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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: SEPTEMBER 30, 2002
[ ] 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)
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 [ ]
As of November 8, 2002, the registrant had 192,472,258 shares of common
stock, $0.01 par value, outstanding. Of such shares outstanding, 122,576,600
shares were held by Hudson City, MHC, the registrant's mutual holding company,
and 69,895,658 shares were held by the public and directors, officers and
employees of the registrant.
Hudson City Bancorp, Inc.
Form 10-Q
Contents of Report
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
Consolidated Statements of Financial Condition -
September 30, 2002 (Unaudited) and December 31, 2001 ..................... 3
Consolidated Statements of Income (Unaudited) - For the three and nine
months ended September 30, 2002 and 2001 ................................. 4
Consolidated Statements of Cash Flows (Unaudited) - For the nine months
ended September 30, 2002 and 2001 ........................................ 5
Notes to Consolidated Financial Statements ............................... 6
Item 2. - Management's Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................... 10
Item 3. - Quantitative and Qualitative Disclosures About Market Risk ............... 27
Item 4. - Controls and Procedures .................................................. 31
PART II - OTHER INFORMATION
Item 1. - Legal Proceedings ........................................................ 32
Item 2. - Changes in Securities and Use of Proceeds ................................ 32
Item 3. - Defaults Upon Senior Securities .......................................... 32
Item 4. - Submission of Matters to a Vote of Security Holders ...................... 32
Item 5. - Other Information ........................................................ 32
Item 6. - Exhibits and Reports on Form 8-K ......................................... 32
SIGNATURES ................................................................................... 33
CERTIFICATION OF DISCLOSURE OF RONALD E. HERMANCE, JR ........................................ 34
CERTIFICATION OF DISCLOSURE OF DENIS J. SALAMONE ............................................. 35
EXHIBIT
Explanatory Note: This Form 10-Q 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, 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-Q, "we" and "us" and "our" refer to
Hudson City Bancorp, Inc. and its consolidated subsidiary Hudson City Savings
Bank, depending on the context.
Page 2
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Cash and due from banks .................................................... $ 125,553 $ 84,214
Federal funds sold ......................................................... 51,000 17,600
------------ ------------
Total cash and cash equivalents ............................ 176,553 101,814
Investment securities held to maturity, market value of $1,511 at
September 30, 2002 and $1,474 at December 31, 2001 .................. 1,406 1,441
Investment securities available for sale, at market value .................. 540,867 167,427
Federal Home Loan Bank of New York stock ................................... 107,500 81,149
Mortgage-backed securities held to maturity, market value of $4,533,614
at September 30, 2002 and $4,530,692 at December 31, 2001 ........... 4,444,229 4,478,488
Mortgage-backed securities available for sale, at market value ............. 1,094,646 530,690
Loans ...................................................................... 6,723,973 5,968,171
Less:
Deferred loan fees .............................................. 11,118 12,060
Allowance for loan losses ....................................... 25,279 24,010
------------ ------------
Net loans .................................................. 6,687,576 5,932,101
Foreclosed real estate, net ................................................ 1,212 250
Accrued interest receivable ................................................ 67,758 61,808
Banking premises and equipment, net ........................................ 33,515 31,363
Other assets ............................................................... 39,864 40,237
------------ ------------
Total Assets ............................................... $ 13,195,126 $ 11,426,768
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Interest-bearing .................................................... $ 8,412,637 $ 7,537,103
Noninterest-bearing ................................................. 407,699 375,659
------------ ------------
Total deposits ............................................. 8,820,336 7,912,762
Borrowed funds ............................................................. 3,000,000 2,150,000
Accrued expenses and other liabilities ..................................... 81,775 75,270
------------ ------------
Total liabilities .......................................... 11,902,111 10,138,032
------------ ------------
Common stock, $0.01 par value, 800,000,000 shares authorized; 231,276,600
shares issued, 193,061,458 shares outstanding at September 30, 2002,
198,317,400 shares outstanding at December 31, 2001 (note 1) ........ 2,313 2,313
Additional paid-in capital ................................................. 526,108 526,855
Retained earnings (notes 1 and 4) .......................................... 1,266,354 1,171,007
Treasury stock, at cost; 38,215,142 shares at September 30, 2002 and
32,959,200 shares at December 31, 2001 .............................. (440,564) (340,716)
Unallocated common stock held by the employee stock ownership plan ......... (51,965) (53,435)
Unearned common stock held by the recognition and retention plan ........... (18,079) (22,132)
Accumulated other comprehensive income, net of tax ......................... 8,848 4,844
------------ ------------
Total stockholders' equity ................................. 1,293,015 1,288,736
------------ ------------
Total Liabilities and Stockholders' Equity ................. $ 13,195,126 $ 11,426,768
============ ============
See accompanying notes to consolidated financial statements.
Page 3
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT SHARE DATA)
Interest and Dividend Income:
Interest and fees on first mortgage loans .......... $ 114,128 $ 98,368 $ 330,922 $ 279,299
Interest and fees on consumer and other loans ...... 2,526 3,013 7,693 9,060
Interest on mortgage-backed securities held to
maturity ......................................... 64,925 63,740 202,330 187,036
Interest on mortgage-backed securities available for
sale ............................................. 11,520 2,762 28,808 3,288
Interest on investment securities held to maturity:
Taxable ........................................ 17 18 51 52
Exempt from federal taxes ...................... 5 5 16 17
Interest on investment securities available
for sale-taxable .............................. 5,456 3,476 11,051 21,972
Dividends on Federal Home Loan Bank
of New York stock ............................. 916 1,102 2,787 3,573
Interest on federal funds sold ..................... 845 1,413 1,756 4,528
------------ ------------ ------------ ------------
Total interest and dividend income .......... 200,338 173,897 585,414 508,825
------------ ------------ ------------ ------------
Interest Expense:
Interest on deposits ............................... 63,619 75,630 195,835 232,890
Interest on borrowed funds ......................... 36,815 26,481 100,912 69,626
------------ ------------ ------------ ------------
Total interest expense ...................... 100,434 102,111 296,747 302,516
------------ ------------ ------------ ------------
Net interest income ...................... 99,904 71,786 288,667 206,309
Provision for Loan Losses ................................ 225 450 1,275 1,350
Net interest income after provision ------------ ------------ ------------ ------------
for loan losses ..................... 99,679 71,336 287,392 204,959
------------ ------------ ------------ ------------
Non-Interest Income:
Service charges and other income ................... 1,366 1,214 3,794 3,486
------------ ------------ ------------ ------------
Total non-interest income ................... 1,366 1,214 3,794 3,486
------------ ------------ ------------ ------------
Non-Interest Expense:
Salaries and employee benefits ..................... 14,313 13,425 45,495 39,248
Net occupancy expense .............................. 3,427 3,588 10,419 10,396
Federal deposit insurance assessment ............... 357 320 1,051 966
Computer and related services ...................... 284 300 891 780
Other expense ...................................... 4,582 3,504 12,345 9,987
------------ ------------ ------------ ------------
Total non-interest expense .................. 22,963 21,137 70,201 61,377
------------ ------------ ------------ ------------
Income before income tax expense ......... 78,082 51,413 220,985 147,068
Income Tax Expense ....................................... 28,464 17,886 79,607 51,943
------------ ------------ ------------ ------------
Net income ............................... $ 49,618 $ 33,527 $ 141,378 $ 95,125
============ ============ ============ ============
Basic Earnings Per Share ................................. $ 0.27 $ 0.18 $ 0.76 $ 0.48
============ ============ ============ ============
Diluted Earnings Per Share ............................... $ 0.26 $ 0.17 $ 0.74 $ 0.47
============ ============ ============ ============
Weighted Average Number of Common Shares Outstanding:
Basic .................................... 183,669,980 191,473,584 185,612,422 198,373,608
Diluted .................................. 189,016,698 195,237,766 191,077,444 201,487,294
See accompanying notes to consolidated financial statements.
Page 4
HUDSON CITY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------
2002 2001
----------- -----------
(IN THOUSANDS)
Cash Flows from Operating Activities:
Net income .............................................................. $ 141,378 $ 95,125
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation, accretion and amortization expense .................. 9,412 3,145
Provision for loan losses ......................................... 1,275 1,350
Allocation of stock for employee benefit plans .................... 9,424 6,399
Deferred tax benefit .............................................. (2,363) (1,794)
Net proceeds from sale of foreclosed real estate .................. 120 488
Increase in accrued interest receivable ........................... (5,950) (1,174)
Decrease in other assets .......................................... 2,248 4,035
Increase in accrued expenses and other liabilities ................ 6,505 29,624
----------- -----------
Net Cash Provided by Operating Activities ...................................... 162,049 137,198
----------- -----------
Cash Flows from Investing Activities:
Originations of loans ................................................... (1,394,695) (1,197,681)
Purchases of loans ...................................................... (955,276) (518,053)
Payments on loans ....................................................... 1,594,322 831,466
Principal collection of mortgage-backed securities held to maturity ..... 1,271,971 1,144,731
Purchases of mortgage-backed securities held to maturity ................ (1,244,612) (2,150,140)
Principal collection of mortgage-backed securities available for sale ... 156,712 12,205
Purchases of mortgage-backed securities available for sale .............. (715,223) (304,767)
Proceeds from maturities and calls of investment securities held
to maturity ........................................................... 35 40
Proceeds from maturities and calls of investment securities available
for sale .............................................................. 124,460 832,461
Purchases of investment securities available for sale ................... (498,802) (91,624)
Purchases of Federal Home Loan Bank of New York stock ................... (26,351) (7,520)
Purchases of premises and equipment, net ................................ (4,932) (2,578)
----------- -----------
Net Cash Used in Investment Activities ......................................... (1,692,391) (1,451,460)
----------- -----------
Cash Flows from Financing Activities:
Net increase in deposits ................................................ 907,574 838,205
Proceeds from borrowed funds ............................................ 850,000 1,150,000
Principal payments on borrowed funds .................................... -- (400,000)
Cash dividends paid ..................................................... (47,997) (33,166)
Purchases of stock by the recognition and retention plan ................ (1,854) (1,163)
Purchases of treasury stock ............................................. (107,915) (258,473)
Exercise of stock options ............................................... 5,273 1,662
----------- -----------
Net Cash Provided by Financing Activities ...................................... 1,605,081 1,297,065
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents ........................... 74,739 (17,197)
Cash and Cash Equivalents at Beginning of Period ............................... 101,814 187,111
----------- -----------
Cash and Cash Equivalents at End of Period ..................................... $ 176,553 $ 169,914
=========== ===========
Supplemental Disclosures:
Interest paid ........................................................... $ 292,478 $ 296,335
=========== ===========
Income taxes paid ....................................................... $ 81,477 $ 31,651
=========== ===========
See accompanying notes to consolidated financial statements.
Page 5
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
1. - BASIS OF PRESENTATION
Hudson City Bancorp, Inc. is a Delaware corporation organized in March
1999 by Hudson City Savings Bank 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. 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 our opinion, all the adjustments (consisting of normal and recurring
adjustments) necessary for a fair presentation of the consolidated financial
condition and consolidated results of operations for the unaudited periods
presented have been included. The results of operations and other data presented
for the three-month and nine-month periods ended September 30, 2002 are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 2002.
Capital accounts, share and per share data included in the consolidated
financial statements and the notes thereto, and all such data at period-end
dates and for periods prior to September 30, 2002, have been retroactively
adjusted to reflect the 100 percent common stock dividend declared on April 16,
2002, having the effect of a two-for-one stock split. The 100% stock dividend
was paid on June 17, 2002 to shareholders of record as of May 24, 2002.
Certain information and note disclosures usually included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission for the
preparation of the Form 10-Q. The consolidated financial statements presented
should be read in conjunction with Hudson City Bancorp's audited consolidated
financial statements and notes to consolidated financial statements included in
Hudson City Bancorp's December 31, 2001 Annual Report on Form 10-K.
Statements of Cash Flow. For the purposes of reporting cash flows, cash
and cash equivalents includes cash on hand, amounts due from banks and federal
funds sold. Transfers of loans to foreclosed real estate of $1.1 million and
$747,000 for the nine-month periods ended September 30, 2002 and 2001,
respectively, did not result in cash receipts or cash payments.
Page 6
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
2. - COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other comprehensive
income. Other comprehensive income includes unrealized holding gains and losses
on securities available for sale, net of tax.
Total comprehensive income during the periods indicated is as follows.
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
2002 2001 2002 2001
-------- -------- -------- --------
(IN THOUSANDS)
Net income ............................... $ 49,618 $ 33,527 $141,378 $ 95,125
Other comprehensive income:
Unrealized holding gain on securities
available for sale, net of tax .. 1,580 3,325 4,004 6,840
-------- -------- -------- --------
Total comprehensive income ............... $ 51,198 $ 36,852 $145,382 $101,965
======== ======== ======== ========
3. - EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of
the basic and diluted earnings per share computations.
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- ------- --------- -------- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income .................. $ 49,618 $ 33,527
======== ========
Basic earnings per share:
Income available to
common stockholders .. $ 49,618 183,670 $ 0.27 $ 33,527 191,474 $ 0.18
====== ======
Effect of dilutive common
stock equivalents .... -- 5,347 -- 3,764
-------- -------- -------- --------
Diluted earnings per share:
Income available to
common stockholders .. $ 49,618 189,017 $ 0.26 $ 33,527 195,238 $ 0.17
======== ======== ====== ======== ======== ======
Page 7
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
2002 2001
------------------------------------ ------------------------------------
PER PER
SHARE SHARE
INCOME SHARES AMOUNT INCOME SHARES AMOUNT
-------- ------- --------- -------- -------- ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net income................... $141,378 $ 95,125
======== ========
Basic earnings per share:
Income available to
common stockholders.. $ 141,378 185,612 $ 0.76 $ 95,125 198,374 $ 0.48
====== ======
Effect of dilutive common
stock equivalents..... -- 5,465 -- 3,113
-------- -------- -------- --------
Diluted earnings per share:
Income available to
common stockholders... $141,378 191,077 $ 0.74 $ 95,125 201,487 $ 0.47
======== ======== ====== ======== ======== ======
4. - SUBSEQUENT EVENT
On October 15, 2002, the Board of Directors of Hudson City Bancorp
declared a quarterly cash dividend of ten cents ($0.10) per common share
outstanding. The dividend is payable on December 2, 2002 to stockholders of
record at the close of business on November 8, 2002.
5. - RECENT ACCOUNTING PRONOUNCEMENTS
On July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 142 requires that, after December 31,
2001, 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 also requires 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."
We were required to adopt SFAS No. 142 effective January 1, 2002. We
currently have no recorded goodwill or intangible assets and the initial
adoption of SFAS No. 142 did not have a significant impact on our consolidated
financial statements.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many
of the fundamental provisions of that Statement. The Statement is effective for
fiscal years beginning after December 15, 2001. The initial adoption of SFAS No.
144 did not have a significant impact on our consolidated financial statements.
Page 8
Hudson City Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB No. 4, "Reporting Gains and Losses
from Extinguishment of Debt," and an amendment of that Statement, SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under change conditions. SFAS No. 145 is effective for fiscal years beginning
after May 15, 2002. Management does not anticipate that the initial adoption of
SFAS No. 145 will have a significant impact on our consolidated financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No 9." This Statement removes acquisitions of financial
institutions from the scope of both SFAS No. 72 and Interpretation 9 and
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." The provision of SFAS No. 147 that relate to the application of the
purchase method of accounting apply to all acquisitions of financial
institutions, except transactions between two or more mutual enterprises.
SFAS No. 147 clarifies that a branch acquisition that meets the
definition of a business should be accounted for as a business combination,
otherwise the transaction should be accounted for as an acquisition of net
assets that does not result in the recognition of goodwill. The provisions of
SFAS No. 147 are effective October 1, 2002. This Statement will not have any
impact on our consolidated financial statements.
Page 9
Hudson City Bancorp, Inc.
Form 10-Q
Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
GENERAL
During the first nine months of 2002, we continued to grow our
operating subsidiary, Hudson City Savings Bank, primarily through our core
investments of residential mortgage loans and mortgage-backed securities.
Customer deposits and long-term borrowings funded the growth. In 2001, general
market interest rates, particularly on short-term maturities, declined. The low
short-term interest rate environment has remained relatively stable through the
first nine months of 2002. Long-term market interest rates have continued to
decline in 2002, thus flattening the market yield curve. Due to the low interest
rate environment and our ability to grow our business with low costing
interest-bearing liabilities, we have been able to increase our net interest
income, interest rate spread and net interest margin during 2002.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
Our total assets increased $1.77 billion, or 15.5%, to $13.20 billion
at September 30, 2002 from $11.43 billion at December 31, 2001. This increase
was generally reflected in increases in our primary investments of mortgage
loans and mortgage-backed securities.
Loans increased $755.8 million, or 12.7%, to $6.72 billion at September
30, 2002 from $5.97 billion at December 31, 2001. For the nine-month period
ended September 30, 2002, we originated and purchased first mortgage loans of
approximately $1.35 billion and $955.3 million, respectively, compared with
$1.15 billion and $518.1 million, respectively, for the corresponding 2001
period. These originations and purchases were concentrated in one-to four-family
mortgage loans and were primarily fixed-rate loans. Along with increased
mortgage loan purchases as part of our growth strategy, the low market interest
rate environment, which caused increased prepayments and loan refinancings, has
accelerated our loan originations and purchases. The purchases were made
pursuant to our wholesale loan purchase program established to supplement our
retail loan originations. Purchased loans are subject to due diligence
procedures, which include substantially the same underwriting standards used in
our own loan origination process. Loan packages purchased include mortgage loans
secured by properties located primarily in the northeastern quadrant of the
United States. At September 30, 2002, fixed-rate mortgage loans accounted for
82.3% of our first mortgage loan portfolio compared with 72.2% at December 31,
2001. This percentage of fixed-rate loans to total loans may have an adverse
impact on our earnings in a rising rate environment as the interest rate on
these loans would not reprice to the current market rate as would variable-rate
loans.
In 2002, due to the low interest rate environment, approximately $345
million of our loan originations were the result of refinancing of our existing
mortgage loans. These refinancings of existing loans are included in total loan
originations. Last year we began to allow certain customers to modify, for a
fee, their existing mortgage loans with the intent of maintaining customer
relationships in periods of extensive refinancing due to a low interest rate
environment. In general, all terms and conditions of the existing mortgage loan
remain the same except the adjustment of the interest rate to the currently
offered fixed-rate product with a similar term to maturity or to a reduced term
at the request of the borrower. Modifications of existing mortgage loans during
the first nine months of 2002 amounted to approximately $339 million. This total
is not included in total loan originations.
Page 10
Hudson City Bancorp, Inc.
Form 10-Q
Mortgage-backed securities increased $529.7 million, or 10.6%, to $5.54
billion at September 30, 2002 from $5.01 billion at December 31, 2001, including
a $564.0 million increase in mortgage-backed securities available for sale. In
addition to purchases of mortgage-backed securities as part of our growth
strategy, purchases also increased due to the low market interest rate
environment during 2001 and the first nine months of 2002, which caused
increased prepayments. Investment securities available for sale increased $373.5
million to $540.9 million at September 30, 2002 from $167.4 million at December
31, 2001. These increases in interest-earning assets reflected our continued
emphasis on the origination and purchase of one-to four-family mortgage loans
supplemented by the purchase of mortgage-backed securities and investment
securities using excess cash flows.
Cash and due from banks increased $41.4 million to $125.6 million at
September 30, 2002 from $84.2 million at December 31, 2001. Federal funds sold
increased $33.4 million to $51.0 million at September 30, 2002 from $17.6
million at December 31, 2001. These increases in cash and cash equivalents were
primarily due to the overall growth in assets, increased levels of cash flows
due to mortgage-related prepayments and excess liquidity received late in the
period having been temporarily invested in federal funds sold. Federal Home Loan
Bank of New York ("FHLB") stock increased $26.4 million, or 32.6%, to $107.5
million at September 30, 2002, which was the amount of stock we were required by
the FHLB to hold. The growth in accrued interest receivable of $6.0 million to
$67.8 million at September 30, 2002 was primarily due to the growth of our
interest-earning assets.
At September 30, 2002, total liabilities were $11.90 billion, an
increase of 17.4%, or $1.76 billion, compared with $10.14 billion at December
31, 2001. Borrowed funds increased $850.0 million, or 39.5%, to $3.00 billion at
September 30, 2002 from $2.15 billion at December 31, 2001. The additional
borrowed funds were 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. Borrowed funds were
comprised of $1.85 billion of securities sold under agreements to repurchase and
$1.15 billion of Federal Home Loan Bank advances. Securities pledged as
collateral against our securities sold under agreements to repurchase had a
market value at September 30, 2002 of approximately $1.92 billion. Advances from
the FHLB utilize our mortgage portfolio as collateral. Our increase in borrowed
funds consisted primarily of 10-year terms to maturity with one-time call
options, generally from 3 to 5 years from the borrowing date. The use of
long-term borrowed funds has allowed us to better manage our interest rate risk
by matching our long-term assets with long-term liabilities. Borrowing long-term
in this low interest rate environment should also allow us to better control
interest expense in future periods.
Total deposits increased $907.6 million, or 11.5%, to $8.82 billion at
September 30, 2002 from $7.91 billion at December 31, 2001. Interest-bearing
deposits increased $875.5 million, or 11.6%, to $8.41 billion at September 30,
2002 from $7.54 billion at December 31, 2001. The increase in interest-bearing
deposits was due, in part, to growth in interest-bearing demand accounts of
$467.9 million due to the introduction during the second quarter of our
interest-bearing High Value Checking account. The growth was also due to a
$231.3 million, or 3.8%, increase in time deposits to $6.34 billion at September
30, 2002 from $6.10 billion at December 31, 2001. Additionally, regular savings
deposits increased $71.8 million, or 8.8%, to $886.2 million and money market
deposits increased $104.5 million, or 20.2%, to $621.2 million at September 30,
2002. Non-interest bearing deposits increased $32.0 million, or 8.5%, to $407.7
million at September 30, 2002 from $375.7 million at December 31, 2001. The
increase in total deposits was primarily used to fund our planned asset growth.
We believe the increase in interest-bearing deposits was due primarily to our
consistent offering of competitive rates on our time deposit, regular
Page 11
Hudson City Bancorp, Inc.
Form 10-Q
savings and money market products, promotions for our High Value Checking
account and volatility in the equity markets.
Accrued expenses and other liabilities increased $6.5 million, or 8.6%,
to $81.8 million at September 30, 2002 from $75.3 million at December 31, 2001
primarily due to an increase in accrued interest payable because of the growth
in our borrowed funds.
Total stockholders' equity increased $4.3 million, or 0.3%, to $1.29
billion at September 30, 2002. The increase was primarily the result of net
income of $141.4 million, an increase of $4.0 million in accumulated other
comprehensive income, net of tax, and $5.3 million due to the exercise of
758,530 stock options. The increase in accumulated other comprehensive income
was primarily due to the growth in our portfolio of mortgage-backed securities
available for sale. Partially offsetting these increases in stockholders' equity
were repurchases of 6,014,472 shares of our common stock at an aggregate cost of
$107.9 million and cash dividends declared and paid to common stockholders of
$48.0 million. As of September 30, 2002, there remain 3,548,796 shares
authorized to be purchased under our current stock repurchase program.
At September 30, 2002, the ratio of total stockholders' equity to total
assets was 9.80% compared with 11.28% at December 31, 2001. For the nine-month
period ended September 30, 2002, the ratio of average stockholders' equity to
average assets was 10.35% compared with 13.05% for the year ended December 31,
2001. The decrease in these ratios was primarily due to planned asset growth and
the slower percentage growth in stockholders' equity as discussed above.
Stockholders' equity per common share was $7.06 and $6.87 at September 30, 2002
and December 31, 2001, respectively.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
Average Balance Sheets. The tables on the following pages present
certain information regarding Hudson City Bancorp's financial condition and net
interest income for the three-month and nine-month periods ended September 30,
2002 and 2001. The tables present the annualized average yield on
interest-earning assets and the annualized average cost of interest-bearing
liabilities. We derived the yields and costs by dividing annualized income or
expense by the average balance of interest-earning assets and interest-bearing
liabilities, respectively, for the periods shown. We derived average balances
from daily balances over the periods indicated. Interest income includes fees
that we considered adjustments to yields. Yields on tax-exempt obligations were
not computed on a tax equivalent basis.
Page 12
Hudson City Bancorp, Inc.
Form 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------ ----------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS:
Interest-earnings assets:
First mortgage loans, net (1) ................ $ 6,518,075 $ 114,128 7.00% $ 5,389,938 $ 98,368 7.30%
Consumer and other loans ..................... 139,774 2,526 7.23 156,107 3,013 7.72
Federal funds sold ........................... 192,035 845 1.75 171,914 1,413 3.26
Mortgage-backed securities at amortized cost . 5,456,206 76,445 5.60 4,200,747 66,502 6.33
Federal Home Loan Bank stock ................. 105,326 916 3.48 81,149 1,102 5.43
Investment securities at amortized cost ...... 356,973 5,478 6.14 219,008 3,499 6.39
----------- ----------- ----------- -----------
Total interest-earning assets ............ 12,768,389 200,338 6.28 10,218,863 173,897 6.81
----------- -----------
Noninterest-earnings assets ....................... 273,914 218,586
----------- -----------
Total Assets ............................. $13,042,303 $10,437,449
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts ............................. $ 885,006 4,400 1.97 $ 783,382 4,573 2.32
Interest-bearing demand accounts ............. 412,888 2,706 2.60 94,178 390 1.64
Money market accounts ........................ 607,543 2,988 1.95 467,730 2,794 2.37
Time deposits ................................ 6,396,600 53,525 3.32 5,435,907 67,873 4.95
----------- ----------- ----------- -----------
Total interest-bearing deposits .......... 8,302,037 63,619 3.04 6,781,197 75,630 4.42
Borrowed funds ............................... 2,956,522 36,815 4.94 1,909,239 26,481 5.50
----------- ----------- ----------- -----------
Total interest-bearing liabilities ....... 11,258,559 100,434 3.54 8,690,436 102,111 4.66
----------- ----------- ----------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits ................. 392,180 359,085
Other noninterest-bearing liabilities ........ 103,141 91,606
----------- -----------
Total noninterest-bearing liabilities .... 495,321 450,691
----------- -----------
Total liabilities ............................ 11,753,880 9,141,127
Stockholders' equity ......................... 1,288,423 1,296,322
----------- -----------
Total Liabilities and Stockholders' Equity $13,042,303 $10,437,449
=========== ===========
Net interest income/net interest rate spread (2) .. $ 99,904 2.74% $ 71,786 2.15%
=========== ===========
Net interest-earning assets/net interest margin (3) $ 1,509,830 3.16% $ 1,528,427 2.84%
=========== ===========
Ratio of interest-earning assets to
interest-bearing liabilities ................. 1.13x 1.18x
- -------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) Determined by subtracting the annualized weighted average cost of total
interest-bearing liabilities from the annualized weighted average yield
on total interest-earning assets.
(3) Determined by dividing annualized net interest income by total average
interest-earning assets.
Page 13
Hudson City Bancorp, Inc.
Form 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
2002 2001
------------------------------------- ------------------------------------
AVERAGE AVERAGE
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE INTEREST COST BALANCE INTEREST COST
------------ ----------- ------- ----------- ---------- -------
(DOLLARS IN THOUSANDS)
(UNAUDITED)
ASSETS:
Interest-earnings assets:
First mortgage loans, net (1) ................ $ 6,295,605 $ 330,922 7.01% $ 5,053,276 $ 279,299 7.37%
Consumer and other loans ..................... 142,045 7,693 7.22 154,071 9,060 7.84
Federal funds sold ........................... 140,885 1,756 1.67 144,902 4,528 4.18
Mortgage-backed securities at amortized cost . 5,330,562 231,138 5.78 3,822,060 190,324 6.64
Federal Home Loan Bank stock ................. 94,948 2,787 3.91 78,835 3,573 6.04
Investment securities at amortized cost ...... 245,837 11,118 6.03 466,030 22,041 6.31
----------- ----------- ----------- -----------
Total interest-earning assets ............ 12,249,882 585,414 6.37 9,719,174 508,825 6.98
----------- -----------
Noninterest-earnings assets ....................... 250,322 199,455
----------- -----------
Total Assets ............................. $12,500,204 $ 9,918,629
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing liabilities:
Savings accounts ............................. $ 863,865 13,174 2.04 $ 769,206 13,325 2.32
Interest-bearing demand accounts ............. 226,131 3,848 2.28 93,560 1,142 1.63
Money market accounts ........................ 582,458 8,943 2.05 455,073 8,105 2.38
Time deposits ................................ 6,331,909 169,870 3.59 5,194,064 210,318 5.41
----------- ----------- ----------- -----------
Total interest-bearing deposits .......... 8,004,363 195,835 3.27 6,511,903 232,890 4.78
Borrowed funds ............................... 2,712,637 100,912 4.97 1,623,810 69,626 5.73
----------- ----------- ----------- -----------
Total interest-bearing liabilities ....... 10,717,000 296,747 3.70 8,135,713 302,516 4.97
----------- ----------- ----------- -----------
Noninterest-bearing liabilities:
Noninterest-bearing deposits ................. 388,495 348,287
Other noninterest-bearing liabilities ........ 101,196 85,092
----------- -----------
Total noninterest-bearing liabilities .... 489,691 433,379
----------- -----------
Total liabilities ............................ 11,206,691 8,569,092
Stockholders' equity ......................... 1,293,513 1,349,537
----------- -----------
Total Liabilities and Stockholders' Equity $12,500,204 $ 9,918,629
=========== ===========
Net interest income/net interest rate spread (2) .. $ 288,667 2.67% $ 206,309 2.01%
=========== ===========
Net interest-earning assets/net interest margin (3) $ 1,532,882 3.13% $ 1,583,461 2.82%
=========== ===========
Ratio of interest-earning assets to
interest-bearing liabilities ................. 1.14x 1.19x
- --------
(1) Amount is net of deferred loan fees and allowance for loan losses and
includes non-performing loans.
(2) Determined by subtracting the annualized weighted average cost of total
interest-bearing liabilities from the annualized weighted average yield on
total interest-earning assets.
(3) Determined by dividing annualized net interest income by total average
interest-earning assets.
Page 14
Hudson City Bancorp, Inc.
Form 10-Q
General. Net income was $49.6 million for the three-month period ended
September 30, 2002, an increase of $16.1 million, or 48.1%, compared with net
income of $33.5 million for the corresponding prior year period. Basic and
diluted earnings per common share were $0.27 and $0.26, respectively, for the
quarter ended September 30, 2002 compared with basic and diluted earnings per
share of $0.18 and $0.17, respectively, for the quarter ended September 30,
2001. For the quarter ended September 30, 2002 our annualized return on average
stockholders' equity was 15.40% compared with 10.35% for the quarter ended
September 30, 2001. Our annualized return on average assets for the third
quarter of 2002 was 1.52% compared with 1.28% for the third quarter of 2001.
These increases reflected our improved profitability due to the low interest
rate environment and our ability to grow our business with low costing
interest-bearing liabilities.
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, created a
significantly different interest rate environment than that which existed at the
beginning of 2001. General market interest rates, particularly on short-term
maturities, decreased during 2001 as the overall yield curve steepened. The
Federal Open Market Committee neither reduced nor increased the federal funds
rate during the first nine months of 2002. During that time, the short-term
interest rate structure remained relatively stable. However, during 2002,
long-term market interest rates have declined further, thus flattening the
market yield curve. On November 6, 2002, the Federal Open Market Committee
reduced the federal funds rate by 50 basis points.
A decreasing general market interest 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 are priced based on short-term market
rates while our mortgage loan products, particularly those with initial terms to
maturity or repricing greater than one year, generally are priced based on
long-term market rates. Conversely, a flat yield curve may have an adverse
impact on our net interest income as the interest rate spread between our
interest-earning assets and interest-bearing liabilities decreases. The current
market yield curve and the increased prepayment activity on our mortgage-related
assets, due to the historically low market interest rates, may have an adverse
impact on our future net interest income and net interest rate spread.
Interest and Dividend Income. Total interest and dividend income
increased $26.4 million, or 15.2%, to $200.3 million for the three-month period
ended September 30, 2002 compared with $173.9 million for the corresponding 2001
period. The increase in total interest income was primarily due to the average
balance of total interest-earning assets increasing $2.55 billion, or 25.0%, to
$12.77 billion for the three-month period ended September 30, 2002 compared with
$10.22 billion for the three-month period ended September 30, 2001. This
increase was due in part to a $1.13 billion, or 21.0%, increase in the average
balance of first mortgage loans, net to $6.52 billion for the three-month period
ended September 30, 2002 compared with $5.39 billion for the corresponding 2001
period. The average balance of mortgage-backed securities increased $1.26
billion, or 30.0%, to $5.46 billion for the three-month period ended September
30, 2002 compared with $4.20 billion for the corresponding 2001 period. The
average balance of investment securities increased $138.0 million, or 63.0%, to
$357.0 million for the three-month period ended September 30, 2002 compared with
$219.0 million for the corresponding 2001 period. The increase in the average
balance of FHLB stock of $24.2 million reflected the increase in the amount of
FHLB stock required to be held by us.
Page 15
Hudson City Bancorp, Inc.
Form 10-Q
The above increases in the average balances of first mortgage loans and
mortgage-backed securities reflected internal growth that was consistent with
our capital management strategy to originate and purchase first mortgage loans,
while purchasing mortgage-backed securities and investment securities to
supplement loan originations and purchases, and assist in the management of
interest rate risk. The growth in the average balance of mortgage-backed and
investment securities reflected the investment of excess cash flows, due to the
increased prepayment activity on our mortgage-related assets, into these
securities. Although the increase in the average balance of loans was somewhat
less than the increase in the average balance of mortgage-backed securities, the
impact of the loan growth was more significant in terms of interest income
because our first mortgage loans are generally higher yielding assets than our
mortgage-backed securities.
The impact on interest income due to the growth in the average balance
of interest-earning assets, was partially offset by a 53 basis point decrease in
the annualized average yield on interest-earning assets to 6.28% for the quarter
ended September 30, 2002 from 6.81% for the quarter ended September 30, 2001.
The annualized average yield on first mortgage loans, net decreased 30 basis
points to 7.00% for the third quarter of 2002 from 7.30% for the corresponding
2001 period. The annualized average yield on mortgage-backed securities
decreased 73 basis points to 5.60% for the third quarter of 2002 from 6.33% for
the corresponding 2001 period.
The decrease in the annualized average yield on first mortgage loans
reflected the large volume of loan originations, purchases and modifications
during the low interest rate environment of 2001 and the first nine months of
2002. The decrease in the annualized average yield on mortgage-backed securities
reflected the large volume of purchases, and the downward repricing of our
variable-rate securities, during the low interest rate environment of 2001 and
the first nine months of 2002. The larger decrease in the annualized average
yield on mortgage-backed securities compared with mortgage loans was due to the
larger increase in the average balance of mortgage-backed securities in this low
rate environment and the greater percentage of variable-rate securities in the
mortgage-backed security portfolio. If market interest rates remain low, the
yield on our mortgage-backed securities may continue to adjust downward due to
annual rate change limits, which have limited the extent our variable-rate
securities may have adjusted in prior periods.
Interest Expense. Total interest expense, comprised of interest on
deposits and interest on borrowed funds, decreased $1.7 million, or 1.7%, to
$100.4 million for the three-month period ended September 30, 2002 from $102.1
million for the three-month period ended September 30, 2001. Interest expense on
borrowed funds increased $10.3 million, or 38.9%, to $36.8 million for the third
quarter of 2002 from $26.5 million for the corresponding 2001 period, while
interest expense on deposits decreased $12.0 million, or 15.9%, to $63.6 million
for the third quarter of 2002 from $75.6 million for the corresponding 2001
period. The slight decrease in total interest expense reflected the impact of a
112 basis point decrease in the annualized average cost of interest-bearing
liabilities to 3.54% for the quarter ended September 30, 2002 from 4.66% for the
corresponding 2001 period. This decrease was offset by an increase in the
average balance of interest-bearing liabilities of $2.57 billion, or 29.6%, to
$11.26 billion for the quarter ended September 30, 2002 from $8.69 billion for
the quarter ended September 30, 2001.
The increase in interest expense on borrowed funds was primarily due to
a $1.05 billion, or 55.0%, increase in the average balance of borrowed funds to
$2.96 billion for the three-month period ended September 30, 2002 from $1.91
billion for the corresponding 2001 period. The impact on interest expense on
borrowed funds due to the increase in the average balance of borrowed funds was
offset, in
Page 16
Hudson City Bancorp, Inc.
Form 10-Q
part, by a 56 basis point decrease in the annualized average cost of borrowed
funds to 4.94% for the third quarter of 2002 from 5.50% for the third quarter of
2001.
The use of borrowed funds has accelerated over the past year to fund
asset growth consistent with our capital management and growth strategies. The
use of long-term borrowed funds has allowed us to better manage our interest
rate risk by matching long-term assets with long-term liabilities. Borrowing
long-term in the prevailing low interest rate environment should also allow us
to better control interest expense in future periods. The decrease in the
annualized average cost of borrowed funds reflected the continued growth of our
borrowed funds in the low interest rate environment that existed during 2001 and
the first nine months of 2002.
The $12.0 million decrease in interest expense on deposits was
primarily due to a 138 basis point decrease in the annualized average cost of
interest-bearing deposits to 3.04% for the three-month period ended September
30, 2002 from 4.42% during the corresponding 2001 period. The decrease in the
annualized average cost of interest-bearing deposits was primarily due to a 163
basis point decrease in the annualized average cost of our time deposits to
3.32% for the third quarter of 2002 from 4.95% for the third quarter of 2001.
The annualized average cost of interest-bearing demand accounts increased 96
basis points due to the introduction during the second quarter of 2002 of our
High Value Checking account. The overall decrease in the annualized average cost
of interest-bearing deposits reflected the low interest rate environment
experienced during 2001 and the first nine months of 2002. The impact on the
annualized average cost of interest-bearing liabilities due to further decreases
in interest rates may not be as favorable in future periods.
The impact on interest expense on deposits due to the decrease in the
annualized average cost of interest-bearing deposits was offset, in part, by a
$1.52 billion, or 22.4%, increase in the average balance of interest-bearing
deposits to $8.30 billion for the three-month period ended September 30, 2002
from $6.78 billion for the corresponding 2001 period. The increase in the
average balance of interest-bearing deposits occurred primarily in the average
balance of time deposits, which increased $960.7 million, or 17.7%, to $6.40
billion for the third quarter of 2002 from $5.44 billion for the third quarter
of 2001. When comparing the third quarter of 2002 to the third quarter of 2001,
the average balance of interest-bearing demand deposits, including our new High
Value Checking account, increased $318.7 million, the average balance of money
market accounts increased $139.8 million and the average balance of savings
accounts increased $101.6 million. We believe the increase in interest-bearing
deposits was due, in part, to our consistent offering of competitive rates on
our time deposit, regular savings and money market products, promotions for our
High Value Checking account and to the volatility in the equity markets.
Net Interest Income. Net interest income increased $28.1 million, or
39.1%, to $99.9 million for the three-month period ended September 30, 2002
compared with $71.8 million for the three-month period ended September 30, 2001.
This increase primarily reflected our planned balance sheet growth, which
resulted in increases in the average balance of both interest-earning assets and
interest-bearing liabilities, and the improved net interest rate spread earned
on this growth. Our net interest rate spread, the difference between the
annualized average yield on total interest-earning assets and the annualized
average cost of total interest-bearing liabilities, increased 59 basis points to
2.74% for the three-month period ended September 30, 2002 from 2.15% for the
corresponding 2001 period. Our net interest margin, represented by annualized
net interest income divided by average total interest-earning assets, increased
32 basis points to 3.16% for the three-month period ended September 30, 2002
from 2.84% for the corresponding 2001 period.
Page 17
Hudson City Bancorp, Inc.
Form 10-Q
These increases reflected our improved profitability due to the
declining interest rate environment experienced during 2001 and the first nine
months of 2002, the fact that our interest-bearing liabilities repriced faster
than our interest-earning assets in the declining interest rate environment and
our ability to grow our business with low costing interest-bearing liabilities
during this period. The larger increase in our net interest spread compared with
the increase in our net interest margin reflected the use of investable funds to
purchase treasury stock.
Provision for Loan Losses. Our provision for loan losses for the
quarter ended September 30, 2002 was $225,000, a decrease of $225,000, or 50.0%,
compared with $450,000 for the quarter ended September 30, 2001. Net charge-offs
for the first nine months of 2002 were $5,000 compared with net charge-offs of
$6,000 for the first nine months of 2001. The decrease in the provision
reflected our recent low charge-off history in the current slow economy given
the relative stability of the housing market. The allowance for loan losses
increased $1.3 million, or 5.4%, to $25.3 million at September 30, 2002 from
$24.0 million at December 31, 2001. The increase in the allowance for loan
losses, through the provision for loan losses, reflected the overall growth of
the loan portfolio and the level of delinquent and non-performing loans.
Non-performing loans, defined as non-accruing loans and accruing loans
delinquent 90 days or more, increased $2.0 million, or 12.8%, to $17.6 million
at September 30, 2002 from $15.6 million at December 31, 2001. The increase in
the dollar amount of our non-performing loans, which was primarily in our
purchased loan portfolio, was due to the overall growth of loans and slow
economic conditions during the first nine months of 2002. The ratio of
non-performing loans to total loans was 0.26% at September 30, 2002 and December
31, 2001. The ratio of the allowance for loan losses to non-performing loans was
143.23% at September 30, 2002 compared with 153.44% at December 31, 2001. The
ratio of the allowance for loan losses to total loans was 0.38% at September 30,
2002 compared with 0.40% at December 31, 2001.
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 we use the best information available,
the level of the allowance for loan losses remains an estimate that is subject
to significant judgement and short-term change.
See "Critical Accounting Policies."
Non-Interest Income. Total non-interest income, consisting primarily of
service fees, was $1.4 million and $1.2 million, respectively, for the
three-month periods ended September 30, 2002 and 2001.
Non-Interest Expense. Total non-interest expense increased $1.9
million, or 9.0%, to $23.0 million for the quarter ended September 30, 2002 from
$21.1 million for the quarter ended September 30, 2001. The increase was due, in
part, to an increase in salaries and employee benefits of $0.9 million, or 6.7%,
to $14.3 million for the third quarter of 2002 from $13.4 million for the
corresponding 2001 period. The increase in salaries and employee benefits
reflected routine salary increases, senior level promotions, increases in
stock-related compensation expense and increases in pension expense. The expense
related to certain of the stock-related plans is based on the average market
price of our common stock in accordance with the provisions of Statement of
Position 93-6, "Employer Accounting for Employee Stock Ownership Plans." The
increase in our stock price has resulted in an increase in stock-related
compensation expense. Other expenses increased $1.1 million, or 31.4%, to $4.6
million for the three-month period ended September 30, 2002 compared with $3.5
million for the corresponding 2001 period.
Page 18
Hudson City Bancorp, Inc.
Form 10-Q
This increase was due, in part, to expenses related to new marketing initiatives
and accelerated recognition of stock-related expense due to the passing of one
of our directors.
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 22.68% for the third quarter of 2002 compared with
28.95% for the third quarter of 2001. Our ratio of annualized non-interest
expense to average assets for the third quarter of 2002 was 0.70% compared with
0.81% for the third quarter of 2001.
Income Taxes. Income tax expense increased $10.6 million, or 59.2%, to
$28.5 million for the three-month period ended September 30, 2002 from $17.9
million for the corresponding 2001 period. This increase was primarily due to
the $26.7 million, or 51.9%, increase in income before income tax expense and
changes to the New Jersey corporate business tax code. Our effective tax rate
for the third quarter of 2002 was 36.45% compared with 34.79% for the third
quarter of 2001.
In July 2002, the New Jersey State Legislature passed the Business Tax
Reform Act. This new legislation, which is retroactive to January 1, 2002, has
increased our annual effective tax rate to approximately 36.8%. As required by
generally accepted accounting principles, income tax expense in the third
quarter of 2002 included both the retroactive adjustment for the first six
months of this year plus the amount for the third quarter. This increase in New
Jersey income tax expense, due to the Business Tax Reform Act, for the nine
months ended September 30, 2002 approximated $3.3 million, net of Federal income
tax benefit. We also recorded in this quarter an adjustment to our net deferred
tax asset, which resulted in a reduction of income tax expense of approximately
$1.2 million due to the increase in our overall statutory tax rate.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
AND 2001
General. Net income was $141.4 million for the nine-month period ended
September 30, 2002, an increase of $46.3 million, or 48.7%, compared with net
income of $95.1 million for the corresponding prior year period. Basic and
diluted earnings per common share were $0.76 and $0.74, respectively, for the
nine-month period ended September 30, 2002 compared with basic and diluted
earnings per share of $0.48 and $0.47, respectively, for the nine-month period
ended September 30, 2001. For the nine-month period ended September 30, 2002 our
annualized return on average stockholders' equity was 14.57% compared with 9.40%
for the nine-month period ended September 30, 2001. Our annualized return on
average assets for the first nine months of 2002 was 1.51% compared with 1.28%
for the first nine months of 2001. These increases reflected our improved
profitability due to the low interest rate environment and our ability to grow
our business with low costing interest-bearing liabilities.
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, created a
significantly different interest rate environment than that which existed at the
beginning of 2001. General market interest rates, particularly on short-term
maturities, decreased during 2001 as the overall yield curve steepened. The
Federal Open Market Committee neither reduced nor increased the federal funds
rate during the first nine months of 2002. During that time, the short-term
interest rate structure remained relatively stable. However, during 2002,
long-term market
Page 19
Hudson City Bancorp, Inc.
Form 10-Q
interest rates have declined further, thus flattening the market yield curve. On
November 6, 2002, the Federal Open Market Committee reduced the federal funds
rate by 50 basis points.
A decreasing general market interest 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 are priced based on short-term market
rates while our mortgage loan products, particularly those with initial terms to
maturity or repricing greater than one year, generally are priced based on
long-term market rates. Conversely, a flat yield curve may have an adverse
impact on our net interest income as the interest rate spread between our
interest-earning assets and interest-bearing liabilities decreases. The current
market yield curve and the increased prepayment activity on our mortgage-related
assets, due to the historically low market interest rates, may have an adverse
impact on our future net interest income and net interest rate spread.
Interest and Dividend Income. Total interest and dividend income
increased $76.6 million, or 15.1%, to $585.4 million for the nine-month period
ended September 30, 2002 compared with $508.8 million for the corresponding 2001
period. The increase in total interest income was primarily due to the average
balance of total interest-earning assets increasing $2.53 billion, or 26.0%, to
$12.25 billion for the nine-month period ended September 30, 2002 compared with
$9.72 billion for the nine-month period ended September 30, 2001. This increase
was due in part to a $1.24 billion, or 24.6%, increase in the average balance of
first mortgage loans, net to $6.29 billion for the nine-month period ended
September 30, 2002 compared with $5.05 billion for the corresponding 2001
period. The average balance of mortgage-backed securities increased $1.51
billion, or 39.5%, to $5.33 billion for the nine-month period ended September
30, 2002 compared with $3.82 billion for the corresponding 2001 period. These
increases were offset in part by a decrease in the average balance of investment
securities for the nine-month period ended September 30, 2002 of $220.2 million,
or 47.3%, to $245.8 million from $466.0 million for the corresponding 2001
period. The increase in the average balance of FHLB stock of $16.1 million
reflected the increase in the amount of FHLB stock required to be held by us.
The above increases in the average balances of first mortgage loans and
mortgage-backed securities reflected internal growth that was consistent with
our capital management strategy to originate and purchase first mortgage loans,
while purchasing mortgage-backed securities to supplement loan originations and
purchases, and assist in the management of interest rate risk. The growth in the
average balance of mortgage-backed securities and the decline in the average
balance of investment securities reflected, in part, the calls of investment
securities during 2001 due to the low interest rate environment and the
reinvestment of the proceeds of those calls in mortgage-backed securities. The
growth in the average balance of mortgage-backed securities also reflected the
investment of excess cash flows, due to the increased prepayment activity on our
mortgage-related assets, into mortgage-backed securities. Although the increase
in the average balance of loans was somewhat less than the increase in the
average balance of mortgage-backed securities, the impact of the loan growth was
more significant in terms of interest income because our first mortgage loans
are generally higher yielding assets than our mortgage-backed securities.
The impact on interest income due to the growth in the average balance
of interest-earning assets, was partially offset by a 61 basis point decrease in
the annualized average yield on interest-earning assets to 6.37% for the
nine-month period ended September 30, 2002 from 6.98% for the nine-month period
ended September 30, 2001. The annualized average yield on first mortgage loans,
net decreased 36 basis
Page 20
Hudson City Bancorp, Inc.
Form 10-Q
points to 7.01% for the nine-month period ended September 30, 2002 from 7.37%
for the corresponding 2001 period. The annualized average yield on
mortgage-backed securities decreased 86 basis points to 5.78% for the nine-month
period ended September 30, 2002 from 6.64% for the corresponding 2001 period.
The decrease in the annualized average yield on first mortgage loans
reflected the large volume of loan originations, purchases and modifications
during the low interest rate environment of 2001 and the first nine months of
2002. The decrease in the annualized average yield on mortgage-backed securities
reflected the large volume of purchases, and the downward repricing of our
variable-rate securities, during the low interest rate environment of 2001 and
the first nine months of 2002. The larger decrease in the annualized average
yield on mortgage-backed securities compared with mortgage loans was due to the
larger increase in the average balance of mortgage-backed securities in this low
rate environment and the greater percentage of variable-rate securities in the
mortgage-backed security portfolio. If market interest rates remain low, the
yield on our mortgage-backed securities may continue to adjust downward due to
annual rate change limits, which have limited the extent our variable-rate
securities may have adjusted in prior periods.
Interest Expense. Total interest expense, comprised of interest on
deposits and interest on borrowed funds, decreased $5.8 million, or 1.9%, to
$296.7 million for the nine-month period ended September 30, 2002 from $302.5
million for the nine-month period ended September 30, 2001. Interest expense on
borrowed funds increased $31.3 million, or 45.0%, to $100.9 million for the
nine-month period ended September 30, 2002 from $69.6 million for the
corresponding 2001 period. Interest expense on deposits decreased $37.1 million,
or 15.9%, to $195.8 million for the nine-month period ended September 30, 2002
from $232.9 million for the corresponding 2001 period. The decrease in total
interest expense reflected the impact of a 127 basis point decrease in the
annualized average cost of interest-bearing liabilities to 3.70% for the
nine-month period ended September 30, 2002 from 4.97% for the corresponding 2001
period. The decrease to interest expense was offset, in part, by an increase in
the average balance of interest-bearing liabilities of $2.58 billion, or 31.7%,
to $10.72 billion for the nine-month period ended September 30, 2002 from $8.14
billion for the nine-month period ended September 30, 2001.
The increase in interest expense on borrowed funds was primarily due to
a $1.09 billion, or 67.3%, increase in the average balance of borrowed funds to
$2.71 billion for the nine-month period ended September 30, 2002 from $1.62
billion for the corresponding 2001 period. The impact on interest expense on
borrowed funds due to the increase in the average balance of borrowed funds was
offset, in part, by a 76 basis point decrease in the annualized average cost of
borrowed funds to 4.97% for the first nine months of 2002 from 5.73% for the
first nine months of 2001.
The use of borrowed funds has accelerated over the past year to fund
asset growth consistent with our capital management and growth strategies. The
use of long-term borrowed funds has allowed us to better manage our interest
rate risk by matching long-term assets with long-term liabilities. Borrowing
long-term in the prevailing interest rate environment should also allow us to
better control interest expense in future periods. The decrease in the
annualized average cost of borrowed funds reflected the continued growth of our
borrowed funds in the low interest rate environment that existed during 2001 and
the first nine months of 2002. It also reflected the maturing of higher costing
short-term borrowed funds and the subsequent refinancing with long-term
borrowings during the low interest rate environment of 2001.
Page 21
Hudson City Bancorp, Inc.
Form 10-Q
The $37.1 million decrease in interest expense on deposits was
primarily due to a 151 basis point decrease in the annualized average cost of
interest-bearing deposits to 3.27% for the nine-month period ended September 30,
2002 from 4.78% during the corresponding 2001 period. The decrease in the
annualized average cost of interest-bearing deposits was primarily due to a 182
basis point decrease in the annualized average cost of our time deposits to
3.59% for the first nine months of 2002 from 5.41% for the first nine months of
2001. The annualized average cost of interest-bearing demand accounts increased
65 basis points due to the introduction during the second quarter of 2002 of
our High Value Checking account. The decrease in the annualized average cost of
interest-bearing deposits reflected the low interest rate environment
experienced during 2001 and the first nine months of 2002. The impact on the
annualized average cost of interest-bearing liabilities due to further decreases
in interest rates may not be as favorable in future periods.
The impact on interest expense on deposits due to the decrease in the
annualized average cost of interest-bearing deposits was offset, in part, by a
$1.49 billion, or 22.9%, increase in the average balance of interest-bearing
deposits to $8.00 billion for the nine-month period ended September 30, 2002
from $6.51 billion for the corresponding 2001 period. The increase in the
average balance of interest-bearing deposits occurred primarily in the average
balance of time deposits, which increased $1.14 billion, or 22.0%, to $6.33
billion for the first nine months of 2002 from $5.19 billion for the first nine
months of 2001. When comparing the first nine months of 2002 to the first nine
months of 2001, the average balance of interest-bearing demand deposits,
including our new High Value Checking account, increased $132.5 million, the
average balance of money market accounts increased $127.4 million and the
average balance of savings accounts increased $94.7 million. We believe the
increase in interest-bearing deposits was due, in part, to our consistent
offering of competitive rates on our time deposit, regular savings and money
market products, promotions for our High Value Checking account and to the
volatility in the equity markets.
Net Interest Income. Net interest income increased $82.4 million, or
39.9%, to $288.7 million for the nine-month period ended September 30, 2002
compared with $206.3 million for the nine-month period ended September 30, 2001.
This increase primarily reflected our planned balance sheet growth, which
resulted in increases in the average balance of both interest-earning assets and
interest-bearing liabilities, and the improved net interest rate spread earned
on this growth. Our net interest rate spread, the difference between the
annualized average yield on total interest-earning assets and the annualized
average cost of total interest-bearing liabilities, increased 66 basis points to
2.67% for the nine-month period ended September 30, 2002 from 2.01% for the
corresponding 2001 period. Our net interest margin, represented by annualized
net interest income divided by average total interest-earning assets, increased
31 basis points to 3.13% for the nine-month period ended September 30, 2002 from
2.82% for the corresponding 2001 period.
These increases reflected our improved profitability due to the
declining interest rate environment experienced during 2001 and the first nine
months of 2002, the fact that our interest-bearing liabilities repriced faster
than our interest-earning assets in the declining interest rate environment and
our ability to grow our business with low costing interest-bearing liabilities
during this period. The larger increase in our net interest spread compared with
the increase in our net interest margin reflected the use of investable funds to
purchase treasury stock.
Provision for Loan Losses. Our provision for loan losses for the
nine-month period ended September 30, 2002 was $1.3 million, a decrease of
$75,000, or 5.4%, compared with $1.4 million for the nine-month period ended
September 30, 2001. Net charge-offs for the first nine months of 2002 were
Page 22
Hudson City Bancorp, Inc.
Form 10-Q
$5,000 compared with net charge-offs of $6,000 for the first nine months of
2001. The decrease in the provision reflected our recent low charge-off history
in the current slow economy given the relative stability of the housing market.
The increase in the allowance for loan losses, through the provision for loan
losses, reflected the overall growth of the loan portfolio and the level of
delinquent and non-performing loans.
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 we use the best information available,
the level of the allowance for loan losses remains an estimate that is subject
to significant judgement and short-term change.
See "Critical Accounting Policies."
Non-Interest Income. Total non-interest income, consisting primarily of
service fees, was $3.8 million and $3.5 million, respectively, for the
nine-month periods ended September 30, 2002 and 2001.
Non-Interest Expense. Total non-interest expense increased $8.8
million, or 14.3%, to $70.2 million for the nine-month period ended September
30, 2002 from $61.4 million for the nine-month period ended September 30, 2001.
The increase was primarily due to an increase in salaries and employee benefits
of $6.3 million, or 16.1%, to $45.5 million for the nine-month period ended
September 30, 2002 from $39.2 million for the corresponding 2001 period. The
increase in salaries and employee benefits reflected routine salary increases,
senior level promotions, increases in stock-related compensation expense and
increases in pension expense. The expense of certain of the stock-related plans
is based on the average market price of our common stock in accordance with the
provisions of Statement of Position 93-6, "Employer Accounting for Employee
Stock Ownership Plans." The increase in our stock price has resulted in an
increase in stock-related compensation expense. Other expenses increased $2.3
million, or 23.0%, to $12.3 million for the nine-month period ended September
30, 2002 compared with $10.0 million for the corresponding 2001 period. This
increase was due, in part, to expenses related to new marketing initiatives and
accelerated recognition of stock-related expense due to the passing of one of
our directors.
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 24.00% for the first nine months of 2002 compared
with 29.26% for the first nine months of 2001. Our ratio of annualized
non-interest expense to average assets for the first nine months of 2002 was
0.75% compared with 0.83% for the first nine months of 2001.
Income Taxes. Income tax expense increased $27.7 million, or 53.4%, to
$79.6 million for the nine-month period ended September 30, 2002 from $51.9
million for the corresponding 2001 period. This increase was primarily due to
the $73.9 million, or 50.2% increase in income before income tax expense and
changes to the New Jersey corporate business tax code. Our effective tax rate
for the first nine months of 2002 was 36.02% compared with 35.32% for the first
nine months of 2001.
Page 23
Hudson City Bancorp, Inc.
Form 10-Q
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, 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 owned.
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-prepayment 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 dependent on the strength of our residential real estate market,
home purchase and new construction activity.
Principal repayments on loans were $1.59 billion during the first nine
months of 2002 compared with $831.5 million for the corresponding 2001 period.
Principal payments received on mortgage-backed securities totaled $1.43 billion
during the first nine months of 2002 compared to $1.16 billion during the
corresponding 2001 period. The increase in payments on loans and mortgage-backed
securities reflected the low market interest rate environment during 2001 and
the first nine months of 2002, which caused an increase in prepayment activity
when compared with the prior corresponding periods. The increase also reflected
the growth in those portfolios, thus a larger base from which to receive
payments. Maturities and calls of investment securities totaled $124.5 million
during the first nine months of 2002 compared with maturities and calls of
$832.5 million during the corresponding 2001 period. The higher amount of calls
during the first nine months of 2001 was due to the declining interest rate
environment that began early in 2001 and the large balance of callable
investment securities held at the beginning of 2001 compared with the amount of
callable investment securities held at the beginning of 2002.
For the nine-month periods ended September 30, 2002 and 2001, we
borrowed funds of $850.0 million and $1.15 billion, respectively. The $850.0
million of new long-term borrowed funds consisted of 10-year terms with one-time
call options of between 3 and 5 years from the borrowing date. There were no
principal payments on borrowed funds during the first nine months of 2002, but
there were $400.0 million of principal payments during the corresponding 2001
period.
The $850.0 million increase in borrowed funds during the first nine
months of 2002 funded asset growth and generated additional earnings through a
positive interest rate spread. The use of long-term borrowed funds has allowed
us to better manage our interest rate risk by matching long-term assets with
long-term liabilities. Borrowing long-term funds in this low interest rate
environment should also allow us to better control interest expense in future
periods. At September 30, 2002, there were $50.0 million of borrowed funds
scheduled to mature within one year.
Total deposits increased $907.6 million during the first nine months of
2002 compared with an increase of $838.2 million during the first nine months of
2001. Deposit flows are affected by the level of
Page 24
Hudson City Bancorp, Inc.
Form 10-Q
market interest rates, the interest rates and products offered by competitors,
and other factors. We believe the increase in interest-bearing deposits was due,
in part, to our consistent offering of competitive rates on our time deposit,
regular savings and money market products, promotions for our High Value
Checking account and to cash inflows due to the volatility in the equity
markets. Time deposit accounts scheduled to mature within one year were $5.60
billion at September 30, 2002. 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.
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
$1.39 billion and $955.3 million, respectively, during the first nine months of
2002 compared with $1.20 billion and $518.1 million, respectively, during the
corresponding 2001 period. The increase was primarily due to planned balance
sheet growth and the low market interest rate environment during 2001 and the
first nine months of 2002, which caused an increase in prepayments and loan
refinancings. Additionally, to supplement our loan originations, we purchased a
higher volume of first mortgage loans than in previous periods.
Purchases of mortgage-backed securities during the first nine months of
2002 were $1.96 billion compared with $2.45 billion during the first nine months
of 2001. The volume of purchases of mortgage-backed securities was related to
the increase in prepayment activity due to the low market interest rate
environment during 2001 and the first nine months of 2002 and the growth
strategies employed by us during these periods. The decrease in mortgage-backed
securities purchases, year-to-year, is due to the large volume of purchases
during the first nine months of 2001 due to the calls of investment securities
during that period. With excess cash flow, during the first nine months of 2002,
we purchased $498.8 million of investment securities compared with purchases of
$91.6 million during the first nine months of 2001. As part of the membership
requirements of the FHLB, we are required to purchase a certain dollar amount of
FHLB common stock. During the first nine months of 2002, we purchased $26.4
million of FHLB common stock compared with purchases of $7.5 million during the
first nine months of 2001. The purchases in 2002 bring our total investment in
FHLB stock to $107.5 million, the amount we are currently required to hold.
During the first nine months of 2002, our recognition and retention
plan purchased 100,580 dividend-adjusted shares of common stock at an aggregate
cost of $1.9 million. 167,900 shares were awarded to plan participants during
the first nine months of 2002. As of September 30, 2002 we had 65,316 shares
purchased and unallocated for the recognition and retention plan.
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
the first nine months of 2002, we purchased 6,014,472 dividend-adjusted shares
of our common stock at an aggregate cost of $107.9 million. During the first
nine months of 2001, we purchased 24,284,600 million dividend-adjusted shares of
our common stock at an aggregate cost of $258.5 million. At September 30, 2002,
there were 3,548,796 shares remaining to be repurchased under the existing stock
repurchase program.
Page 25
Hudson City Bancorp, Inc.
Form 10-Q
At September 30, 2002, Hudson City Savings had outstanding loan
commitments to borrowers of approximately $242.8 million, commitments to
purchase loans of approximately $473.2 million and available home equity and
overdraft lines of credit of approximately $81.5 million. We anticipate we will
have sufficient funds available to meet our current commitments in the normal
course of business.
Cash dividends declared and paid during the first nine months of 2002
were $48.0 million compared with $33.2 million during the first nine months of
2001. The dividend pay-out ratio for the nine-month periods ended September 30,
2002 and 2001 was 32.24% and 34.38%, respectively. On October 15, 2002, the
Board of Directors declared a quarterly cash dividend of ten cents ($0.10) per
common share. The dividend is payable on December 2, 2002 to stockholders of
record at the close of business on November 8, 2002. We anticipate we will have
sufficient funds available to meet our dividend payment obligation.
We opened one new branch during the first nine months of 2002 in
Midland Park, NJ. We also purchased, for future use, an office building near our
corporate headquarters at a cost of approximately $2.8 million. We do not
anticipate any other material capital expenditures nor do we have any balloon or
other payments due on any long-term obligations or any significant off-balance
sheet items other than the commitments and unused lines of credit noted above.
At September 30, 2002, we exceeded each of the applicable regulatory
capital requirements of the Federal Reserve Bank and the Federal Deposit
Insurance Corporation. The following table presents the regulatory ratios of
Hudson City Savings Bank and Hudson City Bancorp.
REGULATORY REQUIREMENTS
----------------------------------------------
ACTUAL AT MINIMUM CAPITAL CLASSIFICATION AS
SEPTEMBER 30, 2002 ADEQUACY WELL-CAPITALIZED
--------------------- --------------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
---------- ------ ---------- ------ ---------- ------
(DOLLARS IN THOUSANDS)
Bank
Leverage (Tier 1)
Capital .... $1,201,895 9.22% $ 521,369 4.00% $ 651,712 5.00%
Risk-based capital:
Tier 1 ..... 1,201,895 27.63 173,971 4.00 260,957 6.00
Total ...... 1,227,174 28.22 347,943 8.00 434,929 10.00
Bancorp
Leverage (Tier 1)
Capital .... $1,284,284 9.85% $ 521,401 4.00% $ 651,751 5.00%
Risk-based capital:
Tier 1 ..... 1,284,284 29.53 173,973 4.00 260,959 6.00
Total ...... 1,309,563 30.11 347,945 8.00 434,932 10.00
Page 26
Hudson City Bancorp, Inc.
Form 10-Q
CRITICAL ACCOUNTING POLICIES
Note 1 to our Audited Consolidated Financial Statements for the year
ended December 31, 2001, included in our Annual Report on Form 10-K for the year
ended December 31, 2001, as supplemented by our Quarterly Reports on Form 10-Q
for the quarters ended March 31, 2002, June 30, 2002 and this report, contains a
summary of our significant accounting policies. We believe our policies with
respect to the methodology for our determination of the allowance for loan
losses and asset impairment judgments, including other than temporary declines
in the value of our securities, involve a higher degree of complexity and
require management to make difficult and subjective judgments which often
require assumptions or estimates about highly uncertain matters. Changes in
these judgments, assumptions or estimates could cause reported results to differ
materially. These critical policies and their application are periodically
reviewed with the Audit Committee and our Board of Directors.
The determination of the amount of the allowance for loan losses, and
the related provision for loan losses, is based on such factors as loan loss
experience, known and inherent risks in the loan portfolio, the estimated value
of the 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 that are probable but not specifically identifiable. Although
management uses the best information available, the level of the allowance for
loan losses remains an estimate that is subject to significant judgment and
short-term change.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosure about market risk is presented
as of December 31, 2001 in Hudson City Bancorp's Annual Report on Form 10-K. The
following is an update of the discussion provided therein.
General. As a financial institution, our primary component of market
risk is interest rate volatility. The higher volume of prepayments on our
mortgage-related assets, due to the historically low market interest rate
environment, and the reinvestment of these assets at the current interest rates
is currently a significant component of interest rate risk. Due to the nature of
our operations, we are not subject to foreign currency exchange or commodity
price risk. Our real estate loan portfolio, substantially located 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 the first nine months
of 2002 and did not have any such hedging transactions in place at September 30,
2002. In the future, we may, with approval of our Board of Directors, engage in
hedging transactions utilizing derivative instruments.
Page 27
Hudson City Bancorp, Inc.
Form 10-Q
Interest Rate Risk Compliance. Hudson City Bancorp continues to monitor
the impact of interest rate volatility upon the present value of equity in the
same manner as at December 31, 2001. The following table presents the estimated
present value of equity over a range of interest rate change scenarios at
September 30, 2002. 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.
PRESENT VALUE OF EQUITY
AS PERCENT OF PRESENT
PRESENT VALUE OF EQUITY VALUE OF ASSETS
----------------------------------------------- ----------------------------
CHANGE IN DOLLAR DOLLAR PERCENT PRESENT PERCENT
INTEREST RATES AMOUNT CHANGE CHANGE VALUE RATIO CHANGE
- ----------------------- ------------ ----------- --------- ----------- ---------
(BASIS POINTS) (DOLLARS IN THOUSANDS)
200 $ 1,164,890 $ (293,164) (20.11)% 9.14% (15.53)%
150 1,317,568 (140,486) (9.64) 10.13 (6.38)
100 1,458,661 607 0.04 11.04 2.03
50 1,502,443 44,389 3.04 11.23 3.79
0 1,458,054 - - 10.82 -
(50) 1,363,858 (94,196) (6.46) 10.08 (6.84)
(100) 1,272,168 (185,886) (12.75) 9.35 (13.59)
(150) 1,183,978 (274,076) (18.80) 8.65 (20.06)
(200) 1,090,297 (367,757) (25.22) 7.91 (26.89)
At December 31, 2001, the percent change in the present value of equity
in the 200 basis point increase scenario was negative 35.67% and in the 100
basis point decrease scenario it was positive 3.16% compared with the table
above. The overall decrease in the present value of equity and the percent
change in the present value of equity in the increasing rate scenarios were
primarily due to the growth of our fixed-rate mortgage loan and mortgage-backed
security portfolios. The change in the negative present value of equity position
at September 30, 2002 compared with December 31, 2001 was due to the higher
prepayment assumptions used in the September 30, 2002 analysis due to the low
market interest rate. The overall decrease in the present value of equity and
the percent change in the present value of equity in the decreasing rate
scenarios were primarily due to the growth of our fixed-rate borrowed funds in
this low interest rate environment. We believe the 150 and 200 basis point
decrease scenarios presented above may not be meaningful given the prevailing
low market interest rate environment.
Our current policy sets a maximum percent change in the present value
of equity at 55% from the current, or zero basis point scenario, present value
of equity, given an instantaneous and parallel increase or decrease of 200 basis
points. Due to our high level of present value of equity as a percent of the
present value of assets in the zero basis point scenario, the maximum percent
change was increased in 2002 to 55% from 40% at year end to allow for more
flexibility in managing our asset/liability mix.
GAP Analysis. The table that follows presents the amounts of our
interest-earning assets and interest-bearing liabilities outstanding at
September 30, 2002, which we anticipate to reprice or mature in each of the
future time periods shown. We have excluded non-accrual loans of $5,971,000 from
the table. Based on recent experience, for the September 30, 2002 gap analysis,
the annual prepayment rate on mortgage loans and mortgage-backed securities has
been increased to 30%, for those products repricing or maturing after one year,
from an annual prepayment rate of 20% and 25%, respectively, at December 31,
2001. This increase was due to the high volume of prepayment on our
mortgage-related assets due to the historically low market interest rate
environment.
Page 28
Hudson City Bancorp, Inc.
Form 10-Q
The interest-bearing High Value Checking account, introduced during the
second quarter of 2002, is reported in the interest-bearing demand totals using
decay rates of: 12.5% in less than six months, 12.5% in six months to one year,
25% in one year to two years, 25% in two years to three years and 25% in three
years to five years. These initial decay rates are based on our initial
assessment of the volatility of the product given its current interest rate in
relation to the overall market interest rate environment. These initial decay
rates will be monitored closely and adjusted as required in future periods.
The cumulative one-year gap as a percent of total assets was negative
5.0% at September 30, 2002 compared with negative 14.3% at December 31, 2001.
The decrease in our negative one-year gap position was primarily due to the
overall growth in our assets during the first nine months of 2002, the continued
use of long-term borrowed funds as a funding source, creating a more positive
asset/liability mix and the increase in the prepayment rate for our
mortgage-related assets. Had the current 30% annual prepayment rate been used
for the December 31, 2001 gap analysis, the cumulative one-year gap as a percent
of total assets would have been negative 8.0%.
Page 29
Hudson City Bancorp, Inc.
Form 10-Q
AT SEPTEMBER 30, 2002
---------------------------------------------------------------------------------------------
MORE THAN MORE THAN
MORE THAN MORE THAN TWO YEARS THREE YEARS
SIX MONTHS SIX MONTHS ONE YEAR TO TO THREE TO FIVE MORE THAN
OR LESS TO ONE YEAR TWO YEARS YEARS YEARS FIVE YEARS TOTAL
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
Interest-earning assets:
First mortgage loans ............. $ 1,042,037 $ 1,071,456 $ 1,383,258 $ 966,081 $ 838,614 $ 1,280,149 $ 6,581,595
Consumer and other loans ......... 35,280 816 2,788 3,197 14,795 79,531 136,407
Federal funds sold ............... 51,000 -- -- -- -- -- 51,000
Mortgage-backed securities ....... 1,437,421 1,627,573 900,097 473,266 332,979 767,539 5,538,875
FHLB stock ...................... 107,500 -- -- -- -- -- 107,500
Investment securities ............ 64,367 148 -- 280 162 477,316 542,273
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total interest-earning assets .. 2,737,605 2,699,993 2,286,143 1,442,824 1,186,550 2,604,535 12,957,650
----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest-bearing liabilities:
Savings accounts ................. 27,729 22,482 219,984 263,981 175,988 175,988 886,152
Interest-bearing demand accounts . 61,926 61,926 142,528 147,197 137,859 18,676 570,112
Money market accounts ............ 138,466 138,466 155,294 159,034 14,958 14,958 621,176
Time deposits .................... 3,964,307 1,637,673 607,616 62,426 63,175 -- 6,335,197
Borrowed funds ................... -- 50,000 50,000 50,000 150,000 2,700,000 3,000,000
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total interest-bearing
liabilities .................... 4,192,428 1,910,547 1,175,422 682,638 541,980 2,909,622 11,412,637
----------- ----------- ----------- ----------- ----------- ----------- -----------
Interest rate sensitivity gap ...... $(1,454,823) $ 789,446 $ 1,110,721 $ 760,186 $ 644,570 $ (305,087) $ 1,545,013
=========== =========== =========== =========== =========== =========== ===========
Cumulative interest rate
sensitivity Gap .................. $(1,454,823) $ (665,377) $ 445,344 $ 1,205,530 $ 1,850,100 $ 1,545,013
=========== =========== =========== =========== =========== ===========
Cumulative interest rate
sensitivity gap as a percent
of total assets .................. (11.03)% (5.04)% 3.38% 9.14% 14.02% 11.71%
Cumulative interest-earning
assets as a percent of
interest-bearing liabilities ..... 65.30% 89.10% 106.12% 115.14% 121.76% 113.54%
Page 30
Hudson City Bancorp, Inc.
Form 10-Q
Item 4. - Controls and Procedures
Ronald E. Hermance, Jr., our President and Chief Executive Officer, and
Denis J. Salamone, our Senior Executive Vice President and Chief Operating
Officer, conducted an evaluation of the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act
of 1934, as amended) as of October 10, 2002. Based upon their evaluation, they
each found that our disclosure controls and procedures were adequate to ensure
that information required to be disclosed in the reports that we file and submit
under the Exchange Act is recorded, processed, summarized and reported as and
when required.
There were no significant changes in our disclosure controls and
procedures or internal controls for financial reporting or other factors that
could significantly affect those controls subsequent to October 10, 2002, and we
identified no significant deficiencies or material weaknesses requiring
corrective action with respect to those controls.
Page 31
Hudson City Bancorp, Inc.
Form 10-Q
PART II - OTHER INFORMATION
Item 1. - 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 operations.
Item 2. - Changes in Securities and Use of Proceeds
Not applicable.
Item 3. - Defaults Upon Senior Securities
Not applicable.
Item 4. - Submission of Matters to a Vote of Security Holders
No matter was submitted during the quarter ended September 30, 2002 to a
vote of security holders of Hudson City Bancorp through the solicitation of
proxies or otherwise.
Item 5. - Other Information
Not applicable.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibit 99.1: Statement furnished pursuant to Section 906 of Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350
(b) No reports on Form 8-K were filed during the quarter ended September 30,
2002.
Page 32
Hudson City Bancorp, Inc.
Form 10-Q
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hudson City Bancorp, Inc.
Date: November 12, 2002 By: /s/ Ronald E. Hermance, Jr.
-------------------------------------
Ronald E. Hermance, Jr.
President and Chief Executive Officer
(principal executive officer)
Date: November 12, 2002 By: /s/ Denis J. Salamone
-------------------------------------
Denis J. Salamone
Senior Executive Vice President and
Chief Operating Officer
(principal financial and
accounting officer)
Page 33
Hudson City Bancorp, Inc.
Form 10-Q
CERTIFICATION OF DISCLOSURE
I, Ronald E. Hermance, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hudson City Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 By: /s/ Ronald E. Hermance, Jr.
-------------------------------------
Ronald E. Hermance, Jr.
President and Chief Executive Officer
Page 34
Hudson City Bancorp, Inc.
Form 10-Q
CERTIFICATION OF DISCLOSURE
I, Denis J. Salamone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hudson City Bancorp,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in the Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiary, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 12, 2002 By: /s/ Denis J. Salamone
-------------------------------------
Denis J. Salamone
Senior Executive Vice President
and Chief Operating Officer
Page 35