds $3.45 billion of one- to four-family mortgage loans as of
December 31, 2001.
PERSONNEL
As of December 31, 2001, we had 980 full-time employees and 53 part-time
employees. The employees are not represented by a collective bargaining unit and
we consider our relationship with our employees to be good.
Page 28
REGULATION OF HUDSON CITY SAVINGS BANK AND HUDSON CITY BANCORP
GENERAL
Hudson City Savings is a New Jersey chartered savings bank, and its
deposit accounts are insured up to applicable limits by the Federal Deposit
Insurance Corporation ("FDIC") under the Bank Insurance Fund ("BIF"). Hudson
City Savings is subject to extensive regulation, examination and supervision by
the Commissioner of the New Jersey Department of Banking and Insurance (the
"Department") as its chartering agency, and by the FDIC as the deposit insurer.
Hudson City Savings must file reports with the Commissioner and the FDIC
concerning its activities and financial condition, and it must obtain regulatory
approval prior to entering into certain transactions, such as mergers with, or
acquisitions of, other depository institutions and opening or acquiring branch
offices. The Commissioner and the FDIC conduct periodic examinations to assess
Hudson City Savings Bank's compliance with various regulatory requirements. This
regulation and supervision establishes a comprehensive framework of activities
in which a savings bank can engage and is intended primarily for the protection
of the deposit 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.
Hudson City, MHC and Hudson City Bancorp, as bank holding companies
controlling Hudson City Savings, are subject to the Bank Holding Company Act of
1956, as amended, ("BHCA") and the rules and regulations of the Federal Reserve
Board under the BHCA and to the provisions of the New Jersey Banking Act of 1948
(the "New Jersey Banking Act") and the regulations of the Department under the
New Jersey Banking Act applicable to bank holding companies. Hudson City, MHC
and Hudson City Bancorp are required to file reports with, and otherwise comply
with the rules and regulations of the Federal Reserve Board ("FRB") and the
Department. Hudson City Bancorp is required to file certain reports with, and
otherwise comply with, the rules and regulations of the Securities and Exchange
Commission under the federal securities laws.
Any change in such laws and regulations, whether by the Department, the
FDIC, the FRB or through legislation, could have a material adverse impact on
Hudson City, MHC, Hudson City Bancorp and Hudson City Savings and their
operations and stockholders.
NEW JERSEY BANKING REGULATION
Activity Powers. Hudson City Savings derives its lending, investment
and other activity powers primarily from the applicable provisions of the New
Jersey Banking Act and its related regulations. Under these laws and
regulations, savings banks, including Hudson City Savings, generally may invest
in:
- real estate mortgages;
- consumer and commercial loans;
- specific 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
Page 29
- certain other assets.
A savings bank may also invest pursuant to a "leeway" power that permits
investments not otherwise permitted by the New Jersey Banking Act. "Leeway"
investments must comply with a number of limitations on the individual and
aggregate amounts of "leeway" investments. A savings bank may also exercise
trust powers upon approval of the Department. New Jersey savings banks may also
exercise any power authorized for federally chartered savings banks unless the
Department determines otherwise. The exercise of these lending, investment and
activity powers are limited by federal law and the related regulations. See "
- -- Federal Banking Regulation -- Activity Restrictions on State-Chartered
Banks" below.
Loans-to-One-Borrower Limitations. With certain specified exceptions, a
New Jersey chartered savings bank may not make loans or extend credit to a
single borrower and to entities related to the borrower in an aggregate amount
that would exceed 15% of the bank's capital funds. A savings bank may lend an
additional 10% of the bank's capital funds if secured by collateral meeting the
requirements of the New Jersey Banking Act. Hudson City Savings currently
complies with applicable loans-to-one-borrower limitations.
Dividends. Under the New Jersey Banking Act, a stock savings bank may
declare and pay a dividend on its capital stock only to the extent that the
payment of the dividend would not impair the capital stock of the savings bank.
In addition, a stock savings bank may not pay a dividend if the surplus of the
savings bank would, after the payment of the dividend, be reduced unless after
such reduction the surplus was 50% or more of the bank's capital stock. Federal
law may also limit the amount of dividends that may be paid by Hudson City
Savings. See " -- Federal Banking Regulation -- Prompt Corrective Action" below.
Minimum Capital Requirements. Regulations of the Department impose on New
Jersey chartered depository institutions, including Hudson City Savings, minimum
capital requirements similar to those imposed by the FDIC on insured state
banks. See " -- Federal Banking Regulation -- Capital Requirements" below.
Examination and Enforcement. The Department may examine Hudson City
Savings whenever it deems an examination advisable. The Commissioner examines
Hudson City Savings at least every two years. The Department may order any
savings bank to discontinue any violation of law or unsafe or unsound business
practice and may direct any director, officer, attorney or employee of a savings
bank engaged in an objectionable activity, after the Department has ordered the
activity to be terminated, to show cause at a hearing before the Department why
such person should not be removed.
FEDERAL BANKING REGULATION
Capital Requirements. FDIC regulations require BIF insured banks, such as
Hudson City Savings, to maintain minimum levels of capital. The FDIC regulations
define two Tiers, or classes, of capital. Tier 1 capital is comprised of the sum
of common stockholders' equity (excluding the net unrealized appreciation or
depreciation, net of tax, from available-for-sale securities), non-cumulative
perpetual preferred stock (including any related surplus) and minority interests
in consolidated subsidiaries, minus all intangible assets (other than qualifying
servicing rights), and any net unrealized loss on marketable equity securities.
The components of Tier 2 capital currently include cumulative perpetual
preferred stock, certain perpetual preferred stock for which the dividend rate
may be reset periodically, mandatory convertible securities, subordinated debt,
intermediate preferred stock and
Page 30
allowance for possible loan losses. Allowance for possible loan losses included
in Tier 2 capital is limited to a maximum of 1.25% of risk weighted assets.
Overall, the amount of Tier 2 capital that may be included in total capital
cannot exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement for
banks in the strongest financial and managerial condition, with a rating of 1
(the highest examination rating of the FDIC for banks) under the Uniform
Financial Institutions Rating System, and that are not experiencing or
anticipating significant growth, of a ratio of Tier 1 capital to total assets of
not less than 3%. For all other banks, the minimum leverage capital requirement
is 4.0%, unless a higher leverage capital ratio is warranted by the particular
circumstances or risk profile of the depository institution. The FDIC
regulations also require that savings banks meet a risk based capital standard.
The risk based capital standard requires the maintenance of a ratio of total
capital (which is defined as the sum of Tier 1 capital and Tier 2 capital) to
risk-weighted assets of at least 8% and a ratio of Tier 1 capital to
risk-weighted assets of at least 4%. In determining the amount of risk-weighted
assets, all assets, plus certain off balance sheet items, are multiplied by a
risk weight of 0% to 100%, based on the risks the FDIC believes are inherent in
the type of asset or item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to declines in
the economic value of a bank's capital due to changes in interest rates when
assessing the bank's capital adequacy. Under such a risk assessment, examiners
will evaluate a bank's capital for interest rate risk on a case-by-case basis,
with consideration of both quantitative and qualitative factors. According to
the agencies, applicable considerations include the quality of the bank's
interest rate risk management process, the overall financial condition of the
bank and the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to hold
additional capital. The agencies also issued a joint policy statement providing
guidance on interest rate risk management, including a discussion of the
critical factors affecting the agencies' evaluation of interest rate risk in
connection with capital adequacy.
The FDIC adopted regulations, effective April 1, 2002, establishing
minimum regulatory capital requirements for equity investments in non-financial
companies. The regulations apply a series of marginal capital charges that range
from 8% to 25% depending upon the size of the aggregate equity investment
portfolio of the banking organization relative to its Tier 1 capital. The
capital charge would be applied by making a deduction, which would be based on
the adjusted carrying value of the equity investment from the organization's
Tier 1 capital. We do not believe this new capital requirement will have a
material adverse effect upon our operations. However, we will have to take this
requirement into consideration should we, at some point in the future, decide to
invest in non-financial companies.
Page 31
The following table shows Hudson City Savings Bank's leverage ratio,
its tier 1 risk-based capital and its total risk-based capital ratio, at
December 31:
FDIC REQUIREMENTS
----------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL-CAPITALIZED
------------------------- ---------------------- -----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- ------- ---- ------- -----
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2001
Leverage (Tier 1) capital $1,182,130 10.64% $444,566 4.00% $555,707 5.00%
Risk-based capital:
Tier 1 ............. 1,182,130 31.32 150,964 4.00 226,446 6.00
Total .............. 1,206,140 31.96 301,927 8.00 377,409 10.00
DECEMBER 31, 2000
Leverage (Tier 1) capital $1,263,703 14.16% $356,932 4.00% $446,165 5.00%
Risk-based capital:
Tier 1 ............. 1,263,703 42.32 119,434 4.00 179,151 6.00
Total .............. 1,285,847 43.06 238,869 8.00 298,586 10.00
As the table shows, Hudson City Savings Bank exceeded the minimum capital
adequacy requirements at the date indicated.
Activity Restrictions on State Chartered Banks. Section 24 of the Federal
Deposit Insurance Act, as amended (FDIA), which was added by the Federal Deposit
Insurance Corporation Improvement Act of 1991 (FDICIA), generally limits the
activities and investments of state-chartered FDIC insured banks and their
subsidiaries to those permissible for federally chartered national banks and
their subsidiaries, unless such activities and investments are specifically
exempted by Section 24 or consented to by the FDIC.
Section 24 provides an exception for investments by a bank in common and
preferred stocks listed on a national securities exchange or the shares of
registered investment companies if:
- the bank held such types of investments during the 14-month period
from September 30, 1990 through November 26, 1991;
- the state in which the bank is chartered permitted such investments
as of September 30, 1991; and
- the bank notifies the FDIC and obtains approval from the FDIC to
make or retain such investments. Upon receiving such FDIC approval,
an institution's investment in such equity securities will be
subject to an aggregate limit up to the amount of its Tier 1
capital.
Hudson City Savings received approval from the FDIC to retain and acquire such
equity investments subject to a maximum permissible investment equal to the
lesser of 100% of Hudson City Savings' Tier 1 capital or the maximum permissible
amount specified by the New Jersey Banking Act. Section 24 also provides an
exception for majority owned subsidiaries of a bank, but Section 24 limits the
activities of such subsidiaries to those permissible for a national bank under
Section 24 of the FDIA and the FDIC regulations issued pursuant thereto, or as
approved by the FDIC.
Before making a new investment or engaging in a new activity not
permissible for a national bank
Page 32
or otherwise permissible under Section 24 of the FDIC regulations thereunder, an
insured bank must seek approval from the FDIC to make such investment or engage
in such activity. The FDIC will not approve the activity unless the bank meets
its minimum capital requirements and the FDIC determines that the activity does
not present a significant risk to the FDIC insurance funds.
The Gramm-Leach Bliley Act ("Gramm-Leach") permits a state-chartered
savings bank to engage, through financial subsidiaries, in any activity in which
a national bank may engage through a financial subsidiary and on substantially
the same terms and conditions. In general, Gramm-Leach permits a national bank
that is well-capitalized and well-managed to conduct, through a financial
subsidiary, any activity permitted for a financial holding company other than
insurance underwriting, insurance investments, real estate investment or
development or merchant banking. The total assets of all such financial
subsidiaries may not exceed the lesser of 45% of the bank's total assets or $50
billion. The bank must have policies and procedures to assess the financial
subsidiary's risk and protect the bank from such risk and potential liability,
must not consolidate the financial subsidiary's assets with the bank's and must
exclude from its own assets and equity all equity investments, including
retained earnings, in the financial subsidiary. State chartered savings banks
may retain subsidiaries in existence as of March 11, 2000 and may engage in
activities that are not authorized under Gramm-Leach; otherwise, Gramm-Leach
will preempt all state laws regarding the permissibility of certain activities
for state chartered banks if such state law is in conflict with the provisions
of Gramm Leach (with the exception of certain insurance activities), regardless
of whether the state law would authorize broader or more restrictive
activities. Although Hudson City Savings meets all conditions necessary to
establish and engage in permitted activities through financial subsidiaries, it
has not yet determined whether or the extent to which it will seek to engage in
such activities.
Federal Home Loan Bank System. Hudson City Savings is a member of the FHLB
system, which consists of twelve regional FHLBs, each subject to supervision and
regulation by the Federal Housing Finance Board ("FHFB"). The FHLB provides a
central credit facility primarily for member thrift institutions as well as
other entities involved in home mortgage lending. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLBs. It
makes loans to members (i.e., advances) in accordance with policies and
procedures, including collateral requirements, established by the respective
boards of directors of the FHLBs. These policies and procedures are subject to
the regulation and oversight of the FHFB. All long term advances are required to
provide funds for residential home financing. The FHFB has also established
standards of community or investment service that members must meet to maintain
access to such long term advances. Hudson City Savings, as a member of the FHLB
of New York, is required to purchase and hold shares of capital stock in that
FHLB in an amount at least equal to the greater of (i) 1% of the aggregate
principal amount of its unpaid mortgage loans, home purchase contracts and
similar obligations at the beginning of each year; (ii) 0.3% of its assets; or
(iii) 5% (or such greater fraction as established by the FHLB) of its advances
from the FHLB as of December 31, 2001. Pursuant to Gramm-Leach, the foregoing
minimum share ownership requirements will be replaced by regulations to be
promulgated by the FHFB. Gramm-Leach specifically provides that the minimum
requirements in existence immediately prior to adoption of Gramm-Leach shall
remain in effect until such regulations are adopted. Hudson City Savings is in
compliance with these requirements.
Enforcement. The FDIC has extensive enforcement authority over insured
savings banks, including Hudson City Savings. This enforcement authority
includes, among other things, the ability to assess civil money penalties, to
issue cease and desist orders and to remove directors and officers, to order
divestitures and withhold approval of the acquisition of business or the
exercise of powers, to terminate deposit insurance coverage and to place a
depository institution in receivership. In general, these enforcement actions
may be initiated in response to violations of laws and regulations and to unsafe
or unsound practices.
Page 33
The FDIC is required, with certain exceptions, to appoint a receiver or
conservator for an insured state bank if that bank is "critically
undercapitalized." For this purpose, "critically undercapitalized" means having
a ratio of tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
- insolvency (whereby the assets of the bank are less than its
liabilities to depositors and others);
- substantial dissipation of assets or earnings through violations of
law or unsafe or unsound practices;
- existence of an unsafe or unsound condition to transact business;
- likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of
business; and
- insufficient capital, or the incurring or likely incurring of losses
that will deplete substantially all of the institution's capital
with no reasonable prospect of replenishment of capital without
federal assistance.
Safety and Soundness Standards. Pursuant to the requirements of FDICIA, as
amended by the Riegle Community Development and Regulatory Improvement Act of
1994, each federal banking agency, including the FDIC, has adopted guidelines
establishing general standards relating to internal controls, information and
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, asset quality, earnings and compensation, fees and
benefits. In general, the guidelines require, among other things, appropriate
systems and practices to identify and manage the risks and exposures specified
in the guidelines. The guidelines prohibit excessive compensation as an unsafe
and unsound practice and describe compensation as excessive when the amounts
paid are unreasonable or disproportionate to the services performed by an
executive officer, employee, director, or principal stockholder.
In addition, the FDIC adopted regulations to require a bank that is given
notice by the FDIC that it is not satisfying any of such safety and soundness
standards to submit a compliance plan to the FDIC. If, after being so notified,
a bank fails to submit an acceptable compliance plan or fails in any material
respect to implement an accepted compliance plan, the FDIC may issue an order
directing corrective and other actions of the types to which a significantly
undercapitalized institution is subject under the "prompt corrective action"
provisions of FDICIA. If a bank fails to comply with such an order, the FDIC may
seek to enforce such an order in judicial proceedings and to impose civil
monetary penalties.
Prompt Corrective Action. FDICIA also established a system of prompt
corrective action to resolve the problems of undercapitalized institutions.
Under this system, the bank regulators are required to take certain supervisory
actions against undercapitalized institutions, based upon five categories of
capitalization which FDICIA created: "well capitalized," "adequately
capitalized," "undercapitalized," significantly undercapitalized" and
"critically capitalized." The severity of the action authorized or required to
be taken under the prompt corrective action regulations increases as a bank's
capital decreases within the three undercapitalized categories. All banks are
prohibited from paying dividends or other capital distributions or paying
management fees to any controlling person if, following such distribution, the
bank would be undercapitalized. The FDIC is required to monitor closely the
condition of an
Page 34
undercapitalized bank and to restrict the growth of its assets. An
undercapitalized bank is required to file a capital restoration plan within 45
days of the date the bank receives notice that it is within any of the three
undercapitalized categories, and the plan must be guaranteed by any parent
holding company. The aggregate liability of a parent holding company is limited
to the lesser of:
(1) an amount equal to five percent of the bank's total assets at the
time it became "undercapitalized"; and
(2) the amount that is necessary (or would have been necessary) to bring
the bank into compliance with all capital standards applicable with
respect to such bank as of the time it fails to comply with the
plan.
If a bank fails to submit an acceptable plan, it is treated as if it were
"significantly undercapitalized." Banks that are significantly or critically
undercapitalized are subject to a wider range of regulatory requirements and
restrictions.
Insurance Activities. In October 2001, the federal banking agencies
adopted regulations prohibiting depository institutions from conditioning the
extension of credit to individuals upon either the purchase of an insurance
product or annuity or an agreement by the consumer not to purchase an insurance
product or annuity from an entity that is not affiliated with the depository
institution. The regulations also require prior disclosure of this prohibition
to potential insurance product or annuity customers. We do not believe that
these regulations will have a material impact on our operations.
Deposit Insurance. Pursuant to FDICIA, the FDIC established a system for
setting deposit insurance premiums based upon the risks a particular bank or
savings association posed to its deposit insurance funds. Under the risk-based
deposit insurance assessment system, the FDIC assigns an institution to one of
three capital categories based on the institution's financial information, as of
the reporting period ending six months before the assessment period. The three
capital categories are (1) well capitalized, (2) adequately capitalized and (3)
undercapitalized. The FDIC also assigns an institution to one of three
supervisory subcategories within each capital group. With respect to the capital
ratios, institutions are classified as well capitalized, adequately capitalized
or undercapitalized, using ratios that are substantially similar to the prompt
corrective action capital ratios discussed below. The FDIC also assigns an
institution to a supervisory subgroup based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information that
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor).
An institution's assessment rate depends on the capital category and
supervisory category to which it is assigned. Under the final risk-based
assessment system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for deposit insurance currently
range from 0 basis points to 27 basis points. The capital and supervisory
subgroup to which an institution is assigned by the FDIC is confidential and may
not be disclosed. The assessment rates for our BIF assessable deposits are zero
basis points. If the FDIC determines that assessment rates should be increased,
institutions in all risk categories could be affected. The FDIC has exercised
this authority several times in the past and could raise insurance assessment
rates in the future. The FDIC has recently alerted insured institutions to the
possibility of higher deposit insurance premiums in the second half of 2002. The
FDIC stated that the higher premiums, if necessary, would likely affect only
institutions with BIF insured deposits and that the amount of any increase would
not exceed 5 basis points. Any increase in deposit insurance premiums could have
an adverse effect upon the earnings of Hudson City Bancorp. However, the recent
advisory
Page 35
statement from the FDIC, if acted upon, is not expected to have a material
adverse effect on our earnings.
Under the Deposit Insurance Funds Act of 1996 ("Funds Act"), the
assessment base for the payments on the bonds ("FICO bonds") issued in the late
1980's by the Financing Corporation to recapitalize the now defunct Federal
Savings and Loan Insurance Corporation was expanded to include, beginning
January 1, 1997, the deposits of BIF-insured institutions, such as Hudson City
Savings. Our total expense in 2001 for the assessment for deposit insurance and
the FICO payments was $1,292,000.
Under the FDIA, the FDIC may terminate the insurance of an institution's
deposits upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC. The management of Hudson City Savings does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
Transactions with Affiliates of Hudson City Savings. Hudson City Savings
is subject to the affiliate and insider transaction rules set forth in Sections
23A, 23B, 22(g) and 22(h) of the Federal Reserve Act, and the regulations of the
FRB promulgated thereunder. These provisions, among other things, prohibit or
limit a savings banks from extending credit to, or entering into certain
transactions with, its affiliates (which for Hudson City Savings would include
Hudson City Bancorp, Hudson City, MHC) and principal stockholders, directors and
executive officers of Hudson City Savings.
In addition, provisions of the BHCA prohibit extensions of credit to a
bank's insiders and their related interests by any other institution that has a
correspondent banking relationship with the bank, unless such extension of
credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
Provisions of the New Jersey Banking Act impose conditions and limitations
on the liabilities to a savings bank of its directors and executive officers and
of corporations and partnerships controlled by such persons that are comparable
in many respects to the conditions and limitations imposed on the loans and
extensions of credit to insiders and their related interests under federal law
and regulation, as discussed above. The New Jersey Banking Act also provides
that a savings bank that is in compliance with the applicable federal laws and
regulations is deemed to be in compliance with such provisions of the New Jersey
Banking Act.
Privacy Standards. Effective July 1, 2001, financial institutions,
including Hudson City Bancorp and Hudson City Savings, became subject to FDIC
regulations implementing the privacy protection provisions of Gramm-Leach. These
regulations require Hudson City Bancorp and Hudson City Savings to disclose
their privacy policy, including identifying with whom they share "non-public
personal information," to customers at the time of establishing the customer
relationship and annually thereafter.
The regulations also require Hudson City Bancorp and Hudson City Savings
to provide their customers with initial and annual notices that accurately
reflect its privacy policies and practices. In addition, Hudson City Bancorp and
Hudson City Savings are required to provide their customers with the ability to
"opt-out" of having Hudson City Bancorp and Hudson City Savings share their
non-public personal information with unaffiliated third parties before they can
disclose such information, subject to certain exceptions. The implementation of
these regulations did not have a material adverse effect on Hudson City Bancorp
or Hudson City Savings.
Community Reinvestment Act. Under the Community Reinvestment Act (CRA),
any insured
Page 36
depository institution, including Hudson City Savings, has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community. The CRA requires the FDIC, in
connection with its examination of a savings bank, to assess the depository
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications for branch relocations, additional branches
and acquisitions.
Current CRA regulations rate an institution based on its actual
performance in meeting community needs. In particular, the evaluation system
focuses on three tests:
- a lending test, to evaluate the institution's record of making loans
in its service areas;
- an investment test, to evaluate the institution's record of
investing in community development projects, affordable housing, and
programs benefitting low or moderate income individuals and
businesses; and
- a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
The CRA requires the FDIC to provide a written evaluation of an
institution's CRA performance utilizing a four-tiered descriptive rating system
and requires public disclosure of an institution's CRA rating. In December
2000, the federal banking agencies adopted regulations, effective April 1, 2001,
implementing the requirements under Gramm-Leach that insured depository
institutions publicly disclose certain agreements that are in fulfillment of the
CRA. Management does not believe that these regulations will have a material
impact on Hudson City Bancorp's operations.
Internet Banking. Technological developments are dramatically altering the
ways in which most companies, including financial institutions, conduct their
business. The growth of the Internet is prompting banks to reconsider business
strategies and adopt alternative distribution and marketing systems. The federal
bank regulatory agencies have conducted seminars and published materials
targeted to various aspects of internet banking, and have indicated their
intention to reevaluate their regulations to ensure that they encourage banks'
efficiency and competitiveness consistent with safe and sound banking practices.
We cannot assure you that the federal bank regulatory agencies will adopt new
regulations that will not materially affect the Hudson City Savings' internet
operations or restrict any such further operations.
FEDERAL RESERVE SYSTEM
Under FRB regulations, Hudson City Savings is required to maintain
non-interest earning reserves against its transaction accounts (primarily NOW
and regular checking accounts). The FRB regulations generally require that
reserves of 3% must be maintained against aggregate transaction accounts of
$41.3 million or less (subject to adjustment by the FRB) and an initial reserve
of $1.239 million plus 10% (subject to adjustment by the FRB between 8% and 14%)
against that portion of total transaction accounts in excess of $41.3 million.
The first $5.7 million of otherwise reservable balances (subject to adjustments
by the FRB) are exempted from the reserve requirements. Hudson City Savings is
in compliance with the
Page 37
foregoing requirements. Because required reserves must be maintained in the form
of either vault cash, a non-interest bearing account at a FRB or a pass through
account as defined by the FRB, the effect of this reserve requirement is to
reduce Hudson City Savings' interest earning assets.
THE USA PATRIOT ACT
In response to the events of September 11th, President George W. Bush
signed into law the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA
PATRIOT Act, on October 26, 2001. The USA PATRIOT Act gives the federal
government new powers to address terrorist threats through enhanced domestic
security measures, expanded surveillance powers, increased information sharing,
and broadened anti-money laundering requirements. By way of amendments to the
Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further, certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions, including banks, thrifts, brokers,
dealers, credit unions, money transfer agents and parties registered under the
Commodity Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the
following requirements with respect to financial institutions:
- Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i)
internal policies, procedures, and controls, (ii) specific
designation of an anti-money laundering compliance officer, (iii)
ongoing employee training programs, and (iv) an independent audit
function to test the anti-money laundering program. Rules
promulgated under this Section are due by April 24, 2002.
- Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations by October 26, 2002 that provide for minimum standards
with respect to customer identification at the time new accounts are
opened.
- Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking accounts
or correspondent accounts in the United States for non-United States
persons or their representatives (including foreign individuals
visiting the United States) to establish appropriate, specific, and,
where necessary, enhanced due diligence policies, procedures, and
controls designed to detect and report money laundering. Rules
promulgated under this Section are due by April 24, 2002, to be
effective by July 23, 2002.
- Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that
do not have a physical presence in any country), and will be subject
to certain recordkeeping obligations with respect to correspondent
accounts of foreign banks.
- Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
FEDERAL BANK HOLDING COMPANY REGULATION
General. Hudson City, MHC and Hudson City Bancorp are bank holding
companies subject to examination, regulation and periodic reporting under the
BHCA, as administered by the FRB.
Page 38
Activity Restrictions. The BHCA generally limits Hudson City Bancorp's
activities to managing or controlling banks, furnishing services to or
performing services for its subsidiaries and engaging in other activities that
the FRB determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In determining whether a
particular activity is permissible, the FRB must consider whether the
performance of such an activity reasonably can be expected to produce benefits
to the public that outweigh possible adverse effects. Possible benefits include
greater convenience, increased competition and gains in efficiency. Possible
adverse effects include undue concentration of resources, decreased or unfair
competition, conflicts of interest and unsound banking practices. Some of the
principal activities that the FRB has determined by regulation to be so closely
related to banking as to be a proper incident thereto are:
- making or servicing loans;
- performing certain data processing services;
- providing certain brokerage services;
- acting as fiduciary, investment or financial advisor;
- leasing personal or real property;
- making investments in corporations or projects designed
primarily to promote community welfare; and
- acquiring a savings and loan association.
The FRB may require that Hudson City Bancorp terminate an activity or
terminate control of or liquidate or divest certain subsidiaries or affiliates
when the FRB believes the activity or the control of the subsidiary or affiliate
constitutes a significant risk to the financial safety, soundness or stability
of any of its banking subsidiaries. The FRB also has the authority to regulate
provisions of certain bank holding company debt, including authority to impose
interest ceilings and reserve requirements on such debt.
Gramm-Leach expands the range of permitted activities of certain bank
holding companies to include the offering of virtually any type of service that
is financial in nature or incidental thereto, including banking, securities
underwriting, insurance (both underwriting and agency), merchant banking,
acquisitions of and combinations with insurance companies and securities firms
and additional activities that the FRB, in consultation with the Secretary of
the Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally. In order to engage in these new activities, a bank holding company
must qualify and register with the FRB as a financial holding company. To
qualify as a financial holding company, a bank holding company must demonstrate
that each of its bank subsidiaries is well-capitalized and well-managed and has
a rating of "satisfactory" or better under the Community Reinvestment Act of
1977. Certain of the additional activities authorized under Gramm-Leach may also
be undertaken by a financial subsidiary of a bank. Under Gramm-Leach, a
functional system of regulation will apply to financial holding companies under
which banking activities will be regulated by the federal banking regulators,
securities activities will be regulated by the federal securities regulators,
and insurance activities will be subject to regulation by the appropriate state
insurance authorities.
Page 39
Although Hudson City Bancorp currently meets all standards required for
qualification as a financial holding company, it has not yet determined whether
it will seek to qualify as, or engage in any of the additional activities
authorized for, a financial holding company. Hudson City Bancorp is examining
its business plan to determine whether, based on market conditions, the
financial condition of Hudson City Bancorp and its subsidiaries, regulatory
capital requirements, general economic conditions and other requirements, it
desires to utilize any of the expanded powers permitted by Gramm-Leach.
Acquisition and Sale of Control. Under the federal Change in Bank Control
Act ("CBCA"), any person (including a company), or group acting in concert,
seeking to acquire 10% or more of the outstanding shares of Hudson City
Bancorp's common stock will be required to submit prior notice to the FRB,
unless the FRB has found that the acquisition of such shares will not result in
a change in control of Hudson City Bancorp. Under the CBCA, the FRB has 60 days
within which to act on such notices, taking into consideration certain factors,
including the financial and managerial resources of the acquiror, the
convenience and needs of the communities served by Hudson City Bancorp and
Hudson City Savings, and the antitrust effects of the acquisition. Under the
BHCA, any company would be required to obtain prior approval from the FRB before
it may obtain "control" of Hudson City Bancorp within the meaning of the BHCA.
Control generally is defined under the BHCA to mean the ownership or power to
vote 25% more of any class of voting securities of Hudson City Bancorp or the
ability to control in any manner the election of a majority of Hudson City
Bancorp's directors.
As bank holding companies, Hudson City, MHC and Hudson City Bancorp
will be required to obtain the prior approval of the FRB to acquire all, or
substantially all, of the assets of any bank or bank holding company. Prior FRB
approval will be required for Hudson City, MHC or Hudson City Bancorp to acquire
direct or indirect ownership or control of any voting securities of any bank or
bank holding company if, after giving effect to such acquisition, it would,
directly or indirectly, own or control more than 5% of any class of voting
shares of such bank or bank holding company.
Capital; Dividends; Share Repurchases; Source of Strength. The FRB
imposes certain capital requirements on Hudson City Bancorp under the BHCA,
including a minimum leverage ratio and a minimum ratio of "qualifying" capital
to risk-weighted assets. These minimum requirements are substantially the same
as the Bank's minimum capital requirements described above under "Federal
Banking Regulation -- Capital Requirements". Subject to its capital requirements
and certain other restrictions, Hudson City Bancorp is able to borrow money to
make a capital contribution to Hudson City Savings, and such loans may be repaid
from dividends paid from Hudson City Savings to Hudson City Bancorp. Hudson City
Bancorp is also able to raise capital for contribution to Hudson City Savings by
issuing securities without having to receive regulatory approval, subject to
compliance with federal and state securities laws.
Page 40
The following table shows Hudson City Bancorp's leverage ratio, its
Tier 1 risk-based capital ratio, and its total risk-based capital ratio, at
December 31:
FEDERAL RESERVE BANK REQUIREMENTS
------------------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANCORP ACTUAL ADEQUACY WELL-CAPITALIZED
--------------------------- --------------------------- ---------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2001
Leverage (Tier 1) capital $1,284,009 11.55% $ 444,585 4.00% $ 555,731 5.00%
Risk-based capital:
Tier 1 ........... 1,284,009 34.02 150,964 4.00 226,446 6.00
Total ............ 1,308,019 34.66 301,929 8.00 377,411 10.00
DECEMBER 31, 2000
Leverage (Tier 1) capital $1,467,666 16.45% $ 356,932 4.00% $ 446,165 5.00%
Risk-based capital:
Tier 1 ........... 1,467,666 49.15 119,434 4.00 179,151 6.00
Total ............ 1,489,810 49.90 238,868 8.00 298,585 10.00
As the table shows, Hudson City Bancorp exceeded the minimum capital
adequacy requirements at the date indicated.
A bank holding company is required to give the FRB prior written notice
of any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, will be equal to 10% or more of the company's consolidated net worth.
The FRB may disapprove such a purchase or redemption if it determines that the
proposal would constitute an unsafe and unsound practice, or would violate any
law, regulation, FRB order or directive, or any condition imposed by, or written
agreement with, the FRB. Such notice and approval is not required for a bank
holding company that would be treated as "well capitalized" under applicable
regulations of the FRB, that has received a composite "1" or "2" rating at its
most recent bank holding company examination by the FRB, and that is not the
subject of any unresolved supervisory issues.
Regulations of the FRB provide that a bank holding company must serve
as a source of strength to any of its subsidiary banks and must not conduct its
activities in an unsafe or unsound manner. A bank holding company should stand
ready to use available resources to provide adequate capital funds to its
subsidiary banks during periods of financial stress or adversity and should
maintain the financial flexibility and capital-raising capacity to obtain
additional resources for assisting its subsidiary banks. Under the prompt
corrective action provisions of FDICIA, a bank holding company parent of an
undercapitalized subsidiary bank would be directed to guarantee, within
limitations, the capital restoration plan that is required of such an
undercapitalized bank. See "Federal Banking Regulation -- Prompt Corrective
Action" above. If the undercapitalized bank fails to file an acceptable capital
restoration plan or fails to implement an accepted plan, the FRB may prohibit
the bank holding company parent of the undercapitalized bank from paying any
dividend or making any other form of capital distribution without the prior
approval of the FRB.
General. Under the FDIA, depository institutions are liable to the FDIC
for losses suffered or anticipated by the FDIC in connection with the default of
a commonly controlled depository institution or any assistance provided by the
FDIC to such an institution in danger of default. This law would have potential
applicability if Hudson City, MHC or Hudson City Bancorp ever acquired, as a
separate subsidiary, a depository institution in addition to Hudson City
Savings.
Dividend Waivers By Hudson City, MHC. It has been the policy of a
number of mutual holding companies to waive the receipt of dividends declared by
its savings institution subsidiary. In
Page 41
connection with its approval of the reorganization the FRB required that Hudson
City, MHC obtain the prior approval of the FRB before Hudson City, MHC may waive
any dividends from Hudson City Bancorp. As of the date hereof, we are not aware
that the FRB has given its approval to any waiver of dividends by any mutual
holding company that has requested such approval.
In addition, the FDIC required that the amount of any dividends waived
by Hudson City, MHC will not be available for payment to its public stockholders
of Hudson City Bancorp (i.e., stockholders except for Hudson City, MHC) and that
such amount will be excluded from Hudson City Bancorp's capital for purposes of
calculating dividends payable to the public stockholders. Moreover, Hudson City
Savings is required to maintain the cumulative amount of dividends waived by
Hudson City, MHC in a restricted capital account that would be added to the
liquidation account established in the reorganization. This amount would not be
available for distribution to public stockholders. The restricted capital
account and liquidation account amounts are not reflected in our financial
statements, but are considered as a notational or memorandum account. These
accounts are maintained in accordance with the laws, rules, regulations and
policies of the Commissioner and our plan of reorganization.
Hudson City, MHC has applied to the FRB to waive dividends declared by
Hudson City Bancorp. As of March 25, 2002, the FRB has not yet approved or
denied Hudson City, MHC's application to waive dividends.
NEW JERSEY HOLDING COMPANY REGULATION
General. Under the New Jersey Banking Act, a company owning or
controlling a savings bank is regulated as a bank holding company. The New
Jersey Banking Act defines the terms "company" and "bank holding company" as
such terms are defined under the BHCA. Each bank holding company controlling a
New Jersey chartered bank or savings bank must file certain reports with the
Commissioner and is subject to examination by the Commissioner.
Acquisition of Control. The New Jersey Banking Act requires prior
approval of the Commissioner before any person may acquire a New Jersey bank
holding company, such as Hudson City Bancorp. For this purpose, the term
"person" is defined broadly to mean a natural person or a corporation, company,
partnership, or other forms of organized entities. The term "acquire" is defined
differently for an existing bank holding company and for other companies or
persons. A bank holding company will be treated as "acquiring" a New Jersey bank
holding company if the bank holding company acquires more than 5% of any class
of the voting shares of the bank holding company. Any other person will be
treated as "acquiring" a New Jersey bank holding company if it acquires
ownership or control of more than 25% of any class of the voting shares of the
bank holding company.
FEDERAL SECURITIES LAW
Hudson City Bancorp's securities are registered with the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). As such, Hudson City Bancorp is subject to the information,
proxy solicitation, insider trading, and other requirements and restrictions of
the Exchange Act.
TAXATION
FEDERAL
General. The following discussion is intended only as a summary and
does not purport to be a comprehensive description of the tax rules applicable
to Hudson City Savings, Hudson City, MHC or
Page 42
Hudson City Bancorp. For federal income tax purposes, Hudson City Savings
reports its income on the basis of a taxable year ending December 31, using the
accrual method of accounting, and is generally subject to federal income
taxation in the same manner as other corporations. Because Hudson City Savings
and Hudson City Bancorp constitute an affiliated group of corporations, they are
eligible to report their income on a consolidated basis. However, because Hudson
City, MHC owns less than 80% of the common stock of Hudson City Bancorp, it will
not be a member of such affiliated group and will report its income on a
separate return. Hudson City Savings is not currently under audit by the
Internal Revenue Service and has not been audited by the IRS during the past
five years.
Bad Debt Reserves. Pursuant to the Small Business Job Protection Act of
1996, Hudson City Savings is no longer permitted to use the reserve method of
accounting for bad debts, and is now recapturing (taking into income) over a
multi-year period a portion of the balance of its tax bad debt reserve as of
December 31, 1995. Since Hudson City Savings has already provided a deferred tax
liability equal to the amount of such recapture, the recapture will not
adversely impact Hudson City Savings' financial condition or results of
operations.
Distributions. To the extent that Hudson City Savings makes
"non-dividend distributions" to stockholders, such distributions will be
considered to result in distributions from Hudson City Savings' unrecaptured tax
bad debt reserve "base year reserve," i.e., its reserve as of December 31, 1987,
to the extent thereof and then from its supplemental reserve for losses on
loans, and an amount based on the amount distributed will be included in Hudson
City Savings' taxable income. Non-dividend distributions include distributions
in excess of Hudson City Savings' current and accumulated earnings and profits,
distributions in redemption of stock and distributions in partial or complete
liquidation. However, dividends paid out of Hudson City Savings' current or
accumulated earnings and profits, as calculated for federal income tax purposes,
will not constitute non-dividend distributions and, therefore, will not be
included in Hudson City Savings' income.
The amount of additional taxable income created from a non-dividend
distribution is equal to the lesser of Hudson City Savings' base year reserve
and supplemental reserve for losses on loans or an amount that, when reduced by
the tax attributable to the income, is equal to the amount of the distribution.
Thus, in certain situations, approximately one and one-half times the
non-dividend distribution would be included in gross income for federal income
tax purposes, assuming a 35% federal corporate income tax rate. Hudson City
Savings does not intend to pay dividends that would result in the recapture of
any portion of its bad debt reserve.
Corporate Alternative minimum Tax. The Internal Revenue Code of 1986,
as amended, imposes a tax ("AMT") on alternative minimum taxable income ("AMTI")
at a rate of 20%. Only 90% of AMTI can be offset by net operating loss
carryovers of which Hudson City Savings currently has none. AMTI is also
adjusted by determining the tax treatment of certain items in a manner that
negates the deferral of income resulting from the regular tax treatment of those
items. Thus, Hudson City Savings' AMTI is increased by an amount equal to 75% of
the amount by which Hudson City Savings' adjusted current earnings exceeds its
AMTI (determined without regard to this adjustment and prior to reduction for
net operating losses.)
Elimination of Dividends; Dividends Received Deduction. Hudson City
Bancorp may exclude from its income 100% of dividends received from Hudson City
Savings as a member of the same affiliated group of corporations. Because Hudson
City, MHC will not be a member of such affiliated group, it will not qualify for
such 100% dividends exclusion, but will be entitled to deduct 80% of the
dividends it receives from Hudson City Bancorp so long as it owns more than 20%
of the common stock.
STATE
Page 43
New Jersey State Taxation. Hudson City Savings files New Jersey Savings
Institution income tax returns. Generally, the income of savings institutions in
New Jersey, which is calculated based on federal taxable income, subject to
certain adjustments, is subject to New Jersey tax. Hudson City Savings is not
currently under audit with respect to its New Jersey income tax returns and
Hudson City Savings' state tax returns have not been audited for the past five
years.
Hudson City Bancorp is required to file a New Jersey income tax return
and will generally be subject to a state income tax rate that is currently
higher than income tax rates for savings institutions in New Jersey. However, if
Hudson City Bancorp meets certain requirements, it may be eligible to elect to
be taxed as a New Jersey Investment Company, which would allow Hudson City
Bancorp to be taxed at a rate that is currently lower than income tax rates for
savings institutions in New Jersey.
Delaware State Taxation. As a Delaware holding company not earning
income in Delaware, Hudson City Bancorp is exempted from Delaware corporate
income tax but is required to file annual returns and pay annual fees and a
franchise tax to the State of Delaware.
ITEM 2. PROPERTIES
During 2001, we conducted our business through our executive office,
our operations center and 80 branch offices. At December 31, 2001, we owned 30
of our locations and leased the remaining 52. Our lease arrangements are
typically long-term arrangements with third-parties that generally contain
several options to renew at the expiration date of the lease.
For additional information regarding our lease obligations, see Note 8
of Notes to Consolidated Financial Statements in Item 8 "Financial Statements
and Supplementary Data."
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. We believe that
these routine legal proceedings, in the aggregate, are immaterial to our
financial condition and results of operation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted during the quarter ended December 31, 2001 to a
vote of security holders of Hudson City Bancorp through the solicitation of
proxies or otherwise.
Page 44
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On the date of the reorganization, July 13, 1999, Hudson City Bancorp,
Inc. common stock commenced trading on the Nasdaq National Market under the
symbol "HCBK." The table below shows the reported high and low sales prices of
the common stock during the periods indicated.
SALES PRICE DIVIDEND INFORMATION
-------------- -----------------------------
AMOUNT PER
HIGH LOW SHARE DATE OF PAYMENT
---- --- ----- ---------------
2000
First quarter .... $15.38 $12.63 $ 0.05 March 31, 2000
Second quarter ... 17.69 14.13 0.07 June 1, 2000
Third quarter .... 18.13 16.00 0.08 September 1, 2000
Fourth quarter ... 20.25 16.81 0.09 December 1, 2000
2001
First quarter .... 20.38 17.44 0.10 March 1, 2001
Second quarter ... 23.13 19.31 0.11 June 1, 2001
Third quarter .... 26.44 21.41 0.12 September 4, 2001
Fourth quarter ... 26.55 22.00 0.14 December 3, 2001
On January 10, 2002, the Board of Directors of Hudson City Bancorp
declared a quarterly cash dividend of fifteen cents ($0.15) per common share
outstanding that was paid on March 1, 2002 to stockholders of record as of the
close of business on February 8, 2002. The Board of Directors intends to review
the payment of dividends quarterly and plans to continue to maintain a regular
quarterly dividend in the future, dependent upon our earnings, financial
condition and other relevant factors.
Hudson City Bancorp is subject to the requirements of Delaware law that
generally limits dividends to an amount equal to the difference between the
amount by which total assets exceed total liabilities and the amount equal to
the aggregate par value of the outstanding shares of capital stock. If there is
no difference between these amounts, dividends are limited to net income for the
current and/or immediately preceding year.
As the principal asset of Hudson City Bancorp, Hudson City Savings will
provide the principal source of funds for the payment of dividends by Hudson
City Bancorp. New Jersey law provides that dividends may be paid by Hudson City
Savings only out of net income, earned surplus or undivided profits. However,
Hudson City Savings will not be permitted to pay dividends on its capital stock
if, among other things, its stockholders' equity would be reduced below the
amount required for the liquidation account established in connection with the
reorganization. Additionally, in connection with the reorganization, we have
committed to the FDIC that we will provide the FDIC with 30 days prior written
notice before implementing any return of capital to stockholders during the
three year period following the consummation of the reorganization.
As of March 25, 2002, there were approximately 18,790 holders of record
of Hudson City Bancorp common stock.
Page 45
ITEM 6. SELECTED FINANCIAL DATA
The summary information presented below under "Selected Financial
Condition Data," "Selected Operating Data" and "Selected Financial Ratios and
Other Data" at or for each of the years presented is derived in part from the
audited financial statements of Hudson City Bancorp and Hudson City Savings. The
following information is only a summary and you should read it in conjunction
with our audited consolidated financial statements in Item 8 of this document.
AT DECEMBER 31,
----------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
SELECTED FINANCIAL CONDITION DATA:
Total assets ................................ $11,426,768 $ 9,380,373 $ 8,518,865 $ 7,752,260 $ 7,313,999
Loans ....................................... 5,968,171 4,872,740 4,305,875 3,659,407 3,463,803
Federal Home Loan Bank of New York stock .... 81,149 73,629 -- -- --
Investment securities available for sale .... 167,427 876,667 812,058 785,031 654,726
Mortgage-backed securities held to maturity . 4,478,488 3,262,035 3,097,072 3,070,931 3,022,225
Mortgage-backed securities available for sale 530,690 -- -- -- --
Total cash and cash equivalents ............. 101,814 187,111 200,839 156,875 95,674
Foreclosed real estate, net ................. 250 438 367 1,026 1,410
Total deposits .............................. 7,912,762 6,604,121 6,688,044 6,807,339 6,465,956
Total borrowed funds ........................ 2,150,000 1,250,000 300,000 -- --
Total stockholders' equity .................. 1,288,736 1,464,569 1,479,040 900,606 807,713
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2001 2000 1999 1998 1997
--------- --------- ------------ --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED OPERATING DATA:
Total interest and dividend income ................ $ 690,498 $ 614,041 $ 536,081 $ 520,791 $ 500,442
Total interest expense ............................ 403,427 360,039 298,832 311,084 297,484
--------- --------- --------- --------- ---------
Net interest income .......................... 287,071 254,002 237,249 209,707 202,958
Provision for loan losses ......................... 1,875 2,130 2,350 2,400 2,850
--------- --------- --------- --------- ---------
Net interest income after provision
for loan losses .......................... 285,196 251,872 234,899 207,307 200,108
--------- --------- --------- --------- ---------
Non-interest income:
Service charges and other income ............. 4,694 4,541 4,752 4,930 4,710
(Losses) gains on securities transactions, net -- -- (7) 24 1,594
--------- --------- --------- --------- ---------
Total non-interest income ................ 4,694 4,541 4,745 4,954 6,304
--------- --------- --------- --------- ---------
Total non-interest expense ............... 81,824 78,997 68,408 63,492 62,919
--------- --------- --------- --------- ---------
Income before income tax expense .................. 208,066 177,416 171,236 148,769 143,493
Income tax expense ....................... 73,517 62,590 63,850 55,500 53,500
--------- --------- --------- --------- ---------
Net income ........................................ $ 134,549 $ 114,826 $ 107,386 $ 93,269 $ 89,993
========= ========= ========= ========= =========
Basic earnings per share .......................... $ 1.37 $ 1.05 $ 0.47(1) $ -- $ --
========= ========= ========= ========= =========
Diluted earnings per share ........................ $ 1.35 $ 1.04 $ 0.47(1) $ -- $ --
========= ========= ========= ========= =========
- ---------------------------------------------------------
(1) From date of reorganization (July 13, 1999)
Page 46
AT OR FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ------------ ------------ ------------- ---------------
SELECTED FINANCIAL RATIOS AND OTHER DATA:
PERFORMANCE RATIOS:
Return on average assets ........................ 1.32% 1.29% 1.32% 1.24% 1.27%
Return on average stockholders' equity .......... 10.09 7.87 9.05 10.90 11.79
Net interest rate spread (1) .................... 2.12 1.91 2.18 2.16 2.28
Net interest margin (2) ......................... 2.87 2.90 2.98 2.85 2.94
Non-interest expense to average assets .......... 0.80 0.89 0.84 0.84 0.89
Efficiency ratio (3) ............................ 28.04 30.55 28.27 29.58 30.30
Dividend payout ratio (4) ....................... 34.31 27.62 10.64 -- --
Cash dividends paid per common share(4) ......... $ 0.47 $ 0.29 $ 0.05 $ -- $ --
Average interest-earning assets to
average interest-bearing liabilities ....... 1.19x 1.24x 1.21x 1.16x 1.15x
CAPITAL RATIOS:
Average stockholders' equity to average assets .. 13.05% 16.35% 14.60% 11.35% 10.79%
Stockholders' equity to assets .................. 11.28 15.61 17.36 11.62 11.04
Stockholders' equity per common share .......... $ 13.74 $ 13.78 $ 12.99 $ -- $ --
REGULATORY CAPITAL RATIOS:
BANK:
Leverage capital ................................ 10.64% 14.16% 15.27% 11.93% 11.37%
Total risk-based capital ........................ 31.96 43.06 47.16 39.23 37.60
BANCORP:
Leverage capital ................................ 11.55% 16.45% 18.54% --% --%
Total risk-based capital ........................ 34.66 49.90 57.06 -- --
ASSET QUALITY RATIOS:
Non-performing loans to total loans ............. 0.26% 0.27% 0.33% 0.42% 0.47%
Non-performing assets to total assets ........... 0.14 0.14 0.17 0.21 0.24
Allowance for loan losses to non-performing loans 153.44 170.67 142.65 115.47 96.85
Allowance for loan losses to total loans ........ 0.40 0.45 0.46 0.48 0.45
OTHER DATA:
Weighted average number of common
shares outstanding:
basic .................................. 97,931,148 109,507,190 114,767,331 -- --
diluted ................................ 99,493,760 109,968,776 114,767,331 -- --
Number of deposit accounts ...................... 495,871 463,369 470,815 484,991 480,414
Branches ........................................ 80 79 75 75 75
- -------------------------------------------------
(1) Determined by subtracting the weighted average cost of average total
interest-bearing liabilities from the weighted average yield on average
total interest-earning assets.
(2) Determined by dividing net interest income by average total
interest-earning assets.
(3) Determined by dividing total non-interest expense by the sum of net
interest income and total non-interest income (adjusted to exclude net
(losses) gains on securities transactions of $0 for 2001, $0 for 2000,
$(7,000) for 1999, $24,000 for 1998 and $1,594,000 for 1997.)
(4) The 1999 data is from the date of reorganization (July 13, 1999).
Page 47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis reflects Hudson City Bancorp's audited
consolidated financial statements and other relevant statistical data and is
intended to enhance your understanding of our financial condition and results of
operations. You should read the information in this section in conjunction with
Hudson City Bancorp's Consolidated Financial Statements and accompanying Notes
to Consolidated Financial Statements in Item 8, and the other statistical data
provided elsewhere in this document.
GENERAL
Our results of operations depend primarily on net interest income. Net
interest income is the difference between the interest income we earn on our
interest-earning assets, primarily mortgage loans, mortgage-backed securities
and investment securities, and the interest we pay on our interest-bearing
liabilities, primarily time deposits, savings deposits and borrowed funds. Our
results of operations are also affected by our provision for loan losses,
non-interest income, and non-interest expense. Non-interest expense consists
primarily of salaries and employee benefits, occupancy expenses and other
general and administrative expenses. Non-interest income consists mainly of
service charges and fees.
Our results of operations may also be affected significantly by general
and local economic and competitive conditions, particularly those with respect
to changes in market interest rates, government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially impact us. Additionally, our lending activity
is concentrated in loans secured by real estate primarily located in New Jersey.
Accordingly, our results of operations may be affected by regional market and
economic conditions.
MUTUAL HOLDING COMPANY REORGANIZATION
On July 13, 1999, Hudson City Savings converted and reorganized from a New
Jersey chartered mutual savings bank into a two-tiered mutual savings bank
holding company structure and became a wholly-owned subsidiary of Hudson City
Bancorp. Hudson City Bancorp sold 54,350,000 shares of its common stock to the
public, representing 47% of the then outstanding shares, at $10.00 per share and
received net proceeds of $527.6 million. Hudson City Bancorp contributed 50% of
the net proceeds from the initial public offering to Hudson City Savings. An
additional 61,288,300 shares, or 53% of the then outstanding shares of Hudson
City Bancorp, were issued to Hudson City, MHC. At December 31, 2001, as a result
of stock repurchases, Hudson City, MHC owned 61.8% of Hudson City Bancorp.
GROWTH INITIATIVES
In accordance with our business plan, we have developed and employed
several initiatives to effectively and prudently utilize our capital through
internally generated growth. During 2001, these initiatives, in conjunction with
the lower interest rate environment, allowed us to increase our long-term
borrowings and grow our assets by 21.9%, or over $2.0 billion. We expect to
continue to grow through expansion using borrowed funds to supplement deposits
as a funding source. We may also grow by adding new branch offices, a strategy
that has been successful for us in the past.
Page 48
MANAGEMENT OF INTEREST RATE RISK
As a financial institution, our primary component of market risk is
interest rate volatility. Fluctuations in interest rates will ultimately impact
our level of both income and expense recorded on a large portion of our assets
and liabilities. Fluctuations in interest rates will also affect the market
value of all interest-earning assets, other than those that possess a short term
to maturity.
During 2001, the Federal Open Market Committee reduced the federal
funds rate on eleven successive occasions by a total of 475 basis points. These
reductions, along with the economic recession experienced during 2001, have
created a significantly different interest rate environment than that which
existed at December 31, 2000. General market interest rates, particularly on
short-term maturities, decreased during 2001 as the overall yield curve
steepened. A decreasing rate environment can be beneficial to our net interest
income as our interest-bearing liabilities generally reprice faster than our
interest-earning assets. A steepening yield curve is where the spread between
long-term interest rates and short-term interest rates widens. A steep yield
curve can also be beneficial to our net interest income as our interest-bearing
liabilities generally price off short-term market rates while our mortgage loan
products, particularly those with initial terms to maturity or repricing greater
than one year, generally price off long-term market rates. In the interest rate
environment experienced in 2001, our net interest rate spread increased 21 basis
points to 2.12% from 1.91% for 2000.
Due to the nature of our operations, we are not subject to foreign
currency exchange or commodity price risk. Instead, our real estate loan
portfolio, primarily concentrated in New Jersey, is subject to risks associated
with the local economy. We do not own any trading assets. We did not engage in
any hedging transactions that use derivative instruments (such as interest rate
swaps and caps) during 2001 and did not have any such hedging transactions in
place at December 31, 2001. In the future, we may, with approval of our Board of
Directors, engage in hedging transactions utilizing derivative instruments.
The primary objectives of our interest rate risk management strategy
are to:
- evaluate the interest rate risk inherent in certain balance
sheet accounts;
- determine the appropriate level of interest rate risk given
our business plan, the current business environment and our
capital and liquidity requirements; and
- manage interest rate risk in a manner consistent with the
approved guidelines and policies set by our Board of
Directors.
We seek to coordinate asset and liability decisions so that, under changing
interest rate scenarios, earnings will remain within an acceptable range.
To achieve the objectives of managing interest rate risk, our
Asset/Liability Committee meets weekly to discuss and monitor the market
interest rate environment compared to interest rates that are offered on our
products. This committee consists of the Chief Executive Officer, the Chief
Operating Officer and the Investment Officer. The Asset/Liability Committee
presents periodic reports to the Board of Directors at its regular meetings, as
well as a comprehensive quarterly report to the Asset Management Committee of
the Board of Directors. The quarterly reports address the results of activities
and strategies and the effect that changes in interest rates will have on our
results of operations and the present value of our equity.
Page 49
Historically, our lending activities have emphasized one- to
four-family first and second mortgage loans. We believe that the frequent
repricing of our adjustable-rate mortgage loans and adjustable-rate securities,
which reduces the exposure to interest rate fluctuations, will benefit our
long-term profitability. However, the prevailing interest rate environment in
recent years has resulted in the increased demand for fixed-rate first mortgage
loans. The result has been an increase in the proportion of fixed-rate loans in
our portfolio. This may have an adverse impact on our net interest income,
particularly in a rising interest rate environment. In addition, the actual
amount of time before mortgage loans and mortgage-backed securities are repaid
can be significantly impacted by changes in mortgage prepayment rates and market
interest rates. Mortgage prepayment rates will vary due to a number of factors,
including the regional economy in the area where the underlying mortgages were
originated, seasonal factors, demographic variables and the assumability of the
underlying mortgages. However, the major factors affecting prepayment rates are
prevailing interest rates, related mortgage refinancing opportunities and
competition. We monitor interest rate sensitivity so that we can make
adjustments to our asset and liability mix on a timely basis.
Our primary source of funds has been deposits, consisting primarily of
time deposits, which have substantially shorter terms to maturity than the loan
portfolio. We use securities sold under agreements to repurchase and FHLB
advances as additional sources of funds. These borrowings are generally
long-term, in an effort to off-set our short-term deposit liabilities and assist
in managing our interest rate risk. Certain of these borrowings have call
options which could shorten their maturities in a rising interest rate
environment.
Gap Analysis. The matching of the repricing characteristics of assets
and liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest rate sensitive" and by monitoring a financial
institution's interest rate sensitivity "gap." An asset or liability is said to
be "interest rate sensitive" within a specific time period if it will mature or
reprice within that time period. The interest rate sensitivity gap is defined as
the difference between the amount of interest-earning assets maturing or
repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that same time period.
A gap is considered positive when the amount of interest-earning assets
maturing or repricing within a specific time period exceeds the amount of
interest-bearing liabilities maturing or repricing within that specific time
period. A gap is considered negative when the amount of interest-bearing
liabilities maturing or repricing within a specific time period exceeds the
amount of interest-earning assets maturing or repricing within the same period.
During a period of rising interest rates, a financial institution with a
negative gap position would be expected, absent the effects of other factors, to
experience a greater increase in the costs of its liabilities relative to the
yields of its assets and thus a decrease in the institution's net interest
income. An institution with a positive gap position would be expected, absent
the effect of other factors, to experience the opposite result. Conversely,
during a period of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would tend to reduce
net interest income.
At December 31, 2001, based on the assumptions below, our interest-bearing
liabilities maturing or repricing within one year exceeded our interest-earning
assets maturing or repricing within the same period by $1.63 billion compared
with $1.97 billion at December 31, 2000. This represented a cumulative one-year
interest rate sensitivity gap as a percent of total assets of negative 14.3% at
December 31, 2001 compared with negative 21.0% at December 31, 2000. The ratio
of interest-earning assets maturing or repricing within one year to
interest-bearing liabilities maturing or repricing within one year was 71.9% at
December 31, 2001 compared with 64.0% at December 31, 2000. The change in these
ratios, year-to-year, is primarily due to accelerated prepayment assumptions
for mortgage loans and mortgage-backed
Page 50
securities used during the current lower interest rate environment, maturing
borrowed funds being funded with long-term borrowings and the overall growth in
our assets during 2001. Our negative gap position would be expected to more
adversely impact our net interest income in a rising interest rate environment
than if we had a positive gap position.
The following table presents the amounts of our interest-earning assets
and interest-bearing liabilities outstanding at December 31, 2001, which we
anticipate to reprice or mature in each of the future time periods shown. Except
as stated below, we determined the amounts of assets and liabilities shown which
reprice or mature during a particular period in accordance with the earlier of
the term to repricing or the contractual maturity of the asset or liability. The
information presented in the following table is also based on the following
assumptions:
- we assumed an annual prepayment rate of 20.0% for mortgage
loans repricing or maturing after one year;
- we assumed an annual prepayment rate of 25.0% for
mortgage-backed securities repricing or maturing after one
year;
- we reported federal agency securities with call options at the
earlier of the next call date or contractual maturity date,
total agency securities reported as called were $25.0 million
based on our assessment of market conditions at December 31,
2001;
- we reported savings and interest-bearing demand accounts that
had no stated maturity using decay rates of: 2.5% in less than
six months, 2.5% in six months to one year, 25% in one year to
two years, 30% in two years to three years, 20% in three years
to five years, and 20% in over five years;
- we reported money market accounts using decay rates of: 25% in
less than six months, 25% in six months to one year, 25% in
one year to two years, and 25% in two years to three years;
and
- we reported borrowed funds with call options at the earlier of
the next call date or contractual maturity date, there were no
borrowed funds reported as called based on our assessment of
market conditions at December 31, 2001.
In 2000, prepayment assumptions on mortgage loans and mortgage-backed securities
were 12.0% and 16.0%, respectively. The change in the prepayment assumptions for
2001 was due to the increase in prepayments experienced during the year on these
investments resulting from the lower interest rate environment. If current
mortgage loan and mortgage-backed security prepayment assumptions were used at
December 31, 2000, and all other assumptions remained the same for that
analysis, the cumulative interest sensitivity gap as a percentage of total
assets would have been approximately negative 16.4%.
Deposit decay rates, as noted above, are based on regulatory guidance,
as modified by our historical experience. Deposit decay rates, prepayment rates
and anticipated call dates can have a significant impact on the estimated
interest sensitivity gap. While we believe that our assumptions are reasonable,
they may not be indicative of actual future deposit decay activity, mortgage and
mortgage-backed securities prepayments, and the actual timing of calls of
federal agency bonds or borrowed funds. We have excluded non-accrual loans
totaling $8,262,000 from the table.
Page 51
AT DECEMBER 31, 2001
---------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN MORE THAN TWO YEARS THREE YEARS
SIX MONTHS SIX MONTHS ONE YEAR TO TO THREE TO FIVE
OR LESS TO ONE YEAR TWO YEARS YEARS YEARS
------- ----------- --------- ----- -----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
First mortgage loans ................ $ 661,654 $ 687,512 $ 935,258 $ 792,979 $ 797,496
Consumer and other loans ............ 32,763 856 2,746 5,421 15,032
Federal funds sold .................. 17,600 -- -- -- --
Mortgage-backed securities .......... 1,255,235 1,405,249 777,851 393,260 297,794
FHLB stock .......................... 81,149 -- -- -- --
Investment securities ............... 35,628 -- 149 100 334
----------- ----------- ----------- ----------- ----------
Total interest-earning assets .... 2,084,029 2,093,617 1,716,004 1,191,760 1,110,656
----------- ----------- ----------- ----------- ----------
Interest-bearing liabilities:
Savings accounts .................... 21,026 21,638 203,080 243,695 162,464
Interest-bearing demand accounts .... 2,555 2,555 25,546 30,655 20,437
Money market accounts ............... 118,661 118,661 129,175 131,511 9,346
Time deposits ....................... 3,688,013 1,833,785 494,653 62,172 25,228
Borrowed funds ...................... -- -- 50,000 50,000 200,000
----------- ----------- ----------- ----------- ----------
Total interest-bearing liabilities 3,830,255 1,976,639 902,454 518,033 417,475
----------- ----------- ----------- ----------- ----------
Interest rate sensitivity gap ............. $(1,746,226) $ 116,978 $ 813,550 $ 673,727 $ 693,181
=========== =========== =========== =========== ==========
Cumulative interest rate sensitivity
gap ................................. $(1,746,226) $(1,629,248) $ (815,698) $ (141,971) $ 551,210
=========== =========== =========== =========== ==========
Cumulative interest rate sensitivity gap
as a percent of total assets ........ (15.28)% (14.26)% (7.14)% (1.24)% 4.82%
Cumulative interest-earning assets
as a percent of interest-bearing
liabilities ......................... 54.41% 71.94% 87.84% 98.04% 107.21%
AT DECEMBER 31, 2001
-------------------------
MORE THAN
FIVE YEARS TOTAL
---------- -----
(DOLLARS IN THOUSANDS)
Interest-earning assets:
First mortgage loans ................ $1,935,647 $ 5,810,546
Consumer and other loans ............ 92,545 149,363
Federal funds sold .................. 0 17,600
Mortgage-backed securities .......... 879,789 5,009,178
FHLB stock .......................... - 81,149
Investment securities ............... 132,657 168,868
---------- -----------
Total interest-earning assets .... 3,040,638 11,236,704
---------- -----------
Interest-bearing liabilities:
Savings accounts .................... 162,464 814,367
Interest-bearing demand accounts .... 20,437 102,185
Money market accounts ............... 9,346 516,700
Time deposits ....................... - 6,103,851
Borrowed funds ...................... 1,850,000 2,150,000
---------- -----------
Total interest-bearing liabilities 2,042,247 9,687,103
---------- -----------
Interest rate sensitivity gap ............. $ 998,391 $ 1,549,601
========== ===========
Cumulative interest rate sensitivity
gap ................................. $1,549,601
==========
Cumulative interest rate sensitivity gap
as a percent of total assets ........ 13.56%
Cumulative interest-earning assets
as a percent of interest-bearing
liabilities ......................... 116.00%
Page 52
The methods used in the previous table have some shortcomings. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Certain assets, such as
adjustable-rate loans, have features which limit changes in interest rates on a
short-term basis and over the life of the loan. If interest rates change,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table. Finally, the ability of borrowers to
make payments on their adjustable-rate loans may decrease if interest rates
increase.
Present Value of Equity. In addition to the gap analysis table, we also
use a simulation model to monitor interest rate risk. This model reports the
present value of equity in different interest rate environments, assuming an
instantaneous and permanent interest rate shock to all interest rate-sensitive
assets and liabilities. The present value of equity is the difference between
the present value of expected cash flows of interest rate-sensitive assets and
liabilities. The changes in market value of assets and liabilities due to
changes in interest rates reflect the interest sensitivity of those assets and
liabilities as their values are derived from the characteristics of the asset or
liability (i.e., fixed rate, adjustable-rate, caps, floors) relative to the
current interest rate environment. For example, in a rising interest rate
environment the fair market value of a fixed rate asset will decline, whereas
the fair market value of an adjustable-rate asset, depending on its repricing
characteristics, may not decline. Increases in the market value of assets will
increase the present value of equity whereas decreases in market value of assets
will decrease the present value of equity. Conversely, increases in the market
value of liabilities will decrease the present value of equity whereas decreases
in the market value of liabilities will increase the present value of equity.
Our policy sets a maximum percentage change in the present value of
equity of 40% from the current present value of equity, given an instantaneous
and parallel increase or decrease of 200 basis points. The following table
presents the estimated present value of equity over a range of interest rate
change scenarios at December 31, 2001. The present value ratio shown in the
table is the present value of equity as a percent of the present value of total
assets in each of the different rate environments. For purposes of this table,
we have made assumptions such as prepayment rates and decay rates similar to
those used for the gap analysis table.
PRESENT VALUE OF EQUITY
AS PERCENT OF PRESENT
PRESENT VALUE OF EQUITY VALUE OF ASSETS
---------------------------------------------------------- ------------------------------
CHANGE IN DOLLAR DOLLAR PERCENT PRESENT VALUE PERCENT
INTEREST RATES AMOUNT CHANGE CHANGE RATIO CHANGE
-------------- ------ ------ ------ ----- ------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
200 $ 992,487 $ (550,397) (35.67)% 9.28% (30.64)%
150 1,135,012 (407,872) (26.44) 10.41 (22.20)
100 1,273,871 (269,013) (17.44) 11.47 (14.28)
50 1,410,817 (132,067) (8.56) 12.47 (6.80)
0 1,542,884 -- -- 13.38 --
(50) 1,609,056 66,172 4.29 13.76 2.84
(100) 1,591,664 48,780 3.16 13.51 0.97
(150) 1,536,568 (6,316) (0.41) 12.99 (2.91)
(200) 1,454,977 (87,907) (5.70) 12.26 (8.37)
Page 53
At December 31, 2000, the percent change in the present value of equity
in the 200 basis point increase scenario was negative 23.8% compared with
negative 35.7% at December 31, 2001. This increase at December 31, 2001, and the
overall decrease in the present value of equity in the increasing interest rate
scenarios, was primarily due to the growth in our fixed-rate mortgage loans and
fixed-rate mortgage-backed securities during 2001. The decrease in the present
value of equity in certain decreasing rate scenarios was primarily due to the
growth of borrowed funds with longer maturities during 2001.
As in the case of the gap analysis table, the methods we used in the
previous table have some shortcomings. This type of modeling requires that we
make assumptions which may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. For example, we assume the
composition of the interest rate-sensitive assets and liabilities will remain
constant over the period being measured and that all interest rate shocks will
be uniformly reflected across the yield curve, regardless of the duration to
maturity or repricing. The table assumes that we will take no action in response
to the changes in interest rates. In addition, prepayment estimates and other
assumptions within the model are subjective in nature, involve uncertainties,
and, therefore, cannot be determined with precision. Accordingly, although the
present value of equity model may provide an estimate of our interest rate risk
at a particular point in time, such measurements are not intended to and do not
provide a precise forecast of the effect of changes in interest rates on our
present value of equity.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between the interest
income we earn on our interest-earning assets, such as mortgage loans,
mortgage-backed securities and investment securities, and the expense we pay on
interest-bearing liabilities, such as time deposits and borrowed funds. Net
interest income depends on our volume of interest-earning assets and
interest-bearing liabilities and the interest rates we earned or paid on them.
Average Balance Sheet. The following table presents certain information
regarding our financial condition and net interest income for 2001, 2000 and
1999. The table presents the average yield on interest-earning assets and the
average cost of interest-bearing liabilities for the periods indicated. We
derived the yields and costs by dividing income or expense by the average
balance of interest-earning assets or interest-bearing liabilities,
respectively, for the periods shown. We derived average balances from daily
balances over the periods indicated. Interest income includes fees which we
considered adjustments to yields. Yields on tax-exempt obligations were not
computed on a tax equivalent basis.
Page 54
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2001 2000
---------------------------------------- ----------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------- -------- ---- ------- -------- ----
ASSETS: (DOLLARS IN THOUSANDS)
INTEREST-EARNINGS ASSETS
First mortgage loans, net (1) ....... $ 5,204,953 $ 381,135 7.32% $ 4,456,451 $ 327,458 7.35%
Consumer and other loans ............ 153,978 11,959 7.77 130,806 10,640 8.13
Federal funds sold .................. 153,495 5,436 3.54 80,449 4,972 6.18
Mortgage-backed securities,
at amortized cost ............... 4,036,100 262,914 6.51 3,196,889 214,435 6.71
Federal Home Loan Bank stock ........ 79,418 4,536 5.71 23,955 1,698 7.09
Investment securities at amortized
cost ............................ 389,472 24,518 6.30 882,166 54,838 6.22
------------- ----------- -------------- -----------
Total interest-earning assets ... 10,017,416 690,498 6.89 8,770,716 614,041 7.00
----------- -----------
NONINTEREST-EARNING ASSETS ............... 203,567 152,583
------------- --------------
TOTAL ASSETS ................. $ 10,220,983 $ 8,923,299
============= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts .................... $ 776,388 17,497 2.25 $ 782,125 19,143 2.45
Interest-bearing demand accounts .... 94,197 1,486 1.58 95,385 1,819 1.91
Money market accounts ............... 465,021 10,731 2.31 463,818 11,909 2.57
Time deposits ....................... 5,381,517 277,293 5.15 4,932,154 277,642 5.63
------------- ----------- -------------- -----------
Total deposits .................. 6,717,123 307,007 4.57 6,273,482 310,513 4.95
Borrowed funds ...................... 1,731,918 96,420 5.57 797,966 49,526 6.21
------------- ----------- -------------- -----------
Total interest-bearing
liabilities .................. 8,449,041 403,427 4.77 7,071,448 360,039 5.09
------------- ----------- -------------- -----------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits ........ 351,970 319,499
Other noninterest-bearing liabilities 86,494 73,025
------------- --------------
Total noninterest-bearing
liabilities .................. 438,464 392,524
------------- --------------
Total liabilities ............ 8,887,505 7,463,972
Stockholders' equity ......... 1,333,478 1,459,327
------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ..... $ 10,220,983 $ 8,923,299
============= ==============
Net interest income ...................... $ 287,071 $ 254,002
=========== ===========
Net interest rate spread (2) ............. 2.12% 1.91%
Net interest-earning assets .............. $ 1,568,375 $ 1,699,268
============= ==============
Net interest margin (3) .................. 2.87% 2.90%
Ratio of interest-earning assets to
interest-bearing liabilities ........ 1.19x 1.24x
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999
----------------------------------------
AVERAGE
AVERAGE YIELD/
BALANCE INTEREST COST
------- -------- ----
ASSETS: (DOLLARS IN THOUSANDS)
INTEREST-EARNINGS ASSETS
First mortgage loans, net (1) ....... $ 3,796,900 $ 277,391 7.31%
Consumer and other loans ............ 94,705 7,583 8.01
Federal funds sold .................. 61,276 2,933 4.79
Mortgage-backed securities,
at amortized cost ............... 3,116,320 192,390 6.17
Federal Home Loan Bank stock ........ -- -- --
Investment securities at amortized
cost ............................ 898,063 55,784 6.21
-------------- ----------
Total interest-earning assets ... 7,967,264 536,081 6.73
----------
NONINTEREST-EARNING ASSETS ............... 160,260
--------------
TOTAL ASSETS ................. $ 8,127,524
==============
LIABILITIES AND STOCKHOLDERS' EQUITY:
INTEREST-BEARING LIABILITIES:
Savings accounts .................... $ 848,734 21,982 2.59
Interest-bearing demand accounts .... 97,304 2,065 2.12
Money market accounts ............... 498,900 13,642 2.73
Time deposits ....................... 5,073,825 258,028 5.09
-------------- ----------
Total deposits .................. 6,518,763 295,717 4.54
Borrowed funds ...................... 53,552 3,115 5.82
-------------- ----------
Total interest-bearing
liabilities .................. 6,572,315 298,832 4.55
-------------- ----------
NONINTEREST-BEARING LIABILITIES:
Noninterest-bearing deposits ........ 309,676
Other noninterest-bearing liabilities 59,260
--------------
Total noninterest-bearing
liabilities .................. 368,936
--------------
Total liabilities ............ 6,941,251
Stockholders' equity ......... 1,186,273
--------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY ..... $ 8,127,524
==============
Net interest income ...................... $ 237,249
==========
Net interest rate spread (2) ............. 2.18%
Net interest-earning assets .............. $ 1,394,949
==============
Net interest margin (3) .................. 2.98%
Ratio of interest-earning assets to
interest-bearing liabilities ........ 1.21x
- ----------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) Determined by subtracting the weighted average cost of average total
interest-bearing liabilities from the weighted average yield on average
total interest-earning assets.
(3) Determined by dividing net interest income by average total
interest-earning assets.
Page 55
Rate/Volume Analysis. The following table presents the extent to which
changes in interest rates and changes in the volume of interest-earning assets
and interest-bearing liabilities have affected our interest income and interest
expense during the periods indicated. Information is provided in each category
with respect to:
- changes attributable to changes in volume (changes in volume
multiplied by prior rate);
- changes attributable to changes in rate (changes in rate
multiplied by prior volume); and
- the net change.
The changes attributable to the combined impact of volume and rate have been
allocated proportionately to the changes due to volume and the changes due to
rate.
2001 COMPARED TO 2000 2000 COMPARED TO 1999
--------------------------------- ---------------------------------
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
--------------------------------- ---------------------------------
VOLUME RATE NET VOLUME RATE NET
------ ---- --- ------ ---- ---
(IN THOUSANDS)
INTEREST-EARNING ASSETS:
First mortgage loans, net ............. $ 55,014 $ (1,337) $ 53,677 $ 48,538 $ 1,529 $ 50,067
Consumer and other loans .............. 1,809 (490) 1,319 2,941 116 3,057
Federal funds sold .................... 3,204 (2,740) 464 1,058 981 2,039
Mortgage-backed securities ............ 55,020 (6,541) 48,479 5,027 17,018 22,045
Federal Home Loan Bank stock .......... 3,228 (390) 2,838 1,698 -- 1,698
Investment securities ................. (31,017) 697 (30,320) (1,032) 86 (946)
-------- -------- -------- -------- -------- --------
Total ............................. 87,258 (10,801) 76,457 58,230 19,730 77,960
-------- -------- -------- -------- -------- --------
INTEREST-BEARING LIABILITIES:
Savings accounts ...................... (136) (1,510) (1,646) (1,681) (1,158) (2,839)
Interest-bearing demand accounts ...... (23) (310) (333) (41) (205) (246)
Money market accounts ................. 31 (1,209) (1,178) (945) (788) (1,733)
Time deposits ......................... 24,279 (24,628) (349) (7,331) 26,945 19,614
Borrowed funds ........................ 52,486 (5,592) 46,894 46,188 223 46,411
-------- -------- -------- -------- -------- --------
Total ............................. 76,637 (33,249) 43,388 36,190 25,017 61,207
-------- -------- -------- -------- -------- --------
Net change in net interest income . $ 10,621 $ 22,448 $ 33,069 $ 22,040 $ (5,287) $ 16,753
======== ======== ======== ======== ======== ========
Page 56
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2001 AND DECEMBER 31, 2000
Our total assets increased $2.05 billion, or 21.9%, to $11.43 billion
at December 31, 2001 from $9.38 billion at December 31, 2000. This increase was
generally reflected in increases in mortgage loans and mortgage-backed
securities, partially offset by decreases in investment securities.
Loans increased $1.10 billion, or 22.6%, to $5.97 billion at December
31, 2001 from $4.87 billion at December 31, 2000. For the year ended December
31, 2001, we originated and purchased first mortgage loans of approximately
$1.52 billion and $857.6 million, respectively, compared with $895.1 million and
$110.7 million, respectively, for the corresponding 2000 period. These
originations and purchases were concentrated in one-to four-family residential
mortgage loans. The increase in loan originations, a part of our growth
strategy, was also due to the lower market interest rate environment during 2001
that caused an increase in prepayments and refinancings. To supplement our loan
originations we began, late in 2000, to purchase a higher volume of first
mortgage loans than were purchased in previous periods. See "Business of Hudson
City Savings Bank - Lending Activities - Residential Mortgage Lending" for a
discussion of loan purchases. We also originated for the years ended December
31, 2001 and 2000, home equity loans of approximately $62.0 million and $71.4
million, respectively.
Mortgage-backed securities increased $1.75 billion, or 53.6%, to $5.01
billion at December 31, 2001 from $3.26 billion at December 31, 2000. Investment
securities available for sale decreased $709.2 million, or 80.9%, to $167.5
million at December 31, 2001 from $876.7 million at December 31, 2000. The
increase in mortgage-backed securities, a part of our growth strategy, was also
due to the reinvestment of $855.7 million of calls of investment securities into
adjustable-rate or higher yielding fixed-rate mortgage-backed securities during
2001. The large amount of calls of investment securities was due to the lower
interest rate environment that existed during 2001. These increases in
interest-earning assets continue to reflect our emphasis on the origination and
purchase of one-to four-family mortgage loans supplemented by the purchase of
mortgage-backed securities as part of our growth strategy. We began classifying
certain mortgage-backed security purchases as available for sale during 2001 to
maintain internal liquidity requirements.
Federal funds sold decreased $104.1 million, or 85.5%, to $17.6 million
at December 31, 2001 from $121.7 million at December 31, 2000. The higher levels
of federal funds sold at December 31, 2000 resulted from calls of investment
securities, the proceeds from which had not yet been fully invested at year end.
Federal Home Loan Bank of New York ("FHLB") stock increased $7.5 million to
$81.1 million at December 31, 2001, which was the amount of stock we were
required to hold based on our asset size.
At December 31, 2001, total liabilities were $10.14 billion, an
increase of 28.0%, or $2.22 billion, compared with $7.92 billion at December 31,
2000. Borrowed funds increased $900.0 million, or 72.0%, to $2.15 billion at
December 31, 2001 from $1.25 billion at December 31, 2000. Borrowed funds at
December 31, 2001 were comprised of $1.55 billion of securities sold under
agreements to repurchase and $600.0 million of FHLB advances. Advances from the
FHLB utilize our mortgage portfolio as collateral. The increase in borrowed
funds was primarily used to fund asset growth consistent with our capital
management strategy. Funding asset growth with borrowed funds generated
additional earnings through a positive interest rate spread.
Total deposits increased $1.31 billion, or 19.8%, to $7.91 billion at
December 31, 2001 from $6.60 billion at December 31, 2000. Interest-bearing
deposits increased $1.27 billion, or 20.3%, to $7.54 billion at December 31,
2001 from $6.27 billion at December 31, 2000. The increase in interest-bearing
Page 57
deposits was primarily due to a $1.13 billion, or 22.7%, increase in time
deposits to $6.10 billion at December 31, 2001 from $4.97 billion at December
31, 2000. Noninterest-bearing deposits increased $43.5 million, or 13.1%, to
$375.7 million at December 31, 2001 from $332.2 million at December 31, 2000.
The increase in total deposits was primarily used to fund asset growth
consistent with our capital management strategy. We believe the increase in
interest-bearing deposits was due in part to the volatility in the equity
markets, our offering competitive rates on our time deposit products, and
deposit movement among financial institutions due to consolidation within our
industry.
Accrued expenses and other liabilities increased $13.6 million, or
22.0%, to $75.3 million at December 31, 2001 from $61.7 million at December 31,
2000. This increase was primarily due to an increase in accrued interest payable
because of the growth of our borrowed funds and an increase in accrued expenses
related to certain employee benefit plans, primarily post-retirement benefits.
Total stockholders' equity decreased $175.8 million, or 12.0%, to $1.29
billion at December 31, 2001 from $1.46 billion at December 31, 2000. Hudson
City repurchased 12,983,400 shares of our common stock during 2001, which
decreased stockholders' equity by $278.5 million. As of December 31, 2001, there
were 4,781,634 shares authorized to be purchased under our current stock
repurchase program. Offsetting the effect of repurchases on stockholders' equity
was net income of $134.5 million for the year ended December 31, 2001 and an
increase in accumulated other comprehensive income, net of tax, of $7.9 million.
This increase was due to increases in the market values of our investment
securities available for sale due to the lower interest rate environment.
Stockholders' equity was also decreased during 2001 by the declarations of cash
dividends to common stockholders totaling $46.5 million and the purchase of
187,418 shares of common stock for the recognition and retention plans at an
aggregate cost of $4.2 million. The exercise of 142,800 options during 2001
increased stockholders' equity by $2.0 million.
At December 31, 2001, the ratio of total stockholders' equity to total
assets was 11.28% compared with 15.61% at December 31, 2000. For the year ended
December 31, 2001, the ratio of average stockholders' equity to average assets
was 13.05% compared with 16.35% for the year ended December 31, 2000.
Stockholders' equity per common share was $13.74 at December 31, 2001 compared
with $13.78 at December 31, 2000. The decrease in these ratios is primarily due
to the decrease in stockholders' equity and the growth in assets as discussed
above.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000
General. Net income was $134.5 million for the year ended December 31,
2001, an increase of $19.7 million, or 17.2%, from net income of $114.8 million
for the year ended December 31, 2000. Basic and diluted earnings per common
share were $1.37 and $1.35, respectively, for 2001 compared with basic and
diluted earnings per common share of $1.05 and $1.04, respectively, for 2000.
Our return on average stockholders' equity and return on average assets for 2001
was 10.09% and 1.32%, respectively, compared with 7.87% and 1.29%, respectively,
for 2000. The increase in the return on average stockholders' equity reflected
the growth in net income and the decrease in stockholders' equity.
Interest and Dividend Income. Total interest and dividend income
increased $76.5 million, or 12.5%, to $690.5 million for year ended December 31,
2001 compared with $614.0 million for the corresponding 2000 period. The
increase in total interest and dividend income was primarily due to the average
balance of total interest-earning assets increasing $1.25 billion, or 14.3%, to
$10.02 billion for the year ended December 31, 2001 compared with $8.77 billion
for the year ended December 31, 2000. The average balance of first mortgage
loans, net increased $748.5 million, or 16.8%, to $5.20 billion for 2001
compared with $4.46 billion for 2000. The average balance of consumer and other
loans increased $23.2
Page 58
million, or 17.7%, to $154.0 million for 2001 compared with $130.8 million for
2000. The average balance of mortgage-backed securities increased $839.2
million, or 26.2%, to $4.04 billion for 2001 compared with $3.20 billion for
2000. These increases were offset in part by a decrease in the average balance
of investment securities for 2001 of $492.7 million, or 55.8%, to $389.5 million
from $882.2 million for 2000. The average balance of Federal funds sold
increased $73.1 million, or 90.9%, to $153.5 million for 2001 compared with
$80.4 million for 2000. The average balance of FHLB stock increased $55.4
million to $79.4 million for 2001 from $24.0 million for 2000.
The above increases in the average balances of interest-earning assets
reflect internal growth that was consistent with our capital management strategy
to originate and purchase first mortgage loans and consumer and other loans,
while purchasing mortgage-backed securities to supplement loan originations and
manage interest rate risk. The increase in the average balance of first mortgage
loans also reflected the program we established late in 2000 to supplement our
loan originations by purchasing a higher volume of first mortgage loans than in
previous periods. The growth in the average balance of mortgage-backed
securities and the decline in the average balance of investment securities
reflected the calls of investment securities during 2001 due to the lower
interest rate environment. The growth in the average balance of mortgage-backed
securities was also due to the investment of other funds in mortgage-backed
securities as part of our capital management strategy. The increase in the
average balance of federal funds sold reflected the initial investment of the
proceeds of the calls of investment securities, and the initial investment of
the large volume of mortgage loan and mortgage-backed security prepayments.
These funds were subsequently invested in adjustable-rate or higher yielding
fixed-rate mortgage-backed securities or mortgage loans. The increase in the
average balance of FHLB stock reflected the increase in the amount of FHLB stock
required to be held by us based on our asset size.
The increase in interest income due to the growth of average total
interest-earning assets was partially offset by an 11 basis point decrease in
the average yield on interest-earning assets to 6.89% for year ended December
31, 2001 compared with 7.00% for the year ended December 31, 2000. The average
yield on first mortgage loans, net, decreased 3 basis points to 7.32% for 2001
compared with 7.35% for 2000. The average yield on mortgage-backed securities
decreased 20 basis points to 6.51% for 2001 compared with 6.71% for 2000.
The slight decrease in the average yield on first mortgage loans, net,
reflected the relative stability of our offered mortgage interest rates, which
are based on long-term market rates, in the lower short-term interest rate
environment during 2001. The decrease in the average yield on mortgage-backed
securities reflected the repricing of our variable-rate mortgage-backed
securities in the lower interest rate environment. The decrease in the average
yield on mortgage-backed securities also reflected the large volume of purchases
made in the lower rate environment due to the calls of investment securities and
the large prepayment volume on our mortgage-backed security portfolio.
Interest Expense. Total interest expense increased $43.4 million, or
12.1%, to $403.4 million for the year ended December 31, 2001 compared with
$360.0 million for the year ended December 31, 2000. Interest expense on
borrowed funds increased $46.9 million, or 94.7%, to $96.4 million for the year
ended December 31, 2001 compared with $49.5 million for the corresponding 2000
period. Interest expense on deposits decreased $3.5 million, or 1.1%, to $307.0
million for the year ended December 31, 2001 compared with $310.5 million for
the corresponding 2000 period.
The increase in total interest expense was attributable to an increase
in the average balance of total interest-bearing liabilities of $1.38 billion,
or 19.5%, to $8.45 billion for the year ended December 31, 2001 compared with
$7.07 billion for the year ended December 31, 2000. The increase in the average
balance of total interest-bearing liabilities primarily resulted from an
increase in the average balance of
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borrowed funds of $934.0 million, or 117.0%, to $1.73 billion for 2001 compared
with $798.0 million for 2000. The use of borrowed funds has accelerated over the
past year to fund asset growth . The increase also reflected our decision to
assist in managing our interest rate risk by using long-term borrowings to match
our long-term assets.
The average balance of interest-bearing deposits increased $443.6
million, or 7.1%, to $6.72 billion for 2001 compared with $6.27 billion for
2000. The increase in the average balance of interest-bearing deposits was
attributable to an increase in the average balance of time deposits of $449.4
million, or 9.1%, to $5.38 billion for the 2001 compared with $4.93 billion for
2000. We believe the overall increase in total interest-bearing deposits was due
in part to the volatility in the equity markets, our offering competitive rates
on our time deposit products and deposit movement among financial institutions
due to consolidation within our industry.
The increase in interest expense due to the growth of total
interest-bearing liabilities was partially offset by a 32 basis point decrease
in the average cost of total interest-bearing liabilities to 4.77% for the year
ended December 31, 2001 from 5.09% for the year December 31, 2000. The
average cost of total interest-bearing deposits decreased 38 basis points to
4.57% for 2001 compared with 4.95% for 2000. Within the interest-bearing deposit
mix, the average cost of time deposits decreased 48 basis points to 5.15% for
2001 compared with 5.63% for 2000. The decrease in the average cost of
interest-bearing deposits reflected the lower market interest rate environment
in 2001.
The average cost of borrowed funds decreased 64 basis points to 5.57%
for the year ended December 31, 2001 compared with 6.21% for the corresponding
2000 period. The decrease in the average cost of borrowed funds reflected the
continued growth in borrowings during the lower interest rate environment of
2001, and the maturing and refunding in 2001 of higher costing short-term
borrowings originated in 2000. The decreases in the average costs of the
individual components of interest-bearing liabilities reflected the lower
interest rate environment experienced during 2001. However, the lower basis
point decrease in the overall cost of total average interest-bearing
liabilities, when compared to the individual components, reflected the larger
percentage of borrowed funds in our interest-bearing liability mix. These
borrowed funds had higher costs than our existing deposit portfolio.
Net Interest Income. Net interest income increased $33.1 million, or
13.0%, to $287.1 million for the year ended December 31, 2001 compared with
$254.0 million for the year ended December 31, 2000. This increase primarily
reflected increases in the average balance of both interest-earning assets and
interest-bearing liabilities, and the net interest rate spread earned on this
growth. Our net interest rate spread, the difference between the average yield
on average total interest-earning assets and the average cost of average total
interest-bearing liabilities, increased 21 basis points to 2.12% for the year
ended December 31, 2001 compared with 1.91% for the corresponding 2000 period.
The increase in the net interest spread is primarily due to the lower interest
rate environment experienced during 2001 and the fact that our interest-bearing
liabilities repriced faster than our interest-earning assets.
Our net interest margin, represented by net interest income divided by
average total interest-earning assets, decreased 3 basis points to 2.87% for the
year ended December 31, 2001 compared with 2.90% for the corresponding 2000
period. The decrease in the net interest margin reflected the fact that the
average balance of our interest-bearing liabilities grew at a higher rate than
the average balance of our interest-earning assets. This was due, in part, to
the use of funds, which could have been otherwise invested, to purchase our
common stock. This use of funds caused our net interest income to grow at a
lesser rate than did our average interest-earning assets.
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Provision for Loan Losses. Our provision for loan losses for the year
ended December 31, 2001 was $1.9 million, a decrease of $0.2 million, or 9.5%,
compared with $2.1 million for the year ended December 31, 2000. Net loan
charge-offs for 2001 were $9,000 compared with net recoveries of $4,000 during
2000. As a result, the allowance for loan losses increased $1.9 million, or
8.6%, to $24.0 million at December 31, 2001 from $22.1 million at December 31,
2000. The increase in the allowance for loan losses to its current level,
through the continued provision for loan losses, reflected the overall growth of
the loan portfolio, the level of delinquent and non-performing loans and real
estate market conditions during 2001.
Non-performing loans, defined as non-accruing loans and accruing loans
delinquent 90 days or more, increased $2.6 million, or 20.0%, to $15.6 million
at December 31, 2001 from $13.0 million at December 31, 2000, primarily due to
the continued growth in the loan portfolio and the slow economic conditions in
2001. Although non-performing loans increased during 2001, the ratio of
non-performing loans to total loans decreased to 0.26% at December 31, 2001
compared with 0.27% at December 31, 2000. The ratio of the allowance for loan
losses to non-performing loans was 153.4% at December 31, 2001 compared with
170.7% at December 31, 2000. The ratio of the allowance for loan losses to total
loans was 0.40% at December 31, 2001 compared with 0.45% at December 31, 2000.
Future provisions for loan losses will continue to be based upon our
assessment of the overall loan portfolio and the underlying collateral, trends
in non-performing loans, current economic conditions and other relevant factors
in order to maintain the allowance for loan losses at adequate levels to provide
for estimated losses. Although management uses the best information available,
the level of the allowance for loan losses remains an estimate which is subject
to significant judgement and short-term change.
Non-Interest Income. Total non-interest income, consisting primarily of
service fees, was $4.7 million for the year ended December 31, 2001 compared
with $4.5 million for the year ended December 31, 2000.
Non-Interest Expense. Total non-interest expense increased $2.8
million, or 3.5%, to $81.8 million for the year ended December 31, 2001 compared
with $79.0 million for the year ended December 31, 2000. The increase was
primarily due to an increase in salaries and employee benefits of $2.4 million,
or 4.8%, to $52.3 million for 2001 compared with $49.9 million for 2000. The
increase in salaries and employee benefits reflected routine salary increases
and included additional expense of our ESOP which is based on the market price
of our common stock in accordance with the provisions of Statement of Position
93-6, "Employer Accounting for Employee Stock Ownership Plans."
Our efficiency ratio, determined by dividing non-interest expense by
the sum of net interest income and non-interest income, excluding net gains on
securities transactions, was 28.0% for 2001 compared with 30.6% for 2000. Our
ratio of non-interest expense to average assets for 2001 was 0.80% compared with
0.89% for 2000. The decrease in these ratios reflected our efforts to control
non-interest expense while growing assets consistent with our capital management
strategy.
Income Taxes. Income tax expense increased $10.9 million, or 17.4%, to
$73.5 million for the year ended December 31, 2001 compared with $62.6 million
for year ended December 31, 2000. The increase in income tax expense was due to
the increase in income before income tax expense. Our effective tax rate for
2001 and 2000 was 35.3%.
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COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2000 AND DECEMBER 31, 1999
Our total assets increased $861.5 million, or 10.1%, to $9.38 billion
at December 31, 2000 from $8.52 billion at December 31, 1999. This increase,
funded by borrowed funds, was generally reflected in increases in mortgage loans
and mortgage-backed securities.
Loans increased $566.9 million, or 13.2%, to $4.87 billion at December
31, 2000 from $4.31 billion at December 31, 1999. For the year ended December
31, 2000, we originated and purchased first mortgage loans of approximately
$1.01 billion. These originations and purchases were concentrated in one-to
four-family residential mortgage loans. We also originated for the year ended
December 31, 2000, home equity loans of approximately $73.8 million.
Mortgage-backed securities increased $165.0 million, or 5.3%, to $3.26 billion
at December 31, 2000 from $3.10 billion at December 31, 1999. Investment
securities available for sale increased $64.6 million, or 8.0%, to $876.7
million at December 31, 2000 from $812.1 million at December 31, 1999. This
increase reflected an increase in the market value of our investment securities
portfolio as well as additional purchases of securities. These increases
continued to reflect our emphasis on the origination and purchase of one-to
four-family mortgage loans supplemented by the purchase of mortgage-backed
securities. Due to our membership in the Federal Home Loan Bank of New York
("FHLB"), we purchased FHLB stock of $73.6 million during 2000, the amount
required for us to hold based on our assets available to secure borrowings.
The above increases in interest-earning assets were partially offset by
a $13.7 million, or 6.8%, decrease in total cash and cash equivalents to $187.1
million at December 31, 2000 from $200.8 million at December 31, 1999. Accrued
interest receivable increased $10.3 million, or 19.8%, to $62.3 million at
December 31, 2000 from $52.0 million at December 31, 1999 primarily due to the
growth in our mortgage loans and mortgage-backed securities.
At December 31, 2000, total liabilities were $7.92 billion, an increase
of 12.4%, or $876.0 million, compared with $7.04 billion at December 31, 1999.
Borrowed funds, consisting entirely of securities sold under agreements to
repurchase, increased $950.0 million to $1.25 billion at December 31, 2000 from
$300.0 million at December 31, 1999. The use of borrowed funds accelerated in
2000 as compared to 1999 to fund asset growth consistent with our capital
management strategy as well as to offset the decrease in total deposits. Funding
asset growth with borrowed funds generated additional earnings through a
positive interest rate spread on the borrowed funds that were invested.
Total deposits decreased $83.9 million, or 1.3%, to $6.60 billion at
December 31, 2000 from $6.69 billion at December 31, 1999. Interest-bearing
deposits decreased $108.0 million, or 1.7%, to $6.27 billion at December 31,
2000 from $6.38 billion at December 31, 1999. The decrease in interest-bearing
deposits reflects a $23.3 million, or 0.5%, decrease in time deposits to $4.97
billion at December 31, 2000 from $4.99 billion at December 31, 1999, a $37.9
million, or 7.8%, decrease in money market accounts to $448.9 million at
December 31, 2000 from $486.8 million at December 31, 1999, and a $46.5 million,
or 5.8%, decrease in regular savings deposits to $757.6 million at December 31,
2000 from $804.1 million at December 31, 1999. We believe the decrease in
interest-bearing deposits was due in part to the intense competition for
deposits in the banking and financial services industry. The decrease also
reflected our decision to use borrowed funds, which had a lower incremental cost
in 2000 than our originated deposit products. The decrease in interest-bearing
deposits was partially offset by an increase in noninterest-bearing deposits,
particularly demand deposit accounts, of $24.1 million, or 7.8%, to $332.2
million at December 31, 2000 from $308.1 million at December 31, 1999. This
increase was partially attributable to the introduction of a free checking
account product during the second quarter of 2000.
Accrued expenses and other liabilities increased $9.9 million, or
19.1%, to $61.7 million at December 31, 2000 from $51.8 million at December 31,
1999. This increase was primarily due to
Page 62
increases in accrued interest payable on borrowed funds and accrued expenses for
certain employee benefit plans.
Total stockholders' equity decreased $14.5 million, or 1.0%, to $1.46
billion at December 31, 2000 from $1.48 billion at December 31, 1999.
Stockholders' equity increased by net income of $114.8 million for 2000 and an
unrealized gain of $24.9 million in accumulated other comprehensive loss due to
increases in the market values of our investment securities available for sale.
Declarations of cash dividends to common stockholders during 2000 decreased
stockholders' equity by $32.0 million. Transactions in 2000 to unallocated
common stock held by the ESOP decreased stockholders' equity $33.3 million due
to purchases of Hudson City Bancorp common stock by the plan of approximately
$35.3 million offset by $2.0 million of common stock allocations to plan
participants. The balance in unearned common stock held by the RRP was $24.0
million at December 31, 2000, due to purchases of Hudson City Bancorp common
stock by the plan in 2000 of $28.6 million offset by $4.6 million of RRP stock
that vested to participants. Hudson City repurchased 3,664,000 shares of common
stock during 2000, which decreased stockholders' equity by $65.5 million.
At December 31, 2000, the ratio of total stockholders' equity to total
assets was 15.61% compared with 17.36% at December 31, 1999. For the year ended
December 31, 2000, the ratio of average stockholders' equity to average assets
was 16.35% compared with 14.60% for the year ended December 31, 1999.
Stockholders' equity per common share was $13.78 at December 31, 2000 compared
with $12.99 at December 31, 1999.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
General. Net income was $114.8 million for the year ended December 31,
2000, an increase of $7.4 million, or 6.9%, from net income of $107.4 million
for the year ended December 31, 1999. Basic and diluted earnings per common
share were $1.05 and $1.04, respectively, for the year ended December 31, 2000.
From the date of our reorganization (July 13, 1999) to December 31, 1999, basic
and diluted earnings were $0.47 per common share. The increase in net income was
primarily attributable to an increase in net interest income. Our return on
average assets for the year ended December 31, 2000 was 1.29% compared with
1.32% for the year ended December 31, 1999. Our return on average equity for
2000 was 7.87% compared with 9.05% for 1999. The decrease in the return on
average equity was primarily due to the additional equity received in connection
with the reorganization, which occurred July 13, 1999.
Interest Income. Total interest income increased $77.9 million, or
14.5%, to $614.0 million for the year ended December 31, 2000 compared with
$536.1 million for the year ended December 31, 1999. The increase in total
interest income was due in part to the average balance of total interest-earning
assets increasing $803.5 million, or 10.1%, to $8.77 billion for the year ended
December 31, 2000 compared with $7.97 billion for the year ended December 31,
1999. This increase was primarily attributable to a $659.6 million, or 17.4%,
increase in the average balance of first mortgage loans, net to $4.46 billion
for the year ended December 31, 2000 compared with $3.80 billion for the year
ended December 31, 1999. The average balance of consumer and other loans
increased $36.1 million, or 38.1%, to $130.8 million for the year ended December
31, 2000 compared with $94.7 million for year ended December 31, 1999. The
average balance of mortgage-backed securities increased $80.6 million, or 2.6%,
to $3.20 billion for the year ended December 31, 2000 compared with $3.12
billion for the corresponding 1999 period. These increases were offset in part
by a decrease in the average balance of investment securities for the year ended
December 31, 2000 of $15.9 million, or 1.8%, to $882.2 million
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from the average balance of $898.1 million for 1999. The average balance of FHLB
stock purchased was $24.0 million for 2000. We did not own FHLB stock in 1999.
The above increases in the average balances of interest-earning assets
reflected internal growth that was financed by borrowed funds. The growth was
consistent with our capital management strategy to originate and purchase first
mortgage loans and consumer and other loans, while purchasing mortgage-backed
securities to manage interest rate risk. In addition, the growth also reflected
a decline in prepayment activity, year-to-year, primarily due to the increase in
market interest rates. The decline in the average balance of investment
securities reflects the initial deployment of funds received during our
reorganization into short-term securities during the second and third quarters
of 1999. These short-term securities were eventually reinvested in our loan and
mortgage-backed security portfolios, which currently generate higher yields.
The increase in interest income was also attributable to an increase in
the average yield on interest-earning assets to 7.00% for the year ended
December 31, 2000 compared with 6.73% for 1999. This increase in the average
yield reflected across the board increases in the average yields of all
categories of our interest-earnings assets. The average yield on first mortgage
loans, net was 7.35% for the year ended December 31, 2000 compared with 7.31%
for 1999. The average yield on mortgage-backed securities increased 54 basis
points to 6.71% for the year ended December 31, 2000 compared with 6.17% for the
year ended December 31, 1999. The average yield on investment securities
increased slightly to 6.22% for the year ended December 31, 2000 compared with
6.21% for 1999. The slight increase in the average yield on first mortgage
loans, net, in the higher market interest rate environment, reflected a general
lag in the repricing of first mortgage loans due to less refinancing and an
increase in originations of fixed mortgage loans in the prior periods. The
increase in the average yield on mortgage-backed securities reflected the
increase in market interest rates, as our portfolio contains predominantly
adjustable-rate securities.
Interest Expense. Total interest expense increased $61.2 million, or
20.5%, to $360.0 million for the year ended December 31, 2000 compared with
$298.8 million for the year ended December 31, 1999. Interest expense on
borrowed funds increased $46.4 million to $49.5 million for the year ended
December 31, 2000 compared with $3.1 million for the year ended December 31,
1999. Interest expense on deposits increased $14.8 million, or 5.0%, to $310.5
million for the year ended December 31, 2000 compared with $295.7 million for
the year ended December 31, 1999. The increase in deposit interest expense was
primarily attributable to an increase in interest expense on time deposits of
$19.6 million, or 7.6%, to $277.6 million for 2000.
The increase in interest expense was attributable in part to an
increase in the average balance of interest-bearing liabilities of $499.1
million, or 7.6%, to $7.07 billion for the year ended December 31, 2000 compared
with $6.57 billion for the corresponding 1999 period. The increase in the
average balance of total interest-bearing liabilities resulted from an increase
in the average balance of borrowed funds of $744.4 million to $798.0 million for
the year ended December 31, 2000 compared with $53.6 million for the year ended
December 31, 1999. The use of borrowed funds accelerated in 2000 as compared to
1999 to fund asset growth consistent with our capital management strategy and to
offset the decrease in the average balance of interest-bearing deposits.
The average balance of interest-bearing deposits decreased $245.3
million, or 3.8%, to $6.27 billion for the year ended December 31, 2000 compared
with $6.52 billion for the year ended December 31, 1999. Within the
interest-bearing deposit mix, the average balance of time deposits decreased
$141.7 million, or 2.8%, to $4.93 billion for the year ended December 31, 2000
compared with $5.07 billion for the year ended December 31, 1999. The average
balance of regular savings deposits decreased $66.6
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million, or 7.8%, to $782.1 million for the year ended December 31, 2000
compared with $848.7 million for the year ended December 31, 1999. The average
balance of money market accounts decreased $35.1 million, or 7.0%, to $463.8
million for the year ended December 31, 2000. The decrease in the average
balance of interest-bearing deposits reflected the effect of the intense
competition for deposits in the banking and financial services industry. The
decrease also reflected our decision to use borrowed funds, which had a lower
incremental cost in 2000 than our originated deposit products. The decrease also
reflected the use by our depositors of approximately $110.0 million of funds on
deposit with Hudson City Savings Bank to fund their Hudson City Bancorp common
stock purchases during the reorganization.
The increase in interest expense was also attributable to a 54 basis
point increase in the average cost of interest-bearing liabilities to 5.09% for
the year ended December 31, 2000 from 4.55% for 1999. The average cost of
borrowed funds increased 39 basis points to 6.21% for the year ended December
31, 2000 compared with 5.82% for the year ended December 31, 1999. The average
cost of interest-bearing deposits increased 41 basis points to 4.95% for the
year ended December 31, 2000 compared with 4.54% for the year ended December 31,
1999. Within the interest-bearing deposit mix, the average cost of time deposits
increased 54 basis points to 5.63% for the year ended December 31, 2000 compared
with 5.09% for the corresponding 1999 period. The increase in the average cost
of borrowed funds and time deposits reflected the rising market interest rate
environment over the period, the fact that the majority of our time deposits
reprice within one year, and the short-term borrowing strategy employed during
2000. These increases were offset, in part, by decreases in the average cost of
other interest-bearing deposits due to our effort to manage the overall cost of
funds.
Net Interest Income. Net interest income increased $16.8 million, or
7.1%, to $254.0 million for the year ended December 31, 2000 compared with
$237.2 million for the year ended December 31, 1999. This increase primarily
reflected the increases in the average balance of first mortgage loans, net and
our other investments due to the use of the net proceeds from the
reorganization, and the additional earnings generated on the borrowed funds that
were invested. Our net interest rate spread, the difference between the average
yield on average total interest-earning assets and the average cost of average
total interest-bearing liabilities, decreased 27 basis points to 1.91% for the
year ended December 31, 2000 compared with 2.18% for the corresponding 1999
period. Our net interest margin, represented by net interest income divided by
average total interest-earning assets, decreased 8 basis points to 2.90% for the
year ended December 31, 2000 compared with 2.98% for the year ended December 31,
1999. The decreases in the net interest rate spread and the net interest margin
reflected the rising market interest rate environment over the period, the fact
that our interest-bearing liabilities reprice faster than our interest-earning
assets, and a shift within interest-bearing liabilities to higher costing funds.
Provision for Loan Losses. Our provision for loan losses for the year
ended December 31, 2000 was $2.13 million, a decrease of $220,000, or 9.4%,
compared with $2.35 million for the corresponding 1999 period. The allowance for
loan losses increased $2.1 million, or 10.5%, to $22.1 million at December 31,
2000 from $20.0 million at December 31, 1999. Non-performing loans, defined as
non-accruing loans and accruing loans delinquent 90 days or more, decreased $1.0
million, or 7.1%, to $13.0 million at December 31, 2000 from $14.0 million at
December 31, 1999 due, in part, to the favorable economy during the period.
There were net loan recoveries of $4,000 during 2000. The increase in the
allowance for loan losses, through the continued provision for loan losses,
reflected the growth of the loan portfolio. The decrease in the provision,
year-to-year, reflected the lower non-performing loans to total loans ratio.
At December 31, 2000, the ratio of non-performing loans to total loans
was 0.27% compared with 0.33% at December 31, 1999. The ratio of the allowance
for loan losses to non-performing loans was 170.7% at December 31, 2000 compared
with 142.7% at December 31, 1999. The ratio of the allowance
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for loan losses to total loans was 0.45% at December 31, 2000 compared with
0.46% at December 31, 1999.
Non-Interest Income. Total non-interest income, consisting primarily of
service fees, decreased $0.2 million to $4.5 million for the year ended December
31, 2000 compared with $4.7 million for the year ended December 31, 1999.
Non-Interest Expense. Total non-interest expense increased $10.6
million, or 15.5%, to $79.0 million for the year ended December 31, 2000
compared with $68.4 million for the year ended December 31, 1999. Salaries and
employee benefits increased $7.8 million, or 18.5%, to $49.9 million for the
year ended December 31, 2000 compared with $42.1 million for the year ended
December 31, 1999, primarily due to expense recognized in 2000 for the ESOP and
RRP, and routine salary increases. The ESOP expense increased, year-to-year, due
to the higher average market price for our stock in 2000. RRP expense began in
2000 after the plan was approved by the stockholders.
Net occupancy expense increased $1.6 million, or 13.2%, to $13.7
million for the year ended December 31, 2000 compared with $12.1 million for the
corresponding 1999 period. The increase was primarily due to increases in
maintenance and repairs of banking premises and equipment and increases in
rental expense. Federal deposit insurance expense increased primarily due to an
industry wide increase in the assessment charged by the FDIC. Goodwill was fully
amortized as of December 31, 1999, resulting in no amortization expense for the
year ended December 31, 2000.
Other expenses increased $2.4 million, or 22.2%, to $13.2 million for
the year ended December 31, 2000 compared with $10.8 million for 1999. The
increase in other expenses was primarily due to increases in operating expenses
incurred in 2000 related to our existence as a public company, increased fees
for professional services and expense related to the RRP allocation of common
stock to non-officer directors.
Our efficiency ratio, which we determined by dividing non-interest
expense by the sum of net interest income and non-interest income, excluding net
gains on securities transactions, was 30.6% for the year ended December 31, 2000
compared with 28.3% for the year ended December 31, 1999. Our ratio of
non-interest expense to average assets was 0.89% for the year ended December 31,
2000 compared with 0.84% for the corresponding period in 1999. The slight
increase in these ratios reflected the increase in non-interest expense
discussed above.
Income Taxes. Income tax expense decreased $1.3 million, or 2.0%, to
$62.6 million for the year ended December 31, 2000 compared with $63.9 million
for the year ended December 31, 1999. Our effective tax rate for the year ended
December 31, 2000 also decreased to 35.3% from 37.3% for the year ended December
31, 1999. These decreases reflected certain tax benefits attained from the
formation and funding of a subsidiary of Hudson City Savings during 2000.
LIQUIDITY AND CAPITAL RESOURCES
The term "liquidity" refers to our ability to generate adequate amounts
of cash to fund loan originations, loan purchases, deposit withdrawals and
operating expenses. Our primary sources of funds are scheduled amortization and
prepayments of loan principal and mortgage-backed securities, deposits,
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borrowed funds, maturities and calls of investment securities and funds provided
by our operations. Our membership in the FHLB provides us access to additional
sources of borrowed funds, which is generally limited to twenty times the amount
of FHLB stock held.
Scheduled loan repayments and maturing investment securities are a
relatively predictable source of funds. However, deposit flows, calls of
investment securities and borrowed funds, and prepayments of loans and
mortgage-backed securities are strongly influenced by interest rates, general
and local economic conditions and competition in the marketplace. These factors
reduce the predictability of the timing of these sources of funds. As mortgage
interest rates decline, customer refinancing activity tends to accelerate
causing an increase in cash flow from both our mortgage loan and mortgage-backed
security portfolios. If our pricing is competitive, the demand for mortgage
originations also accelerates. When mortgage rates increase, the opposite effect
tends to occur and our loan origination and purchase activity becomes
increasingly dependant on the strength of the residential real estate market,
home purchases and new construction activity.
Principal repayments on loans were $1.35 billion during 2001 compared
with $511.9 million for 2000. Principal payments received on mortgage-backed
securities totaled $1.62 billion during 2001 compared to $693.2 million during
2000. The increase in payments on loans and mortgage-backed securities reflected
the lower market interest rate environment during 2001, which caused an increase
in prepayment activity. It also reflected the growth in those portfolios, thus a
larger base from which to receive payments. Maturities and calls of investment
securities totaled $855.7 million during 2001 compared with maturities and calls
of $0.7 million during 2000. The higher amount of calls during 2001 was due to
the lower interest rate environment.
For the years ended December 31, 2001 and 2000, we borrowed funds of
$950 million and $2.45 billion, respectively, through the use of securities sold
under agreements to repurchase. Additionally, we borrowed $600.0 million for the
year ended December 31, 2001 through the use of FHLB advances. An advance from
the FHLB utilizes our mortgage portfolio as collateral. Borrowings with the FHLB
are generally limited to twenty times the amount of FHLB stock owned. Principal
payments on borrowed funds during 2001 were $650.0 million compared with
principal payments of $1.50 billion during 2000. The higher level of borrowings
and principal payments during 2000 reflected the planned use of short-term
funding in that period.
The net increase in borrowed funds during 2001 of $900.0 million was
used to fund asset growth which generated additional earnings through a positive
interest rate spread. Additionally, during the lower interest rate environment
of 2001, we lengthened the maturities of our borrowings which allowed us to
manage our interest rate risk by using long-term borrowings to match our
long-term assets. There are no borrowed funds scheduled to mature within one
year at December 31, 2001.
Total deposits increased $1.31 billion during 2001 compared with a
decrease of $83.9 million during 2000. Deposit flows are affected by the level
of market interest rates, the interest rates and products offered by
competitors, and other factors. We believe the increase in total deposits in
2001 was due in part to the volatility in the equity markets, our offering
competitive rates on our time deposit products and deposit movement among
financial institutions due to consolidation within our industry. Time deposit
accounts scheduled to mature within one year were $5.52 billion at December 31,
2001. Based on our deposit retention experience and current pricing strategy, we
anticipate that a significant portion of these time deposits will remain with
Hudson City Savings. We are committed to maintaining a strong liquidity
position; therefore, we monitor our liquidity position on a daily basis. We
anticipate that we will have sufficient funds to meet our current funding
commitments.
Page 67
Our primary investing activities are the origination and purchase of
one-to four-family real estate loans and consumer and other loans, the purchase
of mortgage-backed securities, and to a lesser extent, the purchase of
investment securities. We originated and purchased total loans of approximately
$1.59 billion and $857.6 million, respectively, during 2001 compared with $968.9
million and $110.7 million, respectively, during 2000. The increase is primarily
due to the lower market interest rate environment during 2001, which caused an
increase in prepayments and refinancings and an overall increase in mortgage
lending activity. Additionally, to supplement our loan originations, we
established late in 2000 a program to purchase a higher volume of first mortgage
loans than in previous periods.
Purchases of mortgage-backed securities during 2001 were $3.36 billion
compared with $862.5 million during 2000. Of the mortgage-backed securities
purchased in 2001, $2.17 billion were real estate mortgage investment conduits
("REMIC") compared with no such purchases in 2000. The REMIC purchases in 2001
had fixed interest rates and generally had shorter average lives compared with
alternate mortgage-backed security investments available at the time of
purchase. The increase in purchases of mortgage-backed securities was related to
the increase in prepayment activity due to the lower market interest rate
environment during 2001. This increase also reflected the reinvestment of the
proceeds from the calls of investment securities received during 2001. As part
of the membership requirements of the FHLB, we are required to purchase a
certain dollar amount of FHLB common stock. During 2001 we purchased $7.5
million of FHLB common stock, which brings our total investment in FHLB stock to
$81.1 million, the amount we are currently required to hold based on our asset
size.
During 2001, the recognition and retention plan purchased 187,418
additional shares of common stock at a cost of $4.2 million. The purchase of
121,100 of these shares was due to additional awards made in 2001. The remaining
66,318 shares purchased were not allocated at December 31, 2001.
Under our stock repurchase programs, shares of Hudson City Bancorp
common stock may be purchased in the open market and through other privately
negotiated transactions, from time-to-time, depending on market conditions. The
repurchased shares are held as treasury stock for general corporate use. During
2001, we purchased 12,983,400 shares of common stock at an aggregate cost of
$278.5 million. During 2000, we purchased 3,664,000 shares of common stock at an
aggregate cost of $65.5 million. At December 31, 2001, there were 4,781,634
shares remaining to be repurchased under the current stock repurchase program.
At December 31, 2001, Hudson City Savings had outstanding loan
commitments to borrowers of approximately $314.8 million, commitments to
purchase loans of approximately $101.2 million and available home equity and
overdraft lines of credit of approximately $73.2 million. We anticipate that we
will have sufficient funds available to meet our current commitments in the
normal course of business.
Cash dividends declared and paid during 2001 were $46.5 million
compared with $32.0 million during 2000. The dividend pay-out ratio for the
years ending December 31, 2001 and 2000, was 34.3% and 27.6%, respectively. On
January 10, 2002, the Board of Directors declared a quarterly cash dividend of
fifteen cents ($0.15) per common share. The dividend was paid on March 1, 2002
to stockholders of record at the close of business on February 8, 2002.
We opened one new branch location in Ocean County during 2001 and
opened a new branch in Bergen County in February 2002. The expenditures related
to their establishment did not have a material impact on our liquidity,
financial position or results of operations. We do not anticipate any material
capital expenditures nor do we have any balloon or other payments due on any
long-term obligations or any off-balance sheet items other than the commitments
and unused lines of credit noted above.
Page 68
At December 31, 2001, Hudson City Bancorp and Hudson City Savings
exceeded all regulatory capital requirements. Hudson City Bancorp's leverage
capital ratio, Tier 1 risk-based capital ratio and total risk-based capital
ratio were 11.55%, 34.02% and 34.66%, respectively. Hudson City Savings'
leverage capital ratio, Tier 1 risk-based capital ratio and total risk-based
capital ratio were 10.64%, 31.32% and 31.96%, respectively.
EVENTS OF SEPTEMBER 11, 2001
The attacks of September 11, 2001, have not caused any significant
impact on our financial condition or results of operations. We expect that any
possible future impact caused by these events will result from their impact on
overall economic conditions and our customers.
RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("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 specifies the
criteria acquired intangible assets must meet to be recognized and reported
apart from goodwill.
SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."
SFAS No. 142 requires that after December 31, 2001, goodwill and any
intangible asset determined to have an indefinite useful life will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142.
We are required to adopt the provisions of SFAS No. 141 immediately.
The initial adoption of SFAS No. 141 had no impact on our consolidated financial
statements. We are required to adopt SFAS No. 142 effective January 1, 2002. We
currently have no recorded goodwill or intangible assets and do not anticipate
that the initial adoption of SFAS No. 142 will have a significant impact on our
consolidated financial statements.
In July of 2001, FASB Technical Bulletin No. 01-1, "Effective Date for
Certain Financial Institutions of Certain Provisions of Statement 140 Related to
the Isolation of Transferred Financial Assets," was issued which delays the
effective date for the isolation standards and related guidance under SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," to transfers of financial assets occurring after
December 31, 2001, instead of March 31, 2001. The implementation of SFAS No. 140
provisions, effective after December 15, 2000, did not have a material impact on
our financial condition or results of operations. The implementation of the
remaining
Page 69
provisions, subsequent to December 31, 2001, is not expected to have a material
impact on our financial condition or results of operations.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and accompanying Notes to
Consolidated Financial Statements of Hudson City Bancorp have been prepared in
accordance with accounting principles generally accepted in the United States of
America (GAAP). GAAP generally requires the measurement of financial position
and operating results in terms of historical dollars without consideration for
changes in the relative purchasing power of money over time due to inflation.
The impact of inflation is reflected in the increased cost of our operations.
Unlike industrial companies, our assets and liabilities are primarily monetary
in nature. As a result, changes in market interest rates have a greater impact
on performance than do the effects of inflation.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information regarding quantitative and qualitative disclosures about
market risk appear under Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Management of Interest Rate
Risk.
Page 70
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders of
Hudson City Bancorp, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Hudson City Bancorp, Inc. and subsidiary as of December 31, 2001
and 2000, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Hudson City
Bancorp, Inc. and subsidiary as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
/s/ KPMG LLP
January 10, 2002
Short Hills, New Jersey
Page 71
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Financial Condition
DECEMBER 31, DECEMBER 31,
2001 2000
---- ----
(IN THOUSANDS)
Assets:
Cash and due from banks (note 3) ............................................... $ 84,214 $ 65,411
Federal funds sold ............................................................. 17,600 121,700
------------ ------------
Total cash and cash equivalents ................................ 101,814 187,111
Investment securities held to maturity, market value of $1,474 at
December 31, 2001 and $1,496 at December 31, 2000 (note 4) .............. 1,441 1,481
Investment securities available for sale, at market value (notes 4 and 10) ..... 167,427 876,667
Federal Home Loan Bank of New York stock ....................................... 81,149 73,629
Mortgage-backed securities held to maturity, market value of $4,530,692 at
December 31, 2001 and $3,287,504 at December 31, 2000
(notes 5 and 10) ........................................................ 4,478,488 3,262,035
Mortgage-backed securities available for sale, at market value
(notes 5 and 10) ........................................................ 530,690 --
Loans (note 6) ................................................................. 5,968,171 4,872,740
Less:
Deferred loan fees .................................................. 12,060 9,555
Allowance for loan losses (note 6) .................................. 24,010 22,144
------------ ------------
Net loans ...................................................... 5,932,101 4,841,041
Foreclosed real estate, net (note 7) ........................................... 250 438
Accrued interest receivable .................................................... 61,808 62,260
Banking premises and equipment, net (note 8) ................................... 31,363 31,309
Other assets (notes 11 and 12) ................................................. 40,237 44,402
------------ ------------
Total Assets ................................................... $ 11,426,768 $ 9,380,373
============ ============
Liabilities and Stockholders' Equity:
Deposits (note 9):
Interest-bearing ........................................................ $ 7,537,103 $ 6,271,944
Noninterest-bearing ..................................................... 375,659 332,177
------------ ------------
Total deposits ................................................. 7,912,762 6,604,121
Borrowed funds (note 10) ....................................................... 2,150,000 1,250,000
Accrued expenses and other liabilities (note 11) ............................... 75,270 61,683
------------ ------------
Total liabilities .............................................. 10,138,032 7,915,804
------------ ------------
Common stock, $0.01 par value, 800,000,000 shares authorized; 115,638,300 shares
issued, 99,158,700 shares outstanding at December 31, 2001,
111,999,300 shares issued and outstanding at December 31, 2000 .......... 1,156 1,156
Additional paid-in capital ..................................................... 526,855 526,718
Retained earnings (notes 12 and 14) ............................................ 1,172,164 1,084,157
Treasury stock, at cost; 16,479,600 shares at December 31, 2001 and
3,639,000 shares at December 31, 2000 ................................... (340,716) (65,011)
Unallocated common stock held by the employee stock
ownership plan (note 11) ................................................ (53,435) (55,396)
Unearned common stock held by the recognition and
retention plan (note 11) ................................................ (22,132) (23,958)
Accumulated other comprehensive income (loss), net of tax ...................... 4,844 (3,097)
------------ ------------
Total stockholders' equity ..................................... 1,288,736 1,464,569
------------ ------------
Commitments and contingencies (notes 8 and 15)
Total Liabilities and Stockholders' Equity ............... $ 11,426,768 $ 9,380,373
============ ============
See accompanying notes to consolidated financial statements.
Page 72
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
YEARS ENDED DECEMBER 31,
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Interest and Dividend Income:
Interest and fees on first mortgage loans (note 6) ...................... $ 381,135 $ 327,458 $ 277,391
Interest and fees on consumer and other loans ........................... 11,959 10,640 7,583
Interest on mortgage-backed securities held to maturity ................. 254,610 214,435 192,390
Interest on mortgage-backed securities available for sale ............... 8,304 -- --
Interest on investment securities held to maturity (note 4):
Taxable ............................................................. 68 67 60
Exempt from federal taxes ........................................... 23 26 28
Interest and dividends on investment securities available for sale -
taxable (note 4).. 24,427 54,745 55,696
Dividends on Federal Home Loan Bank of New York stock ................... 4,536 1,698 --
Interest on federal funds sold .......................................... 5,436 4,972 2,933
--------- --------- ---------
Total interest and dividend income ............................... 690,498 614,041 536,081
--------- --------- ---------
Interest Expense:
Interest on deposits (note 9) ........................................... 307,007 310,513 295,717
Interest on borrowed funds (note 10) .................................... 96,420 49,526 3,115
--------- --------- ---------
Total interest expense ........................................... 403,427 360,039 298,832
--------- --------- ---------
Net interest income .......................................... 287,071 254,002 237,249
Provision for Loan Losses (note 6) ............................................ 1,875 2,130 2,350
--------- --------- ---------
Net interest income after provision for loan losses .......... 285,196 251,872 234,899
--------- --------- ---------
Non-interest Income:
Service charges and other income ........................................ 4,694 4,541 4,752
Losses on securities transactions, net (note 4) ......................... -- -- (7)
--------- --------- ---------
Total non-interest income ........................................ 4,694 4,541 4,745
--------- --------- ---------
Non-interest Expense:
Salaries and employee benefits (note 11) ................................ 52,307 49,871 42,117
Net occupancy expense (note 8) .......................................... 14,088 13,678 12,076
Federal deposit insurance assessment .................................... 1,292 1,414 806
Amortization of goodwill (note 12) ...................................... -- -- 1,440
Computer and related services ........................................... 1,055 806 1,195
Other expense ........................................................... 13,082 13,228 10,774
--------- --------- ---------
Total non-interest expense ....................................... 81,824 78,997 68,408
--------- --------- ---------
Income before income tax expense ............................. 208,066 177,416 171,236
Income Tax Expense (note 12) .................................................. 73,517 62,590 63,850
--------- --------- ---------
Net income ................................................... $ 134,549 $ 114,826 $ 107,386
========= ========= =========
Basic earnings per share (1) (note 18) ........................................ $ 1.37 $ 1.05 $ 0.47
========= ========= =========
Diluted earnings per share (1) (note 18) ...................................... $ 1.35 $ 1.04 $ 0.47
========= ========= =========
(1) Per share data for 1999 from date of reorganization (July 13, 1999)
See accompanying notes to consolidated financial statements.
Page 73
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
UNALLOCATED UNEARNED
ADDITIONAL COMMON COMMON
COMMON PAID-IN RETAINED STOCK HELD STOCK HELD TREASURY
STOCK CAPITAL EARNINGS BY THE ESOP BY THE RRP STOCK
----- ------- -------- ----------- ---------- -----
(IN THOUSANDS)
Balance at December 31, 1998 ........................... $ -- $ -- $ 899,933 $ -- $ -- $ --
Comprehensive income:
Net income .................................. -- -- 107,386 -- -- --
Other comprehensive income (loss):
Unrealized holding losses arising during
Period (net of tax of $(17,552)) ... -- -- -- -- -- --
Reclassification adjustment for losses in
net income (net of tax of $(2)) .... -- -- -- -- -- --
Total comprehensive income ..................
Proceeds from sale of common stock, net ......... 1,156 526,485 -- -- -- --
Capitalization of Hudson City, MHC .............. -- -- (200) -- -- --
Declaration of dividends ($0.05 per share) ...... -- -- (5,782) -- -- --
Purchase of ESOP stock .......................... -- -- -- (23,402) -- --
Allocation of ESOP stock ........................ -- 134 -- 1,293 -- --
-------- -------- ---------- -------- -------- ---------
Balance at December 31, 1999 ........................... 1,156 526,619 1,001,337 (22,109) -- --
Comprehensive income:
Net income .................................. -- -- 114,826 -- -- --
Other comprehensive income (loss):
Unrealized holding gains arising during
period (net of tax of $15,240) ..... -- -- -- -- -- --
Total comprehensive income ..................
Declaration of dividends ($0.29 per share) ...... -- -- (32,006) -- -- --
Purchase of ESOP stock .......................... -- -- -- (35,244) -- --
Allocation of ESOP stock ........................ -- 419 -- 1,957 -- --
Purchase of RRP stock ........................... -- -- -- -- (28,638) --
Vesting of RRP stock ............................ -- (223) -- -- 4,680 --
Purchase of treasury stock ...................... -- -- -- -- -- (65,456)
Exercise of stock options ....................... -- (97) -- -- -- 445
-------- -------- ---------- -------- -------- ---------
Balance at December 31, 2000 ........................... 1,156 526,718 1,084,157 (55,396) (23,958) (65,011)
Comprehensive income:
Net income .................................. -- -- 134,549 -- -- --
Other comprehensive income (loss):
Unrealized holding gains arising during
period (net of tax of $4,868) ...... -- -- -- -- -- --
Total comprehensive income ..................
Declaration of dividends ($0.47 per share) ...... -- -- (46,542) -- -- --
Allocation of ESOP stock ........................ -- 1,277 -- 1,961 -- --
Purchase of RRP stock ........................... -- -- -- -- (4,184) --
Vesting of RRP stock ............................ -- (368) -- -- 6,010 --
Purchase of treasury stock ...................... -- -- -- -- -- (278,458)
Exercise of stock options ....................... -- (772) -- -- -- 2,753
-------- -------- ---------- -------- -------- ---------
Balance at December 31, 2001 ........................... $ 1,156 $526,855 $1,172,164 $(53,435) $(22,132) $(340,716)
======== ======== ========== ======== ======== =========
ACCUMULATED
OTHER
COMPREHENSIVE TOTAL
INCOME STOCKHOLDERS'
(LOSS) EQUITY
------ ------
(IN THOUSANDS)
Balance at December 31, 1998 ........................... $ 673 $ 900,606
Comprehensive income: ----------
Net income .................................. -- 107,386
Other comprehensive income (loss):
Unrealized holding losses arising during
Period (net of tax of $(17,552)) ... (28,641) (28,641)
Reclassification adjustment for losses in
net income (net of tax of $(2)) .... 5 5
----------
Total comprehensive income .................. 78,750
----------
Proceeds from sale of common stock, net ......... -- 527,641
Capitalization of Hudson City, MHC .............. -- (200)
Declaration of dividends ($0.05 per share) ...... -- (5,782)
Purchase of ESOP stock .......................... -- (23,402)
Allocation of ESOP stock ........................ -- 1,427
-------- ----------
Balance at December 31, 1999 ........................... (27,963) 1,479,040
Comprehensive income: ----------
Net income .................................. -- 114,826
Other comprehensive income (loss):
Unrealized holding gains arising during
period (net of tax of $15,240) ..... 24,866 24,866
----------
Total comprehensive income .................. 139,692
----------
Declaration of dividends ($0.29 per share) ...... -- (32,006)
Purchase of ESOP stock .......................... -- (35,244)
Allocation of ESOP stock ........................ -- 2,376
Purchase of RRP stock ........................... -- (28,638)
Vesting of RRP stock ............................ -- 4,457
Purchase of treasury stock ...................... -- (65,456)
Exercise of stock options ....................... -- 348
-------- ----------
Balance at December 31, 2000 ........................... (3,097) 1,464,569
Comprehensive income: ----------
Net income .................................. -- 134,549
Other comprehensive income (loss):
Unrealized holding gains arising during
period (net of tax of $4,868) ...... 7,941 7,941
----------
Total comprehensive income .................. 142,490
----------
Declaration of dividends ($0.47 per share) ...... -- (46,542)
Allocation of ESOP stock ........................ -- 3,238
Purchase of RRP stock ........................... -- (4,184)
Vesting of RRP stock ............................ -- 5,642
Purchase of treasury stock ...................... -- (278,458)
Exercise of stock options ....................... -- 1,981
-------- ----------
Balance at December 31, 2001 ........................... $ 4,844 $1,288,736
======== ==========
See accompanying notes to consolidated financial statements.
Page 74
Hudson City Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
YEARS ENDED DECEMBER 31,
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Cash Flows from Operating Activities:
Net income ................................................................... $ 134,549 $ 114,826 $ 107,386
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, accretion and amortization expense .................... 5,167 5,755 8,005
Provision for loan losses ........................................... 1,875 2,130 2,350
Losses on net securities transactions ............................... -- -- 7
Allocation of stock for employee benefit plans ...................... 8,880 6,833 1,427
Deferred tax benefit ................................................ (2,857) (5,174) (3,173)
Net proceeds from sale of foreclosed real estate .................... 940 1,048 2,170
Decrease (increase) in accrued interest receivable .................. 452 (10,290) (2,929)
Decrease (increase) in other assets ................................. 2,154 (5,722) (1,112)
Increase in accrued expenses and other liabilities .................. 13,587 9,902 7,466
----------- ----------- -----------
Net Cash Provided by Operating Activities ......................................... 164,747 119,308 121,597
----------- ----------- -----------
Cash Flows from Investing Activities:
Net increase in loans ........................................................ (233,507) (456,176) (570,605)
Purchases of loans ........................................................... (857,638) (110,733) (74,969)
Principal collection of mortgage-backed securities held to maturity .......... 1,584,372 693,241 1,059,577
Purchases of mortgage-backed securities held to maturity ..................... (2,804,215) (862,546) (1,094,073)
Principal collection of mortgage-backed securities available for sale ........ 35,996 -- --
Purchases of mortgage-backed securities available for sale ................... (560,228) -- --
Proceeds from maturities and calls of investment securities held to maturity . 40 150 15
Purchases of investment securities held to maturity .......................... -- (252) --
Proceeds from maturities and calls of investment securities available for sale 855,614 536 733,155
Proceeds from sales of investment securities available for sale .............. -- -- 109,766
Purchases of investment securities available for sale ........................ (140,430) (25,000) (913,976)
Purchases of Federal Home Loan Bank of New York stock ........................ (7,520) (73,629) --
Purchases of premises and equipment, net ..................................... (3,966) (3,708) (5,485)
----------- ----------- -----------
Net Cash Used in Investment Activities ............................................ (2,131,482) (838,117) (756,595)
----------- ----------- -----------
Cash Flows from Financing Activities:
Net increase (decrease) in deposits .......................................... 1,308,641 (83,923) (119,295)
Proceeds from borrowed funds ................................................. 1,550,000 2,450,000 300,000
Principal payments on borrowed funds ......................................... (650,000) (1,500,000) --
Proceeds from sale of stock, net ............................................. -- -- 527,641
Capitalization of Hudson City, MHC ........................................... -- -- (200)
Dividends paid ............................................................... (46,542) (32,006) (5,782)
Purchases of stock by the ESOP ............................................... -- (35,244) (23,402)
Purchases of stock by the RRP ................................................ (4,184) (28,638) --
Purchases of treasury stock .................................................. (278,458) (65,456) --
Exercise of stock options .................................................... 1,981 348 --
----------- ----------- -----------
Net Cash Provided by Financing Activities ......................................... 1,881,438 705,081 678,962
----------- ----------- -----------
Net (Decrease) Increase in Cash and Cash Equivalents .............................. (85,297) (13,728) 43,964
Cash and Cash Equivalents at Beginning of Period .................................. 187,111 200,839 156,875
----------- ----------- -----------
Cash and Cash Equivalents at End of Period ........................................ $ 101,814 $ 187,111 $ 200,839
=========== =========== ===========
Supplemental Disclosures:
Interest paid ................................................................ $ 399,401 $ 354,987 $ 297,294
=========== =========== ===========
Income taxes paid ............................................................ $ 70,205 $ 75,017 $ 64,722
=========== =========== ===========
See accompanying notes to consolidated financial statements.
Page 75
Notes to Consolidated Financial Statements
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) BASIS OF PRESENTATION
The following are the significant accounting and reporting policies
applied by Hudson City Bancorp, Inc. ("Hudson City Bancorp") and its
wholly-owned subsidiary Hudson City Savings Bank ("Hudson City Savings") in the
preparation of the accompanying consolidated financial statements. The
consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America. All
significant intercompany transactions and balances have been eliminated in
consolidation. Certain amounts previously reported have been reclassified to
conform to the current year's presentation. As used in these consolidated
financial statements, "Hudson City" refers to Hudson City Bancorp, Inc. and its
consolidated subsidiary, depending on the context.
Hudson City Bancorp is a Delaware corporation organized in March 1999 by
Hudson City Savings in connection with the conversion and reorganization of
Hudson City Savings from a New Jersey mutual savings bank into a two-tiered
mutual savings bank holding company structure, referred to as the
Reorganization, as described more fully in Note 2. Prior to July 13, 1999,
Hudson City Bancorp had not issued any stock, had no assets and no liabilities
and had not conducted any business other than of an organizational nature.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the statements of financial condition and income
for the period. Actual results could differ from these estimates.
b) COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income includes items such as unrealized gains and
losses on securities available for sale, net of tax. Comprehensive income is
presented in the consolidated statements of changes in stockholders' equity.
c) STATEMENTS OF CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents includes
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one-day periods.
Transfers of loans to foreclosed real estate of $747,000, $1,126,000 and
$1,555,000 for the years ended December 31, 2001, 2000 and 1999, respectively,
did not result in cash receipts or cash payments.
d) INVESTMENT SECURITIES
Investment securities are classified as either held to maturity or
available for sale. Investment securities classified as held to maturity are
stated at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income, using a
method that approximates level yield. Hudson City has both the ability and the
positive intent to hold these investment securities to maturity. Securities
available for sale are carried at fair value, with unrealized gains and losses,
net of tax, reported as a component of other comprehensive income, which is
included in stockholders' equity.
Page 76
Notes to Consolidated Financial Statements
Realized gains and losses are recognized when securities are sold or
called using the specific identification method. The estimated fair market value
of all investment securities is determined by use of quoted market prices.
e) MORTGAGE-BACKED SECURITIES
Mortgage-backed securities include pass-through certificates, which
represent participating interests in pools of long-term first mortgage loans
originated and serviced by third-party issuers of the securities, and real
estate mortgage investment conduits ("REMICs"), which are debt securities that
are secured by mortgage loans or other mortgage-backed securities.
Mortgage-backed securities are classified as either held to maturity or
available for sale. Mortgage-backed securities classified as held to maturity
are stated at cost, adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income, using a
method that approximates level yield. Hudson City has both the ability and the
positive intent to hold these investment securities to maturity. Mortgage-backed
securities available for sale are carried at fair value, with unrealized gains
and losses, net of tax, reported as a component of other comprehensive income,
which is included in stockholders' equity. Gains and losses are recognized when
securities are sold using the specific identification method. The estimated fair
market value of these securities is determined by use of quoted market prices.
f) LOANS
Loans are stated at their principal amounts outstanding. Interest income
on loans is accrued and credited to income as earned. Net loan origination fees
are deferred and amortized to interest income over the life of the loan as an
adjustment to the loan's yield, using the level yield method. Purchased loans
are stated at their principal amounts outstanding adjusted for amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income, using a method that approximates level yield.
The accrual of income on loans that do not carry private mortgage
insurance or are not guaranteed by a federal agency is generally discontinued
when interest or principal payments are 90-days in arrears or when the timely
collection of such income is doubtful. Loans on which the accrual of income has
been discontinued are designated as nonaccrual loans and outstanding interest
previously credited is reversed. It is recognized subsequently in the period
collected only when the ultimate collection of principal is no longer in doubt.
A nonaccrual loan is returned to accrual status when factors indicating doubtful
collection no longer exist.
Hudson City defines the population of impaired loans to be all nonaccrual
commercial real estate and multi-family loans. Impaired loans are individually
assessed to determine that the loan's carrying value is not in excess of the
fair value of the collateral or the present value of the loan's expected future
cash flows. Smaller balance homogeneous loans that are collectively evaluated
for impairment, such as residential mortgage loans and consumer loans, are
specifically excluded from the impaired loan portfolio. There were no loans
classified as impaired at December 31, 2001 and 2000.
g) ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is a valuation account established through a
provision for loan losses charged to income. Losses on loans are charged against
the allowance when management believes the collection of the principal is
unlikely. Subsequent recoveries, if any, are generally credited to the
allowance. The determination of the amount of the allowance, and the related
provision for loan losses, is
Page 77
Notes to Consolidated Financial Statements
based on such factors as loan loss experience, known and inherent risks in the
loan portfolio, the estimated value of underlying collateral, current economic
and real estate market trends, loan portfolio growth and other factors which may
warrant recognition.
Hudson City's objective is to maintain an allowance at a level sufficient
to cover specifically identifiable loan losses, as well as estimated losses
inherent in the loan portfolio which are probable but not specifically
identifiable. Although management uses the best information available, the level
of the allowance for loan losses remains an estimate which is subject to
significant judgement and short-term change.
h) FORECLOSED REAL ESTATE
Foreclosed real estate is property acquired through foreclosure and deed
in lieu of foreclosure. After foreclosure, foreclosed properties held for sale
are carried at the lower of fair value minus estimated cost to sell, or at cost.
Fair market value is generally based on recent appraisals. Subsequent
provisions, which may result from the ongoing periodic valuations of these
properties, are charged to income in the period in which they are identified and
credited to a valuation allowance account. Foreclosed real estate is reported
net of the valuation allowance. Carrying costs, such as maintenance and taxes,
are charged to operating expenses as incurred.
i) BANKING PREMISES AND EQUIPMENT
Land is carried at cost. Buildings, leasehold improvements and furniture,
fixtures and equipment are carried at cost, less accumulated depreciation and
leasehold amortization. Buildings are depreciated over their estimated useful
lives using the straight-line method. Furniture, fixtures and equipment are
depreciated over their estimated useful lives using the double-declining balance
method. Leasehold improvements are amortized over the shorter of their estimated
useful lives or the term of the respective leases. The costs for major
improvements and renovations are capitalized, while maintenance, repairs and
minor improvements are charged to operating expenses as incurred. Gains and
losses on dispositions are reflected currently as other non-interest income or
expense.
j) INCOME TAXES
We utilize the asset and liability method of accounting for income taxes.
Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
k) EMPLOYEE BENEFIT PLANS
Hudson City maintains certain noncontributory benefit plans which cover
all employees who have met the eligibility requirements of the plans. Certain
health care and life insurance benefits are provided for retired employees. The
expected cost of benefits provided for retired employees is actuarially
determined and accrued ratably from the date of hire to the date the employee is
fully eligible to receive the benefits.
Page 78
Notes to Consolidated Financial Statements
The employee stock ownership plan ("ESOP") is accounted for in accordance
with the provisions of Statement of Position 93-6, "Employer Accounting for
Employee Stock Ownership Plans." The funds borrowed by the ESOP from Hudson City
Bancorp to purchase Hudson City Bancorp common stock are being repaid from
Hudson City Savings' contributions and dividends paid on unallocated ESOP shares
over a period of up to 30 years. Hudson City common stock not allocated to
participants is recorded as a reduction of stockholders' equity at cost.
Compensation expense for the ESOP is based on the average price of our stock
during each quarter.
The Hudson City stock option plans and the recognition and retention plans
("RRP") are accounted for in accordance with the provisions of APB Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations. Accordingly, no compensation expense has been recognized for
the stock option plans. The fair value pro forma disclosures required by
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" are included in Note 11 - Employee Benefit Plans.
Compensation expense for the RRP in the amount of the fair value of the common
stock at the date of grant is recognized ratably over the five year vesting
period. Unvested and unallocated RRP shares are recorded as a reduction of
stockholders' equity at cost.
l) BORROWED FUNDS
Hudson City enters into sales of securities under agreements to repurchase
with selected brokers and the Federal Home Loan Bank ("FHLB.") These agreements
are recorded as financing transactions as Hudson City maintains effective
control over the transferred securities. The dollar amount of the securities
underlying the agreements continue to be carried in Hudson City's securities
portfolio. The obligations to repurchase the securities are reported as a
liability in the consolidated statements of financial condition.
The securities underlying the agreements are delivered to the party with
whom each transaction is executed. They agree to resell to Hudson City the same
securities at the maturity or call of the agreement. Hudson City retains the
right of substitution of the underlying securities throughout the terms of the
agreements.
Hudson City has also obtained advances from the FHLB, which are generally
secured by a blanket lien against our mortgage portfolio. Total borrowings with
the FHLB are generally limited to twenty times the amount of FHLB stock owned.
m) EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of shares outstanding for the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock (such as stock
options) were exercised or resulted in the issuance of common stock. These
potentially dilutive shares would then be included in the weighted average
number of shares outstanding for the period using the treasury stock method.
Shares issued and shares reacquired during any period are weighted for the
portion of the period that they were outstanding.
In computing both basic and diluted earnings per share, the weighted
average number of common shares outstanding includes all 61,288,300 shares
issued to Hudson City, MHC. Also included are the ESOP shares previously
allocated to participants and shares committed to be released for allocation to
Page 79
Notes to Consolidated Financial Statements
participants and the RRP shares which have vested or have been allocated to
participants. ESOP and RRP shares that have been purchased but have not been
committed to be released have not been considered in computing basic and diluted
earnings per share.
2. STOCKHOLDERS' EQUITY
On July 13, 1999, Hudson City Savings converted and reorganized from a New
Jersey-chartered mutual savings bank into a two-tiered mutual savings bank
holding company structure pursuant to a Plan of Reorganization and Stock
Issuance. Under the terms of the Plan, Hudson City Savings became a wholly-owned
subsidiary of Hudson City Bancorp and received 50% of the net proceeds from the
initial public offering of Hudson City Bancorp's common stock. Hudson City
Bancorp became a majority-owned subsidiary of Hudson City, MHC, a New
Jersey-chartered mutual savings bank holding company, referred to as the MHC.
Hudson City Bancorp sold 54,350,000 shares of its common stock to the
public, representing 47% of the then outstanding shares, at $10.00 per share.
Hudson City Bancorp received net proceeds of $527.6 million. The number of
shares of common stock sold and the price for such shares was determined by the
Board of Directors based upon an appraisal of Hudson City Savings made by an
independent appraisal firm. An additional 61,288,300 shares, or 53% of the then
outstanding shares of Hudson City Bancorp, were issued to Hudson City, MHC. At
December 31, 2001, as a result of stock repurchases, Hudson City, MHC owned
61.8% of Hudson City Bancorp. Hudson City Bancorp's common stock commenced
trading on July 13, 1999 on the Nasdaq National Market under the symbol "HCBK."
Upon completion of the Plan, a "liquidation account" was established in an
amount equal to the total equity of Hudson City Savings as of the latest
practicable date prior to the Reorganization. The liquidation account was
established to provide a limited priority claim to the assets of Hudson City
Savings to "eligible account holders" and "supplemental eligible account
holders", as defined in the Plan, who continue to maintain deposits in Hudson
City Savings after the Reorganization. In the unlikely event of a complete
liquidation of Hudson City Savings, and only in such event, each eligible
account holder and supplemental eligible account holder would receive a
liquidation distribution, prior to any payment to the holder of the Bank's
common stock. This distribution would be based upon each eligible account
holder's and supplemental account holder's proportionate share of the then total
remaining qualifying deposits.
3. RESTRICTIONS ON CASH AND DUE FROM BANKS
Cash reserves are required to be maintained on deposit with the Federal
Reserve Bank based on deposits. The average amount of the reserves on deposit
for the years ended December 31, 2001 and 2000 was approximately $2,104,000 and
$1,502,000, respectively.
Page 80
Notes to Consolidated Financial Statements
4. INVESTMENT SECURITIES
The amortized cost and estimated fair market value of investment
securities at December 31 are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
2001
HELD TO MATURITY
Municipal bonds ................. $ 1,441 $ 33 $ -- $ 1,474
======== ======== ======== ========
AVAILABLE FOR SALE
United States government agencies $155,430 $ 1,417 $ (439) $156,408
Corporate bonds ................. 1,049 2 (7) 1,044
Equity securities ............... 10,000 -- (25) 9,975
-------- -------- -------- --------
Total available for sale $166,479 $ 1,419 $ (471) $167,427
======== ======== ======== ========
2000
HELD TO MATURITY
Municipal bonds ................. $ 1,481 $ 26 $ (11) $ 1,496
======== ======== ======== ========
AVAILABLE FOR SALE
United States government agencies $880,172 $ 453 $ (5,423) $875,202
Corporate bonds ................. 1,491 1 (27) 1,465
-------- -------- -------- --------
Total available for sale $881,663 $ 454 $ (5,450) $876,667
======== ======== ======== ========
The amortized cost and estimated fair market value of investment
securities held to maturity and investment securities available for sale at
December 31, 2001, by contractual maturity, are shown below. The expected
maturity may differ from the contractual maturity because issuers may have the
right to call or prepay obligations. Equity securities have been excluded from
this table.
ESTIMATED
AMORTIZED FAIR MARKET
COST VALUE
---- -----
(IN THOUSANDS)
HELD TO MATURITY
Due after one year through five years .......... $ 265 $ 275
Due after five years through ten years ......... 924 938
Due after ten years ............................ 252 261
-------- --------
Total held to maturity ............. $ 1,441 $ 1,474
======== ========
AVAILABLE FOR SALE
Due in one year or less ........................ $ 651 $ 653
Due after one year through five years .......... 25,270 25,336
Due after five years through ten years ......... 130,558 131,463
-------- --------
Total available for sale ........... $156,479 $157,452
======== ========
Page 81
Notes to Consolidated Financial Statements
Interest and dividend income for the years ended December 31, 2001, 2000
and 1999 consists of the following:
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
United State government agencies ........ $24,252 $54,637 $55,560
Municipal bonds ......................... 91 93 88
Corporate bonds ......................... 78 108 136
Equity securities ....................... 97 -- --
------- ------- -------
Total interest and dividend
income ...................... $24,518 $54,838 $55,784
======= ======= =======
There were no gains or losses on calls or maturities of investment
securities during 2001 and 2000.
Gross realized gains on calls of investment securities available for sale
during 1999 were $1,000. Gross realized losses on sales of investment securities
available for sale during 1999 were $8,000.
The carrying value of securities pledged as required security for deposits
and for other purposes required by law amounted to $16,421,000 and $54,819,000
at December 31, 2001 and 2000, respectively.
5. MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair market value of mortgage-backed
securities at December 31 are as follows:
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
(IN THOUSANDS)
2001
HELD TO MATURITY
GNMA pass-through certificates ............ $1,704,584 $ 25,712 $ -- $1,730,296
FNMA pass-through certificates ............ 642,457 13,621 (15) 656,063
FHLMC pass-through certificates ........... 139,149 3,707 -- 142,856
FHLMC, FNMA and GNMA-REMICs ............... 1,992,298 10,300 (1,121) 2,001,477
---------- ---------- ---------- ----------
Total held to maturity............ $4,478,488 $ 53,340 $ (1,136) $4,530,692
========== ========== ========== ==========
AVAILABLE FOR SALE
GNMA pass-through certificates ... $ 523,825 $ 6,865 $ -- $ 530,690
========== ========== ========== ==========
2000
HELD TO MATURITY
GNMA pass-through certificates ............ $2,457,168 $ 17,511 $ (420) $2,474,259
FNMA pass-through certificates ............ 635,691 6,310 (286) 641,715
FHLMC pass-through certificates ........... 161,684 2,534 (119) 164,099
FHLMC and FNMA - REMICs .................. 7,492 2 (63) 7,431
---------- ---------- ---------- ----------
Total held to maturity............ $3,262,035 $ 26,357 $ (888) $3,287,504
========== ========== ========== ==========
Page 82
Notes to Consolidated Financial Statements
6. LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans at December 31 are summarized as follows:
2001 2000
---- ----
(IN THOUSANDS)
First mortgage loans:
One- to four-family ................... $5,664,973 $4,607,891
FHA/VA ................................ 151,203 112,937
Multi-family and commercial ........... 2,548 2,380
---------- ----------
Total first mortgage loans ... 5,818,724 4,723,208
---------- ----------
Consumer and other loans:
Fixed-rate second mortgages ........... 115,244 118,319
Home equity credit lines .............. 32,715 29,119
Other ................................. 1,488 2,094
---------- ----------
Total consumer and other loans 149,447 149,532
---------- ----------
Total loans .......... $5,968,171 $4,872,740
========== ==========
Substantially all of Hudson City's loans are secured by first or second
liens on real estate property, the majority of which are located in the State of
New Jersey. The ultimate ability to collect the loan portfolio and realize the
carrying value of real estate is subject to changes in the real estate market
and future economic conditions.
The following is a comparative summary of loans on which the accrual of
income has been discontinued and loans which are contractually past due 90-days
or more but have not been classified non-accrual at December 31:
2001 2000
---- ----
(IN THOUSANDS)
Non-accrual loans ................................ $ 8,262 $10,452
Accruing loans delinquent 90-days or more ........ 7,386 2,523
------- -------
Total non-performing loans ........... $15,648 $12,975
======= =======
The total amount of interest income received during the year on nonaccrual
loans outstanding at December 31, 2001, 2000 and 1999 amounted to $154,000,
$179,000 and $242,000, respectively. Additional interest income totaling
$483,000, $652,000, and $625,000 on non-accrual loans would have been recognized
in 2001, 2000 and 1999, respectively, if interest on all such loans had been
recorded based upon original contract terms. Hudson City is not committed to
lend additional funds to borrowers on non-accrual status.
Page 83
Notes to Consolidated Financial Statements
An analysis of the allowance for loan losses at December 31 follows:
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Balance at beginning of year ......... $ 22,144 $ 20,010 $ 17,712
-------- -------- --------
Charge-offs ........................ (20) (18) (73)
Recoveries ......................... 11 22 21
-------- -------- --------
Net (charge-offs) recoveries .... (9) 4 (52)
-------- -------- --------
Provision for loan losses ....... 1,875 2,130 2,350
-------- -------- --------
Balance at end of year ........ $ 24,010 $ 22,144 $ 20,010
======== ======== ========
7. FORECLOSED REAL ESTATE, NET
Foreclosed real estate, net, at December 31 is summarized as follows:
2001 2000
---- ----
(IN THOUSANDS)
Foreclosed real estate .................................... $ 250 $ 443
Valuation allowance ....................................... -- (5)
----- -----
Total foreclosed real estate, net ............. $ 250 $ 438
===== =====
An analysis of the valuation allowance for foreclosed real estate at
December 31 follows:
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
Balance at beginning of year .................. $ 5 $ 12 $ 32
Provisions for write-downs .................... -- 11 52
Write-downs ................................... (5) (18) (72)
---- ---- ----
Balance at end of year ............... $ -- $ 5 $ 12
==== ==== ====
Page 84
Notes to Consolidated Financial Statements
8. BANKING PREMISES AND EQUIPMENT, NET
A summary of the net carrying value of banking premises and equipment at
December 31 is as follows:
2001 2000
---- ----
(IN THOUSANDS)
Land ................................................. $ 4,740 $ 4,291
Buildings ............................................ 31,208 30,477
Leasehold improvements ............................... 12,139 11,504
Furniture, fixtures and equipment .................... 36,110 34,007
-------- --------
Total acquisition value ............... 84,197 80,279
Accumulated depreciation and amortization ............ (52,834) (48,970)
-------- --------
Total banking premises and
equipment, net......................... $ 31,363 $ 31,309
======== ========
Amounts charged to net occupancy expense for depreciation and amortization
of banking premises and equipment amounted to $3,912,000, $3,599,000 and
$3,348,000 in 2001, 2000 and 1999, respectively.
Hudson City has entered into non-cancelable operating lease agreements
with respect to banking premises and equipment. It is expected that many
agreements will be renewed at expiration in the normal course of business.
Future minimum rental commitments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year are as
follows:
YEAR AMOUNT
---- ------
(IN THOUSANDS)
2002 ............................. $ 2,988
2003 ............................. 2,931
2004 ............................. 2,691
2005 ............................. 2,273
2006 ............................. 1,833
Thereafter ....................... 5,552
-------
Total ................ $18,268
=======
Net occupancy expense included gross rental expense for certain bank
premises of $3,459,000 in 2001, $3,286,000 in 2000 and $2,852,000 in 1999 , and
rental income of $620,000, $569,000 and $586,000 for the respective years.
Page 85
Notes to Consolidated Financial Statements
9. DEPOSITS
Deposits at December 31 are summarized as follows:
2001 2000
---- ----
BALANCE PERCENT BALANCE PERCENT
------- ------- ------- -------
(DOLLARS IN THOUSANDS)
Savings ..................... $ 814,367 10.29% $ 757,607 11.47%
Noninterest-bearing demand .. 375,659 4.75 332,177 5.03
Interest-bearing demand ..... 102,185 1.29 96,611 1.46
Money market ................ 516,700 6.53 448,860 6.80
Time deposits ............... 6,103,851 77.14 4,968,866 75.24
---------- ----- ---------- -----
Total deposits $7,912,762 100.00% $6,604,121 100.00%
========== ======= ========== =======
Time deposits $100,000 and over amounted to $923,830,000 and $600,605,000
at December 31, 2001 and 2000, respectively. Interest expense on time deposits
$100,000 and over for the years ended December 31, 2001, 2000 and 1999 was
$34,202,000, $29,671,000 and $27,562,000, respectively. Included in
noninterest-bearing demand accounts are mortgage escrow deposits of $48,917,000
and $48,093,000 at December 31, 2001 and 2000, respectively.
Scheduled maturities of time deposits are as follows:
YEAR AMOUNT
---- ------
(IN THOUSANDS)
2002 ....................................... $5,519,984
2003 ....................................... 496,467
2004 ....................................... 62,172
2005 ....................................... 13,536
2006 ....................................... 11,692
----------
Total .......................... $6,103,851
==========
10. BORROWED FUNDS
Borrowed funds at December 31 are summarized as follows:
2001 2000
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
PRINCIPAL RATE PRINCIPAL RATE
--------- ---- --------- ----
(DOLLARS IN THOUSANDS)
Securities sold under agreements to repurchase:
FHLB ....................................... $ 700,000 5.22% $ 300,000 5.71%
Other brokers .............................. 850,000 5.17 950,000 6.20
---------- ----------
Total securities sold under
agreements to repurchase .......... 1,550,000 5.19 1,250,000 6.08
Advances from the FHLB ........................ 600,000 4.48 -- --
---------- ----------
Total borrowed funds ................. $2,150,000 4.99 $1,250,000 6.08
========== ==========
Page 86
Notes to Consolidated Financial Statements
At December 31, 2001, borrowed funds had scheduled maturities and
potential call dates as follows:
BORROWINGS BY SCHEDULED BORROWINGS BY NEXT
MATURITY DATE POTENTIAL CALL DATE
------------- -------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
YEAR PRINCIPAL RATE PRINCIPAL RATE
---- --------- ---- --------- ----
2002 .......................... $ -- --% $ 500,000 5.76%
2003 .......................... 50,000 4.73 200,000 5.07
2004 .......................... 50,000 5.00 500,000 4.84
2005 .......................... 150,000 5.35 475,000 4.58
2006 .......................... 50,000 4.50 475,000 4.74
2008 .......................... 100,000 4.75 -- --
2009 .......................... 200,000 5.72 -- --
2010 .......................... 350,000 5.58 -- --
2011 .......................... 1,200,000 4.71 -- --
---------- ----------
Total ............. $2,150,000 4.99 $2,150,000 4.99
========== ==========
The amortized cost and fair value of the underlying securities used as
collateral for securities sold under agreements to repurchase, the average
balances and the maximum outstanding at any month-end at or for the years ended
December 31, 2001 and 2000 are as follows:
AT OR FOR THE YEAR ENDED
DECEMBER 31,
------------
2001 2000
---- ----
(IN THOUSANDS)
Amortized cost of collateral:
United States government agency securities .. $ 75,012 $ 392,612
Mortgage-backed securities .................. 1,237,740 995,764
REMIC's ..................................... 315,193 --
---------- ----------
Total amortized cost of collateral ..... $1,627,945 $1,388,376
========== ==========
Fair value of collateral:
United States government agency securities .. $ 75,864 $ 390,550
Mortgage-backed securities .................. 1,253,531 1,002,669
REMIC's ..................................... 321,140 --
---------- ----------
Total fair value of collateral ........ $1,650,535 $1,393,219
========== ==========
Average balance of outstanding borrowings
during the year ............................. $1,731,918 $ 797,966
========== ==========
Maximum balance of outstanding borrowings
at any month-end during the year ............ $2,150,000 $1,250,000
========== ==========
11. EMPLOYEE BENEFIT PLANS
a) RETIREMENT AND OTHER POSTRETIREMENT BENEFITS
Non-contributory retirement and postretirement plans are maintained to
cover all employees, including retired employees, who have met the eligibility
requirements of the plans. Benefits under the qualified and non-qualified
defined benefit retirement plans are based primarily on years of service and
Page 87
Notes to Consolidated Financial Statements
compensation. Funding of the qualified retirement plan is actuarially determined
on an annual basis. It is our policy to fund the qualified retirement plan
sufficiently to meet the minimum requirements set forth in the Employee
Retirement Income Security Act of 1974. The non-qualified retirement plan, for
certain executive officers, is unfunded and had a benefit obligation of
$3,628,000 at December 31, 2001 and $3,281,000 at December 31, 2000. Certain
health care and life insurance benefits are provided to eligible retired
employees ("other benefits"). Participants generally become eligible for retiree
health care and life insurance benefits after ten years of service.
The following table shows the change in benefit obligation, the change in
plan assets, and the funded status for the retirement plans and other benefits
at December 31:
RETIREMENT PLANS OTHER BENEFITS
---------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
(IN THOUSANDS)
Change in Benefit Obligation:
Benefit obligation at beginning of year ...... $ 55,306 $ 48,949 $ 32,028 $ 28,470
Service cost ................................. 2,135 1,995 1,409 1,524
Interest cost ................................ 4,007 3,822 1,929 2,192
Participant contributions .................... -- -- 16 --
Actuarial (gain) loss ........................ (941) 2,091 (5,205) 385
Benefits paid ................................ (1,758) (1,551) (389) (543)
-------- -------- -------- --------
Benefit obligation at end of year ............ 58,749 55,306 29,788 32,028
-------- -------- -------- --------
Change in Plan Assets:
Fair value of plan assets at beginning of year 71,080 73,657 -- --
Actual loss on plan assets ................... (2,177) (1,029) -- --
Employer contribution ........................ 3 3 373 543
Participant contributions .................... -- -- 16 --
Benefits paid ................................ (1,758) (1,551) (389) (543)
-------- -------- -------- --------
Fair value of plan assets at end of year ..... 67,148 71,080 -- --
-------- -------- -------- --------
Funded Status ....................... 8,399 15,774 (29,788) (32,028)
Unrecognized transition asset ................ -- (399) -- --
Unrecognized prior service cost .............. (31) (18) -- --
Unrecognized net actuarial gain .............. (1,836) (9,618) (8,086) (3,241)
-------- -------- -------- --------
Prepaid (accrued) benefit cost ...... $ 6,532 $ 5,739 $(37,874) $(35,269)
======== ======== ======== ========
Net periodic benefit (income) cost at December 31 included the following
components:
RETIREMENT PLANS OTHER BENEFITS
---------------- --------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
(IN THOUSANDS)
Service cost .............................. $ 2,135 $ 1,995 $ 2,476 $ 1,409 $ 1,524 $ 1,496
Interest cost ............................. 4,007 3,822 3,379 1,929 2,192 1,864
Expected return on assets ................. (6,307) (6,545) (5,993) -- -- --
Amortization of:
Net gain .............................. (239) (912) (221) (359) (76) --
Unrecognized prior service cost ....... 13 13 13 -- -- --
Unrecognized remaining net assets ..... (399) (399) (399) -- -- --
------- ------- ------- ------- ------- -------
Net periodic benefit (income) cost . $ (790) $(2,026) $ (745) $ 2,979 $ 3,640 $ 3,360
======= ======= ======= ======= ======= =======
Page 88
Notes to Consolidated Financial Statements
The following are the weighted average assumptions used in accounting for
the benefit plans at December 31:
RETIREMENT PLANS OTHER BENEFITS
---------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
Discount rate .......................... 7.25% 7.50% 7.25% 7.50%
Expected return on assets .............. 9.00 9.00 -- --
Rate of compensation increase .......... 6.00 6.25 -- --
The assumed health care cost trend rate used to measure the expected cost
of other benefits for 2002 was 8.00%. The rate was assumed to decrease gradually
to 5.00% for 2007 and remain at that level thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for health care plans. A 1% change in the assumed health care
cost trend rate would have the following effects on other benefits:
1% INCREASE 1% DECREASE
----------- -----------
(IN THOUSANDS)
Effect on total service cost and interest cost ..... $ 677 $ (556)
Effect on other benefit obligations ................ 5,149 (4,337)
b) EMPLOYEE STOCK OWNERSHIP PLAN
In connection with its initial public offering, Hudson City Bancorp
adopted an ESOP. The ESOP is a tax-qualified plan designed to invest primarily
in Hudson City common stock that provides employees with the opportunity to
receive a Hudson City-funded retirement benefit based primarily on the value of
Hudson City common stock. The ESOP was authorized to purchase, and did purchase,
4,348,000 shares of Hudson City common stock at an average price of $13.49 per
share with a loan from Hudson City Bancorp. The outstanding loan principal at
December 31, 2001 was $54.7 million. Those shares were pledged as collateral for
the loan and are released from the pledge for allocation to participants as loan
payments are made.
At December 31, 2001, shares allocated to participants were 362,333. For
the plan year ending September 30, 2002, there are 144,933 shares that are
committed-to-be-released and will be allocated to participants at the end of the
plan year. Unallocated ESOP shares held in suspense totaled 3,985,667 at
December 31, 2001 and had a fair market value of $105.0 million. ESOP
compensation expense for the years ended December 31, 2001, 2000 and 1999 was
$3,238,000, $2,376,000 and $1,427,000, respectively.
The ESOP restoration plan is a non-qualified plan that provides
supplemental benefits to certain executives who are prevented from receiving the
full benefits contemplated by the employee stock ownership plan's benefit
formula. The supplemental payments consist of payments representing shares that
cannot be allocated to participants under the ESOP due to the legal limitations
imposed on tax-qualified plans and, in the case of participants who retire
before the repayment in full of the ESOP's loan, payments representing the
shares that would have been allocated if employment had continued through
Page 89
Notes to Consolidated Financial Statements
the full term of the loan. Compensation expense related to this plan amounted to
$1,406,000 in 2001, $1,959,000 in 2000 and $731,000 in 1999.
c) RECOGNITION AND RETENTION PLANS
The purpose of the RRP is to promote the growth and profitability of
Hudson City Bancorp by providing directors, officers and employees with an
equity interest in Hudson City Bancorp as an incentive to achieve corporate
goals. The RRP have invested money primarily in shares of Hudson City common
stock that were used to make restricted stock awards. The RRP were authorized,
in the aggregate, to purchase not more than 2,274,000 shares of common stock,
and have purchased 2,153,518 shares on the open market at an average price of
$15.24 per share.
As a general rule, restricted stock grants are held in escrow for the
benefit of the award recipient until vested. Awards outstanding generally vest
in five annual installments commencing one year from the date of the award. As
of December 31, 2001, common stock that had not been awarded totaled 186,800
shares. Compensation expense attributable to the RRP amounted to $5,641,000 for
the year 2001 and $4,457,000 for 2000.
A summary of the status of the granted, but unvested shares under the RRP
as of December 31, and changes during those years, is presented below:
RESTRICTED STOCK AWARDS
-----------------------
2001 2000
---- ----
Outstanding at beginning of year.......... 1,951,600 --
Granted ............................ 121,100 1,966,100
Vested ............................. (401,920) (14,500)
--------- ---------
Outstanding at end of year ............... 1,670,780 1,951,600
========= =========
d) STOCK OPTION PLANS
Each stock option granted entitles the holder to purchase one share of
Hudson City's common stock at an exercise price not less than the fair market
value of a share of common stock at the date of grant. Options granted generally
vest over a five year period from the date of grant and will expire no later
than 10 years following the grant date. Under the Hudson City stock option
plans, 5,595,000 shares of Hudson City Bancorp, Inc. common stock have been
reserved for issuance. Directors and employees have been granted 4,800,000 stock
options.
Page 90
Notes to Consolidated Financial Statements
A summary of the status of the granted, but unexercised stock options as
of December 31, and changes during those years, is presented below:
2001 2000
---- ----
WEIGHTED WEIGHTED
AVERAGE NUMBER OF AVERAGE
NUMBER OF EXERCISE STOCK EXERCISE
STOCK OPTIONS PRICE OPTIONS PRICE
------------- ----- ------- -----
Outstanding at beginning of year .. 4,454,000 13.875 -- --
Granted ..................... 303,000 22.102 4,497,000 13.875
Exercised ................... (142,800) 13.875 (25,000) 13.875
Forfeited ................... (7,000) 13.875 (18,000) 13.875
----------- -----------
Outstanding at end of year ........ 4,607,200 14.416 4,454,000 13.875
=========== ===========
The following table summarizes information about our stock options
outstanding at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED WEIGHTED
OF REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OF OPTIONS EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----- ----------- ---- ----- ----------- -----
$ 13.875 4,304,200 8 years $ 13.875 782,400 $ 13.875
19.875 57,000 9 years 19.875 -- --
21.850 86,000 9 years 21.850 -- --
23.030 160,000 9 years 23.030 -- --
--------- -------
4,607,200 14.416 782,400 13.875
========= =======
Hudson City Bancorp applies APB 25 and related Interpretations in
accounting for the stock option plans. Accordingly, no compensation expense has
been recognized in 2001 or 2000. Had compensation expense for Hudson City's
stock option plans been determined based on the fair value at the grant date for
our stock options consistent with the method of SFAS No. 123, our net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
2001 2000
---- ----
(In thousands, except per share data)
Net income: As reported...... $ 134,549 $ 114,826
Pro forma........ $ 132,352 $ 112,798
Basic earnings per
share: As reported...... $ 1.37 $ 1.05
Pro forma........ $ 1.35 $ 1.03
Diluted earnings per
share: As reported...... $ 1.35 $ 1.04
Pro forma........ $ 1.33 $ 1.03
Page 91
Notes to Consolidated Financial Statements
The fair value of the option grants was estimated on the date of grant
using the Black-Sholes option-pricing model with the following weighted-average
assumptions:
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2001 2000
---- ----
Expected dividend yield .. 2.39% 1.44%
Expected volatility ...... 21.35 16.25
Risk-free interest rate .. 3.96 6.53
Expected option life ..... 5 years 5 years
e) INCENTIVE PLANS
A tax-deferred profit incentive bonus savings plan is maintained based on
Hudson City's profitability. All employees are eligible after one year of
employment and the attainment of age 21. The expense was $1,145,000, $1,095,000
and $1,320,000 in 2001, 2000 and 1999, respectively.
Certain incentive plans are maintained to recognize key executives who are
able to make substantial contributions to the long-term success and financial
strength of Hudson City. At the end of each performance period, the value of the
award is determined in accordance with established criteria. Participants can
elect cash payment or elect to defer the award until retirement. The current
long-term performance period is January 1, 1999 to December 31, 2001. The
expense related to these plans was $2,489,000 in 2001, $2,407,000 in 2000 and
$1,790,000 in 1999.
12. INCOME TAXES
Income tax expense (benefit) for each of the years in the three-year
period ended December 31, 2001 is summarized as follows:
2001 2000 1999
---- ---- ----
(IN THOUSANDS)
FEDERAL:
Current .............................. $ 76,264 $ 67,197 $ 61,578
Deferred ............................. (2,857) (4,759) (2,923)
-------- -------- --------
Total federal ................... 73,407 62,438 58,655
-------- -------- --------
STATE:
Current .............................. 110 567 5,445
Deferred ............................. -- (415) (250)
-------- -------- --------
Total state ..................... 110 152 5,195
-------- -------- --------
Total income tax expense ........ $ 73,517 $ 62,590 $ 63,850
======== ======== ========
Not included in the above table is income tax expense of $4,868,000 and
$15,240,000 for 2001 and 2000, respectively, and income tax benefit of
$17,550,000 for 1999, which represents the income tax expense or benefit on the
net unrealized gains or losses of securities available for sale.
Page 92
Notes to Consolidated Financial Statements
The amounts reported as income tax expense vary from the amounts that
would be reported by applying the statutory federal income tax rate to income
before income taxes due to the following:
2001 2000 1999
---- ---- ----
(DOLLARS IN THOUSANDS)
Income before income tax expense ..... $ 208,066 $ 177,416 $ 171,236
Statutory income tax rate ............ 35% 35% 35%
--------- --------- ---------
Computed expected income tax expense . 72,823 62,096 59,933
State income taxes, net of federal
income tax benefit ................. 72 99 3,377
Amortization of goodwill ............. -- -- 504
Tax-exempt interest .................. (111) (111) (125)
Other, net ........................... 733 506 161
--------- --------- ---------
Income tax expense .............. $ 73,517 $ 62,590 $ 63,850
========= ========= =========
The net deferred tax asset at December 31 consists of the following:
2001 2000
---- ----
(IN THOUSANDS)
Deferred tax asset:
Discount accretion ................................. $ 702 $ 1,459
Deferred loan origination fees ..................... 935 1,330
Postretirement benefits ............................ 14,312 13,350
Book loan loss reserve ............................. 9,124 8,415
Mortgage premium amortization ...................... 4,481 3,939
Non-accrual interest income ........................ 266 348
Net unrealized loss on securities available for sale -- 1,898
Non-qualified benefit plans ........................ 4,147 3,337
Other .............................................. 4,206 4,904
------- -------
38,173 38,980
------- -------
Deferred tax liability:
Tax bad debt reserve ............................... 4,159 6,239
Net unrealized gain on securities available for sale 2,969 --
Retirement plan .................................... 3,860 3,421
Other .............................................. 1,735 1,860
------- -------
12,723 11,520
------- -------
Net deferred tax asset ......................... $25,450 $27,460
======= =======
The net deferred tax asset represents the anticipated federal and state
tax benefits expected to be realized in future years upon the utilization of the
underlying tax attributes comprising this balance. In management's opinion, in
view of Hudson City's previous, current and projected future earnings trends,
such net deferred tax asset will more likely than not be fully realized.
Accordingly, no valuation allowance was deemed to be required at December 31,
2001 and 2000.
At December 31, 2001 and 2000, the bad debt reserve for federal income tax
reporting purposes was approximately $62,000,000 and $66,000,000, respectively.
Retained earnings at December 31, 2001 and 2000 included approximately
$49,000,000 for which no deferred income taxes have been provided. This amount
represents the base year allocation of income to bad debt deduction for tax
purposes. Under
Page 93
Notes to Consolidated Financial Statements
SFAS No. 109, this amount is treated as a permanent difference and deferred
taxes are not recognized unless it appears that it will be reduced and result in
taxable income in the foreseeable future. Events that would result in taxation
of these reserves include failure to qualify as a bank for tax purposes or
distributions in complete or partial liquidation.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments represents the estimated amounts
at which the asset or liability could be exchanged in a current transaction
between willing parties, other than in a forced liquidation sale. These
estimates are subjective in nature, involve uncertainties and matters of
judgment and, therefore, cannot be determined with precision. Changes in
assumptions could significantly affect the estimates. Further, certain tax
implications related to the realization of the unrealized gains and losses could
have a substantial impact on these fair value estimates and have not been
incorporated into any of the estimates.
Carrying amounts of cash, due from banks and federal funds sold are
considered to approximate fair value. The fair value of one- to four-family
mortgages and home equity loans are generally estimated using the present value
of expected future cash flows. For time deposits and borrowed funds, the fair
value is estimated by discounting estimated future cash flows using currently
offered rates. For deposit liabilities payable on demand, the fair value is
estimated by discounting estimated future cash flows using a regulatory
borrowing rate most closely associated with maturity date ranges that were
established using Hudson City's history and regulatory guidelines. There is no
material difference between the fair value and the committed amounts of our
off-balance commitments.
Other important elements which are not deemed to be financial assets or
liabilities and therefore, not considered in these estimates include the value
of Hudson City's retail branch delivery system, its existing core deposit base
and banking premises and equipment.
The estimated fair value of Hudson City's financial instruments at
December 31 are summarized as follows:
2001 2000
---- ----
ESTIMATED
CARRYING ESTIMATED CARRYING FAIR
AMOUNT FAIR VALUE AMOUNT VALUE
------ ---------- ------ -----
(IN THOUSANDS)
ASSETS:
Cash and due from banks .................... $ 84,214 $ 84,214 $ 65,411 $ 65,411
Federal funds sold ......................... 17,600 17,600 121,700 121,700
Investment securities held to maturity ..... 1,441 1,474 1,481 1,496
Investment securities available for sale ... 167,427 167,427 876,667 876,667
Federal Home Loan Bank of New York stock ... 81,149 81,149 73,629 73,629
Mortgage-backed securities held to maturity 4,478,488 4,530,692 3,262,035 3,287,504
Mortgage-backed securities available for sale 530,690 530,690 -- --
Loans, net ................................. 5,932,101 6,009,269 4,841,041 4,842,116
LIABILITIES:
Deposits ................................... 7,912,762 7,730,213 6,604,121 6,427,886
Borrowed funds ............................. 2,150,000 2,185,594 1,250,000 1,276,840
Page 94
Notes to Consolidated Financial Statements
14. REGULATORY CAPITAL
Deposits at Hudson City Savings are insured up to standard limits of
coverage provided by the Bank Insurance Fund ("BIF") of the Federal Deposit
Insurance Corporation ("FDIC"). Hudson City Savings is a New Jersey state
chartered savings bank and is subject to comprehensive regulation, supervision
and periodic examinations by the FDIC and by the New Jersey State Department of
Banking .
FDIC regulations require banks to maintain minimum levels of regulatory
capital. Under the regulations in effect at December 31, 2001, Hudson City
Savings was required to maintain (a) a minimum leverage ratio of Tier 1 capital
to total adjusted average assets of 4.0%, and (b) minimum ratios of Tier 1 and
total capital to risk-weighted assets of 4.0% and 8.0 %, respectively.
Under its prompt corrective action regulations, the FDIC is required to
take certain supervisory actions (and may take additional discretionary actions)
with respect to an undercapitalized institution. Such actions could have a
direct material effect on the institution's financial statements. The
regulations establish a framework for the classification of savings institutions
into five categories: well-capitalized, adequately-capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized. Generally, an institution is considered well-capitalized if it
has a leverage (Tier 1) capital ratio of at least 5.0%; a Tier 1 risk-based
capital ratio of at least 6.0%; and a total risk-based capital ratio of at least
10.0%.
The foregoing capital ratios are based in part on specific quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgments by the FDIC about
capital components, risk weightings and other factors.
Management believes that, as of December 31, 2001, Hudson City Savings
meets all capital adequacy requirements to which it is subject. Further, the
most recent FDIC notification categorized Hudson City Savings as a
well-capitalized institution under the prompt corrective action regulations.
There have been no conditions or events since that notification that management
believes have changed Hudson City Savings' capital classification.
Page 95
Notes to Consolidated Financial Statements
The following is a summary of Hudson City Savings' actual capital
amounts and ratios as of December 31, 2001 and 2000, compared to the FDIC
minimum capital adequacy requirements and the FDIC requirements for
classification as a well-capitalized institution:
FDIC REQUIREMENTS
---------------------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANK ACTUAL ADEQUACY WELL-CAPITALIZED
---------------------------- ---------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- ---------- -------------- ---------- -------------- ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2001
Leverage (Tier 1) capital... $ 1,182,130 10.64% $ 444,566 4.00% $ 555,707 5.00%
Risk-based capital:
Tier 1................... 1,182,130 31.32 150,964 4.00 226,446 6.00
Total.................... 1,206,140 31.96 301,927 8.00 377,409 10.00
DECEMBER 31, 2000
Leverage (Tier 1) capital... $ 1,263,703 14.16% $ 356,932 4.00% $ 446,165 5.00%
Risk-based capital:
Tier 1................... 1,263,703 42.32 119,434 4.00 179,151 6.00
Total.................... 1,285,847 43.06 238,869 8.00 298,586 10.00
The Federal Reserve Bank imposes certain capital requirements on Hudson
City Bancorp under the Bank Holding Company Act of 1956, including a minimum
leverage ratio and a minimum ratio of "qualifying" capital to risk-weighted
assets. These minimum requirements are substantially the same as Hudson City
Savings' minimum capital requirements described above. Subject to its capital
requirements and certain other restrictions, Hudson City Bancorp is able to
borrow money to make a capital contribution to Hudson City Savings, and such
loans may be repaid from dividends paid from Hudson City Savings to Hudson City
Bancorp. Hudson City Bancorp is also able to raise capital for contribution to
Hudson City Savings by issuing securities without having to receive regulatory
approval, subject to compliance with federal and state securities laws.
The following table shows Hudson City Bancorp's leverage capital ratio,
its Tier 1 risk-based capital ratio, and its total risk-based capital ratio, at
December 31, 2001 and 2000:
FEDERAL RESERVE BANK REQUIREMENTS
---------------------------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION AS
BANCORP ACTUAL ADEQUACY WELL-CAPITALIZED
---------------------------- ---------------------------- ----------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------- ---------- -------------- ---------- -------------- ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 2001
Leverage (Tier 1) capital... $ 1,284,009 11.55% $ 444,585 4.00% $ 555,731 5.00%
Risk-based capital:
Tier 1................... 1,284,009 34.02 150,964 4.00 226,446 6.00
Total.................... 1,308,019 34.66 301,929 8.00 377,411 10.00
DECEMBER 31, 2000
Leverage (Tier 1) capital... $ 1,467,666 16.45% $ 356,932 4.00% $ 446,165 5.00%
Risk-based capital:
Tier 1................... 1,467,666 49.15 119,434 4.00 179,151 6.00
Total.................... 1,489,810 49.90 238,868 8.00 298,585 10.00
Page 96
Notes to Consolidated Financial Statements
15. OFF-BALANCE SHEET RISK AND CONTINGENCIES
Hudson City Savings is a party to commitments to extend credit in the
normal course of business to meet the financial needs of its customers.
Commitments to extend credit are agreements to lend money to a customer as long
as there is no violation of any condition established in the contract.
Commitments to fund first mortgage loans generally have fixed expiration dates
or other termination clauses, whereas home equity lines of credit have no
expiration date. Since some commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. Hudson City Savings evaluates each customer's
credit-worthiness on a case-by-case basis.
At December 31, 2001, Hudson City Savings had fixed and variable rate
first mortgage loan commitments to extend credit of approximately $299,776,000
and $15,034,000, respectively, commitments to purchase loans of $101,155,000,
and unused home equity and overdraft lines of credit of approximately
$73,217,000. No commitments are included in the accompanying financial
statements. There is no exposure to credit loss in the event the other party to
commitments to extend credit does not exercise its rights to borrow under the
commitment.
In the normal course of business, there are various outstanding legal
proceedings. In the opinion of management, the consolidated financial statements
of Hudson City will not be materially affected as a result of such legal
proceedings.
16. PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed financial statements for Hudson City Bancorp,
Inc. (parent company only) reflect Hudson City Bancorp's investment in its
wholly owned subsidiary, Hudson City Savings Bank, using the equity method of
accounting.
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, DECEMBER 31,
2001 2000
----------- -----------
(IN THOUSANDS)
ASSETS:
Cash and due from bank................................ $ 47,152 $ 148,634
Investment in subsidiary.............................. 1,186,857 1,260,606
ESOP loan receivable.................................. 54,741 55,321
Other assets.......................................... 14 81
---------- ----------
Total Assets.................................. $1,288,764 $1,464,642
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY:
Accrued expenses...................................... $ 28 $ 73
Total stockholder's equity............................ 1,288,736 1,464,569
---------- ----------
Total Liabilities and Stockholder's Equity.... $1,288,764 $1,464,642
========== ==========
Page 97
Notes to Consolidated Financial Statements
STATEMENTS OF INCOME
DATE OF
REORGANIZATION
YEAR ENDED YEAR ENDED (JULY 13, 1999)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
2001 2000 1999
--------- --------- ---------
(IN THOUSANDS)
Income:
Dividends received from subsidiary....... $ 219,846 $ 33,358 $ 5,782
Interest on ESOP loan receivable......... 4,276 3,848 404
Interest on deposit with subsidiary...... 1,059 3,621 1,257
--------- --------- ---------
Total income........................ 225,181 40,827 7,443
Expenses......................................... 613 899 127
--------- --------- ---------
Income before income tax expense
and (excess of distribution
over earnings)/equity in
undistributed earnings of
subsidiary.......................... 224,568 39,928 7,316
Income tax expense............................... 1,712 2,400 565
--------- --------- ---------
Income before (excess of distribution
over earnings)/equity in
undistributed earnings of
subsidiary.......................... 222,856 37,528 6,751
(Excess of distribution over earnings)/
equity in undistributed earnings
of subsidiary............................ (88,307) 77,298 48,089
--------- --------- ---------
Net Income............................... $ 134,549 $ 114,826 $ 54,840
========= ========= =========
Page 98
Notes to Consolidated Financial Statements
STATEMENTS OF CASH FLOWS
DATE OF
REORGANIZATION
YEAR ENDED YEAR ENDED (JULY 13, 1999)
DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
2001 2000 1999
--------- --------- ----------
(IN THOUSANDS)
Cash Flows from Operating Activities:
Net income................................................ $ 134,549 $ 114,826 $ 54,840
Adjustments to reconcile net income
to cash provided by operating activities:
Excess of distribution over earnings/(equity in
undistributed earnings) of subsidiary.......... 88,307 (77,298) (48,089)
Decrease (increase) in other assets................. 67 (81) --
(Decrease) increase in accrued expenses............. (45) (535) 608
--------- --------- ----------
Net Cash Provided by Operating Activities....................... 222,878 36,912 7,359
--------- --------- ----------
Cash Flows from Investing Activities:
Loan to ESOP.............................................. -- (35,244) (23,402)
Investment in subsidiary.................................. -- -- (263,820)
Principal collected on ESOP loan.......................... 580 1,802 1,523
--------- --------- ----------
Net Cash Provided (Used) in Investing Activities................ 580 (33,442) (285,699)
--------- --------- ----------
Cash Flows from Financing Activities:
Proceeds from the issuance of common stock................ -- -- 527,641
Purchase of treasury stock................................ (278,458) (65,456) --
Exercise of stock options................................. 1,981 348 --
Cash dividends paid to unallocated ESOP shares............ (1,921) (1,241) --
Cash dividends paid....................................... (46,542) (32,006) (5,782)
--------- --------- ----------
Net Cash (Used) Provided by Financing Activities................ (324,940) (98,355) 521,859
--------- --------- ----------
Net (Decrease) Increase in Cash Due from Bank................... (101,482) (94,885) 243,519
Cash Due from Bank at Beginning of Year......................... 148,634 243,519 --
--------- --------- ----------
Cash Due from Bank at End of Year............................... $ 47,152 $ 148,634 $ 243,519
========= ========= =========
Page 99
Notes to Consolidated Financial Statements
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables are a summary of certain quarterly financial data
for the years ended December 31, 2001 and 2000.
2001 QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Interest income........................ $167,301 $167,627 $173,897 $181,673
Interest expense....................... 100,508 99,897 102,111 100,911
-------- -------- -------- --------
Net interest income.............. 66,793 67,730 71,786 80,762
Provision for loan losses.............. 450 450 450 525
-------- -------- -------- --------
Net interest income after
provision for loan losses.... 66,343 67,280 71,336 80,237
Non-interest income.................... 1,052 1,220 1,214 1,208
Non-interest expense................... 19,722 20,518 21,137 20,447
-------- -------- -------- --------
Income before income
tax expense.................. 47,673 47,982 51,413 60,998
Income tax expense..................... 16,996 17,061 17,886 21,574
-------- -------- -------- --------
Net income....................... $ 30,677 $ 30,921 $ 33,527 $ 39,424
======== ======== ======== ========
Basic earnings per share............... $ 0.30 $ 0.32 $ 0.35 $ 0.42
======== ======== ======== ========
Diluted earnings per share............. $ 0.29 $ 0.31 $ 0.34 $ 0.41
======== ======== ======== ========
2000 QUARTER ENDED
--------------------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
Interest income........................ $144,057 $150,382 $156,526 $163,076
Interest expense....................... 80,685 86,898 93,165 99,291
-------- -------- -------- --------
Net interest income.............. 63,372 63,484 63,361 63,785
Provision for loan losses.............. 600 600 480 450
-------- -------- -------- --------
Net interest income after
provision for loan losses.... 62,772 62,884 62,881 63,335
Non-interest income.................... 1,100 1,186 1,176 1,079
Non-interest expense................... 18,864 19,973 19,617 20,543
-------- -------- -------- --------
Income before income
tax expense.................. 45,008 44,097 44,440 43,871
Income tax expense..................... 16,702 15,149 15,362 15,377
-------- -------- -------- --------
Net income....................... $ 28,306 $ 28,948 $ 29,078 $ 28,494
======== ======== ======== ========
Basic earnings per share............... $ 0.25 $ 0.26 $ 0.27 $ 0.27
======== ======== ======== ========
Diluted earnings per share............. $ 0.25 $ 0.26 $ 0.26 $ 0.26
======== ======== ======== ========
Page 100
Notes to Consolidated Financial Statements
18. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations.
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------------
2001 2000 1999 (1)
-------------------------------- ------------------------------- -----------------------------
PER PER PER
SHARE SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT INCOME SHARES AMOUNT
--------- -------- ------ --------- ------- ------ -------- ------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income.................. $ 134,549 $ 114,826 $ 54,840
========= ========= ========
Basic earnings per share:
Income available to
common stockholders.... $ 134,549 97,931 $ 1.37 $ 114,826 109,507 $ 1.05 $ 54,840 114,767 $ 0.47
====== ====== ======
Effect of dilutive common
stock equivalents...... -- 1,563 -- 462 -- --
--------- -------- --------- ------- -------- -------
Diluted earnings per share:
Income available to
common stockholders.... $ 134,549 99,494 $ 1.35 $ 114,826 109,969 $ 1.04 $ 54,840 114,767 $ 0.47
========= ======== ====== ========= ======= ====== ======== ======= ======
(1) Data for 1999 from date of reorganization (July 13, 1999)
19. RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("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 specifies the
criteria acquired intangible assets must meet to be recognized and reported
apart from goodwill.
SFAS No. 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 will also require that intangible assets with definite useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."
SFAS No. 142 requires that after December 31, 2001, goodwill and any
intangible asset determined to have an indefinite useful life will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized prior to the adoption of SFAS No. 142.
We are required to adopt the provisions of SFAS No. 141 immediately.
The initial adoption of SFAS No. 141 had no impact on our consolidated financial
statements. We are required to adopt SFAS No. 142 effective January 1, 2002. We
currently have no recorded goodwill or intangible assets and do not anticipate
that the initial adoption of SFAS No. 142 will have a significant impact on our
consolidated financial statements.
Page 101
Notes to Consolidated Financial Statements
In July of 2001, FASB Technical Bulletin No. 01-1, "Effective Date for
Certain Financial Institutions of Certain Provisions of Statement 140 Related to
the Isolation of Transferred Financial Assets," was issued which delays the
effective date for the isolation standards and related guidance under SFAS No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities," to transfers of financial assets occurring after
December 31, 2001, instead of March 31, 2001. The implementation of SFAS No. 140
provisions, effective after December 15, 2000, did not have a material impact on
our financial condition or results of operations. The implementation of the
remaining provisions, subsequent to December 31, 2001, is not expected to have a
material impact on our financial condition or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
Information regarding directors and executive officers of the Company
is presented under the headings "Proposal 1 - Election of Directors-General,"
"-Who Our Directors Are," "-Our Directors Backgrounds," "-Nominees for Election
as Directors," "-Continuing Directors," "-Meetings of the Board of Directors and
Its Committees," "-Executive Officers," "-Director Compensation," "-Executive
Officer Compensation," and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders to be held on May 10, 2002, which will be filed with the
SEC within 120 days from December 31, 2001, and is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding executive compensation is presented under the
headings "Election of Directors-Director Compensation," " -Executive Officer
Compensation," "-Summary Compensation Table," "Employment Agreements," "Change
of Control Agreements," and "Benefit Plans" in the Company's definitive Proxy
Statement for the 2002 Annual Meeting of Stockholders to be held May 10, 2002,
which will be filed with the SEC within 120 days from December 31, 2001, and is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management is presented under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Company's definitive Proxy Statement
for the 2002 Annual Meeting of Stockholders to be held May 10, 2002, which will
be filed with the SEC within 120 days from December 31, 2001, and is
incorporated herein by reference.
Page 102
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding certain relationships and related transactions is
presented under the heading "Certain Transactions with Members of our Board of
Directors and Executive Officers" in the Company's definitive Proxy Statement
for the 2002 Annual Meeting of Stockholders to be held on May 10, 2002, which
will be filed with the SEC within 120 days from December 31, 2001, and is
incorporated herein by reference.
Page 103
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of this Annual Report on Form
10-K
(1) The following consolidated financial statements are
in Item 8 of this annual report:
Consolidated Financial Statements as of December 31, 2001,
2000 and 1999
- Independent Auditors' Report
- Consolidated Statements of Financial Condition as of
December 31, 2001 and 2000
- Consolidated Statements of Income for the years ended
December 31, 2001, 2000 and 1999
- Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 2001, 2000
and 1999
- Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000 and 1999
- Notes to Consolidated Financial Statements
(2) Financial Statement Schedules have been omitted
because they are not applicable or the required
information is shown in the Consolidated Financial
Statements or Notes thereto in Item 8 of this annual
report.
(b) Reports on Form 8-K. During the last quarter of 2001, no
reports on Form 8-K were required to be filed and as such,
none were filed.
(c) Exhibits Required by Item 601 of Regulation S-K
Page 104
EXHIBIT DESCRIPTION
2.1 Amended and Restated Plan of Reorganization and Stock Issuance
of Hudson City Savings Bank (1)
3.1 Certificate of Incorporation of Hudson City Bancorp, Inc. (1)
3.2 Bylaws of Hudson City Bancorp, Inc. (1)
4.1 Certificate of Incorporation of Hudson City Bancorp, Inc. (See
Exhibit 3.1)
4.2 Bylaws of Hudson City Bancorp, Inc. (See Exhibit 3.2)
4.3 Form of Stock Certificate of Hudson City Bancorp, Inc. (1)
10.1 Employee Stock Ownership Plan of Hudson City Savings Bank (1)
10.2 Profit Incentive Bonus Plan of Hudson City Savings Bank (1)
10.3 Supplementary Savings Plan of Hudson City Savings Bank (1)
10.4 Form of ESOP Loan Commitment Letter and ESOP Loan Documents
(1)
10.5 Form of Employment Agreement by and among Hudson City Savings
Bank and Hudson City Bancorp, Inc. and certain officers (1)
10.6 Form of One-Year Change in Control Agreement by and among
Hudson City Savings Bank and Hudson City Bancorp, Inc. and
certain officers (1)
10.7 Form of Two-Year Change in Control Agreement by and among
Hudson City Savings Bank and Hudson City Bancorp, Inc. and
certain officers (1)
10.8 Severance Pay Plan of Hudson City Savings Bank (1)
10.9 ESOP Restoration Plan of Hudson City Savings Bank (1)
10.10 Hudson City Savings Bank Outside Directors Consultation Plan
(1)
10.11 Hudson City Savings Bank Supplemental Executive Retirement
Plan (1)
10.12 Hudson City Savings Bank Annual Incentive Plan (1)
10.13 Hudson City Savings Bank Long-Term Incentive Plan (1)
10.14 Form of Post-Retirement Death Benefit for Senior Officers (1)
10.15 Hudson City Bancorp, Inc. 2000 Stock Option Plan (2)
10.16 Hudson City Bancorp, Inc. 2000 Recognition and Retention Plan
(2)
10.17 Amendment No. 1 to the Employee Stock Ownership Plan of Hudson
City Savings Bank (3)
10.18 Amendment No. 1 to the Profit Incentive Bonus Plan of Hudson
City Savings Bank (3)
10.19 Amendment No. 2 to the Profit Incentive Bonus Plan of Hudson
City Savings Bank (3)
10.20 Employment Agreement by and among Hudson City Savings Bank,
Hudson City Bancorp, Inc. and Leonard S. Guldelski (4)
10.21 Employment Agreement by and among Hudson City Savings Bank,
Hudson City Bancorp, Inc. and Denis J. Salamone (4)
10.22 Hudson City Bancorp, Inc. Denis J. Salamone Restricted Stock
Award Plan (4)
10.23 Hudson City Bancorp, Inc. Denis J. Salamone Stock Option Plan
(4)
11.1 Statement Re: Computation of Per Share Earnings
21.1 Subsidiaries of Hudson City Bancorp, Inc.
23.1 Consent of KPMG LLP (4)
(1) Incorporated herein by reference to the Exhibits to the Registrant's
Registration Statement No. 333-74383 on Form S-1, filed with the Securities and
Exchange Commission on March 15, 1999, as amended.
(2) Incorporated herein by reference to the Exhibits to the Registrant's
registration Statement No. 333-95193 on Form S-8, filed with the Securities and
Exchange Commission on January 21, 2000.
(3) Incorporated herein by reference to the Exhibits to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 filed with the
Securities and Exchange Commission on March 29, 2000.
(4) Submitted only with filing in electronic format.
Page 105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Paramus, New
Jersey, on March 25, 2002.
Hudson City Bancorp, Inc.
By: /s/ Ronald E. Hermance, Jr.
---------------------------
Ronald E. Hermance, Jr.
President and Chief Executive Officer
Page 106
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ Leonard S. Gudelski Director, Chairman of the Board March 25, 2002
- -----------------------------
Leonard S. Gudelski
/s/ Ronald E. Hermance, Jr. Director, President and Chief Executive Officer March 25, 2002
- ----------------------------- (principal executive officer)
Ronald E. Hermance, Jr.
/s/ Denis J. Salamone Director, Senior Executive Vice President and March 25, 2002
- ----------------------------- Chief Operating Officer (principal financial and
Denis J. Salamone accounting officer)
/s/ Verne S. Atwater Director March 25, 2002
- -----------------------------
Verne S. Atwater
/s/ Michael W. Azzara Director March 25, 2002
- -----------------------------
Michael W. Azzara
/s/ John D. Birchby Director March 25, 2002
- -----------------------------
John D. Birchby
/s/ Kenneth L. Birchby Director March 25, 2002
- -----------------------------
Kenneth L. Birchby
/s/ Victoria H. Bruni Director March 25, 2002
- -----------------------------
Victoria H. Bruni
/s/ William J. Cosgrove Director March 25, 2002
- -----------------------------
William J. Cosgrove
/s/ Andrew J. Egner, Jr. Director March 25, 2002
- -----------------------------
Andrew J. Egner, Jr.
/s/ John W. Klie Director March 25, 2002
- -----------------------------
John W. Klie
/s/ Donald O. Quest Director March 25, 2002
- -----------------------------
Donald O. Quest
/s/ Joseph G. Sponholz Director March 25, 2002
- -----------------------------
Joseph G. Sponholz
/s/ Arthur V. Wynne, Jr. Director March 25, 2002
- -----------------------------
Arthur V. Wynne, Jr.
Page 107